PLR 1035044: Direct rollover treatment confirmed for estate

Plain-English summary

The IRS concluded that a retirement-plan distribution received by a taxpayer who later died was a direct rollover and was not subject to the 60-day rollover requirement. The check was payable to a financial institution for the taxpayer's benefit, was not payable directly to the taxpayer, and remained uncashed because the taxpayer's severe medical and mental conditions prevented delivery. The taxpayer had intended to roll the funds into an IRA, and the court-appointed estate administrator was allowed to place the check into that IRA. The ruling was based on the direct-rollover rules under sections 401(a)(31) and 402(c), and it assumed that the plan was qualified under section 401(a). The IRS did not express an opinion on other tax consequences.

Ruling snapshot

• Question: Was the plan distribution a direct rollover that was not subject to the 60-day rollover deadline?
• Outcome: Approved
• Key authorities: IRC §§ 401(a)(31), 402(c), and 408; Treas. Reg. § 1.401(a)(31)-1; Rev. Proc. 2003-16

Full text (IRS public release)

+DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

Zz
REVERDE

TAX EXEMPT AND

GOVERNMENT ENTITIES JUN 0 / 2010

DIVISION

Uniform Issue List: 402.00-00

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Legend:

Taxpayer A = XXXXXXKXXKXKKX

Administratrix C = XXXXXXXXXXXX

Administrator N = XXXXXXXXXXXKX

Court B = XXXKXXXXKXKKXKX
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State E = XXXXXXXKKXKXKX

Plan X = XXXXKXKXXKKX

IRA Y = XXXKKKXKKKXKKK
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Financial Institution A = XXXXXKXKKKKKX

Financial Institution B = XXXXXXXXXXKX

Company M = XXXXXXXXXKKX
Amount D = XXXXXXXXXXXX
Date 1 = XXXXXKXXXKXKK
Date 2 = XXXXXXXXXKXXKK

Date 3 = XXXXXXXXXKXXKX

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Date 4 = XXXXXXXXKXKXKKXXX
Date 5 = XXXXXXXXKXXKKKXK
Year N = XXXXXXXXXKXXKXKXK
Dear XXXXXXXXXX:

This is in response to your ruling request dated June 30, 2009, as supplemented
by letters dated December 1, 2009, and December 8, 2009, submitted on behalf
of the estate of Taxpayer A, by your authorized representative, in which you, as
the Court Appointed Administrator of the estate of Taxpayer A, request a waiver
of the 60-day rollover requirement contained in section 402(c)(3) of the Internal
Revenue Code (“Code”) for a distribution made to Taxpayer A from Plan X.

The following facts and representations have been submitted under penalty of
perjury in support of the ruling requested.

Taxpayer A, age 52, was employed at Company M and participated in Plan X
which was sponsored by Company M. Taxpayer A received a distribution from
Plan X, totaling Amount D. You assert that Taxpayer A’s failure to accomplish a
rollover within the 60-day period prescribed by section 402(c)(3) was due to his
physical and mental conditions which impaired his ability to make sound financial
decisions or understand the consequences of his actions. Amount D has not
been used for any other purpose.

Documentation shows that Taxpayer A suffered from severe mental disability.
Taxpayer A’s mental and physical health rapidly deteriorated during Year N, to
the extent that he was unable to continue to perform his job with Employer M, his
former employer; and was eventually terminated. Taxpayer A failed to seek
medical attention and died on Date 3, approximately one month after the
expiration of the 60-day rollover period.

Documentation shows that prior to his death, Taxpayer A verbally requested
Employer M to rollover his retirement funds to IRA Y, which he opened on Date 1
with Financial Institution B. A few months before his death, Taxpayer A received
a check dated Date 2 in Amount D from Financial Institution A, representing his
entire interest in Plan X. The check was made payable to the order of Financial
Institution B FBO Taxpayer A. In addition, a notation attached to the check
describes the payment as a “Total Distribution-direct transfer — IRA.” However,
due to Taxpayer A’s failing health and mental condition, he did not deliver the
check to Financial Institution B and the check remained uncashed at the time of
Taxpayer A’s death.

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Although Taxpayer A was unable to complete the rollover within the 60-day
rollover period, documentation shows that Taxpayer A intended to roll over
Amount D. However, his medical and mental conditions which resulted in his
death impaired his ability to handle his basic personal needs and financial affairs.

On Date 4, Administratrix C was appointed as Administratrix of Taxpayer A’s
estate and Letters of Administration were issued by Court B. However, prior to
the settlement of Taxpayer A’s estate, Administratrix C died. As a result, on Date
5, Administrator N became the Court Appointed Administrator of the estate of
Taxpayer A. Administrator N has submitted Letters of Administration issued by
Court B. Court B is located in State E and is asserted to be a court of competent
jurisdiction.

Documentation shows that for calendar Year N, Taxpayer A received a Form
1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc., showing a Plan X distribution to Taxpayer
A with respect to Year N for Amount D. Box 7 (Distribution Code(s)) of said Form
1099-R was coded "G" indicating a "Direct Rollover" to a qualified plan.

Based upon the foregoing facts and representations, you request a ruling that the
Internal Revenue Service waive the 60-day rollover requirement with respect to
the distribution of Amount D from Plan X.

Section 402(a)(1) of the Code provides that, except as otherwise provided in
section 402, any amount distributed out of an employees’ trust described in
section 401(a) that is exempt from tax under section 501(a) shall be taxable to
the distributee, in the taxable year of the distributee in which distributed, in the
manner provided under section 72 of the Code (relating to annuities).

