Prohibited Transactions - SDIRA

[Patricia Gammage]

Need your input for planning purposes - thanks much in advance.

My son and his business partner formed a partnership. My son owns a 49% interest in a partnership and his business partner owns a 51% interest of the partnership. As an aside, within the next 1-2 months, they plan to convert the partnership to an LLC.

I have a self-directed IRA (SDIRA). The SDIRA owns a single member LLC that is organized in the state of Tennessee. In addition, I have a single member LLC that is organized in the state of California.

Questions:

1. If my son's business partner decides to sell his 51% interest in the business, would it be a prohibited transaction if my Tennessee LLC (that is owned by my SDIRA) bought the 51% interest in the partnership? In the new partnership, my son would have a 49% interest in the partnership and my Tennessee LLC would have a 51% interest in the partnership.

2. If my son's business partner decided to sell his 51% interest in the business, would it be a prohibited transaction if my California LLC bought the 51% interest in the partnership? In the new partnership, my son would still only have a 49% interest in the partnership and my California LLC would have a 51% interest in the partnership.

3. Assuming item 2 above would not a prohibited transaction, if my Tennessee LLC (that is owned by my SDIRA) invested in the partnership (owned by my son and my single member California LLC), would providing investment funds to the partnership be a prohibited transaction?

4. Under the partnership, can my son be paid a salary by the partnership or would that be a prohibited transaction?

5. Under the partnership, as a partner, it is planned that my son would share in the profit (and losses) of the business; would sharing in the profit be a prohibited transaction?

[Dennis Tierney]

I believe all of your scenario's would be prohibited transactions as both your son and you are disqualified persons in the eyes of the IRS regulations. The lawyers I've talked to about this have cautioned that even if your SDIRA gets no direct benefit from involvement from your son they have been going after the undoubted indirect benefit situations and you are playing roulette with your SDIRA by doing these types of transactions. If you have any doubt get legal advice from an attorney that has SDIRA expertise and you'll sleep a lot better.