Court rules transaction using IRA rollover funds is violationNews added by Benefits Pro on November 25, 2013

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By Paula Aven Gladych

A Missouri business startup that involved an IRA rollover violated prohibited transaction rules, according to the United States tax court.

The case involved the creation of a limited liability company to operate the defendant, Terry Ellis’ used car business, which was funded with IRA assets the defendant rolled over from a 401(k) plan.

The court’s biggest problem with the rollover was that the defendant was paying himself a salary to manage the used car business in 2005 and 2006 from funds that belonged to the IRA. The used car business owned by the IRA also entered into a real estate agreement with a second LLC, whose members were the defendant, his wife and three sons.

The tax court found that by paying himself, the defendant had engaged in the transfer of plan assets for his own benefit. The salary he received was not viewed as an expense related to the management of the IRA but was instead payment for the management of the used car business.

The court ruled it was a prohibited transaction because as indirect owner of the business through his IRA, he was transferring assets to himself, who, as a fiduciary to the IRA, is a disqualified person.

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