Another ROBS Arrangement Disqualified

Solo-k Plan

“In essence, Mr. Ellis formulated a plan in which he would use his retirement savings as startup capital for a used car business,” Judge Paris stated. “Mr. Ellis effected this plan by establishing the used car business as an investment of his IRA, attempting to preserve the integrity of the IRA as a qualified retirement plan. However, this is precisely the kind of self-dealing that section 4975 was enacted to prevent.”

Tax Court Judge Elizabeth Crewson Paris decided the car dealership was not a disqualified person under tax code section 4975(e)(2)(G) until Ellis actually funded the company. Judge Paris also decided Ellis was a fiduciary of his IRA because he exercised control over the assets, thus becoming a disqualified person to the IRA account. The car dealership LLC, then became a disqualified person in conjunction with the IRA because Ellis owned 98 percent of the company--more than a 50 percent interest.

Section 4975 lists a number of prohibited transactions involving an IRA or 401k Plan, including transfer to, or use of plan assets for the benefit of a disqualified person, or by a fiduciary who deals with the income or assets of the plan for his own account. As a consequence, Judge Paris held that Ellis exercised control over the disposition of the IRA assets and met the definition of a fiduciary within the meaning of section 4975. Judge Paris noted that the term “disqualified person” under Section 4975(e)(2) includes a corporation or partnership in which 50 percent or more of the total value of shares or capital interest is owned directly or indirectly by a fiduciary.

According to the Tax Court, Ellis failed to report using the IRA to purchase membership interests in the dealership LLC, the $9,754 he received in salary during 2005 or $29,236 the following year, or the $21,800 in rental payments in 2006 to CDJ, of which he was a 50 percent owner. The IRS issued a notice of deficiency for one of the two tax years of $135,936 for 2005, or alternatively, $133,067 for 2006. The IRS also added accuracy-related penalties of $27,187 for 2005, or alternatively, $26,613 for 2006.  On top of that the IRS issued notice for failure to file a timely tax return in 2006 for an additional penalty of $19,731.