Personal Guaranty Creates Prohibited Transaction?

[Guest tschotland]

Hello,

I am trying to open futures trading accounts for my IRA and profit sharing plan (single participant plan) so that they may be traded by CTAs. The brokerage says I must sign a personal guaranty on the accounts. I am concerned that this may create a prohibited transaction. The brokerage claims thousands of people have signed them. Is there an issue here? I'd appreciate any insight.

I am cross-posting this to the Investment board. I don't find a board on defined contribution plans.

Thanks,

Tom

[Ron Snyder]

You posted this on IRAs and Roth IRAs, leading me to believe that there are more issues than a personal guarantee:

1. What is the effect of a prohibited transaction on an IRA or a Roth IRA? Plan disqualification and immediate taxation (including penalties for premature distributions).

2. I have seen previous rulings where lending a qualified plan one's credit worthiness may be deemed a prohibited transaction.

3. Would you be doing any leveraging? While leveraging such trades is common, it creates a separate set of problems. Similar to PTs, the penalty for debt-financed unrelated business taxable income is plan disqualification.

4. When is a guarantee by the IRA holder a "personal" guarantee when the account is denominated an IRA account? My answer is that when the purpose of the guarantee is to bypass creditors and bankruptcy laws and give the brokerage firm a superior claim priority in the event of a problem.

If it were me and I was hell-bent on doing the futures trading (rather than purchasing a futures trading fund, for example), I would find another brokerage firm to deal with that did not make me go out on a limb legally to open an account with them.

[Guest mjb]

Because futures trading can have opened ended liability on trades, the broker must have a solvent party in addition to the IRA who can guarantee the payment for the amount of the futures purchased. Otherwise the broker is stuck with having to use its own funds to complete the trade if the IRA doesn have sufficient funds.

[Guest tschotland]

Hi Vebaguru,

Thanks for your reply. Can you give me a citation for the rulings on how lending a qualified plan one's creditworthiness may be deemed a prohibited transaction? I'd like to show them to the brokerage.

Futures trading is always leveraged in that you post only a fraction of the contract value as a performance bond. This amount is called margin, but it has nothing to do with margin borrowing as in an equities account. Nobody lends you any cash and no interest is paid; the leverage comes from controlling a large contract with a smaller amount of money. Crazy people leverage to the hilt and get blown up right away. Anyway, this means UBTI is not an issue.

Unfortunately I do not have the option of going with another broker. It's probably the biggest futures firm in the world, and the CTAs I want to work with all use it. By the way I am not going to trade the accounts myself, I am hiring CTAs (Commodity Trading Advisors) to do it for me. Kind of like a futures fund, except rather than handing over your money to the fund, you give the CTA authorization to trade your account for you. No risk of them running off with your money that way...

For what it's worth, the guaranty agreement only says that the guarantor will pay any debts accrued by the plan/IRA. It does not state that the guarantor must fund the plan with additional money, the guarantor is supposed to make the payment directly to the brokerage. Does that make any difference?

It's all pretty ridiculous because the CTAs have to stop trading if a retirement account declines in value by 50%. So the guaranty will never be exercised. My concern is only that somehow my plan/IRA gets disqualified someday because I signed it.

Best regards,

Tom

You posted this on IRAs and Roth IRAs, leading me to believe that there are more issues than a personal guarantee:

1. What is the effect of a prohibited transaction on an IRA or a Roth IRA? Plan disqualification and immediate taxation (including penalties for premature distributions).

2. I have seen previous rulings where lending a qualified plan one's credit worthiness may be deemed a prohibited transaction.

3. Would you be doing any leveraging? While leveraging such trades is common, it creates a separate set of problems. Similar to PTs, the penalty for debt-financed unrelated business taxable income is plan disqualification.

4. When is a guarantee by the IRA holder a "personal" guarantee when the account is denominated an IRA account? My answer is that when the purpose of the guarantee is to bypass creditors and bankruptcy laws and give the brokerage firm a superior claim priority in the event of a problem.

If it were me and I was hell-bent on doing the futures trading (rather than purchasing a futures trading fund, for example), I would find another brokerage firm to deal with that did not make me go out on a limb legally to open an account with them.

[Guest tschotland]

Hi mjb,

I understand the reason they want/need the guarantee. My only concern is that by signing it I might disqualify my plan/IRA.

Thanks,

Tom

Because futures trading can have opened ended liability on trades, the broker must have a solvent party in addition to the IRA who can guarantee the payment for the amount of the futures purchased. Otherwise the broker is stuck with having to use its own funds to complete the trade if the IRA doesn have sufficient funds.

