IRA’s Ownership of Taxpayer’s Business Resulted in Disastrous Tax Consequences

Posted on 12.13.05

IRA’s Ownership of Taxpayer’s Business Resulted in Disastrous Tax Consequences

Harsh tax consequences resulted where an individual taxpayer had his IRA own the shares of his business, a limited liability company (LLC). Agreeing with the IRS, the Tax Court held that the LLC's payment of compensation to the taxpayer for his services to the LLC was a prohibited transaction under the rules governing IRAs. As a result, the IRA was retroactively disqualified and its assets were deemed distributed to the taxpayer and taxed to him as ordinary income.

One purpose of the prohibited transaction rules is to prevent taxpayers from using their IRA to engage in transactions for their own account that could place plan assets and income at risk of loss before retirement. The taxpayer argued that he did not engage in a prohibited transaction when he caused the LLC to pay him compensation because the amounts it paid to him did not consist of plan income or assets of his IRA but merely the income or assets of a company in which his IRA had invested. However, the Court disagreed, finding that in causing the LLC to pay him compensation, the taxpayer engaged in the transfer of plan income or assets for his own benefit, in violation of the rules.

Sources: Checkpoint; Image, Gold Backed IRA.

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

Posted by: Keiter CPAs

Keiter CPAs is a certified public accounting firm serving the audittax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial servicesconstructionreal estatemanufacturingretail & distribution industries and nonprofits. We also provide business valuations and forensic accounting servicesfamily office services, and inbound international services.

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