                                              LAWRENCE F. PEEK AND SARA L. PEEK, PETITIONERS
                                                  v. COMMISSIONER OF INTERNAL REVENUE,
                                                               RESPONDENT

                                                        DARRELL G. FLECK AND KIMBERLY J. FLECK,
                                                            PETITIONERS v. COMMISSIONER OF
                                                                  INTERNAL REVENUE,
                                                                      RESPONDENT
                                               Docket Nos. 5951–11, 6481–11.                               Filed May 9, 2013.

                                                  In 2001 Ps established traditional IRAs. Ps formed FP
                                               Corp. and directed their new IRAs to use rolled-over cash to
                                               purchase 100% of FP Corp.’s newly issued stock. Ps used FP
                                               Corp. to acquire the assets of AFS Corp. Ps personally
                                               guaranteed loans of FP Corp. that arose out of the asset pur-
                                               chase. In 2003 and 2004 Ps undertook to roll over the FP
                                               Corp. stock from their traditional IRAs to Roth IRAs,
                                               including in Ps’ income the value of the stock rolled over in
                                               those years. In 2006 after the FP Corp. stock had significantly
                                               appreciated in value, Ps directed their Roth IRAs to sell all
                                               of the FP stock. Ps’ personal guaranties on the loans of FP
                                               Corp. persisted up to the stock sale in 2006. R contends that
                                               Ps’ personal guaranties of the FP Corp. loan were prohibited
                                               transactions, and, as a result, the gains realized in 2006 and
                                               2007 from the 2006 sales of FP stock should be included in
                                               Ps’ income. Held: Each of Ps’ personal guaranties of the FP
                                               Corp. loan was an indirect extension of credit to the IRAs,
                                               which is a prohibited transaction; and under I.R.C. sec.
                                               408(e), the accounts that held the FP Corp. stock ceased to be
                                               IRAs. Held, further, the gains realized on the sale of the FP
                                               Corp. stock are included in Ps’ income. Held, further, Ps are
                                               liable for the accuracy-related penalty under I.R.C. sec. 6662.

                                        Sheldon Harold Smith, for petitioners.
                                        Shawn P. Nowlan, E. Abigail Raines, and John Q. Walsh,
                                      Jr., for respondent.

                                      216




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                                      (216)                            PEEK v. COMMISSIONER                                       217


                                         GUSTAFSON, Judge: Pursuant to section 6212, 1 the
                                      Internal Revenue Service (‘‘IRS’’) issued statutory notices of
                                      deficiency to petitioners Lawrence F. Peek and Sara L. Peek
                                      on December 9, 2010, and to petitioners Darrell G. Fleck and
                                      Kimberly J. Fleck on December 14, 2010, determining the
                                      following deficiencies in income tax and accuracy-related pen-
                                      alties under section 6662(a) for tax years 2006 and 2007:

                                                                                                               Penalty
                                                    Taxpayers              Year            Deficiency        sec. 6662(a)
                                                         Peek              2006             $223,650          $44,730.00
                                                                           2007                1,399              279.80
                                                         Fleck             2006              243,229           48,645.80
                                                                           2007                4,948              989.60

                                         The issues for decision in these consolidated cases are: (i)
                                      whether Mr. Fleck’s and Mr. Peek’s personal guaranties of a
                                      loan to FP Company were prohibited transactions under sec-
                                      tion 4975(c)(1)(B); 2 and (ii) whether the Flecks and the Peeks
                                      owe accuracy-related penalties under section 6662(a).

                                                                          FINDINGS OF FACT

                                        These cases were submitted by the parties fully stipulated
                                      under Rule 122 for decision without trial, 3 and the stipu-
                                      lated facts are incorporated herein by this reference.
                                         1 Unless otherwise indicated, all section references are to the Internal

                                      Revenue Code (26 U.S.C.), and all Rule references are to the Tax Court
                                      Rules of Practice and Procedure.
                                         2 Because we hold that the loan guaranties were prohibited transactions,

                                      we need not and do not reach the additional questions of whether prohib-
                                      ited transactions occurred (i) when FP Company made payments of wages
                                      to Mr. Fleck and Mr. Peek (which the IRS contends were prohibited trans-
                                      actions under section 4975(c)(1)(D)), or (ii) when FP Company made pay-
                                      ments of rent to an entity owned by Mrs. Fleck and Mrs. Peek (which the
                                      IRS contends were prohibited transactions under section 4975(c)(1)(E)).
                                      (We also need not consider whether those issues constitute ‘‘new matter’’.
                                      See note 3 below.) Furthermore, because our holding that the loan guaran-
                                      ties were prohibited transactions resolves the income tax issues in favor
                                      of the IRS and against the petitioners, we need not reach the question
                                      whether Mr. Fleck and Mr. Peek would, in the alternative, owe excise tax
                                      for excess contributions to their successor IRAs under section 4973.
                                         3 The burden of proof is generally on the taxpayer, see Rule 142(a)(1),

                                      and the submission of a case as fully stipulated under Rule 122 does not
                                      alter that burden, see Borchers v. Commissioner, 95 T.C. 82, 91 (1990),
                                                                                                       Continued




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                                      218                 140 UNITED STATES TAX COURT REPORTS                                    (216)


                                      Abbot Fire & Safety, Inc.
                                         In 2001 Mr. Fleck identified Abbott Fire & Safety, Inc.
                                      (‘‘AFS’’), as an attractive business opportunity. AFS special-
                                      ized in providing alarms and fire protection, hood suppres-
                                      sion systems, sprinkler systems, backflow inspections, fire
                                      extinguishers, and emergency lights for businesses. AFS also
                                      engaged in government-mandated compliance testing related
                                      to fire suppression and safety. Mr. Fleck contacted A.J.
                                      Hoyal & Co. (‘‘A.J. Hoyal’’), the brokerage firm through
                                      which AFS was offered for sale. While Mr. Fleck originally
                                      hoped to purchase AFS with a family member as partner,
                                      that relative was unable to join the venture. Instead, Mr.
                                      Peek, an attorney who had provided legal services to Mr.
                                      Fleck in the past, approached Mr. Fleck about joining the
                                      venture. (Mr. and Mrs. Fleck are not related to Mr. and Mrs.
                                      Peek.)
                                      The IACC
                                         A.J. Hoyal introduced Mr. Fleck to Christian Blees, a cer-
                                      tified public accountant (‘‘C.P.A.’’) at a Colorado Springs
                                      accounting firm. Mr. Fleck later introduced Mr. Blees to Mr.
                                      Peek. Neither Mr. Fleck nor Mr. Peek knew Mr. Blees pre-
                                      viously. Mr. Fleck and Mr. Peek engaged Mr. Blees and his
                                      firm to assist in structuring the purchase of AFS’s assets and
                                      to perform due diligence on the transaction.
                                         Mr. Blees presented to Mr. Fleck and Mr. Peek information
                                      on a strategy he identified as the ‘‘IACC’’. On September 6,
                                      2001, Mr. Blees gave to Mr. Fleck and Mr. Peek documents

                                      aff ’d, 943 F.2d 22 (8th Cir. 1991). However, the burden of proof can be
                                      shifted when the Commissioner’s position implicates ‘‘new matter’’ that
                                      was not in the notice of deficiency. Petitioners point out that whereas the
                                      notice of deficiency determined that they had engaged in ‘‘prohibited trans-
                                      actions’’ forbidden in section 4975(c)(1)(C) and (F)—involving ‘‘furnishing of
                                      goods, services’’, etc., and ‘‘receipt of consideration * * * in connection with
                                      a transaction involving the income or assets of a plan’’—the Commissioner
                                      now relies on section 4975(c)(1)(B), which prohibits ‘‘indirect * * * exten-
                                      sion of credit’’. We note that the notices of deficiency make no mention of
                                      the loan guaranties. To the extent that this issue would require different
                                      evidence, it could constitute ‘‘new matter’’. However, we need not resolve
                                      that question, see Dagres v. Commissioner, 136 T.C. 263, 279 (2011), since
                                      the material facts are not actually in dispute, and we can resolve the case
                                      by a mere preponderance of the evidence.




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                                      (216)                            PEEK v. COMMISSIONER                                       219


                                      that described the IACC plan. This strategy called for the
                                      participant to establish a self-directed individual retirement
                                      account (‘‘IRA’’), transfer funds into that IRA from an
                                      existing IRA or section 401(k) plan account, set up a new cor-
                                      poration, sell shares in the new corporation to the self-
                                      directed IRA, and use the funds from the sale of shares to
                                      purchase a business interest.
                                         In addition to describing the plan, the IACC documents
                                      included an extensive discussion and an opinion letter from
                                      Mr. Blees about prohibited transactions under section 4975,
                                      which state that such transactions would be detrimental to
                                      the IACC plan’s tax objectives. The documents warned that
                                      ‘‘the taxpayer could not engage in transactions with the IRA
                                      that the IRS would determine to be ‘prohibited trans-
                                      actions’ ’’. Also included in the documents was a letter from
                                      the accounting firm, which instructed:
                                           An important distinction to always recognize is that any actions you
                                           take on behalf of the corporation must be taken by you as an agent for
                                           the corporation and not by you personally. Any business done by the cor-
                                           poration must be done in its status as a corporation and realizing that
                                           you are acting as an agent of the corporation only. The corporation
                                           should exercise care to hold itself out at all times to the public as a cor-
                                           poration and not as some other type of entity, or as an extension of you
                                           personally.

                                                                  *   *    *   *   *    *   *
                                           Failure to properly manage the corporations [sic] affairs, or to conduct
                                           business in any manner other than at arms length could result in
                                           adverse effects to the corporation, your IRA, and to you personally. This
                                           might include, but is not limited to, the assessment of additional income
                                           taxes, penalties and interest from various taxing authorities.

                                      None of the IACC documents indicate that Mr. Fleck or Mr.
                                      Peek informed their accountant that they might guarantee
                                      loans for the new corporation as part of their planned
                                      acquisition of AFS’s assets; and the documents included no
                                      advice to the effect that an extension of credit or personal
                                      guaranty between petitioners and the new corporation would
                                      not be considered prohibited transaction for purposes of sec-
                                      tion 4975.
                                         Mr. Peek completed and submitted an ‘‘IACC Application’’
                                      and, in response, received the ‘‘IACC Plan for FP Company’’,
                                      a document that outlined a plan for the purchase of AFS’s
                                      assets. Mr. Fleck and Mr. Peek subsequently implemented




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                                      220                 140 UNITED STATES TAX COURT REPORTS                                    (216)


                                      this plan and compensated Mr. Blees and his firm for struc-
                                      turing the purchase and performing due diligence. Both Mr.
                                      Fleck and Mr. Peek were aware of the compensation.
                                      Implementing IACC with FP Company
                                        Mr. Fleck and Mr. Peek each established at Vista Bank
                                      accounts intended to be self-directed IRAs, over which they
                                      each retained all discretionary authority and control con-
                                      cerning investments. Mr. Fleck rolled over funds on August
                                      17, 2001, into his IRA (the ‘‘Fleck Vista IRA’’), from an
                                      existing account maintained for his benefit at the Allied
                                      Domesq 401(k) Retirement Plan. Mr. Peek rolled over funds
                                      on August 30, 2001, into his IRA (the ‘‘Peek Vista IRA’’),
                                      from an existing account maintained for his benefit at
                                      Charles Schwab. Neither Mr. Fleck nor Mr. Peek contributed
                                      to the other’s IRA.
                                        On August 27, 2001, the articles of incorporation for FP
                                      Company, Inc. (‘‘FP Company’’) were filed with the Colorado
                                      Secretary of State. At formation, Mr. Fleck and Mr. Peek
                                      intended that FP Company would purchase the assets of AFS
                                      and engage in the retail sale of fire suppression systems.
                                        On September 11, 2001, each IRA purchased 5,000 shares
                                      of newly issued stock in FP Company for $309,000 and
                                      thereby acquired a 50% interest in FP Company. The Peek
                                      Vista IRA made its purchase at Mr. Peek’s direction, and the
                                      Fleck Vista IRA made its purchase at Mr. Fleck’s direction.
                                      In so doing, Mr. Peek and Mr. Fleck both intended that FP
                                      Company would purchase the assets of AFS. At the time of
                                      purchase, both Mr. Peek and Mr. Fleck also intended to
                                      serve as corporate officers and directors of FP Company.
                                        In a transaction closed in mid-September 2001 (but with
                                      an agreed effective date of August 28, 2001), FP Company
                                      acquired most of AFS’s assets for a price of $1,100,000, con-
                                      sisting of: (a) $850,000 in cash (derived from (i) a $450,000
                                      bank loan to FP Company from a credit union and (ii)
                                      $400,000 of the proceeds of the sale of FP Company’s stock
                                      to the IRAs); (b) a $50,000 promissory note from FP Com-
                                      pany to A.J. Hoyal (the broker); and (c) a $200,000 promis-
                                      sory note from FP Company to the sellers, secured by per-
                                      sonal guaranties from Mr. Fleck and Mr. Peek.




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                                      (216)                            PEEK v. COMMISSIONER                                       221


                                        As part of Mr. Fleck’s and Mr. Peek’s personal guaranties,
                                      a deed of trust on their personal residences was recorded in
                                      El Paso County, Colorado, on September 17, 2001. Mr. Fleck
                                      and Mr. Peek were grantors, and Leslie and Carol Heinrich,
                                      the shareholders of the corporation selling AFS’s assets, were
                                      the grantees of the deed of trust. The guaranties remained
                                      in effect until the sale and merger of FP Company in 2006.
                                      Operation of FP Company d.b.a. Abbott
                                         On September 25, 2001, FP Company filed a Statement of
                                      Change of Registered Officer or Registered Agent with the
                                      Colorado Secretary of State, which named Mr. Peek as the
                                      new registered agent of FP Company. Also on September 25,
                                      FP Company filed two Certificates of Assumed or Trade
                                      Name, indicating that it would hereafter do business as
                                      ‘‘Abbott Fire & Safety, Inc.’’ and ‘‘Abbott Fire Extinguisher
                                      Company, Inc.’’
                                         From 2001 until the 2006 sale, Mr. Fleck and Mr. Peek
                                      were the only persons to serve as corporate officers and
                                      directors of FP Company.
                                      Subsequent transactions involving the Fleck and Peek IRAs
                                        In 2002 Mr. Fleck and Mr. Peek’s accountants informed
                                      them that Vista Bank was terminating its services as custo-
                                      dian of the Fleck Vista IRA and the Peek Vista IRA. Con-
                                      sequently, they transferred the Fleck Vista IRA and the Peek
                                      Vista IRA to First Trust Co. of Onaga (to become the ‘‘Fleck
                                      Onaga IRA’’ and the ‘‘Peek Onaga IRA’’). Each man intended
                                      the new account to be self-directed. In each new IRA the sole
                                      asset was the shares of FP Company previously held in the
                                      Vista IRAs.
                                        In 2003 Mr. Fleck converted half of the Fleck Onaga IRA
                                      to a Roth IRA at the same bank (the ‘‘Fleck Roth IRA’’); and
                                      Mr. Peek converted half of the Peek Onaga IRA to a Roth
                                      IRA (the ‘‘Peek Roth IRA’’). In 2004 each transferred the
                                      remaining half of his Onaga IRA into his Roth IRA, so that
                                      thereafter each Roth IRA owned 50% of the stock of FP Com-
                                      pany. Mr. Fleck and Mr. Peek each reported the fair market
                                      values of the converted portions of their accounts as taxable
                                      income for 2003 and 2004.




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                                      222                  140 UNITED STATES TAX COURT REPORTS                                              (216)


                                      2006 Sale and merger of FP Company
                                        In 2006 the Roth IRAs sold FP Company to Xpect First Aid
                                      Co. Each Roth IRA received payments on the following dates
                                      and in the following amounts for its 50% interest in FP Com-
                                      pany:
                                                  Date                                                                         Payment
                                              3/14/2006       ..............................................................   $1,385,920
                                               4/5/2006       ..............................................................      114,713
                                              9/14/2006       ..............................................................       63,932
                                              11/9/2006       ..............................................................        9,156
                                              4/30/2007       ..............................................................       94,471

                                                 Total ..................................................................       1,668,192

                                      Following these payments, neither the Fleck Roth IRA nor
                                      the Peek Roth IRA owned any interest in FP Company, and
                                      neither Mr. Fleck nor Mr. Peek had any involvement with FP
                                      Company or Xpect First Aid Co.
                                      Administrative actions
                                        Both the Flecks and the Peeks timely filed Federal income
                                      tax returns on Forms 1040, ‘‘U.S. Individual Income Tax
                                      Return’’, for the years 2006 and 2007. The IRS examined
                                      those returns, adjusted petitioners’ income to include capital
                                      gain from the sale of FP Company stock, 4 and in the alter-
                                      native imposed excise tax for excess contributions to Mr.
                                      Fleck’s and Mr. Peek’s Roth IRAs during 2006. The IRS
                                      issued statutory notices of deficiency to the Peeks on
                                      December 9, 2010, and to the Flecks on December 14, 2010.
                                        The Peeks timely mailed their petition to this Court on
                                      March 8, 2011; and the Flecks timely mailed their petition
                                      to this Court on March 14, 2011. At the time they filed their
                                      petitions, both the Flecks and the Peeks resided in Colorado.
                                                                                          OPINION

                                      I. IRAs and prohibited transactions
                                        A taxpayer who invests his money in the hope of making
                                      a gain over a period of years—whether to fund his retirement
                                        4 As a result of the increased income, the IRS also made computational

                                      adjustments to exemption amounts, student interest deductions (for the
                                      Flecks only), itemized deductions, and self-employment tax.




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                                      (216)                            PEEK v. COMMISSIONER                                       223


                                      or for any other purpose—normally must pay tax on that
                                      gain as he realizes it. Sec. 1001(a), (c). His payment of the
                                      tax from time to time diminishes the size of his investment
                                      and thereby, to some extent, diminishes his future gains.
                                      However, a taxpayer may create an ‘‘individual retirement
                                      account’’, which is exempt from tax under section 408(e)(1)
                                      and in which his investment can therefore increase until his
                                      retirement without being diminished by income tax liability.
                                      As long as the account qualifies as an IRA, the taxpayer-
                                      investor is not liable for income tax on the gains, so that the
                                      undiminished investment account can earn maximum
                                      returns until the time comes for payout, when the taxpayer
                                      will finally owe income tax on those greater gains. Under sec-
                                      tion 408, the benefit of the traditional IRA is thus deferral
                                      of income tax liability on retirement investment gains. 5 Mr.
                                      Fleck and Mr. Peek therefore used IRAs to make their
                                      investments in FP Company, with the intention of deferring
                                      until retirement their income tax liability on the gain they
                                      hoped for (and did experience) from that investment.
                                         However, IRAs are subject to special rules, including the
                                      provision in section 408(e)(2)(A) 6 that an account ceases to
                                      qualify as an IRA if ‘‘the individual for whose benefit any
                                      individual retirement account is established * * * engages in
                                      any transaction prohibited by section 4975’’. The IRS con-
                                      tends that, under that provision, the Fleck Vista IRA, the
                                      Peek Vista IRA, and their successor IRAs ceased to qualify
                                      as IRAs as of the first day of 2001 through 2006 because Mr.
                                      Fleck and Mr. Peek made loan guaranties that were ‘‘prohib-

