Estate of James E. Caan, Jacaan Administrative Trust, Scott Caan, Trustee, Special Administrator ( 2023 )

United States Tax Court
161 T.C. No. 6ESTATE OF JAMES E. CAAN, DECEASED, JACAAN
ADMINISTRATIVE TRUST, SCOTT CAAN, TRUSTEE, SPECIAL
ADMINISTRATOR,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 14783-18. Filed October 18, 2023.
—————
Decedent (D) held two IRAs with UBS. Both IRAs
were governed by a custodial agreement between D and
UBS. One of the IRAs held a partnership interest (P&A
Interest) in the P&A Fund, a hedge fund. The custodial
agreement between D and UBS stated that it was D’s
responsibility to provide UBS with the P&A Interest’s
yearend fair market value (FMV) every year. When D did
not satisfy this responsibility for tax year 2015, UBS
notified D that it had distributed the P&A Interest to him
pursuant to the relevant terms of the custodial agreement.
P claims such a distribution did not occur.
UBS issued Form 1099–R to D, reporting a
distribution. UBS valued the P&A Interest at $1,910,903,
which was its 2013 FMV and the last FMV known to UBS.
(R admitted in his posttrial briefs that UBS misvalued the
P&A Interest.) More than a year after the notification from
UBS, D’s financial advisor, acting on D’s behalf, liquidated
the P&A Interest and contributed the cash proceeds to D’s
IRA at ML, an investment manager.
On his 2015 income tax return, D reported an IRA
distribution but claimed that it was nontaxable as a
Served 10/18/23
2
rollover contribution under I.R.C. § 408(d)(3). R disagreed
and issued a notice of deficiency, determining that there
was a taxable distribution. D then requested that R issue
a private letter ruling to waive the 60-day period for
rollover contributions. See I.R.C. § 408(d)(3)(A)(i), (I). D
also filed a Petition with this Court for redetermination of
his 2015 income tax deficiency. See I.R.C. § 6213(a).
During the pendency of this case, R declined to issue the
private letter ruling, stating that the 60-day period could
not be waived because D was required to contribute the
P&A Interest (not cash) to ML in order for the distribution
to be nontaxable as a rollover contribution. See I.R.C.
§ 408(d)(3)(A)(i); Lemishow v. Commissioner, 110 T.C. 110,
113 (1998), supplemented by 110 T.C. 346 (1998); Treas.
Reg. § 1.408-4(b)(1).
Held: The P&A Interest was distributed to D in tax
year 2015 within the meaning of I.R.C. § 408(d)(1).
Held, further, the P&A Interest was not contributed
to ML in a manner that would qualify as a rollover
contribution under I.R.C. § 408(d)(3).
Held, further, under I.R.C. § 408(d)(1), D is taxable
for 2015 on the P&A Interest’s value at the time of the
distribution.
Held, further, the value of the P&A Interest at the
time of the distribution was $1,548,010.
Held, further, we have jurisdiction under I.R.C.
§ 6213(a) to review R’s denial of D’s I.R.C. § 408(d)(3)(I)
request for a waiver of the 60-day period for rollover
contributions.
Held, further, we review a denial of a request for a
waiver under I.R.C. § 408(d)(3)(I) for abuse of discretion.
Held, further, R did not abuse his discretion in
denying P a waiver under I.R.C. § 408(d)(3)(I).
—————
3
Steven Ray Mather, for petitioner.
Mark A. Nelson and Sarah A. Herson, for respondent.
COPELAND, Judge: James E. Caan was an actor whose
successful Hollywood and television career lasted over six decades and
proved very lucrative. Throughout his career Mr. Caan focused on his
acting roles, leaving to his business managers and financial advisors the
tasks of managing his wealth and his day-to-day financial affairs.
This case concerns a portion of the late actor’s wealth, namely,
two individual retirement accounts (IRAs) that he held at the Union
Bank of Switzerland (UBS). One IRA held cash, mutual funds, and stock
in exchange-traded funds. The other held similar assets as well as a
partnership interest in P&A Multi-Sector Fund, L.P., a hedge fund (P&A
Interest and P&A Fund, respectively).
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 P&A 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). See I.R.C. § 408(i); 1 Treas. Reg. § 1.408-5; 2014
Instructions for Forms 1099–R and 5498, at 20, 22 (directing trustees
and custodians to report the yearend fair market value of IRA assets
“that are not readily tradable on an established US or foreign securities
market or option exchange, or that do not have a readily available [fair
market value]”). The custodial agreement that governed Mr. Caan’s two
IRAs at UBS reflected that requirement; it was Mr. Caan’s
responsibility to provide UBS with the yearend fair market value of the
P&A Interest every year. In 2015 Mr. Caan did not provide UBS with
the P&A Interest’s 2014 yearend fair market value; as a result, UBS
refused to continue serving as the P&A Interest’s custodian and sent a
letter to Mr. Caan notifying him of a distribution of the P&A Interest.
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and Rule references are to the Tax Court Rules of Practice and
Procedure.
4
UBS then issued Mr. Caan a Form 1099–R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., which reported to the IRS a distribution of the
P&A Interest. UBS used the P&A Interest’s 2013 yearend fair market
value, which was the last yearend fair market value known to UBS, as
the value of the distribution.
Also in 2015, but before UBS sent the distribution letter to Mr.
Caan, the wealth management advisor who managed both of Mr. Caan’s
IRAs resigned from UBS and began a similar role at Merrill Lynch,
Pierce, Fenner, and Smith, Inc. (Merrill Lynch). That advisor—Michael
Margiotta—then convinced Mr. Caan to transfer both IRAs to Merrill
Lynch under his management. All assets in both IRAs, except for the
P&A Interest, were subsequently transferred to a single IRA at Merrill
Lynch through the Automated Customer Account Transfer Service
(ACATS). 2 Since the P&A Interest was ineligible for transfer through
ACATS, Mr. Margiotta directed the P&A Fund to liquidate the P&A
Interest and transfer the cash proceeds to the Merrill Lynch IRA. That
liquidation and cash transfer did not occur until almost a year after UBS
notified Mr. Caan that it had distributed the P&A Interest.
On his federal income tax return for tax year 2015, Mr. Caan
reported a distribution of the P&A Interest but claimed that it was
nontaxable. The Commissioner of Internal Revenue (Commissioner)
disagreed with that position and, in a notice of deficiency dated April 30,
2018, determined an income tax deficiency of $779,915 for tax year 2015
and a section 6662(a) accuracy-related penalty of $155,983. Mr. Caan
then filed a Petition with this Court for redetermination of his 2015
income tax deficiency. See I.R.C. § 6213(a). Shortly before filing that
Petition, Mr. Caan requested a private letter ruling from the IRS
granting him a waiver of the 60-day period for rollovers of IRA
distributions (60-day rollover period). See I.R.C. § 408(d)(3)(I). The IRS
denied that request on the grounds that Mr. Caan did not meet the
“same property” requirement in section 408(d)(3)(A)(i) and (D). See
Lemishow v. Commissioner, 110 T.C. 110, 113 (1998) (applying the
“same property” requirement of section 408(d)(3) under similar
2 The ACATS is a service run by the National Securities Clearing Corporation.
It “automates, expedites, and standardizes procedures for the transfer of many types
of securities . . . in a customer account from one brokerage firm and/or bank to another.”
