Swtching Cash or Real Estate for IRA held Stock
My IRA holds stock in a bank that went from a C Corp to a Sub S corporation. Now my dividends are being taxed via a 990T, unrelated business income. It is really a bad situation, especially since it becomes a double tax when I take a distribution on what’s left on the bank’s dividend payout. I take RDM each year based on my age.
Prior correspondence with Ed Slott’s organization confirms this unsuitable situation. I am unable to sell this stock as it is in a small local bank with no buyers coming along and the bank not able, or unwilling, to repurchase these shares. The bank suggested that I find out about replacing the stock with either cash or real estate property and then take the bank stock out of the IRA and hold it personally. Locking up large cash is not feasible but replacing the stock with property I own that can be appraised at the same or higher value could work for me.
Where in the IRS tax codes does it allow me to do this? Or not do this? What else do I need to know since the bank seems unsure how to proceed and if it can be accomplished?
Thank you all ahead of time for reading and responding to this problem.
Permalink Submitted by Alan Spross on Tue, 2010-01-05 23:55
The code does not allow you to substitute different property in an IRA rollover than what you received in the IRA distribution.
While you could distribute the shares in a taxable distribution, there must be a means of valuing them for tax purposes when distributed or if they stay in the TIRA for year end account values on which your RMD is based. But you cannot roll back different property nor can you roll back cash from the sale of these shares (you could if the distribution was from an employer plan though).
The Pub 590 reference is on p 25, “The same property must be rolled over”.
This is the same quandary that occurs when someone has a holding in an IRA and in a taxable account that they wish to “exchange”. This cannot be done. The IRA must sell the property it has and then purchase the other property. The taxable account must likewise sell the property it has and purchase the former IRA holding. They cannot deal directly with each other since you individually are a disqualified person with respect to your IRA. In addition, if you sell a taxable holding at a loss and wish to re purchase it in your IRA within 30 days, you are subject to wash sale rules, which will disallow your taxable loss.
Permalink Submitted by Bruce Steiner on Wed, 2010-01-06 23:01
The American Jobs Creation Act of 2004 (AJCA) allowed a bank to elect S status even if an IRA held shares, but only with respect to shares held by the IRA at the time of the S election.
The tax isn’t really an additional tax. If the bank remained a C corporation, it would have paid tax on all of its income. But by holding your shares in your IRA, you’re losing the benefit of the S election.
Under the prohibited transaction rules of Section 4975, you generally can’t buy assets from, sell assets to, or otherwise deal with your IRA. However, the AJCA allowed an IRA owner who owned shares of a bank that elected S status to purchase the shares from the IRA within 120 days of the S election. From your question, I assume you didn’t take advantage of this window.
It’s possible to apply to the Labor Department for an exemption from the prohibited transaction rules. I don’t know whether your failure to take advantage of the statutory window will affect the decision as to whether to grant an exemption. But it’s something you might want to discuss with your attorney.
Bruce Steiner
Permalink Submitted by mk foss on Tue, 2010-01-12 03:38
I agree with Bruce that it isn’t really an additional tax but since it is taxed at the compressed tax rates, it does seem particularly burdonsome. I agree with Alan that the only way you can get it out is through distributions. An appraisal would be required if you needed RMDs, I hope the bank will cooperate in some way with an appraisal for you.