Investment in Closely Held business

[MarZDoates]

Dad and Son are owners in a closely held business. They each have their own IRAs. They invest in stock of the closely held business.

Is it possible for Son's IRA to buy family business stock from Dad's IRA?

I'm not even sure where to start to look for this in the regs???

[Ron Snyder]

Here's a start:

http://www.entrustadmin.com/iraplus/Prohib...g_Your_IRA.sqrl

IRC Section 408(e)(2).

[QDROphile]

If Dad or Son are involved in conducting the business or are employees of the business or are otherwise compensated for their services to the business, they are playing with fire.

[dh003i]

QDR, their margin of error may be smaller in such cases, but it still comes down to either prohibited or not prohibited. There is no in-between. If they just squeeze by by one cent, or a small percentage factor, or whatever, then it's completely legit.

[John G]

The rules governing self dealing are tight. We have seen a lot of creative concepts floated here that are not legal.

If a taxpayer wants to pursue these atypical arrangements, they should seek the advice of a tax lawyer and accountant. Don't be surprised if you are asked to sign a waiver, and the advice will not come cheaply.

This area has a high potential for abuse. "Arranged" transactions, as opposed to market transactions, creates the possibility for supersizing a Roth that would be a end run around the contribution limits.

[GBurns]

dh003i

I did not understand "If they just squeeze by by one cent, or a small percentage factor, or whatever, then it's completely legit. "

Squeeze by with what? :

Ownership of the IRA

Ownership of the business

Family relationship

Business purpose

Tax avoidance as sole purpose

Step transaction analysis

[dh003i]

GBurns,

What I mean is that in alot of these kinds of things, you're prevented from investing in the company if your percentage ownership is larger than a certain %. The article cited states that a disqualified person would include (among other things) "any corporation, partnership, trust or estate in which the IRA holder has a 50 percent or greater interest". In other words, if the IRA holder is 1/1000th of a share short of having a 50% interest, the transaction would not be prohibited (presuming that that is in fact the correct % quoted, and assuming that they don't round when determining whether or not your % ownership makes it a PT; otherwise, it would have to 1/1000th of a share short of 49.5%).

Just like in my prior thread, where I noted the difference between an AGI of 15,000.49 and 15,000.50 for the retirement savers credit: it's a difference of $600 in terms of the tax-credit. The person with 15,000.49 can claim a credit of $1,000; the person with 15,000.50 can only claim a credit of $400; in other words, earning one penny more can make you 600 dollars poorer. (This is the correct way to do it, since if you round, you'd have to round down for .49 and up for .50; normally, a rounding error producing an $1 difference in AGI would not get one in trouble; I'm not sure about this case).

Other things would also count as "squeezing by"; e.g., regarding family relations. Someone who is "like a son" or "like a brother" to one, but not adopted, for example.