Roll Over, Bobrow: Surprising Tax Court Decision on IRA Rollover Rules

by Eversheds Sutherland (US) LLP
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On January 28, 2014, the U.S. Tax Court held in Bobrow v. Commissioner that the rule limiting IRA rollovers to one per 12-month period in Internal Revenue Code Section 408(d)(3)(B) applies across all of a taxpayer’s IRAs, rather than only to rollovers from the same IRA. This is a departure from the IRS’s previous position as stated in Publication 590.

IRA Rollover Rules

Generally, distributions from IRAs result in taxable income. However, if a distribution is made to an individual and is “rolled over” by such individual within 60 days to either the same or a different IRA, the amount rolled over within the sixty day period is not includible in income.

Section 408(d)(3)(B) limits the number of such rollovers to one per 12-month period, with the 12 months being measured from the date of the last distribution from an IRA. IRS Publication 590 specifically states that the “one rollover per 12 month limit” is determined on an IRA-by-IRA basis, such that a second rollover cannot be made from the same IRA in a 12-month period. (In contrast, there is no limit on the number of trustee-to-trustee transfers between IRAs.)

Decision in Bobrow

In Bobrow, a husband and wife received three distributions from their IRAs over a six-month period as follows: one distribution from the husband’s traditional IRA, one distribution from the husband’s traditional rollover IRA and one distribution from the wife’s traditional IRA. Both distributions from the husband’s IRA’s were repaid in full within 60 days of each distribution. The distribution from the wife’s IRA was repaid in part, but 61 days following the date of distribution.

The IRS took the position in Bobrow that the 12-month limit of Section 408(d)(3)(B) applies to all IRAs held by a taxpayer and not on an IRA by IRA basis. The taxpayers, in contrast, argued that the 12-month limit applies on an IRA-by-IRA basis, but did not specifically cite to Publication 590. As such, the taxpayers took the position that none of their IRA transactions should be reportable as taxable income (except the amount that was not repaid to the wife’s rollover IRA).

In a memorandum opinion, the court generally sided with the IRS. First, the court ruled that the husband’s first distribution and repayment was a tax-free rollover that satisfied the requirements of Section 408(d). However, the court found that the second distribution and repayment did not qualify as a tax-free rollover because it was the second rollover within a 12-month period. In making its decision, the court was primarily persuaded by the language of Section 408(d)(3)(B) and the legislative history of the provision, determining that Congress added the limitation to ensure taxpayers did not take advantage of the rollover rules by accessing the assets in their IRAs through a series of tax-free rollovers. The court also held that the wife’s distribution and repayment did not qualify as a tax-free rollover because it was not repaid within the 60-day limit, and she did not provide any evidence that she was entitled to or had requested a waiver of this limit.

Observations

The court’s holding in Bobrow conflicts with the commonly held view that the 12-month limit only applies to rollovers from the same IRA—a position that is specifically endorsed in Publication 590. While IRS publications are not binding on and are generally not given meaningful weight by courts, the IRS does not usually take litigation positions in conflict with its published materials. It is not clear at this time whether the IRS will revise the publication or otherwise issue guidance articulating its position regarding the 12-month rule.

In the meantime, IRA issuers, custodians, record-keepers, and other IRA providers should review their forms, client communications and disclosure, website, and marketing materials to determine the extent to which they have described or relied on the “same IRA” position set forth in Publication 590.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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