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CCH® PENSION — 03/09/11

IRA's purchase of note and deed of trust is prohibited transaction where obligors of note are disqualified persons

The purchase by an IRA of a promissory note and a deed of trust held by a bank would be a prohibited transaction under Code Sec. 4975(c)(1)(B) because the IRA owner and his wife, as obligors on the note, would be disqualified persons, and the family trust, which holds title to the real property encumbered by the deed of trust and of which the IRA owner and his wife are trustees and sole beneficiaries, would be a disqualified person, according to EBSA Advisory Opinion No. 2011-04A.

According to EBSA, a loan is a transaction that continues from the time it is made until the loan is paid off, and a debtor-creditor relationship continues throughout the period that the loan is being paid off. As a result, EBSA looked at the relationship of the parties throughout the course of the loan to determine if a disqualified person relationship existed. EBSA concluded that a prohibited extension of credit in violation of Code Sec. 4975(c)(1)(B) would exist between the IRA and the IRA owner and his wife when the IRA acquired the note from the bank. In addition, the holding of the note by the IRA would continue to be a prohibited transaction as long as payments on the note were made by the IRA owner and wife or any other disqualified person.

It was also the view of EBSA that the purchase of the note itself would be a separate prohibited transaction under Code Sec. 4975(c)(1)(D) and Code Sec. 4975(c)(1)(E). EBSA explained that the acquisition and holding of the note by the IRA would violate Code Sec. 4975(c)(1)(D) and Code Sec. 4975(c)(1)(E) if the transaction was part of an agreement, arrangement, or understanding in which the fiduciary (i.e., the IRA owner) causes the plan assets to be used in a manner designed to benefit the fiduciary (or persons in which the fiduciary had an interest that would affect the exercise of his best judgment). In this situation, the IRA would be purchasing the note from an unrelated party where the IRA owner would have an understanding, as a fiduciary, that the assets of the IRA would be used to create a prohibited transaction (i.e., the ongoing debtor-creditor relationship between the IRA and the disqualified persons) once the IRA buys the note.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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