The U.S. Tax Court recently decided that the one-per-year IRA rollover limitation in 26 U.S.C. § 408(d)(3)(B) applies in the aggregate to all of the taxpayer’s IRA accounts rather than separately to each of a taxpayer’s IRA accounts. This decision contradicts published guidance from the IRS which had applied the § 408(d)(3)(B) limitation on an account by account basis. The IRS recently announced that it will follow the Tax Court’s decision starting on January 1, 2015, thereby giving taxpayers a grace period prior to enforcement of this new policy.
Amounts distributed from an IRA are generally includible in taxable gross income by the recipient. 26 U.S.C. § 408(d)(1). However, the Internal Revenue Code permits the recipient of an IRA distribution to exclude from gross income—and therefore avoid tax on—any amount paid or distributed from an IRA if the entire amount is paid (i.e., rolled over) into a qualifying IRA, individual retirement annuity or retirement plan within sixty days. 26 U.S.C. § 408(d)(3)(A). Congress placed a limitation on these "rollovers" in order to ensure that taxpayers do not repeatedly shift nontaxable income in and out of retirement accounts. Under this limitation, the account holder may not perform more than one nontaxable IRA rollover within a one-year period. 26 U.S.C. § 408(d)(3)(B).
In Bobrow v. Commissioner, T.C. Memo 2014-21, 2014 WL 303234 (Jan. 28, 2014), the Tax Court held that the limitation applied on an aggregate basis, meaning that an individual could not make a rollover if he or she had made a rollover involving any of that individual’s IRAs in the preceding one-year period. This decision contradicted longstanding IRS guidance in Publication 590, Individual Retirement Arrangements (IRAs), allowing that amounts from more than one of a taxpayer’s IRAs could be rolled over each year so long as amounts from no single IRA were rolled over more than once in that period. The IRS provided similar guidance in Proposed Treas. Reg. § 1.408-4(b)(4)(ii).
The IRS quickly adopted the Bobrow decision. On March 20, 2014, the IRS released Announcement 2014-15, in which the agency stated that it will follow the stricter aggregate interpretation of the one-per-year IRA rollover limitation. The IRS stated in this announcement that it intends to replace Proposed Treas. Reg. § 1.408-4(b)(4)(ii) with a new proposed regulation reflecting the holding the Bobrow case. Publication 590 will also be revised to reflect the Bobrow holding. The new rollover limitations will not take effect until January 1, 2015 in order to allow time for IRA administrators and trustees to implement changes in rollover processes and disclosure documents.
As it becomes more and more common for individuals to hold multiple IRA accounts, taxpayers and tax planners must be cognizant of the aggregate view of these accounts when taking distributions and making rollover contributions. As the Tax Court noted in Bobrow, however, direct trustee-to-trustee transfers between IRAs are not "distributions" within the meaning of 26 U.S.C. § 408(d)(3)(A) and therefore are not "rollover contributions."