The Tax Court recently ruled in Albert Lemishow v. Commissioner of Internal Revenue, 110 T.C. No. 11 (1998), that a taxpayer receiving a cash distribution from an IRA or Keogh plan must roll it over to an IRA in cash in order to qualify as a tax-free IRA rollover contribution. Mr. Lemishow (the "Taxpayer") received cash distributions from his IRA and Keogh plan accounts which he used to purchase stock. Within 60 days of receiving the cash distributions, the Taxpayer opened a new IRA in which he deposited the newly purchased stock. He did not report the IRA or Keogh plan distributions on his federal income tax return. The IRS determined that the rollover was invalid and therefore, the full amount of the distribution was includable in the Taxpayer's income. The Tax Court agreed, holding that, in order to make a tax-free rollover to an IRA of a distribution from an IRA or qualified retirement plan, the rollover must consist of the same amount of money or the same property that was distributed.
Accordingly, the reinvestment of distributed amounts prior to the rollover to an IRA will render an attempted rollover invalid unless the reinvested amounts are liquidated back to cash prior to the rollover. An attempt to rollover anything other than that which was actually distributed will subject the taxpayer to income tax (and the 10% early distribution penalty, if applicable) on the distributed amounts.