Monday, April 7, 2014

Tax Court Rules on an IRA Prohibited Transactions Case

Tax Court Rules on an IRA Prohibited Transactions Case:

In Ellis v Comm., T.C. Memo. 2013-245 (T.C. Memo 2013), the United States Tax Court ruled that funding an IRA with the taxpayer’s used car business was a prohibited transaction.  The Court determined that by paying himself a salary and pay rent to an entity owned by his immediate family was prohibited under Section 4975 of the I.R.C.   The Court ruled that it was not a prohibited transaction when the taxpayer first caused the IRA to invest in the business since the business did not have owners at the time.  But when the taxpayer became a fiduciary by virtue of the IRA holding more than 50% of the ownership interest in the business, the Court ruled that the company then became a disqualified person.  When he paid himself salary, this was a prohibited transaction also.  Thus, the IRA was deemed to have distributed the entire account subjecting the whole to income tax and a 10% additional tax on early distributions.

Prior to ever having an IRA invest in any business, be sure to consult your tax advisor as disastrous results could result as evidenced by the Ellis case above.

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