Court Opinion

ID: 4414728
Source: CourtListenerOpinion
Date Created: 2019-07-09 04:01:34.225884+00
Date Added: 2024-06-11T09:24:46.887863
License: Public Domain

T.C. Memo. 2019-83

                        UNITED STATES TAX COURT

                   NANCY BURACK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 11819-17.                       Filed July 8, 2019.

      Joseph P. Caracappa, for petitioner.

      Arthur W. Petersen III and Audra M. Dineen, for respondent.

           MEMORANDUM FINDINGS OF FACT AND OPINION

      RUWE, Judge: The Commissioner determined a deficiency in petitioner’s

2014 Federal income tax of $214,333 and an accuracy-related penalty under
                                        -2-

[*2] section 6662(a)1 of $42,867. After concessions by the parties,2 the only issue

remaining for decision is whether petitioner received a taxable distribution from

an individual retirement account (IRA) in 2014.

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated herein by this reference.

      Petitioner resided in the Commonwealth of Pennsylvania when she filed her

petition.

      In 2014 petitioner had an IRA held with Capital Guardian, LLC/Pershing,

LLC,3 with an account number ending in 0946, and she had a financial adviser at

Capital Guardian. Pershing was the custodian of the account. On June 25, 2014,

      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
      2
        In her petition, petitioner did not challenge the Commissioner’s
determinations that: (1) she underreported a taxable health savings account
distribution by $337 and (2) she is liable for the additional tax under sec.
223(f)(4)(A). Therefore, those adjustments are deemed conceded. See Rule
34(b)(4).
       In his opening brief the Commissioner conceded that petitioner is not liable
for the sec. 6662(a) accuracy-related penalty.
      3
       Capital Guardian, LLC, will be referred to as Capital Guardian, and
Pershing, LLC, will be referred to as Pershing.
                                         -3-

[*3] petitioner received a $524,981.89 distribution from the IRA with an account

number ending in 0946. Petitioner used the distribution to purchase her current

home in Philadelphia while waiting for the sale of her former home in New York

City to close. She intended to roll over the distribution back into her IRA within

60 days of receipt.

       On Thursday, August 21, 2014, the sale of petitioner’s former home closed.

On the same day petitioner received a $524,981 Chase Bank cashiers check, drawn

from the closing, to redeposit the distribution back into the IRA. The check was

made out to “PERSHING FBO NANCY J. BURACK”.4

      Petitioner’s financial adviser initially advised her that she could deposit the

check into the Pershing account at Bank of New York on Wall Street. But

petitioner credibly testified that Capital Guardian later assured her that she could

redeposit the distribution into her IRA by overnighting the check to Capital

Guardian in North Carolina. On Thursday, August 21, 2014, petitioner

overnighted the check to Capital Guardian. The check arrived at Capital Guardian

      4
        The record is unclear as to why the check was made out to “PERSHING
FBO NANCY J. BURACK”. Petitioner testified that Capital Guardian instructed
her to do so but later testified that the attorney who represented her in the sale may
have made the decision.
                                         -4-

[*4] on Friday, August 22, which was 58 days after petitioner received the IRA

distribution.

      On August 26, 2014, 62 days after petitioner received the IRA distribution,

the check was deposited at Pershing into petitioner’s IRA account ending in 0946.

Both the deposit and the receipt of funds are reflected on the August 2014 Capital

Guardian IRA statement. What happened between Capital Guardian’s receipt of

the check and the deposit at Pershing is not entirely clear.

      Petitioner never communicated with Pershing. Petitioner appears to have

communicated with only Capital Guardian about the account. The account

statements in the record were generated by Capital Guardian.

      On February 27, 2017, the Commissioner issued petitioner a notice of

deficiency, in which he determined that petitioner did not repay the IRA

distribution until more than 60 days after she received it. Accordingly, the

Commissioner determined that petitioner was required to include $524,980 of the

IRA distribution in her 2014 gross income.5 Petitioner timely filed a petition with

this Court.

      5
        The record is unclear as to why the Commissioner determined that
petitioner was required to include in gross income $524,980 of the distribution
instead of $524,981.89, which is the full amount of the distribution.
                                        -5-

[*5]                                 OPINION

       The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving that they are

incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

       Section 408(d) governs distributions from individual retirement plans.

Generally, section 408(d)(1) provides that any amount distributed from an IRA is

includible in gross income by the recipient. The recipient of an IRA distribution

can exclude from gross income any amount paid or distributed from an IRA if the

full amount is subsequently rolled over into a qualifying IRA not later than the

60th day after the recipient received the payment or distribution. Sec.

408(d)(3)(A). Such distributions and repayments are commonly referred to as

“rollover contribution[s]”. Sec. 408(d)(3).

