If you have clients who have multiple IRAs, take note: They need to tread carefully regarding rollovers. In a Jan. 28 ruling in Bobrow v. Commissioner, the Tax Court reminds us that holders of multiple IRAs are limited to one tax-free rollover in a single year. Not only that, holders of multiple IRAs take their chances if they follow an example in IRS Publication 590, “Individual Retirement Arrangements,” that suggests that under certain circumstances, taxpayers with multiple IRAs can make more than one tax-free rollover in the same year.
The plaintiffs in the case, Alvin and Elisa Bobrow, made rollovers from more than one IRA within the same year. They argued that Code Section 408(d)(3)(B), which prohibits more than one tax-free rollover from one IRA to another in the same year, applies to individual IRAs and not collectively to all of the IRAs a taxpayer has. The IRS argued that the Bobrows had violated the one-tax-free-rollover-per-year rule.
The Tax Court agreed with the IRS that Section 408(d)(3)(B) applies to all of a taxpayer’s IRAs and not to each IRA separately, and said that the Bobrows are liable for taxes on early distributions and for an accuracy-related penalty.
The Tax Court’s Bobrow ruling contradicts an example in Publication 590 that suggests that under certain circumstances, multiple IRA rollovers by a taxpayer holding multiple IRAs are possible. In the example, a taxpayer who has two IRAs rolls money from IRA 1 into a new IRA, IRA 3. The taxpayer then makes a rollover from IRA 2 into another traditional IRA and that rollover is tax-free, like that from IRA 1 to IRA 3. That is because the rollover from IRA 2 is not another rollover from IRA 1 nor one from IRA 3. The Tax Court ruling suggests that the rollover from IRA 2 is taxable, regardless.
The Tax Court’s holding brings that example into even more marked contrast to the provisions of Section 408, heightening the value of caution in relying on Publication 590. In addition, it's important to remember that an IRS publication is not a regulation; it is not drafted, vetted and promulgated in the same way as formal regulations and guidance. Courts generally give statutes more weight.
John Iekel is a writer/editor for ASPPA and its sister organizations, including NAPA Net.