                                           5 To
                                              the extent Mr. Fleck and Mr. Peek attempted to use Roth IRAs
                                      under section 408A, their desired tax benefit was slightly different. A tax-
                                      payer investing through a Roth IRA does not exclude qualifying contribu-
                                      tions to the Roth IRA from income, but once in the Roth IRA, investments
                                      grow tax free and qualifying distributions from the Roth IRA are not sub-
                                      ject to tax. See sec. 408A. Because the IRAs ceased to qualify before the
                                      attempted Roth conversion, the Roth IRA rules of section 408A have no ap-
                                      plication in these cases.
                                         6 Section 408(e)(2)(A) provides: ‘‘If, during any taxable year of the indi-

                                      vidual for whose benefit any individual retirement account is established,
                                      that individual or his beneficiary engages in any transaction prohibited by
                                      section 4975 with respect to such account, such account ceases to be an
                                      individual retirement account as of the first day of such taxable year.’’




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                                      224                 140 UNITED STATES TAX COURT REPORTS                                    (216)


                                      ited transactions’’ under section 4975(c)(1)(B). 7 The IRS
                                      therefore concludes that the IRAs’ assets are, under section
                                      408(e)(2)(B), 8 deemed to have been distributed to Mr. Fleck
                                      and Mr. Peek, who both therefore owe income tax on the gain
                                      on sale in 2006 and 2007. Petitioners dispute the IRS’s
                                      contention that any prohibited transactions occurred, and
                                      instead contend that the IRAs remained qualified as such
                                      and therefore remained exempt from tax under section
                                      408(e)(1).
                                      II. Loan guaranties as prohibited transactions
                                         The IRS argues that Mr. Fleck’s and Mr. Peek’s personal
                                      guaranties of the $200,000 promissory note from FP Com-
                                      pany to the sellers of AFS in 2001 as part of FP Company’s
                                      purchase of AFS’s assets were prohibited transactions. Sec-
                                      tion 4975(c)(1)(B) prohibits ‘‘any direct or indirect * * *
                                      lending of money or other extension of credit between a
                                      [retirement] plan and a disqualified person’’. (Emphasis
                                      added.) Petitioners counter that Mr. Fleck’s and Mr. Peek’s
                                      personal guaranties were not prohibited transactions because
                                      they did not involve ‘‘the plan’’ (i.e., in this case, the IRAs),
                                      whereas the extension of credit prohibited under section
                                      4975(c)(1)(B) is ‘‘between a plan and a disqualified person’’. 9
                                      (Emphasis added.) They acknowledge that a loan guaranty
                                           7 Section4975(c)(1) enumerates categories of prohibited transactions, in-
                                      cluding ‘‘any direct or indirect— * * * (B) lending of money or other exten-
                                      sion of credit between a plan and a disqualified person’’.
                                         8 Section 408(e)(2)(B) provides: ‘‘In any case in which any account ceases

                                      to be an individual retirement account by reason of subparagraph (A) as
                                      of the first day of any taxable year, paragraph (1) of subsection (d) applies
                                      [i.e., ‘‘any amount paid or distributed * * * shall be included in gross in-
                                      come by the payee or distributee’’] as if there were a distribution on such
                                      first day in an amount equal to the fair market value (on such first day)
                                      of all assets in the account (on such first day).’’
                                         9 Section 4975(e)(2)(A) defines ‘‘disqualified person’’ as a ‘‘fiduciary,’’

                                      which is itself defined in section 4975(e)(3) as ‘‘any person who * * * exer-
                                      cises any discretionary authority or discretionary control respecting man-
                                      agement of such plan or exercises any authority or control respecting man-
                                      agement or disposition of its assets’’. See Swanson v. Commissioner, 106
                                      T.C. 76, 88 n.13 (1996). The parties stipulated that Mr. Fleck and Mr.
                                      Peek each retained all authority and control over his Vista IRA and its
                                      successor IRAs, and that each used this discretion to direct their IRAs to
                                      invest in FP Company. Thus, Mr. Fleck and Mr. Peek were ‘‘disqualified
                                      person[s]’’ as to their IRAs for purposes of this section.




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                                      (216)                            PEEK v. COMMISSIONER                                       225


                                      can fall within the prohibition, because, though it is not a
                                      direct extension of credit (i.e., a loan), it is an indirect exten-
                                      sion of credit. See Janpol v. Commissioner, 101 T.C. 518, 527
                                      (1993) (‘‘An individual who guarantees repayment of a loan
                                      extended by a third party to a debtor is, although indirectly,
                                      extending credit to the debtor’’). But petitioners argue that
                                      the prohibition applies only to an extension of credit that,
                                      whether direct (like a loan) or indirect (like a loan guaranty),
                                      is ‘‘between a plan and a disqualified person’’. The loan
                                      guaranties at issue were between disqualified persons (Mr.
                                      Fleck and Mr. Peek) and an entity other than the plans—i.e.,
                                      FP Company, an entity owned by the IRAs, rather than the
                                      IRAs themselves.
                                         This reading of the statute, however, would rob it of its
                                      intended breadth. Section 4975(c)(1)(B) prohibits ‘‘any direct
                                      or indirect * * * extension of credit between a plan and a
                                      disqualified person’’. (Emphasis added.) The Supreme Court
                                      has observed that when Congress used the phrase ‘‘any
                                      direct or indirect’’ in section 4975(c)(1), it thereby employed
                                      ‘‘broad language’’ and showed an obvious intention to
                                      ‘‘prohibit[] something more’’ than would be reached without
                                      it. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S.
                                      152, 159–160 (1993). As the Commissioner points out, if the
                                      statute prohibited only a loan or loan guaranty between a
                                      disqualified person and the IRA itself, then the prohibition
                                      could be easily and abusively avoided simply by having the
                                      IRA create a shell subsidiary to whom the disqualified per-
                                      son could then make a loan. That, however, is an obvious
                                      evasion that Congress intended to prevent by using the word
                                      ‘‘indirect’’. The language of section 4975(c)(1)(B), when given
                                      its obvious and intended meaning, prohibited Mr. Fleck and
                                      Mr. Peek from making loans or loan guaranties either
                                      directly to their IRAs or indirectly to their IRAs by way of
                                      the entity owned by the IRAs.
                                      III. Tax consequences of the guaranties on the sale of stock
                                        The IRS’s two notices of deficiency issued to petitioners for
                                      2006 and 2007 are similar, and the one issued to the Flecks
                                      asserted:
                                           The prohibited transaction triggered a liquidation of the IRAs in the [sic]
                                           2001. Following that liquidation, the stock of FP Company Inc. is treated




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                                      226                 140 UNITED STATES TAX COURT REPORTS                                    (216)

                                           as owned by the [sic] Fleck and another individual [i.e., Mr. Peek]
                                           personally. Consequently, Fleck and the other individual are taxed
                                           personally on any gain on the sale of such stock.

                                      Petitioners seem to argue that the IRS’s notices of deficiency
                                      issued for 2006 and 2007 are somehow too late (because the
                                      loan guaranties were made in 2001), and that in the absence
                                      of an earlier notice of deficiency the IRAs remained exempt.
                                      Petitioners suggest that if the IRAs did not lose their exemp-
                                      tion until 2006, then petitioners would have realized ordi-
                                      nary income in that year, rather than the capital gain deter-
                                      mined in the notices; and they argue that since the notices
                                      did not make that particular adjustment, the notices are
                                      somehow inadequate to support an assessment of tax based
                                      on capital gains. This argument either misconstrues the tax
                                      consequences to an individual who engages in prohibited
                                      transactions with respect to an IRA or perhaps exaggerates
                                      the importance of the wording of the notices. The notices
                                      determined deficiencies for 2006 and 2007 on the basis of a
                                      prohibited transaction that took place in 2001. We now
                                      redetermine those 2006 and 2007 deficiencies and decide (1)
                                      whether the accounts that held the FP Company stock were
                                      IRAs in 2006 when the stock was sold (we hold they were
                                      not), (2) when they ceased to be IRAs and therefore exempt
                                      from income tax (we hold in 2001), and (3) the tax con-
                                      sequences of their non-exemption (we hold Mr. Fleck and Mr.
                                      Peek are liable for tax on the capital gains realized in 2006
                                      and 2007 from the sale of the FP Company stock).
                                         The loan guaranties were not a once-and-done transaction
                                      with effects only in 2001 but instead remained in place and
                                      constituted a continuing prohibited transaction, thus pre-
                                      venting Mr. Fleck’s and Mr. Peck’s accounts that held the FP
                                      Company stock from being IRAs in subsequent years. 10 On
                                      January 1, 2006, it remained true that Mr. Fleck and Mr.
                                      Peek guaranteed the loan to FP Company; if FP Company
                                      defaulted, they would pay. By its nature, the loan guaranty
                                      that each man made put him and his account in an indirect
                                           10 Sincethe guaranties (i.e., the prohibited transactions) continued
                                      through the time of the sale of FP Company stock in 2006, we do not ad-
                                      dress what, if any, requirements there are to subsequently reform or resus-
                                      citate an IRA that, pursuant to the provisions in section 408(e)(1), has
                                      ‘‘ceased to be an individual retirement account’’.




