Rollins v. Commissioner, T.C. Memo 2004-60 – is an important case in the Self Directed IRA LLC context because it illustrates that one can engage in a prohibited transaction with an entity even if the entity is not per se a disqualified entity. The Rollins case also is important when examining whether a transaction may trigger a prohibited transaction in the Solo 401K and Self Directed IRA Real Estate structures.
The facts in Rollins are as follows: Mr. Rollins owned his own CPA firm. He was sole trustee of its 401(k) plan. Mr. Rollins caused plan to lend funds to three companies in which he was the largest (9% to 33%), but not controlling, stockholder. The companies had 28, 70, and 80 other stockholders respectively. Mr. Rollins made decision for companies to borrow from 401(k) plan. The loans were demand loans, secured by each company’s assets. The interest rate was market rate or higher. Mr. Rollins signed loan checks for plan and signed notes for borrowers. All loans repaid in full.
Mr. Rollins acknowledged that he is a disqualified person with regard to the Plan because he owns Rollins – the CPA Firm, but he contends that (1) none of the corporations that were the borrowers was a disqualified person, (2) none of the loans was a transaction between him and the Plan, and (3) he “did not benefit from these loans, either in income or in his own account”.
The IRS did not contend that any of the transactions fits under section 4975(c)(1)(B) (“any direct or indirect–(B) lending of money or other extension of credit between a plan and a disqualified person”), but focuses only on sub-paragraphs (D) and (E) of section 4975(c)(1). In other words, the IRS maintained that the plan loans were prohibited transactions under Code Section 4975(c)(1)(D) transfer or use of plan assets for the benefit of a disqualified person) and Code Section 4975(c)(1)(E) (dealing with plan assets for the fiduciary’s own interest). Mr. Rollins stated that the borrowers were not disqualified persons and therefore no prohibited transactions occurred. The Tax Court held that a Code Section 4975(c)(1)(D) prohibition did not require an actual transfer of money or property between the plan and the disqualified person. The fact that a disqualified person could have benefited as a result of the use of plan assets was sufficient. The Tax Court held that transactions were uses by Rollins or for his benefit, of assets of the Plan. These assets of the Plan were not transferred to Rollins. As to each of the transactions before us, Rollins sat on both sides of the table. Rollins made the decisions to lend the Plan’s funds, and Rollins signed the promissory notes on behalf of the Borrowers. This flies in the face of the general thrust of this legislation to stop disqualified persons from dealing with the relevant employees plans or the plans’ assets.
The Tax Court held the loans to be a “self dealing” since Mr. Rollins couldn’t prove the loans were not a use of plan assets for his own benefit.
Therefore, the Rollins case clearly demonstrates the broad applicability of Internal Revenue Code Section 4975(c)(1)(D) and the IRS’s intent to use it’s broad reach to attack transactions involving a Self Directed IRA or Solo 401k Plan.