R. Butler Posted January 17, 2003 Posted January 17, 2003 Person A owns 33% of Company XYZ. He is a participant in XYZ's qualified plan. The Plan allows participant's to self-direct investments. Person A wants to invest in an L.L.C. in which he is a 5% owner. All participants would be given the opportunity to invest in the L.L.C. The sources & cases I have read indicate that it may be an issue depending on the degree of ownership. Is 5% enough to make this a prohibited transaction? Any other issues I am missing? Thanks in advance for any guidance.
QDROphile Posted January 17, 2003 Posted January 17, 2003 I think it is prohibited, at least from a tax perspective. Because the participant in the XYZ plan can direct investments, the participant is a fiduciary for tax purposes (not ERISA purposes). The investment in the LLC benefits the participant as an LLC member (I presume that additional capital is a good thing for an LLC and therefore benefits the LLC members) . The investment of plan assets by the fiduciary in a manner that benefits the fiduciary's personal interest (as an LLC member) is prohibited. Conclusions could change if the facts and presumptions change.
Guest greggi39 Posted January 17, 2003 Posted January 17, 2003 what makes him a fiduciary? just the ownership? participants who direct their accounts are not fiduciaries.
QDROphile Posted January 17, 2003 Posted January 17, 2003 The Tax Court has ruled, and the Circuit Court has upheld the ruling, that a participant who directs investment of the participant's account is a fiduciary under IRC section 4975(e)(3). Flahertys Arden Bowl, Inc. v Commissioner. Both courts expressly acknowledged the difference from ERISA.
mbozek Posted January 17, 2003 Posted January 17, 2003 It has been a while but I though that there was a requirement that the participant have a controlling interest in the investment in order for the IRS pt rules to apply. mjb
R. Butler Posted January 20, 2003 Author Posted January 20, 2003 The cases I have seen don't use a controlling interest, but a rather a substantial interest. Maybe they are same, I don't Know. I guess thats my question.
chris Posted January 20, 2003 Posted January 20, 2003 Deals with a loan situation, but see TAM 9208001 where the fiduciary had a 7.5% interest in the partnership that received the loan from the plan. Even if participant is not a fiduciary of the plan, e.g., trustee, etc... he is a fiduciary with respect to his directed investment account as pointed out above.
Kirk Maldonado Posted January 20, 2003 Posted January 20, 2003 You might to also look at TAM 9119002, October 4, 1990. Kirk Maldonado
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