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Update on the “one rollover per year” rule for IRAs

Posted Friday, April 25, 2014 by John S. Palmer

In January, the Tax Court issued its decision in Bobrow v. Commissioner, holding that the tax code permits a taxpayer to make one tax-free IRA rollover per year, regardless of how many IRAs he or she owns. (I summarized the decision here.) This set off something of a firestorm among estate planning attorneys, primarily because the decision contradicts IRS Publication 590, which interprets the code to permit one tax-free rollover per IRA per year; for example, in discussing a hypothetical situation in which a taxpayer with two IRAs makes a tax-free rollover from IRA-1 into a new IRA (IRA-3), Publication 590 states:

You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.

A proposed regulation adopted a similar interpretation. However, on March 20, the IRS announced that it will follow the Tax Court’s interpretation of this issue, and amend both the temporary regulation and Publication 590 accordingly. However, the announcement also notes:

The IRS understands that adoption of the Tax Court’s interpretation of the statute will require IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents, which will take time to implement. Accordingly, the IRS will not apply the Bobrow interpretation of § 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before January 1, 2015.

The announcement also notes that this “will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B).”

On a related note, the Tax Court issued an order on April 14 denying a motion for reconsideration in the Bobrow case. Both the taxpayers and the American College of Tax Counsel argued that the court’s decision should be amended to conform to the IRS guidance provided in Publication 590. The motion was denied on a technicality for failing to raise the issue in a timely manner, but the court added that in any event, IRS published guidance is not binding precedent and “taxpayers rely on IRS guidance at their own peril.” On a positive note, the order also notes that the parties had reached a settlement in light of the IRS decision not to adopt the Tax Court’s interpretation of §408(d)(3)(B) until after January 1, 2015.

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