Rulings

IRS Private Letter Rulings Concerning IRAs

An IRS private letter rulings (PLRs) is a statement by the IRS given to a taxpayer who submitted a request to the IRS for it’s position with respect to one or more federal tax issues set forth in the PLR.  The PLR process is a way for a taxpayer to determine in advance of taking action if the proposed action will cause a problem with the IRS.  PLRs annot be relied on by any person except the person who applied for and obtained the PLR.  Although PLRs do not have any precedential value, they are instructive because they do indicate IRS thinking with respect to the issues addressed in the PLR.

Note: As we discuss IRS Private Letter Rulings we are not giving any tax or legal advice. 

IRS Private Letter Rulings have little precedential value. The statements made by the IRS in Private Letter Rulings can be relied on only by the taxpayer(s) who requested the Private Letter Ruling.  The IRS Private Letter Rulings listed below are for informational purposes and to inform you as to positions and statements made by the IRS with respect to IRA investments and transactions.

IRS Private Letter Rulings 200732026 and 200732027:  The IRS said that shares of exchange-traded funds (ETFs) that acquired gold and/or silver did not constitute a collectible if the metals were acquired in an IRA.  The ruling found that money invested in shares of gold and silver ETFs within an IRA was not a distribution subject to an early withdrawal penalty.

IRS Private Letter Ruling 200705032: Allocation of IRAs to a trust after an IRA owner died were not treated as an inherited IRA to decedent’s spouse. The rollover of the entire amount into the spouse’s IRAs were allowed if accomplished within sixty days and the funds attributable to the decedent’s IRAs were not included in the spouse’s or the trust’s gross income.  The spouse and the trust were not required to withdraw any required minimum distributions with respect to any calendar years before the rollover.

IRS Private Letter Ruling 200652028:  The assignment of a decedent’s IRAs to two charities in satisfaction of their share of the residue of a Trust created by the decedent was not a transfer under Internal Revenue Code Section 691(a)(2).

IRS Private Letter Ruling 200650023:  After her husband’s death a surviving spouse was allowed to rollover her deceased husband’s profit sharing plan and SEP-IRAs account balances to an IRA in decedent’s name from which she could receive penalty-free distributions before age 59 and a half in accordance with Internal Revenue Code Section 72(t)(2)(A)(ii).

IRS Private Letter Ruling 200217059, January 31, 2002: The transfer of possession of bullion coins and bars from the IRA custodian to a non-bank entity that provides precious metals safekeeping services would cause the bullion to become collectibles under Internal Revenue Code Section 408(m)(3) because the IRA custodian would not possess the coins and bullion.  Therefore, an IRA that deposits bullion coins and bars with a non-bank entity must  treat the deposit as a distribution from the IRA to its owner.

IRS Letter Ruling 200008044, December 3, 1999: Dividing an inherited IRA into four separate trusts was not a distribution.

IRS Letter Ruling 200027061, April 12, 2000: IRA funds acquired from the estate of a deceased spouse can be rolled over tax free into the survivor’s IRA.

IRS Letter Ruling 199929029, April 27, 1999: IRA’s investment in an entity taxed as a Subchapter S corporation will terminate the entity’s S corporation tax method.

IRS Revenue Ruling 2000-2:  An executor may elect under Internal Revenue Code Section 2056(b)(7) to treat an IRA and a trust as qualified terminable interest property (QTIP) when the trustee of the trust is the named beneficiary of the decedent’s IRA. The surviving spouse may  compel the trustee to withdraw from the IRA all the income earned by the IRA assets at least annually and to distribute that amount to the spouse, and no person has a power to appoint any part of the trust property to any person other than the spouse.

IRS Revenue Ruling 2008-5:  If a taxpayer sells stock for a loss and causes the taxpayer’s IRA or Roth IRA to purchase substantially identical stock or securities within thirty days before or after the sale, the taxpayer’s loss on the sale of the stock will be disallowed because it was a wash sale.

