Use of Roth IRA as a " tax shelter" for appreciated assets

[mbozek]

The Nov 11 Business section of the NY times carried an article on how the accounting firm Grant Thornton set up a Roth IRA for a client to be used as a form of tax shelter through the purchase of a shell corporation holding appreciated assets. The article was not very specific on how the assets were transferred to the shell corporation. I am looking for citations to other articles on this technique or the lawsuit that has been filed against Grant Thornton.

[BPickerCPA]

Participants in this scheme(scam??) had to sign a non disclosure, so I don't think there's a lot out there on this.

What I gathered (and don't hold me to this) is that the Roth owns a corporation, and the individual donates property to the corporation. How an individual can do this with a corporation that he doesn't own (directly) is unanswered.

[Mary Kay Foss]

It would be a prohibited transaction for the Roth IRA to purchase a residence that the owner lives in. It would disqualify the Roth IRA. It doesn't seem to be a good idea anyway. The Roth wouldn't be able to deduct property taxes or mortgage interest if any. In addition, you'd need to find a custodian for the Roth. It's hard to find a custodian that will take any unusual assets. Custodians charge higher fees for the management of unusual assets; those fees aren't deductible if they come out of the IRA and could be lost to the 2% limitation or AMT if paid outside the IRA.

I agree with Barry, the Grant Thornton deal sounds like a scam.

[John G]

Dh003i - I have deleted your post in my roll as moderator.

You need to demonstrate expertise to post "advice" on this message board. Random opinions that show no evidence of a factual basis, issue research, quantitative analysis or professional testimoney dilutes the value of this forum.

It is also my view that comments such as the "government steals too much money from individuals" as a justification are inappropriate.

You have made a number of inappropriate posts in the past, I will continue to delete material that I believe is inappropriate for the Roth / IRA message board.

[mbozek]

The problem with applying the PT rules to IRAs is that not all transactions that appear to be PTs are PTs. While having your IRA purchase the house that you live in, having your IRA loan money to your childern, or buying stock directly from your IRA are pts, the following transactions are not PTs:

1. Having the IRA subscribe to an initial offering of stock in which the IRA owner is the incorporator (Swanson)

2. Having the IRA purchase stock or options directly from the issuer who is the employer of the IRA owner who owns less than 50% of the issuer. PLR 8717079

3. Having the IRA custodian issue a check to a corporation at the direction of the IRA owner for the purchase of the corporation's stock which will be owned by the IRA. Ancira, 119 TC 6. The check will not be considered a taxable distribution from the IRA.

4. Having the IRA invest in a family limited partnership which manages the investments of other family members related to the IRA owner where the IRA owner is a general partner of the FLP. DOL opinion 2000-10A.

Under the above rulings it would be perfectly legal for an individual's Roth IRA to purchase stock options from the IRA owners employer and any appreciation in the

value of the stock or dividends would be exempt from income tax.

[dh003i]

As I said, there is nothing strictly scandelous about this plan, aside from perhaps the $100,000 dollar price of it, which will nullify the benefits associated with it. That is particular to the company offering to provide such a scheme, not to the scheme itself. Regarding the usefulness of the particular non-PT transactions that mzbozek suggests:

2. Having the IRA purchase stock or options directly from the issuer who is the employer of the IRA owner who owns less than 50% of the issuer. PLR 8717079

This is not particularly novel, not useful. What this is saying is that someone who works at IBM as a programmer can buy IBM stock within his Roth IRA. This is done all the time with 401(k)s. There are no astounding benefits to this, since the vast majority of individuals who would do this have no control over how much money the company commits to dividents vs. employees salaries. The following situations, however, could be useful:

1. Having the IRA subscribe to an initial offering of stock in which the IRA owner is the incorporator (Swanson)

3. Having the IRA custodian issue a check to a corporation at the direction of the IRA owner for the purchase of the corporation's stock which will be owned by the IRA. Ancira, 119 TC 6. The check will not be considered a taxable distribution from the IRA.

4. Having the IRA invest in a family limited partnership which manages the investments of other family members related to the IRA owner where the IRA owner is a general partner of the FLP. DOL opinion 2000-10A.

These types of actions could be useful if you can control the company you are purchasing stock from to some extent. For example, if you're using your Roth IRA to buy stocks of an IPO where you are the incorporator. If you also are running that corporation, then you can decide what percentage of its profits go to your salary vs. future investment in the company and dividents. If you pay yourself the bare minimum that is acceptable for you to live off of, then you will benefit greatly from the large amount of reinvestment in the company, which will be tax-free under your Roth. Of course, that assumes that you can actually successfully harness that reinvestment to grow your company, thus increase it's value (or increase your dividents).

[Bruce Steiner]

Without knowing all the facts, it's hard to evaluate the transaction described in the New York Times article.

It's hard to know what to make of the Swanson case. In one sense, it's strong, since it involved not the underlying issue, but rather the issue of attorneys' fees based on the IRS' taking an unreasonable position. But since the IRS conceded the underlying issue, we don't have the benefit of the court's analysis of the underlying issue based on the arguments of the opposing parties. There may also be special considerations for DISCs or FSCs.

DOL advisory opinion 2000-10A is also a difficult one. Some people have expressed concern as to whether the DOL got the math right regarding the issue of 50% ownership, with attribution.

In summary, the Section 4975 prohibited transaction rules are extremely complicated, and to try to understand their application to a particular case based only on a summary in a newspaper is not possible, at least for me.

[mbozek]

The Swanson opinion contains a detailed factual analysis of the IRS PT claims as well as the courts conclusion that the IRS position was unreasonable as a matter of both fact and law which was the basis for awarding legal fees. See B 1 A of the opinion. The court held that under IRS regs. the acquisition of newly issued stock by an IRA could not be the sale or exchange of property between the IRA and a disqualfied person and the payment of dividends by the corporation to the IRA did not constitute an act of self dealing by the IRA owner to benefit his personal account since the only direct or indirect benefit the IRA owner received from the payment of dividends related to his status as a participant of the IRA. Finally the IRS has published FSA 1999-524 which provides that the ownership by an IRA of an initial subscription of stock in a corporation that pays dividends to the IRA is not a violation of the PT rules.

As for the attribution of the family ownership interests, the Dol opinion notes that since the transaction is between the FLP and the IRA and not with the IRA owner and his family, except as fellow investors in the FLP, the FLP is not a disqualfied person under the PT rules.

[Appleby]

http://benefitslink.com/IRS/notice2004-8.pdf From BenefitsLink Retirement Plans Newsletter 12/31/03