Erroneous plan distributions and the 60-day rollover period.

Sec. 402(c)(1) allows an individual to receive an eligible rollover distribution from a qualified retirement trust without being subject to current income taxation or premature distribution penalties, if he transfers such distribution to another eligible retirement plan, such as an individual retirement account (IRA), within the 60-day period beginning on the distribution receipt date. Such a rollover can be done only once during any 12-month period.

Sec. 451(a) and Regs. Sec. 1.451-1(a) indicate that amounts not rolled over shall be included in gross income for the year in which the taxpayer actually or constructively received them, unless under the taxpayer's method of accounting such amounts would be properly reportable in another period.

In Letter Ruling 9826036, a cash-basis taxpayer, who had already retired and was receiving minimum required distributions from a qualified plan, needed additional cash due to a close relative's serious illness. He wished to make a partial withdrawal from the plan and, in fact, consulted the company's plan specialist on how to complete the necessary paperwork to take out only the desired amount. According to the taxpayer, there was a misunderstanding between him and the plan specialist which resulted in the company making a distribution to him of his entire account balance. On receiving the check, the taxpayer held the check, refused to deposit it, immediately asked the company to take it back and appealed the distribution through the plan's formal appeal procedure. The appeal process took about five months before final resolution. The company's plan administrator refused at all stages of the appeals process to accept return of the distribution check, contending that such 'acceptance would violate the terms of the plan. In addition, during this appeal period, the taxpayer lost the original check and the company issued a new one. The new check was received approximately four months after the receipt of the original distribution check. Within 60 days from the receipt of the replacement check and immediately after the company's denial of his final appeal, the taxpayer attempted to roll over the entire distribution (using the replacement check) into a rollover IRA. This attempted rollover was done almost six months from the time the first distribution check was received.

The taxpayer asked the IRS to rule that the entire distribution was a valid rollover within the 60-day period, arguing that he did not actually or constructively receive the distribution until the conclusion of the employer's appeals process, and that he was not required to pay current income tax on the distribution "not received" but rolled over within 60 days of the conclusion of the appeals process.

The Service denied the taxpayer's request, concluding that it did not have the authority to extend the 60-day rollover period requirement of Sec. 402(c) (3) or to revise the definition of the word "received." Therefore, the amount was considered received on the date of the first check, and the rollover was deemed to be subsequent to the expiration of the 60-day period. The distribution was subject to current income taxation in full.

With regard to the taxpayer's argument that he did not "receive" the distribution until the check was executed, the IRS relied on Obland, 278 F Supp 989 (DC Mo. 1967), in which the court held that, for a check that can be turned into cash immediately (as in this case), the receipt of the check, not the subsequent receipt of cash, is the taxable event. The Service further indicated that the only difference between the facts in this letter `ruling and that of any other case of constructive receipt was that, if the taxpayer desired, he was permitted to defer taxation by rolling over the payment into an IRA within the prescribed 60-day period. As additional support for its denial of the taxpayer's request, the IRS cited Aronson, 98 TC 283 (1992) and Orgera, TC Memo 1995-575. These cases both involved plan beneficiaries who received unwanted or unrequested distributions from their retirement plans or IRAs that were not rolled over within the 60-day period. In neither case did the Tax Court grant relief to the taxpayer from liability for current income taxation or from the 10% early distribution penalty. In Letter Ruling 9826036, due to the taxpayer's age, the penalties were not at issue.

A consultation with his tax adviser prior to the expiration of the initial 60day period could have saved this taxpayer a significant premature and unwarranted tax liability.