December 17, 2012
Authored by: Kathy Sherby and Stephanie Moll
Section 408(d)(3) of the Code specifically deals with when a distribution from an individual retirement plan to an individual does not need to be included in the gross income of the individual recipient but rather may be paid into another IRA for the benefit of such individual. This recontribution of an IRA distribution is referred to in this provision as a “Rollover Contribution” and must be completed within 60 days of the receipt of the distribution from the distributing IRA. Section 408(d)(3)(C), however, denies rollover treatment for inherited IRAs, and specifically states that any amount received by an individual from an IRA account inherited on the death of another individual cannot be contributed to another IRA for his or her benefit unless the individual was the surviving spouse of the decedent.
The taxpayer in Beech v. Commissioner, T.C. Summary Opinion 2012-74 (Docket No. 1948-11S, 7/26/2012, however, attempted to complete a Rollover Contribution from the IRA she received from her mother to an inherited IRA in her mother’s name for her benefit. In this case, Citi issued the check directly to the petitioner from her mother’s IRA, which she then deposited into an American Funds IRA. The taxpayer argued that it was her intent to effect a trustee-to-trustee transfer, but what was actually done was a distribution from her mother’s IRA to her and an attempted Rollover Contribution to a new IRA.
Petitioners argued that they substantially complied with the provisions for a Rollover Contribution, and cited the case of Wood v. Commissioner, 93 T.C. 114 (1989) in which the taxpayer had attempted to complete a rollover from a qualified plan to the taxpayer’s IRA but because of financial institution error, the rollover was not completed within the required 60 day period. The Court distinguished the Wood case stating that the Court was not free to waive an “express statutory prohibition,” such as is contained in § 408(d)(3)(C).
The only way that the amounts in the newly created inherited IRA could be excluded from the gross income of this taxpayer was if it amounted to a trustee-to trustee transfer described in § 402(c)(11). That section requires that the distribution from an eligible retirement plan must be made by that plan directly to the inherited IRA established on behalf of the designated beneficiary of the initial distributing plan, in which case, the transfer “would be treated as an eligible rollover distribution.” Once the distribution is made from the plan to the individual non-spouse designated beneficiary of the plan, Elizabeth Beech in this case, § 402(c)(11) no longer applies and § 408(d)(3)(C) applies to deny Rollover Contribution treatment, regardless of intent.
The bottom line is that a designated beneficiary must know and follow the rules in order to end up with a continuing inherited IRA. Those rules require that the designated beneficiary never receive the funds directly. Once the funds are distributed out of a decedent’s IRA to a non-spouse beneficiary, the funds cannot be put back into an inherited IRA.
You simply can’t put the mercury back into the thermometer.