14 6 T.C. No . 7

UNITED STAT ES TAX COURT

JAM ES E. THIESSEN A ND JUDITH T. TH IESSEN, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 11 96 5- 10
. Mar ch29 , 20 16
.
InJu ne 20 03 Ps r ol le d o ve r th ei r ta x- de ferr edret ire m en t fu nd s in to ne wly fo rm edin di vi du al ret ire m en t ac co un ts (IRAs ), cau se d t he IRAs to acqui re the in it ia l s to ckof ane wly fo rm edC co rp or at io n (E) , an d c au se d E t o a cqui re the ass et s o f anex is ti ng bu si ne ss . Ps gu aran te edth e rep aym en t o f a l oa n tha t E rec ei ve d fr om th e se ll er o f th e as se ts as p artof t he acqui si ti onpri ce. Ps ’ 20 03 joi ntFed eral in co m e ta x re tu rnrep orte d t ha t the rol lo ve r of th e ret ire m en t fu nd s in to th e IRAs was n on ta xabl e. The re tu rndi d n otrev eal th atPs h ad gu aran te edth e lo an . R det erm in edth atPs f ai le d t o re po rt f

or20 03 a ta xabl e d is tri bu ti on fro m th ei r IRAs . R ass ert s i n s up po rt o f th e de te rm in at io n t ha t Ps ’ gu aran ti es were p ro hi bi te d t ran sa ct io ns un de r I.R.C. s ec. 4 97 5( c)(1 )(B) , res ul ti ng un de r I.R.C. s ec. 4 08 (e)( 2) in de em eddi st rib ut io ns of the IRAs ’ as se ts to Ps o n J an . 1, 2 00 3. R d id no t d et erm in e th atPs’ rol lo ve r of th e ret ire m en t fu nd s i nt o t he IRAs was eit he r in va li d o r ta xabl e. Held : Ps ’ gu aran ti es of t he lo anwere p ro hi bi te d t ran sa ct io ns un de r I.R.C. s ec. 4 97 5( c)(1 )(B) , andth e IRAs ’ as se ts were d eem ed- 2 -

di st rib ut edto Ps o n J an . 1, 2 00 3. Pe ekv. Co m m is si on er, 1 40 T.C. 21 6 (2 01 3) , fol lo wed
. Held , furth er, as su m in g wi th ou t d eci di ng th atI.R.C. s ec. 49 75 (d )(2 3) is effe ct iv e fo r th is cas e, itis in ap pl ic ab le be cau se Ps’ gu aran ti es were n otinco nn ect io n wi th th e acqui si ti on , ho ld in g, o r di sp os it io n o f a s ecurit y

or c omm od ity . Held , furth er, I.R.C. s ec. 6 50 1( e) ap pl ie s t o e xt en d the li mit at io ns pe rio d fo r as se ss m en t t o s ix y ears . Ps’ rep orti ng th atth e ro ll ov er was no nt ax ab le was i ns uf fic ie ntto advi se R of

th e n atur e an d th e am ou ntof t he un rep orte d i nc om e fl owi ng fro m th e d eem ed di st rib ut io ns fro m

th e IRAs on acco un t o f th e lo angu aran ti es .
Ja m es E. Thie ss enan d J ud ith T. Thi es se n, p ro ses e. E. Abig ai l Ca rls on , Davi d A. Co nr ad , andMat th ew A. Hou ts m a, fo r res po nd en t.
MARVEL, Ju dg e: Res po nd en t d et erm in eda $1 80 ,12 9 d efi ci en cy in pe ti ti on ers ’ Fed eral in co m e ta x fo r 20 03 . The d efi ci en cy st em s fr om

res po nd en t’s de te rm in at io n t ha t p et it io ne rs rece iv edtax ab le di st rib ut io ns fro m th ei r in di vi du al ret ire m en t ac co un ts (pe ti ti on ers ’ IRAs ) du rin g 2 00 3. Re sp on de ntass ert s tha t the di st rib ut io ns res ul te d fr om pro hi bi te d t ran sa ct io ns un de r se ct io n 4 97 5 th at 1 Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 Co de (Co de ) as am en de d a ndineffe ctforth e y ear a t i ss ue . Rul e ref eren ces are t o (co nt in ue d...)- 3 -

pe ti ti on ers en ga ge d i n wi th res pe ctto pe ti ti on ers ’ IRAs , th us cau si ng th e as se ts in pe ti ti on ers ’ IRAs to be de em eddi st rib ut edto pe ti ti on ers on Jan ua ry 1, 2 00 3. W e d eci de fir stwhet he r pe ti ti on ers pa rti ci pa te d i n p ro hi bi te d t ran sa ct io ns as res po nd en t as se rts . W e h ol d t he y di d. We nex t ex am in e whe th er p et it io ne rs m ay be ne fitfro m

th e ri gh t t o c ur e se t fo rth insec ti on49 75 (d )(2 3) , ass um in g i t i s effe ct iv e fo r th is cas e. W e h ol d t he y m ay no t. We deci de las t wh ethe r th e si x- y ear li mit at io ns pe rio d u nd er s ect io n 6 50 1( e) al lo ws re sp on de ntto ass es s t ax as t o 20 03 . W e h ol d i t d oe s. FINDINGS OF FACT I. Bac kg ro un d So m e fac ts were s ti pu la te d. Th e st ip ul at io ns of f actan d t he fact s drawn fro m st ip ul at edex hi bi ts are i nc or po rat edhe rei n, an d we f

in d t ho se fact s acco rd in gl y . Peti ti on ers are m arri edin di vi du al s wh o re si de d i n C ol or ad o wh en th e p et it io n was fil ed . They were ea chun de r 59 y ears of a ge at t he en d o f 20 03
. II. Mr. Th ie ss enan d Hi s Em pl oym en t atKrog er Ja m es E. Thie ss enstud ie d m et al fab ric at io n i n h ig h s ch oo l, an d h e worke d ata st eel fab ric at in g p lantup on gra du at io n. He l at er wo rk edfor a gr oc ery ch ai n (...co nt inue d) 1 th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 4 -

th atev en tu al ly became a di vi si on of Kro ge r Co . (Krog er). He wo rk edforKrog er an d i ts subs id iary , Dil lo n C os ., Inc . (co ll ect iv el y , Krog er), fo r 30 y ears an d pa rti ci pa te d i n Kro ge r’s ret ire m en t p lans . 2 Dur in g 2 00 2 Kro ge r in fo rm edMr. Thi es se n t ha t i t was m ov in g h is job to Ohi o. Pe ti ti on ers di d n otwantto m ov e to Ohi o. Mr . Thi es se n d eci de d t o l eav e Kro ge r, an d h e b eg ansea rch in g fo r a n ew job inm et al fab ric at io n. Hi s s earc h in cl ud edlo ok in g fo r a m et al fab ric at io n b us in es s tha t p et it io ne rs co ul d a cqui re. III. Anc on a In20 02 Anco naJo b S ho p (An co na ) was anun in co rp or at edbu si ne ss th at sp eci al iz edinth e d es ig n, fabr ic at io n, an d i ns ta ll at io n o f m et al pro du ct s. Inearl y 20 03 (orpo ss ib ly in l at e 2 00 2) Mr. Thi es se n l earn edth atAnco na ’s own er, Po lk In ve st m en ts , Inc . (Po lk ), was s el li ng Anco naan d t ha t p et it io ne rs co ul d a cqui re Anc on a th ro ug h t he bro ke rag e fi rm A.J. Hoyal & Co ., Inc . (AJH). IV. Acqui si ti onof An co na Pet it io ne rs de ci de d t o a cqui re An co na , andth ey an d AJ H beg andi sc us si ng th e te rm s o f th e acqui si ti on . Jay H oyal, a b ro ke r atAJH, in fo rm edpe ti ti on ers th at th ey co ul d u se th e fu nd s i n t he ir Kro ge r ret ire m en t ac co un ts to acqui re An co na . Kro ge r es tabl is he d i ts ret ire m en t p lans pu rs ua ntto sec . 40 1( a). Tho se 2 pl an s wer e (1 ) a s av in gs pl anan d (2 ) a p ro fit -s ha rin g a ndsav in gs pl an . Ju di th T. Thi es se n a ls o p art ic ip at edinKrog er’s ret ire m en t p lans .- 5 -