Office of the Comptroller of the Currency, Asset Management Operations and Controls
41 (2011), https://www.occ.treas.gov/publications-and-resources/publications/
comptrollers-handbook/files/asset-mgmt-ops-controls/pub-ch-asset-mgmt-ops-controls
.pdf.
5
circumstances to deny the taxpayer’s claim of a tax-free rollover),
supplemented by 110 T.C. 346 (1998).
We must decide whether UBS distributed the P&A Interest to Mr.
Caan in tax year 2015, and if so, whether that distribution was taxable.
FINDINGS OF FACT
Mr. Caan resided in California both when he filed his Petition
(July 30, 2018) and at his date of death (July 6, 2022). His will listed
the Jacaan Administrative Trust, dated November 17, 1993 (Trust), as
the sole beneficiary of his estate. Scott Caan is the Trust’s trustee. As
a result, in an Order dated November 7, 2022, we appointed Scott Caan
the Special Administrator of Mr. Caan’s estate for purposes of this case
only. The record does not reflect Scott Caan’s state of domicile at the
time the Petition was filed nor at Mr. Caan’s date of death.
I. Background
A. James Caan
Mr. Caan was an actor who rose to prominence playing Sonny
Corleone in The Godfather, released in 1972. He had a long and
distinguished career in both film and television, with acting roles in over
100 films and television series from 1961 until his death in 2022. Such
an active career created substantial demands on his time and caused
him to rely on outside professional assistance for many aspects of his
personal life.
B. Philpott, Bills, Stoll, and Meeks, LLP
One of the areas of his personal life for which Mr. Caan sought
professional assistance was management of his financial affairs. From
1999 until at least the date of trial, Philpott, Bills, Stoll, and Meeks, LLP
(PBSM), a firm based in Encino, California, served as his business
manager. PBSM’s duties included maintaining Mr. Caan’s bank
accounts, sending and receiving correspondence, paying his bills,
preparing his federal and state income tax returns, representing him
before the IRS and any relevant state tax agencies, and acting as liaison
between Mr. Caan and the various attorneys, financial advisors,
insurance agents, and other professionals who assisted him.
As part of its duties, PBSM would receive all of Mr. Caan’s mail.
A PBSM employee would open the mail and determine its character;
6
personal mail would be forwarded to Mr. Caan, while mail pertaining to
his financial affairs would be forwarded to the PBSM employee in charge
of his account. At some point, the financial affairs mail was also scanned
into PBSM’s document retention system. From 2002 to 2017 Enza Cohn
was the PBSM employee in charge of managing Mr. Caan’s account.
After she left PBSM in 2017, that role passed to David Butler. Ms. Cohn
and Mr. Butler are both certified public accountants.
C. Michael Margiotta
Michael Margiotta is a wealth management advisor who first met
Mr. Caan in 2001 while working for Credit Suisse. At the time, Mr.
Caan maintained two IRAs at Credit Suisse managed by his cousin, Paul
Caan. During 2001 Paul Caan decided to transition from managing
investments for wealthy individuals to managing institutional
investments, and he transferred management of the IRAs to Mr.
Margiotta.
Mr. Margiotta worked at Credit Suisse until 2004. He then
worked at Smith Barney & Co. until 2008, UBS until June 2015, and
Merrill Lynch up through the date of trial.
II. Individual Retirement Accounts
A. UBS
During 2008 UBS became the custodian of the two IRAs owned
by Mr. Caan; from 2008 to June 2015 Mr. Margiotta managed those
IRAs. One IRA held a portfolio of cash, mutual funds, and exchange-
traded funds; the other IRA held a similar portfolio in addition to the
P&A Interest.
1. Custodianship
A custodial agreement between UBS and Mr. Caan governed both
IRAs. Article IV of the custodial agreement, titled “Investments,” states,
in pertinent part:
[T]he Client [Mr. Caan] acknowledges, agrees,
understands and warrants the following with respect to
any non-publicly traded investment (the “Investment”) the
Custodian [UBS] allows the Client to hold in the IRA:
....
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The Client must furnish to the Custodian in writing the
fair market value of each Investment annually by the 15th
day of each January, valued as of the preceding December
31st, and within twenty days of any other written request
from the Custodian, valued as of the date specified in such
request. The Client acknowledges, understands and
agrees that a statement that the fair market value is
undeterminable, or that cost basis should be used is not
acceptable and the Client agrees that the fair market value
furnished to the Custodian will be obtained from the issuer
of the Investment (which includes the general partner or
managing member thereof). The Client acknowledges,
understands and agrees that if the issuer is unable or
unwilling to provide a fair market value, the Client shall
obtain the fair market value from an independent,
qualified appraiser and the valuation shall be furnished on
the letterhead of the person providing the valuation. The
Client acknowledges, understands and agrees that the
Custodian shall have no obligation to investigate or
determine whether the fair market value so furnished is
the correct fair market value (without regard to any actual
or constructive knowledge that the Custodian may
otherwise have), but if the Custodian otherwise has a
different value for such Investment, the Custodian may use
such other value in its reports to the Client and to the
Internal Revenue Service if the Custodian (in its sole
discretion) so chooses. The Client acknowledges,
understands and agrees that the Custodian shall rely upon
the Client’s continuing attention, and timely performance,
of this responsibility. The Client acknowledges,
understands and agrees that if the Custodian does not
receive a fair market value as of the preceding December
31, the Custodian shall distribute the Investment to the
Client and issue an IRS Form 1099–R for the last available
value of the Investment.
(The P&A Interest was considered a “non-publicly traded investment”
under the custodial agreement.) The custodial agreement also provides
that it “shall be construed and administered in accordance with the laws
of the State of New York, without regard to the choice of law principles
thereof.”
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2. UBS’s Requests for the P&A Interest’s 2014 Yearend
Fair Market Value, Resignation, and Notification of
Distribution
In March 2015 UBS sent a letter addressed to the P&A Fund’s
operations manager, requesting the P&A Interest’s 2014 yearend fair
market value. It did not receive a response from the P&A Fund (which
claims that it never received the letter).
In August 2015 UBS sent a letter addressed to the “James E Caan
Traditional IRA,” in care of PBSM, at PBSM’s address in Encino,
California. The letter stated, in pertinent part:
As the custodian for your IRA, we [UBS] are required by
the U.S. Department of the Treasury to obtain a yearend
fair market value (FMV) for each investment held in your
UBS IRA. As a condition to UBS holding [the P&A
Interest] in your IRA, you agreed to obtain the FMV each
year. We attempted to contact the issuer of the investment,
but we have not yet received the 2014 FMV for the [P&A
Interest].
Our request
Please contact the issuer(s) directly and request that they
complete the attached form providing the 2014 FMV of the
[P&A Interest] . . . by September 21, 2015. . . . .
If you are unable to obtain a value from the issuer, you may
use a qualified independent appraiser to provide the fair
market value. We cannot accept fair market values that
are not provided by the issuer or an appraiser.
Why this is important
To remain compliant with Treasury regulations, we will
need to resign as IRA custodian of the investment if
we do not receive the fair market value of [the P&A
Interest]. The resignation will be recorded as an in-kind
distribution; there will be no actual disbursement of funds
directly to you. We will send you an IRS Form 1099–R in
January 2016 based on the most recent value of the [P&A
Interest] in our records.
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UBS did not receive a response to that letter from either Mr. Caan or
PBSM.
