substitute one IRA investment for another Options

[Dolores]

A taxpayer wants to know if he can remove a limited partnership investment from his IRA account and substitute an investment of equal fair value, without generating tax consequences. My guess is that the removal of the LP from the IRA would be considered a taxable distribution and the addition of another investment would be considered an IRA contribution, potentially in excess of contribution limits. However, it's hard to know where to go to confirm this answer.

[masteff]

Guess we need to clarify what the individual means by "remove and substitute".

Does he mean he wants to sell the LP investment and then use the proceeds to purchase another investment? That's perfectly fine as long as it's done inside the IRA.

Does he mean move the LP from inside the IRA to outside the IRA but still in his possession? And the replacement would be something he owns outside the IRA and then would move into the IRA? Exchange of investments between an IRA and its owner is a prohibited transaction. See Q&A's 2 & 6 here: http://www.irs.gov/retirement/article/0,,id=163722,00.html

[John G]

I agree with masteff....

Contributions for any IRA or ROTH are made in cash, not in stock. Just off of memory, I think there are only three ways for a stock/holding can move into an IRA or ROTH: (1) a conversion of IRA to Roth, (2) rollover of some company plan to IRA or (3) moving and IRA to IRA via direct custodial transfer.

[Guest_named_mjb_*]

If the LP interest is removed from the IRA the IRA owner will be taxed on FMV of LP. The LP can always be sold by the IRA and the proceeds used to purchase the new investment without any income tax. In addition, an IRA can acquire stock if the IRA owner has been granted option rights or warrants by the issuer that allows the purchase of the stock by another entity the IRA owner controls such as a trust which can include an IRA. Need to review the subscription agreement to see what is permitted.

[jevd]

If the LP interest is removed from the IRA the IRA owner will be taxed on FMV of LP. The LP can always be sold by the IRA and the proceeds used to purchase the new investment without any income tax. In addition, an IRA can acquire stock if the IRA owner has been granted option rights or warrants by the issuer that allows the purchase of the stock by another entity the IRA owner controls such as a trust which can include an IRA. Need to review the subscription agreement to see what is permitted.

MJB,
I just ran across this post while doing some research on another subject. It may be too old for the original poster's benefit but we run across this situation on occaision.

An IRA cannot exercise warrants it does not own. If the IRA owner owns warrants outside the IRA then he cannot contribute them to the IRA as cash contributions are required unless there is a rollover of qualified assets. The IRA owner cannot sell the warrants to his/her own IRA as that would be a PT and disqualify the IRA.

[Guest_named_mjb_*]

If the LP interest is removed from the IRA the IRA owner will be taxed on FMV of LP. The LP can always be sold by the IRA and the proceeds used to purchase the new investment without any income tax. In addition, an IRA can acquire stock if the IRA owner has been granted option rights or warrants by the issuer that allows the purchase of the stock by another entity the IRA owner controls such as a trust which can include an IRA. Need to review the subscription agreement to see what is permitted.

MJB,
I just ran across this post while doing some research on another subject. It may be too old for the original poster's benefit but we run across this situation on occaision.

An IRA cannot exercise warrants it does not own. If the IRA owner owns warrants outside the IRA then he cannot contribute them to the IRA as cash contributions are required unless there is a rollover of qualified assets. The IRA owner cannot sell the warrants to his/her own IRA as that would be a PT and disqualify the IRA.

That is not true in all cases. I have reviewed several subscription agreements which under SEC rules allowed an employee who has been issued warrants or options to purchase employer stock to transfer the rights to another family member or a trust that the employee controls. The employee assigns/transfers the warrants to the IRA which can then purchase the options at the strike price from cash in the IRA. You need to check the purchase agreement to see if the employee's stock purchase rights are transferrable to the IRA.

[jevd]

If the LP interest is removed from the IRA the IRA owner will be taxed on FMV of LP. The LP can always be sold by the IRA and the proceeds used to purchase the new investment without any income tax. In addition, an IRA can acquire stock if the IRA owner has been granted option rights or warrants by the issuer that allows the purchase of the stock by another entity the IRA owner controls such as a trust which can include an IRA. Need to review the subscription agreement to see what is permitted.

MJB,
I just ran across this post while doing some research on another subject. It may be too old for the original poster's benefit but we run across this situation on occaision.

An IRA cannot exercise warrants it does not own. If the IRA owner owns warrants outside the IRA then he cannot contribute them to the IRA as cash contributions are required unless there is a rollover of qualified assets. The IRA owner cannot sell the warrants to his/her own IRA as that would be a PT and disqualify the IRA.

That is not true in all cases. I have reviewed several subscription agreements which under SEC rules allowed an employee who has been issued warrants or options to purchase employer stock to transfer the rights to another family member or a trust that the employee controls. The employee assigns/transfers the warrants to the IRA which can then purchase the options at the strike price from cash in the IRA. You need to check the purchase agreement to see if the employee's stock purchase rights are transferrable to the IRA.

Wouldn't that be a prohibited transaction under IRC 4975? Value is being transferred to the IRA by the Individual. It would be considered a non-cash contribution that is not a rollover in the amount of the value of the warrants at the time of the transaction. It may be allowed under the subscription agreement and the SEC but I think 4975 comes into play and at the very least a non-cash contribution.

[Guest_named_mjb_*]

If the LP interest is removed from the IRA the IRA owner will be taxed on FMV of LP. The LP can always be sold by the IRA and the proceeds used to purchase the new investment without any income tax. In addition, an IRA can acquire stock if the IRA owner has been granted option rights or warrants by the issuer that allows the purchase of the stock by another entity the IRA owner controls such as a trust which can include an IRA. Need to review the subscription agreement to see what is permitted.

MJB,
I just ran across this post while doing some research on another subject. It may be too old for the original poster's benefit but we run across this situation on occaision.

An IRA cannot exercise warrants it does not own. If the IRA owner owns warrants outside the IRA then he cannot contribute them to the IRA as cash contributions are required unless there is a rollover of qualified assets. The IRA owner cannot sell the warrants to his/her own IRA as that would be a PT and disqualify the IRA.

That is not true in all cases. I have reviewed several subscription agreements which under SEC rules allowed an employee who has been issued warrants or options to purchase employer stock to transfer the rights to another family member or a trust that the employee controls. The employee assigns/transfers the warrants to the IRA which can then purchase the options at the strike price from cash in the IRA. You need to check the purchase agreement to see if the employee's stock purchase rights are transferrable to the IRA.

Wouldn't that be a prohibited transaction under IRC 4975? Value is being transferred to the IRA by the Individual. It would be considered a non-cash contribution that is not a rollover in the amount of the value of the warrants at the time of the transaction. It may be allowed under the subscription agreement and the SEC but I think 4975 comes into play and at the very least a non-cash contribution.

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

[K2retire]

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

If there is no transfer of value, what is the point of the transfer? I find it hard to believe that the individual would go to the trouble unless there was some value -- which is exactly what would make it a prohibited transaction.

This post has been edited by K2retire: Nov 9 2008, 09:21 AM

[jevd]

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

If there is no transfer of value, what is the point of the transfer? I find it hard to believe that the individual would go to the trouble unless there was some value -- which is exactly what would make it a prohibited transaction.

That is my point exactly. Most of the time the warrant is allowing a purchase of the stock at a fixed price that is below the current market value. The difference in price is the value being transferred from the individual to the IRA.

This post has been edited by jevd: Nov 10 2008, 09:28 AM

[Guest_named_mjb_*]

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

If there is no transfer of value, what is the point of the transfer? I find it hard to believe that the individual would go to the trouble unless there was some value -- which is exactly what would make it a prohibited transaction.

That is my point exactly. Most of the time the warrant is allowing a purchase of the stock at a fixed price that is below the current market value. The difference in price is the value being transferred from the individual to the IRA.

The individual is not transferring any value to the IRA because the IRA is purchasing the stock directly from the company as is permitted under the terms of the stock purchase agreement.

[jevd]

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

If there is no transfer of value, what is the point of the transfer? I find it hard to believe that the individual would go to the trouble unless there was some value -- which is exactly what would make it a prohibited transaction.

That is my point exactly. Most of the time the warrant is allowing a purchase of the stock at a fixed price that is below the current market value. The difference in price is the value being transferred from the individual to the IRA.

The individual is not transferring any value to the IRA because the IRA is purchasing the stock directly from the company as is permitted under the terms of the stock purchase agreement.

If the purchase price is below market price then Value is transferred.

