Waiver of 60-Day rollover rule; broker said the rollover rule was 90 d

[Guest BKH]

In Revenue Procedure 2003-7, the IRS provided the necessary procedures to request a waiver of the 60-day rollover rule for IRA distributions under Section 408(d)(3). What are the chances that the IRS will grant a waiver where the taxpayer relied on the advice of his broker that the rollover rule was 90 days, not 60? The taxpayer took a $3.5M interest free loan from his IRA and returned the funds on the 89th day. We will have to argue that based on the facts and circumstances, it would be against equity or good conscience not to grant a waiver. This is really not an error committed by a financial institution since I believe this references an accounting type error, not erroneous advice. Any thoughts would be helpful. Thanks.

[Guest b2kates]

Likely not good.

Who else did TP consult before withdrawing the funds?

Can TP document that broker said 90 days?

Likely magnitude of amount will weigh against waiver.

If any cause, potential professional claim against broker. However, what is the true harm?

[mbozek]

Will the broker stipulate that he/she provided the erroneous advice? If so then the letter can be attached to the request for the waiver. IRS routinely relieves taxpayers of the 50% penalty for not taking RMD if there is a written letter from the custodian stating that that the customer was not at fault. I hope the request is being prepared by a tax advisor who can express the postion of the taxpayer in the most favorable circumstances.

[Guest BKH]

I agree that the magnitude of the withdrawal mitigates against getting the waiver. We can prove that the broker stated 90 days and not 60. Our client asked the broker several times if he was sure the rollover rule was 90 not 60 days. The client took a similar interest free loan from his IRA a couple of years ago satisfying the 60-day rule. If we cannot get the waiver, I am sure we will pursue a claim against the broker and brokerage firm. The potential damage is that the full $3.5M is taxable and must be withdrawn from the IRA (with the result that it can no longer grow tax deferred over the life expectancies of the client and his spouse). There will be enormous financial consequences to the cleint. It will be interesting to see what state law will apply to such an action. The IRA Custodial Agreement indicates that a different state law applies than the state the client and broker reside. We have asked the brokerage firm for cooperation so we can attach a verifying statement to our waiver request. However, they are reluctant to do so since it is in essence, an admission which can be used against them in any legal action.

[QDROphile]

It might help if you do not refer to the transaction as a loan.

A 60 day distribution/rollover tour, especially in such amounts, is not for amateurs. I certainly hope the IRS would laugh off the proposition of giving this kind of stunt any break. Maybe the circumstances of the transaction were compelling, like ransom money for a kidnapped child.

[Guest BKH]

Of course I will not refer to it as a loan but rather indicate that this is a permissible transaction under the Code and one that Congress specifically authorized. Unfortunately, there was nothing compelling this failed rollover, just the ability to buy on margin and play the market in a way the IRA rules otherwise prohibited. Unless the brokerage firm will give an unequivocal statement that the taxpayer relied to his detriment on the broker's advice, I do not have much hope for the waiver. Thanks for the input. Advice is always welcome.

[mbozek]

The only action will be in arbitration, not court. Check the custodial agreement. The brokerage will not give a letter if the brokerage can disclaim liability by referring to their correspondence which states that brokers cannot give legal or tax advice. Therefore the client should have consulted his/her own tax advisor (which should have been done anyway for the amount involved). If the client borrowed the money for 60 days a few years ago he was on notice that the period was 60 not 90 days.

[John G]

A cautionary tale for anyone who thought it they might use the 60 day option to get access to IRA funds ! Just because you might be able to do something like this does not imply it is a good idea. Any failure to complete the transaction gets very nasty treatment.

I have no opinion about how the IRS will rule. I do have an opinion about a high net worth individual relying on a broker's advice for such a transaction. I would not trust them to be knowledgable. Where was the accountant? Mine would have instantly cautioned against the transaction as risky and would have known the size of the window in days.

One thing that weighs against this taxpayer is that he apparently did a transaction like this before and should have been more knowledgeable about the rules.

