Nancy Burack v. Commissioner

T.C. Memo. 2019-83UNITED 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
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[*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.
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[*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.
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[*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.
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[*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
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[*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
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[*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
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[*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
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[*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.