In October 2015 UBS sent a notice addressed to the “James E
Caan Traditional IRA,” in care of PBSM, at PBSM’s address. The notice
advised Mr. Caan that UBS had not received a response to its August
2015 letter. The notice warned that as a result, UBS would resign as
the P&A Interest’s custodian on November 23, 2015. Neither Mr. Caan
nor PBSM responded to that notice.
In December 2015 UBS sent a confirmation letter addressed to
the “James E Caan Traditional IRA,” in care of PBSM, at PBSM’s
address. That letter stated, in pertinent part:
As a follow-up to our October 21, 2015 correspondence to
you [Mr. Caan], we [UBS] did not receive the 2014 yearend
fair market value of [the P&A Interest] . . . . As a result,
we have distributed the [the P&A Interest] to you as
required by U.S. Treasury regulations.[3]
....
The distribution has been recorded as an in-kind
distribution; there has been no actual disbursement of
funds directly to you. We will send you an IRS Form 1099–
R in January 2016 based on the most recent value of the
[P&A Interest in our records] . . . . When you file your
taxes, this distribution may need to be reported as taxable
3 No regulation directly imposes such a requirement. However, if an IRA
trustee or custodian cannot provide an updated fair market value of an alternative
investment, it is subject to penalties. See I.R.C. § 6721(a) (imposing a penalty of $250
for “each failure” to timely file an information return or to accurately include all
required information); I.R.C. § 6693(a) (imposing a $50 penalty for “each failure” to
comply with certain reporting requirements for IRAs and other tax-favored accounts).
Section 408(i) requires IRA trustees and custodians to file reports with the Secretary
of the Treasury “with respect to contributions (and the years to which they relate),
distributions aggregating $10 or more in any calendar year, and such other matters as
the Secretary may require.” (Emphasis added.) See also Treas. Reg. § 1.408-5(b)(5)
(requiring IRA trustees and custodians to report to the IRS “[s]uch other information
as the Commissioner may require”). The 2014 Instructions for Forms 1099–R and
5498, at 20, directed IRA trustees and custodians to report the 2014 yearend fair
market value of “[a]ssets held in an IRA that are not readily tradable on an established
US or foreign securities market or option exchange, or that do not have a readily
available [fair market value].”
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income for 2015; it may also be subject to a 10% early
distribution penalty.
Please consult with your tax advisor regarding your
personal circumstances. . . . You will now need to contact
the issuer of the investment [i.e., the P&A Fund] and
instruct them to re-register the [P&A Interest] into your
individual name . . . .
....
You have only 60 days from our November 25
resignation to complete a rollover to a new IRA
trustee or custodian, or the distribution may be
taxable to you. As we previously noted, there are non-
UBS affiliated or endorsed IRA trust companies that may
be willing to hold [the P&A Interest]. Two firms that have
indicated to us an interest in holding [assets like the P&A
Interest] in IRAs are Millenium Trust Company and
PENSCO Trust Company.
UBS thereafter ceased sending account statements for both IRAs; and it
did indeed issue a Form 1099–R, reporting to the IRS that it distributed
the P&A Interest to Mr. Caan in 2015. It valued the distribution at
$1,910,903, which was the P&A Interest’s 2013 yearend fair market
value.
B. Merrill Lynch
In June 2015 Mr. Margiotta resigned from UBS and began
working for Merrill Lynch. Four months later, in October 2015, he
convinced Mr. Caan to transfer the UBS IRAs to Merrill Lynch under
his management. After Mr. Caan executed the requisite paperwork, all
assets in both IRAs were transferred through ACATS to a single IRA at
Merrill Lynch, except for the P&A Interest, which was ineligible for
ACATS.
III. Postdistribution Events
A. Events Occurring Before the Filing of Mr. Caan’s 2015
Income Tax Return
In March 2016 Ms. Cohn sent the following email message to Tina
Fowler, Mr. Margiotta’s assistant at Merrill Lynch: “The P&A
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investment for James Caan still lists UBS. Shouldn’t we change this to
[Merrill Lynch]?” Ms. Fowler’s response stated, in relevant part:
I need to reach out to . . . the transfer department to get
some info but what I do know (based on the notes I see) is
this position was NOT able to be held at Merrill [Lynch]
but we were able to update the broker of record to [Michael
Margiotta at Merrill Lynch] and the position is not linked
to [Mr. Caan’s] IRA at UBS any longer.
Seven months later, in October 2016, Ms. Cohn sent an email to
Mr. Margiotta, asking: “Have we been able to get everything moved over
from UBS on Caan?” Mr. Margiotta responded: “There’s nothing at
UBS, the P&A fund has UBS listed as the custodian of record of his IRA
and when he signs [the necessary documents], we can change that to
Merrill [Lynch] as custodian.”
B. 2015 Income Tax Return
PBSM prepared Mr. Caan’s income tax return for tax year 2015,
which was timely filed. 4 Line 15a of that return disclosed $2,299,567 in
IRA distributions; line 15b reported only $388,664 of that amount as
taxable. In other words, a distribution of the P&A Interest was
disclosed, but it was reported as nontaxable. 5
C. Events Occurring After the Filing of Mr. Caan’s 2015
Income Tax Return
In December 2016 Mr. Margiotta prepared a request, addressed
to the P&A Fund, for a complete liquidation of the P&A Interest and the
transfer of the cash proceeds to the Merrill Lynch IRA. After Mr. Caan
executed that request, the P&A Fund processed it in three separate wire
transfers made on three separate dates: $1,375,000 on January 23, 2017;
$80,000 on March 15, 2017; and $77,605.46 on June 21, 2017, for a total
of $1,532,605.46.
In November 2017 the IRS sent to PBSM’s address a Notice
CP2000, Changes to your 2015 Form 1040, addressed to Mr. Caan. The
notice proposed to include the distribution of the P&A Interest in gross
income as a taxable IRA distribution. PBSM’s receipt of that notice
4 This tax return has PBSM’s address listed as Mr. Caan’s home address.
5 $2,299,567 – $388,644 = $1,910,923.
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caused a flurry of action from Mr. Butler, who at the time was the PBSM
employee in charge of Mr. Caan’s account. Mr. Butler directed another
PBSM employee to send a protest letter, disputing the notice on the
ground that UBS issued the Form 1099–R in error. Mr. Butler then sent
emails to Mr. Margiotta and UBS representatives requesting that UBS
amend its Form 1099–R. After much back and forth, UBS sent Mr.
Butler a letter denying his request for it to send an amended Form
1099–R because it was not provided the P&A Interest’s 2014 yearend
fair market value (despite requesting the value four times), and no
evidence was received indicating that the P&A Interest was rolled over
to another IRA within 60 days from the distribution date.
IV. Petition to the Tax Court and Request for a Private Letter Ruling
In April 2018 the Commissioner issued Mr. Caan a notice of
deficiency for tax year 2015, determining an income tax deficiency of
$779,915 on the basis that there had been a taxable distribution of the
P&A Interest. The Commissioner also determined that Mr. Caan was
liable for a section 6662(a) accuracy-related penalty of $155,983.
On July 27, 2018, Mr. Caan sent a request for a private letter
ruling, asking the IRS to waive the requirement that a rollover of an
IRA distribution be made within 60 days from the date of the
distribution. See I.R.C. § 408(d)(3)(A)(i), (I). Three days later, on July
30, 2018, Mr. Caan filed a Petition with this Court for redetermination
of his 2015 income tax deficiency. See I.R.C. § 6213(a).