Sp eci fic al ly, he st at ed , pet it io ne rs co ul d ro ll ov er the ir r et ire m en t fu nd s i nt o IRAs,
cau se th e IRAs to acqui re the in it ia l s to ckof ane wly fo rm edC co rp or at io n, an d
cau se th e C co rp or at io n t o a cqui re An co na(IRA fund in g s tru ctur e). Mr. Ho y al (or po ss ib ly som eo ne els e atAJH) al so ex pl ai ne d t o p et it io ne rs (orpo ss ib ly to M r. Thi es se n a lo ne ) th atAJH typi cal ly recomm en de d t ha t anacqui si ti on of a n e xi st in g bu si ne ss be stru ctur edto in cl ud e a l oa n fr om th e se ll er s o t ha t the sel le r wou ld ha ve anin te res t i n h el pi ng th e b uyer inth e fu tu re. Mr. Th ie ss endi sc us se d t he IRA fu nd in g s tru ctur e wit h afri en d (aform er co ll eag ue at Kro ge r) wh o h adrece nt ly use d t ha t s tru ctur e to acqui re a b us in es s. The fri en d re ferr edMr. Thi es se n t o C hr is ti anBle es , a cert ifi edpubl ic acco un tant . Pet it io ne rs di sc us se d t he IRA fu nd in g s tru ctur e wit h M r. Bl ees an d l at er as ke d h im to he lp th em

im pl em en t the IRA fu nd in g s tru ctur e to acqui re An co na . Peti ti on ers al so ret ai ne d Th om as James, anatt orne y with n o p rio r ti es to Mr. Bl ees or AJ H, to he lp th em with t he term s o f th e sa le co ntractan d wi thth e te rm s o f a fi na nc in g arra ng em en t tha t the y

wou ldim

pl em en t t o e ffec t the pu rch as e o f Anc on a. Mr. Bl ees was n otin vo lv edindra fti ng th e sa le co nt ractor i n s tru ctur in g t he fin an ci ng arra ng em en t. Mr. Bl ees an d h is firm

(co ll ect iv el y , Mr. Bl ees ) he lp edpe ti ti on ers est ab li sh th e C co rp or at io n, El sa ra En te rp ris es , Inc . (Els ara) , th atpe ti ti on ers ev en tu al ly use d- 6 -

to effe ctth e IRA fund in g s tru ctur e. On M ay 29 , 20 03 , Mr. Bl ees fil edart ic le s o f in co rp or at io n fo r Els ara wi thth e Co lo rad o s ecre tary of s tate . Peti ti on ers were na m edas El sara’s o ffi cers an d d ire ct or s, an d the y (an d n o o ne els e) h av e se rv edin th os e p os it io ns ev er s in ce. Els ara h as ne ve r be ench arac te riz edas aco m pa ny with publ ic ly offer edsec ur it ie s o r with s ecurit ie s i ss ue d b y anin ve st m en t co m

pa ny reg is te redun de r th e In ve st m en t Co m pa ny Act of

19 40
. On o r ab ou t Jun e 2 , 20 03 , Mr. Thi es se n andMrs . Thi es se n e ach est ab li sh ed
anIRA in hi s an d h er n am e (HIRA an d WIRA, res pe ct iv el y ) atFir stTrus t Co . of Ona ga(FTC), wi theachpe ti ti on er re ta in in g a ll di sc ret io na ry auth or ity an d c on tro l
co nc ern in g i nv es tm en ts by his or h er IRA (anarrang em en t re ferr edto as a se lf- di rect edIRA). Mr. Thi es se n t ran sf erre d $ 38 4,8 55 .80 to th e HIRA fro m hi s 3 Kro ge r ret ire m en t ac co un t, an d M rs . Thi es se n t ran sf erre d $ 47 ,22 0.6 1 t o t he W IRA fro m he r Kro ge r ret ire m en t ac co un t. Pet it io ne rs form al ly tran sf erre d t he se fun ds (a t ot al of $ 43 2,0 76 .41 ) as tax -fre e ro ll ov ers , andFTC (aft er the en d o f 20 03 ) rep orte d t o t he Int ern al Rev enue Serv ic e (IR S) o n 2 00 3 F orm s 5 49 8, IRA Co nt rib ut io n In fo rm at io n, tha t the fun ds de po si te d i nt o t he IRAs were “ Ro ll ov er co nt rib ut io ns ”.

Pet it io ne rs ’ IRAs are o f th e type d es cri be d i n s ec. 4 08 (a). 3- 7 -

On J un e 9 , 20 03 , Mr. Thi es se n d ire ct edth e HIRA t o p ur ch as e 8 ,91 1 s ha res of Els ara s to ck , andMrs . Thi es se n d ire ct edth e WIRA to p ur ch as e 1 ,08 9 s ha res of Els ara s to ck . Each s ha re was pu rch as edfro m Els ara a t $ 43 .15 , for

a to ta l p ur ch as e pr ic e o f $4 31 ,50 0 (( 8,9 11 × $4 3.1 5) + (1 ,08 9 × $4 3.1 5) ). Thes e sh ares of s to ck were the on ly one s tha t El sa ra i ss ue d dur in g t he rel ev an t years. On o r ab ou t Jun e 1 8, 2 00 3, El sa ra p ur ch as edth e as se ts of An co nafro m Po lkfor $6 01 ,97 7.5 0. Th e p ur ch as e was stru ctur edas f ol lo ws: Ite m Am ou nt Pro rat ed20 03 pro pe rty tax es $2 12 .94 Earn es t m on ey

de po si t (c as h) 60 ,00 0.0 0 Oth er ca sh pa ym en t 34 1,7 64 .56 Pro m is so ry

no te to sel le r 20 0,0 00 .00 Pur ch as e p ric e 60 1,9 77 .50 The “ Earn es t m on ey

de po si t” cam e fro m

pe ti ti on ers ’ pe rs on al ba nkacco un t. The 4

“ Oth er ca sh pa ym en t” cam e fro m pe ti ti on ers ’ IRAs . The “ Pro m is so ry no te ” st at ed th atEls ara wo ul d p ay

$2 00 ,00 0 (p lu s i nt eres t ac cru in g a t 7 % pe r an nu m) to Po lk th ro ug h 6 0 m on th ly paym en ts , th e fi rs t o f whi chwas due on Sep te m be r 18 , 20 03
. The no te als o s ta te d t ha t re pa ym en t was sec ur edby “ [a]ll it em s o f va lu e u se d i n
The reco rddo es no t es tabl is h h ow El sa ra ch arac te riz edth e $ 60 ,00 0 “ Erne st 4 m on ey de po si t” . Res po nd en t m ak es no arg um en t tha t thi s p aym en t fr om pe ti ti on ers ’ bankacco un t h adan y ne ga ti ve co ns eque nc e fo r Fed eral in co m e ta x pu rp os es , andwe co ns id er an y su charg um en t wai ve d a s d is cu ss edin fra.- 8 -

th e o pe rat io n o f th e b us in es s kno wn as Anco naJo b S ho p” . The n ot e fu rth er s ta te d th atpe ti ti on ers pe rs on al ly gua ran te edrep aym en t, an d i t i nc lu de d p et it io ne rs ’ si gn edst at em en t t o t ha t ef fect . Mr. Jam es work edou t the term s o f th e fi nanc in g. V. Tax Returns Els ara h as op erat edAnco naev er s in ce p ur ch as in g i t. Els ara ( do in g b us in es s as Anco na ) fi le d aFo rm

11 20 , U.S. Corp or at io n In co m e Tax Return (2 00 3
co rp or at e return) , for20 03
. Pet it io ne rs fil eda joi ntFo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r 20 03 (20 03 joi ntreturn) be fo re Ap ril 15 , 20 04 . They rep orte d t ha t the y ha d
rece iv edIRA d is tri bu ti on s t ot al in g $ 43 2,0 76 .41 , th atth es e d is tri bu ti on s wer e th e 5
subjec t o f a “ ROLLOVER”, andth atth ey ha d n o t ax ab le IRA d is tri bu ti on s o r ta x sp eci fic al ly relat edto anIRA. They als o re po rte d o n t he 20 03 joi ntreturn tha t th ei r gr os s i nc om e was $4 6,9 61 .60 . The 2 00 3 jo in t re tu rndi d n otdi sc lo se pe ti ti on ers ’ gu aran ti es of t he lo anor a ny oth er fa ctth atwou ldha ve pu t re sp on de nt
on no ti ce o f th e n atur e an d t he am ou ntof a ny deem eddi st rib ut io n re su lt in g fr om th e g ua ran ti es . The 2 00 3 jo in t re tu rnals o d idno t d is cl os e o r ev enm en ti on Els ara orit s 2 00 3 c or

po rat e return.
Pet it io ne rs sh ou ldha ve rep orte d t ha t the se di strib ut io ns were fro m th ei r 5 pe ns io n p lans (rathe r th anfro m th ei r IRAs ).- 9 -