[Guest mjb]

Hi mjb,

I understand the reason they want/need the guarantee. My only concern is that by signing it I might disqualify my plan/IRA.

Thanks,

Tom

Because futures trading can have opened ended liability on trades, the broker must have a solvent party in addition to the IRA who can guarantee the payment for the amount of the futures purchased. Otherwise the broker is stuck with having to use its own funds to complete the trade if the IRA doesn have sufficient funds.

If you guaranty the obligations of the IRA you will be extending credit to the IRA which is a PT.

[John G]

I would suggest you hire a tax attorney and/or accountant before undertaking any of these types of transactions. You can be dealing with prohibited transactions, or just getting into gray areas where the "devil is in the details".

This message board is no substitute for indepth consultation with someone who is going to ask lots of questions. It is not uncommon for folks to leave out important details, or incorrectly use industry jargon (a simple example is confusing conversions with contributions).

[Guest tschotland]

Hi John,

This is great advice. I have already discussed this matter with my ERISA attorney, he says the whole area is unclear under the law. He advised me to just go ahead and sign the guaranty and fight it out later if necessary. I also spoke to an accountant who specializes in trading and he did not know - he passed me on to an in-house attorney, who also did not know. I am sure he would happily render another opinion and another big bill if I asked him to.

In my experience, if you talk to 10 attorneys you get 10 different answers. I have spent tens of thousands of dollars over the years working with attorneys on my retirement plans and frankly I have never gotten a clearcut answer on anything, at least not when I compared what they all said. It seems there is always some level of risk. So I am trying to get a feel for the issues on my own.

I have sent an inquiry to the compliance department of the futures brokerage expressing my concerns. I'll report back with what they say (if anything).

Thanks,

Tom

I would suggest you hire a tax attorney and/or accountant before undertaking any of these types of transactions. You can be dealing with prohibited transactions, or just getting into gray areas where the "devil is in the details".

This message board is no substitute for indepth consultation with someone who is going to ask lots of questions. It is not uncommon for folks to leave out important details, or incorrectly use industry jargon (a simple example is confusing conversions with contributions).

[GBurns]

I think that you should place the burden of proof on this brokerage. If they have done so amny, the question must have come up before and the must have provided a proper answer. Bear in mind that a sale rep, by whatever name called, is still a sales rep. He or she has the main (sometime sole) function of selling you the services of the brokerage. A sales rep's opinion is not necessarily that of the brokerage. The brokerage has both a legal dept and a compliance dept. Get an official brokerage opinion in writing.

The "fact" that thousands have done something means nothing. Thousands of people do not file tax returns each year and nothing happens. That does not mean that any of us should follow suit.

JohnG suggested that you speak to a tax attorney and or accountant (I am sure that he means tax accountant). An ERISA attorney is not necessarily knowledgeable about tax issues. An accountant is not necessarily knowledgeable abou tax issues. Seeking advice from people who do not have in depth knowledge about the particular issue seems somewhat futile.

On the other hand, PT and disqualification issues are not really tax issues. So that makes the seeking of advice even more specific.

Signing then fighting it out later, could be very very expensive.............

[John G]

I also would not sign and fight it out later. If you signed something you should not, your risk of losing is too high. You don't indicate that level of assets you are talking about, but it sounds like you may be dealing with substantial funds and you don't want to put its tax shelter status at risk. If you have substantial non-tax sheltered assets as well, why not do this type of investing there and do more conventional investing in the more restricted environment?

Sure its hard to find a good tax lawyer or tax accountant (yes, that is what I meant), but its also hard to find a good plumber. Many tax professionals have no experience in some of these odd areas, so you will need to ask some hard screening questions - and you normally don't pay for advice until you find a professional qualified to help you.

I would not rely upon any tax advise from a custodian. They tell you up front that you should not rely upon them for tax advice.

In a large shop like Fidelity, Schwab or Morgan Stanley, there are layers and layers of staff. The most common layer people deal with a sales reps or "counter" help. These are generally the least trained. At a minimum, try to deal with the back office related to pension funds, retirement accounts, etc. You may have to persist to get to talk to these folks because some firms (like Etrade) try hard to keep the public out. Again, you are not asking for tax advice, but rather getting hardcopy of the firms policies and perhaps some citations of IRS regs.

[Guest tschotland]

Hi GBurns.

I'm attempting to get answers from the broker's compliance department. Thing is, can I rely on their opinion that the guaranty is okay if the IRS comes after me?

I have already spoken to an ERISA attorney, a tax attorney, and an accountant who specializes in tax issues for traders. I am burning money and not getting answers. It is very frustrating.