In September 2018, during the pendency of this case, the IRS
responded to Mr. Caan’s request for a private letter ruling, declining to
issue such a ruling on the grounds that the P&A Interest was liquidated
and cash proceeds were then contributed to the Merrill Lynch IRA. It
reasoned that the liquidation and subsequent cash contribution ran
afoul of the “same property” requirement of section 408(d)(3)(A)(i) and
(D), which meant that a waiver of the 60-day rollover period could not
be granted.
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OPINION
After concessions, 6 we must decide the following four issues:
1. Whether UBS distributed the P&A Interest to Mr. Caan in
tax year 2015.
2. If the P&A Interest was distributed, whether that
distribution is nontaxable because it was rolled over into
another IRA within the 60-day rollover period.
3. If the P&A Interest was distributed, what its value was at
the time of the distribution.
4. If the P&A Interest was distributed, whether we can
review the IRS’s refusal to issue a private letter ruling
waiving the 60-day rollover period under section
408(d)(3)(I); if so, what our standard of review is; and under
that standard, whether we should uphold the IRS’s refusal
to issue Mr. Caan such a private letter ruling.
I. Burden of Proof
Generally, we presume that the Commissioner’s determinations
in a notice of deficiency are correct, and the taxpayer bears the burden
of proving those determinations incorrect. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). 7
The Estate contends that this case involves unreported income
and asks us to impose a burden of production on the Commissioner to
produce evidence connecting Mr. Caan with the receipt of unreported
income (the P&A Interest). It is true that in unreported income cases
the Commissioner must either establish a minimal evidentiary showing
connecting the taxpayer with the alleged income-producing activity or
demonstrate that the taxpayer actually received unreported income.
6 In a Stipulation of Settled Issues dated April 13, 2021, the parties agreed that
the Estate of James E. Caan (Estate) is not liable for the section 6662(a) accuracy-
related penalty.
7 Under section 7491(a), the burden of proof shifts to the Commissioner with
respect to a factual issue where the taxpayer (1) produced credible evidence regarding
that issue; (2) complied with the Code’s substantiation and record-keeping
requirements; and (3) complied with the IRS’s reasonable requests for information.
See also Higbee v. Commissioner, 116 T.C. 438, 440–41 (2001). The Estate does not
contend that section 7491(a) applies, so we do not consider it here.
14
Walquist v. Commissioner, 152 T.C. 61, 67 (2019); see also Weimerskirch
v. Commissioner, 596 F.2d 358, 362 (9th Cir. 1979), rev’g 67 T.C. 672(1977). Only once the Commissioner makes the required threshold
showing does the burden shift to the taxpayer, to prove by a
preponderance of the evidence that the Commissioner’s determinations
are arbitrary or erroneous. Walquist, 152 T.C. at 67–68.
However, this case does not involve unreported income. UBS
issued Mr. Caan a Form 1099–R, reporting a distribution of the P&A
Interest to the IRS. Mr. Caan likewise reported a distribution of the
P&A Interest on his 2015 income tax return, and he claimed that the
distribution was nontaxable. This fact defeats the Estate’s contention
that the deficiency determination involves unreported income. The IRS
did not determine that Mr. Caan failed to report a distribution of the
P&A Interest; it merely disagreed with his claim that the distribution
was nontaxable. Thus, the rule enunciated in Walquist does not apply
here.
Although this case is not based on unreported income, it is based
on an information return. Section 6201(d) provides:
In any court proceeding, if a taxpayer asserts a reasonable
dispute with respect to any item of income reported on an
information return filed with the Secretary [of the
Treasury] . . . by a third party and the taxpayer has fully
cooperated with the Secretary . . . the Secretary shall have
the burden of producing reasonable and probative
information concerning such deficiency in addition to such
information return.
The Estate reasonably challenges the accuracy of UBS’s Form 1099–R.
However, reasonable evidence in the record supports the
Commissioner’s determination that a taxable distribution of the P&A
Interest occurred (in particular, the series of correspondence from UBS
to Mr. Caan). The Commissioner has therefore met his burden of
production under section 6201(d). Accordingly, the Estate continues to
bear the burden of proving that the Commissioner erred in determining
that a taxable distribution occurred.
II. IRAs
The Estate argues that UBS never distributed the P&A Interest
to Mr. Caan. It also argues that, even if UBS did distribute the P&A
Interest, Mr. Caan contributed it to his Merrill Lynch IRA in a manner
15
that would qualify as a nontaxable rollover contribution under section
408(d)(3). We will first discuss the legal background governing IRAs
and then decide the merits of these two arguments.
A. What Is an IRA?
Section 408 is the main Code provision governing IRAs. It was
enacted as part of the Employee Retirement Income Security Act of
1974, Pub. L. No. 93-406, § 2002(b), 88 Stat. 829, 959, in furtherance of
Congress’s goal “to create a system whereby employees not covered by
qualified retirement plans would have the opportunity to set aside at
least some retirement savings on a tax-sheltered basis.” Campbell v.
Commissioner, 108 T.C. 54, 63 (1997); see also Orzechowski v.
Commissioner, 69 T.C. 750, 754–56 (1978), aff’d, 592 F.2d 677 (2d Cir.
1979).
Section 408(a) provides that an IRA is “a trust created or
organized in the United States for the exclusive benefit of an individual
or his beneficiaries, but only if the written governing instrument
creating the trust meets the [requirements enumerated in paragraphs
(1) through (6)].” See also Treas. Reg. § 1.408-2(b) (explaining those
enumerated requirements in further detail). Section 408(h) further
provides that for purposes of section 408:
a custodial account shall be treated as a trust if the assets
of such account are held by a bank (as defined in subsection
(n)) or [an IRS-approved non-bank entity], and if the
custodial account would, except for the fact that it is not a
trust, constitute an individual retirement account
described in subsection (a). For purposes of [the Code], in
the case of a custodial account treated as a trust . . . the
custodian of such account shall be treated as the trustee
thereof.
See also Treas. Reg. § 1.408-2(d). Thus, in enacting section 408,
Congress gave taxpayers a choice as to the form of their IRA: a trust IRA
or a custodial IRA.
A trust IRA is, at its core, a trust. The taxpayer is the settlor, a
bank (or an approved nonbank entity) 8 is the trustee, and an individual
8 Section 408(a)(2) requires the trustee to be a “a bank . . . or such other person
who demonstrates to the satisfaction of the Secretary that the manner in which such
16
(initially the settlor) is the beneficiary. The settlor executes a written
trust instrument that meets the section 408(a) requirements and
thereby establishes a trust IRA.
A custodial IRA is established by the dual operation of section
408(a) and (h) and is not a trust but a custodial relationship between the
taxpayer and an IRS-approved custodian. See, e.g., Walsh v. Benson,
No. 05-290J, 2006 U.S. Dist. LEXIS 59251, at *8–11 (W.D. Pa. Aug. 18,
2006) (concluding that a qualifying custodial account is merely treated
as a trust for purposes of section 408(a)). To form a custodial IRA, the
taxpayer executes a written custodial agreement that meets the
requirements enumerated in section 408(a)(1) through (6). Once the
custodial agreement is executed, section 408(h) treats the custodial
agreement as a trust instrument and the custodian as a trustee, which
allows for section 408(a) to apply, thereby creating a custodial IRA.
