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potential problems that may occur with- changes in this evolving landscape. Below are five tips for managing the
out proper tax planning. An additional consideration is the ap- compliance and taxation of these clients.
Classic cars: Using the self-directed plication of the prohibited-transaction
IRA to invest in an investment entity rules under Sec. 4795, not specifically 1. Not all due dates follow the
that holds classic cars as assets may discussed here, but which would also ‘traditional’ deadlines
trigger the lookthrough rules and could be relevant when considering a self- U.S. persons with foreign disclosures
pose issues for certain self-directed directed IRA. and resident aliens who live outside
IRA investors. These types of invest- From Matthew T. Marcellino, J.D., the United States will find themselves
ment entities offer an equity stake in Washington, D.C., and Christine Faris, with some additional dates to contend
a company whose underlying business J.D., Philadelphia with beyond the “traditional” federal
is the purchase, ownership, and sale of due dates.
classic cars. Whether a classic car would First, an automatic two-month exten-
be considered a prohibited collectible Foreign Income & Taxpayers sion is permitted to file and pay federal
per Sec. 408(m) is unclear, but taking a income tax for a U.S. citizen or resident
conservative approach, it likely would US clients with international alien who lives outside the United States
be. The pitfall of this investment is that tax issues: Five helpful tips and Puerto Rico and has a main place
the classic car is imputed to the self- U.S. persons (citizens and permanent of business outside the United States/
directed IRA, likely resulting in the loss residents) whose financial matters ex- Puerto Rico. This extension applies for
of the tax advantages of the self-directed tend overseas may face a tax situation taxpayers filing married filing jointly if
IRA, plus penalties. Nevertheless, the that virtually no other country’s nation- either spouse qualifies (if filing separate-
existence of these investment funds als do. The United States imposes fed- ly, only the qualified spouse receives the
indicates taxpayers’ appetites for alterna- eral income tax reporting and payment automatic extension). No late-payment
tive investments. obligations based on citizenship status penalty is assessed on tax paid by June
Fine art: Another type of alterna- rather than — as is common in the 15; however, interest does accrue in this
tive investment is art funds. Like classic rest of the world — physical residency. two-month period.
car funds, these funds allow individuals Because of this, serving a U.S. client A U.S. citizen or resident alien living
to invest indirectly in works of fine with international income, assets, and outside the United States who has prop-
art. While some of these funds may disclosures can be complex, even apart erly extended his or her return to Oct.
use limited liability companies to hold from the onerous regulations around the 15 may also be granted an additional
each individual piece of art, potential reporting of foreign assets and entities. extension for filing the federal tax return
self-directed IRA investors looking to
emulate this investment strategy must
proceed with caution. Here, potential
investors face similar challenges as those
posed in the classic-car example; howev-
er, unlike classic cars, art is directly iden-
tified as a collectible in Sec. 408(m)(2)
(A). As such, a potential investor seeking
to invest in art using a self-directed IRA
would be wise to speak with a tax pro-
fessional, given the potential negative tax
results and penalties.
Challenging investment
IMAGE BY DA-KUK/GETTY IMAGES environment

The imputation of underlying assets
to a self-directed IRA creates serious
challenges for tax-advantaged alterna-
tive investments. However, with proper
planning and tax advice, a potential in-
vestor can stay abreast of all the current

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