Possible PT - Investment Advisory Fee

[Guest MLG]

IRA owner's portfolio includes IRA ($100,000) and non-IRA ($200,000) funds. Investment advisor's fee (say 1% of the entire $300,000, or $3,000) is paid from IRA assets even though only $1,000 of the fee is allocable to IRA assets.

Any argument that this isn't a PT? Logically, it doesn't make sense to tax the entire IRA, because the owner could have taken a distribution of $2,000 (or perhaps more to cover tax withholding), and then paid the fee. Could the $2,000 be viewed is a taxable distribution to the owner? Citations appreciated.

[ETA Consulting LLC]

IRA owner's portfolio includes IRA ($100,000) and non-IRA ($200,000) funds. Investment advisor's fee (say 1% of the entire $300,000, or $3,000) is paid from IRA assets even though only $1,000 of the fee is allocable to IRA assets.

Any argument that this isn't a PT? Logically, it doesn't make sense to tax the entire IRA, because the owner could have taken a distribution of $2,000 (or perhaps more to cover tax withholding), and then paid the fee. Could the $2,000 be viewed is a taxable distribution to the owner? Citations appreciated.

Each vehicle is a separate legal entity; so you don't need a citation for that. If the IRA has $100K in assets and the Investment Advisor received $3,000 in advisory fees, then that is a 3% fee; which could be considered excessive. This would be the basis for your argument when you apply this fact pattern to Section 4975 of the Internal Revenue Code.

This would be my approach.

Good Luck!

[mbozek]

IRA owner's portfolio includes IRA ($100,000) and non-IRA ($200,000) funds. Investment advisor's fee (say 1% of the entire $300,000, or $3,000) is paid from IRA assets even though only $1,000 of the fee is allocable to IRA assets.

Any argument that this isn't a PT? Logically, it doesn't make sense to tax the entire IRA, because the owner could have taken a distribution of $2,000 (or perhaps more to cover tax withholding), and then paid the fee. Could the $2,000 be viewed is a taxable distribution to the owner? Citations appreciated.

Assuming that there is a PT (and I am not concluding there is a PT) what do you plan on doing with this information? Telling the IRA owner that his IRA has been DQed and the $100,000 is taxable income as of some prior year? Or informing the client that the arrangement has to be stopped and the paper trail buried?