Thanks,

Tom

I think that you should place the burden of proof on this brokerage. If they have done so amny, the question must have come up before and the must have provided a proper answer. Bear in mind that a sale rep, by whatever name called, is still a sales rep. He or she has the main (sometime sole) function of selling you the services of the brokerage. A sales rep's opinion is not necessarily that of the brokerage. The brokerage has both a legal dept and a compliance dept. Get an official brokerage opinion in writing.

The "fact" that thousands have done something means nothing. Thousands of people do not file tax returns each year and nothing happens. That does not mean that any of us should follow suit.

JohnG suggested that you speak to a tax attorney and or accountant (I am sure that he means tax accountant). An ERISA attorney is not necessarily knowledgeable about tax issues. An accountant is not necessarily knowledgeable abou tax issues. Seeking advice from people who do not have in depth knowledge about the particular issue seems somewhat futile.

On the other hand, PT and disqualification issues are not really tax issues. So that makes the seeking of advice even more specific.

Signing then fighting it out later, could be very very expensive.............

[Kimberly S]

I'm attempting to get answers from the broker's compliance department. Thing is, can I rely on their opinion that the guaranty is okay if the IRS comes after me?

Ask them that question too! My guess is they will say no.

[Guest Sieve]

Didn't mjb already give you the answer? In mjb's view--and in mine--a personal guaranty of IRA obligations is a prohibited transaction.

If you think you've been burning money without getting answers, then here you will not burn money but you still will not be able to get full agreement on a difficult issue (but of course, here you will not get legal advice, either).

[Guest tschotland]

Hi John,

Having already talked to three professionals I am a little wary of going on a fishing expedition. My ERISA attorney is actually one of the top guys in the country. However if I did want to screen for someone new, can you suggest the most hardball questions I should ask before hiring them? My issues are the personal guaranty, and whether if I short stock in my plan or IRA I will be doing anything prohibited or even be subject to UBTI.

You and GBurns have suggested getting an official broker opinon - is there any boilerplate for that so I can know that what they are giving me is what I need?

Could I try getting a PLR ruling on this?

Thanks,

Tom

I also would not sign and fight it out later. If you signed something you should not, your risk of losing is too high. You don't indicate that level of assets you are talking about, but it sounds like you may be dealing with substantial funds and you don't want to put its tax shelter status at risk. If you have substantial non-tax sheltered assets as well, why not do this type of investing there and do more conventional investing in the more restricted environment?

Sure its hard to find a good tax lawyer or tax accountant (yes, that is what I meant), but its also hard to find a good plumber. Many tax professionals have no experience in some of these odd areas, so you will need to ask some hard screening questions - and you normally don't pay for advice until you find a professional qualified to help you.

I would not rely upon any tax advise from a custodian. They tell you up front that you should not rely upon them for tax advice.

In a large shop like Fidelity, Schwab or Morgan Stanley, there are layers and layers of staff. The most common layer people deal with a sales reps or "counter" help. These are generally the least trained. At a minimum, try to deal with the back office related to pension funds, retirement accounts, etc. You may have to persist to get to talk to these folks because some firms (like Etrade) try hard to keep the public out. Again, you are not asking for tax advice, but rather getting hardcopy of the firms policies and perhaps some citations of IRS regs.

[GBurns]

John G makes a good point that " Many tax professionals have no experience in some of these odd areas, so you will need to ask some hard screening questions - and you normally don't pay for advice until you find a professional qualified to help you."

The "screening questions" should have established knowledge and ability.

So I do not understand how you could be "burning money".

[Guest tschotland]

Hi Larry,

I appreciate the opinions offered by you and mjb, it's just that I am not clear on why it is a PT (though I am worried that it is). I would not be loaning money to the plan/IRA, nor making a deposit to it. I would be agreeing to pay off the broker if the plan/IRA went into debt. I would not get any tax deferred benefits from doing that - it's not like I would be putting extra money into the plan and seeing it grow. I couldn't claim it as a tax loss outside the plan either. And guaranty or not I would always be free to make contributions to a new plan/IRA in future years, so it's not as though the guaranty enables me to avoid having to make up the losses with only tax-deffered money. From the standpoint of the IRS getting their cut it seems like the guaranty is a non-event. Am I missing something?

Vebaguru said there have been cases where a personal guarantee was treated as a PT. I'd like to see those and understand why. If you guys have citations please let me see them.

Thanks,

Tom

Didn't mjb already give you the answer? In mjb's view--and in mine--a personal guaranty of IRA obligations is a prohibited transaction.

If you think you've been burning money without getting answers, then here you will not burn money but you still will not be able to get full agreement on a difficult issue (but of course, here you will not get legal advice, either).

