PLR 1244023: IRS waives the 60-day IRA rollover requirement after an annuity was misidentified

Plain-English summary

The IRS waived the 60-day rollover requirement for a taxpayer who withdrew funds from an IRA annuity after financial and tax advisors failed to identify the account as an IRA. The taxpayer believed the annuity was a nonqualified investment and deposited the distribution into a joint checking account. After learning that the distribution was from an IRA, the taxpayer could no longer meet the 60-day deadline. The IRS granted a 60-day period from the ruling date to contribute the amount to an IRA, subject to the other rollover requirements, and did not authorize rollovers of amounts required to be distributed under IRC § 401(a)(9).

Ruling snapshot

• Question: Could the IRS waive the 60-day IRA rollover requirement after advisors failed to identify an IRA annuity?
• Outcome: Approved
• Key authorities: IRC §§ 72, 401(a)(9), 408(d)(1), 408(d)(3), and 6110; Rev. Proc. 2003-16

Full text (IRS public release)

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

201244023

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

AUG 09 2012

Uniform Issue List: 408.03-00
T:EP:RA:T3

Legend

Taxpayer A:

Amount M:

Amount N:

Financial Institution P:
Financial Advisor K:

CPA Firm T:

IRA A:

Bank R:

Dear

This is in response to your request dated May 13, 2011, as supplemented by
correspondence dated November 15, 2011, January 6, 2012, and July 16, 2012,
submitted on your behalf by 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 (the “Code”).

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

201244023

Page 2

Taxpayer A maintained an Individual Retirement Annuity (IRA), IRA A, with
Financial Institution P. Taxpayer A asserts that, on May 14, 2010, he received a
distribution of Amount M from IRA A. Taxpayer A asserts that his failure to
accomplish a rollover of Amount M within the 60-day period prescribed by section
408(d)(3) of the Code was due to the failures of Financial Advisor K and
Taxpayer A’s tax advisor, CPA Firm T, to inform Taxpayer A that the annuity, IRA
A, was an IRA account.

In year 1999, Taxpayer A relied on Financial Advisor K to handle the movement of
funds out of his 401(k) plan. Taxpayer A and his spouse had a long-standing
relationship with Financial Advisor K. The advisor provided guidance for their
retirement accounts and all other investments. Taxpayer A and his spouse relied
upon the advice and guidance of their advisor for the financial decisions for the
family since their knowledge of investments and tax treatments of their
investments is limited.

Financial Advisor K convinced Taxpayer A that an investment with the
predecessor to Financial Institution P was the best option. Financial Advisor K
completed all the forms necessary for the rollover of Amount N from Taxpayer

A’s 401(k) plan to IRA A and on July 19, 1999, Amount N was rolled over into
IRA A.

Ten years later, Taxpayer A received a letter from Financial Institution P stating
that his annuity had not met the Target Value, and Financial Institution P offered
to begin making annuity payments. Taxpayer A contacted Financial Advisor K for
help and Financial Advisor K stated that he had left Financial Institution P several
years before, and apologized to Taxpayer A for not letting him know. Financial
Advisor K had never informed Taxpayer A that IRA A was an IRA annuity. The
account value of IRA A had decreased to Amount M. Taxpayer A asserts that
after Financial Advisor K left Financial Institution P they did not provide Taxpayer
A with anyone to assist him with his ongoing financial needs.

By that time, Taxpayer A represents that he had begun working with an online
trading account for a couple of years and had done fairly well. Taxpayer A felt
that he could do better with his own funds than paying someone else to lose
money for him. Taxpayer A asked his accountant at CPA Firm T whether if he
withdrew the funds from IRA A that had lost money, he would run into any
problems and did not know nor did he describe the annuity as an IRA. Taxpayer
A’s accountant at CPA Firm T did not ask to see a copy of the annuity before

issuing the general tax advice concerning liquidation of a nonqualified annuity
that had lost value.

The purpose of withdrawing the funds on May 14, 2010, was to prevent a further
decrease in value of the annuity. IRA A was continually decreasing in value and
Taxpayer A realized he was being charged high annual fees and wanted to

withdraw the funds to appropriately invest the funds elsewhere. Taxpayer A was

Page 3 201244023

unaware that the annuity was within an IRA and that the tax treatment of the
transaction is different than that of an annuity outside an IRA.

