2013 U.S. Tax Ct. LEXIS 13
T.C.2013Background
- IRS issued notices of deficiency for 2006 and 2007 to the Flecks and Peeks after they used IRAs to invest in FP Company and executed guarantees securing FP Company debt.
- IACC plan promoted prohibited 4975 transactions; Fleck and Peek established self-directed IRAs and funded FP with IRA assets.
- Personal guaranties on FP Company debt were recorded as deeds of trust on petitioners’ residences and continued through 2006.
- IRS contends the guaranties caused prohibited transactions, causing IRAs to cease to qualify as IRAs for tax purposes.
- Tax consequences: gains on FP stock in 2006 and 2007 taxed to petitioners; penalties imposed for accuracy-related understatements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether guaranties were prohibited transactions under 4975(c)(1)(B). | IRS: indirect lending to IRAs via guaranties prohibited. | Fleck/Peek: guaranties were not to the plan itself. | Yes; guaranties were prohibited transactions. |
| Tax consequences of prohibited transactions on IRA status and sale of FP stock. | IRAs ceased to qualify in 2001, causing tax on gains from sale. | IRAs remained exempt; gains not taxable. | IRAs ceased in 2001; gains taxed to petitioners in 2006/2007. |
| Whether accuracy-related penalties apply for substantial understatements. | Understatements for 2006/2007 due to prohibited transactions; penalties warranted. | Reasonable cause and reliance on professionals negates penalties. | Penalties sustained for both years. |
Key Cases Cited
- Janpol v. Commissioner, 101 T.C. 518 (1993) (indirect loan guaranties extend credit to the plan’s disqualified person)
- Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152 (1993) (broad language of indirect extensions of credit contemplated by 4975(c)(1))
- 106 Ltd. v. Commissioner, 136 T.C. 67 (2011) (promoter status affects reasonable reliance and reasonable cause)