VI. Defi ci en cy

Not ic e Res po nd en t m ai le d p et it io ne rs a de fic ie nc y no ti ce d at edFeb ru ary 18 , 20 10
. Res po nd en t d et erm in edth atpe ti ti on ers were l iabl e fo r a $ 18 0,1 29 in co m e ta x de fic ie nc y

th atwas a ttrib ut ab le pri m ari ly to u nr ep orte d IRA di st rib ut io ns to ta li ng $4 31 ,50 0, th atth e p rimary ad jus tm en t re qu ire d c om

pu tati on al ad

jus tm en ts to 6 pe ti ti on ers ’ it em iz edde du ct io ns , st an dardde du ct io n, an d e xe m pt io ns , andth at pe ti ti on ers were l iabl e fo r th e 1 0% a dd it io na l t ax im po se d b y sec ti on72 (t) on IRA di st rib ut io ns be cau se th e d is tri bu ti on s wer e p rem atur e in th atne ithe r pe ti ti on er ha d re ach edth e requi si te ag e o f 59 -1 /2
. OPINION I. Ove rv ie w Res po nd en t d et erm in edth atpe ti ti on ers ha d re cei ve d t ax ab le di st rib ut io ns fro m pe ti ti on ers ’ IRAs du rin g 2 00 3 a ndass ert s tha t the se di st rib ut io ns are at tri bu tabl e to pro hi bi te d t ran sa ct io ns un de r se ct io n 4 97 5. Re sp on de nt ’s pri m ary po si ti onis th atth e p ro hi bi te d t ran sa ct io ns oc cu rredun de r se ct io n 4 97 5( c)(1 )(B)
The de fic ie nc y

no ti ce s tate d i n re le va ntpa rt: “ W e ad jus te d your gr os s 6 in co m e to in cl ud e th e am ount[st at edto be $4 31 ,50 0] y ourece iv edas apa ym en t fro m y ou r In di vi du al Ret ire m en t Arra ng em en t” . The n ot ic e fu rth er s ta te d t ha t the $4 31 ,50 0 was rece iv edfro m “ IRA Dis tri bu ti on s” . The n ot ic e d idno t s ta te th at pe ti ti on ers ’ ro ll ov er o f th ei r ret ire m en t fu nd s i nt o t he IRAs was e ithe r in va li d o r ta xabl e.- 10 -

whe n p et it io ne rs gu aran te edth e lo anan d t ha t, as of J anua ry 1, 2 00 3, the pr oh ib it edtra ns act io ns cau se d ade em eddi st rib ut io n o f al l o f pe ti ti on ers ’ IRAs ’
as se ts to pe ti ti on ers ina ta xabl e tr an sa ct io n. Re sp on de ntrel ie s upo n P eekv. Co m m is si on er, 1 40 T.C. 21 6 (2 01 3) , andEll is v. Co m m is si on er, T.C. Mem o. 20 13 -2 45 , aff’d, 7 87 F.3d12 13 (8t h C ir. 2 01 5) , to supp ort h is pri m ary po si ti on . W e ag ree wi th res po nd en t’s p rimary arg um en t tha t p ro hi bi te d t ran sa ct io ns oc cu rredwhen pe ti ti on ers gu aran te edth e lo an . W e rea chour ho ld in gs on th e ba si s o f th e arg um en ts th atth e p art ie s m ad e, be ari ng inm in d t ha t i ss ue s an d arg um en ts no t ad va nc edon bri ef ar e co ns id eredto be ab an do ne d. Se e Me nd es v. Co m m is si on er, 1 21 T.C. 30 8, 3 12 -3 13 (20 03 ); Ni ck laus v. Co m mis si on er, 1 17 T.C. 11 7, 1 20 n.4 (20 01 ). Giv enou r ag reem en t wi th res po nd en t’s p rimary arg um en t, we d o n otdi sc us s re sp on de nt ’s alt ern at iv e arg um en ts insupp ort o f th e de te rm in at io n. II. Pro hi bi te d Trans act io ns An IRA ceas es to be anIRA if th e p ers on forwho se be ne fitth e IRA i s es tabl is he d (I RA own er) o r hi s o r he r be ne fic iary en ga ge s i n apro hi bi te d- 11 -

tra ns act io n wi th res pe ctto th e IRA. See sec . 40 8( e)(2 )(A). A “pr oh ib it ed 7 tra ns act io n” ge ne ral ly inc lu de s “ an y di rector i nd ire ct* * * l en di ng of m on ey or ot he r ex te ns io n o f cre di t b etweena pl anan d adi squa li fie d p ers on ”. Sec. 49 75 (c)( 1) (B). A “pl an ” in cl ud es anIRA d es cri be d i n s ect io n 4 08 (a). See sec . 49 75 (e)( 1) (B). A “ di squa li fie d p ers on ” in cl ud es a “ fiduc iary ”. Sec. 49 75 (e)( 2) (A); see als o s ec. 4 97 5( e)(2 )(F) , (6) (pr ov id in g t ha t a s po us e o f a di squa li fie d p ers on als o i s a “ di squa li fie d p ers on ”). A “ fiduc iary ” in cl ud es an y pe rs on who “ ex erci se s an y di sc ret io na ry

au th or ity or d is cret io na ry

co nt ro l
res pe ct in g m an ag em en t o f su chpl anor e xe rci se s an y au th or ity or c on tro l
res pe ct in g m an ag em en t o r di sp os it io n o f it s as se ts ”. Sec. 4 97 5( e)(3 )(A). Whe re the di squa li fie d p ers on is als o t he IRA o wne r orhi s o r he r be ne fic iary , th e IRA ce as es to be anIRA as of t he fir stda y of t he IRA o wne r’s ta xabl e y ear i n wh ic h t he pro hi bi te d t ran sa ct io n o ccurs . See s ec. 4 08 (e)( 2) (A). In ad di ti on , th e IRA o wne r is de em edto ha ve rece iv eda di st rib ut io n o n t ha t fi rs t d ay
Sec. 4 08 (e)( 2) (A) p ro vi de s: 7 (A) Inge ne ral .--If, dur in g a ny tax ab le y ear o f th e in di vi du al fo r who se be ne fitan y

in di vi du al ret ire m en t ac co un t i s es tabl is he d, th atin di vi du al or h is be ne fic iary en ga ge s i n a ny tran sa ct io n pr oh ib it edby sect io n 4 97 5 wi th res pe ctto su chacco un t, s uc h a cco un t ceas es to be anin di vi du al ret ire m en t ac co un t as of t he fir stda y of su chtax ab le y ear. * * *- 12 -

of anam ou ntequa l t o the fai r m ark etva lu e (o n t he fir stday) of th e as se ts inth e IRA as of t ha t fi rs t d ay . See s ec. 4 08 (e)( 2) (B); Bunn ey v. Co m m is si on er, 1 14 8 T.C. 25 9, 2 62 (20 00 ). The d eem eddi st rib ut io n i s g en eral ly inc lu de d i n t he IRA
own er’s g ro ss in co m e inacco rd an ce wi th th e p rin ci pl es of s ect io n 7 2, s ee s ec. 40 8( d) (1 ); s ee al so sec . 40 8( d) (3 ) (p ro vi di ng th ata ro ll ov er co nt rib ut io n i s ex cep te d fr om

