Treasury Provides Relief for Late 60-Day Rollovers

The Internal Revenue Code allows qualified plan participants and IRA owners to withdraw assets from a plan or IRA and contribute them to another (or the same) plan or IRA without being taxed on the distribution, if the rollover occurs within 60 days. If the deposit occurs after 60 days, the taxpayer can seek a Private Letter Ruling that avoids taxation if the taxpayer has good cause. Unfortunately, such a route is expensive, requiring a $10,000 user fee.

In Rev.Proc. 2016 – 47, Treasury is now allowing taxpayers that make a late rollover to avoid tax without having to seek a Private Letter Ruling if the lateness is attributable to certain listed circumstances. If a taxpayer qualifies, he or she sends a certification letter to the recipient plan or IRA administrator or custodian. The taxpayer is then off the hook for being taxed, unless the IRS audits and finds that the taxpayer really did not meet the criteria for avoiding taxation.

To qualify to use the procedure, the taxpayer must not have previously been denied a waiver by the IRS for the particular distribution at issue. The taxpayer must also complete the rollover as soon as practicable once the reason for not rolling over timely has ended (with a 30 day safe harbor applying to this requirement).

Here are the 11 reasons for a late rollover that will allow use of the procedure:

(a) an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates; (b) the distribution, having been made in the form of a check, was misplaced and never cashed; (c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan; (d) the taxpayer’s principal residence was severely damaged; (e) a member of the taxpayer’s family died; (f) the taxpayer or a member of the taxpayer’s family was seriously ill; (g) the taxpayer was incarcerated; (h) restrictions were imposed by a foreign country; (i) a postal error occurred; (j) the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or (k) the party making the distribution to which the roll over relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

Rev.Proc. 2016 – 47

Spouses Need to Exercise Care in Transferring Property between Them When Subject to a Marital Agreement [Florida]

Many prenuptial and postnuptial agreements provide for a class of property known as Separate Property. Such Separate Property will often not be subject to claim by or transfer to the non-owning spouse upon death or divorce. When Separate Property is provided for in the agreement, the participants need to exercise care in transferring property between and among them to avoid unintended consequences.

This was illustrated in a recent case when a Separate Property provision was included in a prenuptial agreement. The agreement also contained a paragraph that provided if a party acquires real property in his or her own name it shall be that party's Separate Property.

What occurred is that the husband transferred funds from his own separate account to a separate account of his wife. The wife then acquired real property in her name with those funds. Eight months later, she transferred the property by quitclaim deed to the husband, where it remained until divorce.

The trial court found the property to be the Separate Property of the wife at the time of divorce, and thus belonged to her. This was based on the above-described provision that if a party acquires real property in her own name it shall be her Separate Property.

The appellate court reversed the trial court and found the property to be the Separate Property of the husband. It determined that when the property was first acquired, it was the wife's Separate Property because it was in her name. However, since the agreement also allowed a party to gift away his or her Separate Property, when she quit claimed that property to her husband it was then titled in his name and became his Separate Property.

The fact pattern here is pretty specific. However, there is a general lesson here. Transfers of property between and among spouses can have unintended consequences when there is a marital agreement in place. If some type of erroneous transfer occurs, and the parties seek to correct it, they should consider an amendment to the agreement so as to clarify the treatment of the correction. Further, such transfers may invoke difficult contractual interpretations, as evidenced by this case with the trial court and the appellate court reach different conclusions, again suggesting care in such transfers.

Colino v. Volino, 41 Fla. L. weekly D1990b (5th DCA, August 26, 2016)

Applicable Federal Rates - September 2016