According to Law360, the Tax Court ruled that estate of actor James Caan, who played Sonny Corleone in "The Godfather," owes income taxes on $1.5 million from a retirement account that was emptied early and then liquidated while being overseen by Caan's advisers.
An individual retirement account belonging to Caan, who died in July 2022, included a non-publicly traded partnership interest that was held in custody by UBS and which is taxable after unanswered letters from the bank triggered its full distribution to Caan in 2015.
The estate is also ineligible for a waiver of the 60-day deadline for rolling the distribution into another IRA, the court said, upholding a determination by the Internal Revenue Service. A year after UBS distributed the account, one of Caan's advisers ordered the asset liquidated and then transferred its cash value into another IRA, making it ineligible for tax-free treatment under Internal Revenue Code Section 408.
"This Case Is A Quintessential Example Of The Pitfalls
Of Holding Nontraditional, Non-Publicly Traded Assets
In An IRA," Tax Court Judge Elizabeth A.
Copeland wrote for the court. "Failure to follow the labyrinth of rules surrounding these assets can mean forfeiting their tax-advantaged status."
According to Caan's custodial agreement with UBS, he was required to provide the bank with the fair market value of the partnership interest every year or the bank would drop its custody and distribute its contents back to him. When Caan failed to give the bank the 2014 value by the due date in January 2015, the bank tried to obtain the value from the hedge fund and then sent two letters, in August and October, to the California firm that served as Caan's business manager. The final letter warned that the account was about to be distributed and outlined the tax implications, the decision said.
Caan's advisers testified that they never saw the letters, that UBS must not have sent them, and that they didn't know about the distribution, according to the decision. The bank made a so-called phantom distribution by resigning as custodian and purportedly distributing the interest without telling Caan, the advisers said.
Judge Copeland found the advisers' testimony lacked credibility, pointing out that they had received all previous mail for Caan from UBS and would have noticed when suddenly account statements stopped coming, according to the decision.
"It Seems Far More Likely That There Was Simply A Lack
Of Communication And Coordination Between The Professionals Overseeing Mr. Caan's Affairs,"
Judge Copeland Said.
Caan reported the partnership interest distribution for 2015 on his tax return but claimed it was nontaxable. Based on the bank's initial value of the partnership interest at nearly $2 million, rather than the $1.5 million both Caan and the IRS eventually agreed was more accurate, the IRS issued a notice of deficiency for $780,000 for 2015 and an accuracy-related penalty of $156,000, according to the decision.
In addition to petitioning the Tax Court for a redetermination of the deficiency, Caan asked the agency to issue a private letter ruling giving him an extension on the 60-day rollover period. One of Caan's advisers liquidated the partnership interest to move it to a different financial institution after realizing it couldn't be transferred through a national automated account transfer service, according to the decision.
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