SCOTUS Reports

Tag: Tax-Free Rollover

  • Bohner v. Comm’r, 143 T.C. 224 (2014): Tax-Free Rollovers and Eligible Retirement Plans

    Bohner v. Commissioner, 143 T. C. 224 (2014)

    The U. S. Tax Court ruled in Bohner v. Comm’r that a retiree’s withdrawal from a traditional IRA to fund a deposit into the Civil Service Retirement System (CSRS) could not be treated as a tax-free rollover. Dennis Bohner, a retired federal employee, attempted to increase his CSRS annuity by depositing funds withdrawn from his IRA, arguing it was a tax-free rollover. The court held that because CSRS does not accept rollovers, the withdrawal was taxable income. This decision clarifies the limits of what constitutes an ‘eligible retirement plan’ for rollover purposes under IRS regulations.

    Parties

    Dennis E. Bohner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bohner was the plaintiff throughout the litigation, and the Commissioner of Internal Revenue was the defendant.

    Facts

    Dennis E. Bohner worked for the Social Security Administration and participated in the Civil Service Retirement System (CSRS) during his employment. After retiring, Bohner received a letter from the Office of Personnel Management (OPM) stating he could increase his CSRS retirement annuity by remitting $17,832 to account for periods of service without withheld retirement contributions. The letter required payment within 15 days and was silent on the possibility of making the payment through a tax-free rollover. Bohner did not have sufficient funds in his bank account, so he borrowed money from a friend and then made a withdrawal of $5,000 from his traditional individual retirement account (IRA) with Fidelity Investments on April 15, 2010. He then mailed a check for $17,832 to OPM on April 27, 2010. Subsequently, Bohner withdrew an additional $12,832 from his IRA on May 3, 2010, to repay his friend and replenish his bank account. Bohner did not report any of the IRA withdrawals as taxable income on his 2010 tax return, claiming they were part of a tax-free rollover to CSRS.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to Bohner on July 2, 2012, determining a tax deficiency of $4,590 based on the inclusion of the $17,832 IRA withdrawal in Bohner’s taxable income for 2010. Bohner petitioned the U. S. Tax Court for a redetermination of the deficiency. The Tax Court reviewed the case and issued a decision for the respondent on September 23, 2014, affirming the Commissioner’s determination that the IRA withdrawals were taxable income because they did not constitute a valid rollover to CSRS.

    Issue(s)

    Whether the withdrawals from Bohner’s traditional IRA to fund his deposit into the Civil Service Retirement System (CSRS) can be treated as a tax-free rollover under Section 408(d)(3) of the Internal Revenue Code?

    Rule(s) of Law

    Section 408(d)(3)(A) of the Internal Revenue Code provides that an IRA distribution is not taxable if the entire amount received is paid into an eligible retirement plan within 60 days of receipt. An “eligible retirement plan” includes a qualified trust under Section 401(a), among other plans. Section 408(d)(3)(A)(ii) specifies that the maximum amount that can be rolled over is the portion of the amount received that is includible in gross income. CSRS is a qualified trust under Section 401(a), but there is no specific provision requiring CSRS to accept rollovers from IRAs.

    Holding

    The Tax Court held that Bohner’s IRA withdrawals were taxable income because they did not constitute a valid tax-free rollover to CSRS. The court determined that CSRS did not accept Bohner’s remittance as a rollover, and therefore, the withdrawals from his IRA were not excluded from his taxable income under Section 408(d)(3).

    Reasoning

    The court’s reasoning focused on the fact that CSRS does not accept rollovers, and there is no statutory or regulatory requirement for it to do so. The letter from OPM to Bohner was silent on the possibility of using a rollover for the deposit, and Title 5 U. S. C. Section 8334(c) does not specifically permit such a method. The court noted that even if CSRS accepted rollovers, only the portion of an IRA distribution that is otherwise includible in gross income may be rolled over, and Bohner’s deposit was intended to replace after-tax contributions not originally withheld. The court also considered that CSRS would not be aware of the proper tax treatment of the payment upon distribution unless it explicitly accepted rollovers. The majority opinion rejected the argument that the plain language of Section 408(d)(3) allowed for the rollover without regard to CSRS’s acceptance policy, emphasizing that the absence of a requirement for CSRS to accept rollovers meant the transaction did not qualify as a tax-free rollover. The court further distinguished this case from direct rollovers, where the receiving plan’s acceptance policies are more clearly defined, and noted that indirect rollovers require the receiving plan’s awareness and acceptance to maintain proper tax treatment.

