Last week, the IRS clarified its new position on IRA rollovers. One-a-year Limit on Rollovers, IR 2014-107 (Nov. 10, 2014). In short, the IRS will only allow one rollover per year between a person's IRAs-"An individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period." Internal Rev. Bulletin 2014-16 (Apr. 14, 2014). The IRS will begin to follow the Tax Court's interpretation of the applicable IRA laws as set out in Bobrow v. IRS, T.C. Memo 2014-21 (Jan. 28, 2014) in January 2015.
Bohner v. IRS, 143 T.C. 11 (Sept. 23, 2014).
Certain retirement plans qualify for favorable tax treatment. These can include government retirement system accounts, ERISA plans, and IRAs, to name a few. Some plans, like an IRA, allow for the receipt and investment of income prior to paying income taxes thereon. See IRC § 408. A transfer of money between these special retirement plans without loosing this favorable treatment is called a “rollover.”
In Tuesday’s Tax Court case of Bohner v. IRS, 143 T.C. 11, a divided court effectively held that tax treatment of these rollovers is governed by the Internal Revenue Code and by the rules governing the retirement plans themselves. There, the taxpayer attempted to rollover money from his IRA into his Civil Service Retirement System account. Despite his having satisfied the requirements of pre-tax IRA rollovers (§ 408(d)(3)(A)(ii), the Court held that he owed tax on the money taken out of his IRA that he put into is CSRS account. The majority (9 judges) found the fact that the federal laws and regulations governing the CSRS did not allow for IRA rollovers. Bohner at p. 10 (citing 5 U.S.C. § 8334(c) and 5 C.F.R. 831.303 (2001)). Therefore, the majority held that the money taken from Mr. Bohner’s IRA was taxable. Id. at pp. 10-11. The dissent (6 judges) remained unpersuaded—the IRC § 408(d)(3)(A)(ii) requirements were met, so the money distributed from the IRA should not be taxable because it was all deposited in the CSRS account. Bohner at pp. 28-29.
Look for an appeal in the 11th Circuit as a large portion of the Tax Court found itself in the minority, which, from a tax law perspective, was highly persuasive.
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