Prohibited Transaction?

[Guest hilda]

Is this a PT? Is a deemed distribution an issue?

Employee borrowed $50,000 on 1/15/1998 & made only the first payment due (2/1998) during the year 1998. Sporadic payments were made in the years 1999, 2000, 2001 & 2002. The loan still has not been paid in full. Interest continued to accrue for each monthly payment missed.

The loan agreement itself contains the language required with respect to interest rate, re-pmt terms, etc.

Loan called for monthly payments.

Employee is a plan participant, a HCE, a 50% shareholder, a plan trustee, and the plan administrator.

Form 5500 for the 1998 plan year reported the loan.

The statute of limitations bars the employee's 1998 Form 1040.

I'll appreciate receiving help on this.

[QDROphile]

You have a deemed distribution if any loan payment is more than 180 days overdue (and probably before that).

Under the circumstances the probability of a prohibited transaction or a disguised distribution seems very high. You need help from someone who knows how to deal with this stuff. The issues get fuzzy and the consequences are complex.

[Guest b2kates]

what do you mean statute of limitations bars 1040. If a substantial understatement might not be limited by statute.

[mbozek]

Under IRC 6501(e) S/l is extended to 6 years if amount excluded from the return (i.e., outstanding loan balance) exceeds 25% of gross income.