    Disposition

    The Tax Court entered a decision for the respondent, affirming the Commissioner’s determination that the IRA withdrawals were taxable income for Bohner in 2010.

    Significance/Impact

    The Bohner decision clarifies that for a tax-free rollover to occur, the receiving plan must accept the rollover. This ruling impacts retirees and taxpayers who seek to use funds from one retirement account to fund deposits into another, particularly when the receiving plan has not historically accepted rollovers. The case underscores the importance of understanding the specific policies and requirements of receiving plans in retirement planning and tax strategy. It also highlights the distinction between direct and indirect rollovers and the necessity for clear communication and acceptance by the receiving plan to achieve the desired tax treatment. Subsequent courts have cited Bohner to reinforce the principle that the eligibility of a plan to accept rollovers is a critical factor in determining the tax treatment of retirement account transactions.

  • Bohner v. Commissioner, 143 T.C. No. 11 (2014): Tax-Free Rollover Contributions to Civil Service Retirement System

    Bohner v. Commissioner, 143 T. C. No. 11 (U. S. Tax Court 2014)

    In Bohner v. Commissioner, the U. S. Tax Court ruled that Dennis Bohner’s withdrawal from his IRA to fund a payment to the Civil Service Retirement System (CSRS) was taxable income, not a tax-free rollover. The court found that CSRS did not accept the payment as a rollover, thus the funds withdrawn from the IRA could not be excluded from Bohner’s taxable income. This decision clarifies that the tax treatment of contributions to CSRS hinges on whether the plan accepts them as rollovers, impacting how retirees can manage their retirement funds.

    Parties

    Dennis E. Bohner, the petitioner, challenged the Commissioner of Internal Revenue, the respondent, over a tax deficiency determined for the year 2010.

    Facts

    Dennis E. Bohner, a retiree from the Social Security Administration, participated in the Civil Service Retirement System (CSRS) during his employment. After retirement, he received a letter from the Office of Personnel Management (OPM) offering an opportunity to increase his CSRS annuity by paying $17,832 for creditable service during which no retirement contributions were withheld. Bohner, lacking sufficient funds, borrowed part of the sum and used subsequent withdrawals from his traditional Individual Retirement Account (IRA) to repay the loan and replenish his bank account. He did not report these IRA withdrawals as taxable income, asserting they constituted a tax-free rollover to CSRS.

    Procedural History

    The Commissioner issued a notice of deficiency determining a $4,590 tax deficiency for Bohner’s 2010 tax year, treating the $17,832 IRA withdrawal as taxable income. Bohner petitioned the U. S. Tax Court, which reviewed the case and upheld the Commissioner’s determination, ruling that the IRA withdrawals were taxable because CSRS did not accept them as a rollover.

    Issue(s)

    Whether the withdrawals from Bohner’s IRA, used to make a payment to CSRS, constituted a tax-free rollover under Internal Revenue Code section 408(d)(3)?

    Rule(s) of Law

    Under section 408(d)(3)(A) of the Internal Revenue Code, a distribution from an IRA is not taxable if it is rolled over into an eligible retirement plan within 60 days. An eligible retirement plan includes a qualified trust under section 401(a), which CSRS is considered to be.

    Holding

    The Tax Court held that the IRA withdrawals did not qualify as a tax-free rollover because CSRS did not accept the payment as such, and thus, the withdrawals must be included in Bohner’s taxable income for 2010.

    Reasoning

    The court reasoned that despite CSRS being a qualified trust under section 401(a), the plan did not accept rollovers, as evidenced by the lack of any provision in the governing statutes or regulations requiring CSRS to do so. The letter from OPM to Bohner was silent on the possibility of a rollover, and there was no record of Bohner informing CSRS of his intent to make a rollover. The court also noted that the statutory framework governing CSRS did not address the federal income tax treatment of contributions, leaving the tax implications of such contributions to be determined under the Internal Revenue Code. The court rejected the argument that the absence of a specific rule prohibiting rollovers into CSRS implied that they were allowed, emphasizing that the tax treatment of a rollover hinges on the plan’s acceptance of the contribution as such.

