In In re Cherwenka, the U.S. Bankruptcy Court for the Northern District of Georgia concluded that house flipping activities in a self-directed IRA and shared ownership of property with the IRA and the account holder were not prohibited transactions.
Facts & Procedural History
Mr. Cherwenka was in the business of flipping houses.
Mr. Cherwenka established a self-directed IRA to engage in this activity.
To invest, Mr. Cherwenka would identify the property and, in conjunction with a real estate agent, would submit a proposed offer to the IRA custodian.
The IRA custodian would then review the proposal and could accept it or reject it. If accepted, the custodian would sign the paperwork and take title to the property as trustee.
The property would then be held and sold or held, renovated, and sold. The renovations were performed by a third party contractor.
Mr. Cherwenka was not compensated for the services he provided to the IRA. Mr. Cherwenka filed Chapter 7 bankruptcy and reported his self-directed IRA as an exempt asset.
The bankruptcy trustee challenged the classification, arguing that the IRA was not exempt as Mr. Cherwenka had engaged in prohibited transactions by identifying the subject properties, appointing and approving work on the properties, and overseeing payment from the custodian for such work.
The Bankruptcy Court looked to the definition of the term “transaction” as found in the dictionary, which is “an exchange of goods or services.” The court concluded that Mr. Cherwenka did not engage in a “transaction,” as required by the prohibited transaction rules. The court was also not troubled by Mr. Cherwenka making investment decisions for the IRA. The court concluded that this would be the case regardless of what asset the IRA invested in.
The bankruptcy trustee also argued that Mr. Cherwenka personally co-owning property with the IRA was a prohibited transaction because it showed that he used IRA assets for his personal interest or benefit. The court did not agree, as there was no evidence that Mr. Cherwenka shared a joint tenancy or tenancy in common ownership interest with his IRA. The evidence seemed to indicate that the property was divided, with Mr. Cherwekna and his IRA each owning a specific percentage of the property. Thus, there was no evidence that Mr. Cherwenka benefited from the part of the property that the IRA owned.