IRA Money to Buy a Business Can Be Dangerous
owners may need capital to support growth,
and the money in their IRA can be tempting:
Nevertheless, the pitfalls can be steep,
as illustrated in a recent Tax Court case
(Thiessen v. Commissioner, 146 T.C. No.
7 [3/29/16]). Here, the court ruled that
because a married couple had entered into
prohibited transactions with respect to
their IRAs, the assets in the IRAs were
deemed to have been distributed, resulting
in a huge tax bill.
James Thiessen left a long-held job after
declining to relocate, he found a metal
fabricating business (call it ABC Co.)
for sale. Through a friend who had executed
such a transaction and also from a broker,
James heard about the use of IRA money
to help finance the purchase.
James and his wife, Judith, hired tax
and legal advisers. Proceeding according
to plan, the Thiessens created a new C
corporation (call it DEF Co.); James and
Judith were DEF's officers and directors.
They both also established IRA accounts.
Then they rolled a total amount of more
than $430,000 from their employer-sponsored
retirement accounts into the IRAs.
the next step, the Thiessens' IRAs purchased
all the shares of DEF, the new company
they had created; then DEF used the money
from the IRAs to buy the assets of ABC.
In addition to the IRA money, DEF transferred
a $200,000 promissory note to ABC's seller
in the purchase. ABC's assets secured
the note, which James and Judith personally
seven year hitch
all happened in 2003. In 2010, the IRS
asserted that the Thiessens' guarantee
of the note was a prohibited transaction,
which resulted in a deemed distribution
of all of the assets in their IRAs. The
couple was taxed on the deemed distribution
of the over $430,000 they had rolled over
into the IRAs, plus a 10% early withdrawal
penalty, because James and Judith were
"both younger than 59 VE Ongoing
tax deferral on the funds distributed
was lost, and the Thiessens owed over
$180,000 in income tax, according to the
IRS. The Tax Court ruled in favor of the
IRS, upholding the agency's claim.
there's a three-year statute of limitation
on the time in which the IRS can assess
extra income tax. However, there's a six-year
window for the IRS in cases where the
taxpayer substantially understates income.
That was the case here because the Thiessens
had not included the deemed distributions
from their IRAs in income on their 2003
return. The IRS' 2010 filing came within
six years of the date in 2004 when the
Thiessens filed their 2003 tax return.
was the downfall
Tax Court agreed with the IRS that the
Thiessens plan failed because they had
personally guaranteed the promissory note
that DEF transferred in the purchase of
ABC's assets. The Tax Court found that
the Thiessens' "guaranties of the
loan were prohibited transactions and
[the Thiessens'] IRAs ceased to qualify
as IRAs on account of the guaranties."
As a result, all the funds in the IRAs
were deemed distributed in a taxable transaction
in the year the Thiessens guaranteed the
promissory note. This transaction proved
to be very costly for the Thiessens. Other
pitfalls can arise when IRA money is used
to acquire a small business. If you desire
to have your IRA own a business, our office
may be able to help you put together an
arrangement in keeping with the rules
against prohibited transactions.
August 2016 AICPA Client Bulletin