       The issue we must decide is whether petitioner rolled over the IRA

distribution into the Capital Guardian/Pershing IRA account within 60 days of

receiving the distribution. Despite the IRA distribution’s not being redeposited

until 62 days after receipt, petitioner advances two theories for why she is entitled

to qualified rollover treatment. Petitioner contends that (1) the rollover was not

recorded as timely because of a bookkeeping error by Capital Guardian and (2) she
                                         -6-

[*6] is entitled to a hardship waiver under section 408(d)(3)(I). Respondent

disputes petitioner’s contentions.

1. Bookkeeping Error

       In Wood v. Commissioner, 93 T.C. 114 (1989), a taxpayer transferred stock

to Merrill Lynch before the expiration of the 60-day rollover period with the

instruction that the shares be deposited into his IRA account. But Merrill Lynch’s

records showed that the shares were deposited into a nonqualified account and

rolled over into the IRA after the expiration of the 60-day rollover period. Id. at

117.

       In deciding whether the transaction qualified for rollover treatment, we

looked at the substance of the transaction and the relationship between the

taxpayer and Merrill Lynch. Id. at 120-121. We explained that where book

entries conflict with the facts, the facts control. Id. at 121. We found that the

transaction was entitled to rollover treatment because Merrill Lynch “had accepted

petitioner’s Sears stock for deposit to the IRA rollover account and held the stock

subject to the IRA trust instrument.” Id. We found that Merrill Lynch’s failure to

record the transfer within 60 days was a bookkeeping error.

       While not identical to the present case, Wood is applicable. The substance

of the transaction and the relationship between petitioner and Capital
                                        -7-

[*7] Guardian/Pershing show that the late deposit is attributable to a bookkeeping

error. Petitioner never communicated with Pershing about her account. All

communication was with Capital Guardian. All of the account statements in the

record were generated by Capital Guardian. Petitioner credibly testified that

Capital Guardian assured her she could roll over the distribution by overnighting

the check to Capital Guardian. It is undisputed that Capital Guardian received the

check 58 days after petitioner received the distribution, but the transaction was not

recorded by Capital Guardian until 62 days after petitioner received the

distribution.

      Respondent contends that Wood is inapplicable because Pershing was the

custodian and, therefore, petitioner should have deposited the check directly with

Pershing. However, petitioner’s IRA was held with both Capital Guardian and

Pershing in a single account bearing the same account number. Petitioner’s IRA

statement, which was generated by Capital Guardian, listed both Capital Guardian

and Pershing. The relationship between Capital Guardian and Pershing is not

entirely clear. All of the documentation in the record appears to have been

generated by Capital Guardian. The substance of the relationship between

petitioner and Capital Guardian shows that Capital Guardian was an appropriate

institution for petitioner to send the check to. Petitioner had no communication
                                        -8-

[*8] with Pershing. None of the IRA account statements in the record were from

Pershing; they were all generated by Capital Guardian. All discussions about the

rollover contribution were held with Capital Guardian. The June 25, 2014,

distribution was received by petitioner from a Capital Guardian IRA as shown by

the Capital Guardian account statement. There is no documentation generated by

Pershing in the record. The rollover payment was received by Capital Guardian

58 days later. Because the check was received by Capital Guardian during the

rollover period but not book-entered by Capital Guardian until after, we find that

the late recording is due to a bookkeeping error.

2. Hardship Waiver

      Our conclusion that the IRA distribution was not deposited during the

rollover period because of a bookkeeping error is enough for us to conclude that

the distribution qualifies for rollover treatment. See Wood v. Commissioner, 93

T.C. at 122. But as an alternative ground we will also consider whether petitioner

is eligible for a hardship waiver.

      Rev. Proc. 2003-16, 2003-1 C.B. 359, provides guidance about hardship

waivers under section 408(d)(3)(I). It states that an automatic hardship waiver “is

granted only: (1) if the funds are deposited into an eligible retirement plan within

1 year from the beginning of the 60-day rollover period; and (2) if the financial
                                        -9-

[*9] institution had deposited the funds as instructed, it would have been a valid

rollover.” Rev. Proc. 2003-16, sec. 3.03, 2003-1 C.B. at 360.

      In this case the funds were deposited into petitioner’s IRA within one year.

And petitioner credibly testified that Capital Guardian assured her that the rollover

could be completed by overnighting the check to Capital Guardian. Capital

Guardian received the rollover check on August 22, 2014, 58 days after petitioner

received the distribution. As discussed above, Capital Guardian was an

appropriate institution for petitioner to send the check to. See supra p. 7. Had

Capital Guardian deposited the check as instructed, there would have been a valid

rollover. Therefore, petitioner is eligible for the automatic hardship waiver.

      In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit.

      To reflect the foregoing,

                                              Decision will be entered under

                                       Rule 155.