United States Tax Court
CORRECTED
161 T.C. No. 6 ESTATE OF JAMES E. CAAN, DECEASED, JACAAN ADMINISTRATIVE TRUST , SCOTT CAAN, TRUSTEE, SPECIAL ADMINISTRATOR , Petitioner v .
COMMISSIONER OF INTERNAL REVENUE, Respondent ————— Docket N o. 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 distrib uted 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 a fter 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 11/14/23 C OPELAND , 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 managin g 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 a ssets 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. Ho wever, 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. § 40 8(i);1
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 opti on 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 distrib ution of the P&A Interest.
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 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 th e taxpayer actually received unreported income.
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 tr ustee. 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).
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 20 14 yearend fair market value and giving him 30 days to respond. Mr. Caan 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 erron eous. 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 evid ence 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.
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.