The answer is: when the taxpayer is represented by counsel. Well perhaps there is a little more to the answer than that, but it is a good starting point. The Eighth Circuit Court of Appeals recently reversed a U. S. Tax Court decision in which the taxpayer was found to have a taxable distribution on all of his distributions from his IRA even though he had put some of the money back into the IRA within 60 days of the distribution. The taxpayer was pro se in front of the Tax Court and represented by counsel in the appeal process to the Court of Appeals for the Eighth Circuit.
Code Sec. 408(d)(3)(A) allows a payee or distributee of an IRA distribution to exclude from gross income any amount paid or distributed from an IRA, if the entire amount is subsequently paid (i.e., rolled over) into a qualifying IRA, individual retirement annuity, or retirement plan not later than the 60th day after the day on which the payee or distributee receives the distribution. An amount less than the entire distribution is likewise excluded if it is paid into an IRA. (Code Sec. 408(d)(3)(D)).
In the case discussed above, Harry Haury took distributions from his IRA to fund cash flow needs of his businesses in the amounts of $120,000 on February 15, $168,000 on April 9, $100,000 on May 14 and $46,933 on July 6. He deposited back into his IRA the amount of $120,000 on April 30 of the same year. The IRS took the position that the contribution back into the account was more than 60 days after he had taken that amount out (February 15). The Tax Court agreed with IRS. On appeal his counsel argued that the amount deposited on April 30 was a partial return of the amount withdrawn on April 9, and therefore, it was timely returned to the IRA and not taxable. The IRS at the appellate level had to agree that the statutory provisions were timely met, that the money was not tied to the amount taken out in February, but argued the taxpayer did not make that argument to the Tax Court, so he should be barred from making it on appeal. The Eight Circuit was not impressed by that argument and expressed some disappointment in it being made as well the failure of the Tax Court to apply the statute correctly, and reversed the Tax Court. Haury, (CA 8 5/12/2014) 113 AFTR 2d ¶ 2014-820.
One reason this case is important is that it highlights an area about to become even more restrictive for this kind of activity undertaken by taxpayers with their IRA investments. The current rule is that a taxpayer can have one rollover (take out and put back) per year separately to each account of a taxpayer. Starting in 2015, the one roll over per year rule will be applied aggregately to all accounts of a taxpayer.