In Peek v. Commissioner (May 9, 2013), the U.S. Tax Court ruled that two taxpayers had engaged in an indirect “prohibited transaction” with their individual retirement accounts (IRAs) when they provided personal guarantees for promissory notes issued by a company owned by the IRAs. The Court found that the taxpayers had provided an indirect extension of credit to the IRAs, a prohibited transaction under Internal Revenue Code §4975 that disqualified the IRAs.

Prohibited Transactions with IRAs -

Section 4975(c) prohibits specified transactions between (i) various plans including IRAs and (ii) “disqualified persons” (or “parties in interest” under the ERISA version of these rules), which in the case of an IRA includes the IRA owner. Subject to certain exemptions, a disqualified person cannot engage in transactions with the plan that, among other things, constitute direct or indirect:

- Sales, exchanges, or leasing of property;

- Lending of money or other extension of credit;

- Furnishing of goods, services, or facilities; or

- Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.

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Topics:  ERISA, IRA, Prohibited Transactions, Promissory Notes

Published In: General Business Updates, Finance & Banking Updates, Securities Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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