Contributions to Roth IRA Were Excess Contributions; Assessment of Deficiencies Not Barred by Statute of Limitations; Penalties Imposed (Paschall, TC)

Married taxpayers were liable for Code Sec. 4973 excise tax liabilities for the husband’s excess contributions to his Roth IRA account as part of his effort to convert a traditional IRA to a Roth IRA in a complex Roth restructure transaction. Although the taxpayers did not present any evidence to establish that the husband did not make an excess contribution to his Roth IRA, they argued that the excess contribution was the amount the husband used to initially fund the Roth IRA in the first of a 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. 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.

The government’s proposed assessments were not barred by the statute of limitations. Because the taxpayers failed to file Forms 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, the form on which the Code Sec. 4973 excise tax is computed and disclosed, the assessment could be made at any time under Code Sec. 6501(c)(3). Although the taxpayers 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 taxpayers were potentially liable for the Code Sec. 4973 tax. Therefore, the filing of the Forms 1040 did not start the running of the statute of limitations for purposes of the Code Sec. 4973 excise tax in the absence of accompanying Forms 5329.

The taxpayers were liable for additions to tax under Code Sec. 6651(a)(1) for failure to file Forms 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, for the years at issue. The taxpayers stipulated that they did not file the forms but argued that their reliance on tax advisors constituted reasonable cause for the failure. However, the taxpayers’ 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 husband, a highly educated and successful businessman, should have realized that the deal was too good to be true. 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 taxpayers failed to establish that the failure to file was due to reasonable cause and not due to willful neglect.

R.K. Paschall, 137 TC –, No. 2, Dec. 58,686

Other References:

Code Sec. 4973

CCH Reference – 2011FED ¶34,362.101

Code Sec. 6501

CCH Reference – 2011FED ¶38,963.51

Code Sec. 6651

CCH Reference – 2011FED ¶39,475.42

Tax Research Consultant

CCH Reference – TRC IRS: 30,102.05

CCH Reference – TRC PENALTY: 3,060.55

CCH Reference – TRC RETIRE: 66,754


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