You may not be familiar with the tax code’s “same-property rule” that applies to IRA-to-IRA (and Roth IRA-to-Roth IRA) rollovers. The rule requires that the property received in an IRA distribution must be the same property that is rolled over. If you receive cash, you have to roll over cash. If you receive stock, you have to roll over that stock. (There is an exception for plan-to-IRA rollovers where it is OK to receive property from the plan, cash in the property and then roll over the cash.) Violating the same-property rule results in an IRA distribution becoming ineligible for rollover and therefore taxable.
The same-property rule has always been the poor stepchild of rollover rules, never receiving as much attention as the 60-day rollover rule or the once-per-year rule. But it took front and center in a recent Tax Court case involving James Caan, the actor most famous for playing Sonny Corleone in The Godfather.
Before his death in 2022, Caan owned two traditional IRAs and invested part of one in a partnership interest in a hedge fund. The custodian of his IRAs was UBS. Custodians are required to provide year-end valuations of alternative IRA assets, such as hedge funds. In 2015, despite numerous attempts, UBS could not get the hedge fund to provide it with a 2014 year-end valuation. So, UBS resigned as custodian and made a distribution of the hedge fund interest to Caan. On the 1099-R, UBS reported a distribution of about $1.9 million, using the 2013 year-end valuation.
When he filed his 2015 federal income tax return, Caan disclosed the distribution but reported it as nontaxable. In early 2017, Caan had the hedge fund liquidate his interest and then rolled over the cash proceeds to a new IRA.
The IRS subsequently notified Caan that the 2015 distribution of his hedge fund interest was taxable (because his rollover was invalid) and said he owed about $780,000 in unpaid taxes. (He was also hit with a $155,000 “accuracy-related penalty” for understating his taxes.)
Caan asked the IRS to waive his failure to complete the rollover within 60 days (which under the tax code the IRS has the authority to do). But the IRS refused. It said that, even if it gave Caan a waiver of the 60-day deadline, the distribution was still ineligible for rollover because of the same-property rule. (He received a hedge fund interest and rolled over cash.) And, unlike violations of the 60-day rule, the IRS has no ability to waive violations of the same-property rule.
Caan appealed the IRS’s action to the federal Tax Court, and he (actually his estate) lost. The court said the IRS had acted properly.
So, show some respect to the same-property rule. It’s a mistake that can’t be fixed – not even by the Corleone Family.
By Ian Berger, JD
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.