[Guest tschotland]

> The "screening questions" should have established knowledge and ability.

> So I do not understand how you could be "burning money".

I have been with my ERISA attorney for years, so I didn't screen him. I just called him up and discovered that it was going to be a fishing expedition. The tax accountant and his in-house tax attorney have written numerous books and articles on all aspects of taxation for traders and use of retirement vehicles for trading. They came highly recommended by numerous traders. I had no problem starting to pay for their time just on that basis. It was after we burned an hour that I realized that on these particular issues, which are highly specific to be sure, they were also going to have to go on a fishing expedition...

If you could suggest some really hard-ball questions to ask to avoid paying to learn there is going to be a fishing expedition, I would love to hear them.

Thanks,

Tom

[Jim Norman]

Tom,

See Internal Revenue Code Section 4975©(1)(B) under the list of prohibited transactions. You will find "lending of money or other extension of credit between the plan and a disqualified person".

You are a disqualified person with respect to your IRA. Can it seriously be argued that a personal guaranty is NOT an "extension of credit" to the IRA? What is an "other extension of credit"?

How much are you willing to risk to make this argument? The penalty for an IRA engaging in a prohibited transaction is full and immediate taxation of the entire IRA account. If the IRS audits and finds this it will be 2-3 years down the road from 2008, so you would have a 3 year old 2008 tax deficiency with accumulated interest and penalties due to the IRS. Sure, you can fight it later if and when the issue arises, but at what cost?

[jpod]

There is no question that a guarantee is a pt. That is the reason (or at least one of the reasons) why there is a statutory exemption for ESOP loans: the exemption is necessary in order for the employer to guarantee the loan.

I don't think I'm sticking out my neck to say that this is "ERISA 101." This is the type of question to which we can provide a direct answer on this message board, but if you don't accept it as an answer we're not going to argue with you.

[Belgarath]

See if you can find the text of Janpol v. Commissioner, 101 T.C. 518 (1993) which may illuminate the subject a bit. I don't have a link to the actual case.

[Guest tschotland]

I'm sorry if this is all ERISA 101 stuff. Here is my confusion: I understand that if I actually fund my IRA/plan with extra money that is a prohibted transaction. This is very clear. What is not clear to me is, does the mere promise to pay a debt accrued by the IRA/plan should the need arise create a prohibited transaction? Please note, this hypothetical payment of debt would NOT occur by funding the plan with additional money, it would be a direct payment from myself to the broker. Moreover this payment will never actually occur, since if the account declines in value by even 50% the CTA must stop trading, and I would have him stop long before that point anyway.

I cannot find the text of Janpol v. Commissioner. However I did find a document that references it in connection with a case that was ruled on similarly. In that case, a private foundation deposited its assets in a futures margin account to secure the performance of futures trading by the director of the foundation and his family. So money actually was deposited somewhere, not just a mere promise to do so maybe someday.

Thanks,

Tom

[Jim Norman]

does the mere promise to pay a debt accrued by the IRA/plan should the need arise create a prohibited transaction?

If the mere promise to pay is an "extension of credit", then YES, it does create a PT. Is such a promise an extension of credit? IMO yes, it is.

Much like a company may have a credit line with a bank. The bank is extending credit to the company even if the company does not actually draw against the line. Having the line allows the company to tie up its cash in ways that it would not otherwise be possible if it could not rely on the credit line as a backup. Your personal guarantee on behalf of the IRA allows the IRA to make investments it would not be able to make if the guarantee was not there.

The question is, how much risk do you want to take, and how much do you want to spend in legal fees to fight the IRS over the definition of an extension of credit, knowing that it is more likely than not that you would lose the case anyway?

[Guest Sieve]

When you decide if you want to take a chance on this transaction in spite of the strong feeling of this group that your loan guarantee is a PT, remember that the consequences of an IRA entering into a PT generally are much more severe than for a qualified plan. For an IRA, the IRA ceases to be an IRA as of the first day of the taxable year in which the PT occurs, and all amounts are treated as distributed as of that date (and the 15% PT excise tax does not apply). For a qualified plan, the excise tax applies for each year that a PT continues to exist, and the transaction must be undone (which may be difficult for this transaction).

[Guest tschotland]

Okay, you guys have put the fear in me...

Here's another approach: I am 1/3 owner of one of my businesses. If that business signs as guarantor it would not be a prohibited transaction because I do not own a controlling interest in it. Is that correct?

Thanks,

Tom

[GBurns]

For clarification :

What type of business entity is it?

Are you an employee?

Are you an officer ?

Are you a Director/Board member ?

Is this business part of a controlled group or otherwise related to the other businesses ?

