IRS Adopts Stricter Interpretation of One-Year Waiting Period for IRA Rollovers.
(Parker Tax Publishing March 27, 2014)

An individual can make only one tax-free rollover from one traditional IRA to another in any one-year period. For at least as far back as 1981 - the year the IRS issued proposed regulations relating to the one-year waiting period - the IRS has interpreted that rule as applying to IRAs on an-IRA-by-IRA basis. However, in the wake of a recent Tax Court case that rejected that interpretation a case in which the IRS took a litigating position contrary to the proposed regulations and IRS Publication 590 the IRS announced that it would apply the one-year waiting period on an aggregate basis to all of an individual's IRAs. In Announcement 2014-15, the IRS also stated that it will not apply this more restrictive interpretation to IRA distributions occurring before 2015.

One-Year Waiting Period for IRA Rollovers

Under Code Sec. 408(d)(3)(A), a taxpayer can roll over, tax free, a distribution from a traditional IRA into the same or another traditional IRA. Generally, the individual must make the rollover contribution by the 60th day after the day the individual receives the distribution from the IRA. Code Sec. 408(d)(3)(B) provides that an individual can make only one such rollover in any one-year period. The one-year waiting period begins on the date the individual receives the IRA distribution.

Prop. Reg. Sec. 1.408-4(b)(4)(ii) and IRS Publication 590, Individual Retirement Arrangements (IRAs), provide that the one-year waiting period is applied on an IRA-by-IRA basis. Under this interpretation, an individual who makes a tax-free rollover of any part of a distribution from a traditional IRA cannot, within a one-year period, make a tax-free rollover of any later distribution from that same IRA. The individual also cannot make a tax-free rollover of any amount distributed within the same one-year period from the IRA into which he or she made the tax-free rollover.

Looking at it from another perspective, applying the one-year waiting period on an IRA-by-IRA basis also means that if an individual maintains more than one IRA say, IRA-1, IRA-2, and IRA-3 - and rolls over the assets of IRA-1 into IRA-3, he or she would not be precluded from making a tax-free rollover from IRA-2 to IRA-3 or any other IRA within one year after the rollover from IRA-1 to IRA-3. However, a recent Tax Court opinion, Bobrow v. Comm'r, T.C. Memo. 2014-21, held that the one-year waiting period applies on an aggregate basis, rather than on an IRA-by-IRA basis. That means an individual cannot make an IRA-to-IRA rollover if he or she has made such a rollover involving any of the individual's IRAs in the preceding one-year period.

Bobrow Case

In the Bobrow case, Alvan Bobrow maintained two IRAs a regular traditional IRA and a rollover IRA (which apparently contained amounts he had rolled over from an employer plan). On April 14, 2008, Alvan requested and received a distribution of $65,064 from his traditional IRA. On June 6, 2008, he requested and received a distribution of exactly the same amount from his rollover IRA. On June 10, 2008 within 60 days of the April 14 distribution Alvan moved $65,064 back into his traditional IRA. On August 4, 2008 within 60 days of the June 10 distribution he moved $65,064 back into his rollover IRA.

Alvan took the position that the Code Sec. 408(d)(3)(B) one-year waiting period is specific to each IRA maintained by a taxpayer and does not apply across all of a taxpayer's IRAs. Thus, Code Sec. 408(d)(3)(B) did not bar nontaxable treatment of the distributions made from his traditional IRA and his rollover IRA.

The Tax Court, however, held that Alvan's interpretation was incorrect. According to the court, the plain language of Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. By its terms, the one-year limitation is not specific to any single IRA maintained by an individual, but instead applies to all IRAs maintained by a taxpayer. The court observed that Code Sec. 408(d)(3)(B) speaks in general terms: An individual cannot receive a nontaxable rollover from "an individual retirement account or individual retirement annuity" if that individual has already received a tax-free rollover within the past year from "an individual retirement account or an individual retirement annuity." In other words, a taxpayer who maintains multiple IRAs cannot make a rollover contribution from each IRA within one year.

As a result, in the one-year period beginning on April 14, 2008, Alvan could have completed only one distribution and repayment as a nontaxable rollover contribution. When he withdrew funds from his rollover IRA on June 6, 2008, the taxable treatment of his April 14, 2008, withdrawal from his traditional IRA was still unresolved, since he had not yet repaid those funds. However, by recontributing funds on June 10, 2008, to his traditional IRA, Alvan satisfied the requirements of Code Sec. 408(d)(3)(A) for a nontaxable rollover contribution, and the April 14, 2008, distribution was therefore not includible in his gross income. Thus, Alvan had already received a nontaxable distribution from his traditional IRA on April 14, 2008, when he received a subsequent distribution from his rollover IRA on June 6, 2008. According to the court, Code Sec. 408(d)(3)(B) disallowed nontaxable treatment for this second distribution. As a result, the June 6, 2008, distribution from Alvan's rollover IRA was includible in his gross income for 2008.

IRS Will Follow Bobrow

In Announcement 2014-15, the IRS stated that it anticipates that it will follow the interpretation of Code Sec. 408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation.

The IRS noted that these actions will not affect an IRA owner's ability to transfer funds from one IRA trustee directly to another, because, under Rev. Rul. 78-406, such a "trustee-to-trustee transfer" is not a rollover and, therefore, is not subject to the one-waiting period under Code Sec. 408(d)(3)(B).

Practice Tip: A trustee-to-trustee transfer may be accomplished by any reasonable means of direct payment to the receiving IRA. If the payment is made by wire transfer, the wire transfer must be directed only to the trustee or custodian of the receiving IRA. If payment is made by check, the check must be negotiable only by the trustee or custodian of the receiving IRA.

Under a very limited exception, the one-year waiting period also does not apply to a distribution that meets all three of the following requirements:

(1) it is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution;

(2) it was not initiated by either the custodial institution or the depositor; and

(3) it was made because the custodial institution is insolvent, and the receiver is unable to find a buyer for the institution.

Transition Relief

The IRS noted in Announcement 2014-15 that it has received comments about the administrative challenges presented by the Bobrow interpretation of the one-year waiting period. Recognizing that the adoption of the Tax Court's interpretation of the one-year waiting period will require IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents and that this will take time to implement, the IRS stated that it will not apply the Bobrow interpretation of the one-year waiting period to any rollover that involves an IRA distribution occurring before January 1, 2015.

Finally, the IRS stated that regardless of the ultimate resolution of the Bobrow case, it expects to issue a proposed regulation under Code Sec. 408 that would provide that the IRA rollover limitation applies on an aggregate basis. However, in no event would the regulation be effective before January 1, 2015. (Staff Contributor Parker Tax Publishing)

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