Taxpayer A sent a request form to Financial Institution P on May 8, 2010 with the
intention to withdraw the funds from IRA A. Taxpayer A received the distribution
from IRA A in Amount M on May 17, 2010, and deposited Amount M into his joint
checking account with his spouse through Bank R on May 21, 2010. Taxpayer A
asserts that he was unaware that the funds were within an IRA at the time of the
withdrawal on May 14, 2010 and thought he was taking a distribution from a
regular annuity account at Financial Institution P

Taxpayer A has provided a copy of the Annuity Withdrawal Request Form issued
to him from Financial Institution P for Annuity A which shows no mention of the
term IRA but reads: “This form can be used for Deferred or Immediate Annuities.

For 403(b) or ORP withdrawals, the 403(b) Tax Sheltered Annuity or ORP form
MUST be used.”

Taxpayer A asserts that he read these statements, did not understand them, and
took the word of his accountant at CPA Firm T that he would not be charged a
penalty and requested closure of the account. After Taxpayer A, acting on his
own, communicated his desire to withdraw IRA A funds, Financial institution P
did not initiate a call to assist Taxpayer A with this annuity or discuss a successor
to Financial Advisor K, who had abandoned Taxpayer A after having established
IRA A on behalf of Taxpayer A. Taxpayer A, was never assigned a specific
advisor and, as a result, never received any advice or guidance on his annuity
after Financial Advisor K left. .

On March 23, 2011, Taxpayer A and his spouse spoke with their accountant at
CPA Firm T about their tax return and for the first time they were informed that
Amount M was an IRA distribution and that the 60-day rollover rule applied.
Taxpayer A never rolled over any portion of the distribution into an IRA or other
qualified plan and the 60-day rollover period had expired. Taxpayer A’s original
intent was to defer the payment of taxes on the IRA A investment.

In a letter dated July 16, 2012, CPA Firm T stated they had a close working
relationship with Taxpayer A and have provided tax and financial advice for many
years which Taxpayer A relied upon. They also stated that they never asked, but
should have asked, to see a copy of the annuity statement to ensure that it was a
nonqualified annuity before issuing their advice to Taxpayer A. CPA Firm T did
not realize that the annuity was held within an IRA until Taxpayer A received a
Form 1099-R in January of 2011 for the distribution.

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

Page 4 201244023

Section 408(d)(1) of the Code provides that, except as otherwise provided in
section 408(d), 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 defines, and provides the rules applicable to IRA
rollovers.

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)).

Section 408(d)(3)(B) of the Code provides that section 408(d)(3) does not

apply to any amount described in section 408(d)(3)(A)(i) 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) from an IRA which was not includible in gross income because of
the application of section 408(d)(3).

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).

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.

201244023

Page 5

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 408(d)(3)(I), 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 documentation submitted by Taxpayer A is
consistent with his assertion that his failure to accomplish a rollover of Amount M
within the 60 day period prescribed by section 408(d)(3) of the Code was due to
the failures of Financial Advisor K and Taxpayer A’s tax advisor, CPA Firm T, to
inform Taxpayer A that the annuity, IRA A, was an IRA account.

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 to
Taxpayer A of Amount M, Taxpayer A is granted a period of 60 days measured
from the date of the issuance of this letter ruling to make a rollover contribution of

Amount M to an IRA (or IRAs) described in Code section 408(a). Provided all
other requirements of Code section 408(d)(3), except the 60-day requirement,
are met with respect to such IRA contribution, the contribution will be considered
a rollover contribution within the meaning of Code section 408(d)(3).

This ruling does not authorize the rollover of amounts that are required to be
distributed by section 401(a)(9) 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.

Pursuant to a power of attorney on file with this office, a copy of this letter ruling
is being sent to your authorized representative.

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.

Page 6 201244023

If you have any questions, please contact

Sincerely yours,

[illegible signature]

Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

Enclosures:
Deleted Copy of Ruling Letter
Notice of Intention to Disclose

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