The estate of late actor James Caan, who appeared in The Godfather and many other films and television shows, lost a recent Tax Court case that holds lessons for other taxpayers.
The case, Estate of Caan v. Commissioner, 161 T.C. No. 6, involved two of Caan’s IRAs, which owned interests in a hedge fund. The tax code allows IRAs to own non-publicly traded assets, such as hedge funds. But many IRA custodians don’t allow these assets in the IRAs they oversee. Caan had a true self-directed IRA; its custodian allowed ownership of such assets.
After each calendar year, an IRA custodian must report to the IRS and the account owner the value of the IRA as of the end of the previous year. When the IRA owns an asset that isn’t publicly traded, the custodian must determine a value and report that.
The agreement between Caan and the custodian required Caan to estimate the year-end value of the hedge funds and provide that data to the custodian.
One year, Caan failed to provide the values to the custodian. The custodian promptly notified Caan it no longer would serve in that role that role for his IRAs.
The custodian then distributed the IRA assets to Caan and sent both him and the IRS a Form 1099-R, which reports the distribution. The custodian distributed the hedge fund shares simply by informing Caan it no longer was in that role and instructing him to contact the hedge fund and have it re-register the shares in his individual name instead of the custodian’s name.
Other assets were in the IRAs, and Caan transferred them to an IRA at another broker. But the hedge fund shares couldn’t be transferred to the other broker because it didn’t accept assets that aren’t publicly traded. Eventually Caan had the hedge fund shares liquidated and transferred the cash to the new IRA.
The transfer wasn’t completed until after the 60-day period for tax-free IRA rollovers. The IRS said the hedge funds were distributed to Caan and he failed to roll them over to another IRA within 60 days. So the value of the hedge funds had to be included in his gross income.
Caan claimed the distribution was nontaxable, because he didn’t take physical control of the shares or cash. He also asked the court to rule that he had a reasonable excuse for missing the deadline.
The court ruled that once the custodian relinquished title to the hedge fund shares, Caan had full control. It didn’t matter that he didn’t have cash in hand or in his bank account. At that point, he had full discretion over the shares.
To qualify for a tax-free rollover under the 60-day rule, a taxpayer must roll over the same amount of money or property to another IRA within 60 days and also must roll over the same type of property that was distributed. Caan failed on both counts.
The court determined that Caan didn’t have a reasonable basis for not meeting the 60-day deadline. The problem essentially was of his own making, because he didn’t provide the custodian with the required valuation.
Also, after the custodian withdrew, all Caan had to do was contact the hedge fund and have the shares re-registered in the name of a custodian that accepted such assets. Nothing prevented him from doing that in a timely manner, so he didn’t have a reasonable excuse for the delay.
Read the full article here