[Guest tschotland]

Hi GBurns,

> What type of business entity is it?

2 member LLC taxed as an S corp

> Are you an employee?

No, but only because we have no payroll yet. We are in the process of launching our first product. Once we are making money we will start paying ourselves salaries.

> Are you an officer ?

Yes (VP).

> Are you a Director/Board member ?

The LLC is co-managed by its members. I am 1 of 2 members, own 1/3 of the LLC and have 1/3 of the voting power. In practice we don't do anything unless we both agree but that's what the operating agreement says.

> Is this business part of a controlled group or otherwise related to the other businesses ?

Not part of a controlled group, no connection to my other businesses (which are single-member LLCs).

Thanks,

Tom

[Ron Snyder]

You certainly seem to want to live dangerously. You want to do highly leveraged commodity trading with retirement funds. And if the investment risk isn't enough risk for you, you now desire to take legal risks as well. If you are a moth, why bother to come on the board to assuage your conscience? You're going to self-destruct no matter what we say because you are hell bent on taking risks.

Imagine being at the roulette table in Las Vegas (or otherwise). You bet black and win, doubling up. You bet black again and win, doubling up again. How many times can you leave all your chips on black before you have nothing left? 2, 3, 7, 10? The point is that if you keep taking risks, sooner or later you will be left with nothing. There are investments, even investments in commodities and currency futures that are not highly leveraged, do not require a personal guarantee and can provide an adequate return.

Stop letting greed get the best of your judgment before it is too late.

Ask your ERISA attorney to put his opinion in writing. If he is a decent ERISA attorney (as a member of the Employee Benefits Committee of the ABA, I know many of the top ones) he will not give you the response you reported. My guess is that you heard what you wanted to hear from him and need to speak with him again.

[Guest tschotland]

Hi vebaguru,

I can hear you snickering now, but actually I am trying my hardest to avoid living dangerously here. I have no intention of trading futures myself. I am hiring CTAs to do it for me with only part of my retirement funds. There are something like 3600 registered CTAs out there but only a handful are of any possible interest to me. This handful trades in a highly disciplined matter where only 1-2% of the account is risked on any one trade, and only 10%-15% of the account is risked in total at any one time, and that across uncorrelated markets. They have multi-year track records that put any mutual fund to shame. Personally I feel safer with those parameters than dealing with the full exposure to market risk that e.g. an index fund has.

As for the legal risks, my goal is not to take them, but rather to determine what they are so I can avoid them. You guys have convinced me that I cannot sign the personal guaranty, although the question of whether my 1/3 owned company can do so is still open. I am also pressing the compliance department at the futures brokerage on this issue, and so are my introducing brokers. It is my hope that they may waive the personal guaranty.

I would be interested in knowing what commodity/currency futures investments you are speaking of. I am guessing either ETFs or public commodity funds? I agree, some of these are attractive choices that are also of interest to me. Thing is, I am also trying to diversify across strategies and the CTAs I want to have trade for me are running strategies not available in any of the ETFs or funds I know about.

Best regards,

Tom

[masteff]

You guys have convinced me that I cannot sign the personal guaranty, although the question of whether my 1/3 owned company can do so is still open.

No, it's not still open. You've either not read or not fully understood the code section that Jim Norman cited above. Both you and the company constitute a party in interest / disqualified person (don't get hung up on the word "person") and therefore cannot extend credit to/for the plan.

[Guest mjb]

Hi vebaguru,

As for the legal risks, my goal is not to take them, but rather to determine what they are so I can avoid them. You guys have convinced me that I cannot sign the personal guaranty, although the question of whether my 1/3 owned company can do so is still open. I am also pressing the compliance department at the futures brokerage on this issue, and so are my introducing brokers. It is my hope that they may waive the personal guaranty.

I would be interested in knowing what commodity/currency futures investments you are speaking of. I am guessing either ETFs or public commodity funds? I agree, some of these are attractive choices that are also of interest to me. Thing is, I am also trying to diversify across strategies and the CTAs I want to have trade for me are running strategies not available in any of the ETFs or funds I know about.

Best regards,

Tom

So why not ask you expert ERISA counsel for an opinion on whether your 1/3d owned company can guarranty the loan which you can rely upon and will allow you to sue him if he is wrong.

[Guest tschotland]

> No, it's not still open.

I meant open in my mind, as in I still don't fully understand the reasoning.

> You've either not read or not fully understood the code section that Jim Norman cited above.

When it comes to me, bet on "not fully understood". I did read it.