IRS Private Letter Rulings Concerning IRAs2018-05-13T13:58:54+00:00

Department of Labor Advisory Opinion 2006-09A

[RK Summary:  The Department of Labor ruled that an IRA owner could not cause the IRA to invest in promissory notes issued by an entity that was controlled by the IRA owner’s son in law because it would be a prohibited transaction under Internal Revenue Code Section 4975.]

The text of  Department of Labor Advisory Opinion 2006-09A is below.

December 19, 2006
Edward A. Appelt
24 Winslow Drive
Pittsburg, PA 15229

Department of Labor Advisory Opinion 2006-09A
IRC Section 4975 (c)(1)(A) & (B)

Dear Mr. Appelt:

This 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)

You 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) – 5.0%. (more…)

Department of Labor Advisory Opinion 2006-09A2018-05-13T13:58:56+00:00

Department of Labor Advisory Opinion 2006-01A

RK Summary:  The Department of Labor ruled that an IRA owner could not cause the IRA to invest in a new limited liability company that would purchase real estate and lease it to an entity 68%  of which is owned by the IRA owner because it would be a prohibited transaction under Internal Revenue Code Section 4975.  The opinion contains a statement that IRA owners should always keep in mind before an IRA LLC makes an investment”  “the Department considers “a fiduciary who makes or retains an investment in a corporation or partnership for the purpose of avoiding the application of the fiduciary responsibility provisions of the Act to be in contravention of the provisions of section 404(a) of the Act.”

The text of Department of Labor Advisory Opinion 2006-01A is below.

January 6, 2006
Debra C. Buchanan, Esq.
Guidant Legal Group, PLLC
225 Commerce Street, Suite 450
Tacoma, WA 98402

Department of Labor Advisory Opinion 2006-01A
ERISA Sec. 29 CFR 2509.75-2

Dear Ms. Buchanan,

This is in response to your request for an advisory opinion as to whether the following proposed transaction would be prohibited under section 4975 of the Internal Revenue Code (the “Code”), 26 U.S.C. § 4975.(1)

You represent that Salon Services and Supplies, Inc. is a Washington state “S” Corporation (“S Company”) which is 68% owned by Miles and Sydney Berry, a marital community (M). The other 32% is owned by a third-party, George Learned (“G”). Miles Berry (Berry) proposes to create a limited liability corporation (“LLC”) that will purchase land, build a warehouse and lease the property to S Company. The investors in the LLC would be Berry’s individual retirement account (“IRA”) (49%), Robert Payne’s (“R”) IRA (31%) and G (20%). R is the comptroller of S Company. R and G will manage the LLC. You represent that S Company is a disqualified person with respect to Berry’s IRA under section 4975(e)(2) of the Code. You represent that R and G are independent of Berry. You also represent that the LLC does not contain plan assets because it is a “real estate operating company” (REOC) as defined by 29 C.F.R. § 2510.3-101(e). (more…)

Department of Labor Advisory Opinion 2006-01A2018-05-13T13:58:56+00:00

Department of Labor Advisory Opinion 2000-10A

[RK Summary:  The Department of Labor ruled that a prohibited transaction would not occur under Internal Revenue Code Section 4975(c)(1)(A) if an IRA owner caused the IRA to purchase a 39.38%  of limited partnership interests in a limited partnership in which the IRA owner was the sole general partner with a 6.52% interest and in which the IRA owner owned 12.11% through his investment in another entity despite members of his family also owning limited partnership interests in the same limited partnership.”  Note:  The IRA owner was Leonard B. Adler and he had money in the Fetner Family Partnership that invested money with the now infamous Bernard Madoff.]

The text of Department of Labor Advisory Opinion 2000-10A is below.

