IRA valuation of Private Placement stock
I have a client who invested in a Private Placement of stock in a traditional IRA. The Custodian traditionally gave an annual valuation of ‘N/A’. The taxpayer converted the traditional to a Roth at the end of 2010, 2-4 years after purchase, and the Custodian suddenly valued the stock at or near the value of a subsequent PPM, which was not available to my client. Additionally, my client’s stock continues to be subject to a non-transfer agreement. We have tried to get the company who issued the stock to get the Custodian to reduce the valuation to original purchase price (or zero, since it cannot be transferred and the company has a negative net worth). Unfortunately, it is far past the date for recharacterization. The only thing we can think of to do, with the 2011 tax return due soon, is to file the return, matching the 1099-R in Box 15a but use some other value on 15b, with explanation attached.
Can anyone give us any guidance on any aspect of this problem?
Thank you.
Permalink Submitted by Alan Spross on Wed, 2012-10-03 18:33
The “NA” that showed prior to the conversion should have been a huge warning sign.
Unfortuneately, the only way to resolve this is to present enough evidence of a valuation error to the custodian for revision, but all the time that has passed since the conversion date makes that highly unlikely to happen. As for reporting less on line 15b, it may be worth a try, but that explanation would have to be extremely compelling for the IRS to buy into it.
I can’t think of any other action that could improve the odds of a lower tax bill. Of course, while there is little time left to file, amended return options remain if the custodian can be convinced after the extended due date.
Permalink Submitted by Kim Smith on Mon, 2012-10-08 13:25
Thank you, Alan. That’s the way it appears to me too, using IRS From 8275. We will continue to try to get it amended by Custodian even after filing deadline, to ‘head them off at the pass’. FYI, I received a voice mail fromthe investment adviser suggesting that the original IRA may have been after tax, which would reduce the problem substantially.
Permalink Submitted by Joe Luby on Tue, 2012-11-20 18:42
Sorry this post is after the October filing date, but hopefully the information will still be useful. The custodian is responsible for reporting the transaction using the FMV of the asset at the time of conversion. It sounds from your post that they used an arbitrary PPM share valuation created by the company as part of an additional capital raise dated after the time of the conversion. Withouth further information, it is impossible to say whether this value was equivalent to FMV for tax reporting purposes at the time of the Roth conversion, but it’s highly doubtful.
The best option is always to get the custodian to correct the valuation and issue a corrected Form 1099R. The second option is to obtain a FMV appraisal of the assets as of the date of conversion to support your client’s position that the Form 1099R is incorrect as filed. If the amounts involved are substantial, it may be very worthwhile to consider filing an amended return using a FMV appraisal to support the client’s position. For example, assume the PPM value reported was $500,000 while a properly conducted FMV analysis shows the value was actually $100,000 at the time of conversion. Obviously, filing the amended return and establishing the correct valuation would result in substantial tax savings/refund. Also, you may be interested to know that per the Internal Revenue Manual, custodians “may not declare the value of certain assets as indeterminable” when reporting IRA valuations which would seem to have been the case in the 2-4 year period when the asset value was shown as “N/A.”