Custodians' bad advice justifies late IRA rollover waiver

Plain-English summary

A taxpayer used an IRA to invest in a promissory note secured by real property after two financial institutions advised that the investment and payee arrangement were permitted. The IRA documents did not actually permit that investment. When the borrower tried to send principal and interest payments back to the IRA, the custodian rejected them and issued checks to the taxpayer. The taxpayer kept all repayment checks uncashed and represented that none of the distributed amount had been used for another purpose. Because the missed rollover resulted from erroneous financial-institution advice, the IRS waived the deadline and gave the taxpayer 60 days to contribute the amount to an IRA or another eligible plan.

Ruling snapshot

• Question: Could the taxpayer receive a rollover waiver after custodians gave incorrect advice about holding a promissory note through the IRA?
• Outcome: Approved, with 60 days from the ruling date to complete the rollover
• Key authorities: IRC § 408(d)(3)(I); Rev. Proc. 2003-16

Full text (IRS public release)

201447059

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

AUG 26 2014

Uniform Issue List: 408.03-00

T:EP:RA:T2

XXXXX
XXXXX
XXXXX

Legend:

Taxpayer = XXXXX
IRA = XXXXX
XXXXX
XXXXX
Amount = XXXXX
Financial Institution A = XXXXX
Financial Institution B = XXXXX
Borrower = XXXXX
Promissory Note = XXXXX
XXXXX

Dear:

This is in response to your request dated December 12, 2013, as supplemented
by correspondence dated March 23, 2014, April 10, 2014, and June 26, 2014, 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:

2 201447059

Taxpayer represents that he received a distribution from IRA maintained by
Financial Institution A, totaling Amount. Taxpayer asserts that his failure to accomplish
a rollover within the 60-day period prescribed by section 408(d)(3) of the Code was due
to erroneous information provided to Taxpayer by Financial Institution A and Financial
Institution B. Further, Taxpayer represents that he has not used the Amount for any
other purpose.

Taxpayer, through IRA, invested Amount in Promissory Note, which was secured
by a deed of trust on property owned by Borrower. Promissory Note was made payable
to IRA. The beneficiary of the deed of trust was Financial Institution A as custodian of
IRA. The documentation received by Taxpayer at the time he established IRA did not
permit investment of Amount in Promissory Note through IRA. Taxpayer represents that
he nonetheless was advised by representatives from Financial Institution A and
Financial Institution B that he could invest Amount in Promissory Note through IRA, and
further advised that he could make Promissory Note payable to IRA.

Borrower attempted to wire transfer certain repayments of principal and interest
under Promissory Note to Financial Institution A for further deposit to IRA, but such
deposits were rejected by Financial Institution A. Financial Institution A thereafter issued
checks to Taxpayer in an amount equaling the amount of the wire transfers by
Borrower. Taxpayer is still in possession of such checks, which have never been
cashed: All other repayment checks by Borrower under Promissory Note have been
retained by Taxpayer and have not been cashed, or deposited into any other account.
Taxpayer is in possession of uncashed checks totaling Amount.

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

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 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

3 201447059

(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)(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) of the Code do not apply to any amount required to be distributed under section
408(a)(6) of the Code.

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.

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) 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 documentation submitted by Taxpayer are
consistent with his assertion that his failure to accomplish a timely rollover was caused
by erroneous information received from representatives from Financial Institution A and
Financial Institution B assuring him that he could invest Amount in Promissory Note
through IRA.

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 from
IRA. Taxpayer is granted a period of 60 days from the issuance of this ruling letter to
contribute Amount into an IRA or other eligible retirement plan. Provided all other

4 201447059

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 will be considered a
rollover contribution within the meaning of section 408(d)(3) of the Code.

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 in
this ruling under the provisions of any other section of either the Code or regulations
which may be applicable.

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.

If you wish to inquire about this ruling, please contact XXXXX at XXX-XXXX.
Please address all correspondence to SE:T:EP:RA:T2.

Sincerely yours,

Jason E. Levine, Manager,
Employee Plans Technical Group 2

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