There is a practical difference between trust IRAs and custodial
IRAs, as the U.S. District Court for the Western District of Missouri
explained:
The practical difference between “a trust as IRA” and “a
custodial account as IRA” involves the duties of the
financial institution where the IRA is created. If the IRA
is a trust, the institution has a fiduciary responsibility with
respect to the investment. If the IRA is a custodial account,
the institution’s duty is to hold and safeguard the
investment; there is no duty with respect to investment
decisions. The practical distinction is that a custodial
account’s investment decisions can be dictated by the IRA
owner/beneficiary.
United States v. Stover, 731 F. Supp. 2d 887, 901 (W.D. Mo. 2010), aff’d,
650 F.3d 1099 (8th Cir. 2011).
Trust IRAs and custodial IRAs have the same three tax
attributes, which together constitute the tax-deferral system that
other person will administer the trust will be consistent with the requirements of
[section 408].” A plain reading of section 408(a)(2) suggests that the phrase “such other
person” could mean that an individual that the IRS has approved could be an IRA
trustee. However, the regulations make clear that “such other person” means a
nonbank entity; in other words, the trustee must be either a bank (as defined in section
408(n)) or an IRS-approved nonbank entity. See Treas. Reg. § 1.408-2(b)(2)(i),
(e)(2)(i)(A).
17
Congress created: (1) cash contributions are generally deductible;
(2) accretions from the IRA’s assets are not taxable (except for section
511 unrelated business income); and (3) distributions are taxable. 9 See
I.R.C. §§ 219(a) and (b), 408(d)(1), (e)(1); Taproot Admin. Servs., Inc. v.
Commissioner, 133 T.C. 202, 206 (2009), aff’d, 679 F.3d 1109 (9th Cir.
2012); Campbell, 108 T.C. at 64; Orzechowski, 69 T.C. at 755; Treas. Reg.
§ 1.219-1(a).
Section 408 merely creates a framework for IRAs. Nothing in
section 408 or the regulations thereunder prohibits the parties to a trust
or custodial agreement from negotiating the terms of that agreement, so
long as the agreement includes the terms required by section 408 and
the regulations. Thus, when we decide the merits of a deficiency
determination involving an IRA, the text of both section 408 and the
agreement itself may be relevant.
B. Rollover of IRA Distributions and the “Same Property” Rule
In addition to creating a tax-deferral system through IRAs,
Congress provided for nontaxable rollovers of IRA distributions, by
which taxpayers can transfer investments from one IRA to another
without incurring tax. See I.R.C. § 408(d)(3); Lemishow, 110 T.C. at 113.
When a taxpayer requests an IRA distribution, that distribution is
nontaxable if “the entire amount received (including money and any
other property) is paid into an [IRA] . . . for the benefit of such individual
not later than the 60th day after the day on which he receives the . . .
distribution.” I.R.C. § 408(d)(3)(A)(i). A taxpayer may also choose to roll
over only a portion of the distribution, in which case only the portion
that is contributed to another IRA within the 60-day rollover period
qualifies as a nontaxable rollover contribution, see I.R.C. § 408(d)(3)(D),
and the noncontributed portion must be included in income, see I.R.C. §
408(d)(1).
If the distribution consists of noncash property, the taxpayer
must contribute that exact same property in order for the distribution
to be considered a nontaxable rollover contribution under section
408(d)(3)(A)(i). See Lemishow, 110 T.C. at 113; Treas. Reg. § 1.408-
4(b)(1) (stating that a distribution is nontaxable only if “the entire
amount received (including the same amount of money and any other
property) is paid into an [IRA]” (emphasis added)). In other words, the
9 The first and third attributes are not shared by Roth IRAs. See I.R.C. § 408A.
The IRAs at issue are not Roth IRAs.
18
taxpayer cannot change the character of the noncash property.
Taxpayers are also limited to one nontaxable rollover of an IRA
distribution per one-year period, whether it be a full or partial rollover.
I.R.C. § 408(d)(3)(B). 10
III. Issues to Be Decided
A. Was the P&A Interest Distributed?
During 2008 Mr. Caan opened two custodial accounts with UBS.
These accounts were governed by a written custodial agreement
between UBS and Mr. Caan. Since the agreement met the requirements
of section 408(a), both custodial accounts qualified as IRAs by operation
of section 408(a) and (h).
The custodial agreement’s Article IV, a portion of which is
excerpted supra pp. 6–7, sets forth the terms of UBS’s custodianship of
the P&A Interest. The pertinent terms are the following: (1) It was Mr.
Caan’s responsibility to provide UBS with the P&A Interest’s yearend
fair market value by January 15 of each year; (2) it was Mr. Caan’s
responsibility to attempt to obtain the P&A Interest’s yearend fair
market value from the P&A Fund directly, and if he could not obtain it
from the P&A Fund, to provide UBS with an appraisal from “an
independent, qualified appraiser”; and (3) if Mr. Caan did not fulfill his
duty of providing UBS with the P&A Interest’s yearend fair market
value for a given year, then UBS would distribute the P&A Interest to
him and issue him a Form 1099–R reflecting “the last available value”
of the P&A Interest.
Mr. Caan clearly did not provide UBS with the P&A Interest’s
2014 yearend fair market value by January 15, 2015, because in March
2015 UBS sent a letter to the P&A Fund requesting that value. After
receiving no response from the P&A Fund, in August 2015 UBS sent Mr.
Caan (through PBSM) a letter requesting the P&A Interest’s 2014
yearend fair market value and giving him 30 days to respond. Mr. Caan
10 This limitation does not apply to trustee-to-trustee transfers such as
transfers through ACATS, because IRA assets are directly transferred from one IRA
trustee or custodian to another IRA trustee or custodian. See Rev. Rul. 78-406, 1978-
2 C.B. 157; see also Bobrow v. Commissioner, T.C. Memo. 2014-21, at *13 n.5. Such
transfers do not result in a distribution within the meaning of section 408(d)(3)(A)
because the IRA assets transferred are not within the direct control or use of the
taxpayer. See Rev. Rul. 78-406, 1978-2 C.B. 157; see also Bobrow, T.C. Memo. 2014-
21, at *13 n.5.
19
did not respond to that letter, leading UBS to send him a notice that the
P&A Interest would be distributed and later a confirmation letter that
the interest was distributed as of November 25, 2015. The confirmation
letter also explained the definite and potential consequences of UBS’s
resignation as the P&A Interest’s custodian, including that UBS would
issue Mr. Caan a Form 1099–R reporting a distribution.
These letters show that UBS went above and beyond what the
custodial agreement required of it. It had no obligation to contact the
P&A Fund to obtain the P&A Interest’s 2014 yearend fair market value,
yet it did so on Mr. Caan’s behalf. It also sent Mr. Caan a request for
that value and gave him over 30 days to respond. Although the onus
was on Mr. Caan to provide UBS with the P&A Interest’s 2014 yearend
fair market value, UBS nevertheless tried to help him in fulfilling his
duties under the custodial agreement. After receiving no response to its
multiple requests, UBS acted well within its rights under the custodial
agreement by resigning as the P&A Interest’s custodian and
distributing the P&A Interest in kind. It even went further by
recommending that Mr. Caan contact his tax advisor, reminding him of
the 60-day rollover period, and providing him with the names of two
firms willing to serve as custodians of the P&A Interest. We therefore
determine that UBS distributed the P&A Interest to Mr. Caan on
November 25, 2015.
The Estate argues that UBS’s distribution of the P&A Interest
was a “phantom distribution,” alleging that UBS resigned as the P&A
Interest’s custodian—and purported to “distribute” the interest—
without notifying Mr. Caan, PBSM, or Mr. Margiotta. The Estate
further alleges that UBS merely generated, without actually mailing,
the letters that requested the P&A Interest’s 2014 yearend fair market
value and only later notified Mr. Caan of a purported distribution. In
support of this argument, the Estate relies heavily on the trial testimony
of Ms. Cohn and Mr. Margiotta. Both witnesses testified that they had
never seen the relevant letters from UBS until this litigation had begun
and had not known about UBS’s making the distribution.
We do not find that portion of either witness’ testimony credible.
As the trier of fact, we may credit testimony in full, in part, or not at all.
See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 84 (2000),
aff’d, 299 F.3d 221 (3d Cir. 2002). In this instance, the letters were
produced in a logical order, each referencing the prior one, and they were
all maintained by UBS in its files. The last of the letters, which
discussed the in-kind distribution, was followed by the promised Form
20
1099–R; moreover, all further IRA account statements from UBS ceased.
We find it highly unlikely that PBSM received all mail from UBS—
statements, the Form 1099–R, and other correspondence—except for the
key letters (which were addressed to PBSM). Additionally, the March
2016 email between Ms. Cohn and Mr. Margiotta suggests that both of
them knew of UBS’s representations that it had distributed the P&A
Interest. It seems far more likely that there was simply a lack of
communication and coordination between the professionals overseeing
Mr. Caan’s affairs, especially given the timing of UBS’s letters, Mr.
Margiotta’s move from UBS to Merrill Lynch, and the emails between
Mr. Margiotta and Ms. Cohn. If all parties believed that UBS was still
the P&A Interest’s custodian, why did no one follow up with UBS when
it ceased to mail account statements for the IRAs? And why, if everyone
was indeed blindsided by the Form 1099–R, did no one promptly follow
up with UBS regarding it? (That followup did not occur until after the
IRS issued its Form CP2000.) The Estate has offered no satisfactory
explanation to fill these holes in its theory.
The Estate further argues that no distribution occurred because
Mr. Caan was never placed in actual or constructive receipt of the P&A
Interest. We disagree. Under the constructive receipt doctrine “funds
[or other property] which are subject to a taxpayer’s unfettered
command and which he is free to enjoy at his option are constructively
received by him whether he sees fit to enjoy them or not.” Estate of
Brooks v. Commissioner, 50 T.C. 585, 592 (1968); see also Corliss v.
Bowers, 281 U.S. 376, 378 (1930); Treas. Reg. § 1.451-2(a). UBS’s
December 2015 confirmation letter asked Mr. Caan to contact the P&A
Fund and “instruct them to re-register the [P&A Interest] into [his]
individual name.” We understand that sentence of the letter to mean
that, beginning on November 25, 2015, Mr. Caan could have presented
that letter to the P&A Fund and instructed it to re-register the P&A
Interest in his name without needing any further involvement from
UBS. 11 As well, Mr. Caan could have rolled over the P&A Interest into
11 The P&A Interest is a partnership interest, which means that UBS served
two roles: (1) it was the P&A Interest’s custodian, a role governed by a custodial
agreement, and (2) it was a partner in a partnership, a role governed by relevant state
law and/or a partnership agreement. The parties stipulated the custodial agreement
(which we admitted into evidence), but neither party attempted to introduce a
partnership agreement nor any evidence indicating which state’s partnership law
applied. Normally, we would examine the partnership agreement’s text and the
relevant state’s partnership or property law to decide whether the December 2015
confirmation letter indeed placed Mr. Caan in constructive receipt of the P&A Interest.
21
an IRA managed by any other custodian or trustee willing to accept it.
The presence of these options means that Mr. Caan had unfettered
control over the P&A Interest and was therefore in constructive receipt
of it.
Lastly, the Estate attempts to discredit UBS’s resignation by
contending that no resignation or distribution occurred under California
trust law. This argument is a nonstarter for two reasons: (1) Mr. Caan’s
relationship with UBS was a custodial relationship, not a trust
relationship, and (2) the custodial agreement states that it is governed
by New York law, not California law.
B. Was the P&A Interest Contributed in a Manner That Would
Qualify as a Rollover Contribution Under Section
408(d)(3)?
Section 408(d)(3)(A)(i) provides that an IRA distribution is not
taxable if “the entire amount received (including money and any other
property)” is contributed into another IRA within 60 days of the
distribution. The taxpayer may not change the character of any noncash
distributed property between the time of the distribution and the time
of the contribution. See Lemishow, 110 T.C. at 113; Treas. Reg. § 1.408-
4(b)(1).
In the previous section, we determined that UBS distributed the
P&A Interest to Mr. Caan on November 25, 2015. Sixty days from that
date was January 24, 2016. Since the latter date was a Sunday, the 60-
day deadline was extended to “the next succeeding day which is not a
However, since we do not have the benefit of such sources here, we must decide
whether UBS distributed the P&A Interest (and placed Mr. Caan in constructive
receipt of it) on the basis of what we do have in the record. The Commissioner, in his
notice of deficiency, determined that UBS distributed the P&A Interest. This
determination enjoys the presumption of correctness, and the Estate bears the burden
of proving this determination erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S.
at 115. On the one hand, we have the testimonies of Ms. Cohn and Mr. Margiotta that
the Estate uses to support its argument that a distribution never occurred. On the
other hand, we have a deficiency determination that a distribution did occur, which is
entitled to the presumption of correctness. That determination is further supported
by the text of the custodial agreement and the UBS letters to Mr. Caan excerpted supra
pp. 6–10. Our finding that Ms. Cohn and Mr. Margiotta did not credibly testify that
they had never seen the letters before and did not know about the distribution
eliminates the sole evidence in support of the Estate’s argument, shifting the weight
of the evidence in favor of the Commissioner. We therefore conclude that the December
2015 confirmation letter served as the document which conveyed the partnership
interest from UBS to Mr. Caan.
22
Saturday, Sunday, or a legal holiday.” I.R.C. § 7503. Thus, Mr. Caan
had until January 25, 2016, to contribute the P&A Interest to another
IRA.
We acknowledge that Mr. Caan executed a request in October
2015 to transfer all assets in his two UBS IRAs to Merrill Lynch and
that all assets other than the P&A Interest were transferred through
ACATS shortly thereafter. Troublesome here is how the P&A Interest
was handled. Mr. Margiotta (acting on Mr. Caan’s behalf) submitted a
withdrawal request to the P&A Fund in December 2016, asking it to
fully liquidate the P&A Interest and remit the proceeds directly to the
Merrill Lynch IRA. This action occurred over a year after the UBS
distribution. The P&A Fund then remitted a total of $1,532,605.46 in
three separate wire transfers between January 23 and June 21, 2017.
There are three problems with the way the P&A Interest was
handled. First, and most importantly, in liquidating the P&A Interest
Mr. Caan changed the character of the property; yet section
408(d)(3)(A)(i) required him to contribute the P&A Interest itself, not
cash, to another IRA in order to preserve its tax-deferred status. See
Lemishow, 110 T.C. at 113; Treas. Reg. § 1.408-4(b)(1). Second, the
contribution of the cash proceeds from the liquidation occurred long
after the January 25, 2016, deadline. And finally, the P&A Fund’s three
transfers to the Merrill Lynch IRA constituted three separate
contributions; yet section 408(d)(3)(B) allows for only one rollover
contribution in any one-year period, making only the first transfer
potentially eligible for a tax-free rollover.
