Late IRA Rollover Was Not Taxable Due to Bank's Bookkeeping Error

(Parker Tax Publishing July 2019)

The Tax Court held that a taxpayer did not receive a taxable distribution when she withdrew funds from her individual retirement account (IRA) and the funds were not redeposited back into her account by the custodian until 62 days after the distribution. The court found that the late recording of the deposit was due to a bookkeeping error and that, alternatively, the taxpayer qualified for undue hardship relief under Rev. Proc. 2013-16. Burack v. Comm'r, T.C. Memo. 2019-83.

Background

In 2014, Nancy Burack had an individual retirement account (IRA) with Capital Guardian, LLC/Pershing, LLC (Pershing), and had a financial adviser at Capital Guardian. Pershing was the custodian of the account. On June 25, 2014, Burack received a $524,981 distribution from the IRA. Burack used the distribution to buy a home while waiting for the sale of her former home to close. She intended to roll over the distribution back into her IRA within 60 days of receipt.

On Thursday, August 21, 2014, the sale of Burack's former home closed. On the same day Burack received a $524,981 cashier's check to deposit back into her IRA. The check was made out to "Pershing FBO Nancy J. Burack." Burack's financial advisor initially advised her that she could deposit the check into the Pershing account at Bank of New York on Wall Street. But Capital Guardian later assured her that she could redeposit the distribution into her IRA by overnighting the check to Capital Guardian in North Carolina. On Thursday, August 21, 2014, Burack overnighted the check to Capital Guardian. The check arrived at Capital Guardian on Friday, August 22, which was 58 days after Burack received the IRA distribution.

On August 26, 2014 - 62 days after Burack received the IRA distribution - the check was deposited into Burack's IRA. Both the deposit and the receipt of funds were reflected on Burack's August 2014 Capital Guardian IRA statement. It was unclear what happened between Capital Guardian's receipt of the check and the deposit at Pershing. Burack communicated only with Capital Guardian about her IRA account and never communicated with Pershing. The account statements were generated by Capital Guardian.

In February of 2017, the IRS issued Burack a notice of deficiency in which it determined that Burack did not repay the IRA distribution until more than 60 days after she received it. Accordingly, the IRS determined that Burack was required to include the distribution in her 2014 gross income. Burack challenged the notice in the Tax Court.

Under Code Sec. 408(d), any amount distributed from an IRA is includible in gross income by the recipient unless an exclusion applies. Code Sec. 408(d)(3)(A) permits the recipient to exclude any amount distributed from an IRA if the full amount is subsequently rolled over into a qualifying IRA not later than the 60th day after the recipient received the distribution. Burack advanced two theories for why she was entitled to qualified rollover treatment, notwithstanding that her IRA distribution was redeposited 62 days after receipt.

Burack advanced two theories for why she qualified for rollover treatment. First, she contended that the rollover was not recorded as timely because of a bookkeeping error by Capital Guardian. Alternatively, she argued that she was entitled to a hardship waiver under Rev. Proc. 2013-16. The hardship waiver is available if (1) the funds are deposited into an eligible retirement plan within a year of the beginning of the 60-day rollover period, and (2) the rollover would have been valid if the bank had deposited the funds as instructed.

Analysis

The Tax Court held that Burack did not receive a taxable distribution from her IRA. The Tax Court cited Wood v. Comm'r, 93 T.C. 114 (1989), in which a taxpayer transferred stock to Merrill Lynch within the 60-day rollover period for deposit into his IRA, but Merrill Lynch deposited the shares into a nonqualified account and then rolled them over into the IRA after the expiration of the rollover period. In Wood, the Tax Court considered the substance of the transaction and the relationship between the taxpayer and Merrill Lynch and concluded that the transaction was entitled to rollover treatment because Merrill Lynch accepted the stock for deposit into the IRA account, held the stock subject to the IRA trust instrument, and its failure to record the transfer within 60 days was a bookkeeping error.

Applying Wood, the court found that, given the substance of the transaction and the relationship between Burack and Capital Guardian/Pershing, Burack's late deposit was attributable to a bookkeeping error. The court noted that Burack never communicated with Pershing about her account and that Capital Guardian assured Burack she could roll over the distribution by overnighting the check to Capital Guardian. The court said it was undisputed that the check arrived at Capital Guardian 58 days after Burack received the distribution, but the transaction was not recorded by Capital Guardian until 62 days after the distribution.

The Tax Court rejected the IRS's contention that Burack should have sent the check directly to Pershing. The court found that Burack's account was held with both Capital Guardian and Pershing in a single account bearing the same account number. While Burack's IRA statement listed both Capital Guardian and Pershing, the court found that the relationship between the two was not entirely clear. The court concluded that the substance of the relationship between Burack and Capital Guardian showed that Capital Guardian was an appropriate institution for Burack to send the check to.

Although the court said that its finding of a bookkeeping error was enough for it to conclude that Burack's distribution qualified for rollover treatment, the court found that as an alternative ground, Burack also qualified for a hardship waiver under Rev. Proc. 2013-16. According to the court, the funds were deposited into her IRA within one year and, had Capital Guardian deposited the check as instructed, there would have been a valid rollover.

For a discussion of rollovers of distributions from IRAs, see Parker Tax ¶134,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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