Definition of a Disqualified Person

Because the Internal Revenue Code prohibits an IRA LLC from engaging in transactions with a disqualified person, every member and manager of an IRA LLC must know the people and entities that are disqualified persons.  Internal Revenue Code Section 4975(e)(2) contains the definition of a disqualified person.  This section states that a disqualified person is:

(A) a fiduciary

[the IRA owner is a fiduciary];

(B) a person providing services to the plan;

(C) an employer any of whose employees are covered by the plan;

(D) an employee organization any of whose members are covered by the plan;

(E) an owner, direct or indirect, of 50 percent or more of—

(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,

(ii) the capital interest or the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D);

(F) a member of the family (as defined in paragraph (6) [which states: the family of any individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant]) of any individual described in subparagraph (A), (B), (C), or (E);

(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of—

(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,

(ii) the capital interest or profits interest of such partnership, or

(iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A) [a fiduciary], (B) [a person providing services to the plan] , (C) [an employer any of whose employees are covered by the plan], (D) [an employee organization any of whose members are covered by the plan], or (E) [the IRA owner – this subsection (G)(iii) is what makes an entity a disqualified person if the IRA owner owns 50% or more of the entity];

(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or

(I) a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C) [an employer any of whose employees are covered by the plan], (D) [an employee organization any of whose members are covered by the plan], (E) [the IRA owner], or (G).