T.C. Memo. 2008-285



                      UNITED STATES TAX COURT



           JACOB AND FERN JANKELOVITS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24615-06.             Filed December 22, 2008.



     Jacob and Fern Jankelovits, pro sese.

     Frederick C. Mutter, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined a deficiency of $41,244

in petitioners’ 2004 Federal income tax.    The issue for decision

is whether petitioners must include in gross income for 2004 the

proceeds from two individual retirement accounts (IRAs)

transferred to petitioner Fern Jankelovits (Mrs. Jankelovits)

during that year.   Unless otherwise noted, all section references
                               - 2 -

are to the Internal Revenue Code of 1986 as in effect for the

year in issue.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are incorporated

by this reference.   At the time the petition was filed,

petitioners resided in New York.   Petitioners were married and

filed a joint Federal income tax return for 2004.

     Mrs. Jankelovits inherited two IRAs from her aunt, Miriam

Margolis (Ms. Margolis).1   The trustee bank for one of the IRAs

(Emigrant IRA) was Emigrant Savings Bank in New York, New York,

and the trustee bank for the other IRA (Unibank IRA) was Unibank,

subsequently known as First Bank Florida, located in Miami,

Florida.   The owner of both IRAs had been Ms. Margolis, and

petitioner was designated as the accounts’ beneficiary upon the

death of Ms. Margolis.

     Mrs. Jankelovits and petitioner Jacob Jankelovits (Mr.

Jankelovits) discussed the IRAs and decided that Mrs. Jankelovits

should arrange to have the IRAs transferred to her on a

nontaxable basis.

     Mrs. Jankelovits met with an employee of the Emigrant

Savings Bank on June 10, 2004, presented proof of Ms. Margolis’s

death, and told the employee that she wished to have the proceeds

of her aunt’s IRA transferred to her on a nontaxable basis.     The



     1
      Neither the date of Ms. Margolis’s death nor her age at
death is established in the record.
                                 - 3 -

employee thereupon transferred the Emigrant IRA balance to an IRA

beneficiary account, closed the Emigrant IRA, and issued a check

to Mrs. Jankelovits for the $86,004 balance.   Mrs. Jankelovits

opened a savings account in her name at Washington Mutual Bank in

Brooklyn, New York (Washington Mutual account), on the same day

and deposited the check there.

     Shortly thereafter, Mrs. Jankelovits traveled to Florida and

met with an employee of Unibank on June 29, 2004.    She likewise

instructed the employee to effect a nontaxable transfer of the

Unibank IRA, and on that date Mrs. Jankelovits was issued a check

for $39,260, representing the balance of the Unibank IRA.   Mrs.

Jankelovits deposited the check in the Washington Mutual account.

Thereafter, up until the time of trial, petitioners did not

withdraw any funds from the Washington Mutual account.

     Petitioners did not report the amounts transferred from the

Emigrant and Unibank IRA accounts as income on their 2004 return.

     Respondent thereafter issued petitioners a notice of

deficiency for 2004 in which respondent determined that they

failed to report $86,004 and $39,260 of taxable retirement income

distributions from Emigrant Savings Bank and Unibank,

respectively.   Petitioners were not aware of any tax problem with

respect to the IRAs until they were contacted by respondent in

connection with the 2004 deficiency determination.
                                  - 4 -

                                 OPINION

     Section 61(a) requires taxpayers to include in gross income

all income from whatever source derived.        Exclusions from income

are to be narrowly construed.      Commissioner v. Schleier, 

, 328 (1995).

     Amounts paid or distributed out of an IRA are generally

includible in gross income by the payee or distributee.2         Sec.

408(d)(1).   However, section 408(d)(3) provides that a

distribution is not includible in gross income if the entire

amount of the distribution received by an individual is paid into

a qualified IRA for the benefit of that individual within 60 days

of the distribution.     This recontribution is known as a “rollover

contribution”.

after December

31, 2001, the Secretary of the Treasury may waive the 60-day

requirement when the failure to do so would be against equity and

good conscience.    Sec. 408(d)(3)(I); Economic Growth and Tax

Relief Reconciliation Act of 2001, Pub. L. 107-16, sec 644(b) and

(c), 115 Stat. 123.

     Rollover treatment is not available in the case of an

inherited IRA.   Sec. 408(d)(3)(C).       An IRA is treated as

inherited for purposes of section 408(d)(3)(C) if the individual

for whose benefit the account or annuity is maintained acquired




     2
      Sec. 408(d) provides that such distributions are taxed in
the manner provided in sec. 72, which governs the taxation of
annuities.
                               - 5 -

that account by reason of the death of another individual who was

not his or her spouse.   Sec. 408(d)(3)(C)(ii).

