On October 2022, I blogged about What happens to a loan taken against a qualified retirement plan when the plan terminates or employment is terminated? That blog addressed recently-effective Treasury Regulations that provided some breathing room for taxpayers with loans outstanding on a qualified employment retirement plan when the plan or the taxpayer's employment terminates.
In a Private Letter Ruling issued by the IRS on November 4, 2022, the IRS addressed a situation where a taxpayer failed to comply with the 60-day rollover rule for excluding from gross income distributions received from an individual retirement account (IRA). The taxpayer requested a waiver of the 60-day requirement because the taxpayer's failure was allegedly due to fraud.
Private Letter Rulings, Generally. A private letter ruling is a written statement issued by the IRS to a particular taxpayer that interprets and applies tax laws to the taxpayer's represented set of facts. A PLR is issued in response to a written request submitted by a taxpayer. PLRs are specific to the issues presented, and usually, the PLR will include a disclaimer of application to any issue or statute not specifically addressed by the PLR. PLRs are directed only to the taxpayer who requested it. Thus, under section 6110(k)(3) of the Code, a written determination may not be used or cited as precedent. See also IRS Procedures, Frequently Asked Questions under Code, Revenue Procedures, Regulations, Letter Rulings, "How would I obtain a private letter ruling?"
Summary of Facts in PLR 202244029. When the taxpayer tried to access her bank account she received an alert on her computer to contact a representative of a certain company. She did so and was told that hackers from a foreign country had downloaded illegal material onto her computer and taken money from her account. She was then directed to an individual who falsely claimed to be an employee in the anti-fraud department of the bank and also to an individual falsely claimed to be a federal officer. They assured the taxpayer that once they secured all her assets, they would issue a check to reimburse her for withdrawals she made from her accounts. She was told she would surely be arrested for illegal material on her computer if she contacted law enforcement.
So, the taxpayer unwittingly withdrew money from her IRA to "secure" the funds with those who she contacted. After the 60-day rollover period, the taxpayer suspected something fishy, and she contacted the local authorities to report the matter. She then requested that the IRS waive the 60-day rollover requirement under section 408(d)(3) with respect to the distribution from the IRA because she was the victim of fraud.
Primary Holding. Pursuant to section 408(d)(3)(I) of the Code, the IRS waived the 60-day rollover requirement with respect to the distribution from the IRA and allowed the taxpayer an additional time to contribute an appropriate amount into another IRA. See PLR 202244029; see and compare 26 U.S.C. § 408(d)(3) (providing the 60-day rollover requirement), with id. at § 408(d)(3)(I) (allowing the Secretary of Treasury to waive the 60-day rollover requirement in certain circumstances).
60-Day Rollover Rules. Under the Code, an IRA is defined as a trust created in the U.S. and requires that the trustee be a bank or an approved non-bank trustee. See 26 U.S.C. § 408(a)(1)-(6). Except as otherwise provided in section 408(d), any amount paid or distributed out of an IRA shall be included in gross income by the payee or distributee in the manner provided under section 72. Id. at § 408(d)(1); see id. at § 72.
Section 408(d)(3)—Tax treatment of distributions—provides the rules applicable to IRA rollovers. Section 408(d)(3)(A) provides that section 408(d)(1) does not apply to any amount paid or distributed out of an IRA to the individual for whose benefit the IRA is maintained if: (i) the entire amount received is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment; or (ii) the entire amount received is paid into an eligible retirement plan (other than an IRA) for the benefit of such individual not later than the 60th day after the date on which the payment is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income. Id. at § 408(d)(3)(A)-(d)(3)(A)(ii).
Section 408(d)(3)(B) provides that the rollover provisions do not apply to any amount received by an individual from an IRA if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in section 408(d)(3)(A)(i) from an IRA that was not includible in gross income because of the application of the rollover provisions in section 408(d)(3). Section 408(d)(3)(E) provides that the rollover provisions of section 408(d)(3) do not apply to any amount required to be distributed as a death benefit under section 408(a)(6).
Exception to the 60-Day Rollover Rules. Section 408(d)(3)(I) of the Code provides that the Secretary of the Treasury may waive the 60-day requirement where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement. See also Rev. Proc. 2003-16, 2003-4 I.R.B. 359 § 3.02. In determining whether to grant a waiver of the 60-day rollover requirement in this context, the IRS will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed; and (4) the time elapsed since the distribution occurred.
Insights. Section 408 of the Code contains strict 60-day requirements for rolling-over of distribution amounts into a qualified IRA, if the taxpayer desires to not include an IRA distribution amount in taxable gross income. The exception to the rule—section 408(d)(3)(I)—may afford the taxpayer relief from the 60-day rollover requirement where the failure to waive the 60-day rollover requirement would be against equity or good conscience. In PLR 202244029, the IRS applied the equitable waiver where the failure to comply with the 60-day requirement was the result of fraud committed on the taxpayer. But, the taxpayer still must be prepared to comply with the rollover requirement because the IRS's equitable remedy, as seen in PLR 202244029, may be simply to allow the taxpayer additional time to comply with the rollover requirements in order to avoid including a payment or distribution in the taxpayer's taxable gross income.
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