In 2008, Mr. and Mrs. Bobrow made a series of single-day transfers from several Individual Retirement Accounts (“IRA”) to others. Unfortunately for all of us, one of the transfers occurred more than 60 days after the corresponding withdrawal, which the IRS deemed late and assessed a 10% penalty. Instead of simply “taking the bullet” on a late rollover-transfer, the Bobrows appealed to the United States Tax Court.
By statute, there could only be one rollover per year without penalty. The IRS historically applied this limit on an IRA-by-IRA basis, meaning that if you had 5 IRA accounts, you could conceivably have 5 rollovers in any one 12-month period. Obviously, this method could be used to borrow from one retirement account to get some “quick cash,” as long as the funds are reimbursed to a different IRA within the 60 day grace period. The more IRAs you had, the more “rollover-borrowing” opportunities you had.
Apparently, neither the Bobrows nor even the IRS saw this overall rule as an issue. But the Tax Court did. In deciding this case, the Tax Court incidentally decided that Mr. and Mrs. Bobrow could not avoid penalties by making a rollover from one IRA to another if there was a rollover from any other IRA in the preceding 1-year period. This rule does not apply to trustee to trustee transfers, where the taxpayer does not touch the funds. As of this year the IRS changed its rules to conform to this court ruling (Source: Bobrow v. Commissioner, T.C. Memo 2014-21 (2014); IRS Publication 590-A (2014)).
One moral of the Story – If you ever go to court, expect the unexpected. In this case (as sometimes happens) the Tax Court took a little “jab” at Mr. Bobrow, mentioning that he “is an attorney specializing in tax law.” He has now made some new tax law for all of us.