     A taxpayer is not treated as having received a taxable

distribution from an IRA if funds in the IRA are transferred from

one account trustee directly to another account trustee without

the IRA owner or beneficiary ever gaining control or use of the

funds.   Rev. Rul. 78-406, 1978-2 C.B. 157; see also Crow v.

Commissioner, T.C. Memo. 2002-178; Martin v. Commissioner, T.C.

Memo. 1992-331, affd. without published opinion 

(5th

Cir. 1993).

     The funds at issue were transferred from two qualified IRA

accounts of Mrs. Jankelovits’s deceased aunt to Mrs. Jankelovits

because she was the named beneficiary.3   Mrs. Jankelovits

thereupon deposited the funds into an ordinary savings account.

Because the funds were from an inherited IRA, they were

ineligible for rollover treatment, leaving trustee-to-trustee

transfers as the only basis upon which a nontaxable transfer of

the funds could have been effected.4




     3
      While an inheritance is generally acquired tax free, sec.
102(a), a distribution to a beneficiary of an inherited IRA (in
excess of any nondeductible contributions of the decedent to the
account) is taxed as income in respect of a decedent. See Estate
of Kahn v. Commissioner, 

, 231-232 (2005).
     4
      As noted, the record does not establish Ms. Margolis’s age
at death, and it is unknown whether required minimum
distributions from the two IRA accounts at issue had commenced
before her death. See secs. 408(a)(6), 401(a)(9).
                                - 6 -

     This Court in a few instances has treated imperfect rollover

contributions or IRA distributions as if they fully complied with

the statute where the taxpayer had acted with full knowledge of

the law’s requirements, had taken all steps within his reasonable

control to comply with those requirements, and had achieved

substantial compliance.   See Wood v. Commissioner, 

(1989); Childs v. Commissioner, T.C. Memo. 1996-267; Thompson v.

Commissioner, T.C. Memo. 1996-266.

     In Wood, the taxpayer husband, well before expiration of the

60-day period allowed for a rollover, had established an IRA

trust account at a financial institution, had deposited with the

institution certain cash and stock certificates distributed to

him from a qualified plan, and had instructed the institution to

transfer the cash and stock into the IRA account.   He had been

assured by the institution that the transfer would be effected.

On the institution’s books, the cash was recorded as having been

transferred to an IRA account within the 60-day rollover period,

but the stock was not.    When the institution discovered that the

stock was recorded as deposited in a non-IRA account some 4

months after expiration of the rollover period, it promptly made

corrective entries on its books so that the stock was recorded as

deposited into the IRA account.

     We concluded in Wood that the institution’s failure to

record the stock as deposited into the IRA account before

expiration of the rollover period was merely a bookkeeping error
                               - 7 -

that was not disqualifying.   Instead, the substance of the

transaction between the taxpayer and the financial institution

controlled; since the institution had accepted and held the stock

subject to the IRA trust instrument executed by the taxpayer, and

the taxpayer had taken reasonable steps to establish an IRA

rollover account and to transfer the cash and stock to that

account in a timely manner, the taxpayer had in substance

complied with the statute and was entitled to rollover treatment

notwithstanding the institution’s bookkeeping error.   See also

Childs v. 

(following Wood, untimely

distribution of excess IRA contributions treated as timely where

taxpayer took all reasonable steps to comply with the statute and

the failure to meet the statutory deadline was attributable to

error of the taxpayer’s financial institution); Thompson v.

(to same effect).

     However, more frequently, in a line of cases starting with

Schoof v. Commissioner, 

(1998), we have denied any

relief for defective rollovers or transfers where the defect

related to a “fundamental element of the statutory requirements”

rather than “the procedural defects in the execution of the

rollover” found in Wood.   Schoof v. 

at 11;

see also Atkin v. Commissioner, T.C. Memo. 2008-93; Dirks v.

Commissioner, T.C. Memo. 2004-138, affd. 

(9th

Cir. 2005); Crow v. 

; Anderson v.

Commissioner, T.C. Memo. 2002-171; Metcalf v. Commissioner, T.C.
                                 - 8 -

Memo. 2002-123, affd. 

(9th Cir. 2003).    The

same principle has been extended to a trustee-to-trustee transfer

under Rev. Rul. 78-406, supra.     Crow v. 

.

     In Schoof v. 

, the defect in the

“fundamental element” was that the transferee accounts into which

the IRA funds were rolled over were not qualified IRA accounts

(because the purported trustee of those accounts was unqualified

to act as such).   The transfers to defective IRA accounts were

therefore ineligible as rollover contributions, rendering the

transferred amounts taxable.

