Prohibited transaction?

[EGB]

Owner of IRA ("X") wants to invest IRA assets in an LLC in which he owns 45%. The other owners of the LLC are unrelated to X. In addition to owning 45%, X will either be the manager or chairman of management committee of the LLC (ie, he will have operational control). Will this constitute a prohibited transaction? It does not appear to me that this would be prohibited since his ownership percentage is not at least 50%.

Next step (assuming first purchase is not a prohibited transaction) - assume X, through the initial purchase, purchases 10% through his IRA. Then, a year later, X wants to purchase more. Is he then conidered to own 55% (45% owned directly and 10% owned through IRA) due to his IRA holding in the LLC such that the second transaction would be prohibited?

[Guest J Singletary]

In response to your first question, you have to look at the "self dealing" part of the Prohibited Transaction rules (IRC 4975©(1)(E)). This transaction sounds very much like it could run into trouble there. Of course, self dealing can definitely be a gray area.

With regard to your second question on percentage of ownership, I've always understood that the 50% limit does not include what is owned through the retirement plan. 4975 doesn't seem to read that way and it just wouldn't be logical to include it, since the IRS is mostly concerned about the taxpayer benefitting personally from the investment, not in the taxpayer's total control of the investment.

I would typically insist on an opinion letter from the client's attorney in a situation like this.

[EGB]

Singletary - thanks for your comments.

I did locate one case wherein, in satisfying the fifty percent (50%) requirement, the interest personally owned by a plan fiduciary in a partnership was aggregated with the interest he held as plan trustee. Accordingly, the partnership was a party in interest of the plan where a trustee owned thirty percent (30%) of the profits interest in the partnership and held an additional twenty-four and one-half percent (24.5%) of the profits interest as plan trustee. See Fischer v. McKenzie (ED WA) No. C-84-868-JLQ (10-8-85).