The Tax Court held that a taxpayer's distribution from her individual retirement account (IRA) redeposited 62 days later into the IRA was a nontaxable rollover distribution. According to the court, the untimely deposit was due to a bookkeeping error by her financial adviser's company, and, furthermore, the taxpayer qualified for a hardship waiver under Sec. 408(d)(3)(I).
Facts: On June 25, 2014, Nancy Burack received a $524,982 distribution from her IRA that she held with Capital Guardian LLC/Pershing LLC. She had a financial adviser at Capital Guardian, while Pershing was the custodian of the account. She used the proceeds to purchase a new home. In August 2014 she sold her old home and received a check for $524,981 made out to "Pershing FBO Nancy J. Burack" that was to be rolled over into her IRA. Based on the advice of her financial adviser at Capital Guardian, she sent the check to Capital Guardian, which received it 58 days after her initial IRA withdrawal. The amount was deposited into her IRA by Pershing 62 days after her initial withdrawal.
In 2017, the IRS sent Burack a deficiency notice for $214,333 plus an accuracy-related penalty of $42,867, on the basis that her IRA rollover was not timely. She petitioned the Tax Court for relief.
Issues: Burack argued that the rollover was not recorded as timely because of a bookkeeping error by Capital Guardian and she was entitled to a hardship waiver under Sec. 408(d)(3)(I). Generally, amounts distributed to a taxpayer from his or her traditional IRA are included in gross income; however, the taxpayer may exclude them if the entire amount is rolled over into a qualified IRA no later than the 60th day after the receipt of the distribution. The Tax Court, in Wood, 93 T.C. 114 (1989), held that a transfer qualified for rollover treatment where the account custodian made a bookkeeping error resulting in the failure to record the transfer within the 60-day period.
If a taxpayer fails to meet the 60-day deadline, the taxpayer can request a waiver of the 60-day rollover requirement, and the IRS can grant that waiver "where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement" (Sec. 408(d)(3)(I)). Rev. Proc. 2003-16, Section 3.03, states that taxpayers qualify for an automatic hardship waiver of the 60-day rollover period if (1) the funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period, and (2) the rollover would have been valid if the financial institution had deposited the funds as instructed.
Holding: The Tax Court agreed with both of the taxpayer's arguments. The IRS argued that Pershing was the account custodian and that Burack should have sent the rollover contribution to Pershing, not Capital Guardian. However, because all of Burack's communication was with Capital Guardian and all of her IRA account statements came from that company, the court held that it was appropriate for Burack to send the check to Capital Guardian, and its bookkeeping error caused the late recording of the rollover. Thus, the court found that the distribution qualified for rollover treatment.
Although this finding was sufficient to grant the taxpayer relief, the court also considered whether Burack was eligible for a hardship waiver. Because the funds were deposited in her IRA within one year and the rollover would have been timely if Capital Guardian had deposited the funds as instructed, as required by Rev. Proc. 2003-16, the Tax Court concluded that she was eligible for a hardship waiver.
- Burack, T.C. Memo. 2019-83
— By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.