Account bank loan no personal

No IRA Penalty Waiver On Unfortunate Timing Of 60-Day Rollover Deadline; Bank Mistake Qualifies

LTRs 200504037, 200504041, 200504042

Three recent letter rulings help explain the 1RS's position on waiver of the 60-day deadline for IRA rollovers. Waivers will not be permitted when the distribution is a short-term loan or for payment of personal expenses, but will be granted if failure to complete a rollover is not the fault of the taxpayer.

* Comment. Rev. Proc. 2003-16 provides the 1RS with guidelines for approving waivers. It must consider all relevant facts and circumstances, including errors by financial institutions, unforeseen events that prevent completion of the rollover, the use of the funds, and the length of time following the distribution.

Short-term loan

In LTR 200504037, the taxpayer was the father of four college students. He took money out of his IRA to pay his daughter's tuition, intending to replace the funds from her student loan. He was told that he would not be liable for a 10 percent penalty if he put the money back in the IRA within 60 days. However, processing of his daughter's student loan took longer than expected and the money was not available in time to make the 60day deadline.

The 1RS examined Rev. Proc. 2003-16 and the legislative history of Code sec. 72. It determined that the 60-day limitation was intended to facilitate portability between accounts and not to create short-term loans. Since the distribution was not for an anticipated purpose, the taxpayer was not eligible for a waiver of the 60-day deadline.

Personal expenses

In LTR 200504041, a 79-year-old taxpayer received monthly distributions from her IRA. She intended to continue withdrawing money until the funds were exhausted, but after numerous problems with the account, withdrew the balance in what was referred to as a "normal close out." She deposited the balance in her personal savings account.

No one informed her of the consequences of not rolling over the distribution until her personal income taxes were prepared the following year. She used most of the money to pay for two months of assisted care. Because the funds had been used for personal expenses, the 1RS determined that the taxpayer was not eligible for a waiver of the rollover deadline.

* Comment The taxpayer was not subject to the 10 percent penalty on the distribution because of her age, only the inclusion of the entire distribution in her gross income. In a situation where a penalty was assessed, some of the distribution might have been exempt from the penalty to the extent that it was used for medical expenses in excess of 7.5 percent of AGI.

Bank mistake

In LTR 200504042, a permanently disabled taxpayer on a disability pension decided to close out his IRA. He took his savings to another bank, which assured him that he could open a new IRA. A bank employee recommended that part of the money be invested in certificates of deposit and the rest in a money market fund. The taxpayer mistakenly assumed that he was opening an IRA.

The following year, the taxpayer discovered that he owed additional taxes because the money had not been placed in an IRA. The bank informed him that failure to deposit the money into an IRA was due to the employee's inexperience and acknowledged the mistake to the 1RS in writing. After receiving the bank's acknowledgment, the 1RS agreed to waive the 60-day deadline.

References: FED ???? (to be reported); FTS ?¡ìC:22.301.