    Disposition

    The court entered a decision for the respondent, affirming the tax deficiency determined by the Commissioner.

    Significance/Impact

    Bohner v. Commissioner clarifies the tax implications of contributions to the Civil Service Retirement System, emphasizing that the tax treatment depends on whether the plan accepts the payment as a rollover. This decision impacts how federal retirees can manage their retirement funds, particularly in relation to IRA rollovers, and underscores the importance of understanding the specific policies of retirement plans regarding rollovers. The case also highlights the discretionary power of plan administrators, like OPM, to accept or reject rollovers, affecting the tax planning strategies of retirees.

  • Peat v. Commissioner, 111 T.C. 286 (1998): Rollover Contributions Require Same Property or Money

    Peat v. Commissioner, 111 T. C. 286 (1998)

    Rollover contributions to an IRA or qualified plan must involve the same money or property distributed from the original account.

    Summary

    In Peat v. Commissioner, the Tax Court ruled that using distributions from Keogh and IRA accounts to purchase stock, which was then contributed to a new IRA, did not qualify as a tax-free rollover. The court emphasized that rollover contributions must involve the same money or property as the original distribution. Petitioner Peat withdrew funds from his retirement accounts to buy stock, which he later contributed to a new IRA, but the court found this did not meet the rollover requirements under sections 402(c) and 408(d)(3). The court also addressed the accuracy-related penalty under section 6662(a), ruling it inapplicable to the portion of the underpayment related to the stock purchase due to the novel legal issue involved.

    Facts

    Petitioner, a self-employed accountant, withdrew $480,414 from his Keogh and IRA accounts in December 1993. He used these funds, plus $12,883 of his own money, to purchase 30,000 shares of GP Financial Corp. stock for $450,000. Due to oversubscription, he received only 25,193 shares costing $377,895 and received a refund of $72,105 plus interest. On February 11, 1994, he contributed the purchased stock to a new IRA at Smith Barney Shearson. Petitioner did not report any of the distributions on his 1993 tax return, claiming a credit for the withheld taxes.

    Procedural History

    The IRS determined a deficiency in petitioner’s 1993 federal income tax and an accuracy-related penalty under section 6662(a). The case was submitted fully stipulated to the U. S. Tax Court, where the issues of the tax-free rollover and the penalty were considered.

    Issue(s)

    1. Whether petitioner’s use of distributions from Keogh and IRA accounts to purchase stock, which was then contributed to an IRA, constitutes a tax-free rollover contribution.
    2. Whether petitioner received a taxable distribution of money not contributed to an IRA.
    3. Whether petitioner is liable for the accuracy-related penalty under section 6662(a).

    Holding

    1. No, because the rollover provisions require that the same money or property distributed be contributed to the new account.
    2. Yes, because the $102,519 not used to purchase the stock was taxable.
    3. No, for the portion of the underpayment related to the stock purchase due to the novel legal issue; Yes, for the portion related to the $102,519 not used to purchase the stock.

    Court’s Reasoning

    The court’s decision hinged on the interpretation of sections 402(c) and 408(d)(3), which govern rollovers from qualified plans and IRAs, respectively. The court noted that the legislative history of these provisions repeatedly emphasized the requirement of contributing “this same money or property” to the new account. The court rejected petitioner’s argument that using the funds to buy stock and then contributing the stock qualified as a rollover, stating that the statutory language and legislative history clearly required the same money or property. The court also considered the accuracy-related penalty, finding it inapplicable to the stock purchase issue due to its novelty but applicable to the unreported $102,519. The court quoted the legislative history, which stated, “the same amount of money (or the same property)” must be rolled over, to support its interpretation.

    Practical Implications

    This decision clarifies that for a rollover to be tax-free, the exact money or property withdrawn must be contributed to the new account within the 60-day period. It impacts how taxpayers and their advisors should handle retirement account distributions intended for rollovers. Practitioners must advise clients that converting cash to other assets before contributing to an IRA does not qualify as a rollover. The ruling also highlights the importance of reporting all distributions, even if intended for rollover, to avoid penalties. Subsequent cases, such as Rev. Rul. 87-77, have provided limited exceptions where property can be sold and the proceeds rolled over, but these exceptions are narrow and must be carefully considered.

