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IRA Funding Structure Ruled a Prohibited Transaction

Saul Brenner, CPA, J.D., LL.M. 07.13.2016 | eVisor

The Tax Court held that a couple participated in a prohibited transaction by personally guaranteeing loans to a company owned by their IRAs.1  This left them liable for tax on deemed distributions from their IRAs as well as a 10% early distribution penalty.

As part of a plan to buy the assets of a business, the couple rolled over their tax-deferred retirement funds into newly formed IRAs, which then acquired the initial stock of a newly- formed company. That new company acquired the assets of the business they had targeted to buy. The couple guaranteed the repayment of a loan that the new company received from the seller as part of the acquisition price.

The IRS held the couple was liable for a tax deficiency primarily due to unreported IRA distributions. The IRS asserted that the couple's loan guaranties were prohibited transactions under section 4975(c)(1)(B) - exposing them to penalties for deemed distributions of the IRAs' assets.

The Tax Court agreed with the IRS argument that prohibited transactions occurred when the couple guaranteed the loans. The Court further held the couple liable for income tax on the distributions, as well as an additional tax at 10%, because neither was 59 1/2 years old at the time of the transaction. 

1 Thiessen v. Commissioner, 146 T.C. No. 7, March 29, 2016

Questions? Contact your advisor or Saul Brenner, CPA, J.D., LL.M., Berdon LLP, New York Accountants.  

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