Recent cases and rulings.

• Author: O'Driscoll, David
• Position: Tax Trends

IN THIS DEPARTMENT

Employee Benefits & Pensions

* IRA owner can act as conduit for IRA investments: Ancira, TC; p. 798.

Procedure & Administration

* IRS did not prove six-year limitations period: Hoffman, TC; p. 799.

The reports of cases, rulings, etc., herein, except for the Reflections, are edited versions of the relevant court opinion, published ruling, etc.

* This development, concerning related matters, is covered in the Reflections to the report of the principal item.

EMPLOYEE BENEFITS & PENSIONS

IRA Owner Can Act as Conduit for IRA Investments

During 1998, M maintained a self-directed IRA. P was the IRA custodian; H was the investment adviser. M could request that the IRA funds be invested in specific assets (specific mutual funds, stocks, etc.). These requests were typically made by telephone to H; P would then execute them.

In September 1998, M requested that his IRA invest $40,000 in the stock of S Corp. H informed M that P would not purchase the stock because it was not publicly traded. M contacted S and was informed that its stock was available for direct purchase. M and H then determined that the IRA could invest in S if P issued a check payable directly to S. H gave M a" Distribution Request Form" from P to facilitate issuance of the check. The form stated that its use would result in a distribution reportable to the IRS. On Sept. 14, 1998, M executed the form and P issued a $40,000 check payable to S, drawn on M's IRA account. P sent the check to M, who forwarded it directly to S.

On Dec. 1, 1998, S issued a stock certificate stating that M was the owner of 714.28 shares. For reasons that are not clear, the stock was not immediately transferred to P or to M, who was unaware that P did not have the stock until much later. When M learned that the stock had not been transferred to P (after a deficiency notice was issued), he contacted S and had the certificate sent to him. M then delivered the stock to P; the stock was placed in M's IRA account. P issued M a Form 1099-R, indicating that a $40,000 distribution had been made to M, but M did not report this $40,000 transaction on his 1998 return.

The IRS determined that the $40,000 check issued by P to M was an IRA distribution includible in income under Secs. 408(d) and 72, and imposed a Sec. 72(t) 10% penalty tax.

Analysis

Sec. 408(d)(1) provides that "any amount paid or distributed out of an individual retirement plan shall be included in gross income by the ... distributee...