Adviser errors justify late IRA rollovers into self-directed accounts

Plain-English summary

A married couple directed four IRA distributions into a partnership investment after an adviser represented that the investment firm could preserve the funds' IRA status. The adviser failed to arrange for a qualified IRA custodian, while the firm titled and reported the accounts as IRAs. After their accountant discovered the error, the taxpayers moved the amounts and their earnings to newly established self-directed IRAs with a valid custodian. The IRS waived the 60-day rollover requirement for the original distributed amounts because the taxpayers had consistently intended IRA rollovers and relied on the adviser and firm's erroneous handling. The waiver did not cover earnings generated after distribution, which were treated as regular IRA contributions subject to the usual contribution limits.

Ruling snapshot

• Question: Would adviser and investment-firm errors justify waiving the 60-day rollover deadline for four IRA distributions?
• Outcome: Approved for the distributed amounts, but not for later earnings
• Key authorities: IRC §§ 72 and 408; Treas. Reg. § 1.408-2(e); 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

201511035

DEC 16 2014

Uniform Issue List: 408.03-00

T:EP:RA:T1

LEGEND:

Taxpayer A =

Taxpayer B =

IRA C =

Financial Institution D =

IRA E =

Financial Institution F =

IRA G =

Individual H =

Investment Firm I =

Partnership J =

Custodian K =

IRA L =

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IRA M =

IRA N =

Amount 1 =

Amount 2 =

Amount 3 =

Amount 4 =

Dear :

This is in response to your letter dated June 6, 2014, submitted on your behalf by
your authorized representative, in which you requested 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 penalties of
perjury in support of your request:

Taxpayers A and B are husband and wife. Taxpayer A states that he received
distributions of Amounts 1 and 2 from IRA C, a Simplified Employee Pension
Plan (SEP)-Individual Retirement Arrangement, which was maintained by
Financial Institution D. Taxpayer A received a distribution of Amount 3 from IRA
E, and Taxpayer B received a distribution of Amount 4 from IRA G. Both IRA E
and IRA G were maintained by Financial Institution F. Taxpayers A and B assert
that their failure to accomplish a rollover within the 60-day period prescribed by
section 408(d)(3) of the Code was due to errors made by Individual H from
Investment Firm I, which led to the amounts being placed in non-IRA accounts.
Taxpayers A and B intended to roll over the amounts withdrawn from IRA C, IRA
E and IRA G into new rollover IRAs that would invest in Partnership J, and they
erroneously believed that the investment in Partnership J had been made
through new IRAs established in their names. Taxpayers A and B further
represent that the amounts are now held by a valid IRA Custodian, Custodian K,
and the amounts have not been used for any other purpose.

Taxpayers A and B represent that they wished to diversify their investments and
contacted Investment Firm I about rolling over a portion of their IRA assets to
Investment Firm I. Individual H, principal of Investment Firm I, managing
member of Partnership J, and a registered investment advisor and investment

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manager, indicated in a sworn statement that he advised Taxpayers A and B that
Investment Firm I was capable of accepting, administering, investing and
managing Taxpayers A & B’s IRA assets, while preserving the IRA character of
the funds transferred to Investment Firm I.

Taxpayer A made an initial investment in Partnership J, in Amount 1 in June
2013 when, at Taxpayer A’s direction, Financial Institution D sent a check for
Amount 1 directly to Partnership J for the benefit of Taxpayer A. Prior to sending
the check, Taxpayer A completed and signed a subscription agreement to invest
Amount 1 in Partnership J, as an IRA investment. At relevant places in the
subscription agreement, Taxpayer A indicated that the investment of Amount 1
was an IRA investment. Further, in his sworn statement, Individual H indicates
that Taxpayer A clearly instructed that Amount 1 was to be invested as IRA
funds. It was Taxpayer A’s understanding that Individual H would establish a
rollover IRA account to hold Amount 1 and that this account would be invested in
Partnership J. Individual H acknowledges that he agreed to arrange for
custodianship for the investment and that he directed Taxpayer A to leave the
sections of the subscription agreement for a custodian’s signature blank for
Individual H to complete. However, Individual H acknowledges that he
countersigned and accepted the subscription agreement without a custodian’s
signature, and no new IRA was established at that time.

Taxpayers A and B represent that they made subsequent investments in
Partnership J in the same manner. At the direction of Taxpayer A, Financial
Institution F wired Amount 3 from IRA E directly to Partnership J on October 31,
2013. Finally, at the direction of Taxpayer B, Financial Institution F wired Amount
4 from IRA G directly to Partnership J on October 31, 2013. At the direction of
Taxpayer A, Financial Institution D sent Amount 2 from IRA C by check directly to
Partnership J on December 18, 2013. For each investment, Taxpayers A and B
completed a new subscription agreement and indicated that IRAs were to be the
beneficial owners of the Partnership J interest. In addition, Individual H
countersigned and accepted each subscription agreement without arranging for
or securing a custodian’s signature.

