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Rollover relief granted to taxpayer who suffered emotional distress following spouse’s death

PLR 201606032

In a Private Letter Ruling (PLR), IRS has ruled that it would waive the 60-day rollover requirement for a taxpayer whose failure to timely roll over funds from her husband’s individual retirement arrangement (IRA) to her IRA was due to her emotional distress following the death of her husband and the stress of administering his estate. IRS ruled that the contribution of the amount into the IRA was considered a rollover contribution provided all other Code Sec. 408(d)(3) requirements were met.

Background. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity or Code Sec. 403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period. (Code Sec. 408(d)(3)(B))

IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver). (Code Sec. 408(d)(3)(I))

IRS will consider several factors in determining whether to waive the 60-day rollover requirement, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, and errors committed by a financial institution. (Rev Proc 2003-16, 2003-1 CB 359)

Facts. Taxpayer was married to Decedent on Dec. 18, 2012 (the date of Decedent’s death). Before his death, Decedent owned IRA H, which was maintained by Financial Institution A. Decedent’s estate was the beneficiary of IRA H.

Taxpayer and Decedent were the Trustees of Trust until Decedent’s death, at which time Taxpayer became the sole Trustee of Trust. Decedent’s Last Will and Testament provided that his estate pass to the Trustee of Trust. On Decedent’s death, Taxpayer, as sole trustee and beneficiary under Trust, had full authority under the governing law to distribute the assets of IRA H to herself.

On Feb. 26, 2013, Taxpayer requested a lump sum distribution from IRA H equal to Amount. On that same day, Taxpayer’s deceased husband’s estate received a distribution from IRA H equal to Amount. On Mar. 12, 2013, a date within the 60-day rollover period, Taxpayer deposited Amount into Account, a non-IRA account held in the name of Decedent’s Estate and maintained by Financial Institution B.

On Sept. 27, 2013, after the expiration of the 60-day rollover period, Taxpayer requested that the Amount be transferred into her own IRA W, which was also maintained by Financial Institution B. This Amount was deposited into her IRA W on Sept. 30, 2013. Taxpayer represents that this Amount has not been used for any other purpose.

Based on the above facts and representations, Taxpayer requested that IRS waive the 60-day rollover requirement with respect to the distribution of the Amount distributed from her IRA W. Taxpayer, the executor of his estate, asserts that her failure to roll over the distribution from IRA H to her own IRA W within the 60-day period described in Code Sec. 408(d)(3) was due to emotional distress following the untimely death of her spouse, Decedent, and the stress of serving as executor of estate.

Relief provided. In a Private Letter Ruling (PLR), IRS waived the 60-day rollover requirement with respect to the distribution of Amount from IRA H under Code Sec. 408(d)(3)(I). Thus, if all other requirements of Code Sec. 408(d)(3) (dealing with the rules for IRA rollers) are met for the contribution, except the 60-day requirement, the contribution of Amount to IRA W will be considered a rollover contribution within the meaning of Code Sec. 408(d)(3).

IRS reasoned that generally, if the proceeds of a decedent’s IRA are payable to a trust or estate (or both), and are paid to the trustee of the trust, who then pays them to the decedent’s surviving spouse as the beneficiary of the trust, the surviving spouse is treated as having received the IRA proceeds from the trust and not from the decedent. Accordingly, such surviving spouse, in general, isn’t eligible to roll over the disturbed IRA proceeds into her own IRA.

However, the general rule doesn’t apply where the surviving spouse is the sole trustee of the decedent’s trust and has the sole authority and discretion under trust language to pay the IRA proceeds to herself. The surviving spouse may then receive the IRA proceeds and roll over the amounts into an IRA set up and maintained in her name.

In this case, Decedent designated his estate as the beneficiary of his IRA H, and Taxpayer was the executor of his estate, which passed to Trust D. Taxpayer was also the sole Trustee of Trust and had the power to distribute the assets of IRA H from Trust to herself. Thus, Taxpayer could have taken a distribution from IRA H and rolled it over into an IRA in her name. But, Taxpayer was emotionally distraught following Decedent’s untimely death and overwhelmed by the responsibility of handling his estate. The information and documentation submitted by Taxpayer were consistent with her assertion that the failure to accomplish a rollover of Amount from IRA H into her own IRA W within the 60-day period prescribed by Code Sec. 408(d)(3)(A) was due to the emotional distress following Decedent’s death and the stress of administering his estate.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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