CCA 1313025: IRS analyzes tax from an erroneous qualified-plan overpayment and rollover

Plain-English summary

The IRS analyzed a taxpayer who received an overpayment from a qualified employer plan, rolled the overpayment into an IRA based on an erroneous Form 1099-R, and later withdrew it. The memo concluded that the overpayment was taxable when distributed from the qualified plan because it exceeded the taxpayer's plan balance and was not an eligible rollover distribution. It also concluded that the later IRA distribution was taxable because the duty of consistency prevented the taxpayer from changing positions after the assessment period for the earlier year expired. The memo further concluded that the overpayment could create 6% excise-tax liabilities for excess IRA contributions, and that the duty of consistency did not support a refund of those excise taxes.

Ruling snapshot

• Question: How should an erroneous qualified-plan overpayment rolled into an IRA be taxed, including any excess-contribution excise tax?
• Outcome: Advice given that the overpayment and later IRA distribution were taxable and that § 4973 excise tax applied to the excess contributions on the stated facts.
• Key authorities: IRC §§ 402(a), 402(c), 408(d), 408(d)(5)(B), and 4973; Estate of Letts v. Commissioner, 109 T.C. 290 (1997)

Full text (IRS public release)

ID: CCA-831316-12 Number: 201313025
Release Date: 3/29/2013
Office: --------------------------
UILC: 402.00-00

From: ---------------------
Sent: Friday, August 31, 2012 3:16 PM
To: --------------------
Cc:
Subject: CCA ---------

This email is in response to your questions about a taxpayer who received an
overpayment from her employer’s qualified plan in -------. The overpayment (herein
referred to as $X) was in addition to a lump sum payment to which the taxpayer was
entitled. The taxpayer was provided an erroneous Form 1099-R and in good faith
believed that the entire distribution was an eligible rollover distribution. Based on that
erroneous information, the taxpayer rolled over the entire distribution into an individual
retirement account (IRA) in -------. The taxpayer excluded the $X from her gross income
on her Form 1040 for ------- based on the same erroneous information that the $X was
an eligible rollover distribution. Then, in -------, her former employer informed her of the
error, and she withdrew the $X from her IRA in -------. The taxpayer was age 60 when
she withdrew the $X.

First you ask whether the $X was taxable in -------. In general, § 402(a) provides that
any amount actually distributed to a distributee from a qualified plan described in § 401(a)
will be taxable to the distributee in the taxable year of distribution under § 72
(relating to annuities). Section 402(a) applies to any distribution from a qualified plan,
even an overpayment. See Rev. Rul. 2002-84, 2002-50 I.R.B. 953. Section 402(c)(1)
provides that an eligible rollover distribution that is rolled over to an eligible retirement
plan is not includible in gross income for the taxable year in which paid. However, both
the operative language of § 402(c)(1) and the definition of eligible rollover distribution in
§ 402(c)(4) limit the applicability of the exclusion for rollovers to distributions of “any
portion of the balance to the credit of an employee in a qualified trust.” Contrary to the
information the taxpayer was provided, the $X exceeded her balance in the qualified
trust and was not eligible for the exclusion in § 402(c)(1). Based on the corrected
information, she should have treated the $X as taxable under § 72 in -------.

Next you ask whether the distribution of the overpayment from the taxpayer’s IRA was
taxable in -------. Section 408(d)(1) provides that, except as otherwise provided, “any
amount paid or distributed out of an individual retirement plan shall be included in gross
income by the payee or distributee, as the case may be, in the manner provided under
section 72.” Thus, unless an exception applies, the amount distributed in ------- would
be taxable to the taxpayer in that year. The taxpayer asserts that her --------distribution
falls within an exception for distributions of excess rollover contributions under
§ 408(d)(5)(B). The exception in § 408(d)(5)(B) only applies if the taxpayer reasonably

                                         2

relies on information supplied pursuant to subchapter F for determining the amount of
the rollover, but the information was erroneous. The taxpayer asserts that she rolled
the $X into her IRA based on information supplied on a Form 1099-R that stated that the
amount of the overpayment was an eligible rollover distribution, but that she now knows
the information was erroneous and, as a result, the $X distribution in ------- is
excludable under § 408(d)(5)(B). However, the “duty of consistency” precludes this
result because it is contrary to the position she took on her ------- return.