Section 402(c) of the Code provides rules governing rollovers of amounts from
exempt trusts to eligible retirement plans including IRAs.

Section 402(c)(3)(A) of the Code provides that, except as provided in
subparagraph (B), paragraph (1) (which excludes rolled over amounts from gross
income) shall not apply to any transfer of a distribution made after the 60th day
following the day on which the distributee received the property distributed.

Section 402(c)(3)(B) of the Code provides that the Secretary may waive the 60-
day requirement under section 402(c)(3)(A) of the Code where the failure to
waive such requirement would be against equity or good conscience, including
casualty, disaster, or other events beyond the reasonable control of the individual
subject to such requirement. Only distributions that occurred after December 31,
2001, are eligible for the waiver under section 402(c)(3)(B) of the Code.

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Section 402(c)(4) of the Code provides that an eligible rollover distribution shall
not include any distribution to the extent such distribution is required under
section 401(a)(9).

Section 401(a)(31)(A) of the Code provides that a trust shall not constitute a
qualified trust under this section unless the plan of which such trust is a part
provides that if the distributee of any eligible rollover distribution --

(i) elects to have such distribution paid directly to an eligible retirement plan, and

(ii) specifies the eligible retirement plan to which such distribution is to be paid (in
such form and at such time as the plan administrator may prescribe), such
distribution shall be made in the form of a direct trustee-to-trustee transfer to the
eligible retirement plan so specified.

Section 401(a)(31)(E) of the Code provides that, for purposes of Code section
401(a)(31), the term "eligible retirement plan" has the meaning given such term
by section 402(c)(8)(B) with an exception not pertinent to this ruling request.
Thus, a direct transfer defined in Code section 401(a)(31), may be made into an
IRA.

Section 1.401(a)(31)-1 of the Income Tax Regulations, Question and Answer-3,
provides, in relevant part, that a direct rollover that satisfies section 401(a)(31) is
an eligible rollover distribution that is paid directly to an eligible retirement plan
for the benefit of a distributee.

Section 1.401(a)(31)-1 of the Income Tax Regulations, Question and Answer-4,
provides, in summary, that providing a distributee with a check and instructing
the distributee to deliver the check to the eligible retirement plan is a reasonable
means of direct payment as long as there is compliance with the requirements
contained therein.

Section 1.401(a)(31)-1 of the Income Tax Regulations, Question and Answer-5,
provides, in relevant part, that a direct rollover described in Code section
401(a)(31) is a distribution and rollover of the eligible rollover distribution and not
a transfer of assets and liabilities. Thus, for example, the consent and
requirements of Code sections 401(a)(11), 411(a)(11), and 417 apply to
transactions described in Code section 401(a)(31).

The Preamble to the "Final" Income Tax Regulations under Code section
401(a)(31) provides, in relevant part, that". . . the direct rollover option is
provided in addition to the pre-existing rollover provisions under section 402.
Thus, an employee who receives an eligible rollover distribution but does not

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elect a direct rollover still has the option to subsequently roll over the distribution
to an eligible retirement plan within 60 days of receipt”.

Rev. Proc. 2003-16, 2003-4 I.R.B. 359, (January 27, 2003), provides that in
determining whether to grant a waiver of the 60-day rollover requirement
pursuant to section 402(c)(3) of the Code, the Service will consider all relevant
facts and circumstances, including: (1) errors committed by a financial institution;
(2) inability to complete a rollover due to death, disability, hospitalization,
incarceration, restrictions imposed by a foreign country or postal error, (3) the
use of the amount distributed (for example, in the case of payment by check,
whether the check was cashed); and (4) the time elapsed since the distribution
occurred.

In this case, the Service notes that Taxpayer A received a Plan X distribution in
the form of a "direct rollover," as that term is defined in Code section 401(a)(31),
of amounts due him from contributions and earnings from Plan X. The distribution
check was given to Taxpayer A, but made out to Financial Institution A, FBO
Taxpayer A; thus the check was not payable to Taxpayer A and Taxpayer A
lacked control over the check and could not have disposed of it. The Form 1099-
R received by Taxpayer A supports this conclusion by showing Code "G" in box
7, with no withholding for Federal income tax.

In short, Taxpayer A never received a distribution subject to the 60-day rollover
requirement found in section 402(c)(3)(A) of the Code.

Thus the Service concludes as follows with respect to your ruling request:

That Taxpayer A's receipt of his distribution from Plan X was in the form of a
“direct rollover" as that term is used in section 401(a)(31) of the Code and the
Regulations promulgated thereunder. As a result, it was not subject to the 60-day
rollover requirement of section 402(c)(3)(A) of the Code. Furthermore, consistent
with the language on the check which indicates that it is payable to Financial
Institution B, FBO Taxpayer A, the Court Appointed Administrator of the estate of
Taxpayer A may place the check into IRA Y maintained by Financial Institution B.

This letter assumes that Plan X was qualified under section 401(a) of the Code at
the time of distribution of Amount D.

No opinion is expressed as to the tax treatment of the transactions described
herein under the provisions of any other section of either the Code or regulations,
which may be applicable thereto.

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This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited by others as precedent.

A copy of this letter is being sent to your authorized representative pursuant to a
Power of Attorney on file in this office.

If you have any questions regarding this letter, please contact XXXXXXxX, ID
Number XXXXXXXX, SE:T:EP:RA:T4 at XXXXXXXXXXXKXXX.

Sincerely yours,
Laura Warshawsky, Manager

Employee Plans, Technical Group 4
Enclosures:

Deleted copy of letter ruling
Notice of Intention to Disclose