News & Articles


08 / 12 / 2012

Repetto v. IRS, T.C.Memo 2012-168
At issue in this case is whether purported facilities support agreements were utilized by promoters to provide "excess" funds to ROTH IRAs, or whether such agreements and the corporations used to provide such services were legitimate asset protection vehicles and valid from a tax standpoint because they paid corporate taxes (i.e., as C corporations owned 98% by ROTH IRA's).  The court recognized that it is true that an entity in which substantially all of the interest is owned or acquired by a ROTH IRA may be recognized as a legitimate business entity for Federal tax purposes.  However, in this case, the preponderance of the evidence compelled the court to conclude that the substance of the arrangements were nothing more than a mechanism for transferring value to the ROTH IRAs.  Both before and after the arrangements went into effect, the taxpayer husband and wife performed the same services.  A lump sum payment made between the corporations owned by the ROTH IRAs and the taxpayers' S corporation underscored a lack of normal business dealings between corporations.  The arrangements were "circular" and the services were provided exclusively to each other and not to third parties.  The use of "form" invoices did not validate deductions nor meet the substantiation requirements under the Internal Revenue Code.  While the taxpayers inquired of the promoter as to whether the arrangements were proper, and he wrote back and said that they were, the summary denial was not enough advice to be reasonable.  Accordingly, no reasonable cause exception to the assertion of excise taxes and the need to file IRS Form 5329 could be applied.  When it came to whether or not the taxpayers were subject to IRS Section 6662A penalties based on involvement in Reportable Transactions and in particular, a listed transaction the same or substantially similar to the transaction described in Notice 2004-8, the court had no problem determining that the use of the facilities support arrangements are exactly the same type of arrangements and payments that had the effect of attempting to transfer value to the ROTH IRA corporations, and thus, the taxpayers were liable for the increased 30% penalty, for failing to have made the proper disclosures when filing their returns. 
The taxpayers then tried to claim that the refusal under the Code to permit possible application of the reasonable cause exception to listed transactions, based on an additional disclosure requirement (under 6664(d)(2)(A)) violated their Due Process rights.  The court found that the penalty structure under Section 6662A did not violate these rights.  The taxpayers also argued that the "substantially similar" language in Notice 2004-8 violates their due process rights, as "void for vagueness."   The court again rejected this argument.  As the court noted, "it is apparent that Notice 2004-8 ...addresses transactions structured to circumvent the statutory limitations on contributions to ROTH IRAs...and the notice specifies what types of entities or individuals the transaction typically involves."  Thus, the court did not find that the Notice was unconstitutionally vague." 
The IRS did overinclude in its calculations of the 6662A penalties items that were not attributable to the listed transaction.  In other words, items attributable to the facilities support deduction would be factored into the penalty, but not other items that were merely improperly taken deductions.