Holding property in Individual Retirement Accounts and Roth IRAs (collectively, “IRAs”) is increasingly popular as a means of permitting income and gains to accumulate in a tax-deferred, and sometimes completely tax-exempt manner. In order to preserve the integrity of our tax system, the Internal Revenue Code imposes numerous restrictions on the use of IRAs, including limitations on the amounts that may be contributed to them; amounts contributed in excess of the statutory limits are subject to a significant excise tax.1
Unsurprisingly, some creative efforts by individuals to increase the value of their IRAs, beyond what might be expected from ordinary returns on investment, have met with push-back from the Internal Revenue Service. In a recent Tax Court memorandum decision, Roth IRAs owned equity interests in a domestic international sales corporation (DISC),2 and various individuals who established those Roth IRAs successfully countered assertions that payments of commissions by a business controlled by them to the DISC lacked substance for purposes of an excise tax imposed on excess IRA contributions and should be treated as excess contributions subject to that tax.
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