Conformance Supplement – CLIENT PORTAL

Describes the prohibition of transactions involving or benefiting “disqualified persons”.

This is the internal IRS employee manual describing how agents should deal with Prohibited Transactions matters.

Describes the guidelines for determining whether an entity holds plan assets.

Swanson vs Commissioner. Plaintiff moved for award of attorney fees because the position of the tax court was unreasonable. The tax court determined that IRA investment in a corporation directed by the beneficiary was a prohibited transaction. The court held that it was “unreasonable” for respondent Commissioner to maintain that a prohibited transaction occurred when the stock was acquired by the IRA. The stock acquired was newly issued—prior to that point in time, the company had no shareholders. A corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). Further at the time of the stock issuance, the company was not an “employer”, any of whose employees were beneficiaries of the IRA. Employer means any person acting directly as an employer, or indirectly in the interest of an employer. The corporation did not maintain, sponsor or directly contribute to the IRA, the corporation was not a disqualified person under 4975(e)(2)(G). By analogy, an LLC that is set up as a new entity, can issue its units 100% to an IRA without the occurrence of a distribution. The manager of the LLC can be a plan beneficiary, as long as no direct benefit is derived by the IRA beneficiary. The LLC units must be issued to: “(Name of Custodian) F/B/O (Name of plan participant), (type of plan), (plan number).”

Ancira vs Commissioner. Ancira, as the IRA beneficiary, sought to purchase stock in a company that was not publicly traded. The IRA Custodian did not allow such purchases as a matter of policy. They issued a check to “S.K. Corporation” but also advised Mr. Ancira that it was a taxable distribution. The stock purchased was written to the Custodian “FBO Robert Ancira, IRA # —“. The court held that no distribution occurred, even though the stock certificate was not immediately transferred to the Custodian.

Rollins vs Commissioner. Rollins directed is 401(k) plan to loan money to several corporations which he owned various percentages of and had various positions of control or responsibility. Rollins also commingled funds throughout the process, often personally making payments to the 401(k) plan when his companies could not. Additionally, Rollins failed to file tax returns for some tax years. The court held that excise taxes were due as a result of the prohibited transactions.

Jason. Jason & Berbit (abbr “J&B”) wanted to partner their two IRAs into a subchapter S corporation in order to purchase two condominium units. IRA funds would be used as a down payment, and a mortgage loan would be obtained for the remainder of the purchase price. J&B were to personally guarantee the mortgage loans. J&B were also to serve as officers of the S corporation without compensation. In this opinion, the Department of Labor held that their scenario did not create a prohibited transaction as long as J&B did no personally guarantee the mortgage loans.

Janow. Adler wanted to form a partnership in which his IRA, himself, and other disqualified persons would co-invest. This partnership would then hire an investment manager who is unrelated to Adler. The investment manager has a minimum investment requirement. The prospective partners’ cumulative investment was able to satisfy this minimum investment requirement without the inclusion of the IRA funds. The Department of Labor held that such a partnership would not, in itself, create a prohibited transaction. DOL did, however, mention that if the partnership required the IRA funds in order to satisfy the investment manager’s minimum investment requirement, a prohibited transaction would occur. This opinion is often wrongly interpreted to declare that all instances of plan-disqualified person partnering are acceptable. To the contrary, applying this opinion to most scenarios of investment into alternative assets (rather than securities) that involve plan-disqualified-person partnering holds that a prohibited transaction would occur.

Hurst. Darragh wants to loan $500,000 to a corporation in which he has ownership of about 47%. Darragh asserted that the corporation was not a disqualified person because his ownership was under 50%. DOL determined that the corporation was not a disqualified person, but the proposed loan would still violate 4975(c)(1)(D) and/or 4975(c)(1)(E). These specific rules any use of plan assets in the interest of a disqualified person. DOL asserted that Darragh’s 47% ownership was significant enough to fairly clearly believe that the loan was in his personal interest.

Prohibited Transaction Exemption 96-62. This DOL exemption states that when a plan wants to pursue an investment substantially similar to 2 previous advisory opinions, that plan can write into DOL demonstration such, and may pursue the transaction as early as 78 days from DOL’s acknowledgement of receipt.