> Both you and the company constitute a party in interest / disqualified person

Here is where I am still stuck. Further down from the code section Jim Norman cited there is a section (4975(e)(2)) that defines what a disqualified person is. If that person is a corporation the section states it is only disqualified if it is 50%+ owned by disqualified persons. Since I am only a 1/3 owner I do not understand why the corporation is disqualified. Jim Norman cited that code section before I floated the 1/3-owned corporation idea. He was explaining why I personally am disqualified to extend credit, not why the 1/3-owned corporation is disqualified.

Moreover GBurns asked me a host of questions about the corporation after I floated the idea. He didn't reply, "no way can the corporation sign." I figured if a pro asked me specific questions rather than just shooting me down, maybe my idea had some merit.

At the end of 4975(e)(2) I find this:

"The Secretary, after consultation and coordination with the Secretary of Labor or his delegate, may by regulation prescribe a percentage lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for subparagraphs (H) and (I). "

Paragraph (G) is the one about corporations. Are you guys saying that there is a regulation lowering the percentage from 50% in my case?

Thanks,

Tom

[Guest tschotland]

> So why not ask you expert ERISA counsel for an opinion on whether your 1/3d owned company

> can guarranty the loan which you can rely upon and will allow you to sue him if he is wrong.

I may have mentioned this elsewhere but over the years I have found so much disagreement between experts that at this point I feel my only option is to listen to a lot of different opinions, weigh them all and decide for myself. My attorney has told me many times in the past that it takes 50%+ ownership for a corporation to be disqualified. I am still interested in hearing what others have to say.

As for using his opinion as some kind of insurance policy: first of all, I never thought of that. I knew I could rely on an attorney's opinion as "substantial authority" for avoiding some penalties and/or interest; I never considered suing the guy himself if he was wrong. Second, counting on being able to win a lawsuit as my sole protection is just not my way of doing things. I just don't like the idea personally. It is also way more risk than I care to take on, since prevailing in a suit is by no means certain, especially when your opponent is a top-ranked law firm!

Thanks,

Tom

[John G]

OK, lets summarize this thread.

The consensus opinion of the panel of responders is that you are looking at high risk and dangerous options that puts your entire (not just the part invested) retirement assets at risk.

[GBurns]

Tom

The reason for my questions was just to make sure that all bases were covered in case there was some loophole that no one saw because of some detail.

Controlled group, ASG, attributon issues etc not being considered, both you and the corporation are disqualified nor a number of reasons.

Rather than go into details, which is what the advisors you have paid, should have and could have easily done, I make a simple suggestion, use Google searches on the terms 4975(e)(2) and "disqualified person IRA" (without the "").

In the mean time read this, especially the last few paragraphs which explain why the corporation is disqualified even with less than 50% ownership:

http://www.checkbookira.net/Father_Kids.pdf

[Ron Snyder]

The standards that apply to what your attorney says to you and a tax opinion are quite different. Under Circular 230, the penalties for the attorney's making a mistake are considerable, in addition to the potential liability to you in case you detrimentally rely upon his opinion and ultimately his position is upheld. Many tax attorneys will not issue written opinions any more. Those who continue to do so have implemented safeguards to avoid making mistakes. If your ERISA/tax attorney will give you a favorable opinion, you can go ahead with the transaction. Otherwise you should not.

Your excuse ("I have found so much disagreement between experts") doesn't wash. Here on this thread you have consistent opinions from several knowledgeable people and you don't want to accept those, only to argue with them.

[Guest Sieve]

Here's a recent string, Tom, which discusses this issue about midway through & reaches the same conclusion as we have here--& I'm sure there are other similar strings, but I didn't look . . .

http://benefitslink.com/boards/index.php?s...ic=39174&hl=

. . . & read the DOL advisory opinion GBurns provided.

You don't have to agree with us, but don't expect us to be convinced by your protestations to the contrary.

[shades of 410b . . . http://benefitslink.com/boards/index.php?showtopic=39081 ]

[Guest tschotland]

> In the mean time read this, especially the last few paragraphs which explain why the corporation is disqualified even

> with less than 50% ownership:

http://www.checkbookira.net/Father_Kids.pdf

Thanks for this link. Let me see if I can summarize: A self-directed IRA owner wants to lend money to a corporation that he works for, directs, and owns less than 50% of. The DOL says the corporation is not a disqualified person by reason of either the IRA owner's employment or ownership. However the transaction is still prohibted because as fiduciary the IRA owner can't do anything that would benefit himself (in this case, lend IRA assets to his own company).