July 27, 2000

Hugh Janow
Janow & Meyer, LLC
One Blue Hill Plaza
P.O. Box 1606 Suite 1006
Pearl River, N.Y. 10965-8606

Department of Labor Advisory Opinion2000 – 10A
ERISA Section 4975(c)(1)(A)

Dear Mr. Janow:

This 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 IRA to direct the IRA to invest in a limited partnership, in which relatives and the IRA owner in his individual capacity are partners, will violate section 4975 of the Code.1

You represent that the Fetner Family Partnership is a New York general partnership that is an investment club (the Partnership), in which Mr. Adler, through a general partnership known as Esponda Associates (Esponda), and various relatives of Mr. Adler invest. Through his investment in Esponda, which is a pass-through partnership, Mr. Adler owns a 12.11 percent interest in the Partnership. Mr. Adler presently owns a 30.38 percent interest in Esponda. The only other partner in Esponda is David Geiger, who is unrelated to Mr. Adler. Esponda currently owns a 39.85 percent interest in the Partnership. (more…)

Department of Labor Advisory Opinion 2000-10A2018-05-13T13:58:56+00:00

Department of Labor Advisory Opinion 1993-33A

[RK Summary:  The Department of Labor ruled that an IRA owner could not cause the IRA to purchase land at fair market value from a tax-exempt entity of which the IRA owner’s daughter and son-in-law were the officers and directors and then lease the land back to the entity at fair-market rent or below market rent, depending on the entity’s ability to pay because it would be a prohibited transaction with a disqualified person under Internal Revenue Code Section 4975.]

December 16, 1993

Mr. Roberto Faith
1101 S.W. 102 Court
Miami, Florida 33174

Department of Labor Advisory Opinion 2006-09A
IRC Section 4975 (c)(1)

Dear Mr. Faith:

Your letter to the Internal Revenue Service (the Service) has been forwarded to this Office for our consideration and response with respect to the first of the two rulings you requested. You request guidance concerning the application of the prohibited transaction provisions of the Internal Revenue Code (the Code) to a proposed purchase and lease-back of a tax-exempt school’s land and building by a self-directed Individual Retirement Account (the IRA). Specifically, you ask whether the purchase and lease-back of the school would result in a prohibited transaction under section 4975 of the Code, and if so, whether the prohibited transaction would result in a deemed distribution from the IRA under section 408(e)(2) of the Code.

You represent that you have discretionary control over the IRA’s assets. You propose to cause the IRA to purchase the land and building of Harkness Road High School Ltd. (the School), a high school founded by your daughter and son-in-law, who are the sole directors and officers of the School. The purchase would be made at fair market value. Subsequently, the IRA would lease the land and building to the School at a fair-market rent or below market rent, depending on the School’s ability to pay.

Pursuant to regulations promulgated by the Department of Labor (the Department), at 29 C.F.R. §2510.3-2(d), an IRA as described in the regulation is not an employee pension benefit plan. The Department does not have jurisdiction under Title I of the Employee Retirement Security Act of 1974 (ERISA) over IRAs that are not employee pension plans.1

Nevertheless, under 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 such as section 4975(c)(3) of the Code, to the Secretary of Labor.

The Department’s authority to issue interpretations involving certain prohibited transaction provisions of section 4975 of the Code extends to transactions involving individual retirement accounts which are not plans and over which the Department would not normally have any jurisdiction. The Department, therefore, can address your first inquiry concerning the purchase and lease-back regardless of whether your IRA is a plan under ERISA. While your second inquiry, which asks whether the purchase and lease-back would result in a deemed distribution, turns on the resolution of the prohibited transaction inquiry, it involves a section of the Code over which the Department has no jurisdiction. Accordingly, we are referring this part of your request back to the Service for their response.

The Code prohibits certain transactions between a plan and a disqualified person with respect to the plan. Code section 4975(e)(1) defines a plan to include an IRA described in Code section 408(a). Code section 4975(a) imposes a tax on each prohibited transaction as that term is defined in section 4975(c). Specifically, section 4975(c)(1) prohibits any direct or indirect sale or exchange, or leasing, of any property between a plan and a disqualified person (4975(c)(1)(A)); any lending of money or other extension of credit between a plan and a disqualified person (4975(c)(1)(B)); any transfer to, or use by or for the benefit, of a disqualified person of the income or assets of a plan (4975(c)(1)(D)); and any act by a disqualified person who is a fiduciary whereby he or she deals with the income or assets of a plan in the fiduciary’s own interest or for his or her own account (4975(c)(1)(E)).

