A dispute concerning the 2015 income tax return of actor James Caan, best known for playing Sonny Corleone in The Godfather, remained unresolved when he died in 2022. The Tax Court has now ruled, in a case that has a message for IRA owners.
Caan’s IRA held a partnership interest. The rules for IRAs require annual valuation of assets for which market prices are not readily available. The financial institution maintaining the IRA did not receive the information required for a 2014 year-end valuation. In response, it notified Caan that it was transferring the partnership interest out of the IRA, and reported this event as an IRA distribution.
Around the same time, Caan transferred his IRA assets to another financial institution. Rather than transfer the partnership interest, his advisor had it liquidated and transferred the proceeds to the new IRA. Caan’s 2015 income tax return reported the distribution of the partnership interest but treated it as a tax-free rollover. The IRS disagreed, saying the rollover requirements were not met.
The case involved a number of issues, but the IRS prevailed on the central question of whether a valid rollover occurred, making Caan’s estate liable for tax on a seven-figure IRA distribution. The court succinctly stated the main lesson to be learned:
This case is a quintessential example of the pitfalls of holding nontraditional, non-publicly traded assets in an IRA. Failure to follow the labyrinth of rules surrounding these assets can mean forfeiting their tax-advantaged status.