[Gary Lesser]

The Revenue Procedure (2003-7) was eentually published as 2003-16. Note that it is effective on the date issued (1-27-03).

IMO, it is unlikely that the IRS would grant a waiver in this case.

Revenue Procedure 2003–16, 2003-4 IRB 359 (January 27, 2003)

[summary: IRS provides guidance on applying to the IRS for a waiver of the 60-day roll-over requirement.]

SECTION 1. PURPOSE

This revenue procedure provides guidance on applying to the Internal Revenue Service for a waiver of the 60-day roll-over requirement contained in §§ 402©(3) and 408(d)(3) of the Internal Revenue Code. It also provides for an automatic waiver under certain circumstances.

SECTION 2. BACKGROUND AND GENERAL INFORMATION

.01 Section 401(a)(31) of the Code requires that a qualified trust provide for the direct transfer of eligible rollover distributions. A similar rule applies to § 403(a) annuity plans, § 403(B) tax-sheltered annuities and § 457 eligible governmental plans. (See §§ 403(a)(1), 403(B)(10) and 457(d)(1)©.) If a distributee fails to elect to have an eligible rollover distribution paid directly to an eligible retirement plan, section 3405© provides that the payor of a designated distribution that is an eligible rollover distribution must withhold from such distribution an amount equal to 20 percent of such distribution.

.02 Sections 402©(3) and 408(d)(3) of the Code require generally that any amount distributed from a qualified trust or individual retirement plan must be transferred to an eligible retirement plan no later than the 60th day following the day of receipt in order to avoid inclusion in the distributee’s gross income. A similar rule applies to § 403(a) annuity plans, § 403(B) tax-sheltered annuities and § 457 eligible governmental plans. (See §§ 403(a)(4)(B), 403(B)(8)(B) and 457(e)(16)(B).)

.03 Section 72(t) of the Code imposes an additional tax on a distribution from a qualified retirement plan equal to 10-percent of the amount of the distribution included in the distributee’s gross income, subject to certain exceptions.

.04 Section 644 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), Pub. L. 107–16, amended § 402©(3) of the Code and added new § 408(d)(3)(I) to permit the Secretary to waive the 60-day rollover requirement “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.” The Conference Report to EGTRRA provides examples of situations that may justify waiver of the 60-day rollover requirement, such as during a period in which a distribution in the form of a check was not cashed, or for errors committed by a financial institution, or in cases of inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error. (H.R. Rep. No. 84, 107th Cong., 1st Sess. 252 (2001).) The amendments made by § 644 of EGTRRA apply to distributions after December 31, 2001.

.05 Under §§ 7508 and 7508A of the Code, the time for making a rollover may be postponed in the event of service in a combat zone or in the case of a Presidentially declared disaster or a terroristic or military action. See Regulations § 301.7508–1 and Rev. Proc. 2002–71, 2002–46 I.R.B. 850.

.06 Rev. Proc. 2003–4, 2003–1 I.R.B. 123 (January 6, 2003), provides the procedures for issuing letter rulings, information letters, etc., on matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division.

.07 Rev. Proc. 2003–8, 2003–1 I.R.B. 236 (January 6, 2003), provides guidance for complying with the user-fee program as it pertains to requests for letter rulings, information letters, etc., on matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division.

SECTION 3. REQUIREMENTS FOR HARDSHIP EXCEPTION TO 60-DAY RULE

.01 Application to the Service. Except as provided in Section 3.03 below, a taxpayer must apply for a hardship exception to the 60-day rollover requirement using the same procedure as that outlined in Rev. Proc. 2003–4 for letter rulings, accompanied by the user fee set forth in Rev. Proc. 2003–8.

.02 Requirements for favorable ruling. The Service will issue a ruling waiving the 60-day rollover requirement in cases 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 taxpayer. In determining whether to grant a waiver, the Service will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution, other than as described in Section 3.03 below; (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 elapsed since the distribution occurred.

