Surviving spouse could not roll over assets from child's inherited IRA

Plain-English summary

A surviving spouse sought to roll over part of an IRA that the decedent had left to their child. A state court had approved a settlement assigning that amount to the spouse as her community property interest. The IRS declined to decide the state-law ownership question and ruled against the requested federal tax treatment. IRC § 408(g) requires the IRA rules to be applied without regard to community property laws, so the spouse could not be treated as the inherited IRA's payee or roll its assets into her own IRA. An assignment to the spouse would instead be a taxable distribution to the child, the named beneficiary.

Ruling snapshot

• Question: Could a surviving spouse use a state-court community property award to roll part of a child's inherited IRA into her own IRA without tax?
• Outcome: Denied, with the state-law ownership question left undecided
• Key authorities: IRC § 408(d), (g)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201623001                                            Third Party Communication: None
Release Date: 6/3/2016                                       Date of Communication: Not Applicable
Index Number: 408.06-00
                                                             Person To Contact:
-----------------------------------------                    --------------------------, ID No. ----------------
---------------------------------------------------          -----------------
--------------------                                         Telephone Number:
---------------------------                                  --------------------
                                                             Refer Reply To:
-----------------------                                      CC:TEGE:EB:QP4
---------------------------------                            PLR-125461-15
------------------------                                     Date:
                                                             March 03, 2016
--------------------------------
---------------------------------
------------------------

--------------------------------------------------

LEGEND:

Decedent          = ------------------------

Taxpayer A        = -----------------------

Taxpayer B        = ---------------------------------

Taxpayer C        = -------------------------------------
                        ---------------------------------

State A            = ----------

Date 1            = ------------------

Amount 1          = ------------



Dear ---------------------------------------------------------------:

This is in response to your request dated July 21, 2015, submitted by your authorized
representative, in which you request rulings allowing Taxpayer A to rollover a portion of
Taxpayer B’s inherited individual retirement account (IRA) that has been assigned to
Taxpayer A by a state court as her community property interest.
PLR-125461-15                                2

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

Decedent and Taxpayer A were married in 2004 and lived in State A, a community
property state. Taxpayer B is the child of Decedent and Taxpayer A. Decedent named
Taxpayer B as the sole beneficiary of his three IRAs. Decedent died on Date 1.

After Decedent’s death, Taxpayer A filed a claim against Taxpayer C, the estate of
Decedent, for Taxpayer A’s one-half interest in the community property Decedent and
Taxpayer A owned. Taxpayer A and Taxpayer C negotiated a settlement under which
Taxpayer A’s community property interest in the estate was valued at Amount 1. A
state court in State A approved the settlement and ordered that the custodian of the
IRAs “assign [Amount 1] of the inherited IRA for [Taxpayer B] to [Taxpayer A] as a
spousal rollover IRA.”

Based on the foregoing facts and representations, you have requested rulings that:
         1) Amount 1 of the IRA of Decedent naming Taxpayer B as sole beneficiary
         should be classified as Taxpayer A’s community property interest; then
         2) Taxpayer A may be treated as a payee of the inherited IRA for Taxpayer
         B; then
         3) The custodian of the inherited IRA for Taxpayer B can distribute Amount 1
         to Taxpayer A in the form of a surviving spouse rollover IRA; and
         4) The distribution of Amount 1 from the inherited IRA for Taxpayer B to
         Taxpayer A will not be considered a taxable event.

Section 408(d)(1) provides that “any amount paid or distributed out of an individual
retirement plan shall be included in the gross income of the payee or distributee.”

Section 408(d)(3) permits rollovers by “the individual for whose benefit the [IRA] is
maintained.” Section 408(d)(3)(C) provides that rollovers are not permitted from
inherited IRAs. Section 408(d)(3)(C)(ii) defines inherited IRAs as IRAs where (i) the
individual for whose benefit the IRA is maintained acquired the IRA by reason of the
death of another individual, and (ii) such individual was not the surviving spouse of such
other individual.

Section 408(g) provides that § 408 “shall be applied without regard to any community
property laws.”

In regard to the first ruling request, whether an amount of the inherited IRA for Taxpayer
B is classified as Taxpayer A’s community property interest is a matter of state property
law and not a matter of federal tax law. Accordingly, we decline to issue the requested
ruling.
In regard to the second, third, and fourth ruling requests, Taxpayer B was the named
beneficiary of the IRA of Decedent and the IRA has been retitled as an inherited IRA for
PLR-125461-15                                  3

Taxpayer B. Section 408(g) provides that section 408 shall be applied without regard to
any community property laws, and, therefore, section 408(d)’s distribution rules must be
applied without regard to any community property laws. Accordingly, because
Taxpayer A was not the named beneficiary of the IRA of Decedent and because we
disregard Taxpayer A’s community property interest, Taxpayer A may not be treated as
a payee of the inherited IRA for Taxpayer B and Taxpayer A may not rollover any
amounts from the inherited IRA for Taxpayer B (and therefore any contribution of such
amounts by Taxpayer A to an IRA for Taxpayer A will be subject to the contribution
limits governing IRAs). Additionally, because Taxpayer B is the named beneficiary of
the IRA of Decedent and because we disregard Taxpayer A’s community property
interest, any “assignment” of an interest in the inherited IRA for Taxpayer B to Taxpayer
A would be treated as a taxable distribution to Taxpayer B. Therefore, the order of the
state court cannot be accomplished under federal tax law.

This ruling letter expresses no opinion on the property rights of the parties under state
law, and only provides a ruling on the federal tax law impact on the specific facts
presented.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayers and accompanied by a penalties of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Additionally, 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 ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited by others as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                    Sincerely yours,



                                    Cathy Pastor
                                    Senior Counsel,
                                    Qualified Plans Branch 4
                                    (Tax Exempt & Government Entities)