Individual H acknowledges in his sworn statement that he erred when he
overlooked the requirement that the amounts transferred by Taxpayers A and B
from their IRAs to Partnership J be held by a qualified IRA custodian, even
though at all times Taxpayers A and B had indicated their intent to execute
rollovers to new IRAs at Partnership J. Individual H indicates that he assumed
that Taxpayers A and B’s previous IRA custodians (Financial Institution D and
Financial Institution F) would continue in their capacity as custodians for the
amounts that were placed in new accounts with Partnership J.

Taxpayers A and B indicate that they asked Individual H about whether he had
established custodians for the accounts with Investment Firm I, and Individual H
responded that Investment Firm I had completed the steps necessary to maintain

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the IRA status of the funds and that all was in order. In addition, Investment Firm
I set up and titled the accounts to indicate that they were IRAs, in a manner that
Taxpayers A and B represent led them to conclude that their previous custodians
were somehow still acting as custodians for the assets. Once Investment Firm I
had titled the accounts in this manner, it continued to refer to the improperly-titled
accounts as IRAs in correspondence with Taxpayers A and B, including on the
Partnership J’s Schedule K-1 that Investment Firm I issued for each of the three
accounts opened with Partnership J. Investment Firm I also indicated on the
Schedule K-1 issued for each account that the beneficial owners of Taxpayers A
and B’s partnership interest in Partnership J were IRAs.

Taxpayers A and B assert that they did not learn that Partnership J was not a
qualified IRA custodian until their certified public accountant discovered the error
during the preparation of their annual income taxes in April 2014. Immediately
thereafter, Taxpayers A and B represent that they located Custodian K, an IRA
custodian and administrator, and established three new self-directed IRAs, IRA
L, IRA M and IRA N. On May 14, 2014, Taxpayer A transferred Amounts 1 and 2
(plus earnings), originally from IRA C, to IRA L. Taxpayer A transferred Amount
3 (plus earnings), originally from IRA E, to IRA M. Taxpayer B transferred
Amount 4 (plus earnings), originally from IRA G, to IRA N. Shortly thereafter,
Taxpayers A and B submitted this ruling request.

Based on the foregoing 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 1 and Amount 2 from IRA C, Amount 3 from IRA E and Amount 4 from
IRA G.

Section 408(a) of the Code defines an individual retirement account as a trust
that meets certain conditions, including the requirement that the trustee of the
trust must be a bank (as defined in Section 408(n) of the Code) or other person
who demonstrates, to the satisfaction of the Secretary, that the manner in which
he will administer the account will be consistent with the requirements of such
section. Section 408(h) provides that a custodial account may be treated as a
trust if the custodian meets those requirements, and if the account would
otherwise satisfy the 408(a) requirements. Section 1.408-2(e) of the Income Tax
Regulations sets forth stringent requirements an applicant must meet in order to
be approved to serve as an IRA trustee or custodian.

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.

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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)).

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.

Revenue Procedure 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

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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 Taxpayers A and B
are consistent with their assertion that their failure to complete a rollover of
Amounts 1, 2, 3 and 4 was a result of errors committed by Individual H,
Investment Firm I and Partnership J. Taxpayers A and B intended to rollover the
amounts withdrawn from IRA C, IRA E and IRA G into new rollover IRAs that
would invest in Partnership J, and they believed that the investment in
Partnership J had been made through new IRAs established in their names. The
documentation also demonstrates that Individual H’s processing of the
investments in Partnership J as investments in IRAs (despite the lack of
signatures by an IRA custodian) and the titling of the accounts in the names of
the IRAs’ previous custodians led Taxpayers A and B erroneously to believe that
no further steps were needed to ensure that the investments were held through
IRAs.

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
Amounts 1 and 2 from IRA C, Amount 3 from IRA E, Amount 4 from IRA G.
Provided all other requirements of section 408(d)(3) of the Code, except the 60-
day requirement, are met with respect to the contributions, the contributions of
Amounts 1 and 2 to IRA L, Amount 3 to IRA M, and Amount 4 to IRA N with
Custodian K on May 14, 2014, will be considered valid rollover contributions.

However, the ruling request does not apply to earnings on Amounts 1, 2, 3 and 4.
Section 408(d)(3)(I) of the Code provides for waivers only with respect to
distributions and not with respect to earnings on such amounts after distribution.
Therefore, the transfer of any amounts representing earnings on Amount 1 and 2
from IRA C, earnings on Amount 3 from IRA E, and earnings on Amount 4 from
IRA G are not considered rollover contributions within the meaning of section
408(d)(3) of the Code. Rather, they are considered IRA contributions under
section 408(a)(1) of the Code, and these amounts are subject to the rules and
limits that pertain thereto.

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 taxpayers who requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

A copy of this letter is being sent to your authorized representative in accordance
with a Power of Attorney (Form 2848) on file with this office.

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If you have any questions, please contact (I.D. # ) by
phone at or fax at . Please address all
correspondence to SE:T:EP:RA:T1.

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:

Deleted Copy of Ruling Letter
Notice of Intention to Disclose

cc: