NEWS RELEASE
Houston, July 9, 2015
COURT CASE REVEALS PROHIBITED TRANSACTION REGARDING THE PAYMENT OF WAGES FROM IRAS
The Future of Checkbook Control IRAs May Be in Question
Checkbook Control IRAs suffer another blow after a recent court case deemed the Terry Ellis IRA distributable, with extensive taxation and penalties. The ruling was due to a prohibited transaction that occurred within the IRA, relating to the payment of wages.
In 2005, Terry Ellis directed his IRA, referred to as the Terry Ellis IRA, to purchase 98% of CST, an LLC designed for the business of selling used cars. The remaining 2% of the company was owned by a non-related party, in the case Ellis v. Commissioner. Terry Ellis served as the managing member of the CST LLC, and had some oversight in the operations of the business, relating to the sale of the company’s used cars. In the same year, Terry Ellis paid himself $9,754 in compensation, directly from the CST company checking account.
Based on of Internal Revenue Code Section 4975(c)(1)(D)(E), Terry Ellis was involved in a prohibited transaction. Terry Ellis served as the fiduciary of his IRA, making him a disqualified person, and unable to receive compensation. Terry Ellis directed the CST LLC to pay him compensation, which was indirectly drawn from the Terry Ellis IRA, which funded CST LLC, ultimately benefitting the owner of the IRA, Terry Ellis.
Terry Ellis served as the managing member of the CST LLC, receiving compensation and taking an active role within the company. Terry Ellis acted as the fiduciary to his IRA, and as such, was a disqualified person, making it prohibited that he would serve as the managing member of CST. According to IRC Sec. 4975e(2)(G), a “disqualified person” includes an LLC, in which 50% or more of the interest or profits is either directly or indirectly owned by a fiduciary. Both Terry Ellis and CST LLC were deemed disqualified persons, and consequently engaged in a prohibited transaction.
The Tax Court deemed the Terry Ellis IRA fully distributed as of January 1, 2005, with the full amount becoming part of Terry Ellis’ gross income in 2005, with an additional tax of 10%, based on the age of Terry Ellis.
The future of Checkbook Control IRA owned LLCs may be in question, with the ruling of this case. Using a Checkbook Control IRA provides the ability to be the 100% owner of a company, such as CST LLC. Changes in the industry are certain with rulings such as in the case Ellis v. Commissioner.
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