In re Edward WILLIAMS, Brenda Diane Williams, Debtors., United States Bankruptcy Court, M.D. Florida, Tampa Division., 269 B.R. 68, No. 00-04681-8G3., September 28, 2001

In re Edward WILLIAMS, Brenda Diane Williams, Debtors.

United States Bankruptcy Court, M.D. Florida, Tampa Division.

269 B.R. 68

No. 00-04681-8G3.

September 28, 2001.

B. Gray Gibbs, Gibbs & McCurley, P.A., St. Petersburg, FL, Jamie K. Proctor, Tampa, FL, for debtors.

Donna A. Bucella, United States Attor╜ney, Mac Cauley, United States Attorney, Hemant Sharma, Trial Attorney, Tax Divi╜sion, U.S. Department of Justice, Washing╜ton, D.C., for U.S.

Terry E. Smith, Bradenton, FL, Chap╜ter 13 Trustee.

ORDER ON OBJECTION TO CLAIM # 11 OF INTERNAL REVENUE SERVICE

PAUL M. GLENN, Bankruptcy Judge.

THIS CASE came on for final evidentia╜ry hearing on the Objection to Claim # 11 of the Internal Revenue Service filed by Edward and Brenda Diane Williams (the "Debtors").

Background

The Debtors filed a Chapter 13 petition on March 28, 2000. The Internal Revenue Service filed Claim # 11 on September 5, 2000 in the total amount of $13,160.26 for the year ending December 31, 1997. The Debtors filed an Objection to Claim # 11 on November 1, 2000.

Edward Williams received a check from Consolidated International Group, Inc. dated December 21, 1997 in the amount of $26,876.61. This amount represented a distribution from his 401(k) plan with his former employer less federal income tax withholding of 20%. Mr. Williams re╜ceived the check in the mail "either ... the last week of December or the first week of January." Mr. Williams did not cash the check or deposit it in an existing bank account, but held the check until March 3, 1998, at which time he deposited the check in a newly opened SunTrust IRA account.

Discussion

The Debtors' objection to the claim of the IRS focuses on the distribution from a 401(k) plan and the subsequent rollover to an eligible plan. In general, distribu╜tions from qualified retirement plans are included in the income of the taxpayer/dis╜tributee in the year of distribution. Sec╜tions 72 and 402, Internal Revenue Code. An exception to the inclusion into income applies if the distribution is rolled over into an eligible retirement plan within 60 days of receipt of the distribution. 26 U.S.C. ╖ 402(c)(3). ¹

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^1. 26 U.S.C. ╖╖ 402(a) and (c) provide:

╖ 402. Taxability of beneficiary of em╜ployees' trust

(a) Taxability of beneficiary of exempt trust.-Except as otherwise provided in this section, any amount actually distributed to any distributee by any employees' trust de╜scribed in section 401(a) which is exempt from tax under section 501(a) shall be tax╜able to the distributee, in the taxable year of the distributee in which distributed, under section 72 (relating to annuities).

(c) Rules applicable to rollover from ex╜empt trusts.-

(1) Exclusion from income.-If-

(A) any portion of the balance to the credit of an employee in a qualified trust is paid to the employee in an eligible rollover distribution,

(B) the distributee transfers any portion of the property received in such distribution to an eligible retirement plan, and

(C) in the case of a distribution of prop╜erty other than money, the amount so trans╜ferred consists of the property distributed, then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid. . .

(3) Transfer must be made with 60 davs of receipt.- Paragraph (l) shall not apply to any transfer of a distribution made after the 60th day following the day on which the distrtbutee received the property distributed .

(Emphasis added.)

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The Debtors' Objection to Claim # 11 of the Internal Revenue Service contained the statement that "On or about December 21, 1997 the Debtor Husband received dis╜bursement from a qualified retirement plan through his employer, Consolidated International Group, Inc., in the amount of $26,876.61." The check received by Mr. Williams was dated December 21, 1997.

The date of actual receipt of the proper╜ty disbursed is critical in meeting the 60 day rollover exception from income. Al╜though private letter rulings from the IRS cannot be relied on as precedent, a reading of applicable rulings shows that the IRS has not looked to the date of the disburse╜ment check for the start of the rollover period, but the date of actual receipt by the taxpayer. For example, in Private Letter Ruling 8833043, 1988 WL 572439, a taxpayer did not receive his distribution check from the trustee of his former prof╜it-sharing plan for ten months after the date of issuance of the check. Since the taxpayer completed a rollover transaction within thirty days of actual receipt of the plan distribution, the IRS ruled that the taxpayer completed a valid rollover.

