On August 26, 2015, the IRS issued a private letter ruling (PLR) 201547010 that addressed a certain fact patters involving an IRA investment into a private business venture. The interesting aspect of the PLR is that the seemed to offer a very odd reason behind its decision to not allow for a waiver of the 60-day IRA rollover rule. The facts of the PLR are as follows.
Taxpayer A had an IRA with Custodian D. Taxpayer wanted to make a private business investment through a partnership. Taxpayer A’s financial advisor prepared the paperwork for Taxpayer A to make the investment in November 2012. Custodian D issued a check amount payable to partnership C. Taxpayer represented that he intended to have the IRA purchases the partnership shares and have the shares held by Custodian D. The partnership agreement showed the shares held by Taxpayer A’s IRA. However, Custodian D determined that they were unable to hold the partnership interest owned by the IRA and as a result, issued an IRS Form 1099-R treating the investment as a taxable distribution on November 21, 2012. Taxpayer A believed the financial advisor should have prepared the necessary documentation to move the partnership interest held with Custodian D to Custodian E, who would have held the partnership interest investment owned by Taxpayer A’s IRA. The mistake was only discovered in October, 2013 during the preparation of Taxpayer A’s tax return, well over 60 days from the date the investment was treated as a distribution.
Taxpayer A requested a ruling from the IRS to waive the 60-daay IRA rollover rule under IRC Section 408(e).
Under the IRA rollover rules, rollovers between retirement account custodians (direct rollover) can be done anytime without limit and are not subject to tax or penalty. However, if a distribution from an IRA or a retirement plan is paid directly to you, (indirect rollover) you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. An indirect rollover can only be done once every twelve months. IRC Section 408(d)(3)(1) provides that the IRS may waive the 60-day IRA rollover requirement when the failure to waive such requirement would be against equity or good conscious, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.
The IRS has traditionally taken a very tough stance against waiving the 60-day IRA rollover requirement and has not shown much flexibility. In this ruling the IRS argues that since the IRA funds were being used for investment and not part of a rollover process and, thus, decided against waiving the 60-day rollover requirement.
I understand the IRS’s determination is based on their application of the facts and circumstances, but in this case Taxpayer A clearly believed that his financial planner was going to take care of moving the IRA to a new custodian who would accept the IRA partnership investment and only discovered the error after the 60-day period has ended. I think it is fair to assume that Taxpayer A did not attempt to use the IRA funds in any way that would personally benefit him. In fact, the IRA funds were tied up in the partnership investment the entire time as the IRS rules that the amount of the investment and all investment earnings would be subject to tax. Clearly the PLR illustrates the importance of working with tax professionals that understand how to make alternative asset investments with a self-directed IRA and the importance of working with the right IRA custodian. Nevertheless, it is still hard not to feel bad for Taxpayer A who believed he was following all the IRS rules and trusted his financial advisor to take the required actions necessary for the IRA to make the investment. The one mistake taxpayer A made was to not work directly with a tax advisor or self-directed IRA facilitation firm who understands all the rules and processes involved in making alternative investments with a self-directed IRA.
To learn more about how to make self-directed IRA investments, please contact an IRA tax advisor at 800-472-0646.