PLR 1226036: IRS waives rollover deadlines after fraudulent investment advice

Plain-English summary

The IRS waived the 60-day rollover requirement for two retirement-plan distributions after a taxpayer was misled into believing that the funds had been deposited into a rollover IRA. The taxpayer gave the checks to an adviser, who placed them in a consolidated account that was not an IRA and later transferred the funds to another institution. The IRS granted 60 days from the ruling letter to contribute no more than the combined amount of the two distributions to an eligible retirement plan or rollover IRA. The ruling did not address the transaction under other Code provisions.

Ruling snapshot

• Question: Could the taxpayer obtain a waiver of the 60-day rollover requirement after fraudulent advice caused two distributions to be deposited outside an IRA?
• Outcome: Approved
• Key authorities: IRC §§ 401(a)(31), 402(c), 6110; Treas. Reg. § 1.401(a)(31); Rev. Proc. 2003-16

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224 201226036

TAX EXEMPT AND APR 03 2012
GOVERNMENT ENTITIES
DIVISION

Uniform Issue List: 402.00-00

T:EP:RA:T1

Legend:

Taxpayer A =
Company B =
Plan C =
Financial Institution E =

Individual F =
Firm G =
Financial Institution H =
Financial Institution I =
Financial Institution J =
Account K =
Account L =
Account M =
Amount 1 =
Amount 2 =
Amount 3 =
Amount 4 =
Amount 5 =

201226036

Dear :

This letter is in response to a request for a letter ruling dated February 18, 2011,
as modified and supplemented by additional correspondence dated May 26 and
27, 2011, November 15 and 28, 2011, and March 6 and 7, 2012, from your
authorized representative, in which you request a waiver of the 60-day rollover
requirement contained in section 402(c)(3)(B) of the Internal Revenue Code
(“Code”), regarding the distributions of Amount 1 and Amount 2 from Plan C.

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

Taxpayer A, who had attained age 59 ½ at the time of distribution of Amount 1
from Plan C, asserts that her failure to accomplish rollovers of Amounts 1 and 2
within the 60-day period prescribed by section 402(c)(3) of the Code was due to
her reliance on fraudulent information provided by Individual F of Firm G.

Taxpayer A participated in Plan C, a profit sharing plan under section 401(a) of
the Code, maintained by Company B. Funds in Plan C were held by Financial
Institution E. Taxpayer A represents that in September, 2009, she met with
Individual F, of Firm G, to discuss opening an individual retirement account (IRA)
with Financial Institution H. On or about October 7, 2009, Taxpayer A received a
distribution of Amount 1 from Plan C. The check for Amount 1 was given to
Individual F who knowingly deposited it into Account K with Financial Institution H
on October 12, 2009. Account K, however, was not an IRA Account as
Taxpayer A had intended. Instead, Account K was a consolidated deposit
account containing funds of several clients of Firm G. Individual F then
contacted Taxpayer A and assured her that he was able to set up the rollover
IRA into which he said he had deposited Amount 1.

In January, 2010, Taxpayer A had a telephone conversation with Individual F to
discuss rolling over a distribution of Amount 2 from Plan C. The check for
Amount 2 was dated January 19, 2010. It was delivered to Individual F's office
(Firm G) and was deposited into Account K on January 22, 2010. After March
19, 2010, all of the funds in Account K were transferred to a similar account
established at Financial Institution I.

Soon thereafter, Taxpayer A became suspicious over the failure by Firm G to
produce deposit slips showing deposits of Amounts 1 and 2 into a rollover IRA.
Taxpayer A was able to recover Amounts 3 and 4 from Financial Institution I, on
July 16 and August 19, 2010, respectively. Both Amounts 3 and 4 were
deposited by Taxpayer A into Account L maintained with Financial Institution J
and subsequently were transferred to Account M.

3 201226036

On November 29, 2010, Taxpayer A met with Federal investigators to discuss
the activities of Individual F and Firm G. She was advised that Individual F and
Firm G were being investigated for possible criminal violations.

Based on the above facts and representations, you request that the Internal
Revenue Service (“Service”) waive the 60-day rollover requirement contained in
section 402(c)(3)(B) of the Code with respect to the distribution of Amounts 1
and 2.

Section 402(c) of the Code provides that if any portion of the balance to the credit
of an employee in a qualified trust is paid to the employee in an eligible rollover
distribution, and the distributee transfers any portion of the property received in
such distribution to an eligible retirement plan, and in the case of a distribution of
property other than money, the amount so transferred consists of the property
distributed, then such distribution (to the extent transferred) shall not be
includible in gross income for the taxable year in which paid.

Section 402(c)(3)(A) of the Code states that such rollover must be accomplished
within 60 days following the day on which the distributee received the property.
An individual retirement account (IRA) constitutes one form of eligible retirement
plan.

Section 402(c)(3)(B) of the Code provides, in relevant part, that the Secretary
may waive the 60-day requirement under section 402(c) 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.

Section 401(a)(31) of the Code provides the rules for governing “direct transfers
of eligible rollover distributions”.

Section 1.401(a)(31) of the Income Tax Regulations, Question and Answer-15,
provides, in relevant part, that an eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover is a distribution and rollover, and not a
transfer of assets and liabilities.

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 sections 408(d)(3)(I) and 402(c)(3)(B) 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.

The information presented and the documentation submitted by Taxpayer A is
consistent with her assertion that her failure to accomplish timely rollovers of
Amounts 1 and 2 was due to having been misled by Individual F and Firm G
into believing that both amounts had been deposited into an IRA.

Therefore, pursuant to section 402(c)(3)(B) of the Code, the Service hereby
waives the 60-day rollover requirement with respect to the distribution of
Amounts 1 and 2 from Plan C. Taxpayer A is granted a period of 60 days from
the issuance of this letter ruling to contribute no more than Amount 5 (Amount 1
plus Amount 2) into an eligible retirement plan or rollover IRA. Provided all other
requirements of section 402(c)(3) of the Code, except the 60-day requirement,
are met with respect to such contribution, the contribution will be considered a
rollover contribution within the meaning of section 402(c)(3) of the Code.

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

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

A copy of this letter ruling has been sent to your authorized representative
pursuant to a power of attorney on file in this office. If you wish to inquire about
this ruling, please contact (I.D. # ), , at ( ).

Sincerely yours,

Carlton A. Watkins

Manager
Employee Plans Technical Group 1

Enclosures:
Deleted Copy of this Letter
Notice of Intention to Disclose, Notice 437

CC: