Wednesday, June 8, 2011

No Waiver of 60-Day IRA Rollover Limit to Help Mom

Tweet

Just in time for Mother's Day, the IRS issued PLR 201118025, denying a waiver of the 60-day time limit to roll over an IRA distribution where a group of siblings pooled their money to buy their elderly mother a one-story home after she developed mobility problems in her two-story home. The plan called for the taxpayer and his siblings to add funds to the sale proceeds of the existing residence in order for their mother to make a cash purchase of the new  home. The mother would then enter into reverse-mortgage financing of the new residence and receive a lump-sum cash payment which she would use to repay her children. The taxpayer obtained an IRA distribution to pay for his share of the pooled funds. However, the bank handling the transaction delayed processing the reverse mortgage, and the taxpayer received the funds to redeposit his IRA distribution after the expiration of the 60-day time limit for IRA rollovers under Sec. 408(d)(3).

The taxpayer requested a waiver of the 60-day limit under Rev. Proc. 2003-16, claiming that  he used the IRA distribution for a short-term purpose but that he always intended to roll over the same amount back into his IRA, and that his failure to accomplish a timely rollover was due to numerous and unreasonable processing delays by the bank which were beyond his control. He also argued that, based on the total number of days that the 60-day rollover period was exceeded, and the adverse tax consequences to him for the premature distribution, it would be against equity and good conscience not to grant a waiver.

In denying the waiver, the IRS noted that when the IRA distribution was presented to the bank, the taxpayer did not intend that the bank transact any financial matter relating to an IRA, but rather, the IRA distribution was presented to the bank for the purpose of contributing that amount, on a temporary basis, toward the purchase price of a suitable residence for the mother. In essence, the IRS reasoned, the taxpayer made a short-term loan when he made the IRA withdrawal, and while he had the intent at the time of withdrawal to redeposit that amount into his IRA before the expiration of the 60-day rollover period, he assumed the risk that the IRA distribution might not be returned to him in time.

PLR 201118025 presents a cautionary tale for anyone who thinks they should take a short-term loan from an IRA. It is one more ruling demonstrating the IRS's position that the purpose of the rollover provisions is to allow portability of retirement funds between eligible plans, not as a vehicle to provide short-term financing for personal needs and that, where an IRA distribution is used as a short-term loan to cover personal expenses, the  failure to waive the 60-day rule is not against equity or good conscience if a taxpayer is not able to redeposit the funds within the 60-day period.

For a discussion of the 60-day time limit on IRA rollovers and IRS waivers, see 367 T.M., IRAs , III.E.2.a.

-- Mark C. Wolf, Tax Law Editor (Compensation Planning)

All BNA publications are subscription-based and require an account. If you are a subscriber to the BNA publication and signed-in, you will automatically have access to the story. If you are not a subscriber, you will need to sign-up for a trial subscription.