     In Crow, the defect in the “fundamental element” was

likewise the failure to transfer IRA account proceeds into

another qualified IRA account.    The taxpayer had withdrawn the

entire balance of an IRA account at his bank in 1998.    The amount

withdrawn was transferred to a nonqualified annuity administered

by an insurance company.   Although he received a Form 1099-R,

Distributions From Pensions, Annuities, Retirement or Profit-

Sharing Plans, IRAs, Insurance Contracts, etc., reporting that

the entire amount withdrawn was taxable, the taxpayer took no

action in response and did not report the amount on his 1998

return.   When contacted by the Internal Revenue Service (IRS) in

2000 regarding the IRA withdrawal, the taxpayer conferred with

the bank, and in 2001 the bank took steps to recharacterize the

transaction.   The bank prepared documents stating that there had

been a bank error and that the IRA account had been mistakenly
                               - 9 -

closed out and should have been closed as a trustee transfer.

The bank also issued a revised Form 1099-R reporting that none of

the distribution was taxable and a “Correction Worksheet” stating

that “[t]his was to have been a trustee transfer to * * * [an IRA

annuity], not a distribution” of the account proceeds.

Nonetheless, approximately a year later in March 2002, at the

time of trial, the withdrawn proceeds remained in the

nonqualified annuity to which they had been transferred in 1998.

     We rejected Mr. Crow’s argument that he should obtain relief

under Wood.   He contended that the transferor bank either had

mistakenly rolled over the funds into a nonqualified annuity or

had mistakenly rolled over the funds instead of making a trustee-

to-trustee transfer to an IRA or other qualified plan.   Instead,

emphasizing the fundamental nature of the requirement that IRA

funds be transferred into an IRA or other qualified plan and the

failure to correct the defect in a timely manner, we held that

the IRA funds withdrawn were includible in income.

     A fundamental requirement for a rollover contribution
     under section 408(d)(3) or a trustee-to-trustee
     transfer under Rev. Rul. 78-406 * * * is that funds
     actually be rolled over or transferred into an IRA or
     other qualified plan. We believe that failure of this
     fundamental requirement extends beyond the procedural
     error in Wood v. Commissioner * * * which was cured by
     substantial compliance and the fulfilment of the
     remaining requirements of the statute. Thus, like the
     situation in Schoof v. Commissioner, * * * we find that
     the failure to roll over or transfer the funds to an
     IRA or other qualified plan is fatal to petitioner’s
     case. * * * [Crow v. Commissioner, T.C. Memo. 2002-
     178.]
                              - 10 -

     Similarly, in Anderson v. 

, the taxpayer-

husband withdrew funds from an IRA account and used them to

purchase certificates of deposit in his and the taxpayer-wife’s

names, pursuant to documents that did not mention the creation of

either an IRA account or other trust account.   Emphasizing that

the taxpayers had neither established nor instructed the

transferee bank officer to establish a valid IRA or trust account

and that the failure to establish such an account to receive the

transferred funds “‘involves the failure of a fundamental element

of the statutory requirements for an IRA rollover contribution’”

), we rejected the

taxpayers’ reliance on Wood v. Commissioner, 

(1989),

and held that the withdrawn funds were includible in income.

     The evidence in this case is sparse.   Mr. Jankelovits

testified that he counseled his wife to request a nontaxable

transfer of the IRA funds, but he conceded that he did not become

aware of trustee-to-trustee transfers until he consulted an IRS

publication after being contacted by respondent concerning

petitioners’ 2004 return.   Mrs. Jankelovits testified that she

visited each bank and followed her husband’s advice by informing

bank employees that she wanted the funds transferred to her on a

nontaxable basis.   It is undisputed that in June 2004 each bank

issued her a check for the balance in the IRA account that each

held, and that Mrs. Jankelovits promptly deposited the checks in

an ordinary savings account in a third, more conveniently located
                              - 11 -

bank, where they remained untouched for over 3 years until the

time of trial.   Neither of the transferor banks has conceded any

error.5   Petitioners offered no testimony concerning what, if

anything, Mrs. Jankelovits told the transferee bank concerning

the deposited funds.

     The foregoing facts are sufficient to place this case

outside the Wood line of cases and instead put it squarely under

the caselaw treating IRA distributions as taxable when they do

not conform with fundamental elements of the statutory

requirements for an exclusion from gross income.   Even if we

accept petitioners’ version of their dealings with the transferor

banks and assume that the banks’ employees misunderstood or

misapplied Mrs. Jankelovits’s instructions,6 we would conclude

that respondent is entitled to prevail.



