Prohibited Transaction Rules, Part II: Who is a prohibited person?
By Jordan Sheppherd
Part I of this series was all about defining what constitutes a prohibited transaction. You know that any deal or transaction of any kind between a plan and a prohibited person is a prohibited transaction. Super. But what is a disqualified person?
(NOTE : For purposes of this series, I will use disregarded and prohibited interchangeably; they mean the same thing. So, a disqualified person is the same as a prohibited person or party, a prohibited entity is the same as a disqualified entity, etc…)
Let’s look at USC›Title 26›Subtitle D›Chapter 43›§ 4975 (e)(2):
(2) Disqualified person
For purposes of this section, the term “disqualified person” means a person who is—
(A) a fiduciary;
(F) a member of the family (as defined in paragraph (6)) of any individual described in subparagraph (A), (B), (C), or (E);
There’s more to this section that has to do with entities, but we’ll deal with the rest in a later post. For now, we’ll focus on (A) and (F) because it has immediate importance regarding the CheckBook IRA LLC. You can read the definition of a fiduciary in the code itself but, in plain English it means any person that has any control over the IRA, or in this case the IRA/LLC. So, whoever serves as the Manager(s) of the IRA/LLC will be considered a fiduciary. The next section is (F) which states that a member of the family is also considered a disqualified person. That’s pretty vague language “a member of the family”, but thankfully the code fleshes this out a bit later in (e)(6):
(6) Member of family
For purposes of paragraph (2)(F), the family of any individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.
You’ll notice that this is a pretty small list. Let’s use me as an example: the disqualified persons to my CheckBook IRA LLC would be: me, my wife, my parents, grandparents, and my children and their spouses; my grandchildren and their spouses would also be disqualified persons, but I don’t have any ?
So, now we know that any deal or transaction between those parties and the CheckBook IRA LLC is a prohibited transaction. Something I’ve been telling my clients to do for years is to take a 3×5 card and write down the names of all the people that appear in the preceding section. Now all you have to do is look at that card and ask yourself if any one of those people are involved in the deal you intend to do with the IRA LLC. If the answer is no, you’re in the clear.
Actually you’re not in the clear…not quite yet. On the other side of that 3×5 card, you’ll need to write down any prohibited entities, which is the subject of Part III.
Invest intelligently. Enjoy the rewards.