Section 4975(e)(2)(A) defines the term “disqualified person” to include a plan fiduciary. Section 4975(e)(3)(A) of the Code defines the term “fiduciary,” in part, to include any person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control regarding management or disposition of its assets. As a person with investment discretion over the assets in the IRA, you are a fiduciary with respect to the IRA, and, therefore, a disqualified person under section 4975(e)(2) of the Code.

Section 4975(e)(2)(F) of the Code defines a “disqualified person” to include a family member of a plan fiduciary. Section 4975(e)(6) defines a family member to include a lineal descendant and any spouse of a lineal descendant. Therefore, your daughter and son-in-law would be disqualified persons with respect to the plan. Accordingly, the sale and lease-back arrangement, described above, between the plan and the School would constitute a use of plan assets for the benefit of disqualified persons in violation of section 4975(c)(1)(D) of the Code.2

Moreover, it is the view of the Department that violations of sections 4975(c)(1)(D) and (E) would occur if a transaction were part of an agreement, arrangement or understanding in which the fiduciary caused plan assets to be used in a manner designed to benefit any person in whom such fiduciary had an interest that would affect the exercise of his or her best judgement as a fiduciary. For example, Treasury Regulation § 54.4975-6(a)(6), Example (6), illustrates that where F, a fiduciary of plan P with discretionary authority respecting the management of P, retains S, the son of F, to provide services necessary to the operation of the plan for a fee, F has engaged in an act described in section 4975(c)(1)(E), because S is a person in whom F has an interest that may affect the exercise of F’s best judgment as a fiduciary. Therefore, if you, as fiduciary of the IRA, were to purchase the School property at fair-market value pursuant to an arrangement to lease it back to the School at a rent that is dependent on the School’s ability to pay in order to benefit your daughter and son-in-law, the transaction would violate Code section 4975(c)(1)(D) and (E).

The Department notes that section 4975(c)(3) of the Code, over which the Secretary of the Treasury retains jurisdiction to issue interpretations, provides, in part, for an exemption from the excise tax on prohibited transactions that would otherwise be imposed if the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) of the Code and is treated as distributing all its assets. However, because the Service retains jurisdiction to issue interpretations concerning section 4975(c)(3) of the Code, we are referring this portion of your inquiry back to the Service.

Finally, to the extent that the IRA is an employee pension benefit plan covered by Title I of ERISA, it should be noted that the Department has consistently taken the position that, to act prudently under ERISA, a plan fiduciary must consider, among other factors, the availability, risk, and potential return of alternative investments for the plan. Because the purchase of the School would be an investment selected in preference to alternative investments, the purchase would not be prudent if it provided the IRA with less return, in comparison to risk, than comparable investments available to the plan, or if it involved a greater risk to the security of plan assets than other investments offering a similar return. Similarly, the Department construes the requirements that a fiduciary act solely in the interest, and for the exclusive purpose, of providing benefits to participants and beneficiaries as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives. In this regard, a decision to cause an IRA to purchase a property at fair-market value pursuant to an arrangement to lease the property to the seller at a rent that is dependent on the seller’s ability to pay would be difficult to reconcile with the prudent person rule under ERISA.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, Aug. 27, 1976). Section 10 of the Procedure explains the effect of advisory opinions.

Sincerely,

ROBERT J. DOYLE
Director of Regulations
and Interpretations

ORI/DFI/TLT/BAW/12/14/93/F-5137A/A00066

1 You have not indicated whether the IRA is an “employee pension benefit plan” within the meaning of section 3(2) of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). To the extent there is also Title I jurisdiction over the IRA, the fiduciary provisions of Title I would apply and references to the Code in this letter should be deemed to also refer to the corresponding sections of ERISA.

2 You have not provided facts in your submission concerning ownership interests in the School. In consequence, this opinion does not address how Code section 4975 would apply if your daughter or son-in-law had any ownership interest in the School.

Department of Labor Advisory Opinion 1993-33A2018-05-13T13:58:57+00:00