William Glenn Johns
The following constitutes the ruling of the court and has the force and effect therein described.
Robert L. Jones
United States Bankruptcy Judge
Signed March 26, 2024
MEMORANDUM OPINION
William Glenn Johns filed his chapter 7 bankruptcy petition and, in doing so, claimed his self-directed Roth IRA as exempt from the bankruptcy estate.1 ECF No. 1, Sched. C.2 He listed one creditor, a collection company purportedly collecting a
For the reasons set forth below, the Court sustains the Trustee‘s and Rutans’ objection and disallows Johns‘s exemption claim to the IRA.
BACKGROUND
I. The Bankruptcy
Johns filed his chapter 7 petition on February 3, 2021. ECF No. 1. His bankruptcy schedules reveal an individual with few assets and limited income. Johns exempted his only asset of substantial value—a self-directed Roth IRA, which he values in his schedules at $250,000.4 Id. Johns makes his exemption under
Together the Trustee and Rutans objected to Johns‘s exemption of the IRA. They contend that the IRA is not tax exempt because of “prohibited transactions” and “excessive contributions” that thereby disqualify the IRA as an exempt retirement fund under
The Trustee and Rutans filed their original objection to Johns‘s exemptions on January 6, 2022. ECF No. 73. They then “supplemented” their objection on October 3, 2022.6 The Court heard six days of testimony and evidence7 and permitted the parties to submit post-trial briefs in lieu of closing arguments.8
Not every transaction involving the IRA is described below; instead, the Court focuses on the facts of the IRA‘s structure, history, and transactions that impact Johns‘s exemption claim.
Pertinent to the discussion on excess contributions, Johns was born in 1963; his age determines the amount he is eligible to contribute toward his IRA.
II. NuView IRA
Johns established his self-directed IRA with an application he signed and submitted to NuView IRA, Inc. on December 27, 2016. Debtor Ex. 1. In the application, Johns specified the account would be a Roth IRA, and he acknowledged NuView as the Administrator of the account. Over three years, Johns made three separate
Johns‘s tax returns for the three years he funded his IRA showed total income of $2,673 for 2016, $2,446 for 2017, and $2,738 for 2018. Debtor Ex. 4. Nearly two years after filing his bankruptcy petition, Johns filed amended tax returns on November 28, 2022. Debtor Ex. 5. By his amended tax returns, Johns reported total income in the amounts of $9,173 for 2016, $8,946 for 2017, and $8,738 for 2018. Id.
From at least 2016 to the present, Johns worked for and with an individual named Terrell Sheen. Sheen is a real estate investor who uses trusts and other entities as a way to manage and control his investment properties. Johns and Sheen met at a real estate convention in Florida many years ago, became friends, and developed a mutually beneficial business relationship. For the past several years, Johns has served as a “trustee” for many of Sheen‘s trusts and manages properties for various entities controlled by Sheen. For the tax years that Johns contributed to his IRA, he was paid for various services by two entities, TSU Control, LLC and A Trust Services Trust—both are Sheen‘s creations.10 Despite managing properties for Sheen, Johns claims, and so testified, that he “was just a name and a signature” for Sheen. But such description is overly simplistic and meant to distract from the convoluted and complex transactions effected as a result of their relationship.
In late 2016, Sheen advised Johns that he should prepare for his retirement and recommended that Johns establish a self-directed Roth IRA; to facilitate this, Sheen—through one of his entities—paid Johns the funds that he used for opening his IRA.11 This is where Johns‘s IRA converges with the creation of Carswell Cherokee Trust.
A. Carswell Cherokee Trust
Generally, Carswell Cherokee Trust is a trust that manages real estate and mobile homes and sells improvements for mobile homes. Carswell began thanks to Johns‘s talent for, as was described, “bird dogging” for deals. Johns found a deal to buy real estate and a collection of mobile homes and associated notes (notes payable from buyers of the mobile homes). Beginning
in October 2016, Johns and Sheen began negotiations to purchase the assets from the seller, Denny L. Taylor and Taylor Repo, Inc.
In late 2016, Johns created his IRA. The plan was that Johns, Sheen, and Sheen‘s wife, Cathy Sheen, would use their separate IRAs to create a trust that would then purchase the Taylor Repo assets.
The financing for the Taylor Repo purchase is important for the discussion of prohibited transactions. Each part of the three-part sale had separate forms of consideration. For the first purchase and sale agreement, the purchase price is listed as $735,145.31, with $547,382 payable to Denny Taylor at closing and the balance to be paid to certain banks in satisfaction of the debts
owed by Taylor to those banks.14 Trustee Ex. 16 ¶ 4. The testimony and supporting documents reflect that the Sheens’ IRAs fronted over $550,000. See Trustee Ex. 23. Importantly, Johns testified that the money provided by the Sheens was to be repaid, and he produced a one-sentence, one-party written “agreement” for repayment.15 Debtor Ex. 39. Under the second purchase and sale agreement, Carswell Cherokee Trust assumed16 the debt that Taylor Repo owed to PrimeSouth Bank, in the amount of $1,147,267.63.17 Trustee Ex. 17. The same day the Taylor Repo sale closed, Carswell Cherokee Trust issued a promissory note in favor of Terrell Sheen‘s IRA to repay the $1,147,267.63. Debtor Ex. 11. Apparently, the promissory note was to provide additional “security” for repayment of the debt owed to PrimeSouth Bank. Id. ¶ 15. It is not clear why Terrell Sheen‘s IRA would be owed for Carswell Cherokee Trust‘s assumption of Taylor Repo‘s debt—especially considering, per Johns‘s
An accident in January 2017 left Johns injured and in need of help managing various properties. Enter Shannell Smith—a long-term tenant of property managed by Johns and friend
of Johns. Smith made her mark with her management of many properties and impressed Sheen and Johns so much that she was appointed trustee of several other trusts. She was responsible for managing the Carswell Cherokee Trust properties in Georgia, while other Texas properties of the trust were handled by “the Texas office” (ostensibly by Sheen or his agents). There are two unique features of Smith‘s property-management style that should be highlighted: a tendency to commingle funds and to draw her compensation from commingled accounts. Smith has no formal training in accounting or bookkeeping.
Smith helped Johns manage Carswell Cherokee Trust property; she was not, however, the trustee. She opened a bank account that she dubbed “American Management Trust dba Taylor Repo and Trust Services.” The purpose of this account was to take-in the funds from the Taylor Repo properties; in fact, Smith included the “dba Taylor Repo and Trust Services” in the account name to make it easier to deposit checks payable to Taylor Repo. See Trustee Ex. 153. One problem with the account is that Smith used it for other properties that she manages. Consequently, it is impossible to determine what funds are whose. Smith said that she keeps track of the funds with a spreadsheet. See Debtor Ex. 35. But when questioned about the spreadsheet, she was unable to explain several discrepancies. One issue with the spreadsheet is that it does not account for the funds from the Carswell Cherokee Trust, which is problematic because the American Management Trust account was specifically established to manage the income and other funds derived from the Carswell Cherokee Trust properties. Also problematic is that Smith used funds from the American Management Trust account to pay the mortgage and bills on a property where Johns stayed for upwards of four months a year. Johns and Smith maintain that those payments were made by entities other than Carswell Cherokee Trust, however. From the evidence, the Court cannot determine to any degree of certainty who owned
the money that left the American Management Trust bank account to pay expenses of the property where Johns periodically resides. That property is owned by Sheen through his trust named Rideout Blalock Trust; Smith paid the mortgage and other utilities of the property out of the American Management Trust account. See Trustee Ex. 109; Debtor Ex. 35. There has been no formal tracing of the funds used to pay those expenses.
Another characteristic of Smith‘s management style was her habit of withdrawing funds with, she says, the intent to pay back amounts withdrawn—frequently by deferring her future pay checks.19 The advances arose in different contexts and covered different expenses—from her purchase of Louis Vuitton luggage and Walt Disney World tickets to payment of her daughter‘s college tuition. See Trustee Ex.
Approximately five months after acquiring the Taylor Repo properties, Carswell Cherokee Trust acquired more income-producing properties—this time from Michael and Jill Hobbs (the transaction is referred to as the “Hobbs transaction“). See Trustee Exs. 20, 21, & 22. The purchase price for those properties was $237,085.29 due at closing and the assumption of debt in the amount of $449,423.55. Trustee Exs. 20 & 21. Johns said the cash at closing came from a third-party, Caleb Walsh, who simultaneously purchased a portion of the properties from Carswell Cherokee Trust when the trust purchased the property.20 This contradicts the most recent balance sheet of assets and liabilities of Johns‘s IRA, which lists a debt owed to “Sheen‘s
IRA” for the down payment on the Hobbs property.21 ECF No. 295 at 5. From the evidence, the Court concludes that Sheen‘s IRA loaned the funds for the Hobbs transaction to Carswell Cherokee Trust.22
The testimony on the decision-making process for Carswell Cherokee Trust paints a convoluted picture. On some level, Sheen, Smith, and Johns had frequent discussions concerning the acquired properties, and all three had some level of input in the management of those properties. Smith is responsible for collections and evictions, and she occasionally enlisted Johns‘s help. In contrast, the named trustee, Brian Anderson, merely signed the paperwork that Sheen instructed him to sign.
Johns occasionally uses a small office at Carswell Cherokee Trust‘s office in Georgia.
In summary, Carswell Cherokee Trust funded its acquisition of properties with loans issued by the Sheens, and the funds in the account for American Management Trust are commingled to the point that the allocation of the account‘s funds is undeterminable. The account includes funds from Carswell Cherokee Trust. And the loans made by the Sheens’ IRAs also account for their IRAs’ respective interests—Terrell Sheen‘s 41.73% and Cathy Sheen‘s 9.27%—in Carswell Cherokee Trust. As stated above, Johns‘s IRA‘s $13,000 contribution accounts for its 49% interest.
B. Southeast Financial Trust
The other asset of Johns‘s IRA is its interest in the Southeast Financial Trust. Like Carswell Cherokee Trust, Southeast Financial Trust owns businesses and manages properties. Its story begins with Sheen recommending that his son, Austin Sheen, do a deal with Johns. Johns
found a good business opportunity for them—a portable toilet business that was for sale. So Johns and Sheen agreed that Sheen (or his son) would front the money for a 49% interest in the business; Johns‘s IRA would also get a 49% interest, while the
Amerifirst Portalet‘s operating agreement was signed on January 6, 2018 but bears an “effective date” of December 19, 2017. Trustee Ex. 33. Amerifirst Portalet‘s operating agreement states it is an Idaho LLC. The document specifies as follows: that Giving Joy 10-2015 Trust (Austin Sheen‘s trust) contribute $259,648.09 for a 49% interest in the company; that Southeast Financial Trust contribute $5,600 for a 49% interest; and that the managers of the business, Christopher and Katherine Magart, contribute their time and effort for a 2% interest. Id. From December 2017 to October 2019, Giving Joy Trust purports to have contributed $664,554.06 to Amerifirst Portalet. Debtor Ex. 19. Like Carswell Cherokee Trust, all
contributions to Amerifirst Portalet were to be repaid before distributing profits.24 Debtor Ex. 18.
Amerifirst Portalet held a bank account at US Bank under the name “Amerifirst Portalet & Pump Service LLC dba Tams Traveling Toilets” and later opened an account at PrimeSouth Bank under the name “Amerifirst Portalet and Pump Service, LLC d/b/a Peacock Pumping and Portalet.”25 See Trustee Exs. 34, 77, & 78.
Shortly after Amerifirst Portalet‘s creation, on January 18, 2018, it purchased assets from Tam‘s Traveling Toilets, LLC. Trustee Ex. 43. The total purchase price was $430,000 with $170,000 paid as a down payment and the balance seller-financed. Tam‘s Traveling Toilets, not content with holding a security interest in only the assets sold, demanded “additional security“; Johns agreed, with Sheen‘s approval, to use the property held in another trust, the Sheen Foundation 51 Trust, as additional security to purchase Tam‘s Traveling Toilets. The additional security is in the form of a promissory note that Johns signed as trustee of the Sheen Foundation 51 Trust and made payable to Tam‘s Traveling Toilets. Debtor Ex. 20 at 6; Trustee Ex. 44. Johns is the named trustee of Sheen Foundation 51 Trust, and the two beneficiaries are 252 Equity Trust and Stagecoach Enterprises, Inc. Debtor Ex. 37. While the listed beneficiaries are not individuals, Sheen controls the property of those beneficiaries. The Winona Beach Resort in Washington state was held in the Sheen
additional security for the seller-financed acquisition of property for Southeast Financial Trust.26 See Trustee Exs. 43 & 44.
A problem shared by Carswell Cherokee Trust and Southeast Financial Trust is that bank accounts associated with each trust made payments to Johns‘s mother and Johns‘s then-girlfriend. Johns testified that he had not had a credit card since before 2008; instead, he used his mother‘s and his girlfriend‘s credit cards for various purchases—particularly for dining-out and groceries.27 Sheen would later approve the reimbursement of those purchases, as per an unwritten arrangement between him and Johns. Likewise, Johns‘s girlfriend worked with Johns and for Sheen, and Sheen or Johns routinely approved the reimbursement of her work-related expenses. The kicker in this arrangement is the source of the reimbursements—the American Management Trust account and an Amerifirst Portalet and Pump Service account.28 Smith also cut checks directly to Johns‘s mother to cover expenses that she paid—for example, Johns‘s mother would occasionally pay for lawn services for which she was reimbursed by Smith out of the American Management Trust account.
DISCUSSION
From the history of Johns‘s IRA‘s investments, it is evident that financial formalities were loosely followed, if at all, by the parties controlling the various properties that benefit
Johns‘s IRA. But the Court must decide if Johns‘s involvement constituted “prohibited transactions” or “excessive contributions” that thereby strip his IRA of its exemption under
I. Jurisdiction
The Court‘s jurisdiction of this case and proceeding derives from
II. The Exemption and the Objection
Upon the filing of a bankruptcy petition, “all legal or equitable interests of the debtor in property” become property of the bankruptcy estate.
The provision at issue here,
and thus his exemption claim fails. And the assets of the IRA therefore became property of the bankruptcy estate.29 Johns maintains his IRA is tax exempt.
III. The Burden of Proof
The party saddled with the burden of proof here must prove its case by a preponderance of the evidence. Rea v. Crum (In re Crum), No. 00-4013, 2002 Bankr. LEXIS 1948, at *10-11 (Bankr. N.D. Tex. Feb. 22, 2002); In re Park, 246 B.R. 837, 840 (Bankr. E.D. Tex. 2000). Neither party adequately addressed the question of who bears the burden given the objection to the exemption.30 And this point turns on whether an exemption under
First, it is important to note that exemptions are limited. See generally Schwab v. Reilly, 560 U.S. 770, 791 (2010) (“The Code limits exemptions … because every asset the Code permits a debtor to withdraw from the estate is an asset that is not available to his creditors.“). Bankruptcy Rule 4003(c)31 specifies that the burden of proof is on the objecting party to prove the exemptions are not proper.32 But
then bears the burden to prove the retirement funds are not properly exempt, much like the burden in Rule 4003(c).
But when the retirement fund has not received a favorable determination from the IRS, the debtor bears the burden.
Johns did not offer evidence of a favorable determination letter, but the Trustee and Rutans have not argued that the burden shifted to Johns under
Supreme Court‘s reasoning in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644 (1992). See In re James, 489 B.R. at 735. With due respect to those courts, the reliance on Taylor is misplaced. In Taylor, the Court addressed whether a trustee may object to an exemption “after the 30-day period if the debtor had no colorable basis for claiming the exemption.” Taylor, 503 U.S. at 639. For context, Bankruptcy Rule 4003 requires objections to exemptions be brought within a 30-day period after the § 341 meeting of creditors. Fed. R. Bankr. P. 4003(b)(1). The Court held that the Bankruptcy Code and Bankruptcy Rules do not allow the trustee to object to exemptions after the 30-day deadline. Taylor, 503 U.S. at 642-46. Relying on Taylor for the premise that exemptions are presumably correct is not justified; the Court made no mention of such a presumption, it merely limited the time for objecting to the exemptions. See id.
In contrast, other courts have found that even when a favorable determination letter is provided, such proof does not always give rise to the presumption that the retirement funds are exempt. See Jie Xiao v. Chorches, 610 B.R. 183, 190-91 (D. Conn. 2019). For example, in Jie Xiao, a favorable IRS determination letter was provided, but it was premised on a pension plan that was subsequently amended, and the amended plan was not considered by the
So the question remains—what should the Court do when no proof of an IRS determination is provided and the objecting parties do not argue the burden was shifted to the debtor? A simple reading of the Bankruptcy Code resolves the issue.
Beginning with
First, there is no evidence that the IRS ever blessed Johns‘s IRA with a favorable determination letter. The Court thus looks past
are exempt from the estate if the debtor demonstrates that—
(i) no prior determination to the contrary has been made by a court or the Internal Revenue Service; and
(ii) (I) the retirement fund is in substantial compliance with the applicable requirements of the Internal Revenue Code of 1986; or
(II) the retirement fund fails to be in substantial compliance with the applicable requirements of the Internal Revenue Code of 1986 and the debtor is not materially responsible for that failure.
whether the IRA substantially complies with the Internal Revenue Code, and if not, was Johns materially responsible for that non-compliance.