.03 Automatic approval. No application to the Service is required if a financial institution receives funds on behalf of a taxpayer prior to the expiration of the 60-day rollover period, the taxpayer follows all procedures required by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan) and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement plan within the 60-day rollover period. Automatic approval is granted only: (1) if the funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period; and (2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover.

.04 General rules. To be eligible for a waiver of the 60-day rollover period, either automatic or through application to the Service, the distribution must have occurred after December 31, 2001, and the rules regarding the amount of money or other property that can be rolled over into an eligible retirement plan within the 60-day rollover period (including § 402©(6) relating to sales of distributed property) apply to deposits made pursuant to a waiver of the 60-day rollover period (thus, if a taxpayer received $6,000 in cash from the taxpayer’s IRA, the most that could be deposited into an eligible retirement plan pursuant to a waiver of the 60-day rollover period is $6,000). Also, the rules for waiver of the 60-day rollover period in this revenue procedure apply to distributions from an individual retirement plan described in § 408(a) or (B), a plan qualified under § 401(a), a § 403(a) annuity plan, a § 403(B) tax-sheltered annuity and a § 457 eligible governmental plan.

SECTION 4. EFFECTIVE DATE

This revenue procedure is effective on January 27, 2003.

[Appleby]

Ignorance of the law is no excuse

There is a PLR , in which the IRS ruled that the client is responsible- even though the broker made an error. I remember it had something to do with a rollover- I am trying to locate it.

[Gary Lesser]

I believe you are looking for PLR 8108044 [On April 14, 1980, an employee received a lump-sum distribution from a profit-sharing plan. The employee's broker mailed his application to establish an individual retirement account (IRA) several days after the 60-day rollover period under section 402(a)(5)© expired. Under these circumstances, the Service has held that the employee is not entitled to establish a rollover IRA with his lump-sum distribution.]

In most of the other ruling, the IRS stated it didn't have the authority to extend the 60-day period.

IMO, the IRS would not allow an extension for erroneous advice of this nature. It is not the same as receiving the funds within 60 days, but depositing it after the 60-day period. Here, the error was NOT "beyond the reasonable control of the taxpayer." Furthermore, the IRA disclosure statement provided the taxpayer contained the correct rules.

If the erroneous advice was relied on, the compliance department might agree to a settlement (but not a rollover). One wayof looking at damages may be-- loss of the tax deferral on gain and payment of current taxes due on the distribution (and adjusted for the increse in basis I imagine).

[Guest BKH]

Appleby, if you can locate that PLR that will be great. I am also trying to locate it myself. I will ask the client where his accountant was in all of this mess (I assume no where). The brokerage firm is nervous about their potential liability. After the rollover occured on the 89th day, the brokerage firm discovered that the rule was 60 days and not 90 but did not tell our client about it for 4-5 weeks. Their legal department was researching whether there was any way the transaction could be reversed on its books. The right answer is, of course, they cannot do that without criminal liability. The branch office manager admitted that the broker had given the wrong advice. We will be submitting our waiver request shortly.

[Appleby]

Gary,

I am still trying to locate the PLR you referenced- the number you provided appears to be short one digit.

BKH- In the meantime, the Chief Counsel's Written Determination at the following URL may help- refer to the case of Orgera v. Commissioner, where the ruling shows that claiming not to be familiar with the rules is no excuse for not complying.

http://www.unclefed.com/ForTaxProfs/irs-wd...999/9933038.pdf

[Gary Lesser]

Yes, the correct PLR ref is 8108044

November 26, 1980

***

M = ***

N = ***

Dear Sir:

This is in reply to your letter requesting a ruling concerning a rollover of a lump-sum distribution from a qualified plan to an individual retirement account (IRA) after the 60 day time period for completing a rollover has passed.