  • Rodoni v. Commissioner, 105 T.C. 29 (1995): Requirements for Tax-Free Rollovers from Qualified Plans to IRAs

    Rodoni v. Commissioner, 105 T. C. 29 (1995)

    A tax-free rollover from a qualified plan to an IRA must be to an IRA established for the benefit of the employee who received the distribution.

    Summary

    Mario Rodoni received a lump-sum distribution from his employer’s profit sharing plan and transferred it to his wife, Donna Rodoni, who deposited it into her IRA within 60 days. The court held that this transfer did not qualify as a tax-free rollover under IRC sections 402(a)(5) or 402(a)(6)(F). The key issue was whether the IRA could be established in the name of someone other than the employee receiving the distribution. The court ruled that for a rollover to be tax-free under section 402(a)(5), the IRA must be for the employee’s benefit, and under section 402(a)(6)(F), a qualified domestic relations order (QDRO) must be in place before the distribution. The decision underscores the strict requirements for tax-free rollovers and the necessity of QDROs in marital property divisions involving retirement plans.

    Facts

    Mario Rodoni received a lump-sum distribution of $307,204. 46 from Sunset Farms, Inc. ‘s profit sharing plan on February 5, 1988. He immediately handed the check to his wife, Donna Rodoni, who deposited it into a joint account. Within 60 days, Donna transferred the funds into her own IRA. The Rodonis were in the process of a divorce, and a Marital Settlement Agreement was executed, which was later incorporated into their Judgment of Dissolution of Marriage entered nunc pro tunc to December 31, 1988. The agreement specified that Donna was to receive the community property interest in the profit sharing plan.

    Procedural History

    The IRS determined a deficiency in the Rodonis’ 1988 federal income tax due to the lump-sum distribution. The Rodonis petitioned the U. S. Tax Court, arguing that the transfer to Donna’s IRA qualified as a tax-free rollover. The Tax Court held that the transfer did not meet the requirements for a tax-free rollover under sections 402(a)(5) or 402(a)(6)(F).

    Issue(s)

    1. Whether the transfer of a lump-sum distribution from a qualified plan to an IRA in the name of the employee’s spouse qualifies as a tax-free rollover under IRC section 402(a)(5).
    2. Whether such a transfer qualifies as a tax-free rollover under IRC section 402(a)(6)(F) when made pursuant to a domestic relations order.

    Holding

    1. No, because the rollover must be to an IRA established for the benefit of the employee who received the distribution, not the spouse.
    2. No, because the lump-sum distribution was not made by reason of a qualified domestic relations order (QDRO).

    Court’s Reasoning

    The court interpreted section 402(a)(5) to require that the IRA be established for the benefit of the employee receiving the distribution. The legislative history emphasized the purpose of promoting portability of pension benefits for the employee’s retirement. The court rejected the argument that an employee could roll over funds into any individual’s IRA, including a spouse’s, as it would contradict this purpose. For section 402(a)(6)(F), the court found that a QDRO must be in place before the distribution to qualify as tax-free. The Rodonis’ Judgment of Dissolution did not meet the QDRO requirements because it was not presented to the plan administrator before the distribution and did not clearly specify the necessary details about the distribution. The court also rejected the Rodonis’ argument of substantial compliance with these statutory provisions, noting that the requirements were substantive and essential to the statute’s purpose.

    Practical Implications

    This decision emphasizes the strict requirements for tax-free rollovers from qualified plans to IRAs, particularly the necessity that the IRA be established in the name of the employee receiving the distribution. For practitioners, it is crucial to ensure that any rollover complies with these requirements, and that any marital property division involving retirement plans includes a QDRO that is presented to the plan administrator before any distribution. The ruling affects how attorneys draft marital settlement agreements and QDROs, ensuring they meet statutory specifications to avoid tax consequences. Subsequent cases have cited Rodoni in upholding the need for strict adherence to rollover rules and QDRO requirements.