Rollover Treatment for Untimely IRA Rollover Distribution Due to Bookkeeper Error
In Burack, 1 the IRS determined that an untimely rollover distribution nonetheless qualified for rollover treatment because of a bookkeeping error and the applicability of a hardship waiver.
In 2014, Petitioner Nancy Burack purchased a home in Philadelphia while waiting for the sale of her home in New York City to close. Burack withdrew $524,981 from her IRA account held with Capital Guardian, LLC/Pershing, LLC to purchase the new home. Immediately upon receipt of the closing check, Burack sent it to Capital Guardian to redeposit it into her IRA, as Capital Guardian advised her to do.
Capital Guardian received the check 58 days after Burack received the IRA distribution. However, the check was not deposited into Burack’s IRA account at Pershing until 62 days after she received the IRA distribution. Two years later, the Commissioner issued a notice of deficiency finding that Burack failed to repay the IRA distribution within 60 days of receipt and ordered her to include the IRA distribution in her annual gross income for the year of receipt.
It is not clear what happened between Capital Guardian’s receipt of the check and the deposit at Pershing. Burack had a financial advisor at Capital Guardian and Pershing was the custodian of her IRA, but both institutions held her IRA in a single account bearing the same account number. Burack only communicated with Capital Guardian, never Pershing.
It is well known that a recipient of an IRA distribution may exclude it from his or her gross income if the full amount is rolled over into a qualifying IRA within 60 days after receipt of the distribution. 2 Burack contended that she was entitled to qualified rollover treatment despite the fact that her IRA distribution was not redeposited within 60 days of receipt. Burack’s contention was based upon an alleged bookkeeping error committed by Capital Guardian and upon a hardship waiver under Section 408(d)(3)(I). The court addressed both and found in favor of Burack.
Burack argued and the court agreed that the late deposit of the rollover check was due to a bookkeeping error on the part of the financial institution. Citing case law, the court found that it was appropriate for Burack to send the rollover check to Capital Guardian based upon the substance of their relationship. Burack correctly sent Capital Guardian the check within the rollover period. Capital Guardian’s failure to record the transaction until after the rollover period terminated was a bookkeeping error, and not due to any fault on the part of Burack.
The court also agreed with Burack’s alternative ground for relief based upon an automatic hardship waiver under Section 408(d)(3)(I) , which is granted only if the funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period, and it would have been a valid rollover if the financial institution had deposited the funds as instructed. The court found Burack eligible for an automatic hardship waiver because (1) Capital Guardian assured her that she could complete the rollover by sending them the check, (2) she sent Capital Guardian the check within 58 days of receiving the distribution, and (3) it would have been a valid rollover if Capital Guardian had deposited the check as instructed.
The court concluded that Burack’s IRA distribution and late deposit qualified for rollover treatment because of a bookkeeping error committed by the financial institution holding the IRA and, in the alternative, because of a hardship waiver under Section 408(d)(3)(I). This case illustrates that although a taxpayer has 60 days to complete a rollover, it is prudent for a taxpayer to plan on sending the rollover distribution to the financial institution well before the end of the 60 days to provide the financial institution sufficient time to process the rollover distribution.
Frank Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or [email protected].
This article originally appeared in the January 2020 edition of Estate Planning, a monthly periodical directed to estate planning professionals that offers readers the newest and most innovative strategies for saving taxes, building wealth, and managing assets. Robert E. Madden, the author of Tax Planning for Highly Compensated Individuals (Thomson Reuters/WG&L), and Scott A. Bowman, a partner in the law firm of McDermott Will & Emery LLP in Washington, D.C., co-wrote the article.