Property Held in Profit Sharing Plan

[DP]

I have a client who has a piece of property held in his self-directed Profit Sharing account. If he sells the property to an unrelated party, can the closing costs and other fees related to the sale be paid with his personal assets? Or does these fees have to come out of his plan assets?

Thanks.

[chris]

Use of personal funds may end up being prohibited transaction. Safest to have all paid by/through plan assets so that there's no commingling...... That's an example of problems with having real estate inside a retirement plan....

[DP]

Chris, thanks for your information.

I have a follow-up question. This client has rolled over all his assets in the Profit Sharing Plan to his IRA other than this piece of property which he is trying to sell. The client has a property tax bill due on the property. In the past, he used plan assets to pay the property taxes on the land.

Now he has no assets in the plan with which to pay the taxes due. Can he pay the tax bill with personal money? If not, how should the tax bill be handled?

[QDROphile]

The tax bill cannot be paid with personal money. Is he able to roll some cash into the plan from an IRA? Are there any contributions that can to be made to the plan?

[DP]

This client is retired so there are no contributions coming into the plan. Could the corporation that sponsors the plan pay the tax bill, and then the client reimburse the corporation? Thanks.

[AndyH]

QDROphile, why is that so? I'm just curious. Are taxes different than a fee charged by an investment manager, i.e. an investment expense?

I once had a DB plan that held raw land audited. The sponsor had been paying the taxes. The auditor said that in such case the tax payments should be treated as contributions to the plan. We accepted that statement and changed how this was handled go-forward, but I always wondered if that was correct.

Is there something different about taxes?

[imchipbrown]

I'd watch out that they were considered non-deductible contributions.

[QDROphile]

I suppose property taxes are not an administrative expense of the plan, they relate to and are generated by the asset, not the management of the asset.

The IRS had, and may still have, a similar published position on commissions on stock sales. Commissions are inextricably related to the stock (you can't obtain or dispose of the stock without them) so the assets of the plan have to be used to pay the commissions. Look at a typical statement for a sale. The shares are sold and the amount net of commission is delivered. You would have to go to extraordinary lengths to recieve the full sales proceeds and pay the commission separately. Payment of the commissions outside of plan assets is treated as a contribution. However, payment of fees for investment advice is asset management and may be paid outside of the plan as an administrative expense.

The plan sponsor cannot pay the property taxes outside the plan any more than the participant can.

The plan administrator was a bit asleep when the assets were reduced to real property. The liquidity problem is a classic and the administrator should never have let the plan get in this position even if the participant was short sighted. Either the property has to generate sufficient income at the right times or other assets have to be available to meet the cash needs.

[mbozek]

I dont see any PT violation under IRC 4975 because the funds used to pay taxes are not plan assets and there is no sale, exchange or lending of property between the plan and the sponsor. However, the client cannot deduct the taxes as a contribution to the plan or as an expense of the client because the taxes are not a legal obligation of the client.

[jevd]

I agree with Chip Brown that they would be considered non-deductible contributions subject to the appropriate penalties.