PLR 1237025: IRS waives the 60-day rollover deadline after financial-adviser error

Plain-English summary

The taxpayer received a distribution from her deceased spouse's individual retirement annuity and deposited it into a non-IRA account after her long-time financial adviser incorrectly concluded that the check represented life-insurance proceeds. The taxpayer did not understand the tax consequences and later learned that she could have rolled the inherited IRA into an IRA in her own name. The IRS found that the missed deadline resulted from erroneous advice and waived the 60-day rollover requirement. The taxpayer was given 60 days from the ruling date to contribute no more than the distributed amount back into an IRA, subject to the other applicable requirements.

Ruling snapshot

• Question: Can the IRS waive the 60-day rollover deadline when an adviser incorrectly identifies an IRA distribution and gives erroneous investment advice?
• Outcome: Approved, subject to completing the rollover within 60 days of the ruling.
• Key authorities: IRC § 408(d)(3)(I), including the surviving-spouse rollover rules.

Full text (IRS public release)

201237025

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

JUN 19 2012

Uniform Issue List: 408.03-00

[illegible handwritten routing mark]

Legend:
Taxpayer A =
Individual B =

IRA C =

Financial Institution D =
Account E =
Financial Institution F =
Individual G =
Financial Institution H =

Amount 1 =

Dear [redacted]:

This letter is in response to a request for a letter ruling dated March 10, 2012,
as supplemented by additional information dated April 24, and May 22, 2012,
from your authorized representative, in which you request a waiver of the 60-day
rollover requirement contained in section 408(d)(3) of the Internal Revenue Code
("Code").

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

Taxpayer A, age 75, represents that she took a distribution of Amount 1 from
IRA C. Taxpayer A asserts that her failure to accomplish a rollover within the 60-
day period prescribed by Code section 408(d)(3) was due to an error by Financial
Institution F.

Taxpayer A was married to Individual B. Individual B maintained IRA C, an
individual retirement annuity (IRA) under section 408(b) of the Code, with
Financial Institution D. Individual B passed away on February 22, 2011. Soon
after his death, Taxpayer A requested a distribution from IRA C as Individual B’s
beneficiary. On March 9, 2011, Taxpayer A met with Individual G, who had been
Taxpayer A’s and Individual B’s financial advisor for 15 years. She showed him
a check for Amount 1 which had been distributed from IRA C. Individual G
noticed the check had been written by Financial Institution D, an insurance
company. He concluded Amount 1 had to represent a life insurance death
benefit. He failed to investigate the source of Amount 1. Per his advice, that her
family investment accounts be consolidated, Taxpayer A deposited Amount 1 into
Account E, a non-IRA account with Financial Institution F.

Taxpayer A represents she did not understand the tax consequences of this
transaction. She relied on Individual G to recommend to her the most prudent
way to invest Amount 1. Subsequent to the expiration of the 60-day rollover
period for Amount 1, Taxpayer A reviewed Internal Revenue Service Publication
590, Individual Retirement Accounts, and discovered she could have elected to
roll Individual B’s IRA into an IRA in her own name. She communicated this to
Individual G who told her he should have asked her some questions about the
source of Amount 1. The ruling request is accompanied by a letter from
Financial Institution H which admits that Individual G failed to exercise
“due diligence” as Taxpayer A’s financial advisor. Had he determined that
Amount 1 had been distributed from Individual B’s IRA C, he would have advised
her to deposit it into her own IRA as a spousal rollover.

Based on the above facts and representations, you request that the Internal
Revenue Service (“Service”) waive the 60-day rollover requirement contained in
section 408(d)(3) of the Code with respect to the distribution of Amount 1.

Section 408(d)(1) of the Code provides that, except as otherwise provided in
section 408(d) of the Code, any amount paid or distributed out of an IRA shall be
included in gross income by the payee or distributee, as the case may be, in the
manner provided under section 72 of the Code.

Section 408(d)(3) of the Code provides the rules applicable to IRA rollovers.

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Section 408(d)(3)(A) of the Code provides that section 408(d)(1) of the Code
does not apply to any amount paid or distributed out of an IRA to the individual
for whose benefit the IRA is maintained if -

(i) the entire amount received (including money and any other property) is
paid into an IRA for the benefit of such individual not later than the 60th day after
the day on which the individual receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is
paid into an eligible retirement plan (other than an IRA) for the benefit of such
individual not later than the 60th day after the date on which the payment or
distribution is received, except that the maximum amount which may be paid into
such plan may not exceed the portion of the amount received which is includible
in gross income (determined without regard to section 408(d)(3) of the Code).

Section 408(d)(3)(B) of the Code provides that section 408(d)(3) of the Code
does not apply to any amount described in section 408(d)(3)(A)(i) of the Code
received by an individual from an IRA if at any time during the 1-year period
ending on the day of such receipt such individual received any other amount
described in section 408(d)(3)(A)(i) of the Code from an IRA which was not
includible in gross income because of the application of section 408(d)(3) of the
Code.

Section 408(d)(3)(C)(i) of the Code provides, in summary, that in the case of an
inherited IRA, section 408(d)(3) shall not apply to any amount received by an
individual from such account (and no amount transferred from such account to
another IRA shall be excluded from income by reason of such transfer), and such
inherited account shall not be treated as an IRA for purposes of determining whether
any other amount is a rollover contribution.

Section 408(d)(3)(C)(ii) of the Code provides that the term “inherited IRA” means an
IRA obtained by an individual, other than the IRA owner’s spouse, as a result of the
death of the IRA owner. Thus, under circumstances that conform with the
requirements of section 408(d)(3), a surviving spouse who acquires a decedent’s
IRA after, and as a result of, the death of an IRA owner will be able to roll over the
decedent’s IRA into an IRA set up and maintained in the name of the surviving
spouse.

Section 408(d)(3)(D) of the Code provides a similar 60-day rollover period for
partial rollovers.

Section 408(d)(3)(E) of the Code provides that the rollover provisions of section
408(d) do not apply to any amount required to be distributed under section
408(a)(6).

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Section 408(d)(3)(I) of the Code provides that the Secretary may waive the
60-day requirement under sections 408(d)(3)(A) and 408(d)(3)(D) 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
408(d)(3)(I) of the Code.

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 a timely rollover of
Amount 1 was due to her following the erroneous advice provided by Financial
Institution F.

Therefore, pursuant to section 408(d)(3)(I) of the Code, the Service hereby
waives the 60-day rollover requirement with respect to the distribution of Amount
1 from IRA C. Taxpayer A is granted a period of 60 days from the issuance of
this letter ruling to contribute no more than Amount 1 back into an IRA. Provided
all other requirements of section 408(d)(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 408(d)(3).

This ruling does not authorize the rollover of amounts that are required to be
distributed by section 408(b)(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.

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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 [redacted] (I.D. # [redacted]), [redacted], at ([redacted]).

Sincerely yours,

[signature]

Carlton A. Watkins
Manager
Employee Plans Technical Group 1

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

cc: