James Caan's IRA transfer penalty upheld in court

The estate of actor James Caan lost its five-year quest to avoid paying nearly $1 million in tax deficiencies and penalties relating to a partnership interest in a hedge fund in his IRA.

Wikimedia Commons/Dutch National Archives, The Hague, Fotocollectie Algemeen Nederlands Persbureau (ANEFO), 1945-1989

In an Oct. 18 ruling by the U.S. Tax Court, the late actor's estate fell short in a bid for relief from $935,898 in payments to the IRS based on the distribution of the hedge fund holdings from an individual retirement account at UBS to one at Merrill Lynch after his financial advisor switched from one firm to the other in 2015. Caan had claimed the distribution was nontaxable. Upon learning of the deficiency and accuracy penalty three years later, he filed a request for a private letter ruling from the agency to give him a waiver and a petition to the tax court for relief.

The partnership interest got "distributed in tax year 2015 within the meaning of" the tax code, according to the decision by Judge Elizabeth Copeland, who added that Caan and his advisor "did not thereafter contribute the [hedge fund holding] in a manner that would qualify as a nontaxable rollover contribution."

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"We agree with the estate that UBS misvalued the [partnership interest], and we hold that its value was $1,548,010 at the time of the distribution," Copeland wrote. "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."

Caan died last year after "a long and distinguished career in both film and television" spanning parts in more than 100 productions, including the role in which he "rose to prominence," Sunny Corleone in "The Godfather" in 1972, Copeland noted in the ruling. 

In the case, Estate of James E. Caan V. Commissioner, the late actor's estate argued that he had accurately transferred the full holdings of his IRA between the firms, according to an analysis of the case by certified public accountant Ed Zollars on the "Current Federal Tax Developments" blog from Kaplan Financial Education.

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"The IRS largely concurred with this stance, save for the transfer of an interest in a non-publicly traded hedge fund," Kaplan wrote. "This asset encountered numerous challenges during its transfer from UBS to Merrill Lynch. Ultimately, the hedge fund interest was liquidated, and the proceeds were transferred to Merrill Lynch — nearly a year after UBS reported the fund's distribution to Mr. Caan."

Copeland rejected the estate's contentions that UBS had never disbursed the hedge fund interest or that the IRS had "unjustly declined to grant late rollover relief," Zollars added. Her decision "determined that UBS had indeed disbursed the account" and found the IRS rejection to be valid because "the exact asset distributed from the UBS IRA was not the one transferred to the new Merrill Lynch IRA."