You state that you resigned from M in February of 1979. On April

14, 1980 you received a lump sum distribution of your interest in the M profit-sharing plan. On June 11, 1980 you mailed, to your broker, an application to establish an IRA with N. Your broker sent the application to N on June 24, 1980 and it was received by N on June 27, 1980.

Based on the foregoing, you request a ruling whereby you would be able to rollover the funds distributed from the M profit-sharing plan to an IRA even though the 60 day period for a rollover, allowed by the Internal Revenue Code, has passed.

Section 402(a)(5)© of the Code states that a participant in a qualified plan may roll over funds distributed from the qualified plan to an IRA if such transfer is made within 60 days of receipt of the lump sum distribution. It goes on further to state that a tax free rollover will not be allowed if any transfer of the distribution is made after the 60th day following the day on which the employee received the property distributed.

In the instant case, there was no transfer of the funds distributed from the M profit-sharing plan within the 60 day period. Neither the Code nor the Internal Revenue Service Regulations allow for waiver or extension of the 60 day time limit.

Accordingly, since the distribution was not transferred within the 60 day period allowed by Code section 402(a)(5)© you may not now rollover the funds distributed from M profit-sharing plan to an IRA.

Sincerely yours,

John J. Swieca

Acting Chief, Employee Plans Technical Branch

[Gary Lesser]

Here's the IRM mentioned above.

UILC: 408.03-00; 72.20-00

Release Date: 8/20/1999

Date: June 24, 1999

CC:EBEO:Br7

MEMORANDUM FOR

* * *

FROM:

Chief, Branch 7, Office of Associate Chief

Counsel (Employee Benefits & Exempt

Organizations) (CC:EBEO:BR7)

SUBJECT:

Review Of Advisory Opinion Concerning Ira

Distributions

[1] This Field Service Advice is in response your request for

our views regarding your memorandum to Chief, Examination Division,

* * *. Field Service Advice is not binding on Examination or Appeals and is not a final case determination. Field Service Advice issued to Examination or Appeals is advisory only and does not resolve Service position on an issue or provide the final basis for closing a case. This document is not to be relied upon or otherwise cited as precedent.

LEGEND:

X = * * *

Y = * * *

ISSUES

[2] Whether the Service has the authority to waive the 60-day rollover rule of I.R.C. section 408(d)(3)(1) and the early distribution tax under section 72(t).

CONCLUSION

[3] The Service does not appear to have the authority to waive either the 60-day rollover rule of section 408(d)(3)(1) or the early distribution tax under section 72(t) under the circumstances of this case.

[4] X, an individual doing business under the name Y, provided accounting services primarily with respect to estate and trust work. Between 1989 and 1997, X, in addition to providing legitimate accounting services, misappropriated funds from 22 clients, friends, and relatives by convincing them to make investments in either a partnership venture or a mutual bond fund and subsequently embezzling their money. Many of X's victims obtained funds for the investment by making withdrawals from qualified tax deferred accounts such as IRA's, and apparently believed that the new investments would receive tax-free rollover treatment.

[5] On January 6, 1999, after being the target of a criminal tax investigation, X pled guilty to mail fraud and income tax evasion based on the unreported embezzlement income. Until recently, X's victims were unaware that he had defrauded them. After learning of the embezzlement, the victims contacted the special agent on the case regarding the tax consequences stemming from their lost investments. It is unknown whether X spent all the embezzled funds or whether a portion of the funds is available to satisfy claims of the defrauded investors.

LAW AND ANALYSIS

[6] In your memorandum to the Examination Division, you conclude that the Service should waive the 60-day rollover period for those taxpayers whose funds were embezzled if they replenish their IRAs with funds from other sources within a reasonable time. In reaching this conclusion, you rely upon Wood v. Commissioner, 93 T.C. 114 (1989), Childs v. Commissioner, T.C. Memo. 1996-267 (1996) and PLR 9234016. Based upon the facts presented, the taxpayers' situation appears to be distinguishable from this authority, and we do not believe that the Service has the authority to waive the rollover period absent additional facts that bring the taxpayers within the ambit of Wood. /1/ We similarly believe that there is no basis to waive the additional tax for early distributions under section 72(t). Our reasons are discussed below.

