Taxpayer had unfettered control over SEP-IRA distribution

By James A. Beavers, CPA, CGMA, J.D., LL.M.

Distributions made from a taxpayer's simplified employee plan-individual retirement account (SEP-IRA) that were deposited into a bank account of a limited liability company (LLC) wholly owned by the taxpayer were taxable distributions includible in the gross income of the taxpayer because he had unfettered control over the use of the distributed funds.


During 2012 and 2013, Brett John Ball participated in a SEP-IRA, the custodian of which was Chase Bank (Chase). In 2012, Ball took two distributions from the SEP-IRA account, one of $170,000 and the other of $39,600 (the distributions). Ball had the bank deposit the distributions into a Chase business checking account that he had opened in the name of The Ball Investment Account LLC (Ball LLC), of which Ball was the sole owner and only member. Ball LLC was not a retirement account. The only information Ball provided Chase about the distributions was that they were early distributions to which no known exceptions to being taxable applied.

Immediately after receiving both distributions, Ball used the distributed funds to make real estate loans. The funds from the first distribution went to Petersen Development LLC (Development LLC), and the funds from the second went to Svarga LLC. The first loan was repaid in April 2013 with a check payable to "the Ball SEP Account," which Ball immediately deposited into the SEP-IRA account. The second loan was paid off in installments in 2012 and 2013, again by checks payable to "the Ball SEP Account," which Ball deposited into the SEP-IRA. Chase had no knowledge of or control over the use that Ball LLC made of the distributions it deposited in the Ball LLC business checking account and never held any documents related to the loans Ball LLC made.

Chase Bank issued Ball a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for 2012 reporting that he had received taxable distributions from the SEP-IRA of $209,600. Ball, however, on his Form 1040, U.S. Individual Income Tax Return, for 2012, reported he had received distributions of $209,600 and that none of the amount was includible in gross income.

The IRS, after running its matching programs, initiated a correspondence audit of Ball's 2012 return, sending him a Notice CP2000 stating that he had failed to report the distributions from Chase Bank and that he therefore owed $67,031 in tax and a substantial-understatement penalty of $13,406. Ball did not respond to the notice to indicate that he disagreed with the IRS's proposed changes to his return, so the IRS sent him a notice of deficiency that determined the deficiency, additional tax, and penalty due. Ball challenged the IRS's determination in Tax Court.

The Tax Court's decision

The Tax Court held that distributions from Ball's SEP-IRA were taxable distributions that were includible in his gross income for 2012.

In defense of his reporting of the distributions as nontaxable, Ball argued that the movement of funds from the SEP-IRA through the Ball LLC account to, and then back from, Development LLC and Svarga LLC was a "conduit agency arrangement." Under that theory, Ball LLC acted as a mere facilitator, transferring funds between the SEP-IRA and the two real estate development LLCs. Therefore, the distributions were not taxable distributions.

The Tax Court noted that it had previously found in certain circumstances that an otherwise taxable IRA distribution was not includible in a taxpayer's gross income when the taxpayer was acting as an agent or conduit on behalf of the IRA's custodian to carry out an investment (e.g., Ancira, 119 T.C. 135 (2002); McGaugh, T.C. Memo. 2016-28). However, it further noted it had also held that when a distributee had unfettered control over an IRA distribution, he could not claim that he was acting as a mere conduit or an agent for the IRA custodian with respect to the distributed funds (Vandenbosch, T.C. Memo. 2016-29).

The Tax Court determined that Ball LLC was not acting as an agent or conduit on behalf of Chase (as custodian of the SEP-IRA) when Ball LLC received and made use of the distributions. It came to this conclusion because Chase had no knowledge of how the distributed funds were used after they were deposited in the Ball LLC account at Ball's direction and that nothing in the record showed that Ball, who controlled Ball LLC, did not have unfettered control over the distributions. Thus, the facts of his case were analogous to those in Vandenbosch, so Ball LLC was not a conduit for Chase.

In the alternative, Ball argued that because the funds were deposited into the Ball LLC account, rather than his own checking account, the distributions were not income to him. The Tax Court also rejected this argument. Although neither the statute nor regulations define the term "payee or distributee," the court has held that "[g]enerally, the payee or distributee of an IRA is the participant or beneficiary who is eligible to receive funds from the IRA" (Roberts, 141 T.C. 569, 576 (2013)). The court found that Ball was the distributee of the SEP-IRA, and that was sufficient for it to conclude that the distributions were includible in his income, even though he directed that they be deposited into the Ball LLC account.


Although the Tax Court does not mention it in its opinion, in both the Ancira and the McGaugh cases, where the Tax Court found that the taxpayer was a "mere conduit" of the custodian of the IRA, the IRAs involved were self-directed IRAs and the taxpayer was required to be involved in making an investment because the IRA custodian would not make an investment requested by the taxpayer directly. In both cases, the taxpayers did not receive the purported distributions in a form that they could use to do anything other than make the self-directed stock investment the IRA custodian refused to make directly.

Ball, T.C. Memo. 2020-152

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