In PLR 201123048, the Internal Revenue Service addressed a late rollover request from the widow when her late husband failed to accomplish a rollover on a timely basis. In a surprising move, and certainly devastating to this family, the Service denied such a rollover.
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The deceased husband (Taxpayer B) retired from his employer and, unbeknownst to him, his pension plan had a “cash out” provision that required a one hundred percent distribution of Plan assets upon the participant reaching age 65. The surviving spouse (Taxpayer A) represented that her husband received a check from the pension plan and initiated a rollover into an IRA. The surviving spouse further represented that the purpose of this rollover was to maintain the funds in a tax-free environment. While waiting for the IRA to be established, Taxpayer B deposited one hundred percent of the funds in a joint account with his spouse. Unfortunately, before the rollover could be completed, Taxpayer B became ill and subsequently died. In this ruling, the surviving spouse desired to complete the rollover initiated by her husband.
Defining the precise issue is critical to understanding the Service’s negative ruling. According to the ruling, the issue before the Service was as follows:
“Based on the facts and representations, you request a ruling that the Internal Revenue Service waive the 60-day rollover requirement with respect to the distribution of ‘Amount 1’ contained in § 402(c)(3) of the Code in this instance and allow Taxpayer A to make a rollover contribution to a tax-deferred vehicle in her name.” [Emphasis added.]
Under § 402(c)(3)(a), the law provides that a rollover must occur within 60 days following the day which the taxpayer received the property. Furthermore, § 402(c)(3)(b) provides that the Government may waive the 60-day requirement under § 402(c) if failure to waive such requirement would be against equity or good conscience. The relevant portion of the statute reads as follows:
“…where the failure to waive such a requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to the requirement.”
The ruling points out that under § 402(c)(9) distributions to the spouse of the employee after the employee’s death permits a rollover to be available as if the spouse were the employee.
The ruling further analyzes Rev. Proc. 2003-16 which provides the following guidance:
"In determining whether to grant a waiver, the Service will consider all facts and relevant circumstances, including: 1) errors committed by a financial institution, 2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error, 3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed), and 4) the time elapse since the distribution occurred."
The Service provided the information presented and the documentation submitted by Taxpayer A (the surviving spouse) was consistent with her assertion that Taxpayer B’s failure to accomplish a timely rollover was caused by the death of Taxpayer B prior to a completed rollover. Just as this looks to be a routine ruling, the Service then provides “…since ‘Amount 1’ was received by Taxpayer B (the husband) prior to Taxpayer B’s death, Taxpayer A (the spouse) is precluded from rolling the funds over into a tax-deferred account in her name under § 402(c)(9) of the Code.”
In the analysis, the Service seems to be overly focused on the spousal rollover question posed rather than the legally correct result. The Service writes “because Taxpayer B is deceased, it is impossible for Taxpayer B to complete the proposed transaction. Since ‘Amount 1’ was received by Taxpayer B from Plan X prior to Taxpayer B’s death, Taxpayer A [surviving spouse] is precluded from rolling the funds over into a tax-deferred account in her own name.”
402(c)(9) reads as follows:
“Rollover Where Spouse Receives Distribution After Death of Employee –If any distribution attributable to an employee is paid to the spouse of the employee after the employee’s death, the preceding provisions of this subsection shall apply to such distribution in the same manner as if the spouse were the employee.”
In this instance, the taxpayer and her advisors appear to not have asked whether the rollover could be made into an inherited IRA in her husband’s name, but rather whether she would be allowed to roll it into an IRA in her own name under § 402(c)(3). It would seem that the taxpayer and advisors should have asked whether the IRA could be first finalized into an IRA in her husband’s name. Subsequent to rolling the IRA into her husband’s name, it is likely there would not have been a beneficiary form and that the IRA would have been payable to the default beneficiary. In all likelihood, the default beneficiary would have been either the decedent’s estate or the surviving spouse.
There are literally dozens of rulings allowing rollovers from estates or trusts and this does not seem to be a confusing issue. Even if the taxpayer/advisor asked the wrong question, I would respectfully suggest that the Service has at least some responsibility to help the taxpayer reframe the issues to achieve the result intended by Congress.