Thiessen v. Comm'r
| Decision Date | 29 March 2016 |
| Docket Number | Docket No. 11965-10.,146 T.C. No. 7 |
| Parties | JAMES E. THIESSEN AND JUDITH T. THIESSEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
In June 2003 Ps rolled over their tax-deferred retirement funds into newly formed individual retirement accounts (IRAs), caused the IRAs to acquire the initial stock of a newly formed C corporation (E), and caused E to acquire the assets of an existing business. Ps guaranteed the repayment of a loan that E received from the seller of the assets as part of the acquisition price. Ps' 2003 joint Federal income tax return reported that the rollover of the retirement funds into the IRAs was nontaxable. The return did not reveal that Ps had guaranteed the loan. R determined that Ps failed to report for 2003 a taxable distribution from their IRAs. R asserts in support of the determination that Ps' guaranties were prohibited transactions under I.R.C. sec. 4975(c)(1)(B), resulting under I.R.C. sec. 408(e)(2) in deemed distributions of the IRAs' assets to Ps on Jan. 1, 2003. R did not determine that Ps' rollover of the retirement funds into the IRAs was either invalid or taxable.
Held: Ps' guaranties of the loan were prohibited transactions under I.R.C. sec. 4975(c)(1)(B), and the IRAs' assets were deemed distributed to Ps on Jan. 1, 2003. Peek v. Commissioner, 140 T.C. 216 (2013), followed.
Held, further, assuming without deciding that I.R.C. sec. 4975(d)(23) is effective for this case, it is inapplicable because Ps' guaranties were not in connection with the acquisition, holding, or disposition of a security or commodity.
Held, further, I.R.C. sec. 6501(e) applies to extend the limitations period for assessment to six years. Ps' reporting that the rollover was nontaxable was insufficient to advise R of the nature and the amount of the unreported income flowing from the deemed distributions from the IRAs on account of the loan guaranties.
James E. Thiessen and Judith T. Thiessen, pro sese.
E. Abigail Carlson, David A. Conrad, and Matthew A. Houtsma, for respondent.
MARVEL, Judge: Respondent determined a $180,129 deficiency in petitioners' Federal income tax for 2003. The deficiency stems from respondent's determination that petitioners received taxable distributions from their individual retirement accounts (petitioners' IRAs) during 2003. Respondent asserts that the distributions resulted from prohibited transactions under section 49751 thatpetitioners engaged in with respect to petitioners' IRAs, thus causing the assets in petitioners' IRAs to be deemed distributed to petitioners on January 1, 2003.
We decide first whether petitioners participated in prohibited transactions as respondent asserts. We hold they did. We next examine whether petitioners may benefit from the right to cure set forth in section 4975(d)(23), assuming it is effective for this case. We hold they may not. We decide last whether the six-year limitations period under section 6501(e) allows respondent to assess tax as to 2003. We hold it does.
Some facts were stipulated. The stipulations of fact and the facts drawn from stipulated exhibits are incorporated herein, and we find those facts accordingly. Petitioners are married individuals who resided in Colorado when the petition was filed. They were each under 59 years of age at the end of 2003.
James E. Thiessen studied metal fabrication in high school, and he worked at a steel fabricating plant upon graduation. He later worked for a grocery chain that eventually became a division of Kroger Co. (Kroger). He worked for Kroger and its subsidiary, Dillon Cos., Inc. (collectively, Kroger), for 30 years and participated in Kroger's retirement plans.2
During 2002 Kroger informed Mr. Thiessen that it was moving his job to Ohio. Petitioners did not want to move to Ohio. Mr. Thiessen decided to leave Kroger, and he began searching for a new job in metal fabrication. His search included looking for a metal fabrication business that petitioners could acquire.
In 2002 Ancona Job Shop (Ancona) was an unincorporated business that specialized in the design, fabrication, and installation of metal products. In early 2003 (or possibly in late 2002) Mr. Thiessen learned that Ancona's owner, Polk Investments, Inc. (Polk), was selling Ancona and that petitioners could acquire Ancona through the brokerage firm A.J. Hoyal & Co., Inc. (AJH).
Petitioners decided to acquire Ancona, and they and AJH began discussing the terms of the acquisition. Jay Hoyal, a broker at AJH, informed petitioners that they could use the funds in their Kroger retirement accounts to acquire Ancona.Specifically, he stated, petitioners could roll over their retirement funds into IRAs, cause the IRAs to acquire the initial stock of a newly formed C corporation, and cause the C corporation to acquire Ancona (IRA funding structure). Mr. Hoyal (or possibly someone else at AJH) also explained to petitioners (or possibly to Mr. Thiessen alone) that AJH typically recommended that an acquisition of an existing business be structured to include a loan from the seller so that the seller would have an interest in helping the buyer in the future.
