Assets in an Individual Retirement Account (“IRA”) or retirement plan that do not have a readily ascertainable value, which in this context means the asset is traded on an active market, can create serious problems. Internal Revenue Service (“IRS”) reporting rules require that assets without an ascertainable market value be valued annually with a professional appraisal. While the IRS can act on its own, sometimes the custodian of the asset is the investor’s worst enemy.
Consider the United States Tax Court case “Estate of James E. Caan, Deceased, JACAAN Administrative Trust, Scott Caan, Trustee, Special Administrator, Petitioner v. Commissioner of Internal Revenue, Respondent.” This case involved the late actor James E. Caan’s estate and two IRA’s he held at United Bank of Switzerland (“UBS”). One IRA included a partnership interest in a hedge fund.
The custodian of the IRA required the owner to provide it with the value of a partnership interest (hedge fund) each year for its annual reporting. At the end of 2014, that value was not provided and pursuant to the custodial agreement, in such case, the custodian was to deem the investment as having been distributed.
UBS reported this distribution and valued it based on the last known value. Caan’s financial advisor, after more than a year, liquidated this interest and moved the cash to Caan’s IRA at Merrill Lynch. Caan reported this on his tax return as a nontaxable rollover contribution, which the IRS disputed, leading to a tax deficiency notice.
The court had to: a) decide if the distribution was done in 2015; b) decide if it was taxable; and c) decide what the value was at the time of distribution. The court found that the distribution did occur in 2015 and was taxable, as Caan didn’t meet the rollover requirements. The court reasoned that he converted the interest to cash, which is not allowed. The court valued the interest at $1,548,010. Furthermore, the court determined that the IRS didn’t abuse its discretion in denying a waiver for the 60-day rollover period, as such a waiver wouldn’t have affected the outcome due to the nature of the distribution.
Many nontraditional investment assets do not have a readily ascertainable market value. If you have any in a retirement plan or an IRA, consult with your custodian or trustee regarding the need for an annual valuation. Watch out for provisions that create “deemed” distributions if a valuation is not timely completed.