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Vanderhage Law LLC | News

Self directed IRAs - debt guarantee is a prohibited transaction : 2013/05/09


Taxpayers have been using self directed individual retirement accounts ("IRA") to establish business corporations for quite some time.  In a nutshell, an individual's self directed IRA forms a new corporation and that corporation is used to conduct a business of some sort.  These structures have a high risk of prohibited transactions.  If the IRA undertakes a prohibited transaction, it will cease to be an IRA and it will be treated as if the IRA distribuited all of its assets on the date of the prohibited transaction.  This means that the IRA's owner will have taxable income to the extent of the entire IRA account value. In Peek v. Commissioner, 140 T.C. 2 (May 9, 2013), the Tax Court ruled that the IRA owner's personal guarantee of debt of the corporation owned by the IRA was a prohibited transaction.  In the Peek case, this resulted in hundreds of thousands of dollars in taxes, interest, and penalties.  Persons considering the establishment of a self directed IRA to operate a business or acquire a rental property must be very cautious and obtain competent tax advice.