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Monday, December 05, 2005

Motorcycles and Administrative Discretion Do Not Always Mix

Generally, amounts withdrawn from an Individual Retirement Account (IRA) are taxed to the recipient. However, if the withdrawn amount is paid into another IRA or eligible retirement plan for the recipient within 60 days of the original withdrawal, taxation is avoided.

If the 60 day period is violated, the IRS does have discretion to extend the 60 day period. In an attempt to test the limits of a kinder, more gentle IRS, a taxpayer who had withdrawn substantial funds from his IRA and not recontributed them to another IRA or retirement plan within 60 days tried to get the IRS to extend the 60 day period. Noting that the taxpayer never told anyone at any of the involved financial institutions that he intended to recontribute the funds, that the taxpayer did not have any desire to recontribute until his tax advisor told him he was taxable on the withdrawn, and that he used some of the proceeds to buy a motorcycle, the IRS refused to grant an extension.

For those that may be in similar straits, Section 408(d)(3)(I) of the Internal Revenue Code provides that the Secretary may waive the 60 day requirement where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement. Revenue Procedure 2003-16 provides that in determining whether to waive, the IRS will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error, (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.

Therefore, if you missed the 60 day deadline but fall within the above criteria (and, apparently, you did not use any of the proceeds to buy a motorcycle), you may be able to get relief from the IRS.

PLR 200548030, December 2, 2005
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