With this framework in mind, the linchpin of the Trustee‘s and Rutans’ argument is that Johns‘s IRA fails to substantially comply with the Internal Revenue Code because of Johns‘s prohibited transactions and excessive contributions, which render all—or some portion—of the account taxable and thus a non-qualifying exemption under
To understand the arguments, the Court shifts from the Bankruptcy Code,
trust[s] created ... in the United States for the exclusive benefit of an individual ... , but only if the written governing instrument creating the trust meets the following requirements:
(1) Except in the case of a rollover contribution ..., no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).
(2) The trustee is a bank ... or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
(3) No part of the trust funds will be invested in life insurance contracts.
(4) The interest of an individual in the balance in his account is nonforfeitable.
(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.
(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.
The takeaway is that a Roth IRA is an IRA that satisfies § 408 of the Internal Revenue Code and is designated as a Roth IRA when established. A Roth IRA is treated in the same manner as an IRA except as provided by § 408A. See
Section 408(e)(1) of the Internal Revenue Code exempts an IRA from taxation. And again, retirement funds may be exempted from the bankruptcy estate under
The Trustee and Rutans also charge Johns with making excessive contributions to his IRA. Excessive contributions do not entirely cancel the tax-exempt status of an IRA. Instead, a tax is imposed on the amount of the excessive contributions, and the tax is to be paid by the owner of the account.
A. Prohibited Transactions
As stated above, an IRA loses its tax-exempt status when the “individual for whose benefit [the] individual retirement account is established ... engages in any transaction prohibited by section 4975 with respect to such account.”
1. Section 4975 of the Internal Revenue Code
A prohibited transaction, as defined by § 4975 of the Internal Revenue Code, is:
... any direct or indirect-
(i) the individual for whose benefit any account was established is treated as the creator of such account,
(ii) the separate account for any individual within an individual retirement account maintained by an employer or association of employees is treated as a separate individual retirement account, and
(iii) each individual retirement plan of the individual shall be treated as a separate contract.
(B) Account treated as distributing all its assets
In any case in which any account ceases to be an individual retirement account by reason of subparagraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) applies as if there were a distribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day).
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or (F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
Before applying the statute to the case at hand, the Court will outline several examples that demonstrate the boundaries of what is and is not prohibited.
Beginning with a rather straight-forward case, in Ellis v. Commissioner, 787 F.3d 1213 (8th Cir. 2015), a taxpayer established a self-directed IRA that invested in an LLC. The LLC engaged in automobile sales and had two members: the taxpayer‘s IRA (which provided the initial capital for a 98% interest) and an employee (who retained the remaining 2%). Id. at 1214. The taxpayer was named the general manager of the LLC and was paid a salary. Id. at 1215. The Tax Commissioner sent a notice of deficiency because the IRA lost its status as an IRA and its entire fair market value was treated as taxable income due to the taxpayer‘s salary being a prohibited transaction. Id. The taxpayer petitioned to the tax court, and the court upheld the Commissioner‘s notice by determining the taxpayer engaged in prohibited transactions under
A slightly more abstract case is Thiessen v. Commissioner, 146 T.C. 100 (2016), where the tax court held that the taxpayers’ (a husband and wife) loan guaranties were prohibited transactions because the guaranties were indirect extensions of credit to the taxpayers’ IRAs and prohibited under
Contrasting with the above cases, the Sixth Circuit in Daley v. Mostoller (In re Daley) held that a debtor did not use his IRA to obtain credit and thus did not engage in a prohibited transaction. 717 F.3d 506 (6th Cir. 2013). In Daley, the debtor opened an IRA with Merrill Lynch and signed an agreement where the debtor granted a lien on the property he owns in any Merrill Lynch account to cover any indebtedness owed to Merrill Lynch. Id. at 507. The debtor did not owe any debts to Merrill Lynch when he opened the account or after. Id. The debtor also did not use his IRA for collateral on any other form of indebtedness. Id. After the debtor filed his chapter 7 petition, the chapter 7 trustee objected to him exempting his IRA on the grounds that the agreement was a prohibited extension of credit. Id. at 508. The bankruptcy court and district court agreed with the trustee, to be later reversed by the Sixth Circuit. Id. The Sixth Circuit first noted that there is a favorable presumption when the account received a favorable determination letter from the IRS, and in Daley, the trustee conceded the account had such a letter. Id. Then turning to the extension of credit, the Sixth Circuit noted that no credit was ever provided; Merrill Lynch never extended credit to either the plan or the debtor. Id. at 508-09. “The lien provision was contingent on an event that never occurred, and above all could not occur until [the debtor] opened a separate account,” like a margin account. Id. at 509. On that record, the Sixth Circuit held that the debtor did not engage in a prohibited transaction, so his IRA was exempt from his bankruptcy estate. Id. at 510-11.
(a) Plan Assets
Applying the statute in this case is complicated by the fact that
Testimony was elicited concerning the “plan asset rule,” also referred to as the “plan asset regulation.”43 The “rule” or “regulation” refers to the regulation enacted by the Department of Labor that provides a definition of plan assets. See
The regulation begins: “Generally, when a plan invests in another entity, the plan‘s assets include its investment, but do not ... include any of the underlying assets of the entity.”
Applying the regulation, beginning with the basic rule, the IRA‘s assets do not include the underlying investment‘s assets. See
An “operating company” includes entities that satisfy the definition of a “real estate operating company.”
On to the second exception to the exception. This is when “[e]quity participation in the entity by benefit plan investors is not significant.”
Simply stated, applying the plan asset regulation to this case, Johns‘s IRA‘s assets include the assets of its investments.
It gets more complicated. The previously mentioned regulation applies to entities, but the Florida Land Trust Act provides that the instrument for a land trust ”does not itself create an entity, regardless of whether the relationship among the beneficiaries and the trustee is deemed to be an entity under applicable law.”45
So, the question becomes: who owns the trust assets if the trusts are not the owners of the trust property? The Florida Land Trust Act vests “both legal
The framework for a Florida land trust places the beneficial interest in the trust property in the hands of the beneficiary while the trustee holds both the equitable and legal title to that trust property.