My situation is sort of the opposite. I am a self-directed IRA owner and I want a corporation that I work for, direct and own less than 50% of to extend credit to my IRA. Per the DOL letter the corporation is not disqualified by these facts. Are you saying the transaction is still prohibited because of my fiduciary responsibility to the IRA? I don't see how the guaranty violates that. I do not get personal benefit from the guaranty, only the IRA does. From the standpoint of my ownership of the corporation the guaranty could be said not to benefit me.

If I've missed the point here please spell it out for me in block letters.

Thanks.

[Guest tschotland]

> Here on this thread you have consistent opinions from several knowledgeable people and you don't

> want to accept those, only to argue with them.

I have accepted the board's opinion that I cannot personally guarantee the plan. Now I am just trying to understand the argument that says my 1/3-owned corporation cannot do so.

Thanks.

[GBurns]

In block letters:

YOU STAND TO GAIN/BENEFIT.

It cannot be simpler.

[Guest tschotland]

Hi Larry,

> Here's a recent string, Tom, which discusses this issue about midway through & reaches the same

> conclusion as we have here--& I'm sure there are other similar strings, but I didn't look . . .

> [...]

> . . . & read the DOL advisory opinion GBurns provided.

I read both the string you referenced and the DOL opinion from GBurns. They are very similar, in both cases the issue is that the plan/IRA fiduciary does something that benefits him personally. I think I've got it going the other way. I can understand someone arguing that I have blown my fiduciary responsibility to my corporation by having it sign the guaranty. But I just don't see why it violates my fiduciary responsibility to the IRA. Only the IRA benefits, not myself nor the corporation. I must be missing some big obvious point here that the rest of you see, and I'd be grateful if someone could explain it to me.

>shades of 410b . . .

Ouch. I read that string too. I really don't mean to get on anyone's nerves. You guys have convinced me about one point already (no personal guaranty). I am now just getting stuck on understanding your current point about the corporation being disqualified too. From where I sit when I read your logic it sounds like we are comparing apples and oranges, but as I said, I am willing to believe there is something you all understand that so far I am just not getting.

Thanks.

ADDENDUM: While I was writing this GBurns posted his opinion in block letters per my request. Is that the consensus opinon: that as fiduciary of my IRA I somehow personally benefit when my company signs the guaranty?

[K2retire]

You benefit because it your IRA.

[GBurns]

It is BOTH your IRA AND your CORPORATION (to a sufficient extent). You have a fiduciary duty to BOTH. Any way you cut it, you are self-dealing and causing actions with the sole purpose of getting a benefit. This is the point of the last few paragraphs of the DOL letter.

The action by the corporation is an action by you and/or for you exclusively.

Benefits do not enure to the IRA they enure to the owner of the IRA.

You cannot separate yourself from either the IRA or the corporation. That is the point that you are missing.

[Guest tschotland]

Hi George,

The light is beginning to break. I don't want to wear out whatever might be left of my welcome here, so please say no if you're sick of this, but otherwise would you mind going a little further with me on it?

I reread the DOL letter. This seems to be the key sentence:

"Accordingly, a prohibited use of plan assets for the benefit of a disqualified person under

section 4975©(1)(D) or an act of self-dealing under section 4975©(1)(E) is likely to result

if Mr. Darragh directs the IRA to loan funds to the Corporation."

Here's what 4975©(1)(D) and (E) say:

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account;

Here is my remaining point of confusion: These subparagraphs both refer to things a disqualified person cannot do with the income or assets of the IRA. I understand that I am disqualified both personally and as a fiduciary, which is the reason I think you are saying these subparagraphs apply. I also understand your point that benefits accrue to me as the IRA owner and not to the IRA itself, therefore the guaranty benefits me directly. However the guaranty does not do so by doing anything with the income or assets of the IRA; rather it draws upon the assets of the corporation. In fact the only time it would come into play would be when the IRA has no income or assets. So I am having trouble understanding how (D) and (E) apply here.

If you're still with me and haven't given up in disgust, thanks... ;-)

Tom

[Guest tschotland]

Lost in the shuffle here is the fact that many people before me who have signed these personal guarantys are at risk. Does anyone have any thoughts on the best way to get the word out?

I have now spoken with two alternative asset IRA custodians and two introducing brokers, all of whom agree that it is clearly a prohibited transaction. Apparently I created quite a stir at one of the custodians; they told me they had a big meeting where everybody wanted to know if the guaranty was a new thing, and if not, how had they missed it? They said they have thousands of customers trading futures and I was the first person to raise the issue.

I spoke to two other custodians who told me they knew it was a prohibited transaction but their clients do sign the guaranty and it would be up to me to decide to take the risk. Can't they get in trouble for knowingly permitting that to happen?

