Rollover Contribution to Second IRA Disallowed
The Tax Court held that a taxpayer who received distributions from two individual retirement accounts (IRAs) and later transferred the amounts back into his IRAs had taxable income equal to the amount of the second transfer. According to the court, the plain language of Sec. 408(d)(3)(B) allows a taxpayer to make only one tax-free rollover contribution during a one-year period. The IRS subsequently announced that it will not apply this interpretation to distributions occurring before Jan. 1,2015. Generally, individuals must include the amount of distributions received from an IRA in their gross income. Taxpayers are not taxed to the extent those distributions are paid (often referred to as rollover contributions) into a qualifying IRA, retirement annuity, or retirement plan no later than the 60th day after the day on which the distribution is received. Sec. 408(d)(3)(B) states that the tax-free treatment does not apply to any distribution received by a taxpayer and subsequently rolled over if "at any time during the 1-year period ending on the day of such receipt such individual received any other amount ... from an individual retirement account ... which was not includible in his gross income because of the application of this paragraph." Alvan Bobrow, a tax attorney, maintained a traditional IRA and a rollover IRA. He received distributions totaling $65,064 on April 14, 2008, from his traditional IRA and another distribution of $65,064 on June 6,2008, from his rollover IRA. On June 10, 2008, he transferred $65,064 back into his traditional IRA, and he transferred another $65,064 back into his rollover IRA on Aug. 4, 2008. On July 31, 2008, his wife, Elisa, withdrew $65,064 I from her traditional IRA, and on Sept. 30, j 2008, she transferred $40,000 into the IRA. She claimed that she instructed Fidelity Investments, the account custodian of her IRA, to transfer $65,064 from the couple's joint checking account into her IRA at some time before Sept. 30, 2008. On their 2008 federal income tax return, the taxpayers treated all three sets of transactions as tax-free rollover contributions, but the IRS disagreed. The taxpayers petitioned the Tax Court for relief. The taxpayers argued that the limitation of Sec. 408(d)(3)(B) applies to each IRA owned by a taxpayer and, although it prevents multiple tax-free rollover contributions from the same IRA during a one-year period, it does allow a tax-free rollover contribution from each IRA during a one-year period. …