Partnership investment does not qualify for rollover waiver

Plain-English summary

An IRA owner directed his custodian to issue funds to a partnership so his IRA could acquire a partnership interest. The custodian could not hold the interest and reported the payment as a taxable distribution, and the taxpayer later argued that his adviser should have arranged for another financial institution to hold the investment for the IRA. The IRS found that the taxpayer had chosen to use the IRA proceeds to fund a business venture rather than attempting to roll them into another retirement account. It denied the 60-day waiver and ruled that the distribution and its earnings were includible in the taxpayer's gross income for the distribution year.

Ruling snapshot

• Question: Could an IRA owner receive a rollover waiver after using distributed funds to purchase a partnership interest that his custodian could not hold?
• Outcome: Denied
• Key authorities: IRC § 408(d)(3)(I); Rev. Proc. 2003-16

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
201547010
WASHINGTON, D.C. 20224

AUG 26 2015

COMMISSIONER
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Uniform Issue List: 408.03-00
Legend

Taxpayer A =
IRA B =
Partnership C =

Custodian D =

Financial Advisor E =

Financial Institution F =
Amount 1 =

Percentage 2 =

Dear :

This is in response to your request dated November 11, 2013, as supplemented
by correspondence dated October 3, and November 24, 2014, in which you
request, through your authorized representative, 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.

Taxpayer A represents that he received a distribution from IRA B equal to
Amount 1. Taxpayer A asserts that his failure to accomplish a rollover within the

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60-day period prescribed by 408(d)(3)(A) of the Code was due to incorrect advice
from Partnership C and Financial Advisor E.

Taxpayer A maintained IRA B with Custodian D. Taxpayer A wanted to purchase
a partnership interest equal to Percentage 2 in Partnership C. Financial Advisor
E prepared the paperwork for taxpayer A to sign and on November 21, 2012,
Custodian D issued a check in Amount 1 payable to Partnership C. Taxpayer A
represents that he intended to have IRA B purchase the shares and be held by
Custodian D. The partnership agreement of Partnership C indicated that the
interest was held by “Taxpayer A IRA”. However, Custodian D was unable to
hold the partnership interest and as a result, issued a Form 1099-R treating the
distribution on November 21, 2012, as a taxable distribution. Taxpayer A
represents that Financial Advisor E should have prepared paperwork to transfer
Amount 1 to Financial Institution F, who would have held the partnership interest
on behalf of Taxpayer A’s IRA. The mistake was discovered in October, 2013,
during the preparation of Taxpayer A’s 2012 tax return.

Based on the above facts and representations, you request a ruling that the
Service waive the 60-day rollover requirement under section 408(d)(3) of the
Code as to the distribution of Amount 1.

Section 408(a) of the Code defines an IRA to mean a trust created or organized
in the United States, and requires that the trustee be a bank or an approved non-
bank trustee.

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.

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) 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 or 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

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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).

Effective January 1, 2015, all of an individual’s IRAs are considered a single IRA
for purposes of applying the one rollover per year limitation.

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 of the Treasury may
waive the 60-day requirement under sections 408(d)(3)(A) and 408(d)(3)(D)
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, provides that the Service will issue a
ruling waiving the 60-day rollover requirement in cases 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 taxpayer.
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 Service has the authority to waive the 60-day rollover requirement where the
individual failed to complete a rollover to another IRA within the 60-day rollover
period because of one of the factors enumerated in Rev. Proc. 2003-16, for
example, errors committed by a financial institution, death, hospitalization, postal
error, incarceration, and/or disability. In this instance, Taxpayer A chose to use
the proceeds from IRA B to fund a business venture rather than attempt to roll
the proceeds over into an IRA account for retirement purposes.

201547010

Therefore, pursuant to section 408(d)(3)(I) of the Code, Taxpayer A’s request
that the Service waive the 60-day rollover requirement with respect to the
distribution of Amount 1 is declined, and Amount 1 and any earnings thereon are
therefore includible in Taxpayer A’s gross income for the 2012 taxable year.

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 as precedent.

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

If you have any questions, please contact
Please address all correspondence to

SE:T:EP:RA:T1.
Sincerely yours,
Carlton A. Watkins, Manager
Employee Plans Technical Group 1
Enclosures:

Notice of Intention to Disclose
Deleted copy of this letter

cc: