Partial Distribution of Assets not revealed

[CAR]

I am a TPA that has a client with a one participant/owner only plan that I have filed 5500EZ forms on for all years since the plan assets were over $100,000. The plan has had undeveloped property as an asset for which the tax valuation has been recorded in the plan each year. No contributions have been made to the plan in over five years so I called the client to discuss the process of terminating the plan and rolling the assets to an IRA. In discussing this process with her, I mentioned that she must make a decision on the property, whether to establish a separate IRA for it or to sell it to a disinterested third party and put the proceeds back into the plan, then roll all to an IRA. The client then notified me that she had transferred the property to herself from the plan back in 2003 through a deed transfer for a grand sum of $10. The tax valuation is 27,000. What is the best way to handle this? Do I go back and amend the prior years 5500s back to 2003. What penalties/interest will there be on the non filing of the 1099-R and the taxes due for the distribution to her? I asked her real estate attorney to refer her to an ERISA attorney because I really did not want to have to deal with this problem. The ERISA attorney said he could not help her. Thank you for any assistance you can provide.

[masteff]

The prohibited transaction of selling it to herself at $10 is of much greater concern. She really needs to go back to the ERISA atty to figure out how she can fix this mess. You might look at the instructions to Form 5330 on which the excise tax for a prohibited transaction is reported. http://www.irs.gov/pub/irs-pdf/i5330.pdf

[JanetM]

Am sure the service will disqualify the plan. Another concern she now has is the capital gains she will pay when she sells the land. It was a dumb move to basically write off the cost basis by this transfer. BTW if she already sold the land and used the original basis not the $10 you can add tax evasion.

[WDIK]

The ERISA attorney said he could not help her.

Find another who can.

[Belgarath]

Just a wild thought - Did the plan have an in-service distribution provision for which the participant was eligible? If so, perhaps this could be claimed as a distribution and therefore not a PT. There are of course other problems, such as back taxes/penalties/interest, so not a great outlook regardless.

[J Simmons]

Did she actually pay the plan the $10 recited in the deed into the Plan? or what that merely a routine reference ("$10 and other good and valuable consideration") so that the deed cannot be attacked as a gift for lack of valid consideration? It might have been proforma rather than the reality.

As you prepared those Forms 5500, what did you put down on the question asking about a current, annual appraisal of the property? Were you basing that simply on the property tax valuation?

[CAR]

This is the rest of the story: The owner of this company passed away suddenly 5 years ago and his wife has kept his corporation open since then. Though no more contributions were being made to the plan, she did not want to terminate the retirement plan. She now wishes to close down the corporation and terminate the plan. That is how this property issue came to light. The attorney who did the property transfer stated that he just put the amount of $10 on the deed transfer document, no money was paid for the transfer of property. Also only the tax valuation was inserted each year on the 5500 because that is all she provided to our firm. I assume that she signed and has filed each 5500 report that we sent to her without any corrections. This is my worst nightmare coming true! Is there a website that lists ERISA attorneys and their practice locations? Or does anyone have any referral ideas?

[JanetM]

Try the state bar association.

[FormsRstillmylife]

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