Under the facts here, the beneficiaries of Carswell Cherokee Trust are Johns‘s IRA, Terrell Sheen‘s IRA, and Cathy Sheen‘s IRA; the trustee of Carswell Cherokee Trust is Anderson; and Smith acts as the property manager. For Southeast Financial Trust, the beneficiary is Johns‘s IRA, and the trustee is Smith.
The Court holds some concerns about the legitimacy of the two land trusts because (1) not all the assets of the trusts are land; and (2) the formalities of the Florida Land Trust Act may not have been followed.48 And when a land trust fails for
If the trusts are analyzed under the framework of an express trust governed by the Florida Trust Code, the beneficiaries of the trusts hold a beneficial interest in the trust property.50
Whether governed by the Florida Land Trust Act or the Florida Trust Code, Johns‘s IRA‘s beneficial interest is the right to receive proceeds, control the property, and instruct the trustee to convey property. This comports with a general understanding of a beneficial interest. See
The result is that the trust itself does not own any portion of the trust property; ownership is split between the beneficiary and the trustee. The trust instruments here provide that the beneficiaries hold rights to the trust property—and Johns‘s IRA is a beneficiary of the trusts.
The trust agreement that governs the Carswell Cherokee Trust provides that the beneficiaries include “Nuview IRA Inc. FBO William Johns Roth IRA.” Trustee Ex. 25. The agreement contains language characterizing the beneficiaries’ interest as personal property. Trustee Ex. 25 ¶ 5 (“No Beneficiary shall have any legal or equitable right, title or interest, as realty ... but shall have only the rights, as personalty, set out below ....“).51 The agreement
The interest of Johns‘s IRA in the property held in the Southeast Financial Trust is convoluted. The first confounding wrinkle concerns the trust property. The Florida Land Trust Act governs land trusts, and the property of a land trust means “any interest in real property.”
Fortunately, as described above, there is no substantive difference in the analysis of ownership whether Southeast Financial Trust is a land trust or an express trust. Specifically, the Southeast Financial Trust instrument provides that Johns‘s IRA, as sole beneficiary of the trust, retains the right to direct the trustee to convey title to the trust property, the right to participate in management and control of the trust property, and the right to receive proceeds from the trust property. Debtor Ex. 7 ¶ 5. The assets of the Southeast Financial Trust include an interest in Amerifirst Portalet & Pump Service, LLC, the 127 El Terrace Trust, the 406 CDA Trust M/L, a mobile home, and Amerifirst Portalet deposits. Trustee Ex. 62.
Amerifirst Portalet & Pump Service, LLC‘s operating agreement specifies that it, the LLC, and not its members, holds the personal and real property. Trustee Ex. 33 at 3. The business is managed by its members.53 Id. at 1. And each member‘s vote is based on their percentage of capital contributed until all capital contributions have been repaid, at which point the voting rights change by the percent interest of the members. Id. at 2. The operating agreement provides that distributions are first made to repay the capital contributions of its “managing members“; then, when the capital is repaid, the distributions are allocated based on the member‘s percentage interest. Id. at 4. The capital contributions to Amerifirst Portalet & Pump Service are: (1) Giving Joy 10-2015 Trust‘s $259,648.09 contribution for a 49% interest in the LLC; (2) Southeast Financial Trust‘s $5,600 contribution for a 49% interest in the LLC; and (3) the Magarts’ contribution of time and effort for a 2% interest in the LLC.54 Trustee Ex. 33 at 3-4.
(b) Disqualified Persons
The next question is who is a disqualified person as defined by the Internal Revenue Code. See
First, a disqualified person includes a fiduciary.
To Johns,55 he exercised authority and control over managing his IRA assets; he negotiated numerous business opportunities for the trusts—e.g., the acquisition of Taylor Repo, Tam‘s Traveling Toilets, and Amerifirst Portalet and Pump Service.56 Johns also discussed the actions needed to care for the Carswell Cherokee Trust property and occasionally assisted in the maintenance and collections for Carswell Cherokee Trust properties.
The testimony was replete with situations where Terrell Sheen issued some instruction or was consulted before action was taken regarding trust property, such as directing Anderson, Smith, and Johns in their dealings with the trust property.
Austin Sheen, through his trust (Giving Joy 10-2015 Trust), holds some amount of discretionary control over Amerifirst Portalet, although no evidence showed he exercised control.
Smith testified that she and Sheen make decisions regarding the various properties that she manages. She had business conversations with Johns but maintains that she ultimately decides what happens with the properties outside of Texas; she frequently stated that the “Texas office” is responsible for property within Texas.
The second relevant provision governing disqualified persons is
(c) Prohibited Transactions
After identifying Johns‘s IRA‘s assets (certain rights to Carswell Cherokee Trust and Southeast Financial Trust property) and the disqualified persons (Johns, Sheen, Smith, Austin Sheen, Cathy Sheen, and Mildred Johns), the next step is to identify any “prohibited transaction” between the disqualified person and the plan (the IRA) or its assets.
Again, a prohibited transaction is “any direct or indirect” sale, exchange, lease, loan, or extension of credit; provision of goods, services, or facilities; transfer of plan income or assets for the benefit of a disqualified person; dealing by a fiduciary in the plan‘s income or assets for his benefit; or receipt by a disqualified person of consideration from any party dealing in a transaction involving the plan‘s income or assets.
Courts have interpreted the language “direct or indirect” broadly. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159 (1993); Peek v. Commissioner, 140 T.C. 216, 225 (2013); see Thiessen v. Commissioner, 146 T.C. at 106-114. An example of this is the tax court holding that a guaranty of a loan can be an indirect extension of credit. Thiessen, 146 T.C. at 106-114; Peek, 140 T.C. at 224-25.
Here, several loans were made by a disqualified party; the effect of those loans added value to Johns‘s IRA.