[7] In Wood, the taxpayer received a lump sum distribution and stock shares from a profit sharing fund. The taxpayer met with an account executive of a national brokerage firm where he had an existing non-IRA account in order to establish an IRA into which he could roll over the distribution. The taxpayer signed documents to establish the IRA and instructed the account executive to deposit the lump-sum distribution into the IRA. The taxpayer physically delivered the lump sum distribution check and stock certificates to the account executive at that time. The brokerage firm's records indicated that a portion of the distribution was recorded as having been transferred to the other account that the taxpayer maintained with the brokerage firm. Four months after the expiration of the 60-day period allowed for rollover, the brokerage firm corrected its records to reflect transfer of the remaining portion of the distribution to the IRA. The court held that under these circumstances, the 60-day rollover period of section 408(d)(3) was satisfied because the money was delivered to the trustee of a valid IRA rollover account and the failure by the brokerage firm to record the transfer was a mere bookkeeping error.

[8] In Childs, the taxpayer opened two IRA accounts with a bank and deposited a distribution which she later learned was not eligible for tax-free rollover treatment. In order to qualify for relief under section 408(d)(4), the taxpayer was required to withdraw the excess contributions on or before August 15th of the year at issue. Although the taxpayer verbally instructed the bank to convert her IRA account into a non-IRA account, this request was not completed by the bank until after August 15th. The delay was the result of a failure on the part of the taxpayer to complete necessary documentation. However, the court found that the taxpayer had exercised diligence in phoning the bank, and had been misled by a bank employee into believing that it was not necessary to execute any bank documents to convert the account. The court held that since the taxpayer took all necessary steps to withdraw the excess funds by the required date, relief should be granted.

[9] PLR 9234016 dealt with the tax consequences of embezzlement by a bank officer. The officer had issued worthless certificates of deposit to account holders in exchange for funds. The bank reimbursed depositors who could demonstrate that they had made deposits for the purchase of worthless certificates. The Service ruled that amounts restored to the depositors' IRA's were not taxable to depositors.

[10] In our view, two facts distinguish the taxpayers at issue from the taxpayers in the cases and ruling cited above. First, the taxpayers at issue have not established that they were dealing with an individual that they had a reasonable expectation to believe had the authority to establish an IRA, such as an employee of a bank or a financial institution. Although the facts indicate that X provided accounting services, there is no mention of his qualifications as an IRA trustee. In Wood, Childs and PLR 9234016, the taxpayers were each dealing directly with individuals who were employees of financial institutions and therefore would have met the qualifications for IRA trustees within the meaning of section 408(a)(2). Second, although the facts indicate that the taxpayers at issue believed that the money would be deposited into accounts that would qualify for tax- free rollover treatment, there is no evidence that they ever took the steps required to set up these accounts. Rather, it appears that the taxpayers merely gave their money to X and requested that he invest it for them. This fact distinguishes the taxpayers at issue from the taxpayer in Wood, who had completed the paperwork necessary to establish the IRA rollover account, and from the taxpayers in Childs and PLR 9234016, who maintained accounts at the institutions that effectuated the transfers.

[11] Although you have drawn an analogy between the instant case and Wood, we believe that the holding in Schoof v. Commissioner, 110 T.C. 1 (1998) actually controls. In Schoof, the Tax Court held that where a taxpayer gives a distribution intended as a rollover to a trustee who is not qualified under section 408(a)(2), rollover tax treatment is denied, and the taxpayer must include the distribution in income. In reaching this decision, the court specifically held that Wood was distinguishable because it merely involved "procedural defects in the execution of the rollover" rather than "the failure of a fundamental element of the statutory requirements . . . the qualification of the IRA trustee." Schoof at 11. The court also held that based upon the legislative history of section 408(a)(2), individuals are per se ineligible to serve as trustees for IRA trusts. In the present case, it is unlikely that X could be considered a qualified trustee since he appears to have acted in an individual capacity, even though he did business under the name Y. Accordingly, under the holding of Schoof, the taxpayers who gave him distributions failed to satisfy a fundamental statutory requirement, and should be required to include the amount of the distribution in income. This result is not changed simply because X embezzled the funds.

