Can this be done?
I have a client who has his IRA in an instrument that is not liquid and is questionable whether we will recover anything. The owner is in jail and the Department of Justice is prosecuting and the hope is that there will be a settlement in the case. This happens to be something called a Universal Lease if anyone is familiar with it. This is causing obvious problems with RMD’s since no rental income is being paid so no money for RMD’s. I was wondering if we could make a case to write the asset’s value down to $1,000, convert it to a Roth, and if anything is recovered years from now it would be non-taxable under the Roth. The value of his lease is still showing $80,494 which is what he then has to take his RMD on. Any thoughts?
Bruce
Permalink Submitted by Alan Spross on Mon, 2008-10-20 19:26
Is his prosecution related to the universal lease situation, and is the following link applicable to him in any respect?
http://www.sec.gov/news/press/2007/2007-172.htm
Who is the IRA custodian?
Converting assets to a Roth at depressed valuations is also a target of the IRS. Did the IRA custodian report a 2007 year end value to the IRS on Form 5498?
Permalink Submitted by Bruce Vangsnes on Mon, 2008-10-20 21:07
Yes you have the case right. The custodian has changed several times, but yes they have continually reported the original lease value as the 12/31/xx value, but income has not been paid since early 2005 and nothing will be paid unless there is a settlement. The custodian has recommended taking an “in-kind” distribution for the RMD where they wouldn’t send out money, but they would recognize that the client took the RMD and show that $ amount in a non-qualified account. So if money comes back, some would show that taxes have been paid.
We did discuss writing the asset down to zero with the custodian and if the money ever comes back it would be taxable income, but I never discussed reducing the value and converting to Roth.
Permalink Submitted by Bruce Vangsnes on Tue, 2008-10-21 19:41
Does anyone else have the courage to take a stab at this one? Any thoughts are greatly appreciated.
BV
Permalink Submitted by Alan Spross on Wed, 2008-10-22 00:57
If client has no other IRAs from which to satisfy the RMD, perhaps it is best to pass on the RMD until this case is settled, and requesting the IRS to excuse the penalty due to reasonable cause (RC). The IRS has been quite flexible on this and this case appears to justify their consideration.
You might also check with the DOJ to see if there is any known buyer for whatever residual value remains including any disgorgement or other settlement. Finally, perhaps someone is pursuing a PLR from the IRS on behalf of all the victims of this fraud. It seems that any resolution would have to include prior years when illiquidity first surfaced on these leases.
Permalink Submitted by Bruce Vangsnes on Wed, 2008-10-22 02:28
Thank you for your comments. This client does have another IRA in an annuity that only allows him to pull the interest or the RMD whichever is greater. If he is forced to pull the RMD for the lease from this, he pays a penalty for the withdrawal from the annuity. It’s a bad situation, that will hopefully come to a reasonable solution, I just wondered about writing it down in value and converting to Roth. I thought it might have some possibility. Apparently not.
Permalink Submitted by Alan Spross on Wed, 2008-10-22 03:24
It’s the write down rather than the conversion that is the problem, as I do not know on what reasonable basis a value could be determined. Even if it was converted at the original value, only the amount that is in excess of the RMD could be converted because an RMD is not eligible for conversion. The conversion would eliminate next year’s RMD, but not this year’s. Perhaps there is also a couple prior years with no RMD taken.
Then there is the matter of taxes since he certainly does not want to pay taxes on the original value, whether converted or not. It’s really a rather ugly situation.