From the beginning, Johns‘s IRA‘s first investment, through Carswell Cherokee Trust, was made by substantial loans from other beneficiaries of that trust. The Sheens’ IRAs made a loan of over $550,000 to Carswell Cherokee Trust, the proceeds of which were used for the purchase of the Taylor Repo assets for the benefit of Johns‘s and the Sheens’ IRAs. This arrangement fits squarely within
Also, as part of the Taylor Repo acquisition, Carswell Cherokee Trust signed a $1 million, non-interest-bearing promissory note payable to Terrell Sheen‘s IRA. Debtor Ex. 11. This transaction is prohibited under
Like the Taylor Repo purchase, Johns failed to prove that the Hobbs transaction
An unsworn declaration provided by Johns lists a debt owed to “Sheen‘s IRA” for the downpayment in the Hobbs transaction. ECF No. 295 at 5. But when asked at trial about the source of the downpayment, Johns initially responded that Caleb Walsh provided the funds. Then to square the discrepancies, Johns claimed he didn‘t know how the money traded hands and posited that the money could have flowed from Caleb Walsh to Sheen‘s IRA then to the title company upon closing. But after reviewing the purchase agreements and the settlement statements, it appears the only parties in the Hobbs transaction were Michael and Jill Hobbs (sellers) and Hampton Beesley as trustee of Carswell Cherokee Trust (buyer). Debtor Ex. 12. The settlement statement shows that $242,881.53 was due from the buyer [Debtor Ex. 12 at 38], which matches the corresponding list of debt owed to Sheen‘s IRA in the balance sheet provided by Johns [ECF No. 295 at 5]. The evidence shows that the funds were treated by Smith, Sheen, and Johns as coming from Sheen. The Court concludes that Sheen‘s IRA loaned the funds for the Hobbs transaction to Carswell Cherokee Trust.
Smith transferred or used Johns‘s IRA‘s assets for her own benefit when she took commingled funds from the American Management Trust account that held funds of Carswell Cherokee Trust and by drawing her salary for managing Carswell Cherokee Trust property. She is a fiduciary of the plan (the IRA); those transactions are therefore prohibited transactions under
For the reasons below concerning Johns‘s engagement, the Court does not need to determine whether the America Management Trust account‘s payments for expenses of the Rideout Blalock Trust property, where Johns stays for up to a quarter of the year, were prohibited transactions.
The Trustee and Rutans argue that the IRA furnished facilities for Johns; those facilities were a small office in the main facility that Carswell Cherokee Trust operated in. Although true, the facilities were insubstantial.58
Like the initial acquisition of Carswell Cherokee Trust‘s properties, the contributions
The guaranty issued by Johns as trustee of the Sheen Foundation 51 Trust to Tam‘s Traveling Toilets was an indirect extension of credit to Johns‘s IRA by a disqualified person.59 See, e.g., Thiessen, 146 T.C. at 106-114.
2. Johns‘s engagement
Several transactions fall within the definition of a prohibited transaction under
Of the transactions described above, the evidence shows Johns orchestrated the purchasing and financing of several business opportunities that arose: Carswell Cherokee Trust‘s acquisition of Taylor Repo, the funding of Amerifirst Portalet, and the collateralization of Sheen Foundation 51 Trust property. Using a self-directed IRA to invest in business opportunities is not inherently prohibited under the Internal Revenue Code, but the problem here arises from Johns‘s engagement in the financing of those investments. Fiduciaries of his IRA—those who exercise discretionary control over his IRA‘s assets—extended the credit used to purchase his IRA‘s investments. And the assets of his IRA were used as collateral for guaranties. Johns was integral to these extensions of credit. The facts of those transactions—where Carswell Cherokee Trust purchased Taylor Repo properties, Amerifirst Portalet‘s funding from Austin Sheen, and Johns‘s use of Sheen Foundation 51 Trust property as security—establish that Johns “engaged in” those transactions. These transactions are prohibited under
The evidence does not establish that Johns paid Smith‘s salary or approved her borrowing from the accounts she managed. And the evidence fails to show that Johns participated in the mortgage payments on the Rideout Blalock Trust property.
3. The Prohibited Transaction Summary
To summarize the prohibited transaction analysis: Johns engaged in the negotiations and actions that caused large sums of money or credit to be extended to his IRA by virtue of its beneficial interest in the properties that were purchased with that credit. The money was provided by disqualified persons through entities they controlled.
The first prohibited transaction occurred shortly after Johns created his IRA, with Sheen extending over half-a-million dollars for the purchase of Taylor Repo. Johns found and negotiated the acquisition, and Sheen, a disqualified person, extended the financing (the prohibited transaction). Because this was a prohibited transaction that Johns engaged in, the IRA is not in substantial compliance with and should not be afforded tax-exempt status under the Internal Revenue Code. And Johns failed to prove that he was not materially responsible for the noncompliance. Under
B. Excessive Contributions
The Court concludes the IRA loses its tax-exempt status because of the prohibited transactions. This conclusion resolves the exemption issue against Johns. The Court will, however, also address the charge of excessive contributions. These are in two buckets: (1) the initial contributions he made above-and-beyond his taxed income, and (2) the enhancement of his IRA‘s value due to the transfers from Sheen into trusts that benefit Johns‘s IRA.
The Internal Revenue Code limits the amount a taxpayer may contribute to a Roth IRA.
The Trustee and Rutans claim that the initial funding of $19,000 to Johns‘s IRA, made over three years, was excessive because it exceeded Johns‘s income during the relevant years. Johns insists that amended tax returns for each of the three years rectify this issue. See supra Background, Part II. The question is whether Johns‘s initial three contributions, totaling $19,000, were in excess. And the crux of that question is what limit applied to Johns.
