Aftershocks of Tax Court’s IRS Rollover Decision Ripple Throughout Retirement Planning Community

Just a few weeks ago, this article discussed the US Tax Court’s decision in Bobrow v. Commissioner, a case involving multiple retirement account rollovers occurring in quick succession within the same year. The court’s opinion ruling in favor of the Internal Revenue Service created a significant stir within many retirement planning circles, as the court declared that taxpayers could perform only one rollover per year in order to qualify for tax-free status. Some analysts have declared the ruling in direct conflict with IRS guidance documents, while others have pointed out that options exist to avoid the potential trap set by the Bobrow ruling.

In the Bobrow case, the husband and wife executed three rollovers within one year involving several of their multiple retirement accounts. The couple believed that all their rollovers were tax free because, during that year, they never performed more than one rollover involving any one of the accounts. The IRS declared that the one-rollover-per-year rule applied per taxpayer, not per account.

To the amazement of some observers, the court took the IRS’s side. “Industry leaders, financial advisers, and everyone else who handles IRAs are stunned,” Denise Appleby, the editor and publisher of The IRA Authority, told MarketWatch. As MarketWatch pointed out, IRS Publication 590 contained an example that seemed in direct conflict with the IRS’s position in the Bobrow case, which the Tax Court supported. In the example, a hypothetical taxpayer had 2 IRAs, and took a distribution from the first IRA and rolled it over into a new, third IRA. The guidance stated that this hypothetical taxpayer could not make any more rollovers involving the first or third IRAs, but could still complete a rollover involving the second, untouched IRA. Both Appleby and Dan Caplinger of The Motley Fool pointed out that an alternative exists that avoids the new potential peril of rollovers. With rollovers, the taxpayer takes direct control over the money, but for no more than 60 days and no more often than once per year. The 60-day limitiation is a strict one — part of the reason the taxpayer in the Bobrow case ran into trouble was because one of his rollovers took 61 days.

Conversely, the alternative choice, which is the direct transfer, avoids these problems. With a direct transfer, the funds move from one financial institution directly to another, never reaching the taxpayer’s hands. The IRS allows taxpayers to complete as many direct transfers in a year as the taxpayer desires. By “using direct transfers, you can avoid the IRA rollover trap and keep the IRS happy,” Caplinger stated. Appleby agreed, concluding that, “There are too many pitfalls with rollovers and none with transfers.”

Changes in the prevailing understanding of what the tax code and regulations demand can occur abruptly and with little notice. As you contemplate creating your retirement plans, or transfers from one retirement account to another, you need to know the tax implications of any option. To understand your choices, talk to the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They have the most up-to-date knowledge of the rules and can help you ensure your plans with not leave you with a massive, unexpected bill from the IRS. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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