You know that old joke about being your own lawyer means you have a fool as a client? Well, in this case, Alvan Bobrow proved that – and also made it worse for the rest of us.
Bobrow challenged the IRS and its ruling on the tax treatment of his IRA rollovers. One of the vagaries of IRA tax rules sets the possibility that you can raid your IRA during a rollover- IF you replenish the funds in a new IRA within 60 days. So, if you have those hot tax tips (boy, is THAT risky in oh, so many ways) or you want to buy that new house and your house won’t close for 45 days, you can break the IRA piggy-bank- as long as you repay the money in full within 60 days
But, that was not all the issues. Many folks (ok, those with lots of IRAs and lots of money) used this ploy many times during the year. And, all of a sudden (at least, that’s how it appears to me), the IRS decided this was not really their proper concept about the rollovers. They decided that you could do only ONE tax-free rollover a year that met the 60 day deadline.
And, Bobrow took this to the Tax Court. And, the court ruled: Only one such rollover in any given 12 month period. The court felt that the IRS was being way too generous- and the law provided no such considerations. (Note this is ANY 12 month period, not just a calendar year.)
Of course, even though the regulation is now changed for good, there are other facts to learn Bobrow really went whole hog on this loophole- and his flagrant use of the rollover loophole was the red flag that the bull (IRS) could no longer ignore.
The court also reiterated a fact that I have stated often- that the IRS is not required to stand behind any guidance they provide. (In other words, you can’t believe what the IRS tells you.)
But, don’t panic. Most of you (as well as I) don’t really transfer IRA’s- we roll them over. We never take custody of our funds, but have IRA #2 withdraw the funds from IRA #1 directly. There are no limits to those rollovers – they are all legal rollovers. It’s only when you take possession of the assets that this new ruling comes into play.
The ruling should allow for the transferring of funds from a 401(k) to an IRA are not covered by this new ruling. That may be the silver lining you seek.
