Perhaps I've not phrased the question or trade off very well, so let me try this way.
Suppose I directed $1000 or IRA money into a specific investment which, over time, declined in value to $200. Then, if that specific investment asset was distributed in-kind out of the IRA, what value should be reported on a 1099-R, $1000, $200, or some other value?
Even if there was objective evidence that the specific investment asset had declined in value to $200, what if the IRA custodian refused to recognize that decline in value and reported a $1000 withdrawal on the 1099-R? If the custodian refuses to correct the 1099-R, do I correspond directly with the IRS to demonstrate that ordinary income gained via the withdrawal was only the $200?
If there is no way to have the ordinary income from the withdrawal "adjusted" to $200 even though the asset value is demonstrably $200, I would have $1000 of ordinary income from the withdrawal, which must then become my basis in the asset. When the asset is then liquidated at its $200 real value, I have an $800 loss, right? But is that short-term, because the IRA withdrawal was recent, or long term, because the asset was acquired in the IRA some years ago?
If the income from the withdrawal can be adjusted somehow to $200, then I would have that $200 of ordinary income to report, a $200 basis in the asset, and neither a gain nor a loss if the asset was then liquidated at its $200 real value, right?
