RMD from IRA containing stock that is restricted and probably now worthless

[Kathy]

Help please - just need to know where to look and memory fails me. An individual with an IRA that is invested in the stock of a company that is in court - bankruptcy I think or SEC investigation or something. He can't sell the stock - it's restricted. 12/31/02 statement shows and estimated value (actual isn't available because stock was restricted) which is substantially higher than the estimated values being shown on 9/30/03 statement and broker and client are convinced the stock is now actually worthless. Where do I look to find info. on calculating RMD? How is he to take distribution if he can't sell the stock? Nothing like waiting 'til the last minute.

Thanks,

Kathy

[Appleby]

Start with the issuer or the transfer agent---request a confirmation of the price as of 12/31 in writing …this should be sufficient for the custodian to update their records.

In the meantime, since there is some uncertainty about the value of the security, it may be in the IRA owner's best interest to calculate the RMD amount using the highest known value… should it be determined that the distribution exceeds the RMD amount, the difference can be rolled over within 60-days. Better to exceed the RMD amount that to fall short…

[mbozek]

Is this the only IRA ? If not then the 2003 MRD must be satisfied from other IRAs. If there is only 1 IRA and the stock is worthless because the co is in bkcy then the mrd amount that is payable from the IRA can only be 0. The taxpayer doesnt have many options- either file the return without paying the 50% excise tax on the theory that all IRA assets have been paid out under IRC 401(a)(9) since the value of the account is 0 or pay the 50% excise tax and ask for a refund on the grounds of reasonable error. Look at this situation as no different than an IRA owner who outlives the account balance. Even though there is an MRD due no amount can be paid if the IRA has no assets.

[Appleby]

mbozek…that is assuming the stock is the only investment in the IRA. If that is so, and the security is indeed worthless, then taking the RMD amount would be impossible---Assuming the individual has no other IRAs.

Under the SEPP rules, any penalties would be waived if failure to meet the SEPP payments is as a result of Complete depletion of assets… IMO, there is no reason why the same treatment, i.e. the waiver, would not be applicable here---again assuming the individual has no other IRAs

That being said… I assumed that the IRA had other investments…except for bank CDs and the like, most IRAs that are SDA invests in more than one security...

[Kathy]

Thank you for your help! I did a little further research and found that the stock is actually trading now - at 13 cents a share. Guess the poor guy is really going to take a hit on it as he does have other IRAs as well. Guess I'll have him find one with cash and take it from that IRA. Oh well, at least next year he won't have to take such a large distribution!