As the global workforce becomes increasingly mobile, more and more workers must wade through the intricacies of cross-border taxation. One of these more common cross-border situations is discussed in Chief Counsel Advice (CCA) 201231010. The situation described in this CCA is likely to arise more and more for taxpayers who take an employment assignment overseas.
The taxpayer was a university professor and had worked most of his career at various universities in the United Kingdom. While working at these universities, he contributed to qualified pension plans under U.K. law.
However, for a period, he worked at a U.S. university and contributed to a Sec. 403(b) pension account. After he completed the U.S. work assignment, he sought professional advice regarding the ability to roll over the balance in his U.S. plan to his U.K. pension plan. The U.K. tax authorities advised the taxpayer to consult the administrators of the U.S. plan on whether the proposed transfer would be permitted under the plan rules.
While the taxpayer was again a resident of the U.K. and a nonresident alien for U.S. income tax purposes, the U.S. plan issued a lump-sum check made payable to the U.K. plan. The funds went directly from the U.S. pension plan to the U.K. pension plan. The taxpayer was issued a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reporting the gross distribution. The taxpayer believed that the rollover was a "good" tax-deferred rollover. Therefore, he neither filed a U.S. tax return nor paid any U.S. income tax on the distribution. Unfortunately, the IRS disagreed with the taxpayer's position for the reasons discussed below.
Sec. 403(b)(8) provides that if (1) any portion of an employee's balance in an annuity contract is paid to the employee in an eligible rollover distribution (within the meaning of Sec. 402(c)(4)); (2) the employee transfers any portion of the property he or she receives in that distribution to an eligible retirement plan described in Sec. 402(c)(8)(B); and (3) in the case of a distribution of property other than money, the transferred property consists of the property distributed, then the distribution (to the extent transferred) will not be includible in the employee's gross income for the tax year in which it is paid.
Sec. 402(c)(8)(B) provides that the term "eligible retirement plan" includes an annuity contract described in Sec...