Prohibited transaction - Children?

[Lynn Campbell]

The children (no matter what age) of the owner of 50 percent or more of the Employer are included as a "party in interest" under ERISA and a "disqualified person" under IRC 4975 - check these out and see what you think.

It appears quite likely this is a prohibited transaction.

[Guest MattNewman]

I have a client who wants to have his well to do defined contributio (profit sharing) plan (maintained by an S Corp with the client being the sole owner of the Corp)purchase mortgages as an investment. The client, a lawyer, is a shrewd investor particularly with mortgages. While there are specific PTE's allowing for Plan's to make these investments, the client would like to make an investment via his children (both over 21 years old) where his children would purchase a business subject to a mortgage, and my client's plan would later purchase the mortgage from his children. I have been assuming that dealing with one's own children is potentially in one's own interests and therefore a prohibited transaction, but I cannot pin this down.

Similarly, the client wants to purchase mortgages from one of his law firm's clients.

Do you know if these are prohibited transactions, and do you have any authority for that proposition? Or do you think this is a "tweener" that cannot easily be answered.

Finally, (and I just thought of this question) is there a difference for prohibited transaction analysis purposes if the mortgages are for residential or commercial property? (I'll need to recheck the PTE's I've already pulled, but in the back of my mind, I wonder if they were limited to residential mortgages.)