Tax Court Denies Hardship Waiver to 60-day Rollover Rule

In a case of first impression, the Tax Court held that it has jurisdiction under Code Sec. 6213(a) to review the IRS’s denial of a taxpayer’s request for a waiver of the 60-day period for rollover IRA contributions. It also held that it reviews a denial of a request for a waiver under Code Sec. 408(d)(3)(I) for abuse of discretion. (Est. of James E. Caan, (2023) 161 TC No. 6)

Mr. Caan, a famous actor, held two IRAs with UBS. Both IRAs were governed by a custodial agreement between him and UBS. One of the IRAs held a partnership interest (P&A Interest) in the P&A Fund, a hedge fund. The IRA custodial agreement stated that it was Mr. Caan’s responsibility to provide UBS with the P&A Interest’s year-end fair market value (FMV) every year.

When Caan did not satisfy this responsibility for tax year 2015, UBS notified him that it had distributed the P&A Interest to him pursuant to the relevant terms of the custodial agreement.

The IRS claims such a distribution did not occur.

UBS issued Form 1099-R to Caan, reporting a distribution, which both parties and the Tax Court valued at $1.5 million. More than a year after the notification from UBS, Caan’s financial advisor, acting on his behalf, liquidated the P&A Interest and contributed the cash proceeds to D’s IRA at ML, an investment manager.

On his 2015 income tax return, D reported an IRA distribution but claimed that it was nontaxable as a rollover contribution under Code Sec. 408(d)(3).

The IRS disagreed and issued a notice of deficiency, determining that there was a taxable distribution. Caan then requested that the IRS issue a private letter ruling to waive the 60-day period for rollover contributions (often referred to a hardship waiver). (See Code Sec. 408(d)(3)(A)(i) and Code Sec. 408(d)(3)(I))

The IRS declined to issue the private letter ruling, stating that the 60-day period could not be waived because D was required to contribute the P&A Interest (not cash) to ML in order for the distribution to be nontaxable as a rollover contribution, in accordance with Code Sec. 408(d)(3)(A)(i); Lemishow, (1998) 110 TC 110; and Reg. §1.408-4(b)(1))

The Tax Court held:

• The P&A Interest was distributed to Caan in tax year 2015 within the meaning of Code Sec. 408(d)(1).
• The P&A Interest was not contributed to ML in a manner that would qualify as a rollover contribution under Code Sec. 408(d)(3).
• Under Code Sec. 408(d)(1), Caan is taxable for 2015 on the P&A Interest’s value at the time of the distribution.
• In a case of first impression, the Tax Court held it has jurisdiction under Code Sec. 6213(a) to review the IRS’s denial of Caan’s Code Sec. 408(d)(3)(I) request for a waiver of the 60-day period for rollover contributions.
• In another case of first impression, the Tax Court held that it reviews a denial of a request for a waiver under Code Sec. 408(d)(3)(I) for abuse of discretion. In this case, the IRS did not abuse its discretion in denying Caan a waiver because it cannot be an abuse of discretion for the IRS to deny a waiver where granting the waiver would not have helped the Caan in any way. Caan had already converted the partnership interest to cash, so there was no way to roll over the cash, even before the 60-day period expired.

• Caan’s estate urged the Tax Court to adopt an equitable resolution. The Tax Court said that, although it was sympathetic to the estate’s situation, the court is not a court of equity, and it cannot ignore the statutory law to achieve an equitable end. The Tax Court added, “[t]his case is a quintessential example of the pitfalls of holding nontraditional, non-publicly traded assets in an IRA. Failure to follow the labyrinth of rules surrounding these assets can mean forfeiting their tax-advantaged status.”

For more information regarding the waiver of the 60-day requirement, see Checkpoint’s Federal Tax Coordinator ¶H-11472.