The advisor was shaken. She had just learned that earlier this year the U.S. Tax Court slapped taxes and penalties on a couple who attempted multiple 60-day rollovers in a matter of months, each involving a different individual retirement account at Fidelity (see chart). A client of the advisor had likewise executed some of these rollovers in a short time frame—on the advisor’s recommendation—in order to consolidate retirement assets. Had the planner unwittingly walked the client into an immediate seven-figure tax bill?

When it is done correctly, there is no current-year tax consequence to moving money from one IRA to another via a 60-day rollover. A chief requirement is that within 60 days of an individual receiving a distribution from an IRA, he must redeposit the full amount, including any withheld income tax, into the same or another retirement account. Any amount not rolled over in that span gets taxed as ordinary income.

In January, U.S. Tax Court Judge Joseph Nega ruled in the case of Bobrow v. Commissioner that taxpayers are allowed a single 60-day IRA-to-IRA rollover every 12 months no matter how many accounts they own.

That’s what sent the advisor into shock, and she wasn’t the only one. Both long-standing proposed Treasury regulation 1.408-4(b)(4)(ii) and IRS Publication 590 indicate taxpayers get one of these rollovers per year for each IRA they have.

Yet “IRS publications don’t have any legal significance. The court isn’t bound in any way by those pronouncements of the IRS,” says Chicago attorney Bobbi Bierhals, a partner in the Private Client Practice Group at McDermott Will & Emery. “And the words of the Internal Revenue Code trump proposed regulations.”

Indeed, the judge in the Bobrow case looked to the exact wording of Code Section 408(d)(3)(B), observes Bierhals. “His ruling emphasized the fact that the code says receiving a non-taxable rollover from an IRA precludes receiving another one from an IRA for one year. It doesn’t say from such IRA, which would indicate a per-account basis,” says Bierhals.

The petitioners in the Bobrow case were a couple, Alvan and Elisa Bobrow. Alvan took a distribution on April 14, 2008. This distribution was successfully rolled over within 60 days (and thus non-taxable), so the court disallowed non-taxable rollover treatment for his June 6, 2008, distribution.

The couple’s woe grew when the court refused to accept their explanation for why the repayment of Elisa Bobrow’s IRA was a day late and 25 grand short.
Ultimately their taxes and penalties were reduced in a settlement with the IRS.

For everyone else, relief came March 20 in the form of IRS Announcement 2014-15. It said the agency would not apply the U.S. Tax Court’s ruling “to any rollover that involves an IRA distribution occurring before January 1, 2015.”

Yes, the advisor we met at the beginning has calmed down dramatically. But it was a heart-stopping reminder that the Internal Revenue Code really is the ultimate tax authority.

“If it’s not in the tax code, then you go to regulations, then proposed regulations, and only if there is no other official guidance do you look at IRS publications—and cross your fingers,” says Denise Appleby, CEO of Appleby Retirement Consulting Inc., a Grayson, Ga., provider of IRA technical support to financial, tax and legal professionals.

Clients also need to know about the ruling in the event they might get cute and move IRA money without telling you.

Start their education by harping on the ugly fallout of a second (or third, etc.) 60-day rollover within 12 months. The amount taken from the IRA is considered a taxable distribution, assuming the money was not previously taxed. In addition, the 10% early distribution penalty applies if the client is under age 59 and a half. Pile on state income tax, too.