Recent Tax Court Case Ruling on IRA Prohibited Transaction Could Have Been Avoided by Use of ROBS Strategy, According to IRA Financial Group Tax Attorney

Share Article

Tax Court ruling in Peek Vs. Commissioner highlights the benefits of using the "roll over as business start-up" (ROBS) strategy for using IRA funds to buy a business

New Tax Court Case Highlights benefit of ROBS Strategy

By using a ROBS strategy instead of IRA funds to purchase the business, the taxpayers could have avoided the IRS prohibited transaction rules

The recent U.S. Tax Court case Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), reinforced the IRA prohibited transaction rule that a taxpayer’s personal guaranty of a loan by a corporation owned by the individual’s IRA is a prohibited transaction under section 4975(c)(1)(B). The Court found that the taxpayers had provided an indirect extension of credit to the IRAs, a prohibited transaction under Internal Revenue Code § 4975 that disqualified the IRAs. In the Peek case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. The “roll over as business start-up” or “ROBS” would have allowed the taxpayer to purchase business assets with retirement funds as well as personally guaranteeing the business loan without triggering the IRS prohibited transaction rules. The ROBS arrangements typically involve rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan which a start-up business sponsored, and then investing the rollover funds in the stock of the new corporation. “By using a ROBS strategy instead of IRA funds to purchase the business, the taxpayers could have avoided the IRS prohibited transaction rules, “ stated Adam Bergman, a tax attorney with the IRA Financial Group.

In the Peek case, the U.S. Tax Court ruled that a taxpayer’s personal guaranty of a loan by a corporation owned by the individual’s IRA is a prohibited transaction under section 4975(c)(1)(B). The Court found that the taxpayers had provided an indirect extension of credit to the IRAs, a prohibited transaction under Internal Revenue Code § 4975 that disqualified the IRAs
According to Mr. Bergman, the main difference between the Peek case and the ROBS strategy is, “most 401(k) Plan offer employer securities as an investment option under a specific exemption from the IRS prohibited transaction rules based off ERISA Section 408(e), which permits 401(k) qualified retirement plans to purchase, hold, and sell “qualifying employer securities.” ERISA Section 408(e) shields employers from prohibited transaction and disqualified person rules under IRC 4975 due to the employer-sponsored retirement plan’s ownership of qualifying employer securities. “More specifically, using a 401(k) Plan adopted by a C Corporation to purchase stock in the corporation (“qualifying employer securities”) would have allowed the taxpayers in the Peek case to use retirement funds to buy a business as well as guarantee a personal loan without triggering a prohibited transaction,” stated Mr. Bergman.

The Peek decision highlights the importance of working with professional tax advisors before using retirement funds to make an investment involving alternative assets. “Because the rules involved in using retirement funds to make investments are so complicated, it is imperative to work with tax experts before using retirement funds to make non-traditional investments, “ stated Mr. Bergman. “Mr. Peek is an attorney and was advised by an accountant and still engaged in a prohibited transaction so it is vital that one works with tax experts that have specific experience in the area of retirement funds, “ stated Mr. Bergman.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP and Dewey & LeBoeuf LLP.

IRA Financial Group is the market’s leading “Checkbook Control” Self Directed IRA and Solo 401k Plan Facilitator. We have helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate tax-free and without custodian consent!

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Jaclyn Baily
Visit website