Is a judgment award eligible for IRA rollover

Submitted by Bert Starr on Wed, 2019-03-27 20:02

IRA was managed by investment advisor who invested the clients funds in penny stocks and lost most of the funds.
Complaint filed against broker/dealer and arbitration awarded client damages for non-suitable investment.
B/D paid damages to client with a check.
Client immediately deposited funds into IRA so met the 60 day rollover requirement.
However, B/D issued a 1099-MISC and not a 1099-R to client.
Client’s tax return preparer has taken the position that the damage award is income and not eligible for rollover.
I think the award should be eligible for rollover since it is replacing lost IRA funds, but can not locate authority.
Client does not want to pursue PLR request.
So, I am thinking of including a “self certification” letter similar to Rev. Proc. 2016-47.
Any thoughts?
(P.S. Client is over 591/2 so no 10% penalty issue)

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Permalink Submitted by Alan - IRA critic on Wed, 2019-03-27 20:36

This is a “restorative payment”, and if handled correctly the check should have been made payable to client’s IRA FBO client. There would be no 1099 of any type since a restorative payment would be treated as a non reportable transfer back to the IRA, or to a another IRA if the source IRA had been closed. The following includes an article on restorative payments:
https://www.kkwc.com/attorney/bruce-d-steiner/
But you have to deal with what you have since the BD is not going to rescind the 1099 MISC. 2016-47 addresses extension of the 60 day rollover deadline, so that is not applicable here since a rollover IRA contribution has been made within 60 days. The receiving IRA custodian will likely issue a 5498 reporting a rollover contribution, for which the IRS will not see a matching 1099R. Since client will have to square up the 1099R MISC with the 5498, the client should file the return reporting the 1099 MISC income and then adding another line to subtract it back out. This will require an explanatory statement that a restorative payment of IRA losses should be treated as a non reportable transfer. If a 5498 is issued, the matchup issue should be part of the explanation. By treating this as a transfer, it eliminates the potential issue of the client not having a 60 day rollover available due to the one rollover limitation per 12 months.