Self-Directed IRA – Matured Promissory Note
The custodian of my self-directed IRA recently asked for directions on proceeding with a matured promissory note, the lone asset in my account. I advised the custodian that the debtor of the note recently declared bankruptcy, and this debt was discharged, and is therefore uncollectible. I also requested the asset be distributed at $1.
The custodian then requested documentation of collection attempts I had made and/or debtors’ discharge from the bankruptcy. When I provided a copy of the debtor’s discharge, the custodian then said my annual account fees were past due, and before proceeding with the distribution, I would have to bring my dues current. Approximately two weeks later I received a Distribution Notice, indicating that the promissory note asset had been distributed at full market value, approximately $39,000.00. , which obviously has significant tax consequences.
Is this permissible? I understand my obligation to pay the annual dues, but I believe the asset distribution and my past due amounts are two separate transactions. The custodian has every right to penalize me for unpaid dues, but in this instance I am being penalized by the IRS for an early withdrawal, and have no incentive to pay the annual dues owed to the custodian.
Any clarification or advice would be appreciated.
Permalink Submitted by Alan - IRA critic on Fri, 2015-03-20 00:34
Do you have another self directed IRA (with dues current) that would accept a rollover of the note and your documentation and then distribute it to you with the correct valuation? Their 5498 would have to show 39,000 and their 1099R MUCH less. Are you within 60 days and have a rollover available under the new restrictions? The actions of the current custodian are inexcusable, and you could report this to the IRS, but given the current state of affairs at the IRS, I doubt there would be action taken. In fact, the current custodian may be emboldened by this.
Permalink Submitted by Jose Morales on Fri, 2015-03-20 15:30
This scenario seems to be a recurring theme with self directed IRAs and promissory notes. My 2 cents, there is enough blame for this type of mess to go around for all parties involved.There are two somewhat recent tax court rulings on a similar situation regarding promissory notes in an IRA that were distributed. The IRA owners did not report the amounts of the distribution listed on the 1099-R because they disputed the amounts. The tax court ruling was not favorable:http://www.ustaxcourt.gov/InOpHistoric/BerksSum.Guy.SUM.WPD.pdf#xml=http://www.ustaxcourt.gov//UstcInOp/PDFXML.aspx?DocId=9551&Index=E%3a%5cdtSearch%5cInOpHistoric&HitCount=20&hits=14e+198+1ac+2a0+329+370+389+39e+3eb+4b5+514+577+5a6+5cc+61d+747+78c+875+8be+af3+http://www.ustaxcourt.gov/InOpHistoric/GistSum.Guy.SUM.WPD.pdf#xml=http://www.ustaxcourt.gov//UstcInOp/PDFXML.aspx?DocId=9552&Index=E%3a%5cdtSearch%5cInOpHistoric&HitCount=22&hits=14d+197+1ab+298+322+38b+3b5+3d6+418+444+49f+4f6+505+50c+5ac+5d2+729+7d0+869+8b1+ae8+b5a+
Permalink Submitted by Joe Luby on Thu, 2015-03-26 16:26
What you have described is a blatant violation of the tax code by your IRA trustee. IRA trustees are required to report in-kind distributions of assets (i.e., non-cash distributions) at the asset’s fair market value (FMV) as of the date of distribution. Your post states that you provided the IRA trustee evidence from the bankruptcy court indicating that the debt was discharged and therefore uncollectible. Under such circumstances the IRA trustee has no legitimate way to support their reporting of the original loan amount ($39,000) as the current FMV on the date of distribution. At a minimum, they are violating the rules related to how they are to report this transaction to you and the IRS on Form 1099R.
Permalink Submitted by Kirk Chisholm on Wed, 2015-07-15 15:09
You should contact the custodian and have them fix it. If it is still in the same tax year, this is an easy enough fix for them. You should contact an attorney or financial advisor who specialize in this area, they might be able to help you fix this problem.