In Uncategorized on 03/29/2016 at 16:06

That’s Judge Marvel’s advice to James E. Thiessen and Judith T. Thiessen in 146 T. C. 7, filed 3/29/16, but why this case needs a full-dress T.C. is not immediately apparent.

See my blogpost “Any Which Way You Slice It,” 5/9/13, and you will discern a certain confluence of issue and relevant law.

Briefly, Jim and Judi personally guaranty the note given as part of the purchase price of the metal-fabricating corporation Jim and Judi buy in their Trad IRAs. But the cash came from their pension plans with former employer Kroger, the supermarket people. Jim and Judi claim rollover, but of course the prohibited personal guaranty puts paid to that, so their Trad IRAs are DOA. Wherefore, the distribution from the Kroger should have been reported in full, and no rollover claimed.

Judge Marvel makes it short: “A ‘prohibited transaction’ generally includes ‘any direct or indirect * * * lending of money or other extension of credit between a plan and a disqualified person’.  Sec. 4975(c)(1)(B).  A “plan” includes an IRA described in section 408(a).  See sec. 4975(e)(1)(B).  A ‘disqualified person’ includes a ‘fiduciary’.  Sec. 4975(e)(2)(A); see also sec. 4975(e)(2)(F), (6) (providing that a spouse of a disqualified person also is a ‘disqualified person’).  A ‘fiduciary’ includes any person who ‘exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets’.  Sec. 4975(e)(3)(A).

“Where the disqualified person is also the IRA owner or his or her beneficiary, the IRA ceases to be an IRA as of the first day of the IRA owner’s taxable year in which the prohibited transaction occurs.  See sec. 408(e)(2)(A).  In addition, the IRA owner is deemed to have received a distribution on that first day of an amount equal to the fair market value (on the first day) of the assets in the IRA as of that first day.  See sec. 408(e)(2)(B); Bunney v. Commissioner, 114 T.C. 259, 262 (2000).  The deemed distribution is generally included in the IRA owner’s gross income in accordance with the principles of section 72, see sec. 408(d)(1); see also sec. 408(d)(3) (providing that a rollover contribution is excepted from the general rule of section 408(d)(1)), and the IRA owner also is subject to an additional 10% tax if the IRA owner was not yet 59-1/2 years of age on the date of the distribution and no other exception to the additional tax applies, see sec. 72(t).” 146 T. C. 7, at pp. 11-12. (Footnotes omitted).

Jim and Judi claim that Department of Labor must interpret the prohibited transaction provisions, and Jimmy Carter said so. But John Marshall said in Marbury v. Madison in 1803 that the courts decide what the law is. And anyway Tax Court’s interpretation doesn’t contradict DOL’s.

The Section 4975(d)(23) out for publicly-traded securities and commodities don’t help Jim and Judi, as they were buying the assets of a business, not the stock of the corporation they set up themselves to acquire the assets. The note they gave was secured by the assets, not their stock, and that’s what they guaranteed.

Now Jim and Judi argue 3SOL bars IRS, but they never said anything on the return they filed for the year at issue about buying assets and guaranteeing a note in furtherance thereof. So 6SOL applies, per Colony and Home Concrete. If you want 3SOL, tell the whole story, or at least enough to let IRS know, in the immortal words of Dave “Curlee” Williams, “whole lotta shakin’ goin’ on.” And of course the deemed distribution was way over 25% of Jim’s and Judi’s gross income for the year at issue. Finally, even though the corporation Jim and Judi set up disclosed something on its return for the year at issue, Jim and Judi are the taxpayers, and they have to spill.

No mention of penalties or reliance on experts, even though Jim and Judi had counsel and a CPA on the deal.

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