TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, May 18, 2013

WSJ: Tax Court Slaps Down IRAs Holding 'Alternative Assets'

Tax Court Logo 2Wall Street Journal:  Tax Court Slaps Down IRAs Holding 'Alternative Assets', by Laura Saunders:

A U.S. Tax Court decision offers a cautionary tale for people who want to invest individual retirement account funds in "alternative" assets, especially operating businesses.

The case involved Lawrence Peek and Darrell Fleck, two Colorado taxpayers who used IRA assets to help them buy a fire-safety business [140 T.C. No. 9]. In a May 9 opinion, a judge ruled that Messrs. Peek and Fleck engaged in forbidden actions that terminated their accounts when they bought the business.

As a result, each owes tax of more than $225,000 plus more than $45,000 in penalties. Their lawyer, Sheldon H. Smith of Bryan Cave LLP in Denver, says they haven't decided whether to appeal.

According to the decision, the two men each used $309,000 of assets from their respective IRAs in August 2001 to buy two 50% shares in a corporation. The corporation then paid $1.1 million to buy Abbot Fire & Safety, a provider of fire alarms, sprinkler systems and related equipment.

The purchase price consisted of $400,000 of the taxpayers' IRA assets, a bank loan and other funds, including a $200,000 promissory note personally guaranteed by the two men. The note was secured by their homes.

The Tax Court ruled that the personal guarantees were "prohibited transactions" under federal law, which forbids "any direct or indirect...lending of money or extension of credit between a retirement plan" and insiders such as Messrs. Peek and Fleck.

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