Monday, June 20, 2016

When the taxpayer in PLR 201547010 decided to invest his IRA assets in a partnership, he forgot to check whether his IRA provider was able to hold an interest in a partnership as an investment in the IRAs for which it served as custodian.  While all IRA accounts are able to hold investments in publicly traded securities, i.e. stocks, bonds and mutual funds, not all IRA custodians are set up to handle alternative investments, such as direct ownership of a business, real estate, partnership interests and LLC member interests, in their IRA accounts managed pursuant to their IRA account agreements.  In fact, some IRA account agreements specifically preclude ownership of such alternative assets in the IRA accounts covered by the IRA custodian’s account agreement.

In this PLR, Taxpayer A instructed the IRA Custodian to invest his IRA assets in a percentage partnership interest of Partnership C.  The IRA Custodian issued a check in November of 2012 payable to Partnership C for the amount required for purchase of that percentage partnership interest in Partnership C, and Partnership C indicated that the percentage interest was owned by “Taxpayer A IRA”.  However, since the IRA Custodian’s account agreement did not authorize the Custodian to hold the partnership interest in Taxpayer A’s IRA, the IRA Custodian issued a 1099-R reporting the payment to Partnership C as a distribution from Taxpayer A’s IRA.  When finalizing the preparation of his 2012 income tax return in October 2013, Taxpayer A finally came to a full appreciation of the significance of the IRA Custodian’s 1099-R, that a mistake had been made in the purchase of the percentage partnership interest.  Had he opened another IRA with another IRA Custodian whose account agreement would permit the ownership of a percentage interest in Partnership C in a new IRA account for Taxpayer A and had he directed the old IRA Custodian to transfer the amount for purchase of the Partnership C percentage partnership interest in a custodian to custodian transfer from Taxpayer A’s IRA B for a new IRA to use to purchase the Partnership C percentage partnership interest directly in a Taxpayer A IRA, there would have been no 2012 IRA distribution to report on his 2012 income tax return.

Since more than 60 days had elapsed following the purchase of the Partnership C percentage partnership interest with assets from Taxpayer A’s IRA B, the amount of the purchase price for this interest could no longer be rolled over to a new IRA without a waiver by the Service of the 60 day rollover requirement under § 408(d)(3).  The Service has the authority to waive the requirement that the rollover of funds to an IRA be completed within 60 days from the date on which the distributee received the property distributed “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.” § 402(c)(3)(B).

As set forth in Rev. Proc. 2003-16, 2003-4 I.R.B. 359 (January 8, 2003), in determining whether to waive the 60 day requirement, the Service will “consider all relevant fact and circumstances,” including:

1.                  Errors committed by a financial institution;

2.                  Inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error;

3.                  The use of the amount distributed; and

4.                  The time elapsed since the distribution occurred.

Taxpayer A attempted to convince the Service that his failure to purchase the Partnership C partnership interest in his IRA was due to financial institution error, to fall within one of the factors enumerated in Rev. Proc. 2003-16.  Instead, the Service stated that “Taxpayer A chose to use the proceeds from IRA B to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.”  Apparently, the Service was focusing on the failure of Taxpayer A to open a new IRA with an IRA Custodian who was able to hold a partnership interest in Taxpayer A’s IRA, as a failure or error within the control of Taxpayer A.  All Taxpayer A had to do was read the IRA account agreement, or contact Custodian C directly about whether Custodian C was able to hold Partnership B partnership interests in Taxpayer A’s IRA.  Had he done that, he would have known that he needed a different IRA in order to do what he wanted to do, that is, own Partnership C partnership interests in his IRA.  This failure was, in the Service’s view, within the “reasonable control” of Taxpayer A, and was beyond the scope of the Service’s ability to waive the 60 day rollover requirement.


Thursday, February 19, 2015

459482489The Treasury Green Book provides explanations of the President’s budget proposals.  One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning is found on page 165 of the Green Book and is re-printed here for your convenience:


Current Law Minimum distribution rules apply to employer sponsored tax-favored retirement plans and to IRAs. In general, under these rules, distributions must begin no later than the required beginning date and a minimum amount must be distributed each year. For traditional IRAs, the required beginning date is April 1 following the calendar year in which the IRA owner attains age 70½. For employer-sponsored tax-favored retirement plans, the required beginning date for a participant who is not a five-percent owner is April 1 after the later of the calendar year in which the participant attains age 70½ or retires. Under a defined contribution plan or IRA, the minimum amount required to be distributed is based on the joint life expectancy of the participant or employee and a designated beneficiary (who is generally assumed to be 10 years younger), calculated at the end of each year.

Minimum distribution rules also apply to balances remaining after a plan participant or IRA owner has died. The after-death rules vary depending on (1) whether a participant or IRA owner dies on or after the required beginning date or before the required beginning date, and (2) whether there is an individual designated as a beneficiary under the plan. The rules also vary depending on whether the participant’s or IRA owner’s spouse is the sole designated beneficiary. (more…)

Friday, July 12, 2013

With guest co-blogger, Washington University School of Law student and Bryan Cave summer intern, Mike Gallagher.

As is the case for everyone (and as we previously discussed in our prior post, Rock, Paper, Scissors: Life Insurance Beneficiary Designation Beats Will), based on the United States Supreme Court decision in Hillman v. Maretta, if you are a federal employee, you should carefully consider who is listed as beneficiary of your life insurance policy. In Hillman, the Court favored Warren Hillman’s ex-wife, Judy Maretta, over his widow, Jacqueline Hillman, and not because the former was more deserving or the marriage to the latter was overly capricious. $124,558 of life insurance benefits accrued to the ex-wife because the husband neglected to send the federal government’s Office of Personnel Management the necessary documentation to change his beneficiary designation before his death. (more…)