Company A owns Company B

Company A has note payable for purchase of Company B

Individual Shareholder owns 100% of Company A

Company A wants to payoff note for purchase of Company B. The Individual Shareholder will have to provide Company A with the funds to payoff the note. He has enough money in his IRA to payoff the note.

We are looking for a way to use the IRA funds to payoff the note without taking a distribution. Can Individual Shareholder's IRA form a new corporation to invest in Company A?

The transaction would provide a personal benefit to the IRA owner outside of the IRA (beyond the economic value of the IRA investment). That would be a prohibited transaction and kill the IRA.

Thanks for the reply. Is anyone is familiar with James H Swanson vs Commissioner? If so, do you think we can rely on it in the above scenario?

I agree with QDR. While the specific facts are still a little murky, I think the problems with the proposal are clear. These kinds of transactions can create artificial "returns" that can boost the assets of the tax shelter, which presents a huge problem for the IRS. I am not saying that is the intent in this case, but self dealing arrangements open the door to that issue. This is one of the reason why custodians are reluctant to support non-traditional investments where the marketplace sets the price or valuation. When you get away from open trading and third party transactions, you have a problem establishing value. This is also a problem with any infrequently traded asset.