Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

Thiessen v Commissioner: A Self-Directed IRA or a Self-Inflicted Wound

Author: James F. McDonough

Date: May 18, 2016

Key Contacts

Back

Thiessen v Commissioner: A Self-Directed IRA or a Self-Inflicted Wound

Recently, myself and another attorney in the firm met with accountants from a well-established practice with several offices. When I inquired about the biggest problems they encountered in tax season, they replied that it was the use of self-directed IRAs to finance business acquisitions. They described the problem as an epidemic caused by the sluggishness of the economy in the parts of New Jersey served by their offices.

Self-directed IRAs are not new nor are they prohibited. The facts in Thiessen v Commissioner, a Tax Court case, are typical of the circumstances described to us in that recent meeting.

The Facts of Thiessen v Commissioner

In Thiessen v Commissioner, taxpayers did not want to accept a transfer to a Kroger location in another state. Taxpayers rolled over their respective Kroger 401K account balances to self-directed IRAs. Taxpayers looked for a business to acquire and encountered a broker who located one suited to their skills. A friend recommended a CPA who advised an acquisition structure whereby the 401K account balances would be rolled over to self-directed IRAs (“IRAs”). These transfers in 2003 were reported as tax-free rollovers. The CPA formed a C corporation for the taxpayers. Then, the taxpayers directed the IRAs to purchase all of the stock of a C corporation and then cause the C corporation to acquire the business.

The taxpayers had an attorney to represent them regarding the purchase but he did not participate in establishing the structure, nor did he have ties to the CPA or the broker. The CPA was not involved in drafting the contract of sale nor in the negotiation of the financing terms.

Issues down the road

The taxpayers transferred $432,000 to their IRAs and then directed the IRAs to purchase of all shares of stock of the new corporation. The contract of sale called for a purchase price of about $600,000 consisting of $60,000 of a deposit, a $200,000 Note (the “Note”) and the $340,000 balance in cash from the IRAs (presumably from the C corporation). The deposit came from the personal bank account of the taxpayers and the government did not raise the source of these funds as a tax issue. The Note required and contained the personal guarantee of the taxpayers.

In 2010, seven years after the acquisition, the taxpayers received a tax deficiency notice for $180,000 based upon the disqualification of the IRAs in 2003. Disqualification was based upon the fact that the guarantee of the Note by the taxpayers was a prohibited transaction. A prohibited transaction includes the indirect lending of money or extension of credit between a plan and a disqualified person. The later term includes a fiduciary who is one who exercises discretionary authority or control over plan assets. The court held that the guaranties constituted indirect extensions of credit between the taxpayers and the IRAs. The distinction here is that the taxpayer guaranties added to the value of the assets held in the IRAs and circumvented contribution limitations.

The irony here is that the CPA was also involved in a 2013 case, Peek v. Commissioner, that taxpayers also lost. One should also know that the government had other arguments that the Court did not rule upon. A reader should not read Thiessen as giving the government only one line of attack.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
Dissolving Your Business: Essential Legal Steps to Protect Your Interests post image

Dissolving Your Business: Essential Legal Steps to Protect Your Interests

If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]

Author: Christopher D. Warren

Link to post with title - "Dissolving Your Business: Essential Legal Steps to Protect Your Interests"
The Role of Corporate Restructuring in Mergers & Acquisitions post image

The Role of Corporate Restructuring in Mergers & Acquisitions

Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]

Author: Dan Brecher

Link to post with title - "The Role of Corporate Restructuring in Mergers & Acquisitions"
Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public post image

Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public

Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]

Author: Bryce S. Robins

Link to post with title - "Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public"
Understanding Chattel Paper: A Key Component in Secured Transactions post image

Understanding Chattel Paper: A Key Component in Secured Transactions

Using chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement […]

Author: Dan Brecher

Link to post with title - "Understanding Chattel Paper: A Key Component in Secured Transactions"
Crypto Compliance: A Comprehensive Guide post image

Crypto Compliance: A Comprehensive Guide

For years, digital assets operated in a legal gray area, a frontier where innovation outpaced the reach of regulators and law enforcement. In this early “Wild West” phase of finance, crypto startups thrived under minimal oversight. That era, however, is coming to an end. The importance of crypto compliance has become paramount as cryptocurrency has […]

Author: Bryce S. Robins

Link to post with title - "Crypto Compliance: A Comprehensive Guide"
Supreme Court and Title VII: Implications for Reverse Discrimination post image

Supreme Court and Title VII: Implications for Reverse Discrimination

Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]

Author: Matthew F. Mimnaugh

Link to post with title - "Supreme Court and Title VII: Implications for Reverse Discrimination"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!