Considering that Johns was over the age of 50 when he made his contributions, the applicable limits for tax years 2016, 2017, and 2018 are the lesser of $6,500 for each year or the individual‘s taxable compensation for the same years.60 The problem is that Johns‘s original tax returns reflect his income was less than the allowable contributions. Johns must have received at least as much “taxable compensation” as he contributed to his IRA. That does not mean that he properly and timely paid taxes on that taxable income, however. But this goes against the mechanics of a Roth IRA where the taxpayer pays taxes on his income before contributing that
income to his Roth IRA so that he can enjoy non-taxed distributions later. The caselaw on this issue is sparse, and the IRS publications and guidance assume the taxpayer properly reported all income.The question is whether a taxpayer can remedy excessive contributions to an IRA by later reporting extra income and paying taxes on that income. The Court questions the integrity of Johns‘s amended returns. Johns‘s amended returns simply add the amounts of his purported contributions as income to his amended returns. And this was done nearly two years after filing bankruptcy and, more important, after the Trustee and Rutans raised the issue of his having made excessive contributions.61
A debtor in bankruptcy is required to file a complete and accurate list of his creditors and schedules that identify all
Red flags are raised when a debtor says he contributed $19,000 of funds he ostensibly did not have, that such $19,000 has a value of $250,000 a few years later, and that such value is exempt.
A chapter 7 bankruptcy case requires more candor than what Johns has provided. Johns offered no plausible explanation of how his reported income was less than half the amount of his contributions to the IRA and how his after-the-fact correction simply matches the amounts of his contributions. A debtor cannot absolve his deficiencies by simply addressing them after another party, or the Court, has raised the problem. Johns turned the process on its head. His “correction” is not plausible. The problem, however, is that the Court‘s skepticism is whether Johns has accurately reported all his income. Johns paid taxes on the additional amount that he did report under his amended returns. As a result, this issue has no practical effect here.
The Court briefly addresses the Trustee‘s and Rutans’ contention that the loans (or contributions) made to Carswell Cherokee Trust and Southeast Financial Trust are contributions that also exceed the allowable contribution amount. The Internal Revenue Code defines the metes and bounds of taxpayer contributions to their Roth IRAs. See
The Fifth Circuit has routinely held that a cardinal principle of income taxation is that a “transaction‘s tax consequences depend on its substance, not its form.” Southgate Master Fund, L.L.C. v. United States, 659 F.3d 466, 478-79 (5th Cir. 2011). Indeed, “[t]his principle is no schoolboy‘s rule; it is the cornerstone of sound taxation.... Tax law deals in economic realities, not legal abstractions.” Id. (internal quotations and citations omitted).
The Trustee and Rutans evoke the substance-over-form principle to characterize transfers by third parties into trusts, for which the IRA benefits, as contributions. Trial Br., ECF No. 315 at 20.
The taxpayers argued the Commissioner of the Internal Revenue Service improperly calculated deficiencies based upon an excess contribution to the husband‘s Roth IRA. Specifically, the taxpayers maintain that the $2,000 initial contribution was the only contribution made to his self-directed Roth IRA. Id. at 19. The court disagreed because the series of transactions, taken as a whole, showed the transactions themselves were shams with the only purpose of achieving the anticipated tax consequences. Id. The court emphasized that:
The substance of what happened in the instant case is that approximately $1.3 million began the year in [the husband‘s] traditional IRA and was transferred to his Roth IRA by the end of the year with no taxes being paid. [The husband] did not attempt to provide a nontax business, financial, or investment purpose for what he did, and this Court cannot ascertain one. Instead, [the husband], incited by and at the urging of [his financial advisor], used corporate formations, transfers, and mergers in an attempt to avoid taxes and disguise excess contributions to his Roth IRA.
The alleged contributions implicate the substance-over-form doctrine.
Applying the doctrine to the case at hand is more nuanced than in Paschall because the transfers came from third parties (albeit a fiduciary of the IRA for purposes of prohibited transactions) and were made to trusts that benefit Johns‘s IRA. Nonetheless, the substance of what occurred is clear—Johns‘s Roth IRA received substantial value without paying tax.62 The transactions in this case are “loans” made from Sheen—who controls assets of the IRA. Taken as a whole, what transpired in and around Johns‘s IRA is that Johns stands to reap substantial value and tax benefits from this scheme. The transactions that Johns and Sheen label as loans are also treated as investment contributions to Johns‘s IRA. When asked by the Court if the funds going in from the Sheens were allocated as between the amount that constituted a loan and the
C. Commingling
Under
V. Fair Notice
Johns objects to several matters as not having been raised in the pleadings. In the Pre-Trial Order, Johns claims thirty-four of the Trustee‘s and Rutans’ issues of fact and fifty-nine of their issues of law were not raised in the pleadings. ECF No. 301 at 14 ¶ 13 & 22 ¶ 11. Not all the issues are pertinent to what the Court decides here. The chief concern is whether the Trustee‘s and Rutans’ pleadings put Johns on notice that their allegations challenge transactions related to his IRA as excessive contributions and prohibited transactions.63
Looking to the original objection to exemption, the basis in law for the objection is that the IRA is not tax exempt due to prohibited transactions and excessive contributions and “such contributions constitute prohibited transactions.” ECF No. 73 ¶ 14. The objection to exemption directs Johns to the statutory bases for the objection, and those same statutory provisions are central to the Court‘s analysis here. Id. ¶¶ 58-67. The Trustee and Rutans included extensive factual allegations that put Johns on notice of the charges made. Johns was in the best position to know the facts that support his exemption claim.
The supplemental objection is rooted in the same law: prohibited transactions and
The Trustee‘s and Rutans’ Supplemental Objection to Exemptions favors “excessive contributions” as a descriptor more so than “prohibited transactions.” They cite an IRS notice in support. ECF No. 306, Summary, ¶ 5865 (referencing IRS Notice 2004-8, 2004-4 I.R.B. 333).
32. Whether Shanell Smith, as trustee of the Southeast Financial Trust, is a disqualified person under
26 U.S.C. § 4975(e)(2)(A) as a fiduciary of the trust?
33. Whether Brian Anderson, as trustee of the Carswell Cherokee Trust, is a disqualified person under26 U.S.C. § 4975(e)(2)(A) as a fiduciary of the trust?
34. Whether Shanell Smith is a disqualified party?
...
48. Whether Austin Sheen is a disqualified party?
...