th e g en eral rul e o f se ct io n 4 08 (d )(1 )), an d t he IRA o wne r al so is
subjec t t o an a dd it io na l 1 0% t ax if the IRA o wne r was no t yet 59 -1 /2 y ears of a ge on th e d at e o f th e d is tri bu ti on an d n o o th er ex cep ti on to th e ad di ti on al tax ap pl ie s, se e se c. 72 (t)
. Res po nd en t d et erm in edth atpe ti ti on ers rece iv edtax ab le di st rib ut io ns fro m pe ti ti on ers ’ IRAs du rin g 2 00 3. Re sp on de nt ’s pri m ary arg um en t i n s up po rt o f th is de te rm in at io n i s tha t p et it io ne rs ’ gu aran ti es of t he lo anwere p ro hi bi te d tra ns act io ns un de r se ct io n 4 97 5( c)(1 )(B) be cau se th e g ua ran ti es were p et it io ne rs ’ in di rectex te ns io ns of c red itto pe ti ti on ers ’ IRAs an d t ha t p et it io ne rs ’ pa rti ci pa ti on
Sec. 4 08 (e)( 2) (B) p ro vi de s: 8 (B) Acc ou nttre at edas d is tri bu ti ng all it s as se ts .--Inan y cas e in whi chan y

acco un t ce as es to be anin di vi du al ret ire m en t ac co un t b y reas on of s ub pa rag rap h (A) as o f th e fi rs t d ay of a ny tax ab le y ear, pa rag rap h (1 ) of

subs ect io n (d ) ap pl ie s as if the re were a di st rib ut io n on su chfir stday

inanam ou ntequa l t o t he fai r m ark etva lu e (o n s uc h fir stday ) of

all ass et s i n t he acco un t (o n s uc h fi rs t d ay ).- 13 -

in th e p ro hi bi te d t ran sa ct io ns cau se d t he IRAs to lo se th ei r st atus as I RAs an d b e de em edto have di st rib ut edth ei r as se ts to pe ti ti on ers ina ta xabl e tr an sa ct io n. We ag ree wi th th is pri m ary arg um en t. Ourag reem en t wi th res po nd en t’s p rimary arg um en t i s co m

pe ll edby the Co urt’s Op in io n i n P eekv. Co m m is si on er, 1 40 T.C. 21 6. Th ere, M r. Bl ees pr om ot edth e IRA fu nd in g s tru ctur e to two un rel at edtax pay ers who , pu rs uantto th atpro m ot io n, ro ll edov er fu nd s i n t he ir r et ire m en t p lans to sel f-d ire ct edIRAs
an d c au se d t he IRAs to est ab li shan d t o wh ol ly own a n ewly form edco rp or at io n. See i d. at21 8- 22 0. Th e ta xp ay ers th encau se d t he co rp or at io n t o p ur ch as e (th ro ug h AJ H) th e as se ts of abu si ne ss by, am on g o th er thi ng s, re cei vi ng fro m th e se ll er a l oa n tha t the tax pa y ers pe rs on al ly guaran te ed . See i d. at21 7, 2 20 -2 21
. The Co urt h el d tha t the tax pa y ers were “ di squa li fie d p ers on s” withi n t he m ean in g of sec ti on 49 75 (e)( 3) an d h el d tha t the tax pa y ers ’ gu aran ti es of t he lo anwere pr oh ib it edtra ns act io ns inth atth e g ua ran ti es co ns ti tu te d i nd ire ctex te ns io ns of cred itbe twee n t he tax pay ers an d t he IRAs . See i d. at22 4- 22 5; see als o J anpo l v
. Co m m is si on er, 1 01 T.C. 51 8, 5 27 (19 93 ) (“ An i nd iv idua l wh o g ua ran te es rep aym en t o f a l oa n e xt en de d b y a th irdpa rty to ade bt oris , alt ho ug h i nd ire ct ly,
ex te nd in g c red itto th e d eb to r.”). The Co urt h el d t ha t the tax pay ers ’ pa rti ci pa ti on in th e p ro hi bi te d t ran sa ct io ns cau se d t he IRAs to ceas e qua li fy in g a s IRAs wi th in- 14 -

th e m ean in g o f se ct io n 4 08 (a) i n t he y ear i n wh ic h the gu aran ti es were m ad e. Peek v. Co m m is si on er, 1 40 T.C. at 2 27 . Like wis e, pe ti ti on ers ’ IRAs are “pl an s” withi n th e m ean in g o f se ct io n 4 97 5( e)(1 )(B) (pe ti ti on ers ’ IRAs are d es cri be d i n s ect io n 40 8( a)), an d p et it io ne rs are “ di squa li fie d p ers on s” withi n t he m ean in g o f se ct io n 49 75 (e)( 2) (A) an d (3 )(A) (p et it io ne rs ex erci se d d is cret io na ry au th or ity or di sc ret io na ry

co ntro l o ve r th e m an ag em en t o f pe ti ti on ers ’ IRAs , as wel l as ov er th e m an ag em en t an d d is po si ti on of t he ass et s o f pe ti ti on ers ’ IRAs ). Acco rdEll is v. Co m m is si on er, at*1 6. Th eref or e, as was tru e fo r th e ta xp ay ers inPeek , pe ti ti on ers ’ gu aran ti es of t he lo anwere p ro hi bi te d t ran sa ct io ns an d p et it io ne rs ’ IRAs ceas edto qu al ify as IRAs on acco un t o f th e g ua ran ti es . Pet it io ne rs askth e Co urt t o d is reg ardor t o d is ti ng ui shou r Opi ni on inPeek
. Pet it io ne rs ass ertas t o the form er tha t the Depa rtment o f Lab or ha s the pri m ary au th or ity to in te rp retth e p ro hi bi te d t ran sa ct io n ru le s an d t ha t the Co urt i n P eek in te rp ret edth os e ru le s i nc on si st en tl y with t he in te rp ret at io n o f th e Dep art m en t o f Lab or . Peti ti on ers ass ertas t o t he lat te r th atth e Co urt’s d eci si on inPeekwas dr iv enby find in gs th atth e co rp or at io n andth e IRA were in se pa rab le an d t ha t the
co rp or at io n’s as se ts were d eem edto be own edby the IRA. Pet it io ne rs als o a ss ert th atth e cas es are d is ti ng ui sh ab le be cau se Els ara i s, b utth e co rp or at io n i n P eek
was no t, an “ op erat in g c om pa ny” with in th e m ean in g o f 29 C.F.R. s ec. 2 51 0.3
-- 15 -

10 1( c)(1 ) (2 00 3) . Peti ti on ers dra w fro m 29 C.F.R. s ec. 2 51 0.3 -1 01 (a)( 2) th at pe ti ti on ers ’ IRAs can no t b e co ns id eredto ownan y of El sa ra’s as se ts gi ve n Els ara’s s ta tu s as an“ op erat in g c om pa ny”. 9 W e d ecl in e p et it io ne rs ’ in vi ta ti on to di sr eg ardor d is ti ng ui sh Peek
. Co ng res s i nc lu de d p ro vi si on s o n p ro hi bi te d t ran sa ct io ns inbo th ti tl e 2 6 a ndti tl e 29 , andPres id en t Ca rte r ga ve th e Dep art m en t o f Lab orpri m ary auth or ity to in te rp retbo th set s o f th os e p ro vi si on s. See Reo rg an iz at io n P lan No . 4 o f 19 78 , se c. 10 2, 3 C.F.R. 3 32 (19 79 ), rep rin te d i n 5 U.S.C. app . at 7 28 (20 12 ) an d i n 9 2 St at . 37 90 (19 78 ); s ee al so Fla he rtys Ard enBo wl, In c. v. Co m mis si on er, 1 15 T.C. 26 9, 2 72 -2 77 (20 00 ), aff’d, 2 71 F.3d76 3 (8 th Cir . 20 01 ). Thatdo es no t m ean , ho wev er, tha t the Depa rtment o f Lab orha s the fin al wordas t o t he in te rp ret at io n of th os e p ro vi si on s. “ It i s empha ti cal ly the pro vi nc e an d dut y of t he jud ic ia l de pa rtment t o s ay

whatth e la w is .” Marb ury v. Ma di so n, 5 U.S. (1 Cr an ch ) 13 7, 17 7 (1 80 3) ; s ee al so Uni te d S ta te s v . Am . Truck in g As s’ns , Inc ., 31 0 U.S. 5 34 , 54 4 (1 94 0) . W e rea d o urOpi ni on inPeekto be co ns is te ntwith t he st atut e (an d, as
a se co nd ary m at te r, no t t o b e in co ns is te ntwith t he in te rp ret at io n o f th e Purs ua ntto 29 C.F.R. s ec. 2 51 0.3 -1 01 (a)( 2) (20 03 ), a p lan’s as se ts 9 ge ne ral ly inc lu de it s i nv es tm en t i n a n e nt ity th atis ne ithe r a p ub li cl y

off ered se cu rit y no r a s ecu rit y

is su edby an in ve st m en t co m pa ny regi st eredun de r th e In ve st m en t Co m

pa ny Act of

19 40 as we ll as a n u nd iv id edin te res t i n t he en ti ty’ s un de rlyin g a ss et s u nl es s the en ti ty is an “ op erat in g c om pa ny”.- 16 -

