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PT Question


Scuba 401

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2 scenarios -  1) Employee Doctor who is an officer of the medical practice in which he works wants to use IRA funds to purchase closely held REIT (owned by other doctors in the practice.  Practice would rent office space from the REIT.

2) is a 2% owner of the medical practice wants to do the same as the non-owner.  

Are these Prohibited Transactions? 

I think they are conflict of interest PT's as they clearly benefit from the transactions as officer and owner of the medical practice. I do not believe the practice is a disqualified person under 4975.  

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I have practiced a fair amount in this area, unfortunately. I think you have put your finger on the issue, i.e., 4975(c)(1)(E), and I think the answer to your question is that no one knows. The IRS is the only regulatory agency interested (mildly), but it has only enforcement authority, not regulatory (DOL has regulatory authority under the ERISA Reorganization Plan of 1978). So we get cases every now and then (Peek, Ellis) in egregious circumstances, and that's about it. Since IRAs are really just special tax pockets of their owners, conceptually there is a lot of difficulty applying 4975(c)(1)(E) because you have to create a mental construct in which the owner has a conflict of interest with him/herself. It can be done, but still untrodden ground in terms of clear precedent. See the footnote in Ellis.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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7 hours ago, Scuba 401 said:

2 scenarios -  1) Employee Doctor who is an officer of the medical practice in which he works wants to use IRA funds to purchase closely held REIT (owned by other doctors in the practice.  Practice would rent office space from the REIT.

2) is a 2% owner of the medical practice wants to do the same as the non-owner.  

Are these Prohibited Transactions? 

I think they are conflict of interest PT's as they clearly benefit from the transactions as officer and owner of the medical practice. I do not believe the practice is a disqualified person under 4975.  

Besides the lack of clarity, I assume he wants to do this because he thinks the REIT is a terrific investment? So, he's guaranteeing that he will convert capital gains to ordinary income and pay lots more in taxes.  That['s always a great idea (said as a taxpayer who appreciates his additional payments to the US deficit).

Now, I'm sure that the doctor owner of the IRA signing a rental agreement for his IRA with the partnership (where he is an officer and an employee even if not a partner) is a PT.  And the 2% owner is just that much worse.

 

 

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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Larry, are you saying those are PTs under 4975(c)(1)(E) or some other provision? I don't see them except under 4975(c)(1)(E).

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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larry are you saying the employer (medical practice) is a disqualified person?  I don't think it is without more substantial ownership. on the other hand i still am sticking with my conflict of interest PT.  

Luke does it change anything if doctors who are not employees of the medical practice invest in the REIT and at some time in the future become shareholders in the practice?  my feeling is it becomes a PT at that time as opposed to at the initial investment. 

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Scuba 401, I agree with you that neither the medical practice nor the REIT seems to be a disqualified person with respect to the IRA. However, if the REIT holds plan assets (because it both (a) has 25% or more plan investors and (b) is not a REOC under 29 CFR 2510.3-101), then a more detailed inquiry would be required.

If the REIT never holds plan assets, then it seems to me that there will be a "facts and circumstances" argument that there is a PT (as well as a counterargument) in a variety of circumstances. I'm not sure whether the issue of when the doctors become shareholders matters.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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  • 1 month later...

Luke:

I read your responses and not only 100% agree but I think your description of the PT rules as mental gymnastics is spot on! All too often, I end up drawing pictures and labeling each party in a transaction! That said, I feel like this transaction would be okay provided that the Plan Asset rules aren't triggered. I was thinking about it this way:

1) The Doctor/IRA's owner's investment in the REIT owned by the other unrelated doctors doesn't trigger a PT. The other doctors (presumably) aren't disqualified persons. 

2) The REIT then invests in a building which rents space to the practice at FMV.

3) As long as the REIT investment doesn't exceed 25%, the Plan Asset rule isn't triggered and the entire transaction isn't a PT. However, if it is triggered, then REIT assets are considered plan assets and the deal with the doctors office in which he owns a small stake (i.e., the 2%) does create PT issues.

However, even if the Plan Asset rule is triggered, he may be alright given his small ownership position. I mean, the transaction (e.g., rental agreement) would be between the doctor's office and the REIT. in this situation, the REIT is a disqualified person. However, and obviously depending on the facts, his position in the doctor's group may NOT make it a disqualified person, again....allowing the transaction. Nevertheless, I'd rather not take that position if possible.

Does that sound right? What I'm not clear on, and maybe you can help, is whether the 2% stake is factored into our plan asset analysis? I feel like it wouldn't be, since we are determining ownership of the REIT and not the practice, but what do you think? Am I off on this any of this analysis?

Jeremy

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Jamin' JROD, it's not clear to me from the question who is going to own the 2%. If you tell me that, I might be able to respond to your question.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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