[Guest_named_mjb_*]

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

If there is no transfer of value, what is the point of the transfer? I find it hard to believe that the individual would go to the trouble unless there was some value -- which is exactly what would make it a prohibited transaction.

That is my point exactly. Most of the time the warrant is allowing a purchase of the stock at a fixed price that is below the current market value. The difference in price is the value being transferred from the individual to the IRA.

The individual is not transferring any value to the IRA because the IRA is purchasing the stock directly from the company as is permitted under the terms of the stock purchase agreement.

If the purchase price is below market price then Value is transferred.

Under what provision of 4975 is the individual transferring value to the IRA if the IRA is purchasing directly from the issuer?

[jevd]

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

If there is no transfer of value, what is the point of the transfer? I find it hard to believe that the individual would go to the trouble unless there was some value -- which is exactly what would make it a prohibited transaction.

That is my point exactly. Most of the time the warrant is allowing a purchase of the stock at a fixed price that is below the current market value. The difference in price is the value being transferred from the individual to the IRA.

The individual is not transferring any value to the IRA because the IRA is purchasing the stock directly from the company as is permitted under the terms of the stock purchase agreement.

If the purchase price is below market price then Value is transferred.

Under what provision of 4975 is the individual transferring value to the IRA if the IRA is purchasing directly from the issuer?

It is the implied value as stated above. The IRA account owner and the IRA account are separate entities. If the IRA account purchases the stock using the warrants owned by the account owner then there has been a defacto transfer of the ownership of the warrants between the account owner & the IRA account. The Account Owner has transferred (contributed) the warrants to the IRA account. A contribution (non-cash) or the IRA has purchased the warrants for zero value. Either way a transaction has taken place bewtween the entities. At the very least, there is an over contribution of the inkind contribution of the warrants.

Before I would allow this type of transaction, I would require a PLR with a positive response from the IRS to be received by the client.

Would anyone else out there just let this transaction go through without question?

This post has been edited by jevd: Nov 10 2008, 04:19 PM

[Guest_named_mjb_*]

Its not a PT if there is no a transfer of value between the IRA and the IRA owner, such as where the employer's stock purchase progam for employees allows a trust controlled by the employee to purchase stock. The employee can act as a conduit between the issuer and the IRA to facilitate a purchase of stock by the employee's IRA. In Ancira, 119 TC 6, the tax court held that an IRA owner who transmitted a check issued by the IRA custodian payable to a corporation to purchase the corporation's stock that was issued to the IRA as the owner of the shares was acting only as a conduit to facilitate the purchase because the taxpayer was exercising his right under the IRA agreement to direct investments in his IRA. Of course the IRA custodian could send the check directly to the corporation to purchase shares for the employee's IRA account.

If there is no transfer of value, what is the point of the transfer? I find it hard to believe that the individual would go to the trouble unless there was some value -- which is exactly what would make it a prohibited transaction.

That is my point exactly. Most of the time the warrant is allowing a purchase of the stock at a fixed price that is below the current market value. The difference in price is the value being transferred from the individual to the IRA.

The individual is not transferring any value to the IRA because the IRA is purchasing the stock directly from the company as is permitted under the terms of the stock purchase agreement.

If the purchase price is below market price then Value is transferred.

Under what provision of 4975 is the individual transferring value to the IRA if the IRA is purchasing directly from the issuer?

It is the implied value as stated above. The IRA account owner and the IRA account are separate entities. If the IRA account purchases the stock using the warrants owned by the account owner then there has been a defacto transfer of the ownership of the warrants between the account owner & the IRA account. The Account Owner has transferred (contributed) the warrants to the IRA account. A contribution (non-cash) or the IRA has purchased the warrants for zero value. Either way a transaction has taken place bewtween the entities. At the very least, there is an over contribution of the inkind contribution of the warrants.

Before I would allow this type of transaction, I would require a PLR with a positive response from the IRS to be received by the client.

Would anyone else out there just let this transaction go through without question?

There is no transfer between the employee and his IRA because the company is ALLOWING the employee's IRA the right to purchase its stock directly in the same manner permitted under Ancira, where the IRA custodian issued a check to the company to purchase stock to be issued in the name of the employee's IRA. Under these facts there is no transfer between the employee and the IRA.

Do you disagree with Ancria?