As discussed supra pp. 17–18, our caselaw and the regulations
have interpreted section 408(d)(3)(A)(i) to require the same money or the
same property to be transferred in a rollover, rather than merely similar
property or property of equivalent value. See Lemishow, 110 T.C. at 113;
Treas. Reg. § 1.408-4(b)(1). In Lemishow, we discussed the legislative
history supporting this interpretation: 12
12 In Lemishow, 100 T.C. at 111, the taxpayer had maintained Keogh plans
(which generally allow larger annual contributions than do IRAs but must be funded
only with income earned through self-employment, see I.R.C. §§ 402(c), 415) and IRAs
with two different banks. He requested cash distributions from both account types,
which he then used to purchase stock. Lemishow, 110 T.C. at 111. He then opened an
IRA with Smith Barney Shearson and contributed the stock to that IRA. Id. at 111–
12. Distributions from Keogh plans are governed by section 402, while distributions
23
Both rollover provisions [viz, section 408(d)(3) and
section 402(c), the latter of which governs rollovers from
employment-based tax-deferred plans, see I.R.C. § 401, to
any of a number of tax-deferred plans, including IRAs]
were enacted as part of the Employee Retirement Income
Security Act of 1974, Pub. L. 93-406, sec. 2002(b), (g)(5), 88
Stat. 829, 959–964, 968–969. The purpose of allowing a
tax-free rollover from a retirement plan to an IRA was to
facilitate portability of pensions. Conf. Rept. 93-1280
(1974), 1974-3 C.B. 415, 502; H. Rept. 93-807 (1974), 1974-
3 C.B. (Supp.) 236, 265. The purpose of the IRA-to-IRA
transfers was to permit flexibility with respect to the
investment of an IRA. H. Rept. 93-807, supra, 1974-3 C.B.
(Supp.) at 374; S. Rept. 93-383 (1973), 1974-3 C.B. (Supp.)
80, 214. With respect to rollovers, the legislative history
repeatedly speaks in terms of “this same money or
property” and “the same amount of money (or the same
property)”, both for distributions from an IRA and from a
qualified plan. H. Rept. 93-807, supra, 1974-3 C.B. (Supp.)
at 374–375; Conf. Rept. 93-1280, supra, 1974-3 C.B. at 502.
[Treasury Regulation § 1.408-4(b)], describing rollovers
from IRA to IRA, uses the language “if the entire amount
received (including the same amount of money and any
other property) is paid into an” IRA.
Based on the language of the statutory provisions
and the legislative history of those provisions, we hold that
petitioner’s use of the [cash] distributions from his Keogh
and IRA’s [sic] to purchase stock which he then contributed
to the Smith Barney IRA does not constitute a tax-free
rollover contribution under section 402(c) or 408(d)(3),
respectively.
Lemishow, 110 T.C. at 113 (footnotes omitted).
Section 402, however, is distinct from section 408 in that
Congress enacted a limited exception to the “same property” rule in the
Revenue Act of 1978, Pub. L. No. 95-600, § 157(f)(1), 92 Stat. 2763,
2806–07. Thus, section 402(c)(6) allows for property to be sold and the
from IRAs are governed by section 408. The fact that the taxpayer requested
distributions from two different retirement vehicles meant that we had to interpret
the rollover provisions of both section 402 and section 408.
24
proceeds to be contributed to an IRA in a tax-free rollover, whereas there
is no similar exception for IRAs governed by section 408. Congress
enacted section 402(c)(6) as a means to address a perceived hardship for
those taxpayers attempting to roll over investments from section 401
qualified plans but having difficulty finding a trustee willing to accept
property in kind. See Staff of J. Comm. on Tax’n, 95th Cong., General
Explanation of the Revenue Act of 1978, JCS-7-79, at 110 (J. Comm.
Print 1979). However, Congress did not enact an analogous provision
for IRAs. We are unsure why Congress sought to alleviate this hardship
for section 401 qualified plans without making a parallel fix for IRAs.
However, our job is to apply the terms of statutes, not revise or update
them. United Therapeutics Corp. v. Commissioner, No. 10210-21, 160
T.C., slip op. at 26 (May 17, 2023) (citing Wis. Cent. Ltd. v. United States,
138 S. Ct. 2067, 2074 (2018)). And when Congress includes certain
language in one provision but omits it in another, we presume that the
inclusion and exclusion are intentional. See Loughrin v. United States,
573 U.S. 351, 358 (2014) (“We have often noted that when ‘Congress
includes particular language in one section of a statute but omits it in
another’—let alone in the very next provision—this Court ‘presume[s]’
that Congress intended a difference in meaning.” (quoting Russello v.
United States, 464 U.S. 16, 23 (1983))); see also Henson v. Santander
Consumer USA Inc., 582 U.S. 79, 85–86 (2017) (same).
The text of section 408(d)(3)(A)(i), the legislative history behind
section 408(d)(3), our caselaw, and the regulations all make clear that
Mr. Caan was required to contribute the P&A Interest, not cash, to the
Merrill Lynch IRA in order to preserve its tax-deferred status. Because
he did not do so, we hold that the cash proceeds from the liquidation of
the P&A Interest were not contributed in a manner that would qualify
as a nontaxable rollover contribution under section 408(d)(3)(A)(i).
C. What Is the 2014 Yearend Fair Market Value of the P&A
Interest?
On the Form 1099–R that reported to the IRS the distribution of
the P&A Interest, UBS claimed that the value of the P&A Interest was
$1,910,903, which was the 2013 yearend fair market value. The Estate
generally argues that that Form 1099–R is incorrect because UBS never
distributed the P&A Interest and the value it reported was erroneous.
The Commissioner agrees with the Estate that the P&A Interest was
misvalued. He urges us to adopt a value of $1,548,010, which was the
ending capital account balance reported by the P&A Fund on Schedule
K–1, Partner’s Share of Income, Deductions, Credits, etc., for tax year
25
2015. He believes that the 2015 ending capital account balance serves
as the best approximation of the P&A Interest’s value at the time of the
distribution because the distribution occurred on November 25, 2015,
and the ending capital account balance was Mr. Caan’s capital account
balance as of December 31, 2015.
In its briefs, the Estate does not argue against the
Commissioner’s proposal, focusing instead on arguing that the Form
1099–R is “a useless, inaccurate, [and] unreliable document.” Since the
value the Commissioner proposes closely matches the aggregate 2017
liquidation amount of $1,532,605.46, and since the Estate does not
propose a different value, we hold that the value of the P&A Interest at
the time of the distribution was $1,548,010.
D. Did the IRS Err in Not Granting a Waiver of the 60-Day
Rollover Period Under Section 408(d)(3)(I)?
Three days before filing the Petition, Mr. Caan sent a private
letter ruling request to the IRS, asking it to waive the 60-day rollover
period. See I.R.C. § 408(d)(3)(A)(i), (I); Rev. Proc. 2003-16, 2003-1 C.B.