The Debtors do not argue that actual receipt of the check was within the 60 day period specified in ╖ 402(c)(3). ² The Debt╜ors argue that by holding the check, and not depositing it initially in any type of account, they did not actually "receive" the property pursuant to this section until the check was deposited. As the Debtors' Post-Final Evidentiary Hearing Reply Brief states, ". . , the 60-day period should not begin to run until the Debtors received and gained control over the distribution, i.e. final payment or certification of the check." The Debtors assert that until the check was honored by Consolidated Inter╜national Group's bank in accordance with the bank collection process, the distributee has not received the property distributed.

The Debtors rely on Florida Statutes ╖ 6 74.215 for the proposition that a check's payment does not become final until the payor bank makes "final settlement" on the check. Section 674.215 of the Florida Statutes relates to the rules for final pay╜ment of items between banks. ³ The Debt╜ors also rely on In re College Bound, 172 B.R. 399 (Bankr.S.D.Fla.1994). In that case, the debtor corporation sent checks to the investment manager of the debtor's 401(k) plan, but then filed a Chapter 11 petition and closed the checking account before the checks could clear the account. The Court concluded in College Bound that the funds represented by the pre╜petition check that had been sent to the 401(k) plan but not paid by the bank had not become property of the plan, but were property of the bankruptcy estate. In de╜termining the significance of the prepeti╜tion checks that had been dishonored, the bankruptcy court looked to the bank col╜lection process as codified under ╖ 674.215 Fla. Stats. The court determined that since only a "provisional" settlement had been made to the payee's bank account pending "final settlement" when the funds are actually transferred from the payor's account, the funds evidenced by the pre╜petition checks never left the estate and were property of the estate. Id . at 402. Since the checks were dishonored, the bankruptcy court found under Florida law that the monies represented by such checks were deemed to have never left the debtor's checking account.

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^3. ╖ 674.215. Final payment of item by pay╜or bank...

(1) An item is finally paid by a payor bank when the bank has first done any of the following:

(a) Paid the item in cash;

(b) Settled for the item without having a right to revoke the settlement under statute, clearinghouse rule, or agreement; or

(c) Made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearinghouse rule, or agreement.

(2) If provisional settlement for an item does not become final, the item is not finally paid.

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In the College Bound case, the checks were received, deposited, and then dishon╜ored. The possibility of dishonor of a check, however, should not affect the de╜termination of when a check is actually received by a payee. Florida Statutes ╖ 673.3101 controls the relationship be╜tween payors and payees of negotiable in╜struments (as opposed to the relationship between banks, as relied upon in In re College Bound, Inc., supra). This section provides that payment by an uncertified check is treated as a cash payment so long as the check is honored when initially pre╜sented. ⁴ The obligation is suspended upon delivery of the check and is discharged to the extent of the amount of the check upon honor. In re A. W. & Associates, Inc., 196 B.R. 900, 904 (Bankr-.N.D.Fla.1996). Thus, only in a situation where a check is subsequently dishonored is there a ques╜tion of receipt by the payee and satisfac╜tion of the obligation by the payor upon delivery of the check. It is certainly the prerogative of a payee to hold a check for a period of time, but in doing so, the payee does not defer the "receipt" of the satisfac╜tion of the obligation and the consequences thereof.

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^4. ╖ 673.3101. Effect of instrument on obli╜gation for which taken.-

(2) Unless otherwise agreed and except as provided in subsection (1), if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply:

(a) In the case of an uncertified check, sus╜pension of the obligation continues until dishonor of the check or until it is paid or certified. Payment or certification of the check results in discharge of the obligation to the extent of the amount of the check.

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Therefore, the Court determines that pursuant to 26 U.S.C. ╖ 402(c)(3), "the day on which the distributee received the prop╜erty distributed" in the Debtors' case was the date that the Debtors actually received the check from Consolidated International Group, Inc., and not the date that the check was paid by the payor bank. Ac╜cordingly, the objection to Claim # 11 of the IRS should be overruled.

