Jan. 6, 2006 – The Dept. of Labor issues Advisory Opinion 2006-01a. It addresses whether a real estate transaction between an Individual Retirement Account (IRA) and an S-Corp and an LLC owned in part by the same person is a prohibited transaction under Internal Revenue Code section 4975.
The idea proposed by the parties was that several individuals would form an LLC, which would purchase land, build a warehouse, and lease the warehouse to a S-Corp.
The LLC owning the property would be partially financed by self-directed IRAs owned by the individuals who owned or managed the S-Corp. Specifically, the investors in the LLC would be:
- Individual A’s IRA: 49%
Individual B’s IRA: 31%
Individual C: 20%
The S-Corp leasing the property is owned by:
- Individual A and his wife: 68%
Individual C: 32%
The individuals with management responsibility for both the LLC and the S-Corp were:
- Individual B, who was the comptroller of the S-Corp.
Individual B and Individual C, who managed the LLC.
In Advisory Opinion 2006-01a, the Dept. of Labor discusses the Internal Revenue Code’s prohibitions against any direct or indirect sale, exchange or leasing of any property between a plan and a “disqualified person”, and determines that this leasing of property between the LLC and the S-Corp would be a prohibited transaction under Code section 4975 for Individual A’s IRA.
On Feb. 3, 2011, the Dept. of Labor releases Advisory Opinion 2011-04a, which cites to Advisory Opinion 2006-01a in finding that another real estate transaction between an IRA held by a family trust purchasing the promissory note secured by an apartment building owned and managed by the trustees of the family trust was a prohibited transaction.