Menu Close

Self-Directed IRA Prohibited Transaction Case Update: James E. Thiessen, et ux. v. Commissioner, 146 T.C. No. 7, Code Sec(s) 4975; 408; 72.

The Internal Revenue Code does not describe what a Self Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of IRAs for accumulation of retirement savings and to prohibit those in control of IRAs from taking advantage of the tax benefits for their personal account.

The foundation of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975.

James E. Thiessen, et ux. v. Commissioner, 146 T.C. No. 7, Code Sec(s) 4975; 408; 72.

The case involved married taxpayers, who rolled over prior retirement plan funds to self-directed IRAs, then caused the IRAs to purchase stock of newly-formed C corporation, which in turn purchased assets of another business in a transaction involving a loan from the seller on which taxpayers made personal guaranties. The Court relied heavily on the ruling in Peek v. Commissioner, 140 T.C. 216, which involved similar facts and also held that the purchase of corporate stock by the IRA and the use of the IRA funds by the corporation to invest and operate a business actively involving a disqualified person, as well as involving personal guarantees, was a prohibited transaction. The Court held that the IRAs ceased to qualify on account of same, taxpayers were deemed to have received distributions as of 1st day of tax year.

IRS Logo
James E. Thiessen, et ux. v. Commissioner, 146 T.C. No. 7, Code Sec(s) 4975; 408; 72.

What Can We Lean From The Case?

Like the Peek case, this case shows that using an IRA to buy a business through a C Corporation in which a disqualified person will be actively involved in, including the use of personal guarantees, would trigger a prohibited transaction under IRC Section 4975. Unlike a Rollover Business Start-Up (“ROBS”) solution, which involved the use of a 401(K) plan to purchase C Corporation stock (“qualifying employer securities), which takes advantage of an exception to the prohibited transaction rules under IRC Section 4975(d)(13), using IRA funds does not allow one to avail themselves of this exception.

For more information on the Thiessen case or the application of the IRS prohibited transaction rules on self-directed IRA investments, please contact a self-directed IRA expert at 800-472-0646 or email [email protected]

Share the knowledge
Posted in IRA Financial Group