Uni-K as S Corp Owner?

[Scott]

Not sure which board is best for this question, but here goes.

A C-corp is converting to an S-corp. An individual owns C-corp shares through a SEP-IRA established by his separate sole proprietorship. Since a SEP-IRA cannot own S-corp shares, the individual (who is also a director of the C-corp) is contemplating establishing a "Uni-K" plan for his sole proprietorship, taking a distribution of the shares from his SEP-IRA, and rolling them over into the Uni-K plan.

Can this be done? A couple of issues that jump out at me are (1) can a Uni-K plan (essentially a Keogh) be an S-corp shareholder, and (2) would the rollover be viewed as a prohibited sale or exchange of property between the individual (who is a disinterested person with respect to the Uni-K plan) and the Uni-K plan?

Any thoughts? Any other issues I'm not thinking of? Thanks to all.

[Archimage]

What is a Uni-K?

If the plan is a qualified plan then it can be a shareholder of an S-corp.

[Scott]

A Uni-K is a 401(k) plan for a sole-proprietorship, so there is only 1 participant. In this case, the participant is the owner of the sole proprietorship, and also the owner of the IRA from which the shares of the S corp would come.

I know that a qualified plan can be an S-corp shareholder--I'm just trying to make sure there aren't any wrinkles with respect to a qualified plan for one person. Also, the plan would be prohibited from acquiring property from a disqualified (not "disinterested" as I said in my original post) person. Since the 401(k) plan participant is also the owner of the S.P., he would be a disqualified person. I'm trying to get some comfort that the rollover of S-corp stock from the SEP to the 401(k) plan wouldn't be viewed as an "acquisition" of the stock from the disqualified person.

[QDROphile]

Have you considered the effects of unrelated business income taxes?

[Scott]

Yes I have, Q-phile, but thanks.

[Appleby]

Scott,

Actually , as Uni-K ( or Individual (k)) Plan is a 401(k) plan for a small business owner. It is not limited to a sole proprietor.

The only plan participants would be the business- owner, which by attribution includes the business owner, his/her spouse and his/her children.

[Mike Preston]

What did you mean by "the director"? The director of what? If you are saying that this individual has shares of a C-corp in his SEP-IRA and those shares are of a company that this individual is a Director of, then you might have a problem. Rolling over the shares to a qualified plan that this individual participates in won't cure that problem, even though it will, as pointed out already, apparently avoid the S-corp problem, if done in advance.

[Scott]

Mike, my bad. I originally drafted my post referring to the "individual" as the "director." When I changed the wording, I missed one reference to "director." I have gone back and edited the original post.

So, yes, you're right, the individual is a director of the C-corp, and he holds C-corp shares in his SEP-IRA. I understand the issue you raise, and it's a good one, that there may be a prohibited transaction caused by his SEP-IRA holding the stock. Thanks for your input.

[KJohnson]

You might want to look at this article:

Under What Circumstances Can an IRA Invest in a Business Owned in Part by the IRA Owner and Members of The IRA Owner’s Family

(Last Updated 10/17/01)

by Noel Ice that can be found here:

http://www.trustsandestates.net/IRAsFLPs/I.../IceSwanson.htm

Personally, I don't think the article pays enough attention to the 4975©(1)(E) and (F) self-dealing issues.

There are several examples where the DOL has raised "concerns" regarding self-dealing. For example when an IRA owner wanted to lend IRA assets to a corporation of which he owned approximately 1% and was an officer, the DOL raised, but did not address self-dealing issues. (Of course there was no "technical" prohibited transaction because the IRA owner did not own 50% of the corporation). Under a similar fact scenario where the IRA owner also owned 48% of the corporation, the DOL found that a self-dealing prohibited transaction was "likely " although, once again there was no technical prohibited transaction. In a third situation, DOL found that there was a probable self-dealing prohibited transaction where an IRA owner wanted to use IRA assets for a sale/lease-back of school property where the IRA owner's children were the founders and employees of the school (but did not have an ownership interest).

[mbozek]

The PT rules of IRC 4975(e)(2)(H) apply to a director of an employer whose employees are covered by the plan. An individual who establishes a HR-10 plan for director fees is not acting in the capacity of a director of his unincorporated business that establishes the HR-10 plan. For example a director of ABC corp is a disqualfied person for engaging in acts with the ABC Corp Pension Plan, but would not be disqualfied ifrom owning ABC Corp stock in his HR-10 plan becuase he is not a disqualfied person with regard to the HR-10 plan.

[Scott]

Thanks everyone for your helpful responses. I just learned some additional facts that muddy the waters even further. In addition to the C-corp shares, the SEP-IRA holds cash. The individual (director of the C-corp) holds warrants to purchase shares of the C-corp. He wants to do the following prior to the conversion of the C-corp into an S-corp:

(a) roll the SEP-IRA assets into the 401(k) plan

(b) use the cash in the 401(k) plan to exercise the warrants, putting additional C-corp shares into the plan

This gives me concern. I don't see how the 401(k) plan can exercise warrants that the individual owns. It seems that he would have to exercise the warrants individually, and then the 401(k) plan would have to purchase the stock from him, which would be a prohibited transaction, right? I believe he would get the same result if these steps were taken by the IRA before rolling over into the 401(k).

Does anyone see how this could work?

[mbozek]

The application of the PT rules to purchases of stock by an individual holding warrants or options is very complicated and the client should retain counsel to review the law and the stock purchase agreements to see if the stock can be purchased without violating the PT rules.