Cautionary IRA Tale #345: 60 Day Rollover Rule Does Not Apply to Inherited IRAs
A recent Tax Court opinion in Beech v. Commissioner of Internal Revenue U.S. Tax Court, T.C. Summary Opinion, 2012-74 (July 26, 2012), reminds us that a “taxpayer’s intention to take advantage of tax laws does not determine the tax consequences of his or her transactions.”
Distributions from an IRA are generally taxable income. Section 408(d)(3) of the Internal Revenue Code provides, however, that a distribution is not includible in gross income if the entire amount of the distribution received by an individual is paid into a qualified IRA for the benefit of that individual within 60 days of the distribution. This recontribution is known as a “rollover contribution”.
Mrs. Beech’s mother died on March 22, 2008. Mrs. Beech was the beneficiary of her mother’s traditional IRA. The IRA custodian made two death benefit distributions to petitioner. Mrs. Beech established an inherited traditional IRA with a new custodian and deposited the death benefit distribution into the inherited traditional IRA within 60 days.
The Internal Revenue Service took the position that the entire distribution was taxable income that did not qualify as a rollover. The Tax Court agreed:
Rollover treatment is not available in the case of an inherited IRA. Sec. 408(d)(3)(C). An IRA is treated as inherited for purposes of section 408(d)(3)(C) if the individual for whose benefit the account or annuity is maintained acquired that account by reason of the death of another individual who was not his or her spouse. Sec. 408(d)(3)(C)(ii). . . . A taxpayer is not treated as having received a taxable distribution from an IRA, however, if funds in the IRA are transferred from one account trustee directly to another account trustee without the IRA owner’s or beneficiary’s ever gaining control or use of the funds.
The Court held that it could not “find that petitioners substantially complied with section 408(d)(3)(A)(i) because section 408(d)(3)(C) expressly denies rollover treatment to an inherited IRA. The Court noted
“Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles. * * * The Code’s lines are arbitrary. * * * Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries.” Kim v. Commissioner, 679 F.3d 623, 625-626 (7th Cir. 2012), aff’g T.C. Dkt. No. 11902-10 (May 20, 2011) (bench opinion).
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