This conclusion is consistent with the treatment of checks in other instances in the tax laws. A taxpayer may deduct ex╜penses paid by a check delivered on or before December 31 against that year's income even though the drawee bank does not honor the check until the next calendar year. See, e.g., Clark v. Commissioner, 253 F.2d 745, 748 (3d Cir.1958); see also Don E. Williams Co. v. Commissioner, 429 U.S. 569, 572, n. 2, 582-583, 97 S.Ct. 850, 853, n. 2, 858, 51 L.Ed.2d 48 (1977). Treasury regulations similarly provide that a charitable contribution is made upon de╜livery of a check which subsequently clears in due course. Treas. Reg. ╖ 1.170A-1(b), 26 CFR ╖ 1.170A-1(b).

The Debtors made reference to a clerical error by Consolidated Internation╜al Group, Inc. in issuing the check to Mr. Williams instead of making a direct roll╜over to an eligible plan in the Objection to Claim # 11 filed on November 1, 2000. The Court has reviewed several cases in which the tax court examined various mis╜takes and misunderstandings in connection with rollover transactions by taxpayers. In each case the taxpayer thought he had completed a valid rollover from a retire╜ment plan or an IRA, but the IRS as╜sessed taxes in connection with the trans╜action. In Lemishow v. Commissioner, 110 T.C. 110, 1998 WL 130156 (1998), a taxpayer received money distributions from IRA and Keogh accounts, purchased stock with the funds, and then deposited the stock into a newly opened IRA. The Tax Court held that since money was dis╜tributed from the IRA and Keogh account, the respective rollover provisions required that money be transferred into the newly opened IRA. Id. at 113. In Schoof v. Commissioner, 110 T.C. 1, 1998 WL 6143 (1998), twelve consolidated cases involved the transfer by taxpayers of retirement plan distributions into newly opened IRAs in which the trustee of the IRA was not eligible to serve in that capacity. Despite the court's sympathy to the taxpayers' plight, the court found that the lack of a qualified trustee was fatal to the existence of a qualified IRA trust, and the distribu╜tions were not completed rollovers. Id . at 11.

The failure to rollover IRA distributions for the same person from whose plan the distribution was made was fatal to the taxpayer in Rodoni v. Commissioner, 105 T.C. 29, 1995 WL 432635 (1995). In Moon v. United States, 1997 WL 718521 (Fed. Cl.), the taxpayer requested a distribution from his retirement plan directly to him╜self and then transferred the funds to an IRA. The retirement plan sent the taxpay╜er a check for the balance of his account less 20% which was withheld for federal taxes. The withheld taxes then became taxable income since the taxpayer only deposited the net check into his rollover IRA account, but did not contribute additional funds to the IRA to equal the total balance in his original retirement plan. In Orgera v. Commissioner, 1995 WL 710939 (U.S.Tax Ct.), the taxpayer established an IRA for rollover purposes from his pension plan, but deposited pension funds in a different account with the same financial institution and misunderstood the specifics of the funding of the IRA. Again, the tax court ruled for the Internal Revenue Ser╜vice.

The tax court cases cited above have determined tax consequences for the tax╜payer for failing to accomplish a valid roll╜over of an IRA or pension plan. The Court has reviewed one case in which a taxpayer attempted a rollover of stock and cash from a profit-sharing plan to an IRA and the trustee made a bookkeeping error which caused the stock portion of the dis╜tribution not to be placed in the IRA until after the 60 day rollover period had passed. The tax court disregarded the trustee's bookkeeping error and found that the taxpayer made a timely rollover to his IRA. Wood v. Commissioner, 93 T.C. 114, 1989 WL 83936 (1989). The other tax court cases cited above distinguish the Wood case as one resulting from a "book-keeping error" on the part of the trustee and do not extend the circumstances under which an unfortunate taxpayer who failed to complete a valid rollover could prevail against the Internal Revenue Service.

Conclusion

The Court is sympathetic to the Debt╜ors' circumstances. However, the Court has found no authority for the Debtors' position or for extension or modification of the requirement that a distribution must be rolled over within 60 days after actual receipt to be tax-free. In accordance with the legal authority set forth above, the Court determines that it is appropriate to overrule Debtors' Objection to Claim # 11 of the Internal Revenue Service.

Accordingly

IT IS ORDERED that the Debtors' Ob╜jection to Claim # 11 of the Internal Reve╜nue Service is overruled.

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