IRA Owners’ Guaranties of Corporate Debt Were Prohibited Transactions

In May of 2013, the U.S. Tax Court ruled that two IRAs engaged in prohibited transactions under Internal Revenue Code Section 4975(c)(1)(B) and were disqualified because the IRA owners guaranteed a debt of a corporation owned by the two IRAs.  See Peek vs. Commissioner, 140 T.C. No. 12, (2013).  Why did the IRA owners guaranty the debt of the corporation owned by their IRAs?  The rule against IRA owners guarantying loans to the LLC or corporation owned by the IRA is well know, at least among advisers who understand IRA LLCs.

The taxpayers in Peek apparently did everything wrong that they possibly could have done.  Even if the IRA owners had not guaranteed the corporation’s debt the IRS could have disqualified the two IRAs for several other prohibited transactions.  The Tax Court said:

“Because we hold that the loan guaranties were prohibited transactions, we need not and do not reach the additional questions of whether prohibited transactions occurred (i) when FP Company made payments of wages to Mr. Fleck and Mr. Peek (which the IRS contends were prohibited transactions under section4975(c)(1)(D)), or (ii) when FP Company made payments of rent to an entity owned by Mrs. Fleck and Mrs. Peek (which the IRS contends were prohibited transactions under section 4975(c)(1)(E)).”

2017-09-10T15:27:36+00:00