Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

(c)(2)(A)(I). The Tax Court accepted the IRS view in Taproot Administrative Services, Inc. v. Comm’r, 133 T.C. No. 9 (9/29/09). The Code has a corrective procedure allowing S corp. status to be restored when it is lost inadvertently. § 1362(f). For how an IRA owner can use this procedure to correct inadvertent loss of S corp. status through transfer of S corp. stock into an IRA or Roth IRA, see PLRs 2008-07022, 2009-06015, 2009-15020, 2009-17008, 2009-31039, and 2009-40013. D. Real estate. Real estate can trigger the same titling problems as hedge funds (see “B”). Direct ownership of real estate by an IRA also has pitfalls of its own. One is the need to buy the property inside the IRA; the participant cannot buy the property outside the IRA and then later contribute the property to the IRA (noncash contribution; ¶ 8.1.01 (A)) or sell it to the IRA (prohibited transaction; ¶ 8.1.06 (B)). Another problem is personal use of the IRA-owned real estate (IRA owner and his family vacation in the IRA-owned ski chalet, for example), an obvious “prohibited transaction” ( ¶ 8.1.06 (B)). Another pitfall is commingling of funds. If the IRA owner uses his personal funds to pay expenses associated with the IRA-owned property, that would presumably be considered a contribution to the IRA, which may create an excess contribution problem (see ¶ 5.3.05 ). If the IRA owner tries to treat such payments as advances, and repays himself out of IRA funds, he either has a taxable distribution or an IRA-disqualifying prohibited transaction (loan; ¶ 8.1.06 (B)). Any shared ownership or expense-sharing between the IRA and the IRA owner in his personal capacity creates prohibited transaction potential. If the IRA owner works on the IRA-owned real estate (for example painting the place on the weekend), thus contributing “sweat equity,” he becomes vulnerable to several possible lines of IRS attack: Disqualifying the IRA for accepting noncash contributions ( § 408(a)(1) ); reallocation of the IRA’s “income” from sale or rental of the property to the IRA owner’s personal return (with resulting penalties for failure to report such income) (see § 482), followed by deemed contribution of the re-allocated income to the IRA (excess IRA contribution penalty), etc. E. Active business. Theoretically an IRA can operate a business. Of course the business’s income would be taxable as UBTI; see ¶ 8.2.02 . And the operating business could legally get into the IRA only by being purchased (or started) with cash that had been legally contributed to the IRA (or proceeds of investments arising from legal cash contributions); see ¶ 8.1.01 (A). Also, to avoid prohibited transaction problems ( ¶ 8.1.06 ), it would appear that neither the IRA owner or any member of his family could work for the business; the only possible limited exception to that would be that it might be permissible for the IRA owner to perform “management” services without compensation. (Note: Despite occasional statements in IRS Publications that a prohibited transaction will arise if the IRA owner is paid “unreasonable” compensation from his IRA, it is actually the case that the payment of any compensation to the IRA owner from the IRA would be a prohibited transaction.) And obviously there would be prohibited transaction concerns regarding any transaction between the IRA-owned business and the IRA owner or any of his relatives or entities owned by any of them. With so many risks and limitations, it seems not advisable to operate a business inside an IRA.

IRAs and prohibited transactions