Those of you who are regular readers of mine know that I have dabbled a bit into writing articles – mostly in the area of self directed IRA investors (more specifically, the federal rules and regulations that govern IRAs). My latest attempt at imparting some semblance of wisdom was published recently in a Washington State Bar Association newsletter directed towards tax attorneys (i.e. members of the Taxation Law section of the WSBA). While this probably sounds terribly boring to many of you, the article actually goes into much more depth than some of my prior works, and due to its focus on three important IRS/Tax Court events in 2013, I believe that anyone who is interested in self directed IRA could benefit from reading the article. If you do take a look (see link below), please make sure and review the footnotes as well, which provide an expanded look at certain topics that cannot be discussed in full detail within in the body of the article.
Self Directed IRA Investors
The following is a sneak preview of the “three important events in 2013” that are discussed in the article:
Peek v. Commissioner (Tax Court case): Two IRA owners use their IRAs to invest in a newly-formed corporation; corporation purchases an active business; individuals personally guarantee part of business purchase price; IRAs converted to Roth IRAs while corp’s value was relatively low; business sold for large profit several years later; IRS retroactively invalidates both IRAs due to “extension of credit” (i.e. personal guarantee) prohibited transaction; business sale proceeds recognized as occurring to IRA owners personally, not within IRAs = tax, penalties, interest.
Form 5498 changes (IRS informational tax form): Form 5498 is sent from IRA custodians to the IRS once per year and currently reports various activity within IRA accounts (e.g. contributions, distributions, fair market value of account, etc.); changes will add several additional “boxes”, which will require new information to be reported relating to “certain specified assets” – i.e. assets that do not have readily ascertainable values (e.g. real estate, privately-held business entities, etc.); this change will provide the IRS with more (but very limited) information about what is going on within self directed IRAs – what the IRS will do with this information is a different question.
Ellis v. Commissioner (Tax Court case): IRA owner purchases substantially all of a new LLC; LLC operates a car dealership; LLC pays IRA owner a small salary for serving as “general manager” of the business; IRS retroactively invalidates IRA using various prohibited transaction arguments; IRA owner owes huge tax bill, penalties, and interest due to retroactive IRA distribution (8 years prior to Court’s ruling); however, Tax Court affirms that IRA-owned LLCs are valid upon formation (and presumably on-going as long as they are handled correctly – I couldn’t agree more!)