Magazine article The CPA Journal

Cash Distribution Require Cash Contributions to Rollovers

Magazine article The CPA Journal

Cash Distribution Require Cash Contributions to Rollovers

Article excerpt

The Tax Court, in Lemishow v. Commissioner, a case of first impression, ruled that certain otherwise excludable rollovers from Keogh and individual retirement accounts (IRAs) were taxable due to a change in the character of the property deposited into a new IRA. This case is especially important because the rising stock market and the new Roth IRAs have encouraged rollovers. Generally, distributions from IRAs and from qualified retirement plans, including Keogh (self-employed) plans, are taxable under IRC section 72. However, rollovers into other qualified plans or into IRAs are excludable if they satisfy IRC section 408(d)(3)(A) for IRA distributions or section 402(c)(1) for qualified plan distributions. IRC section 408(d)(3)(A)(i) requires that "the entire amount received (including money and any other property)" be paid into an IRA within 60 days of the distribution. Partial rollovers are allowed under section 408(d)(3)(D). Regulations section 1.408-4(b) states that "the same amount of money and any other property" must be paid into another IRA. Section 402(c)(1) more explicitly distinguishes between money (cash) and other property. It requires the distributee to transfer, within 60 days, "any portion of the property received" into a qualified retirement plan or IRA, and, if the property is "other than money," the amount transferred must be the "property distributed." Section 402(c)(6) allows an exception for qualified retirement plan distributions if the property is sold and the cash proceeds are transferred to a qualified retirement plan or IRA within 60 days. This exception does not apply to IRA distributions.

Lemishow withdrew $480,414 from his Keogh and IRA accounts and purchased $377,895 of GP Financial stock by subscription from GP Financial. Within 60 days, he opened a new IRA and deposited the stock into it. Lemishow did not report the distributions on his return, and the IRS added the $480,414 to his income. …

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