Section 408(d)(3) provides that a distribution from an IRA 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.
Per §408(d)(3)(C), rollover treatment is not available in the case of an inherited IRA. An IRA is treated as inherited for purposes of §408(d)(3)(C) if the individual for whose benefit the account or annuity is maintained acquired that account by reason of the trust of another individual who was not his or her spouse.
However, taxpayer is not treated as having received a taxable distribution from an IRA, however, if funds in the IRA are transferred from one account trustee directly to another account trustee without the IRA owner’s or beneficiary’s ever gaining control or use of the funds.
In Beech v. Commissioner, T.C. Summ. Op. 2012-74, the Tax Court refused to create a substantial compliance exception to the Code, where mother died in March, daughter received IRS distributions in May and rolled them into an IRA in June. The opinion states:
The Court cannot find that petitioners substantially complied with section 408(d)(3)(A)(i) because section 408(d)(3)(C) expressly denies rollover treatment to an inherited IRA. “Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles. * * * The Code’s lines are arbitrary. * * * Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries.” Kim v. Commissioner, 679 F.3d 623, 625–626 (7th Cir.2012), aff’g T.C. Dkt. No. 11902–10 (May 20, 2011) (bench opinion).