Titling Misstep Makes SEP Loan Taxable to Account Holder

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A Tax Court decision held that funds taken from a SEP IRA to make a third party loan were made taxable to the SEP account holder due to the account holder’s claim of right on the funds.

Background: Dr. Mark Vandenbosch, the SEP account holder, engaged in a contract with Mr. Carver, a shareholder and vice president of a publicly traded corporation called IAHL. The contract stated that Vandenbosch’s SEP IRA would lend $125,000 to IAHL. However, the note listed that the borrower would repay the loan to “Mark J. Vandenbosch.” Vandenbosch signed the note in his personal capacity, and did not indicate that he was signing on behalf of his SEP IRA . Carver also signed the note in his personal capacity.

Vandenbosch requested that his IRA custodian distribute $125,000 from his SEP IRA into his personal joint account with his wife. Vandenbosch then wired $125,000 from the joint account to his personal bank account. From here, Vandenbosch wired $125,000 from his personal bank account to Carver.

The Decision: By the date of the Tax Court trial, Carver had not repaid the loan, and Vandenbosch had not attempted to collect it. Because Vandenbosch did not report the $125,000 as gross income, the IRS ruled that that the funds were gross income, and that he had a claim of right to the funds. Vandenbosch had this claim because the money was within his personal possession throughout the course of the transaction. He directed his SEP IRA to distribute the funds into his personal account, and he transferred the funds between his accounts and eventually on to Carver. The funds were therefore ruled as a taxable distribution.

The IRS also ruled that the loan from Vandenbosch’s IRA was not a legitimate investment because both Vandenbosch and Carver signed in their personal capacity. As most self-directed IRA experts know, IRA loans cannot be lent by or repaid to the IRA account holders personally.

The Take-Away: It’s important for IRA owners to understand the rules about IRA lending, so they don’t end up paying income taxes on the amount loaned. Additionally, all IRA assets must be titled in the name of the IRA, not the IRA holder. Had Vandenbosch not signed in his personal capacity, he would not have been penalized by the Tax Court due to his right of claim to the funds. Check with your self-directed IRA provider to ensure all paperwork substantiates the IRA as the investor, not the IRA holder. To learn more about self-directed IRA investing, feel free to send us an e-mail at info@ndtco.com or give us a call at 877-742-1270.