Dep artm en t o f Lab or , see , e.g., DOL Adv is ory Op. 9 0- 23 A, 19 90 W L 26 34 43 (Jul y 3, 1 99 0) (co nc lu di ng ina se tt in g s im il ar t o t ha t i n P eek(an d h ere) th ata pe rs on al gu aran ty w ou ldbe a pr oh ib it edtra ns act io n u nd er s ect io n 4 97 5( c)(1 )(B) ). W e al so di sa gr ee wi th pe ti ti on ers ’ as se rti on th atth e Co urt re st edit s h ol di ng in Peekon it s fi nd in g t ha t the co rp or at io n a ndth e IRA were in se pa rab le or tha t the IRA o wne d the co rp or at io n’s as se ts . In fa ct , th e Co urt i n P eekne ve r m en ti on ed 1 0 th e te rm “ op erat in g c om

pa ny”, letalo ne fou ndor d eci de d t ha t the co rp or at io n was orwas n otan“ op erat in g c om pa ny”. W e al so are m in df ul th atpe ti ti on ers in rel y in g upo n 2 9 C .F.R. se c. 25 10 .3-1 01 (a)( 2) m ak e n o m en ti on of 2 9 C .F.R. se c. 25 10 .3-1 01 (h )(3 ) orof t he pre am bl e to th os e reg ul at io ns . Titl e 2 9 C .F.R. se c. 25 10 .3-1 01 (h )(3 ) pr ov id es : “ Whe n apl anor arel at edgro up of p lans own s al l o f th e o ut st an di ng equi ty int eres ts * * * i n a n e nt ity , it s as se ts in cl ud e th os e equi ty in te res ts an d a ll of the un de rlyin g a ss et s o f th e en ti ty”. T he pre am bl e to th e reg ul at io ns st at es : “ [A]s a ge ne ral m at te r, whe re al l o f th e o ut st an di ng equi ty in te res ts inanen ti ty are own edby a pla n, the re i s n o p ract ic al di ffer en ce b etween th e as se ts of t he pl anan d t he ass et s o f th e en ti ty whi chis own edby the pl an .” 51 Fed . Reg . 41 27 6 (No v. 1 3, 1 98 6)
. Ourde ci si on he re tha t p et it io ne rs ’ gu aran ti es of t he lo anwere i nd ire ct 1 0 ex te ns io ns of c red itto pe ti ti on ers ’ IRAs als o d oe s n otres t o n wh ethe r pe ti ti on ers ’ IRAs are co ns id eredto ownan y or a ll of El sara’s as se ts .- 17 -

Pet it io ne rs arg ue furth er tha t the ir p ers on al gu aran ti es can no t b e p ro hi bi te d tra ns act io ns be cau se , whenth ey ga ve th e g ua ran ti es , th e jud ic iary ha d n ev er de ci de d t ha t s uc h g ua ran ti es were p ro hi bi te d tran sa ct io ns . W e d is ag ree wi th th is arg um en t as well . Statut ory pro vi si on s s uc h a s s ect io n 4 97 5( c)(1 )(B) are ef fect iv e whe n C on gr es s s ay s the y are an d, ab se nta le gi sl at iv e m an da te to th e co nt rary (wh ic h we d o n otha ve he re), n otwhen th e jud ic iary fir stin te rp ret s the m . W e h av e al so co ns id eredth e ap pl ic ab il ity of s ect io n 4 97 5( d) (2 3) an d, m or e sp eci fic al ly, th e is su e o f whe th er tha t s ect io n e xc ep ts pe ti ti on ers ’ gu aran ti es fro m th e d efi ni ti on of “ pr oh ib it edtra ns act io n” setforth insec ti on49 75 (c)( 1) (B). 1 1 Sect io n 4 97 5( d) (2 3) was a dd edto th e Co de as p artof t he Pen si on Pro te ct io n Act of 20 06 , Pub . L. No. 10 9- 28 0, s ec. 6 12 (b )(1 ), (c), 1 20 Sta t. at97 6, 9 77 , effec ti ve with “ an y tra ns act io n wh ic h the fiduc iary or d is qu al ifi edpe rs on di sc ov ers , or reas on ab ly sho ul d h av e d is co ve red , aft er the date of the en actm en t o f th is Act [Au gu st17 , 20 06 ] co ns ti tu te s a p ro hi bi te d tran sa ct io n.” Sect io n 4 97 5( d) (2 3) ge ne ral ly pro vi de s tha t the pro hi bi ti on s s etforth insec ti on 49 75 (c)( 1) (B) d o n ot ap pl y to th e le nd in g o f m on ey

or o th er ex te ns io n o f cre di t b etweena pl anan d a di squa li fie d p ers on “ in co nn ect io n wi th th e acqui si ti on , ho ld in g, o r di sp os it io n o f
Neit he r party ini ti al ly addres se d t hi s i ss ue . Each p arty fil eda 1 1 supp le m en ta l b rie f on th e is su e p ur su an t t o a n o rd er o f th is Co urt.- 18 -

an y sec ur ity or c omm od ity , if the tra ns act io n i s co rrec te d b efo re the en d o f th e co rrec ti on pe rio d.” The l eg is la ti ve hi st ory un de rlyin g s ect io n 4 97 5( d) (2 3) is th in bu t i nd ic at es th atCo ng res s i nt en de d fo r se ct io n 4 97 5( d) (2 3) “ to faci li ta te eas ie r, fas te r, an d l es s ex pe ns iv e tr an sa ct io ns be twee n p riv at e p en si on pl an s an d s erv ic e pr ov id ers * * * t o e ns ur e th atpe ns io n p lans are n otde ni edcert ai n i nv es tm en t op po rtu ni ti es or o ve rb ur de ne d b y un ne ces sary

or dup li cat iv e reg ul at ory stru ctur es th atres ul t i n h ig he r adm in is tra ti ve co st s.” H.R. Re pt . No. 1 09 -2 32 (Part1), at 6 8 (2 00 5)
. 1 2 Res po nd en t ac kn owl ed ge s tha t s ect io n 4 97 5( d) (2 3) canap pl y to a pr oh ib it edtra ns act io n b etweenanIRA an d i ts own er (o r be ne fic iary ). Res po nd en t arg ue s, h owe ve r, th atth e eff ect iv e d at e o f th e se ct io n m ak es itin ap pl ic ab le he re i n th at , res po nd en t as se rts , pet it io ne rs di sc ov eredor r eas on ab ly sho ul d h av e di sc ov eredbe fo re Au gu st17 , 20 06 , th atth ei r pe rs on al gu aran ti es were p ro hi bi te d tra ns act io ns . W e n eedno t an d d o n otde ci de res po nd en t’s ar gu m en t as to th e
The pa rti es do no t ci te any othe r co nt em

po ran eo us leg is la ti ve hi st ory , and 1 2 we ha ve no t fo un d a ny. W e n ot e th atth e St aff o f th e Jo in t Co m m it te e o n Tax at io n ha s d is cu ss edth e en act m en t o f se c. 49 75 (d )(2 3) inSta ff o f J. Co m m . onTaxa ti on , Gen eral Exp lana ti on of Tax Legi sl at io n En act edinth e 1 09 th Co ng res s, at45 2- 45 3 (J . Comm . Prin t 2 00 7) , andinSta ff o f J. Co m m . onTaxa ti on , Tech ni cal Exp lana ti on of H.R. 4 , The “ Pen si on Pro te ct io n Actof 2 00 6” , as Pa ss edby the Hou se on Ju ly 28, 2 00 6, an d a s C on si de redby the Sen at e o n Au gu st3, 2 00 6, at 14 0- 14 1 (J . Comm . Prin t 2 00 6)
.- 19 -

effe ct iv e d at e o f se ct io n 4 97 5( d) (2 3) . This is be cau se sec ti on 49 75 (d )(2 3) wou ld
no t o th erwi se ap pl y

he re ev enif i t wer e eff

ect iv e. Sect io n 4 97 5( d) (2 3) requi res th atpe ti ti on ers ’ gu aran ti es be “ in co nn ect io n with t he acqui si ti on , ho ld in g, o r di sp os it io n o f an y sec ur ity or c omm od ity ” an d th atth e g ua ran ti es be “ co rrec te d b efo re the en d o f th e co rrec ti on pe rio d.” In thi s co nt ex t, Co ng res s h as de fin edth e te rm s “ se cu rit y ” an d “ co m m od ity ” b y in co rp or at in g (wi th sl ig htm od ifi cat io ns ) th e d efi ni ti on s o f th os e te rm s fo un d i n se ct io n 4 75 (c)( 2) an d (e )(2 ), res pe ct iv el y . See s ec. 4 97 5( f)(1 1) (D)(i ) an d (i i). A

