So far in 2016 we have seen two Tax Court decisions dealing with IRA-owned businesses. In Polowniak v. Comm’r, decided on February 25th, the Tax Court dealt with a purported run-around of contributions limits. Mr. Polowniak owned and operated through an S corporation a successful consulting business. In an effort to siphon some of those consulting fees to a tax-advantaged vehicle, Mr. Polowniak set up a new company and Roth IRA and immediately directed the Roth IRA to acquire virtually all of the new company stock. At the same time, the new company entered into a subcontracting agreement with the consulting business for Mr. Polowniak’ s services. When the dust settled, following the form of the agreement, over $600,000 of consulting fees came to reside in the Roth IRA. However, the Tax Court held that in substance, the transfers from the consulting business to the Roth-IRA-owned business were nothing more than a mechanism for transferring value to the Roth IRA and were excess contributions. To review the full Polowniak decision, follow this link: https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10707
In Thiessen v. Comm’r decided on March 29, 2016, the Tax Court dealt with a guarantee of an IRA-owned company loan. The taxpayers, a married couple, rolled over their retirement funds into new IRAs, and caused those IRAS to acquire stock of a newly formed corporation. The corporation, in turn, acquired the assets of an existing business from a third party. The acquisition was financed in part with a loan from the seller to the corporation, which the taxpayers personally guaranteed. The Tax Court held that the loan guarantees were an indirect extension of credit to the IRAs by the taxpayers who were disqualified persons, and thus prohibited transactions. This prompted the IRAs to lose their status as such, with the IRAs being deemed to have distributed their assets to the taxpayers in a taxable transaction. Further, while the IRS issued the notice of deficiency beyond the 3-year limitations period, the Tax Court held that the 6-year statute of limitations applied because the “deemed” distributions exceeded more than 25% of the taxpayers’ reported gross income. The Court rejected the taxpayers’ argument that the reporting of the rollovers was adequate disclosure (an affirmative defense to the 6-year limitations period), finding that the income omission did not arise from the rollovers but from the taxpayers’ later prohibited transactions. To review the full Thiessen decision, follow this link: https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10693
The takeaway: other than passive investments in real estate, there are simply too many ways for taxpayers to stub their toes with IRA-owned business ventures which the IRS has more time than you think to challenge. If you have any questions regarding these Tax Court decisions, or are looking for ways to help your client remediate past transactions involving IRA-owned businesses, please do not hesitate to contact Anthony Daddino at (214) 749-2464.