This is usually a self directed IRA which needs a custodian who charges fees to hold the asset(s).  When it goes belly up, the owner quits paying the custodian fees and they issue the 1099 for the original value.  It is difficult at best to get the IRS to change their thinking that a 1099 is always right.  My client that had this issue freaked out and wanted to pay the tax so he wouldn't go to jail.  I know that is wrong, but a lot of taxpayers think that can happen no matter what you tell them.  I took the original cost as a capital loss, since technically he had basis by paying tax on the 1099R amount.  We got the tax back in a way by doing this, but he had to take $3,000 per year since he had no capital gains.