The U.S. Tax Court today in a “reviewed opinion” upheld an IRS determination that payments made from a foreign sales corporation (FSC) to Roth IRAs were, in substance, contributions made by the taxpayers to their Roth IRAs.
The court majority concluded that the taxpayers owed excise taxes under section 4973 for the resulting excess contributions made to their Roth IRAs.
The case is: Mazzei v. Commissioner, 150 T.C. No. 7 (March 5, 2018). Read the Tax Court’s 104-page opinion [PDF 377 KB] that includes both concurring and dissenting opinions.
The taxpayers (members of a family) entered into a pre-packaged plan to save taxes by routing funds from their family business through a Bermuda-based foreign sales corporation (FSC) and then into Roth IRAs created for this purpose. Under this plan, in 1998 each of the taxpayers directly contributed $2,000 (the applicable contribution limit) to his or her newly created Roth IRA, which then paid a nominal amount for stock in the FSC.
From 1998 to 2002, the taxpayers indirectly transferred over $533,000 from their business to their Roth IRAs by routing these funds through the FSC.
The IRS found that the payments from the FSC to the Roth IRAs were, in substance, contributions by the taxpayers to their Roth IRAs and, as such, the taxpayers owed excise taxes for the amount of excess contributions to their Roth IRAs (under section 4973).
The taxpayers countered that the IRS erred in recharacterizing the transfers as something other than dividends from the FSC directly to the Roth IRAs and that, as a result, they were not liable for the excess contribution excise taxes.
The Tax Court majority today held that the taxpayers—and not their Roth IRAs—were the owners of the FSC stock and that, in substance, the FSC dividends were income to the taxpayers who then contributed the funds to their Roth IRAs. The court distinguished today’s findings from those and the decision in Summa Holdings, Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017), rev’g T.C. Memo. 2015-119.
In concluding, the Tax Court found the taxpayers were liable for the excise taxes on the excess contributions to their Roth IRAs. The court, however, did not sustain the imposition of timely filing / timely paying penalties under section 6651(a)(1) and (2).
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.