Menu Close

“Checkbook Control” IRA Gaining in Popularity in Light of Recent Tax Court Case Confirming its Legality

IRA Financial Group has seen strong demand for the “checkbook control” IRA in light of recent Tax Court case Peek Vs. Commissioner

Peek v. Commissioner (140 T.C. No. 12, 2013), a recent U.S Tax Court is an important case because it reinforces the ability for a retirement account investor to use retirement funds to invest in a wholly owned entity without triggering a prohibited transaction. In the Peek case, the U.S. Tax Court ruled that a taxpayer’s personal guaranty of a loan by a corporation owned by the individual’s IRA is a prohibited transaction under section 4975(c)(1)(B). 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. According to an IRA Financial Group internal report, the Peek case help spur string demand from retirement investors looking to make real estate and other investments in a “checkbook control” format,

According to Adam Bergman, a tax attorney with the IRA Financial Group, some commentators have incorrectly construed the Peek case to hold that a checkbook control self-directed IRA was in violation of IRS rules. In fact, Peek holds just the opposite, that an individual can use IRA funds to invest in a wholly owned entity to make an investment. The Tax Court did not have an issue with the taxpayer forming a special purpose corporation to make the investment as well as serve as director and registered agent of the corporation, but did rule that that the investment made by Peek triggered a prohibited transaction solely due to a personal guarantee of a loan, not the use of an entity wholly owned by an IRA to make the investment. “Even though the Peek case centered on the IRA prohibited transaction rules, the Tax Court could have argued that establishing a special purpose entity wholly owned by IRA funds and managed by the IRA holder is a prohibited transaction, but it did not, “ stated Mr. Bergman. “The Peek case is yet another Tax Court case that confirmed that an individual could use IRA funds to invest in a newly established entity and manage it without triggering the IRA prohibited transaction rules, “ stated Mr. Bergman.

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, pursuant to Internal Revenue Code Section 4975, a disqualified person cannot engage in transactions with the plan that, among other things, constitute direct or indirect: (i) Sales, exchanges, or leasing of property; (ii) Lending of money or other extension of credit; (iii) Furnishing of goods, services, or facilities; or (iv) Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.

In 2001, two taxpayers, Mr. Lawrence Peek and Darrel Fleck sought to use a self-directed IRA to acquire a business. The taxpayers established self-directed IRAs using 401(k) rollovers, created a new company (FP Company), and then directed the IRAs to purchase the common stock of FP Company with the cash in the IRAs. FP Company then sought to purchase the business. To consummate the purchase, in addition to the cash and other credit lines, FP Company provided a promissory note to the sellers. This promissory note was backed by the personal guarantee of the taxpayers, and the guarantees were then backed by the deeds to the taxpayers’ homes. The IRS argued that Mr. Fleck’s and Mr. Peek’s personal guarantee of a $200,000 promissory note from FP Company to the sellers of the business in 2001 as part of FP Company’s purchase of the business assets were prohibited transactions. Tax Court agreed with the IRS and found that the taxpayers had committed prohibited transactions.

According to Mr. Bergman, “Peek highlighted the importance of working with independent tax professionals who can properly advise on a proposed investment. Mr. Peek and Mr. Fleck relied on the advice of Mr. Blees, a CPA, who was also the promoter of the transaction. As a result, Mr. Blees did not warn Mr. Peek and Mr. Fleck about personally guaranteeing the business loan for their IRA investment.”

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP and Dewey & LeBoeuf LLP.

IRA Financial Group is the market’s leading “Checkbook Control” Self Directed IRA and Solo 401k Plan Facilitator. We have helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate tax-free and without custodian consent!

To learn more about the IRA Financial Group please call 800-472-0646.

Share the knowledge
Posted in IRA Financial Group, Self-Directed IRA