[12] Even if X were considered to be a qualified trustee, Orgera v. Commissioner, T.C. Memo. 1995-575 demonstrates that although a taxpayer may believe that he has done everything necessary to effectuate a rollover, the 60[day]-period is nevertheless strictly construed. In Order, the taxpayer deposited his pension distribution in a money market account at his company's credit union and argued that he should receive tax-free rollover treatment because he believed he was making a qualified IRA deposit. In Orgera, as in Schoof, the court specifically declined to extend the Wood rationale, and denied rollover treatment since the taxpayer failed to make a timely transfer of the distribution to an IRA that met the statutory requirements. Similarly, despite their intentions, the taxpayers in the present case failed to meet the statutory requirements necessary to achieve rollover treatment.

[13] In addition to the above cited cases, one private letter ruling supports our finding that there is no legal basis for the Service to waive the rollover requirements or early distribution tax in this case. PLR 8815036 involved a taxpayer who gave IRA funds to an embezzler with the mistaken expectation that the funds would be deposited to a qualified retirement plan within 60 days. In this ruling, which is directly analogous to the instant case, the Service denied rollover treatment even though the taxpayer deposited the funds to the plan after they were recovered because the 60-day period was not met. In support of its position, the Service states:

The Code does not provide relief from applicable taxation where the taxpayer intended to rollover funds from one IRA to another, and in fact fails to do so or places the funds in an investment vehicle other than an IRA. Therefore, the transfer of funds to an individual instead of an IRA does not constitute a complete and timely rollover.

[14] In PLR 8815036, the Service also ruled with respect to section 72(t) that the 10% additional tax applied because none of the exceptions were satisfied. We believe that this is the correct conclusion.

[15] In our view, there is no legal basis to waive the additional tax for early distributions under section 72(t) in the instant situation unless the taxpayers meet one of the exceptions set forth in the statute. Although you cite Larotonda v. Commissioner, 89 T.C. 287 (1987) and Murillo v. Commissioner, T.C. Memo. 1998-13 in support of the theory that section 72(t) tax should be waived where a distribution is involuntary, the Service has specifically declined to adopt the position that section 72(t) tax should be waived in instances of involuntary distributions. /2/ Even if the Service applied this standard, however, the fact remains that these taxpayers voluntarily withdrew funds from their IRA's and transferred those funds to X. This distinguishes them from the taxpayer in Larotonda, whose distribution was the result of a levy, and the taxpayer Murillo, who forfeited his IRA to the government as part of a plea agreement.

[16] In summation, based on the facts presented, we see no legal basis for relief with respect to the rollover issue because the taxpayers' situation appears to be distinguishable from those cases and private letter rulings that disregard a taxpayer's failure to follow literal statutory requirements. In addition, the requirements articulated by the court in Schoof do not appear to be satisfied. The taxpayer's situation appears similar to Orgera where the court declined to grant relief even though the taxpayer intended to make a tax-free rollover. However, if any of the taxpayers are able to prove additional facts that would narrow the distinction between their case and Wood, we should consider such facts carefully. Barring such a showing, the Service must operate within the existing statutory framework if it is to fairly, consistently and effectively administer the Internal Revenue Code.

[17] Please contact Christine Keller at (202) 622-2311 with any questions.

MICHAEL J. ROACH

FOOTNOTES

/1/ We believe that further factual development is necessary to resolve each case. For example, it is not evident from the information that we have whether X held himself out as a nonbank trustee. In addition, we do not know whether the taxpayers signed any documents opening an IRA or took any other reasonably prudent steps to insure that the rollover was accomplished. The burden is on the taxpayer to prove what reasonable steps each took to accomplish the rollover.