One of them told me that it wasn't a problem because whenever an IRA enters into a prohibited transaction they resign as custodian. Another said the guaranty would only come into effect when the IRA was broke, so what did it matter if it was a prohibited transaction, there was no money left anyway. I swear, this is what they said.

[GBurns]

As you have now discovered:

1. That many people do something does not make it right. They might never get caught but you might. Is it worth the risk?

2. That some seller of a product says that his product is good, does not make it so. You bear the burden and penalties, if it goes bad. Is it worth the risk?

3. When errors in judgement are discovered and changes are made by purveyors of products, those changes are made at your expense. Is it worth the risk?

4. The quality of the advice you have been getting for a long time. Are you at risk with anything else ? At the least you should have learned that topics are broad and not narrow, which means you have to do your homework and ask good questions when seeking advice. Even more important to check the competency of advisors before you engage and pay.

I think that you still do not quite get it. You are apparently still hung up on you the person and will not move to the issue of the corporation. All you have to do is to read the last few paragraphs of the DoL letter. It is plain and simple. You cannot use the corporation in this self dealing manner. The corporation exists for transacting business not to act as your personal checkbook. Doing so places your corporate status at risk and makes piercing of the corporate veil in litigation or disqualification by regulators or the IRS easy.

Just pay attention to the last few paragraphs which talk about the corporation.

[Guest tschotland]

> The corporation exists for transacting business not to act as your personal checkbook.

> Doing so places your corporate status at risk and makes piercing of the corporate veil

> in litigation or disqualification by regulators or the IRS easy.

That loud sound you hear is me smacking my forehead. Okay, I think I get it. In my defense I don't see that the DOL letter makes this point, because in it Mr. Darragh is straightforwardly self-dealing with his IRA assets through his company. While what I asked about would not touch plan assets, I think your point is if my corporation is set aside then I am personally extending credit to the IRA. So the issue is not 4975©(1)(D) or (E) as in the letter, but (B). Did I get it right?

Would you agree that a totally unrelated party could sign the guaranty, e.g. a kindly rich uncle? This is just intellectual curiousity at this point. I have no such rich uncle (nor rich anything for that matter), and wouldn't ask him to sign even if I did.

> The quality of the advice you have been getting for a long time. Are you at risk with anything else ?

I've only been dealing with these IRA custodians for the past few weeks, and I don't really count what they say as advice becuase of course they want to sell me their services. I don't think I've received bad advice from my ERISA attorney or accountant in the past, but then again I was never so tuned in to the controversial nature of these things before, so in the past I did not solicit and compare multiple opinions.

Thanks for all your help. Can I buy you a virtual beer?

[Guest tschotland]

They blinked.

I have an email from the VP and Senior Compliance Counsel of the futures brokerage to my introducing broker saying I do not have to sign the guaranty. I will sign a document saying I will stop trading if my account drops by 50% (something the CTAs have to do anyway in a retirement account).

[GBurns]

No. Not getting it yet.

It is not the setting aside that would cause anything as much as your actions causing the set aside, but that is another issue.

Although the letter deals with the IRA lending funds to the corporation, the reverse would be the same result. Mr. Darragh has an interest in the corporation which might affect his best judgement as a fiduciary. Hence the sentence in bold print in the letter... "Accordingly, a prohibited use ... or an act of self-dealing under 4975©(1)(E) is likely to result......."

Loan from IRA to corporation or loan from corporation (in which you have a substantial interest) to your IRA is substantially the same. Substance prevails over form.

But you now have the authoritative answer that you were seeking. Now that the CTA etc have been called out, they have essentially admitted that it was wrong in the first place.

As for using a third party, I do not know. Maybe one of the experts in this area ha an opinion and is willing to share.

[Guest tschotland]

Okay, I know it doesn't matter to me anymore, but I find this kind of fascinating...

4975©(1)(E) talks about a fiduciary's duty with regard to plan income and assets - he can't use them in his own interest. I see that a loan in either direction would violate that. But a guaranty? I see that my ownership of 1/3 of the company "affects [my] best judgment" because it induces me to want to create the guaranty. I see that as IRA owner/fiduciary I get the benefit of it. But a guaranty is not a loan. So the IRA pays nothing to the guarantor. No interest, no principal. Nada. Zilch. This means nothing is done with plan income or assets in anyone's interest.

I know, I know, this horse is ready for the glue factory...

> Now that the CTA etc have been called out, they have essentially admitted that it was wrong in the first place.

I don't want to give the CTAs a bad name - to be clear, this guaranty is entirely a brokerage deal.

Thanks again George.

[Guest tschotland]

> This means nothing is done with plan income or assets in anyone's interest.

Unless a negative balance counts as plan assets, in which case that asset does get transferred to the corporation!