“ se curit y ” fo r pu rp os es of s ect io n 4 97 5( d) (2 3) in cl ud es : (1 ) a s ha re o f st oc k i n a co rp or at io n; (2) a pa rtn ers hi p o r be ne fic ia l o wne rs hi p i nt eres t i n awid el y he ldor publ ic ly trad edpa rtn ers hi p o r trus t; (3) a no te , bo nd , deb en tu re, o r ot he r ev id en ce of in de bt edne ss ; (4 ) anin te res t ra te , curren cy , or e qu ity no ti on al pri nc ip al
co nt ract ; (5 ) anev id en ce o f anin te res t i n, o r a d eri va ti ve fin an ci al in st ru m en t i n, an y sec ur ity de sc rib edin(1) th ro ug h (4 ), oran y curren cy , in cl ud in g a ny op ti on , fo rwardco nt ract , sh ort p os it io n, an d a ny sim il ar fi na nc ia l i ns tru m en t i n s uc h a
se cu rit y or c urren cy ; an d (6 ) a p os it io n t ha t i s n ota se cu rit y de sc rib edin(1) th ro ug h (5 ) an d i s a h ed ge with re sp ectto su cha se curit y . See s ecs . 47 5( c)(2 ), 49 75 (f)(1 1) (D)(i ). A “ co m m od ity ” fo r pu rp os es of s ect io n 4 97 5( d) (2 3) in cl ud es : (1 ) a co m m od ity th atis act iv el y

tra de d; (2) a no ti on al pri nc ip al co nt ractwith- 20 -

res pe ctto anact iv el y

tra de d c omm od ity ; (3 ) anev id en ce o f anin te res t i n, o r a de riv at iv e in st rum en t i n, an y co m m od ity de sc rib edin(1) or ( 2) , in cl ud in g a n op ti on , forwardco nt ract , futur es co nt ract , sh ort p os it io n, an d s im il ar i ns tru m en t i n su cha co m

m od ity ; an d (4 ) a p os it io n t ha t i s n ota co m m od ity de sc rib edin(1) th ro ug h (3 ) an d i s a h ed ge with re sp ectto su cha co m m od ity . Sec. 4 75 (e)( 2)
. Pet it io ne rs ’ gu aran ti es were n otgi ve n i n c on ne ct io n wi th th e acqui si ti on , ho ld in g, o r di sp os it io n o f a s ecu rit y or c omm od ity

withi n the m ean in g o f se ct io n 49 75 (d )(2 3) . Ins te ad , th ey were g iv eninco nn ect io n wi th Els ara’s ac qu is it io n o f
as se ts . Tho se ass et s fa il to m eetth e rel ev an t d efi ni ti on of “ se cu rit y ” o r

“ co m m od ity ”. Whi le pe ti ti on ers ga ve th e g ua ran ti es in ci de ntto anov eral l p lan th atin cl ud edpe ti ti on ers ’ IRAs ’ acqui si ti on or h ol di ng of El sa ra s to ck , th e ai m of th e tr an sa ct io n, t o b e su re, was to acqui re An co na ’s ass et s ra th er tha n t o a cqui re Els ara’s s to ck . The m or e ap pr op ria te ch arac te riz at io n o f th e g ua ran ti es , th eref or e, is , as we fi nd , th atth ey

were g iv eninco nn ect io n wi th th e as se t ac qu is it io n ra th er th aninco nn ect io n wi th pe ti ti on ers ’ IRAs ’ acqui si ti onor h ol di ng of t he Els ara st oc k. 1 3

Pet it io ne rs als o arg ue th atth ei r gu aran ti es of El sa ra’s d eb t wer e in

1 3 co nn ect io n wi th th e acqui si ti on , ho ld in g, o r di sp os it io n o f a s ecu rit y inth e fo rm

of th e d eb t. We reject thi s ar gu m en t. The de btwas i ss ue d a s p artof t he tra ns act io n an d was no t ac qu ire d, h el d, o r di sp os edof.- 21 -

Inclo si ng , pet it io ne rs ’ pa rti ci pa ti on inth e p ro hi bi te d t ran sa ct io ns on or ab ou t Jun e 1 8, 2 00 3, caus edpe ti ti on ers ’ IRAs to ceas e to be IRAs as o f th e fi rs t da y of p et it io ne rs ’ ta xabl e y ear i n wh ic h t he pro hi bi te d t ran sa ct io ns oc cu rred . See
se c. 40 8( e)(2 )(A). Fu rth erm or e, pe ti ti on ers are d eem edto ha ve rece iv ed di st rib ut io ns on th atfir stda y of a m ou nt s equa li ng th e fai r m ark etva lu es (on th e fir stda y ) of

th e as se ts inpe ti ti on ers ’ IRAs as o f th atfir stda y . See s ec. 40 8( e)(2 )(B) . The fi rs t d ay of p et it io ne rs ’ ta xabl e y ear i n wh ic h t he pro hi bi te d tra ns act io ns oc cu rredwas J anua ry 1, 2 00 3. Al th ou gh pe ti ti on ers ’ IRAs were n ot actua ll y inex is te nc e o n t ha t d at e, as th ey were es tabl is he d app ro xi m at el y fiv e m on th s l at er, s ect io n 4 08 (e)( 2) de em s the m to ha ve be enest ab li sh edan d fu nd ed with t he $4 32 ,07 6.4 1 c on ve rte d fr om th e Kro ge r ret ire m en t ac co un ts on Janua ry 1, 20 03 , forpu rp os es of d et erm in in g the am ou nt s o f th e d eem eddi st rib ut io ns . Acco rdEll is v. Co m

m is si on er, at*2 3- *2 4. W e h ol d i n a cco rd an ce wi th th is 1 4 InEll is v. Co m

m is si on er, T.C. Mem o. 2 01 3- 24 5, at*5 -* 6, * 22 -* 23 , aff’d, 1 4 78 7 F .3d12 13 (8th C ir. 2 01 5) , th e ta xp ay ers , inm id -2 00 5, ro ll edov er the ir ret ire m en t fu nd s i nt o t he ir n ewly op en edIRAs an d l at er i n 2 00 5 p art ic ip at edin pr oh ib it edtra ns act io ns co nn ect edto th e IRAs . The Co urt h el d t ha t the pro hi bi te d tra ns act io ns cau se d t he rol le d- ov er fu nd s t o b e d eem eddi strib ut edfro m th e IRAs as of J anua ry

