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CCH® PENSION — 08/15/11

Roth IRA restructure transactions were attempt to disguise excess contributions

A taxpayer was liable for excise taxes and additions to tax for the conversion of a traditional IRA to a Roth IRA in complex Roth restructure transactions that lacked economic substance and were merely an attempt to avoid taxes and disguise excess contributions to the Roth IRA, the U.S. Tax Court has ruled in Paschall v. Commissioner.

Although the taxpayer did not present any evidence to establish that he did not make an excess contribution to his Roth IRA, he argued that the excess contribution was the amount used to initially fund the Roth IRA in the first series of transactions. However, the transactions lacked economic substance and were merely an attempt to avoid taxes and disguise excess contributions to the Roth IRA, the court found. The taxpayer "did not attempt to provide a nontax business, financial, or investment purpose for what he did," and the court could not ascertain one. Instead, the taxpayer "used corporate formations, transfers, and mergers in an attempt to avoid taxes and disguise excess contributions to his Roth IRA." Accordingly, the IRS's determinations were sustained and the Code Sec. 4973 excise tax liabilities were calculated based on the fair market value of the Roth IRA at the end of each tax year.

Statute of limitations no bar

The IRS's proposed assessments were not barred by the statute of limitations, the Tax Court ruled. Because the taxpayer failed to file Forms 5329, the form on which the excise tax is computed and disclosed, the assessment could be made at any time under Code Sec. 6501(c)(3).

Although the taxpayer timely filed Forms 1040 for all of the years at issue, the Forms 1040 did not give any indication of the amount of the excess contributions or enable the IRS to determine that the taxpayer was potentially liable for the excise tax. Therefore, the filing of the Forms 1040 did not start the running of the statute of limitations for purposes of the excise tax in the absence of accompanying Forms 5329, the court ruled.

Additions to tax

The taxpayer was liable for additions to tax under Code Sec. 6651(a)(1) for failure to file Forms 5329 for the years at issue. The taxpayer stipulated that he did not file the forms but argued that his reliance on tax advisors constituted reasonable cause for the failure. However, the taxpayer's alleged reliance was not reasonable because the advisors were not independent parties; they set up the various entities and coordinated the transaction and would not have been compensated if the taxpayers decided not to complete the transaction.

The taxpayer, a highly educated and successful businessman, should have realized that the deal was "too good to be true," said the court. Further, despite his doubts as to the legality of the Roth restructure, he never asked for an opinion letter or sought the advice of an independent advisor. Therefore, the taxpayer failed to establish that the failure to file was due to reasonable cause and not due to willful neglect.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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