Prohibited Transaction?

[J Simmons]

Situation: A owns 100 shares of C Corp. C Corp sets up plan. A rolls money into the plan from prior employer's plan. Then C Corp sells 900 new shares to plan.

A owns LLC that in turn owns a building. LLC leases the building to C Corp.

Is that an indirect leasing of property between A, a disqualified person, and the plan?

Or since the plan assets, stock of C Corp, is not involved in the lease transaction, it is not a prohibited transaction?

[My 2 cents]

I don't work on this sort of thing, but I can't help but wonder why the C Corp plan would have agreed to purchase shares of C Corp. Where is the diversification? Aren't there limits to the percentage of plan assets invested in the sponsor of the plan?

Was a process followed that would withstand scrutiny with respect to the fiduciary standards? Should the plan be choosing investments that benefit a participant? Are there other participants who could ultimately be hurt by the fiduciary's actions?

What is the relationship between A and C Corp? Is A considered an employee of the wholly-owned C Corp (otherwise, how can A participate in C Corp's plan)? Is C Corp the best tenant for the building owned by A's LLC? Are the LLC and C Corp members of A's controlled group? Sounds way too cozy to me. But, as I said, I don't work on this sort of thing.

[jpod]

J Simmons, I don't have an answer, but you may wish to take a look at a fairly recent Tax Court case, Peek v. Commissioner. A relevant question may be: How much of the corporation does 900 shares represent?

[jpod]

While it appears to be 90%, that isn't stated explicitly in your post.

[J Simmons]

Thanks for the Peek v Commissioner reference. It certainly is a tax court precedence, but it does seem rather flimsy by way of reasoning--just concluding that if the personal guaranties (themselves only an indirect "lending") are not extended beyond so guaranteeing loans taken by the plan but also loans taken by a corporation owned in part by the plan, that the obvious intent of Congress in using "direct or indirect" would be thwarted.

Essentially, without analysis or applying the federal common law requirements for piercing the corporate veil, the tax court disregarded the corporation's existence in Peek and treated its assets and dealings as if they were those of the Plan itself.

Nor did the tax court try to set a perimeter on the reach of this new application of the definition of prohibited transaction. For example, if Z, a participant in a plan, directs investment in 10 shares of GM stock, would there be a prohibited transaction if Z leases an office to GM for its regional service manager to work out of? That would of course be a ridiculous stretch of "indirect", but a logical consequence of the decision in Peek. The Peek court did not explain what level of ownership of the corporation by the plan was required for this disregard of the corporate entity.

But, the Peek decision stands for now. I could not see that it was appealed by the taxpayer. But since it did not address these concerns, I am not sure that it would be followed by other courts in the future, even though the IRS has to be bolstered by Peek in its audit and litigating positions.

[masteff]

Does IRC 4975(d)(2) apply? See bottom of 25th page here for slight explanation of criteria: https://www.irs.gov/pub/irs-tege/epche303.pdf