advisory opinion concludes that a self-directed IRA‘s investment in notes of a corporation, a majority of whose stock is owned by
the son-in-law of the IRA owner, would be a prohibited transaction
under the Internal Revenue Code.
Edward A. Appelt
24 Winslow Drive
Pittsburg, PA 15229
Dear Mr. Appelt:
is in response to your request for an advisory opinion under section
4975 of the Internal Revenue Code (Code). Specifically, you ask whether
allowing the owner of an individual retirement account (IRA) to direct
the IRA to invest in notes being offered by a corporation, in which
a relative of the IRA owner is the majority owner and stockholder,
would give rise to a prohibited transaction under Code section 4975.(1)
represent that as the owner of an IRA for which you have retained
investment discretion, you would like to direct the investment of
these IRA funds into notes (Notes) that are being offered by STARR
Life Sciences Corporation (STARR). STARR is currently owned by the
founders of the Company who are: Eric (your son-in-law) - 87.5%; Erika
(an unrelated party) - 7.5%; and Dr. Strolh (an unrelated party) -
represent that these Notes are being offered and sold exclusively
to persons who qualify as "accredited investors" under rule 501(a) of Regulation D promulgated under the Securities Act of 1933.
You represent that you qualify as an accredited investor.
ask whether the IRA’s investment in the Notes would give rise to a prohibited transaction under section
4975 of the Code. Section 4975(c)(1)(A) and (B) of the Code defines
a prohibited transaction to include any direct or indirect sale or
exchange of property and lending of money or other extension of credit
between a plan and a disqualified person.
4975(e)(1) of the Code defines, in relevant part, the term "plan" to include an IRA described in Code section 408(a). Section 4975(e)(3) of the
Code defines the term "fiduciary," in relevant part, to include any person who exercises any discretionary authority
or discretionary control respecting management of such plan or exercises
any authority or control respecting management or disposition of its
assets. Because you retain investment discretion over the IRA, you
are a fiduciary. Section 4975(e)(2) of the Code defines "disqualified person," in relevant part, to include a fiduciary and certain members of the family of
a fiduciary. Consequently, you are also classified as a disqualified
person under Code section 4975(e)(2)(A). Sections 4975(e)(2)(F) and
4975(e)(6) of the Code state, in relevant part, that the family of
a fiduciary shall include his spouse, ancestor, lineal descendant,
and any spouse of a lineal descendant. Consequently, your son-in-law
is also classified as a disqualified person because he is a member
of the family of a fiduciary.
IRA’s purchase of the Notes would be a transaction between STARR and the IRA. Code
section 4975(e)(2)(G)(i) defines "disqualified person," in relevant part, to include a corporation of which (or in which) 50 percent
or more of the combined voting power of all classes of stock entitled
to vote or the total value of shares of all classes of stock of such
corporation is owned indirectly by a fiduciary.
determining indirect stockholdings, Code section 4975(e)(4) requires
that for purposes of Code section 4975(e)(2)(G)(i), indirect stockholdings
include those which would be taken into account under Code section
267(c), except that members of a family of a fiduciary are members
within the meaning of Code section 4975(e)(6). The application of
this rule attributes to you the majority stockholdings of your son-in-law.
Consequently, STARR is also classified as a disqualified person.
IRA is a plan and STARR is a disqualified person. Based on the facts
and representations in your submissions, it is the opinion of the
Department of Labor that the IRA's purchase of the Notes from STARR
at your direction would be a transaction described in section 4975(c)(1)(A)
and (B) of the Code which prohibit a direct or indirect sale or exchange
of property and lending of money or other extension of credit between
a plan and a disqualified person.
letter constitutes an advisory opinion under ERISA Procedure 76-1.
Accordingly, this letter is issued subject to the provisions of such
procedure, including section 10 relating to the effect of advisory
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
Presidential Reorganization Plan No. 4 of 1978, effective
December 31, 1978, the authority of the Secretary
of the Treasury to issue interpretations regarding
section 4975 of the Code has been transferred, with
certain exceptions not here relevant, to the Secretary
of Labor and the Secretary of the Treasury is bound
by the interpretations of the Secretary of Labor
pursuant to such authority.