CCA 200928038: Prohibited transaction requires plan dealing with or benefiting a disqualified person

Plain-English summary

Chief Counsel explained that section 4975 prohibits sales, exchanges, leases, transfers, and fiduciary self-dealing between a plan and a disqualified person. A disqualified person who participates in such a transaction may owe excise tax even if the person acted innocently or in good faith. Counsel said a violation would require a transaction between the plan and a disqualified person, or a transaction benefiting a disqualified person or someone in whom that person had an interest. Based on the facts supplied at that point, Counsel had difficulty identifying a prohibited transaction and requested more information, but the specific questions were redacted from the release.

Ruling snapshot

• Question: Did the described plan-related conduct constitute a prohibited transaction under section 4975?
• Outcome: Advice given that the facts supplied so far did not clearly show a prohibited transaction
• Key authorities: IRC § 4975(a), (b), (c); ERISA § 406(a); Treas. Reg. § 53.4941(a)-1(a)(3)

Full text (IRS public release)

ID: CCA_2009052010552850 Number: 200928038

Release Date: 7/10/2009

Office: -------------------------

UILC: 4975.03-00

From: --------------------

Sent: Wednesday, May 20, 2009 10:55:30 AM

To: ----------------------

Cc: -------------------------------------------------------------

Subject: RE: The 4975 case ---------

Section 4975(c)(1)(A) prohibits any direct or indirect sale or exchange or leasing, or any property between a plan and a disqualified person. Section 4975(c)(1)(D) defines, in part, a “prohibited transaction” as any direct or indirect transfer of plan income or assets to a “disqualified person” or the use of plan income or assets by or for any “disqualified person.” Section 4975(c)(1)(E) further defines a “prohibited transaction” as any act whereby a “disqualified person” who is a fiduciary deals with the income or assets of a plan for his own interest or for his own account. Under section 4975(a) and (b), a disqualified person is liable for the excise tax if he or she participates in the transaction. Participation in section 4975 occurs any time a disqualified person is involved in a transaction in a capacity OTHER THAN as a fiduciary acting only as such. See sec. 4975(a); see also sec. 53.4941(a)- 1(a)(3), Excise Tax Regs. Further, a fiduciary who violated section 406(a), ERISA is liable only if he or she possessed or should have possessed the requisite knowledge. In contrast, those that participate in a section 4975 prohibited transaction are liable for the excise tax notwithstanding the fact that they may have acted innocently or in good faith or otherwise did not know or understand the nature of the transaction. O.Malley v. Commissioner, 96 T.C. 644 (1991); Rutland v. Commissioner, 89 T.C. 1137 (1987); Lieb v. Commissioner, 88 T.C. 1474 (1987). Thus, a violation of section 4975(c) of the Code would arise only if there were a transaction between the Plan and the disqualified person or the transaction benefited a disqualified person or a person in who the disqualified person had an interest. Based on the facts that you have given so far I am having difficulty seeing that there is a prohibited transaction.

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------

These are the questions that I think we should have in order to make a proper determination as to whether there is a PT:

---------------------------------------------------------------------------------------------------------------------

------------------------

2

---------------------------------------------------------------------------------------------------------------------

-----------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

----------------------------------------