IRA to Roth Conversion on Worthless Assets
I have a client who converted his IRA to a Roth in 2008 and more in 2010. He used his Roth to purchase a private placement IPO of his own company bank stock of which he was one of the principals. Subsequently, the bank was caught in the credit crisis, taken over by the FDIC and eventually sold for the asset value and the stock became worthless. Between the two years (2008 and 2010) he paid close to $350,000 in federal taxes to do the conversions. Since the bank stock is worthless and will never be worth anything as the entity has been closed, does the client have any recourse to get any of the tax revenue he paid back on what is now a worthless asset? How does he go about this process? Can he deduct any of these losses on his tax return? Any other ideas to try and recover any of this paid tax revenue on a worthless asset?
Permalink Submitted by Alan - IRA critic on Thu, 2013-10-17 02:48
This could be a very complex set of issues. He might qualify for a huge itemized deduction for his loss if he closes all his Roth IRAs. However, a more basic question is whether this stock violated the self dealing limitations if he was an officer of the bank or held a controlling interest in the corporation. Has this issued been analyzed in light of the share purchase, as this appears to have the potential of being a prohibited transaction?? If this occurred there is a complex relationship between the distribution a prohibited transaction would result in, the conversion, and the possible deductible loss in a later year, and the timing of all these actions. More detail is needed to determine the possible results of all this. When was the stock deemed worthless?