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Taxpayers’ Made Excess Roth IRA Contributions; Excise Tax Imposed (Mazzei, TC) – Tax & Accounting Blog

The taxpayers, not their Roth IRAs, owned foreign sales corporation (FSC) stock purchased by their Roth IRAs. The form of the Roth IRAs’ purchase of the FSC stock did not accord with its substance. Thus, the FSC dividends were income to the taxpayers, who then contributed the funds to the Roth IRAs. Moreover, the FSC dividends exceeded the contribution limits for Roth IRAs. Accordingly, the taxpayers were liable for the excise tax on excessive Roth IRA contributions.


The taxpayers purchased a prepackaged plan to save taxes that involved routing funds from their family business through an FSC. Under the plan, the taxpayers contributed the contribution limit to a Roth IRA, which then bought stock in the FSC. Over five years, the taxpayers routed over $500,000 from their family business into the Roth IRAs. The taxpayers argued that the transactions were dividends from the business to the FSC, followed by FSC dividend payments to the shareholder Roth IRAs. However, the IRS argued that the FSC payments to the Roth IRAs were taxpayer contributions to their Roth IRAs. Moreover, the dividend payments exceeded the Roth IRA contribution limits. Accordingly, the taxpayers were liable for excise taxes on excessive Roth IRA contributions.

Taxpayers Owned FSC Stock

The taxpayers owned the stock because:

(1) the initial stock purchase was 99 percent fee and 1 percent investment because the taxpayers paid $500 for 100 shares worth $1;

(2) the taxpayers’ business had established export receipts when the stock was purchased and, therefore, could make large commission payments to the FSC;

(3) the taxpayers; business controlled the profits earned by the FSC and, therefore, the distributions from the FSC to the Roth IRAs;

(4) no independent stockholder could expect to receive a benefit because the business could take back commission payments it made to the FSC;

(5) the Roth IRAs were not exposed to any risk because the FSC was a corporate entity and its only known creditor was the taxpayers’ business;

(6) the taxpayers intended to fund their Roth IRAs through the FSC using part of their export receipts; and

(7) the taxpayers funded their Roth IRAs to the maximum extent permitted while the FSC/Roth IRA program was in place.

Excess Roth Contribution Excise Tax Imposed

Based on these facts, taxpayers controlled every aspect of the transactions in question. Therefore, the taxpayers, not their Roth IRAs, were the owners of the FSC stock for federal tax purposes. Moreover, the FSC dividends were properly recharacterized as dividends from the FSC to the taxpayers, followed by the taxpayers’ contributions to their Roth IRAs. Further, the payments exceeded the contribution limits and, therefore, were excess contributions subject to the excise tax under Code Sec. 4973.

Penalties Not Imposed

However, the taxpayers were not liable for the failure to file and failure to pay penalties. The taxpayers reasonably relied on their long-time tax professional. The accountant testified that he and another accountant reviewed the information and determined that the taxpayers were qualified to use an FSC. He also advised them that a Roth IRA could invest in an FSC.

Summa Holdings, Inc., CA-6, 2017-1 ustc ¶50,155, distinguished. Related decision at C. Mazzei, 107 TCM 1292, Dec. 59,865(M), TC Memo. 2014-55.

C. Mazzei, Dec. 61,130

Other References:

Code Sec. 408A

CCH Reference – 2018FED ¶18,930.57

Code Sec. 4973

CCH Reference – 2018FED ¶34,362.30

Code Sec. 6651

CCH Reference – 2018FED ¶39,475.34

Tax Research Consultant

CCH Reference – TRC RETIRE: 66,752

CCH Reference – TRC RETIRE: 66,754

CCH Reference – TRC SALES: 3,154.10
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Author: CCHTaxGroup

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