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By Benetrends • January 12, 2014

Recent Self Directed IRA Tax Court Case Peek Vs. Commissioner, 140 T.C. No. 12 (May 9, 2013)

IRA prohibited transaction in self-directed IRA issue is significantly different than the Benetrends ROBS qualified plans.

This case emphasizes the importance of using experienced professionals to assure that the process is compliant.

In the U.S. Tax Court case, Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), the court ruled that two taxpayers engaged in a prohibited transaction when using their self-directed IRA assets to purchase a new business. This case did not involve a ROBS plan, also known as the Benetrends Rainmaker Plan®. The rules are very different for self-directed IRAs, which were used in this court case. The ROBS community is not affected by this court decision. It does, however, emphasize the importance of using experienced professionals when planning to use retirement monies to purchase a business.

According to court documents, two Colorado taxpayers used self-directed IRA assets to help purchase a fire-safety business. In a May 9, 2013 opinion, the Court ruled that a prohibited transaction had occurred when the two taxpayers personally guaranteed a promissory note to the seller as part of the purchase of the business. Consequently, the court ruled that the IRAs lost their tax-deferred status. Beginning of the year, the note was guaranteed, resulting in the taxpayers being required to pay capital gains tax with penalties and interest on the proceeds from the eventual sale of the company.

The Court’s opinion in Peek v. Commissioner was based on the prohibited transaction rules found in ERISA and the Internal Revenue Code. According to the court case, the personal guarantee provided by the individuals was considered to be an indirect extension of credit by the taxpayers to the corporation which was owned by the IRAs.

While some of the fact patterns in Peek v. Commissioner is similar to the design of the Rainmaker Plan, it is significantly different. The critical difference is that a Rainmaker Plan is a qualified retirement plan and not a self-directed IRA, allowing the plan to invest in company stock. We do not want the Rainmaker Plan to be confused with self-directed IRAs.

The statute provides an exemption to the prohibited transaction rules when an eligible individual account type retirement plan purchases qualifying employer securities. This means that an individual can purchase, through their retirement plan, equity in a corporation in which they are an employee.

Taking the correct steps in the right sequence is paramount. Benetrends has been designing plans for our clients, allowing them to take advantage of our 35-plus years of experience and our plan guarantee that provides every client with peace of mind.

This court ruling does not affect the Rainmaker Plan at all. The Benetrends professionals are available to assist you and answer any of your funding questions.