Prohibited Transaction?

John Doe and his spouse own 100% of corporation A. No employees. They have a qualified plan.

John Doe and his spouse, together, own 40% of Corporation B. No other attributed ownership in corporation B. Corporation B sponsors a qualified plan. There is no CG/ASG. John Doe's brother own the majority of the remaining 60% of corporation B.

John Doe wants his PLAN, Plan A, to purchase some of the stock owned by his BROTHER in corporation B. My initial reaction was that it is a PT, but now I'm not so sure. Any opinions?

http://rsmus.com/what-we-do/services/assurance/employee-benefit-plan-audit/party-in-interest-transactions-controls-for-benefit-plans.html

The brother is not a part-in-interest to Plan A, so i don't think there is a PT. Since Plan A is an owner-only plan, the prudence of such investment probably doesn't matter either. But if Plan A acquires 40% (41%?) of the stock in Corp B, does that then create a CG? I don't know, but if it does you need to be concerned in B has employees. Still don't think a PT because then B stock becomes qualified employer security, right?

I would be very concerned that this is an indirect PT.  No time for chapter and verse, but it doesn't take much to make a case that the investment of the plan in the entity is a benefit to the prohibited party.

Sounds like this could easily be a self-dealing PT by John Doe, i.e., John Doe as a fiduciary of a plan using the plan's assets to benefit a person in which John Doe has an interest:  his brother.

I don't think you have to reach that far.  I was thinking more along the lines of John Doe as fiduciary of a plan using the plan's assets to shore up an investment John Doe (an individual or marital estate) has in Corp B.  It might even reach to effective control. If the stock purchased by the plan is 10.0000000001% of B then, on its face, it looks like a PT to me.

Thanks Mike - that's the issue that was concerning me as well.

P.S. - thanks Jpod - although I don't really have an opinion as to whether benefitting your brother rises to a PT, doesn't it benefit himself? By that that I mean he is an owner and fiduciary of Corp B and Plan B - so if a transaction using assets of another plan (A) in which he is a fiduciary benefits himself as owner of another business (B) in which he's an owner and fiduciary for Plan B, is that self-dealing?

I started off thinking it was a PT, then I started questioning myself, then over the weekend I waffled back to my original position. Of course we'll recommend legal counsel, but trying to refine my own opinion... happy Monday!

I don't see how it necessarily helps Corp B if he is buying stock of B from his brother.  Using plan assets to benefit your brother can absolutely be a self-dealing PT, although I agree with Mike that there may be a self-dealing PT by virtue of John Doe's purchase of the stock to benefit himself.