Unauthorized in-kind IRA distribution receives rollover waiver

Plain-English summary

An IRA held a promissory note and a small cash account used to pay administrative fees. After the cash was exhausted, the sponsor made an unexpected and unauthorized in-kind distribution of the note without the taxpayer's knowledge. The taxpayer did not learn of the distribution until the IRS contacted him, the original note was presumed lost, and a new custodian agreed to accept a copy if relief was granted. The IRS waived the 60-day deadline and gave him 60 days from the ruling date to complete an in-kind rollover of the note into a rollover IRA.

Ruling snapshot

• Question: Would the IRS waive the 60-day deadline for an unexpected, unauthorized in-kind distribution of a promissory note from an IRA?
• Outcome: Approved, with 60 days from the ruling date to complete the in-kind rollover.
• Key authorities: IRC §§ 401(a)(9) and 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

DEC 18 2015

Uniform Issue List: 408.03-00

Legend:

Taxpayer A =

IRA B =

Company C =

Company D =

Custodian E =

Custodian F =

Asset 1 =

Amount 2 =

Dear                 :

This is in response to your request for a private letter ruling dated June 18,
2015, as supplemented by correspondence dated July 8, and 9, 2015, from 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 (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 of Asset 1 from
IRA B. Taxpayer A asserts that his failure to accomplish a rollover within the



60-day period prescribed by section 408(d)(3) was due to the unexpected and
unauthorized distribution of Asset 1 by Company D.

In 2005, Taxpayer A rolled over IRA B with Company C, which
subsequently became Company D in 2012. From 2007 to 2012, IRA B was
maintained by Custodian E for Company C. IRA B’s investments included Asset
1, a promissory note to an unrelated party and a cash account for Amount 2.
Asset 1 required no monthly re-payments and had a lump-sum payment due in
2020. Amount 2 was a cash account used for set-up and annual administrative
fees of IRA B. In 2007, Taxpayer moved from                    to                    .
Taxpayer A represents that he sent a change of address notice to Company D
but received no communications from Company D after his move. Annual
administrative fees continued to be deducted from the cash account and by the
close of 2011, only a small amount remained in this account.

In 2012, Company C changed its name to Company D. Company D uses
Custodian E as the custodian of self-directed IRA custodial accounts that it
sponsors, including IRA B. The 2012 annual custodial fee assessed by
Company D reduced the balance in the cash account within IRA B to zero.
Unbeknown to Taxpayer A, on December 27, 2013, Company D deemed an in-
kind distribution of Asset 1 in Taxpayer A’s IRA B for failure to pay the annual
custodial fee. Taxpayer A was unaware of the distribution until April, 2015, when
the Internal Revenue Service sent Form CP 2501 notifying Taxpayer A that he
failed to include an amount reported on Form 1099-R on his 20    Tax Return.
Taxpayer A represents that he never received Asset 1 and it is presumed lost.
Taxpayer A also represents that a new IRA custodian (Custodian F) has agreed
to accept a copy of Asset 1 if a waiver is granted.

Based on the facts and representations, you request a ruling that the
Internal Revenue Service waive the 60 day rollover requirement contained in
section 408(d)(3) of the Code with respect to the distribution of Asset 1.

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 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
are consistent with his assertion that his failure to accomplish a timely rollover of
Asset 1 was due to its unexpected distribution from IRA B by Company D.



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 Asset 1 from IRA B. Taxpayer A is granted a period of 60 days from the
issuance of this letter ruling to complete an in-kind rollover of Asset 1 (promissory
note dated February 7, 2005) 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 in-kind rollover, the contribution 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 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.

A copy of this letter ruling has been sent to your authorized representative

pursuant to a power of attorney on file in this office. If you wish to inquire about
this ruling, please contact (I.D. #          ),          , at (          )          or          .

Sincerely yours,

Manager
Employee Plans Technical Group 1

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

CC: