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Say I have a C-Corp that is holding my investments. I want to eventually cash out of my positions in the C-Corp and put the money into my Roth SDIRA LLC. Here is the plan my buddy and I have come up with. We would both sell the shares of our C-Corp to each other. We would then use our Roth SDIRA to buyback the shares (avoiding the self-dealing rule). When we do cash out our positions, we pay the corporate tax rate (lower than our income tax rate) and then pay our Roth SDIRA LLC dividends which will then not be taxed.

We think this is a great way to get our taxable investments into a tax free account and allow that extra cash to then grow tax free. Is this possible? Thanks!

2 Answers 2

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Is this possible?

Of course.

But the more interesting question is whether it is legal.

We would both sell the shares of our C-Corp to each other. We would then use our Roth SDIRA to buyback the shares (avoiding the self-dealing rule).

What you're describing is a plan that you and your buddy have come up with ("conspired" in legal terms) in order to avoid the detection of self-dealing ("avoiding the self-dealing rule"). You're not avoiding the self dealing since the plan is for your IRA to purchase your C-Corp from you, you're just using your friend as an intermediary in the premeditated scheme to circumvent the rules. Similarly your buddy is using you in his scheme to commit the same crime.

I suggest you discuss this with a criminal and a tax attorneys in order to better understand how long you'll be spending in prison, what would be the penalties, and the costs of legal representation during the trial, and the effect of a felony conviction on your life. If you decide that the benefit of slightly lower taxes outweigh the costs of all these things - then yes, sure, it's possible.

Worth mentioning that if you do get caught and the scheme is uncovered, you'll have the IRA disqualified (which may potentially trigger a significant tax bill on the spot).

In the comments you said "...If we pay fair market value, I don’t see what law is broken". But the law forbids self-dealing, regardless of the value. The IRS also uses a well-established "step transaction" doctrine to determine whether a premeditated series of transactions served an unlawful goal even if each individual transaction was not unlawful on its own. This is frequently used to crack down on tax evasion of the kind that you've described (using sham transactions and intermediaries to avoid or sidestep specific legal prohibitions).

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    No need to be rude. I was just seeing whether this was possible (and legal) like a back door Roth. If we pay fair market value, I don’t see what law is broken. All are different legal entities and don’t violate the SDIRA rules. Commented May 7, 2023 at 1:38
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    The answer is maybe (and no).
    – keshlam
    Commented May 7, 2023 at 2:47
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    @Billybob643 I'm not trying to be rude, I'm answering your question. It is possible. Your original question wasn't whether it was legal, but I expanded on that as well. Sometimes people decide that commiting crimes is worth their while despite the risk, you may be one of these people, I can't know.
    – littleadv
    Commented May 7, 2023 at 4:24
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    Good answer, +1. Oddly Thiel isn't in prison for this though... Commented May 7, 2023 at 14:54
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    @Billybob643 I don't see how this rude... I think the better term would be "Honest about the risks"
    – Questor
    Commented May 8, 2023 at 17:32
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We would both sell the shares of our C-Corp to each other.

OK so far.

We would then use our Roth SDIRA to buyback the shares

I assume that is is allowed.

(avoiding the self-dealing rule).

That makes this idea "interesting".

When we do cash out our positions, we pay the corporate tax rate (lower than our income tax rate) and then pay our Roth SDIRA LLC dividends which will then not be taxed.

Nice. You have saved some money.

Only two problems:

  • You are doing this to avoid a provision of the tax code.
  • and even more importantly:

Here is the plan my buddy and I have come up with.

The problem is the Step-transaction doctrine

Under the step transaction doctrine, "a series of transactions designed and executed as parts of a unitary plan to achieve an intended result ... will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation."

The idea is that because this is prearranged then the courts have said that going by your proposed plan the result can't be different. So if you are not allowed to do the transaction under the normal conditions, you can't be allowed to do the transaction under your proposed alternate path.

Your tax advisor should be able to explain the penalties for this. One possible penalty is having the IRS treat the entire SDIRA as a taxable account.

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