Two Roth IRA Restructuring Cases

Robert Paschall worked for Rockwell International for his entire career. Before he retired in 1996, he established a regular IRA. Early in 2000, Paschall met with A. Blair Stover and they restructured his regular IRA into a Roth IRA. Paschall rolled his IRA over into a self-directed traditional IRA and also opened up a self-directed Roth IRA.

In 2008, the IRS came to collect excise tax on the excess contribution to the Roth IRA from 2002 to 2006 and assessed penalties for failure to file Form 5329 during the same period. Paschall tried to argue that since he filed a 1040 for those years, the statute of limitations barred the collection of the excise tax. Also, Paschall tried to argue that he relied on Stover and so he had reasonable cause not to file.

The court held that the 5329 is a separate form that needed to be filed so that the IRS could property compute the section 4973 excise tax liability. The court also held that the transfer of cash to the Roth IRA was an excess contribution and there was no explanation for that transfer other than trying to avoid paying federal income tax. Lastly, the court held that Mr. Paschall should have been aware that these transfers were questionable and that it was unreasonable for him to rely on that tax advisors opinion.

In another case involving the same advisor, the taxpayers tried to argue that they relied in good faith on Stover. The court similarly found that the taxpayers reliance was unreasonable.

See Charles J. Reichert, Roth Restructure “Too Good to Be True”, Journal of Accountancy, Oct. 2011; see also Robert K. and Joan L. Paschall v. Commissioner, 137 TC no. 2; see also Ronald V. and Donna-Kay Swanson v. Commissioner, TC Memo 2011-156.

Special thanks to Jim Hillhouse (Professional Legal Marketing  (PLM, Inc.)) for bringing this article to my attention.