Trustee resigned, issued $100k 1099-R on $0 value IRA

Submitted by Anon User on Sat, 2020-10-31 17:19

An attorney I work with has a client with the following scenario and asked me for any guidance I could provide. I haven’t seen anything like this before.

Fifteen to tweny years ago, client bought a non-traded stock for $100k through a self-directed IRA at utilizing a trustee specializing in non-traditional assets. The stock issuing company appears to be defunct for some time now, although the phone still rings and emails appear to be received, but neither are answered. There has been no communication from the company regarding business activity or valuation in many years. The client, assuming the value to be $0, stopped paying the IRA custodial fees. After five years of this, the custodian (understandably) resigned and issued a 1099-R for the last reported value of the stock, which was $100k. The period for a 60-day rollover has long passed. Additionally, when the client tried to open up a new IRA with another trustee, they passed, noting the non-payment of fees with the prior trustee. Client now has reportable income of $100k based on an asset that is presumably worth $0, but for which there is no confirmation. Obviously, A LOT of lessons to be learned here.

I would appreciate any suggestions on how to proceed in an effort to eliminate a large tax bill on what looks to be $0-value asset.

Thank you in advance for any guidance.

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Permalink Submitted by Alan - IRA critic on Sun, 2020-11-01 23:34

Client should start by checking the IRA agreement with respect to the terms stated with respect to custodian resignation. Custodian should have been issuing a 5498 every year reporting the account value and type of holding as required by the IRS. If the custodian is not able to determine the value, they can ask the client for assistance, and if client has been ignoring such requests or tossing explanatory letters, he has dug himself a deep hole. Many self directed custodian will encourage a transfer to another custodian before resigning, since they can be rid of the client and the assets by a direct transfer. It does not seem likely that the custodian who specializes in such holdings would violate the term of their own agreement. The following article explains further on this topic:
https://www.pension-specialists.com/hottopics/2018ResigningCustodian.htm
Most likely the client will now have to take up this manner directly with the IRS, and will probably have to pay for an accounting specialist to establish the value of the holding on whatever date the distribution was made.