Internal Revenue Code
The Internal Revenue Code rules governing Individual Retirement Account (IRA) rollovers and allowable investments are complex and demand respect when planning. Particularly limiting is the general inability for an IRA holder to invest in a private business venture. In one recent case, where the taxpayer actually requested a ruling from the Service, a strategy devised to move funds from and IRA to a partnership was found NOT to qualify for tax free rollover treatment.
The facts are as follows:
On advice of his financial planner, the taxpayer had his IRA custodian issue a check payable to a partnership for purchase of a partnership interest in November, 2012, which he intended to be held by the custodian. However, the custodian was unable to hold the partnership interest and, as a result, issued a Form 1099-R treating the distribution as a taxable distribution on November 21, 2012. It was the taxpayer’s belief that the custodian would have prepared the necessary paperwork to transfer the partnership interest to an alternative custodian who would have been able to hold the interest. This assignment to an alternative custodian never occurred. The taxpayer learned about these events nearly a year later in October, 2013 when preparing his tax return.
The taxpayer then requested the Internal Revenue Service waive the 60-day rollover requirement due to incorrect advice from his financial planner.
Under the IRA rollover rules, rollovers between retirement account custodians (direct rollover) can be done anytime without limit and are not subject to tax or penalty. However, if a distribution from an IRA or a retirement plan is paid directly to you, (indirect rollover) you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. An indirect rollover can only be done once every twelve months. Internal Revenue Code Section 408(d)(3)(1) provides that the Internal Revenue Service may waive the 60-day IRA rollover requirement when the failure to waive such requirement would be against equity or good conscious, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.
The Internal Revenue Service has traditionally taken a very tough stance against waiving the 60-day IRA rollover requirement and has not shown much flexibility. In this ruling the IRS argues that since the IRA funds were being used for investment and not part of a rollover process and, thus, decided against waiving the 60-day rollover requirement.
This outcome seems unduly harsh due to the fact that the taxpayer clearly believed that his financial planner was going to take care of moving the IRA to a new custodian who would accept the IRA partnership investment and only discovered the error after the 60-day period has ended. It would seem fair to assume that the taxpayer did not attempt to use the IRA funds in any way that would personally benefit him. In fact, the IRA funds were tied up in the partnership investment the entire time as the Service ruled that the amount of the investment and all investment earnings would be subject to tax.
This Ruling clearly illustrates the importance of working with tax professionals that understand how best to make alternative asset investments with a self-directed IRA and the importance of working with the right IRA custodian and tax professional.
A complete copy of this ruling can be found here.
Questions or comments may be submitted to Bob Grossman or Don Johnston.
