Refusal to grant 60-day IRA rollover waiver upheld. (individual retirement account)

• Author: Beavers, James A.
• Date: 01 January 2024

January 1, 2024

The Tax Court held it could review, under the abuse-of-discretion standard, the IRS's refusal to issue a private letter ruling granting a waiver of the Sec. 408(d)(3)(1) 60-day limit for rolling over an IRA distribution. The court further held that the IRS's refusal to grant a waiver for actor James Caan's distribution of a partnership interest from an IRA was not an abuse of its discretion.

Background

Caan was best known for playing Sonny Corleone in "The Godfather," released in 1972, for which he received an Oscar nomination. Over his long acting career, from 1961 until his death in 2022, he had roles in over 100 films and television series.

In 2015, Caan held two IRAs with the Swiss bank UBS. Both IRAs were governed by a custodial agreement between Caan and UBS. Under that agreement, every year by a certain date, Caan was required to provide UBS with the year-end fair market value (FMV) of any non-publicly traded investment that UBS allowed Caan to hold in the IRAs. If Caan did not provide the information, UBS would distribute the investment to Caan and issue an IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the investment's last available value.

One of the IRAs held a partnership interest (P&A interest) in the P&A Fund, a hedge fund. Caan did not provide UBS the FMV for tax year 2015 as required by the custodial agreement, so UBS distributed the P&A interest from the IRA and notified Caan and his financial advisers of the distribution under the relevant terms of the custodial agreement.

In June 2015, Caan's investment adviser, Michael Margiotta, who initially worked for UBS, resigned from the company and began working for Merrill Lynch. In October 2015, Caan transferred the UBS IRAs to Merrill Lynch under Margiotta's management.

All assets in both IRAs were transferred to a single IRA at Merrill Lynch, except for the P&A interest. In 2016, UBS issued a Form 1099-R to Caan, reporting that the P&A interest was valued at $1, 910, 903, which was its 2013 FMV and the last FMV known to UBS. More than a year after the notification from UBS, Margiotta, acting on Caan's behalf, liquidated the P&A interest and contributed the cash proceeds from the liquidation to Caan's IRA at Merrill Lynch.

On his 2015 income tax return, Caan reported the IRA distribution but claimed that it was nontaxable as a rollover contribution under Sec. 408(d)(3). The IRS disagreed with this treatment of the distribution and issued a notice of deficiency to Caan, determining that there was a taxable distribution and an...