Taxpayer Can Make Only One Rollover Contribution In One-Year Period

The Tax Court has ruled that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained (Bobrow v. Commissioner,Dec. 59,823(M), TC Memo. 2014-21). The one-year limitation underCode Sec. 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer, the court held.

Auditor Note

“The Tax Court’s broad holding that the ‘one-year’ period limitation under the Code applies in the aggregate to all IRAs is a clear departure from the longstanding IRS proposed regulations (and IRS publication and rulings),” Elizabeth Thomas Dold, principal, The Groom Law Group Chartered, Washington, D.C., told CCH. “Hopefully the IRS will clarify its position and any change therein would be applied prospectively only.”

On April 14, 2008, the husband received two distributions from his traditional IRA in the combined amount of $65,000. On June 6, 2008, the husband requested and received a $65,000 distribution from his rollover IRA. Four days later, the husband transferred $65,000 from his individual account to his traditional IRA. On July 31, 2008, the wife requested and received a $65,000 distribution from her traditional IRA. Five days later, the couple transferred $65,000 from their joint account to the husband’s rollover IRA. On September 30, 2008, the wife transferred $40,000 from the couple’s joint account to her traditional IRA. The IRS determined that the June 6 distribution to the husband and the July 31 distribution to the wife were taxable.

The court found that the plain language of Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. The one-year limitation, the court found, is not specific to any single IRA maintained by a taxpayer but instead applies to all IRAs maintained by a taxpayer. A taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year, the court held.

In the one-year period beginning on April 14, 2008, the court concluded that the husband could have completed only one distribution and repayment as a nontaxable rollover contribution. Any other distribution was subject to Code Sec. 408(d)(3)(B) limitation and was includible in the couple’s gross income.

Caution

The Tax Court did not mention IRS Publication 590, which speaks in general terms of tax-free rollovers and in an illustration appears to show that a taxpayer could make more than one tax-free rollover in the scenario described. The court emphasized that the legislative history of Code Sec. 408(d)(3)(B), refers to the limitation as a limitation that applies across all of a taxpayer’s retirement accounts.

The court also found that the wife had not redeposited funds withdrawn from her traditional IRA within 60 days. Consequently, the full amount was includible in the couple’s gross income. Additionally, the court upheld the accuracy-related penalty.

Reference: PTE §25,445.10