In light of its recent Tax Court victory in Bobrow v. Commissioner, the IRS is taking a tougher stance on a taxpayer's ability to make more than one tax-free/penalty-free IRA rollover per year. This change in policy will take effect on January 1, 2015.
60-Day Rule and One-Year Limit
A prominent U.S. tax lawyer, Alan L. Bobrow, recently found himself on the losing end of a U.S. Tax Court decision concerning his attempted IRA rollovers. At issue in the case is a provision in the Internal Revenue Code that allows IRA owners to pull money out of an IRA account without having the money taxed or subjected to the 10% early withdrawal penalty so long as the withdrawn funds are either re-deposited or rolled over to a different IRA within 60 days after the withdrawal date (the "60-Day Rule"). Since 1978, taxpayers availing themselves of the 60-Day Rule have been required to wait one year before taking advantage of it again (the "One-Year Limit").
IRS Publication 590
The instructions set forth in each edition of IRS Publication 590 released since 1984 have provided that the One-Year Limit is to be applied separately to each IRA. Thus, prior to the Bobrow decision, if a taxpayer had a total of two traditional IRA accounts (IRA #1 and IRA #2), the taxpayer could presumably make a tax-free rollover of a distribution from IRA #1 into a new traditional IRA (IRA #3). The One-Year Limit would, based upon the instructions in Publication 590, apply only to IRA #1 and IRA #3 (i.e., no tax-free rollover of any distribution from IRA #1 or IRA #3 into another traditional IRA), but would not prevent the taxpayer from making a tax-free rollover from IRA #2 into any other traditional IRA (because within the last year, the taxpayer has not rolled over, tax free, any distribution from IRA #2 or made a tax free-rollover into IRA #2).
The case involved the following transfers to and from the Bobrows' accounts:
Bobrow withdrew $65,064 from IRA#1 at Fidelity on April 14, 2008
Bobrow withdrew $65,064 from IRA#2 at Fidelity on June 6, moved the funds to his Fidelity Checking account, and then on June 10, deposited the cash into IRA #1 at Fidelity.
Bobrow's wife withdrew $65,064 from IRA #3 at Fidelity on July 31, 2008, moved the funds into a joint checking account at Fidelity, and then on August 4, the couple transferred the funds into IRA #2.
Only $40,000 was re-deposited into IRA #3 and not until September 30, 2008 (the 61st day after the day of withdrawal).
The Bobrows argued that (i) the June 10th transfer was a qualified repayment of the April 14th distribution; (ii) the August 4th transfer was a qualified repayment of the June 6th distribution; and (iii) the September 30th transfer was a qualified repayment of the July 31st distribution. The IRS disagreed and was able to convince the court that there was only one qualified repayment (being on June 10th with respect to the June 6th distribution).
The Winning Government Argument
The government lawyers arguing the case produced two prior Tax Court decisions that in their view supported the position that the 60-Day Rule is limited to one use per taxpayer per year. Bobrow did not cite IRS Publication 590 as authority for his position that the One-Year Limit applies separately to each IRA; however, the IRS audit manual and a U.S. Tax Court decision both state that taxpayers cannot rely on the publication to support their position. The Tax Court sided with the IRS and stated that "[h]ad Congress intended to allow individuals to take nontaxable distributions from multiple IRAs per year, we believe [the applicable Internal Revenue Code Section] would have been worded differently." Thus, the holding of the case is that regardless of the number of IRAs maintained by a taxpayer, he or she may make only one nontaxable rollover contribution within each one-year period.
IRS Adopts Bobrow Effective January 1, 2015
The IRS does not dispute that for decades IRS Publication 590 has applied the One-Year Limit on an IRA-by-IRA basis. Nevertheless, it has issued a notice stating that it intends to adopt the Bobrow decision beginning on January 1, 2015. It would be reasonable to expect a revised version of IRS Publication 590 as a result. Given the outcome of the case, taxpayers should not attempt more than one 60-day rollover a year after January 1, 2015, even with transactions involving different IRAs. Given that the IRS will not apply the aggregate basis interpretation between now and January 1, 2015, taxpayers seeking to take advantage of the prior IRA by IRA interpretation have a very limited time window in which to do so. We recommend that a tax adviser be consulted prior to any rollover attempt.