56. Whether Terrell Sheen, as a party who controlled all the investments of the Carswell Cherokee Trust is a disqualified person under26 U.S.C. § 4975(e)(2)(A) as a fiduciary of the trust?
57. Whether Terrell Sheen is a disqualified party?
...
73. Whether Austin Sheen made excess contributions to CCT, APPS or SEFT?
ECF No. 301 at 15-21.
The IRS Notice, however, goes on to say that the transactions (which the Trustee and Rutans categorize as contributions) can be prohibited transactions when the requirements listed in
At page 29 of their Supplemental Objection, the Trustee and Rutans state the “above mentioned prohibited transactions” cause Johns‘s IRA to lose its exempt status under
There is significant overlap here on facts that support both the excessive contribution and prohibited transaction charges; and Johns was on notice of the facts and the law. The Trustee‘s and Rutans’ supplemental objection even nested factual allegations of excessive contributions within their prohibited transaction charge. See ECF No. 306 at 21-25. This is not a case where the Trustee and Rutans pursued an unpleaded legal theory. See generally 2 MOORE‘S FEDERAL PRACTICE - CIVIL § 8.04[3] (2023); Ruivo v. Wells Fargo Bank, N.A., 766 F.3d 87, 90-91 (1st Cir. 2014); Marie v. American Red Cross, 771 F.3d 344, 365 (6th Cir. 2014).
Finally, in the Joint Pre-Trial Order, the Trustee and Rutans raise the same factual and legal issues for their objections to the exemption claim. Despite this, Johns objects to those issues as not raised in the pleadings. For example, the Trustee and Rutans list “[w]hether Debtor‘s IRA engaged in credit extension prohibited transactions” as a contested issue of law. ECF No. 301 at 15 ¶ 6. The issue seems to be that the Trustee and Rutans previously categorized the “loans” from third parties
Johns was fully on notice of the legal allegations made and had access to the relevant facts to support his position.
Johns‘s IRA is part of a pyramid-like scheme orchestrated by Terrell Sheen. Johns contributed his $19,000 to NuView for the funding of his Roth IRA. The IRA then invested in two trusts, Carswell Cherokee Trust and Southeast Financial Trust. As described herein, the two trusts are specialty trusts, designated as Florida land trusts. For Johns‘s IRA‘s contribution of $13,000 to the Carswell Cherokee Trust, the IRA obtained a 49% interest in the trust; for its $5,900 contribution to the Southeast Financial Trust, the IRA obtained a 100% interest in the trust. Beyond the level of the two trusts, the level at which the trusts are engaging in various transactions and acquiring business interests, the trusts—both Carswell and Southeast Financial—are making investments. As described, IRAs of which Sheen and his wife are the beneficiaries made large contributions to the Carswell Cherokee Trust that thereby allowed it to acquire interests in assets and other business ventures. And the Sheens’ IRAs acquired an almost half interest in the Carswell Cherokee Trust. Sheen‘s son, through yet another trust, Giving Joy 10-2015 Trust, made a similarly large contribution (or loan) to Amerifirst Portalet, the limited liability company that constitutes the major asset of the Southeast Financial Trust. Amerifirst Portalet, in fact, has made multiple investments in an array of business ventures that were mostly funded by the contributions made to Amerifirst by the Sheens. But to further complicate the analysis, all major “contributions“—those by the Sheens—are repayable as loans, despite also constituting equity investments. And if this byzantine scheme is not sufficiently complicated, it is compounded by Shanell Smith‘s “management” of funds from the various Sheen-and-Johns related activities that were all run through and commingled in her personal bank account named American Management Trust. The “trusts” are used as a means to separate the funds and assets from the IRAs that benefit from the various “investments“. The owners of the IRAs are the real beneficiaries.
The Court provides the foregoing history to underscore the complexity and difficulty of labeling the transactions that are alleged in the pleadings and were proven at trial. Johns, with Sheen‘s guidance, helped orchestrate this scheme. The Trustee‘s and Rutans’ objections, both the original objection and the supplemental objection, clearly allege prohibited transactions, and they carry this allegation forward in the pretrial order. Johns was placed on notice of the facts and the legal bases for the objection to his exemption. “[A] pleading, or pretrial order, need not specify in exact detail every possible theory of recovery—it must only give the defendant fair notice of what the plaintiff‘s claim is and the grounds upon which it rests.”72 Thrift v. Hubbard, 44 F.3d 348, 356 (5th Cir. 1995) (internal quotation marks and citation omitted). Johns is the party here that is responsible for knowing and explaining how his IRA is valued; he is the beneficiary of the IRA. And as discussed above, Johns has the burden to explain how his IRA satisfies the requirements of the Internal Revenue Code and thus the conditions for qualifying as a valid exemption under
Last, from a broader perspective, Johns‘s bankruptcy case is replete with red flags. How does a debtor that earns less than $3,000 a year make $19,000 in contributions to fund his self-directed Roth IRA? How does such $19,000 IRA turn into an IRA worth $250,000 (or perhaps, much more) within three years? How does a debtor satisfy his duty of candor and transparency in his bankruptcy when he has maintained no bank accounts or owned a credit card for over fourteen years? And how does a debtor conveniently fail to report income in the exact amount of the contributions made to his tax-exempt IRA? Johns failed to satisfactorily resolve these questions.
CONCLUSION
Johns‘s IRA does not substantially comply with the Internal Revenue Code because of the prohibited transactions in violation of
### End of Memorandum Opinion ###
Notes
Here, the one deed in evidence that transfers property into one of the purported land trusts is a deed transferring realty in Washington state to Southeast Financial Trust (of which Johns‘s IRA is the 100% beneficiary). Trustee Ex. 36. That deed merely transfers property to “Southeast Financial Trust, Shannell Smith, Trustee[,]” without conferring the power “to protect, to conserve, to sell, to lease, to encumber, or otherwise to manage and dispose of the real property[.]” See
6. Whether Debtor‘s IRA engaged in credit extension prohibited transactions
...