1, 2 00 5, u nd er s ec. 4 08 (e)( 2) (A). See i d. at*2 4. Th e Co urt reas on edth atun de r se c. 40 8( e)(2 )(A) the IRA acc ou nt s ce as edbe in g IRAs as of Ja nu ary 1, 2 00 5, o n a cco un t o f th e p ro hi bi te d t ran sa ct io ns an d t ha t u nd er s ec. 40 8( e)(2 )(B) th e acc ou nt s wer e d eem edto ha ve di strib ut edth ei r as se ts to th e ta xp ay ers als o a s o f th atdate . See i d. at*2 3. Th e Co urt d idno t h ol d t ha t the (co nt in ue d...)- 22 -

de em edtre atm en t tha t p et it io ne rs ’ gr os s i nc om e fo r 20 03 in cl ud es th e fai r m ark et
va lu es of t he ass et s tha t wer e in it ia ll y tra ns ferr edto pe ti ti on ers ’ IRAs or, i n o th er wor ds , th e $ 43 2,0 76 .41 co nv ert edfro m th e Kro ge r ret ire m en t ac co un ts . Acco rd 1 5 id . W e al so ho ldth atpe ti ti on ers are l iabl e fo r th e 1 0% a dd it io na l t ax setforth in
se ct io n 7 2( t)( 1) with re sp ectto th e $ 43 2,0 76 .41 , bec au se ne ithe r pe ti ti on er was 59 -1 /2 y ears of a ge or o ld er dur in g 2 00 3. 1 6 III. Lim it at io ns Peri od The Co m m is si on er g en eral ly m

us t as se ss tax as t o aFed eral in co m e ta x return wi th in th ree years a fte r th e return i s fi le d. Se e se c. 65 01 (a); see als o s ec. 65 01 (b )(1 ) (s ta ti ng th ata return fi le d b efo re i ts du e d at e is co ns id eredfil edon it s (...co nt in ue d) 1 4 ro ll ov ers fai le d ab i ni ti o o r th atth e ro ll ed -o ve r fu nd s wer e ta xabl e as an un su cces sf

ul rol lo ve r di st rib ut io n fr om th e ret ire m en t p lans . Res po nd en t d et erm in edth atth e unr ep orte d d is tri bu ti on s t ot al ed$4 31 ,50 0 1 5 (n ot$4 32 ,07 6.4 1 a s we h av e fo un d) an d t ha t thi s n um be r co rres po nd s t o t he to ta l am ountth atpe ti ti on ers ’ IRAs pa idforth e Els ara s to ck . Res po nd en t d oe s n ot ex pl ai n h ow h e d et erm in edth e unr ep orte d d is tri bu ti on am ount . Res po nd en t al so ha s n otm ov edforanin crea se d d efi ci en cy , whi chm ean s tha t we wi ll no t en te r in ou r de ci si on a de fic ie nc y gre at er tha n t ha t s ho wn i n the de fic ie nc y no ti ce. See sec . 62 14 (a); Est at e o f Pet sc he k v . Comm is si on er, 8 1 T.C. 2 60 , 27 1- 27 2 (1 98 3) , aff’d, 73 8 F .2d67 (2dCir . 19 84 ); s ee al so Kou fm anv. Co m m is si on er, 6 9 T.C. 4 73 , 47 5- 47 6 (1 97 7)
. Pet it io ne rs do no t as se rt tha t the y m eetanex cep ti on to th e se c. 72 (t) 1 6 ad di ti on al tax , andwe do no t fi ndth atan y su chex cep ti on ap pl ie s.- 23 -

du e d at e fo r pu rp os es of s ect io n 6 50 1( a)). Sec ti on65 01 (e)( 1) m ay ex te ndth e th ree- y ear p eri odto a si x- y ear p eri od , ho wev er, wh ere the tax pa y er fa il s t o re po rt gr os s i nc om e in ex ces s o f 25 % of the am ou ntof g ro ss in co m e rep orte d o n t he return. Se e al so Uni te d S ta te s v . Hom e Co nc ret e & Supp ly, LLC, 56 6 U.S. , , 13 2 S . Ct. 1 83 6, 1 83 9 (2 01 2) ; Bu rb ag e v . Comm is si on er, 8 2 T.C. 5 46 , 55 3 (1 98 4) , aff’d, 7 74 F.2d64 4 (4 th Cir . 19 85 ); B ardwell v. Co m mis si on er, 3 8 T.C. 8 4, 9 2- 93 (1 96 2) , aff’d, 3 18 F.2d78 6 (1 0t h C ir. 1 96 3)
. Inco m pu ti ng th e am ou ntof g ro ss in co m e o m it te d fo r th is pu rp os e, any am ount“ di sc lo se d i n t he return, o r in a st at em en t at ta ch edto th e return, i n a m an ne r ad equa te to ap pr is e th e Sec ret ary of th e n atur e an d a m ou ntof s uc h i te m ” is
no t t ak enin to acco un t. See sec . 65 01 (e)( 1) (A)(i i). A di sc lo su re i s “ ad equa te ” if 1 7 itis “ su ffi ci en tl y

de ta il edto ale rt t he Co m m is si on er an d h is ag en ts as t o t he na tu re of th e tr an sa ct io n s o t ha t the de ci si on as t o wh ethe r to sel ectth e return fo r au di t
m ay be a reas on ab ly info rm edon e.” Est at e o f Fry v. Co m m is si on er, 8 8 T.C. 1 02 0, 10 23 (19 87 ); s ee al so Co lo ny, Inc. v . Commis si on er, 3 57 U.S. 28 , 36 (19 58 ). The di sc lo su re n eedno t d et ai l ev ery un de rlyin g fa ctbu t m us t b e m or e subs tant ia l tha n si m pl y pro vi di ng a cl ue th atwou ldin tri gu e th e li ke s o f Sh erl oc k Ho lm es . See The Hiri ng Inc en ti ve s t o R es to re Em pl oym en t Act , Pub . L. No. 11 1- 14 7, 1 7 se c. 51 3( a)(1 ), 12 4 S ta t. at11 1 (2 01 0) , red es ig na te d t hi s p ro vi si on as s ec. 65 01 (e)( 1) (B)( ii ).- 24 -

Qui ck ’s Tr. v. Co m

m is si on er, 5 4 T.C. 1 33 6, 1 34 7 (1 97 0) , aff’d, 4 44 F.2d90 (8t h Ci r. 19 71 ); s ee al so Whi te v. Co m m is si on er, 9 91 F.2d65 7, 6 61 -6 62 (10 th Cir
. 19 93 ), aff’g T.C. Me m o. 1 99 1- 55 2. Th e te stis whet he r a rea so nabl e p ers on wou ld di sc ernfro m

th e return t ha t the di sp ut edgro ss in co m e is om it te d. Se e Uni v. Co un try Club, In c. v. Co m m is si on er, 6 4 T.C. 4 60 , 47 1 (1 97 5)
. The pa rti es ag ree t ha t the th ree- y ear l im it at io ns pe rio d h as ex pi red
. Res po nd en t’s re li an ce o n t he si x- y ear p eri od , th eref or e, requi res th athe sh ow tha t pe ti ti on ers fai le d t o re po rt a n a m ou ntof g ro ss in co m e in ex ces s o f 25 % of the
am ountof g ro ss in co m e rep orte d o n t he 20 03 joi ntreturn. Se e Hof fm anv. Co m m is si on er, 1 19 T.C. 14 0, 1 47 (20 02 ). Res po nd en t h as m ad e th is sh owi ng in th at , as we h av e h el d, p et it io ne rs om it te d g ro ss in co m e fo r pu rp os es of s ect io n 65 01 (e) wh enth ey

fai le d t o re po rt t he am ou nt s o f th e d eem eddi st rib ut io ns as gr os s i nc om e fo r 20 03
. See i d. (n ot in g t ha t al th ou ghsec ti on 65 01 do es no t 1 8 de fin e th e te rm

“ gr os s i nc om e” fo r pu rp os es of s ect io n 6 50 1( e), the term is ge ne ral ly und ers to odto refe r to th e d efi ni ti on of g ro ss in co m e fo un d i n s ect io n 61 ); c f. Ben so n v . Comm is si on er, 5 60 F.3d11 33 , 11 36 -1 13 7 (9 th Cir . 20 09 )

W e n ot e fo r co m

pl et en es s tha t the de em eddi st rib ut io ns ex ceed25 % of t he 1 8 am ountof g ro ss in co m e rep orte d o n t he 20 03 joi ntreturn.- 25 -

