Forced Distribution of Illiquid IRA asset from Custodian
Hi … I have a situation where I (and others I know) am invested in an LP within an IRA held at JPMorgan Clearing. It has been there for years (used to be Bear Stearns).
The LP (the hedge fund) is now in liquidation and under investigation. We all assume its worthless. But the last known value was Dec 31 , 2010 and that value reflects in our IRA brokerage statements.
JPMorgan no longer wants to act as custodian and has alerted us that they will “DISTRIBUTE” the LP out of the IRA.
Essentially I will get (AND THE IRS WILL GET) a 1099 saying I took an IRA DISTRIBUTION of (in my case) $1/2million. When in fact the fund is worthless.
Question is … is the IRS going to expect me to pay penalty/taxes/etc on money I didnt really receive ???
How does one explain this to the IRS?
Has anyone ever seen a situation like this before ?
Thanks so much for reading.
Jonathan
Permalink Submitted by Alan Spross on Mon, 2012-01-09 20:34
An IRA custodian has a right to resign and to distribute assets. If JPM is not cooperating by finding another self directed custodian to accept a transfer, then you need to attempt to locate one yourself to transfer the shares to, whatever they may be worth. The 1099R is meaningless if you can transfer the shares/units to a new custodian as a rollover within 60 days. Further, the IRS will extend the 60 day period to complete the rollover upon request and your ability to show due diligence in attempting to find a new custodian. This might be difficult if the shares are worth little, so you should document your attempts to locate a custodian.
If you can complete a rollover, then the amount shown on the 1099R is of no consequence and you will not be taxed. Part of the difficulty in locating a new custodian is the obligation of the any custodian to determine and report a value on these shares each 12/31 of Form 5498. It is JPM’s responsibility to do this as of 12/31/2011 and that is another issue since it directly affects what the IRS will expect for RMDs of IRA owners subject to RMDs.
If you are not subject to RMDs, finding a new custodian provides time to work out the valuation problem.
Permalink Submitted by Jonathan Gilbert on Tue, 2012-01-10 01:27
Thanks so much for your thoughtful reply. I will take all your advice.
BUT …. what id we CAN NOT find a new custodian .. ever.
Then does the 1099r have “meaning” ? What will be my “story” then ?
Permalink Submitted by mk foss on Tue, 2012-01-10 03:06
When individuals receive a Form 1099 of any kind where they are disputing the amount or treatment of the item, tax preparers often add the amount on the tax return where it would normally go and then subtract the amount on the other income line with the description “see attached”. On an attachment you would describe why you were adjusting the amount or the tax treatment of the item. If you do this, you should file your return on paper so that the IRS can read the explanation.
Sometimes you will not hear anything more. In some situations, if there’s an IRS inquiry you can respond by saying “see this attachment to the original return filed.”
Hopefully, you’ll find a custodian and won’t need this advice.
Permalink Submitted by Alan Spross on Tue, 2012-01-10 03:10
FInding a custodian may be easier if the shares have value. And if they do not have value, then the 1099R should be challenged. You may have to investigate whether any shareholders are combining their resources to hire counsel in this case to address the various issues and put some pressure on JPM. Govt regulatory agencies may also come into play.
You might also contact some large self directed IRA custodians to see if you can get any advice from them. Guidant and Pensco are two such custodians.
NOTE: These are just some ideas. I have no experience dealing with this type of situation.
Permalink Submitted by Jonathan Gilbert on Tue, 2012-01-10 22:31
Thank You BOTH very much!