Excise tax for prohibited transaction

[Gary]

Form 5330 instructs a filer to calculate the excise tax for a PT using Schedule C FOrm 5330.

Schedule C has a column called "Amount involved in pt"

It seems this amount is based on the amount for the use of the money.

So for example say a employer or owner of company takes $20,000 out of his one participant pension plan. We'll assume it is all a PT since he already took a maximum loan of 50k.

Say he takes $20,000 from plan on 1/1/09.

When completing the Schedule C form 5330 what is "Amount involved in pt"?

It seems that it is not the $20,000 but the amount or value for the use of the $20,000 for the year. What would that be? What interest rate should be used? If an interest rate of 0 is used than there amount involved is $0.

Any comments?

Thanks.

[J Simmons]

Gary,

Was there a promissory note or anything else evidencing that the owner was obligated to repay the $20,000 at the time he withdrew it? If so, then I think that the use of the $20,000 is the measure of the amount involved. I don't think that you could simply use zero interest to then nullify any penalty. I think that you'd need to use a commercially reasonable interest rate at the time of the withdrawal.

If there was nothing contemporaneously documenting that the withdrawal was a loan and the owner obligated to repay it, then the measure of the amount involved was the $20,000 for PT purposes. Since it was in essence the benefits of the owner that were withdrawn, you might also have a plan disqualification issue to deal with--an improper, in-service distribution==and want EPCRS correction.

[Ron Snyder]

You may not have a PT at all. You may either have a disqualifying event or an excess loan taxable under IRC section 72(p).

[Gary]

I agree it's an excess loan and a disqualifying event, but why wouldn't it also be a PT? Is that because a disqualifying event would just trump the PT? If not a dq than it would have to be a PT right?

Thanks.

[J Simmons]

Hi, Gary,

Even though the lending of money by the plan to a disqualified person or party-in-interest is a PT (e.g., IRC section 4975©(1)(B)), it might fit withing the exemption set forth in IRC section 4975(d)(1). The dollar limits of IRC section 72(p) are not in that exemption language of IRC section 4975(d)(1). However, one of the requirements for the exemption from the excess loan being a PT is that the loan is made in accordance with specific provisions regarding such loans set forth in the plan. Often written plan provisions reflect the dollar limits; if so, the exemption would not apply and the excess loan would be a PT.

Also, a requirement for the exemption is that the loan be adequately secured. I doubt that when the $20,000 was withdrawn, there was security given for it, so that too might blow the PT exemption for the excess loan.