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In a private letter ruling, the IRS has declined to waive the 60-day rollover requirement for a taxpayer who withdrew funds from her IRA to secure care at an assisted living facility pending the sale of her home, but failed to timely redeposit them when the home sale took longer than 60 days. The IRS concluded that when the taxpayer withdrew the funds and effectively used them as a short-term loan, she assumed the risk that they might not be returned and redeposited in a timely manner.

Background. There is no immediate tax if distributions from traditional IRAs are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity and Code Sec. 403(b) tax-shelter annuity) within 60 days of receipt of the distribution. For the rollover to be tax-free, the amount distributed from the traditional IRA generally must be recontributed to a traditional IRA no later than 60 days after the date that the taxpayer received the withdrawal from the IRA.  A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax).  Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period.

IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver).

IRS will consider several factors in determining whether to waive the 60-day rollover requirement, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institution, etc.

Facts. Taxpayer, a widow living alone, fell and broke her shoulder in 2008 and, according to her doctor, began showing signs of mental impairment that same year. The doctor recommended that Taxpayer move to an assisted living institution.

There was only one time-sensitive opportunity to secure a contract for care at the institution due to the high cost of care and Taxpayer’s available financial resources. Taxpayer’s family put her house on the market to pay for her care at the institution.

On June 24, 2009, Amount M was withdrawn from Taxpayer’s IRA and transferred directly to Institution to secure a contract for Taxpayer’s care. Due to Taxpayer’s mental condition, the papers for the withdrawal were executed by her son under a durable power of attorney. Taxpayer’s family intended to return the funds to the IRA following the sale of Taxpayer’s residence.

The sale of Taxpayer’s residence occurred on Sept. 9, 2009, after the 60-day period had expired. Amount M was returned on or near that date to a taxable account of Taxpayer at the bank where she maintains her IRA.

Waiver denied. IRS examined the factors in Rev Proc 2003-16, and found that no evidence was presented as to how any such factors affected her ability to timely roll over Amount M to an IRA. Accordingly, IRS declined to waive the 60-day rollover requirement with regard to Taxpayer’s distribution. In effect, the withdrawal was used as a short-term loan, and regardless of whether Taxpayer intended to redeposit the funds within the 60-day period, she assumed the risk that she might not be able to do so.

This PLR illustrates the potential tax hazards of using IRA funds as a temporary source of cash, especially in situations where there is any uncertainty (e.g., due to the housing market crisis) as to whether the cash will be available for redeposit before the 60-day period expires.