Bookkeeping Error by Financial Institution Meant that Taxpayer's IRA Rollover Qualified for Late Rollover Relief

The taxpayer in the case of Burack v. Commissioner, TC Memo 2019-83[1], had withdrawn over $500,000 from her IRA.  She used the funds to pay for her new home in Philadelphia as she was awaiting the funds from the sale of her former residence.  She planned to return the funds to an IRA with 60 days of the original receipt, completing a tax free rollover.[2]

The provision Nancy Burack wished to take advantage of is found at IRC §408(d)(3)(A) which provides:

(A) In general

Paragraph (1)[3] does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if—

(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution;

On June 25, 2014 the taxpayer withdrew $524,981.99 from her IRA she held with Capital Guardian LLC/Pershing LLC.  On Thursday, August 21 the sale of her former home closed and she received a cashier’s check made out to “Pershing FBO Nancy J. Burack.”[4]  August 21 was 57 days after the original distribution—so Nancy had time to complete the rollover, but the clock was running.

Nancy now looked to place the check back in her IRA.  The Tax Court describes what happened next:

Petitioner’s financial adviser initially advised her that she could deposit the check into the Pershing account at Bank of New York on Wall Street. But petitioner credibly testified that Capital Guardian later assured her that she could redeposit the distribution into her IRA by overnighting the check to Capital Guardian in North Carolina. On Thursday, August 21, 2014, petitioner overnighted the check to Capital Guardian. The check arrived at Capital Guardian on Friday, August 22, which was 58 days after petitioner received the IRA distribution.

On August 26, 2014, 62 days after petitioner received the IRA distribution, the check was deposited at Pershing into petitioner’s IRA account ending in 0946. Both the deposit and the receipt of funds are reflected on the August 2014 Capital Guardian IRA statement.[5]

This created a problem in the view of the IRS—the funds were not reflected in Nancy’s IRA account until 62 days after the distribution.  To the IRS this meant she had not timely rolled the funds back into the IRA, and thus the original distribution was fully taxable to Nancy.

The taxpayer argued that her rollover should be treated as timely for two separate reasons:

  • The rollover is not shown as timely due to a bookkeeping error by Capital Guardian that is similar to that faced by the taxpayer in Wood v. Commissioner, 93 TC 122 (1989) and

  • The taxpayer should be entitled to a hardship waiver under IRC §408(d)(3)(I) as she met the requirements of Rev. Proc. 2003-16 for an automatic waiver.

The Tax Court first looked the bookkeeping error argument.  That argument looks to the Tax Court’s decision in Wood, where the Court for the first time allowed for a late rollover where the funds did not actually make it into another IRA within 60 days due to an error by the custodian. 

The Court summarizes the facts and holdings in Wood as follows:

In Wood v. Commissioner, 93 T.C. 114 (1989), a taxpayer transferred stock to Merrill Lynch before the expiration of the 60-day rollover period with the instruction that the shares be deposited into his IRA account. But Merrill Lynch’s records showed that the shares were deposited into a nonqualified account and rolled over into the IRA after the expiration of the 60-day rollover period. Id. at 117.

In deciding whether the transaction qualified for rollover treatment, we looked at the substance of the transaction and the relationship between the taxpayer and Merrill Lynch. Id. at 120-121. We explained that where book entries conflict with the facts, the facts control. Id. at 121. We found that the transaction was entitled to rollover treatment because Merrill Lynch “had accepted petitioner’s Sears stock for deposit to the IRA rollover account and held the stock subject to the IRA trust instrument.” Id. We found that Merrill Lynch’s failure to record the transfer within 60 days was a bookkeeping error.[6]

The Tax Court found that this case, while not identical, was similar enough that the taxpayer qualified for relief due to a similar bookkeeping error.  The IRS argued that in this case it was different—Pershing was the custodian, not Capital Guardian, and that the failure to present the check to Pershing is a key difference.[7]

The Tax Court disagreed that not going directly to Pershing was a key difference in this case:

…[P]etitioner’s IRA was held with both Capital Guardian and Pershing in a single account bearing the same account number. Petitioner’s IRA statement, which was generated by Capital Guardian, listed both Capital Guardian and Pershing. The relationship between Capital Guardian and Pershing is not entirely clear. All of the documentation in the record appears to have been generated by Capital Guardian. The substance of the relationship between petitioner and Capital Guardian shows that Capital Guardian was an appropriate institution for petitioner to send the check to. Petitioner had no communication with Pershing. None of the IRA account statements in the record were from Pershing; they were all generated by Capital Guardian. All discussions about the rollover contribution were held with Capital Guardian. The June 25, 2014, distribution was received by petitioner from a Capital Guardian IRA as shown by the Capital Guardian account statement. There is no documentation generated by Pershing in the record. The rollover payment was received by Capital Guardian 58 days later. Because the check was received by Capital Guardian during the rollover period but not book-entered by Capital Guardian until after, we find that the late recording is due to a bookkeeping error.[8]

The Tax Court found that even if Wood had not been applicable, the taxpayer qualified for hardship relief under IRC §408(d)(3)(I).

Revenue Procedure 2003-16, issued by the IRS to provide guidance on when a hardship waiver under IRC §408(d)(3)(I) is available, provides two conditions for an automatic hardship waiver due to a financial institution error:

  • The funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period; and

  • If the financial institution had deposited the funds as instructed, it would have been a valid rollover.

Again, the IRS’s main argument against the transaction qualifying for this relief was that Pershing was the custodian, not Capital Guardian.  So the wrong party given the check.  As the Court had already concluded that Capital Guardian was an appropriate party to give the check to, not surprisingly the Tax Court concluded that Nancy also qualified for relief under this provision.

[1], retrieved July 9, 2019

[2] Ibid, pp. 2-3

[3] The inclusion of the IRS in the taxpayer’s gross income under IRC §408(d)(1)

[4], retrieved July 9, 2019, p. 2-3

[5] Ibid, pp. 3-4

[6] Ibid, p. 6

[7] Ibid, p. 7

[8] Ibid, pp. 7-8