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Example of what NOT to do with a self-directed IRA – new Tax Court ruling – Commissioner v. Peek

Posted on by Warren Baker

 

On May 9, 2013, a new Tax Court ruling opinion was released that further emphasizes the importance of self-directed IRA investors receiving proper counseling before and during investments into “nontraditional” assets.  The full case of Commissioner v. Peek can be found here 140 T.C. No. 9.

In summary, two individuals (“Peek” and “Fleck”) used self-directed IRAs to invest $309k each into a newly-formed Corporation.  The Corporation then purchased an operating business.  The purchase price consisted of $400,000 of the Peek’s and Fleck’s 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 a “disqualified person” (like Peek and Fleck, who are disqualified based on being considered “fiduciaries” of their respective self-directed IRAs).

As a result of the ruling, Peek and Fleck each owe tax of more than $225,000 plus more than $45,000 in penalties.

In my opinion, this ruling describes an IRA investment fact-pattern that contains a very obvious prohibited transaction – i.e. personal guarantee of debt involved with an IRA investment.  However, despite the lack of surprise with the ruling, perhaps more importantly, this case demonstrates that the IRS is very much aware of the potential problems with self-directed IRA investments and is willing to enforce the federal legal framework.

 

Warren L. Baker is a tax attorney with Amicus Law Group, PC in Seattle.  His areas of practice include retirement plan tax consulting, self-directed IRA compliance, and legacy planning and trusts.  His complete bio can be found here: Warren L. Baker – Tax & Estate Attorney – Services & Bio – Amicus Law Group, PC