He wasn’t Michael, but he’ll always live in memory as Sonny. Unhappily, once again the Corleone gambit is played out, with a $1.5 million unrollable IRA distribution from one of the two (count ’em, two) IRAs which held what Judge Elizabeth A. (“Tex”) Copeland discreetly calls “a portion of the late actor’s wealth”. Estate of James E. Caan, Deceased, Jacaan Administrative Trust, Scott Caan, Trustee, Special Administrator, 161 T. C. 6,  filed 10/18/23, at p. 3.

The IRA trustee was UBS, s/a/k/a Banco Unione Svizzera, and the IRA included membership in a hedge fund.

Judge Tex Copeland judge-‘splains: “IRAs are not limited to holding traditional assets such as cash, bonds, and publicly traded securities; they can still qualify for tax advantages while holding alternative assets, such as non-publicly traded partnership interests like the [hedge fund interest]. However, in that case the Internal Revenue Service (IRS) requires that the IRA’s trustee or custodian report the fair market value of the alternative assets yearly, valued as of December 31 of the preceding year (yearend fair market value).” 161 T. C. 6, at p. 3.

Naturally, neither UBS nor any trustee with a brain will take the risk of guessing what a hedge fund interest is worth, so their deal with the late Sonny required him to tell them. Except he didn’t, so UBS, after a barrage of notices, bailed as trustee and sent the not-then-late Sonny a notice that they bailed, plus a 1099-R, stating FMV of the hedge fund interest based on the prior year’s number, at no extra charge.  UBS claims Treasury regs require this, but Judge Tex Copeland says they don’t, 161 T. C. 6, at p. 9, and gives a run-down on what the IRC and regs do require.

Meantime, the not-yet-late Sonny’s adviser at UBS bailed and went to Merrill Lynch, so the IRAs followed him there. Said adviser cashed out the hedge fund interest, because Merrill’s computer gets indigestion from hedge fund transfers, and deposited the proceeds in the IRA. The then-not-late Sonny seeks a PLR per Section 408(d)(3)(I), extending his 60-day rollover grace period, but only after his return for year at issue is filed and IRS gives him a SNOD.

Judge Tex Copeland says the record does not reflect the late Sonny’s date of death nor domicile, but my sources tell me 7/6/22, in LA CA. And she appoints the trustee of Sonny’s administrative trust as Special Administrator for this case. Might be a good tactic to try for Special Administrator status where State probate is tough and expensive.

IRS bounced the waiver because the hedge fund interest and the cash were not “same property” per Reg section 408(d)(3)(A)(I) and (D).

Special Administrator (SA) wants a BoP shift for unreported income, except UBS issued a 1099-R and the late Sonny’s return for year at issue reported the distribution as nontaxable. And IRS reasonably relies on the 1099-R, so Section 6201(d) is satisfied.

There are trust IRAs (with the financial institution acting as trustee with fiduciary duties to beneficiary) and custodial (hold the loot but the beneficiary decides what to do with it). The parties are free to contract how they want within broad limits. Sonny’s was custodial.

But here it appears to Judge Tex Copeland that the professionals managing Sonny’s affairs miscommunicated, and their testimony they never got UBS’ letters falls flat.

The rollover argument fails because the hedge fund portion (a partial rollover) was done more than a year after the hedge fund interest was constructively received (a notice from UBS that Sonny could do whatever he wanted with the interest). And there were three (count ’em, three) wire transfers of the net hedge fund proceeds. And the transfer was cash, not the interest itself. Only rollovers from 401s (like 401ks) can do a sell-and-fund.

There’s a jumpball over the value of the distributed interest, but IRS took the number from the hedge fund’s K-1 capital account, and the trustee said nothing.

OK, so why a full-dress T. C.?

Well, does Tax Court have jurisdiction to review IRS’ denial of a Section 408(d)(3)(I) waiver? Yes, we do, says Judge Tex Copeland. See my blogpost “The Guys from the Hood,” 4/20/17 for more.

Scope? Abuse of discretion. Result? “Same property” requirement not waivable, and appeals to do equity go nowhere in pore l’il ol’ Tax Court.

I get the feeling some of the late Sonny’s advisers will be getting The Phone Call.

Full disclosure- Merrill Lynch is custodian of my IRA. Needless to say, it holds ever so much less than the late Sonny’s, and no interests in hedge funds.