PLR 1323041: IRS waives the rollover deadline after fraudulent IRA activity

Plain-English summary

The IRS considered a taxpayer whose IRA assets were transferred to an entity that falsely represented itself as a qualified IRA custodian. The taxpayer said the custodian's owner engaged in fraudulent activity, including a Ponzi scheme, and that she did not learn of the misrepresentations until a federal investigation became public. The IRS waived the 60-day rollover requirement for the transferred real estate and amount and allowed the taxpayer 60 days after the ruling to contribute the specified replacement assets to a rollover IRA. It also treated a later contribution to another IRA as a rollover, provided the other statutory requirements were satisfied.

Ruling snapshot

• Question: Could the IRS waive the 60-day rollover requirement after fraudulent representations by an unqualified IRA custodian?
• Outcome: Approved, subject to the stated conditions.
• Key authorities: IRC § 408(d)(3); Rev. Proc. 2003-16.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAR 11 2013

Uniform Issue List: 408.03-00

Legend:
Taxpayer A =
IRA B =
IRA C =
IRA D =
Real Estate =

Amount A =
Amount B =
Amount C =
Individual D =
Company C =
Company E =

Company F =

Company V =

201323041

Dear [illegible]:

This is in response to your request dated December 15, 2011, supplemented by letters
dated September 4, 2012, September 18, 2012, October 5, 2012, November 1, 2012,
and January 29, 2013, 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 ("Code").

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

Taxpayer A represents that she received a distribution from IRA B consisting of Real
Estate and Amount A. Taxpayer A asserts that her failure to accomplish a rollover
within the 60-day period prescribed by section 408(d)(3) was due to Individual D's
misrepresentations and fraudulent activity with respect to the distributed assets.

Taxpayer A represents that she had a self-directed IRA with Company C which held real
estate properties and a money-market account (IRA B). On September 18, 2009,
Company C notified Taxpayer A that it would no longer handle self-directed IRAs. On
September 29, 2009, Taxpayer A opened a self-directed IRA (IRA C) with Company E
and authorized the transfer of the assets in IRA B to IRA C. Individual D was the
president of Company E. To effect the transfer, Taxpayer A signed a Company E
Transfer Authorization form certifying that she had self-directed real estate within IRA B.
Company C's Transfer Authorization also stated that Company E would be the
successor custodian. Company E's investment management agreement stated that
Company E is a fiduciary as defined in the Employee Retirement Security Act of 1974,
and that Company E is registered as an investment advisor under the Investment
Advisor Act of 1940.

On January 25, 2010, the Trustee of IRA B transferred the real estate investments to
IRA C. In two transactions, on February 2, 2010, and February 9, 2010, the Trustee of
IRA B transferred Amount A to Company F owned by IRA C. On April 27, 2010,
Taxpayer A moved Amount B out of IRA C with Company E and into IRA D with
Company V.

Unbeknownst to Taxpayer A, Individual D engaged in a Ponzi scheme and
misrepresented Company E as a fiduciary under the Employee Retirement Security Act
of 1974, and the fact that Company E was registered as an investment advisor under
the Investment Advisor Act of 1940. In fact, Company E was not a qualified IRA
custodian and IRA C was not a qualified IRA. Consequently, the transfers of Real
Estate and Amount A from IRA B to IRA C and the transfer of Amount B to IRA D were
not rollovers under section 408(d) of the Code.

Taxpayer A intended that the assets transferred from IRA B to IRA C remain in a self-
directed IRA with Company E and relied on Company E to act as a custodian for her
investment account. Taxpayer A did not learn of Individual D's and Company E's
fraudulent misrepresentations until the publication of the outcome of a federal
investigation in 2011.

Based on the facts and representations, you request a ruling 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 Real Estate and Amount A from IRA B.

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

201323041

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 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 her assertion that her failure to accomplish a timely rollover was due to Individual
D's misrepresentations as to Company E's ability to act as an IRA custodian and his
fraudulent activity with respect to the assets she entrusted to him.

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 Real Estate and Amount A
from IRA B. Taxpayer A is granted a period of 60 days from the issuance of this ruling
letter to contribute the Real Estate and Amount C into a Rollover IRA. Provided all
other requirements of section 408(d)(3) of the Code, except the 60-day requirement, are
met with respect to such contributions, the contribution of the Real Estate and Amount
C will be considered rollover contributions within the meaning of section 408(d)(3) of the
Code. In addition, 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 of Amount B to IRA D on April 27, 2010, will be considered a rollover
contribution within the meaning of section 408(d)(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 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.

201323041

If you have any questions regarding this letter, please contact [illegible]. Please address all correspondence
to SE:T:EP:RA:T3.

Sincerely,

[signature illegible]

Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose

cc: