Surprising Tax Court Ruling on IRA Rollovers

[taxref]

The Tax Court has ruled that, contrary to the details given in Publication 590, a taxpayer can only make one IRA rollover per year.  Pub 590 has stated for several decades that a taxpayer can make one IRA rollover per year for each IRA account he owns.  

The service basically argued that, while the taxpayer followed the IRS pub, the pub was in conflict with the code.  The taxpayer was hit for amounts in excess of $50K in tax and $10K in penalties.  

I know that pubs are only intended as guidance, but this ruling seems unfair to me.  In any event, practitioners must sure to warn any of their clients who do rollovers.
 
The case is: Bobrow v. Comm’r, T.C. Memo. 2014-21 .

[Ombud]

Any ideas on how this will be implemented? Taxed according to date rolled? I've got an account that rolled 25k, then 142k, then 1.2m

[taxref]

At this point, except for the Bobrows (the taxpayers who were audited), the IRS is indicating that no one else will be affected by this ruling until 1-1-15.  Based on this court case, however, I would not recommend that any of my own clients trust the service on this point.  

This ruling only applies to rollovers in which the funds were given to the taxpayer, and deposited in a different IRA within the mandatory 60 day period.  The ruling does not apply to direct transfers between IRA trustees.

Additionally, the one-rollover-per-year rule will not be on a calender year basis.  Rather, the 12 months will begin on the date the funds are distributed to the taxpayer.  

[rangerj]

In 45 years of practice I do not ever recall the IRS taking a stance that is in direct conflict with one of their own Publications. My understanding is that the Publications are generally written by IRS and approved by the Treasury Dept. with the possibility of Congressional input. This is not a matter of interpretation, but a clear difference 180 degrees from their written position in the Publication. I would add the comment that I would interpret the one year period not as a matter of 12 months, but as a period of 356 or 366 days between the aforementioned roll overs in order to be safe. Lastly, while we can hope that our clients would inform us of their intentions to enter into a transaction, or multiple transactions, the facts are that more often than not we hear about it after the fact. Another thought. This is a clear situation in which a waver of the penalties would be appropriate. Do we know if an appeal has been filed?

[taxref]

Rangerj:

I know no further details regarding an appeal.  

Like you, I have never seen anything quite like this before.  Its a disturbing development, and reminiscent of some of the IRS horror stories we used to sometimes hear of decades ago.  I only rarely have situations come up when reviewing the code is necessary, but this episode makes me wonder if checking the code for almost anything is due diligence.  

As far as penalty abatement goes, I would contend that the pub itself was written advice from the IRS, upon which the taxpayer relied.    

 

[Ombud]

Apparently they made 3 rollovers. Redeposited the first within 60 days, 61 days (2 calendar months) on the second, 60 days on the 3rd. Judge felt they were using the funds as a float plus he told the judge that he was a tax attny and knew the law. This change won't affect anyone else until 2015. Clients are now being advised to only make one roll over every 366 days. Trustee to trustee transfers are not affected.

Moral of the story is: don't piss off a tax court judge

[Savoir Faire-Demogague in NJ]

Apr 11, 2014 22:37:02 GMT -5 Ombud said:

Apparently they made 3 rollovers. Redeposited the first within 60 days, 61 days (2 calendar months) on the second, 60 days on the 3rd. Judge felt they were using the funds as a float plus he told the judge that he was a tax attny and knew the law. This change won't affect anyone else until 2015. Clients are now being advised to only make one roll over every 366 days. Trustee trustee transfers are not affected.

Moral of the story is: don't piss off a tax court judge

Interesting, so tax law is now decided based on "feelings".... oy vey.... just heard Ric Edelman discuss this briefly about 30 minutes ago.

[Ombud]

Apparently the pub misquotes the law and the judge decided to not grant any leniency based on that misquote. The 2nd rollover didn't meet the test as being within 60 days as August has 31 days

Wanna avoid this issue? Do transfers instead of taking the money for a cheap 60 day loan.

But really. Don't piss off the judge ruling on your case, kinda like don't run from a cop