     5
      Officers at each bank wrote letters in April 2006, the
authenticity of which the parties have stipulated. The letters
provide very general, after-the-fact, and self-serving
descriptions of the withdrawals. The letters are hearsay, and we
accord little weight to them.
     6
      Assuming Mrs. Jankelovits instructed the transferor banks
in general terms that she wanted to move the inherited IRAs on a
nontaxable basis to a more conveniently located bank, the bank
employees could have failed to appreciate the necessity of a
trustee-to-trustee transfer when dealing with an inherited IRA,
since rollover treatment is not available for an IRA in that
status. (Petitioners have conceded they were unaware of trustee-
to-trustee transfers at the time.) Possibly the employees
assumed, contrary to sec. 408(d)(3)(C), that a nontaxable
rollover of Mrs. Jankelovits’s inherited IRA accounts could be
made. Accordingly, they could have believed that the
distribution of the funds directly to Mrs. Jankelovits was
nontaxable so long as she redeposited the funds in a qualified
account within the 60-day rollover period.
                              - 12 -

     As noted, the IRAs in Mrs. Jankelovits’s hands were

“inherited” within the meaning of section 408(d)(3)(C), rendering

them ineligible for nontaxable rollover treatment.7   See sec.

408(d)(3)(A).   Even if petitioners and the two transferor banks’

personnel were unaware of this restriction and thought that a

nontaxable rollover could be effected, it remains the case that

there is no evidence that petitioners made any effort to

establish an IRA at the transferee bank.   Mrs. Jankelovits

offered no testimony concerning what, if anything, she told the

transferee bank about the funds she deposited into the savings

account she established there.   The lack of an IRA account at the

transferee bank to receive the transferred funds undermines the

claim that a nontaxable rollover or trustee-to-trustee transfer

should be deemed to have occurred in these circumstances.

Neither petitioner explained how he or she could have supposed

that the transferred money retained its character as nontaxable

IRA funds while sitting in an ordinary savings account;8 they



     7
      We note that since sec. 408(d)(3)(C) denies the benefit of
the rollover contribution “paragraph” to inherited IRAs, the
Secretary’s authority under sec. 408(d)(3)(I) to waive the 60-day
rollover period has no application in this case because, under
the latter section, only “subparagraphs” (A) or (D) of sec.
408(d)(3) may be waived.
     8
      Although the record is silent regarding whether
distributions to Ms. Margolis had begun before her death, Mrs.
Jankelovits, as the designated beneficiary of Ms. Margolis’s
IRAs, would have been required to commence receiving taxable
distributions from the IRAs after Ms. Margolis’s death. See
generally secs. 408(a)(6), 401(a)(9); sec. 1.408-8, Income Tax
Regs.
                               - 13 -

merely blamed the transferor banks for not effecting a nontaxable

distribution.

     Petitioners’ circumstances are readily distinguishable from

those of the taxpayers in Wood.    In Wood, the taxpayer-husband

had established an IRA account to receive a rollover distribution

and had sufficient knowledge of the statute’s requirements to

enable him to give instructions to the financial institution

that, if followed, would have produced full compliance with the

statute.   There is no evidence that Mrs. Jankelovits attempted to

establish an IRA account to receive the funds from her deceased

aunt’s IRAs.    She did not give detailed instructions that would

have resulted in nontaxable transfers if followed, as she and Mr.

Jankelovits were unaware of trustee-to-trustee transfers when the

distributions were made.

     Instead, petitioners’ circumstances are much closer to those

of the taxpayer in Crow v. Commissioner, T.C. Memo. 2002-178.

The taxpayer in Crow sought relief on the grounds that the

transferor bank had mistakenly failed to make a trustee-to-

trustee transfer.   Even though the transferor bank in Crow

conceded error in handling the taxpayer’s transaction (unlike the

transferor banks here), we denied any relief because the funds

had been transferred to a nonqualified account and had remained

in that account without any timely corrective action.   In Crow,

the failure to transfer the funds to a qualified account was a

defect in a “fundamental requirement” that precluded relief,
                             - 14 -

notwithstanding any mistakes by the transferor bank.

Petitioners’ claim that a trustee-to-trustee transfer was

intended is likewise unavailing, because the funds at issue were

transferred to a nonqualified account and remained there

approximately 3 years up until the time of trial.   In addition,

petitioners’ failure to show that the transferee bank received

any instructions from them to the effect that the deposited funds

should be placed in an IRA account also militates against relief.

In Anderson v. Commissioner, T.C. Memo. 2002-171, we denied any

relief with respect to a transfer of IRA funds to a nonqualified

account, emphasizing the taxpayers’ failure to instruct the

transferee bank to establish an IRA account.   In sum, the fact

that the funds at issue were transferred to a nonqualified

account, without any instructions to the transferee bank

regarding establishment of an IRA account to hold them, and

remained there until the time of trial, precludes relief for

petitioners.

     We therefore hold that the amounts transferred to Mrs.

Jankelovits from the Emigrant and Unibank IRAs are includible in

petitioners’ gross income in 2004.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.