Eighth Circuit reverses Tax Court’s denial of taxpayer’s partial rollover contribution

 

In reversing the Tax Court, the Eighth Circuit Court of Appeals has allowed a taxpayer to qualify for partial rollover treatment a re-contribution made within 60 days of an amount that otherwise would be taxed as an early distribution from an individual retirement account (IRA). The Eighth Circuit determined that the fact that entitlement to the partial rollover was overlooked by the IRS before the Tax Court where the taxpayer represented himself pro se was enough to excuse the taxpayer from not raising the issue until represented by counsel on appeal.

A taxpayer withdrew funds from his IRA at various times to provide loans to two companies of which he was a major shareholder. One withdrawal of $120,000 took place on February 15, 2007. Another, in the amount of $168,000, took place on April 9, 2007. On April 30, 2007, the taxpayer made a $120,000 contribution into his IRA. The IRS incorrectly matched the first withdrawal with a later rollover contribution. That error went unnoticed by the taxpayer who represented himself pro se, as well as by the Tax Court, which found that the 60-day re-contribution deadline was missed. Thus, the distribution was included in the taxpayer’s gross income and he was assessed a 10% additional tax because he was under age 59½. The current appeal ensued.

Under Code Sec. 408(d)(3)(D), an amount less than the entire distribution from an IRA is excluded from income if it is rolled over into an IRA (a “partial” rollover). The appeals court found that the April 30 contribution was made well within the 60-day period and was clearly a qualifying partial rollover contribution under Code Sec. 408(d)(3)(D). It did not matter that the taxpayer had taken a $120,000 distribution in February that matched the same amount.
The court determined that the fact that entitlement to the partial rollover was overlooked by the IRS before the Tax Court where the taxpayer represented himself pro se was enough to excuse the taxpayer from not raising the issue until represented by counsel on appeal. Though the appellate court generally does not consider issues not raised in the lower court, it makes an exception “where injustice might otherwise result.” Accordingly, the Eighth Circuit reversed the Tax Court and allowed the taxpayer’s belated partial rollover argument.

Source: Haury v. Commissioner (CA-8).
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