(h ol di ng th atth e fai lu re t o re po rt c on st ru ct iv e d iv id en ds was an o m is si on of g ro ss in co m e und er s ect io n 6 50 1( e)(1 )), aff ’g T.C. Mem o. 2 00 6- 55
. The si x- y ear l im it at io ns pe rio d t he refo re ap pl ie s u nl es s p et it io ne rs pro ve th atth e am ou nt s o f th e d eem eddi st rib ut io ns were “ di sc lo se d i n t he return, o r in a st at em en t at ta ch edto th e return, i n am an ne r ad equa te to ap pr is e th e Sec ret ary of th e n atur e an d a m ou ntof s uc h i te m .” See s ec. 6 50 1( e)(1 )(A)(i i); see als o 1 9 Hof fm anv. Co m

m is si on er, 1 19 T.C. at 1 47 ; Un iv . Cou nt ry Club, In c. v. Co m m is si on er, 6 4 T.C. at46 8. Pe ti ti on ers ha ve no t m etth is bu rd en . Pet it io ne rs arg ue th atth e th ree- y ear l im it at io ns pe rio d app li es be cau se th ey di sc lo se d o n t he face of the ir 2 00 3 jo in t re tu rnth atth ey rol le d o ve r th ei r Kro ge r ret ire m en t fu nddi st rib ut io ns in to th e IRAs . Peti ti on ers als o a rg ue th atth ey were no t re qu ire d t o m ak e an y furth er d is cl os ur e as to th e ro ll ed -o ve r fu nd s b ecau se cas el aw as of t he ti m e th ey fil edth e 2 00 3 jo in t re tu rndi d n otpu t the m on no ti ce th atan yth in g t he y

di d dur in g 2 00 3 was a pr oh ib it edtra ns act io n. Pet it io ne rs ’ pr im ary arg um en t i s fl awedinth atitres ts on th e p ro po si ti on th atpe ti ti on ers ’ di sc lo sure o f th e ro ll ov ers as t ax -fre e is su ffi ci en t t o p ut
Und er s ec. 7 49 1( a), the bu rd enof p ro of as t o fa ctua l m at te rs m ay sh iftto 1 9 th e Co m m is si on er i n c ert ai n c irc um st an ces . Neithe r attri al no r in th ei r op en in g br ie f di d p et it io ne rs m en ti on sec . 74 91 (a), an d we u nd ers tandpe ti ti on ers to ha ve ag reedat t ria l tha t the y

be ar the bu rd enof p ro of . See al so Ru le 14 2( a)(1 ).- 26 -

res po nd en t o n n ot ic e th atpe ti ti on ers ha d e ng ag edinth e p ro hi bi te d t ran sa ct io ns . As d is cu ss edab ov e, th e p ro hi bi te d t ran sa ct io ns are p et it io ne rs ’ gu aran te ei ng of th e lo an , andth e unr ep orte d i nc om e ari se s fr om th e res ul ti ng tax ab le de em ed di st rib ut io n t o p et it io ne rs of t he ass et s i n p et it io ne rs ’ IRAs (an d n otfro m pe ti ti on ers ’ ro ll ov er o f th e ret ire m en t fu nd s i nt o p et it io ne rs ’ IRAs ). Ind eed , th e de fic ie nc y

no ti ce s ta te s s pe ci fic al ly tha t the un rep orte d i nc om e st em s fr om IRA di st rib ut io ns an d m ak es no m en ti on of t he rol lo ve rs or t he tax ab il ity th ereo f. 2 0

W e can un de rs tandpe ti ti on ers ’ co nf us io n o n the fact s an d l aw su rro un di ng 2 0 th e p ro hi bi te d t ran sa ct io ns . Res po nd en t i n b rie f al so was s om et im es co nf us ed
. Res po nd en t ar gu edfir st(co ns is te ntwith o urop in io n i n El li s v . Comm is si on er, T.C. Mem o. 2 01 3- 24 5, an d wi th ou r Opi ni on he re) tha t p et it io ne rs ’ pa rti ci pa ti on in th e p ro hi bi te d t ran sa ct io ns cau se d t he ass et s i n t he IRAs to be de em ed di st rib ut edto pe ti ti on ers as o f Ja nu ary 1, 2 00 3. Re sp on de ntlat er as se rte d, wi th a ci ta ti on of El li s, tha t the tra ns fers of the ret ire m en t fu nd s t o t he IRAs were i nv al id an d t ha t the tra ns ferr edfun ds were the refo re i nc lu dabl e inpe ti ti on ers ’ in co m e as if no rol lo ve r ha d o ccurred . The l at er as se rti on s ar e n otsupp orte d b y Ell is . W e h el d in Ell is v. Co m

m is si on er, at*2 4, tha t the pro hi bi te d t ran sa ct io ns cau se d t he rol le dov er fu nd s t o b e d eem eddi st rib ut edfro m th e IRAs an d e xp res se d n o o pi ni on on th e v al id ity

or t he tax ab il ity

of t he rol lo ve rs . The d efi ci en cy no ti ce h ere s ta te s li ke wis e th atth e unr ep orte d i nc om e was fro m “ IRA Dis tri bu ti on s” an d d oe s n ot st at e th atth e in co m e was fro m an y di st rib ut io n fr om

pe ti ti on ers ’ Kro ge r ret ire m en t pl an s. We als o n ot e th atth e fu nd s tha t wer e tr an sf erre d fr om

pe ti ti on ers ’ Kro ge r ret ire m en t p lans to pe ti ti on ers ’ IRAs wou ldha ve be enin cl ud ab le inpe ti ti on ers ’ gr os s i nc om e as di st rib ut io ns fro m th e ret ire m en t p lans (rathe r th anfro m th e IRAs ) ha d t he rol lo ve rs no t b eenva li d. Se e se c. 40 2( a) (ru le s ap pl ic ab le to th e ta xa ti on of d is tri bu ti on s) ; s ee al so sec . 40 2( c) (ru le s ap pl ic ab le to rol lo ve rs fro m ex em pttru st s)
.- 27 -

Neit he r th e 2 00 3 jo in t re tu rnno r an y att ach m en t t o i t d is cl os edth at pe ti ti on ers ’ gu aran ti es of alo anm ig htbe pro hi bi te d t ran sa ct io ns or t ha t p et it io ne rs ha d u nr ep orte d i nc om e res ul ti ng fro m pro hi bi te d t ran sa ct io ns . The 2 00 3 jo in t return the refo re o ffer s n otev ena cl ue as t o t he ex is te nc e, na tu re, o r am ou ntof a ny om itte d i nc om e. W e co nc lu de th ata reas on ab le pe rs onwou ldno t d is cern fro m th e 20 03 joi ntreturn tha t p et it io ne rs ha d o m it te d a ny gro ss in co m e fo r 20 03 , andwe ho ldth atth e si x- y ear l im it at io ns pe rio d u nd er s ect io n 6 50 1( e) ap pl ie s. See Est at e of Fry v. Co m m is si on er, 8 8 T.C. at10 23 . As to pe ti ti on ers ’ se co nd ary arg um en t,
se ct io n 6 50 1( e) d oe s n otco nd it io n a n app li cat io n o f th e si x- y ear l im it at io ns pe rio d
on pe ti ti on ers ’ kn owi ng th atth e g ua ran ti es were p ro hi bi te d t ran sa ct io ns . Pet it io ne rs als o arg ue th atth e fac ts un de rlyin g t he pro hi bi te d t ran sa ct io ns were ad equa te ly dis cl os edinEls ara’s 2 00 3 c or po rat e return. Fo r pu rp os es of t hi s is su e, ho wev er, the rel ev an t t ax pa y ers are p et it io ne rs . Thei r return (the 20 03 joi nt return) m ak es no refe ren ce t o El sa ra o r it s 2 00 3 re turnor t o t he factth at pe ti ti on ers pa rti ci pa te d i n t he pro hi bi te d t ran sa ct io ns . IV. Co nc lu si on W e h ol d t ha t p et it io ne rs parti ci pa te d i n p ro hi bi te d t ran sa ct io ns in20 03 an d th atres po nd en t p ro pe rly det erm in edth atpe ti ti on ers ha d u nr ep orte d d eem ed- 28 -

di st rib ut io ns fro m

pe ti ti on ers ’ IRAs . W e al so ho ldth atth e si x- y ear l im it at io ns pe rio d a ll ows res po nd en t t o a ss es s the in co m e ta x d efi ci en cy for20 03
. W e h av e co ns id eredpe ti ti on ers ’ rem ai ni ng arg um en ts , andto th e ex te ntno t di sc us se d abo ve , con cl ud e th atth os e arg um en ts are i rrel ev an t, m oo t, o r witho ut
m eri t. To r efl ectth e fo reg oi ng , Deci si on wil l b e en te redfor
res po nd en t.