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Worldwide. At the time of the purchase, Mr. Swanson
was the sole director of Swansons' Worldwide.
The sale of stock by Swansons' Worldwide to
Mr. Swanson's Individual Retirement Account
constitutes a prohibited transaction within the meaning
of section 4975(c)(1)(A) of the Code. The sale
occurred February 15, 1985. By operation of section
408(e)(2)(A) of the Code, the Individual Retirement
Account ceases to be an Individual Retirement Account
effective January 1, 1985.
Effective January 1, 1985 the Individual Retirement
Account is not exempt from tax under section 408(e)(1)
of the Code. The fair market value of the account,
including the 2500 shares of Swansons' Worldwide, is
deemed to have been distributed to Mr. Swanson in
accordance with section 408(e)(2)(B) of the Code.
Therefore, Mr. Swanson effectively became the sole
shareholder of Swansons' Worldwide, Inc. with the loss
of the IRA's tax exemption. [Emphasis added.]
Although the record is not entirely clear on the matter, it
appears that respondent imputed to IRA #2 the prohibited
transactions found with respect to IRA #1 and used similar
reasoning to disqualify IRA #2 as a valid trust under section
408(a).
b. "Sham Transaction"
With respect to the Algonquin property, respondent concluded
in the notice of deficiency that:
the purported sale of your personal residence located
in Algonquin, Illinois by you in 1986 to Trust #234,
Barry D. Elman, Trustee, of which your corporation, H &
S Swansons' Tool Company, Inc. is the beneficiary, can
not be recognized for tax purposes. The purported sale
in 1986 was no more than a sham transaction which was
entered into for tax avoidance purposes. It is
determined that the purported sale served no other
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