Of the three issues raised in the case of Thiessen v. Commissioner, 146 TC No. 7, the first will likely evoke a sense of déjà vu in some readers.  And you will be right—the facts for the first issue (did the beneficiaries of two IRAs participate in prohibited transactions causing the entire IRA balances to be immediately taxable) are very similar to those the Tax Court had previously ruled upon in the case of Peek v. Commissioner, 140 TC 216 back in 2013.

However the taxpayer would introduce two defenses to the imposition of tax in this situation the court would view—but the Court would not use the step transaction doctrine to view the transaction in the taxpayer’s favor in these areas.

The IRS appears to be continuing to show its displeasure with attempts to use IRA funds to purchase businesses, most recently in PLR 201547010.  The IRS denied the taxpayer relief for failing to complete a rollover of IRA funds within 60 days.

An IRA-based rollover as a business startup style transaction produced disastrous consequences for the individual whose rollover was involved in the case of Ellis v. Commissioner, TC Memo 2013-245, affirmed CA8, 115 AFTR 2d ¶2015-805, No. 14-1310.

The issues in the case was whether the taxpayer had engaged in a prohibited transaction under IRC §4975 as part of his use of funds received from his previous employer’s 401(k) plan to have his IRA start a used car business.  If an IRA engages in a prohibited transaction, the entire balance of the account is deemed distributed to the IRA beneficiary and tax is triggered.