Mr. Thiessen discussed the IRA funding structure with a friend (a former colleague at Kroger) who had recently used that structure to acquire a business. The friend referred Mr. Thiessen to Christian Blees, a certified public accountant. Petitioners discussed the IRA funding structure with Mr. Blees and later asked him to help them implement the IRA funding structure to acquire Ancona. Petitioners also retained Thomas James, an attorney with no prior ties to Mr. Blees or AJH, to help them with the terms of the sale contract and with the terms of a financing arrangement that they would implement to effect the purchase of Ancona. Mr. Blees was not involved in drafting the sale contract or in structuring the financing arrangement.
Mr. Blees and his firm (collectively, Mr. Blees) helped petitioners establish the C corporation, Elsara Enterprises, Inc. (Elsara), that petitioners eventually used to effect the IRA funding structure. On May 29, 2003, Mr. Blees filed articles of incorporation for Elsara with the Colorado secretary of state. Petitioners were named as Elsara's officers and directors, and they (and no one else) have served in those positions ever since. Elsara has never been characterized as a company with publicly offered securities or with securities issued by an investment company registered under the Investment Company Act of 1940.
On or about June 2, 2003, Mr. Thiessen and Mrs. Thiessen each established an IRA in his and her name (HIRA and WIRA, respectively) at First Trust Co. of Onaga (FTC), with each petitioner retaining all discretionary authority and control concerning investments by his or her IRA (an arrangement referred to as a self-directed IRA).3 Mr. Thiessen transferred $384,855.80 to the HIRA from his Kroger retirement account, and Mrs. Thiessen transferred $47,220.61 to the WIRA from her Kroger retirement account. Petitioners formally transferred these funds (a total of $432,076.41) as tax-free rollovers, and FTC (after the end of 2003) reported to the Internal Revenue Service (IRS) on 2003 Forms 5498, IRA Contribution Information, that the funds deposited into the IRAs were "Rollover contributions".
On June 9, 2003, Mr. Thiessen directed the HIRA to purchase 8,911 shares of Elsara stock, and Mrs. Thiessen directed the WIRA to purchase 1,089 shares of Elsara stock. Each share was purchased from Elsara at $43.15, for a total purchase price of $431,500 ((8,911 × $43.15) + (1,089 × $43.15)). These shares of stock were the only ones that Elsara issued during the relevant years.
On or about June 18, 2003, Elsara purchased the assets of Ancona from Polk for $601,977.50. The purchase was structured as follows:
Item Amount Prorated 2003 property taxes $212.94 Earnest money deposit (cash)
60,000.00 Other cash payment 341,764.56 Promissory note to seller 200,000.00 Purchase price 601,977.50
The "Earnest money deposit" came from petitioners' personal bank account.4 The "Other cash payment" came from petitioners' IRAs. The "Promissory note" stated that Elsara would pay $200,000 (plus interest accruing at 7% per annum) to Polk through 60 monthly payments, the first of which was due on September 18, 2003. The note also stated that repayment was secured by "[a]ll items of value used inthe operation of the business known as Ancona Job Shop". The note further stated that petitioners personally guaranteed repayment, and it included petitioners' signed statement to that effect. Mr. James worked out the terms of the financing.
Elsara has operated Ancona ever since purchasing it. Elsara (doing business as Ancona) filed a Form 1120, U.S. Corporation Income Tax Return (2003 corporate return), for 2003.
Petitioners filed a joint Form 1040, U.S. Individual Income Tax Return, for 2003 (2003 joint return) before April 15, 2004. They reported that they had received IRA distributions totaling $432,076.41,5 that these distributions were the subject of a "ROLLOVER", and that they had no taxable IRA distributions or tax specifically related to an IRA. They also reported on the 2003 joint return that their gross income was $46,961.60. The 2003 joint return did not disclose petitioners' guaranties of the loan or any other fact that would have put respondent on notice of the nature and the amount of any deemed distribution resulting from the guaranties. The 2003 joint return also did not disclose or even mention Elsara or its 2003 corporate return.
Respondent mailed petitioners a deficiency notice dated February 18, 2010. Respondent determined that petitioners were liable for a $180,129 income tax deficiency that was attributable primarily to unreported IRA distributions totaling $431,500,6 that the...
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