"The Pension Specialists" Blog

Warning: U.S. Tax Court Rejects IRS Policy on the One Rollover Per 12-Month Rule

Commencing immediately, an IRA custodian/trustee will need to start applying a new rule for when it is receiving an IRA rollover contribution.

Since at least 1989 the IRS has stated in Publication 590 that the once per year rollover rule applies on a per IRA plan agreement basis and not to all of a person’s IRAs. That is, if two distributions are taken from the same IRA, then only one of them could be rolled over. A distribution taken from a different IRA could be rolled over even though a person had taken a distribution from another IRA and rolled it over within the 12-month period. The 2013 version states the following on page 25.

Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

Example. You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.

A recent U.S. Tax Court case is a classic illustration that there are times the IRS wants to collect taxes so strongly from a particular taxpayer that the IRS personnel in charge is willing to have the decision cause the general public large tax administrative problems. Such is the result of a recent U.S. Tax Court case, A.L. Brobrow and E.S. Brobrow v. Internal Revenue Commissioner, T.C. Memo 2014-21 as decided on January 28, 2014.

The court expressly holds that the one-year restriction between rollovers applies to all distributions from all IRAs and is not limited to the same IRA. The court found the applicable statute expressly authorizes just one rollover during the 12-month period commencing on the date of distribution when such distribution is rollover. The court did not discuss the subject if the IRS had the authority to modify this provision. The court wrote,

Section 408(d)(3)(B) limits a taxpayer from performing more than one nontaxable rollover in a one-year period with regard to IRS and individual retirement annuities. Specifically, section 408(d)(3)(B) provides:

This paragraph [regarding tax-free rollovers] does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income, because of the application of this paragraph.

The reference to “any amount described in subparagraph (A)(i)” refers to any amount characterized as a non-taxable rollover contribution by virtue of that amount's being repaid into a qualified plan within 60 days of distribution from [*9] IRA or individual retirement annuity. The one-year limitation period begins on the date on which a taxpayer withdraws funds from an IRA or individual retirement annuity and has no relation to the calendar year.

The plain language of section 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a non-taxable rollover contribution. By its terms, the one-year limitation laid out in section 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. Section 408(d)(3)(B) speaks in general terms: An individual may not receive a non-taxable rollover from ''an individual retirement account or individual retirement annuity" if that individual has already received a tax-free rollover within the past year from ''an individual retirement account or individual retirement annuity." (Emphasis added.) In other words, a taxpayer who maintains [*13] multiple IRAs may not make a rollover contribution from each IRA within one year.

What were the facts of this case?

Mr. Brobrow maintained two traditional IRAs at Fidelity Investments. One was a rollover IRA. His wife maintained her own traditional IRA. The couple must have had cash flow problems. Fidelity's advisers apparently told him he could to do the following.

1. On April 14, 2008, he withdrew $65,064 from his IRA #l. He did take two distributions. It may be he needed these funds to pay tax liabilities, which had to be paid by the April 15th.
2. On June 6, 2008, he withdrew $65,064 from his IRA #2
3. On June 10, 2008, he made a rollover contribution of $65,064 into IRA #l. The funds had come from his personal checking or investment account
4. On July 31, 2008, she withdrew $65,064 from her personal traditional IRA. These funds were deposited into a joint account
5. On August 4, 2008, Mrs. Brobrow made a rollover contribution of $65,064 into his IRA #2. The funds for this rollover came from their joint account
6. On September 30, 2008, she made a rollover contribution of $40,000 into her traditional IRA. The funds came from their joint account. Note her withdrawal of $65,064, however, was taxable as she made her rollover contribution on day 61 and not on day 60.

If the court had followed the IRS statement set forth in the 2007 or the 2008 Publication 590, Mr. Brobrow’s two withdrawals of $65,064 would not have been taxable. He rolled over both within the 60-day time period. He had not rolled over a previous distribution from the two IRAs within the preceding 12 months.

Actions by an IRA Custodian/Trustee.

CWF is in the process of revising its rollover certification forms to state the 12-month rule is no longer a one per plan agreement. The Disclosure Statement of the IRA Plan Agreement booklet will also be revised. An IRA custodian/trustee will want to send an amendment to its IRA accountholders informing them of this change. It must be remembered that any distribution after the one which is rolled over is now taxable. One way to inform the existing accountholders would to furnish the 2013-2014 Comprehensive IRA Amendment, which discusses this change.