CamaPlan believes that an informed investor is the most successful investor. The court cases in this section provide important insight into IRS rules and regulations and their effect on IRAs. In 1996, Swanson v. Commissioner became the landmark case which created the legal backdrop for what became the self-directed IRA LLC structure. Many more cases have followed since then, some of which are highlighted below.
Daley v. Mostoller US Court of Appeals for the Sixth Circuit
This case discusses IRA bankruptcy protection and consequences of committing prohibited transactions in your IRA.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affords favorable rules to retirement account owners. IRA owners should be aware of unique bankruptcy rules that allow most, if not all of the qualified retirement savings to be preserved in bankruptcy. However, if the IRA or IRA owner is involved in or commits a prohibited transaction, the bankruptcy exemption shield can be pierced, thus allowing retirement funds to be accessed by creditors.
Mr. Daley had an IRA with Merrill Lynch and the Merrill Lynch “Client Relationship Agreement” had lien provisions in the fine print primarily dealing with margin accounts. Ann Mostoller, the bankruptcy trustee, argued that Mr. Daley was extending credit with his IRA thus committing a prohibited transaction according to IRC section 4975. Mr. Daley never had a margin account and never was assessed a lien but it took two appeals to reverse the courts original findings and thus protect the retirement account from creditors.
Rollins v. Commissioner
Rollins v. Commissioner is a tax court case where the court ruled based on the facts and circumstances that the taxpayer (Rollins) participated in prohibited transactions that resulted in Rollins using his 401(k) plan assets for his personal benefit.
Rollins v. Commissioner is an important case that illustrates that one can engage in a prohibited transaction with an entity even if the entity is not “per se” a disqualified entity. The case helps shed light on the question of whether certain actions may trigger a prohibited transaction in the 401(k) and self-directed real estate IRA structures.
Rollins loaned his 401(k) assets to three different companies that him and his spouse owned, at a combined 33% or less (in each company). The Tax Court ruled that even though Rollins and his wife owned less than 49% or less interest in each company, the loans made by the Rollins 401(k) plan to each of the three companies was prohibited.
Clark v. Rameker
Inherited IRAs are no longer protected from debtors from US Supreme Court June 12,2014 Clark vs Rameker.
CA 8: Payment of Wages to Taxpayer by His IRA-Owned LLC was Prohibited Transaction.
The Court of Appeals for the Eighth Circuit, affirming the Tax Court, has concluded that where an individual taxpayer had his IRA own the shares of his business, a limited liability company (LLC), the LLC’s payment of compensation to the taxpayer for his services to the LLC was a prohibited transaction resulting in disqualification of the IRA and a deemed distribution of its assets. Ellis, et ux. v. Comm., (CA 6/5/2015) 115 AFTR 2d ¶ 2015-805
Niemann vs Commisioner of Internal Revenue Department Checkbook IRA and Flipping Houses
An engineer from Phoenix made a living doing “Phase I” and similar types of environmental impact reports for purchasers of commercial properties. When the crash came, his services business declined. He started flipping properties and did quite well with it.
Pursuant to the “advice” of a Check Book LLC promotor, the promotor set up an IRA-owned LLC for the Engineer. The “advice” and “customization” were typical, or, in a word, somewhere between “awful” to “non-existent”. The operating agreement was almost certainly a template with no customization to meet the client’s specific needs. The Engineer was the sole manager of the LLC. Worse yet, Engineer received no effective advice on how to use the LLC without destroying his IRA. Consequently, he entered into deals between himself and his IRA that were clearly prohibited. As a result, his $230,000 IRA was destroyed, the funds distributed, and heavy taxes & penalties levied as a result.