359 (prescribing the procedures by which taxpayers may request a
waiver under section 408(d)(3)(I)). After considering the request, the
IRS declined to issue a private letter ruling on the grounds that waiving
the 60-day rollover period would be inconsequential, in light of the same
property requirement. Mr. Margiotta (acting on Mr. Caan’s behalf)
liquidated the P&A Interest and contributed the cash proceeds to the
Merrill Lynch IRA. In so doing, Mr. Caan ran afoul of the same property
requirement. See supra pp. 21–24. Thus, the IRS reasoned that even if
it were to grant a waiver of the 60-day rollover period, the cash
contribution to the Merrill Lynch IRA could not be respected as a
rollover contribution, since the IRS cannot waive the same property
requirement. The Estate disagrees with the IRS’s reasoning, contending
that a waiver under section 408(d)(3)(I) should have been granted given
the facts and circumstances of this case.
Section 408(d)(3)(I) provides that the IRS “may waive the 60-day
requirement . . . where the failure to waive such requirement would be
against equity or good conscience, including casualty, disaster, or other
events beyond the reasonable control of the individual subject to such
requirement.” The parties’ disagreement over whether the IRS
appropriately declined to issue a waiver under section 408(d)(3)(I)
presents two antecedent questions: (1) Does our Court have jurisdiction
to review such a denial, and (2) if we do have jurisdiction, what is our
26
standard of review? These are both questions of first impression for our
Court.
1. Jurisdiction to Review Denials of Waivers Under
Section 408(d)(3)(I) and Standard of Review
In Trimmer v. Commissioner, 148 T.C. 334, 345–49 (2017), we
considered similar questions in a case similar to this one. Trimmer
concerned section 402, which governs distributions from a qualified plan
known as an employees’ trust. 13 A short background on section 402 is
helpful in understanding what transpired in Trimmer. Section 402(a)
provides that a distribution from an employees’ trust is “taxable to the
distributee, in the taxable year of the distributee in which distributed.”
Section 402(c) allows for rollover contributions similar to how section
408(d)(3) allows for rollover contributions for IRAs. Section 402(c)(1)
excludes from gross income distributions from an employees’ trust that
are thereafter contributed “to an eligible retirement plan.” Section
402(c)(3)(A) provides that such a contribution must be made no later
than 60 days “following the day on which the distributee received the
property distributed.” Section 402(c)(3)(B) allows the IRS to “waive the
60-day requirement . . . where the failure to waive such requirement
would be against equity or good conscience, including casualty, disaster,
or other events beyond the reasonable control of the individual subject
to such requirement.”
One of the taxpayers in Trimmer held retirement accounts in two
employees’ trusts. Trimmer, 148 T.C. at 336. This taxpayer received a
distribution from each of his two retirement accounts. Id. He then
deposited the two distribution checks into a joint bank account he held
with his wife. Id. Over 10 months later, on the advice of his tax return
preparer, he opened an IRA and rolled over the two distributions into
his new IRA. Id. at 336–37. On his joint income tax return, he reported
the two distributions but claimed that they were nontaxable. Id. at 337.
The IRS sent him a letter proposing, among other things, to include the
two distributions in income. Id. In his response to the IRS’s letter, the
taxpayer explained his circumstances, which included a mental health
issue, and asked for a waiver of the 60-day rollover period. Id. at 338.
13 An employees’ trust is a “trust created or organized in the United States”
that is “part of a stock bonus, pension, or profit-sharing plan of an employer for the
exclusive benefit of his employees or their beneficiaries.” I.R.C. § 401(a).
27
The IRS summarily denied the request in a boilerplate response. See id.
at 338–39.
In deciding that we had jurisdiction to review the IRS’s denial of
a hardship waiver under section 402(c)(3)(B), we stated:
Nothing in section 402(c)(3) expressly precludes
judicial review, nor does the legislative history reveal any
such congressional intent. To the contrary, because the
denial of a hardship waiver can affect directly the existence
and amount of any asserted deficiency—as it does in this
case—the procedures Congress has established for judicial
review of the Commissioner’s deficiency determinations
logically contemplate review of such a denial as one
element of the deficiency determination.
Trimmer, 148 T.C. at 346–47 (footnote omitted) (citing Estate of Gardner
v. Commissioner, 82 T.C. 989, 996 (1984)). We therefore concluded that
our jurisdiction to redetermine deficiencies under section 6213(a)
includes jurisdiction to review any discretionary agency actions that
would affect the deficiency amount. Trimmer, 148 T.C. at 348; Estate of
Gardner, 82 T.C. at 999. We also concluded, on the basis of our prior
caselaw, that the appropriate standard of review is abuse of discretion.
Trimmer, 148 T.C. at 348.
Our reasoning in Trimmer applies here as well. Sections
402(c)(3)(B) and 408(d)(3)(I) are worded identically. Neither the text of
section 408(d)(3) nor its legislative history precludes judicial review; and
whether the Commissioner grants a waiver under section 408(d)(3)(I) is
a discretionary determination that would affect a taxpayer’s deficiency.
We therefore extend our holding in Trimmer, 148 T.C. at 345–49, to
denials of waivers under section 408(d)(3)(I). In other words, we hold
that we do have jurisdiction to review the Commissioner’s denial of a
waiver under section 408(d)(3)(I) and that we review such a denial for
abuse of discretion. See Trimmer, 148 T.C. at 348; Mailman v.
Commissioner, 91 T.C. 1079, 1084 (1988) (“The standard of review most
appropriate in the case of a failure to grant a waiver is . . . whether [the
Commissioner] abused his discretion.”); Estate of Gardner, 82 T.C. at
1000; see also 5 U.S.C. § 706(2)(A) (providing that generally a reviewing
court shall “hold unlawful and set aside agency action, findings, and
conclusions” that are “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law”).
28
2. Did the Commissioner Abuse His Discretion in
Declining to Waive the 60-Day Rollover Period Under
Section 408(d)(3)(I)?
As we explained above, the IRS declined to issue a waiver under
section 408(d)(3)(I) because Mr. Caan liquidated the P&A Interest after
the distribution from UBS and, in so doing, ran afoul of the same
property requirement, see I.R.C. § 408(d)(3)(A)(i); Lemishow, 110 T.C. at
113, which the IRS cannot waive. We hold that denying a waiver on
that basis is not an abuse of discretion. It cannot be an abuse of
discretion for the IRS to deny a waiver where granting the waiver would
not have helped the taxpayer in any way.
The Estate urges us to adopt an equitable resolution to this case.
Although we are sympathetic to the Estate’s situation, we are not a court
of equity, and we cannot ignore the statutory law to achieve an equitable
end. See Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Stovall v.
Commissioner, 101 T.C. 140, 149–50 (1993). 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.
IV. Conclusion
We hold that the P&A Interest was distributed in tax year 2015
within the meaning of section 408(d)(1). We further hold that Mr. Caan
did not thereafter contribute the P&A Interest in a manner that would
qualify as a nontaxable rollover contribution under section 408(d)(3),
because he changed the character of the property when he liquidated the
P&A Interest. We agree with the Estate that UBS misvalued the P&A
Interest, and we hold that its value was $1,548,010 at the time of the
distribution. But we disagree with the Estate that the Commissioner
abused his discretion in declining to issue a waiver of the 60-day rollover
period, as such a waiver would not have helped Mr. Caan in this case.
We have considered all of the arguments made by the parties and,
to the extent they are not addressed herein, we consider them moot,
irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.