Caution: An IRA LLC Transaction that Indirectly Benefits the IRA Owner Is a Prohibited Transaction

If your IRA is a member of an IRA LLC, you must know and follow the prohibited transaction rules set forth in Internal Revenue Code Section 4975.  Many prohibited transaction rules are obvious such as the IRA LLC cannot loan money to the IRA owner or buy, sell or lease property with the IRA owner.

The prohibited transaction rules also contain a general, but nebulous rule some times referred to as the “indirect benefits” rule.  If the IRA LLC engages in a transaction that creates an “indirect benefit” for the IRA owner, it is also a prohibited transaction that will disqualify the IRA, cause the IRA to lose its tax-exempt status and result in a deemed distribution of the all the assets to the IRA owner as of the first day of the tax year in which the prohibited transaction occurred.

The indirect benefit rule is codified in Internal Revenue Code Section 4975(c)(1) (E), which states that a:

prohibited transaction means any direct or indirect . . . act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests […]