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Prohibited Transaction


Guest Shelton

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Guest Shelton

The attached document suggests that an IRA owner may use his IRA money to purchase shares of his own LLC. This seems to be a prohibited transaction- is it not?

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S: Who are these people??? Some of their ideas are very strange--- and are devoid of economic reality. For example even if u could have an IRA purchase a disability policy which I dont think is possible becuase the insurance co would not issue it to a non human owner why would you do it because the payments made to the IRA would be taxable income. If an individual purchases a disability policy the payments are not taxed.

The idea of having an IRA invest in a home occupied by the owner has been the subject of a court case where the IRS won a judgment that the purchase was a prohibited transaction and a taxable event to the Owner. These people seem to believe that if the DOL says that something is ok then the IRS would not tax it. This is not true. I dont know where they came up with all of those PT exemptions but some of them are inconsistent with IRC 4975- Further even if they exist who wants to pay for the cost of getting their own PT exemption-- u have to hire a lawyer and prepare extensive documentation -- figure 10K minimum expense.

While an IRA can invest in privately held companies, limited partnerships, LLCs, RE and mortages it is almost impossible to find a custodian who will handle such investments because of the liability and administrative issues. Again the PT rules will apply to such investments. Also the IRA owner, not the custodian is responsible for determiing if the investment is a PT. I do not know why an IRA owner would want to invest in mortgages because if the mortagee defaults the IRA owner has to hire counsel and commence proceedings to seize the underlying property and must pay the legal costs with IRA assets. Also the IRA is not collecting any interest whlie the mge is in default and the vlaue of the property may not cover the amount of the outstanding mortgage.

One has to be careful in investing in options because of the requirement that IRAs cannot use borrowed money for investment and some types of options are considered loans. Most individual investors are not sophisticated enough to use options.

mjb

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Guest Shelton

mbozek,

I agree with you totally. You also mentioned some critical points that I did not think of .

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If I were the IRS, I would wonder why someone insists on a questionable investment when there are 8,000 stocks, 8,000 mutual funds, a huge number of bonds and other basic things in which to invest. Just the pursuit of these kinds of odd investments might appear suspicious.

The APCG site seems to think everyone should have a Nevada Corporation, apparently even if they don't actually have a business. The pitch seems to cater to the tax evasion crowd as their number one reason for a Nevada Corp is that Nevada does not share info with the IRS. If not a Nevada Corp then something in the Bahamas..... does everyone get the picture?

I would be very wary about any advice offered by these folks.

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mbozek:

>>>These people seem to believe that if the DOL says that something is ok then the IRS would not tax it. This is not true. <<<

I had thought that the IRS deferred to the DOL in interpreting 4975, even if the question applied to an IRA and not a Title I plan. Do you disagree?

That said, this memo completely ignores the prohibition against dealing with the assets of an IRA on the owners own account. The DOL will not issue a ruling on this prohibition, and most of the examples he cites would run afoul of it.

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I think the IRS would be able to tax a prohibited transaction that violates IRC 4975 under IRC precedents regardless of the DOL view of the transaction-See Baizer V. IRS, 204 F3d 1231.- e.g., one of the examples cited in the publication states that the DOL has issued a PT exemption permitting an IRA to purchase a home that the IRA owner lives in. Since there is a Tax ct opinion that this is a PT I dont think the IRS will refrain from disqualfiying the IRA even if such an opinon exists. If you have a basis for a differing opinion please let me know.

As far as transactions invovling self dealing, the IRA owner is always at risk-- I think the article cleverly assumes that the PTs will not be discovered because their is little audit risk for IRAs.

mjb

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Risk reward for being to "clever" is not good. This is the kind of stuff that someone at the bank or a neighbor could report to the IRS as an abuse for the finder fee. The upside is you have a normal investment. The downside you lose you tax shelter, owe taxes and may have penalties. So... why take a dumb risk.

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mbozek:

Presidential Reorganization Plan No. 4 of 1978 transferred the authority to issue interpretations of 4975 to the DOL. The interpretations so issued are binding on the IRS. See, e.g., DOL Opinion Letters 93-33A, 2000-10A, 2001-02A.

However, I've not read the case you cited. I'll take a look.

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Agrred, but the DOL had not ruled in either of the PLRs you listed. If an IRA owner has a DOL opinion stating that there is no PT, it is my understanding that they are protected from both the IRS and the DOL (although the DOL would likely be unable to take any action anyway.)

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