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                                      (216)                            PEEK v. COMMISSIONER                                       227


                                      lending relationship that would persist until the loan was
                                      paid off.
                                        Consequently, under section 408(e)(2)(A), each original
                                      account holding the FP Company stock ceased to qualify as
                                      an IRA in 2001. In 2003 and 2004 when Mr. Fleck and Mr.
                                      Peek established Roth IRAs, those accounts ceased to be
                                      Roth IRAs when they funded the accounts with FP Company
                                      stock, because the prohibited transactions continued as to
                                      those accounts. See sec. 408A(a) (‘‘Except as provided in this
                                      section, a Roth IRA shall be treated for purposes of this title
                                      in the same manner as an individual retirement plan’’). For
                                      the same reasons, the accounts holding the FP Company
                                      stock when the stock was sold in 2006 were not Roth IRAs,
                                      and the gains from the sale realized in 2006 and 2007 were
                                      not exempt from tax. The tax liability from the gain is prop-
                                      erly attributable to Mr. Fleck and Mr. Peek as the creators
                                      and beneficiaries of the accounts that sold the FP Company
                                      stock. See secs. 671, 408(a), (e)(2)(A)(i). Petitioners have not
                                      challenged the IRS’s calculation of gain on the sale or
                                      asserted that they were entitled to a higher basis in the
                                      stock than what the IRS allowed. They were therefore liable
                                      for tax on the gains realized in the sale transaction as deter-
                                      mined in the notices of deficiency. 11
                                      IV. Accuracy-related penalties
                                           A. Substantial understatements
                                         The IRS determined that the Flecks and the Peeks are
                                      liable for a 20% accuracy-related penalty because their
                                      underpayments were ‘‘substantial understatement[s] of
                                      income tax’’ under section 6662(b)(2). By definition, an
                                      understatement of income tax is substantial if it exceeds the
                                      greater of $5,000 or 10% of the tax required to be shown on
                                        11 In the alternative, the IRS agues that Mr. Fleck and Mr. Peek owe

                                      excise tax on the excess contributions to their successor IRAs under section
                                      4973(a). While section 4973(a) imposes an excise tax equal to 6% of the ex-
                                      cess contribution made to a traditional/Roth IRA, this tax is imposed only
                                      for each subsequent year in which the excess contribution remains in the
                                      IRA. Under our holding here that when the IRAs engaged in prohibited
                                      transactions, they ceased to be IRAs and the value of the IRAs’ assets con-
                                      stituted deemed distributions to Mr. Peek and Mr. Fleck personally, any
                                      excessive contribution to a new IRA was self-corrected and no excise tax
                                      would be due. We therefore do not address further this alternative theory.




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                                      228                 140 UNITED STATES TAX COURT REPORTS                                    (216)


                                      the return. Sec. 6662(d)(1)(A). Pursuant to section 7491(c),
                                      the Commissioner bears the burden of producing sufficient
                                      evidence showing that the imposition of the penalty is appro-
                                      priate in a given case. Higbee v. Commissioner, 116 T.C. 438,
                                      446 (2001). He has met this burden of showing substantial
                                      understatements of income tax for 2006, since the adjust-
                                      ments for 2006 in the notices of deficiency result in defi-
                                      ciencies that exceed the requisite amounts. The same cannot
                                      be said for the 2007 deficiencies; consequently, the Commis-
                                      sioner also maintains that both the 2006 and 2007 underpay-
                                      ments in these cases were attributable to ‘‘negligence or dis-
                                      regard of rules or regulations’’. Sec. 6662(b)(1).
                                           B. Negligence or disregard
                                         For purposes of section 6662, ‘‘the term ‘negligence’
                                      includes any failure to make a reasonable attempt to comply
                                      with the provisions of this title [i.e., 26 U.S.C.]’’. Sec. 6662(c).
                                      Negligence is defined as a lack of due care or failure to do
                                      what a reasonable and ordinarily prudent person would do
                                      under the circumstances. Neely v. Commissioner, 85 T.C. 934
                                      (1985). The term ‘‘disregard’’ includes any careless, reckless,
                                      or intentional disregard of the rules or regulations. Sec.
                                      6662(c).
                                         The underpayments in these cases result from petitioners’
                                      failures to report capital gain income that they realized from
                                      the 2006 sale of FP Company stock; instead petitioners con-
                                      tended that IRAs held the FP Company stock when the stock
                                      was sold and, therefore, the realized gains were not taxable.
                                      However, Mr. Fleck and Mr. Peek were well aware that
                                      prohibited transactions listed in section 4975 could be fatal
                                      to their IRA arrangements, because both the IACC informa-
                                      tion they received and an opinion letter from their account-
                                      ant discussed section 4975 in detail. The IACC information
                                      expressly stated: ‘‘the taxpayer could not engage in trans-
                                      actions with the IRA that the IRS would determine to be
                                      ‘prohibited transactions’ ’’.
                                         Section 4975(c)(1)(B) clearly provides that any ‘‘indirect
                                      * * * lending of money or other extension of credit between
                                      a plan and a disqualified person’’ is a prohibited transaction.
                                      As we have held, Mr. Fleck’s and Mr. Peek’s personal
                                      guaranties to FP Company were ‘‘indirect * * * extension[s]




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                                      (216)                            PEEK v. COMMISSIONER                                       229


                                      of credit’’ to their IRAs and were prohibited transactions, see
                                      Janpol v. Commissioner, 101 T.C. at 527, and no one advised
                                      them otherwise. Given Mr. Fleck’s and Mr. Peek’s knowledge
                                      about the hazards of prohibited transactions and their per-
                                      sonal involvement with the FP Company transactions (in
                                      particular, their personal guaranties), we conclude that peti-
                                      tioners were negligent when they failed to report income
                                      from the sales of FP Company stock after Mr. Fleck and Mr.
                                      Peek had engaged in a prohibited transaction.
                                           C. Reasonable cause and good faith
                                          Once the Commissioner meets this burden, the taxpayer
                                      must come forward with persuasive evidence that the
                                      Commissioner’s determination is incorrect. Rule 142(a);
                                      Higbee v. Commissioner, 116 T.C. at 447. Petitioners argue
                                      that, even if they owe tax on the gain from the sale of FP
                                      Company, they acted with reasonable cause and in good faith
                                      when they failed to report the capital gains at issue, because
                                      they relied on advice provided by Mr. Blees, the C.P.A. See
                                      sec. 6664(c) (accuracy-related penalty is not due with respect
                                      to any portion of an underpayment if it is shown that there
                                      was reasonable cause and taxpayer acted in good faith with
                                      respect to that portion). However, as Mr. Fleck and Mr. Peek
                                      knew, Mr. Blees was himself not a disinterested professional
                                      but rather an active promoter of the IACC. A ‘‘promoter’’ is
                                      ‘‘ ‘an adviser who participated in structuring the transaction
                                      or is otherwise related to, has an interest in, or profits from
                                      the transaction.’ ’’ 106 Ltd. v. Commissioner, 136 T.C. 67, 79
                                      (2011) (quoting Tigers Eye Trading, LLC v. Commissioner,
                                      T.C. Memo. 2009–121), aff ’d, 684 F.3d 84 (D.C. Cir. 2012).
                                      What they received from Mr. Blees was not advice so much
                                      as a sales pitch.
                                          Because of Mr. Blees’s role as promoter, Mr. Fleck and Mr.
                                      Peek could not reasonably and in good faith rely on that
                                      advice. See 106 Ltd. v. Commissioner, 136 T.C. at 79 (‘‘pro-
                                      moters take the good-faith out of good-faith reliance’’). As the
                                      parties have stipulated, Mr. Blees sold to Mr. Fleck and Mr.
                                      Peek the IACC plan, which was later used to structure the
                                      purchase of AFS’s assets. Mr. Blees was thus a promoter,
                                      and Mr. Fleck and Mr. Peek could not reasonably and in
                                      good faith rely on his advice to adopt the IACC.




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                                      230                 140 UNITED STATES TAX COURT REPORTS                                    (216)


                                        Moreover, there is no indication that Mr. Fleck and Mr.
                                      Peek informed their accountant of their intention to person-
                                      ally guarantee FP Company loans, or that Mr. Blees gave
                                      them any advice that their personal guaranties would not be
                                      a prohibited transaction under section 4975. Rather, they
                                      were warned not to engage in any transactions that ‘‘the IRS
                                      would determine to be a ‘prohibited transaction’ ’’.
                                        Since Mr. Blees’s advice did not address the issue of per-
                                      sonal guaranties, we conclude that petitioners did not rely on
                                      their accountant’s advice with regard to the prohibited trans-
                                      actions in these cases, and did not have reasonable cause or
                                      act in good faith in failing to report the capital gains in these
                                      cases.
                                        We therefore sustain the imposition of the accuracy-related
                                      penalty under section 6662(a) for both years in issue in both
                                      cases.
                                        To reflect the foregoing,
                                                                        Decisions will be entered under Rule 155.

                                                                               f




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