The duty of consistency is an affirmative defense that prevents a party, usually the
taxpayer, from taking a tax position with respect to a tax year and then taking a contrary
position in a subsequent year. As it applies to a taxpayer, the three elements of the
duty of consistency are: (1) the taxpayer made a representation for tax purposes in one
tax year; (2) the Commissioner acquiesces to the representation or relies on it; and (3)
the taxpayer desires to change the representation in a later tax year after the statute of
limitations bars an adjustment to the earlier year. Estate of Letts v. Commissioner, 109
T.C. 290 (1997), aff’d without published opinion, 212 F.3d 600 (11th Cir. 2000). See
also Janis v. Commissioner, 461 F.3d 1080 (9th Cir. 2006); Estate of Ashman v.
Commissioner, 231 F.3d 541 (9th Cir. 2000); and LeFever v. Commissioner, 100 F.3d
778 (10th Cir. 1996).

In this case, the taxpayer excluded the $X from her gross income in ------- based on the
position that the $X was an eligible rollover distribution. The Service relied on that
information when it did not assess tax on the $X for -------. Now, new information has
come to light that the $X was in fact not an eligible rollover distribution, and the taxpayer
seeks to exclude the $X from her gross income in ------- based on this new information.
However, the duty of consistency prevents the taxpayer from basing her ------- return on
one set of facts (that the $X was an eligible rollover distribution) and basing her ---------
return on a different set of facts (that the $X was not an eligible rollover distribution).
Even if the Service were to accept an amended ------- return with the new information on
it, the time period during which the Service could have assessed the tax on the $X for --
------- has expired, and the Service’s reliance on the misinformation on the ------- return
cannot be undone. Accordingly, she is precluded from claiming the exception under
§ 408(d)(5)(B) on her ------- return, and the distribution of the $X from her IRA was
taxable under § 72 in -------.

Notably, the § 408(d)(5)(B) exception could have applied if the time period for assessing
the tax on the $X for ------- had not expired. In that case, after consistently applying the
new information to both ------- and -------, the overpayment would be included in her
gross income for ------- but not for -------.

Finally, you ask whether the taxpayer is liable for the 6% excise tax under § 4973 for the
years ------- through -------. Section 4973(a) imposes an excise tax equal to 6% of the
amount of excess contributions in an IRA. In the case of an IRA, § 4973(b) defines
excess contributions to be the sum of (1) the excess of the amount contributed for the
taxable year to the account (other than a contribution to a Roth IRA or a rollover
contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16))
over the amount allowable as a deduction under § 219, plus (2) the amount of excess
contributions for the previous taxable year minus certain distributions and the amount
allowable as a deduction under § 219 for the taxable year. In this case, the excise tax
applies to the amount of the excess contribution in each year from ------- through -------.
Assuming that the taxpayer made no IRA contributions other than the ones described in
your question, the excess contribution for ------- was equal to the amount of the
overpayment that the taxpayer contributed to the IRA minus the § 219 limit for -------.
The excess contribution for ------- was equal to the excess contribution for ------- minus
the § 219 limit for -------. Each year, the excess contribution is reduced by the § 219
limit for that year (less any IRA contributions actually made by the taxpayer in that year).

The taxpayer paid the excise taxes and is now seeking a refund. Note that the taxpayer
may not assert the duty of consistency to generate a refund of these excise taxes. The
duty of consistency is an affirmative defense against the party seeking to change its
own prior representation. In this case, it is the taxpayer (not the Service) that is
changing positions, and the inaccurate information provided in ------- cannot be used to
require the Service to refund the excise taxes.

We have not addressed any potential statute of limitations questions regarding the
excise tax, nor have we raised any issues regarding corrections (and relief from the
§ 4973 excise tax) involving overpayments from qualified plans under the Employee
Plans Compliance Resolution System (see Rev. Proc. 2008-50, 2008-35 I.R.B. 464).

This document may not be used or cited as precedent. Section 6110(k)(3) of the
Internal Revenue Code.