/2/ The Service published AOD CC-1988-010 on April 11, 1988 indicating non-acquiescence with Larotonda and stating that the [sic] under the rationale of In re Kochell, 804 F.2d 84 (7th Cir. 1986), the premature distribution tax applies to distributions regardless of whether they are voluntary. On January 29, 1999, the Service published AOD CC-1999-002, which withdraws the earlier Larotonda AOD due to statutory changes to section 72(t) brought about by the Restructuring and Reform Act of 1988, Pub. L. No. 105-206, 112 Stat. 685 (1998) that will be effective for distributions after December 31, 1999. However, the withdrawal does not alter the Service's position with respect to whether a voluntary/involuntary standard should apply. On January 29, 1999 in AOD 1999-003, the Service acquiesced in result only in response to Murillo v. Commissioner, T.C. Memo. 1998-13. The AOD specifically states that although the Service will not assess section 72(t) tax under the narrow circumstances of Murillo, in all other cases involving early distributions, the Service will continue to assess section 72(t) tax unless a statutory exception applies.

END OF FOOTNOTES

[Bruce Steiner]

For $3.5 million, it's worth a try.

[mbozek]

Regardess of whether we think the IRS would waive the taxes because of the brokers advice, the taxpayer is required to submit a request for a waiver of taxes to the IRS and receive a denial from the IRS in order to make a claim for repayment from the broker. If no request is made the broker can claim that the taxpayer did not attempt to mitigate the damage caused by the brokers mistake and the Arbitrator could rule against the taxypayer claim for reimbursement of taxes. (A party claiming injury has a duty to mitigate damages). I can prepare a request to the IRS for the client.

[Guest Fishchick]

I just wanted to post a few points of discussion.

First, I believe that EGTRRA specificially authorized the IRS to extend the 60-day rollover period beginning in 2002, whereas before, they were unable to do so even in the case of an obviously deserving hardship (like being a victim of a fire or a flood that made it impossible to make the deposit).

Second, does the IRS know about this situation? If not, why tell them? Especially if you have a 1099R and a 5498 from the same tax year. In my experience, it is rare for the IRS to ask a taxpayer to prove the timing of the 60-day rollover when the distribution and rollover occur the same year (although not unheard of). This is a real question for those who might be in the know. I really would like to know if there is a perceived benefit to "fessing up" in this scenario.

Also, you mentioned waiving the taxes. Do you mean waiving the taxes on the initial distribution, or on the excess created by rolling over an ineligible amount? I'm assuming that you mean the initial distribution. Have you taken steps to remove the 3.5mil as a return of excess?

[jpod]

1. I assume that the the poor soul has not yet filed his tax return for the year of the distribution. Notwithstanding FishChick's suggestion, he should consult with tax counsel experienced in the law of tax crimes before he reports the contribution to the IRA as a valid rollover on his 1040.

2. In addition to seeking tax counsel on the potential criminal ramifications discussed above, this individual needs to consult with an experienced broker-dealer litigator first and foremost to think about strategy. Would it be better to (a) appeal to the IRS and get rejected, report the 3.5MM as taxable income and then file a complaint against the broker, or (B) do nothing and try to negotiate a tolling agreement with the broker and his firm? My guess would be (a), but I'm not sure; you need the tax lawyer and the broker-dealer litigator to put their heads together and figure this out.

3. Remember, if the taxpayer decides to report this as a valid rollover, the statute of limitations on the assessment of back taxes will be 6 years, not 3 years. But, the excise tax on excess contributions to the IRA (i.e., if it is not a valid rollover, which it is not) is assessed year after year after year until corrected. Therefore, that issue will never go away.

[Guest Fishchick]

Just wanted to add that I agree-- this person should definitely seek legal advice before proceeding.