Self-Directed ERISA Plan Prohibited Transaction Chinese Walls

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Two 2013 United States Tax Court decisions, Peek[1]and Ellis,[2] evince a clear mandate for taxpayers seeking protection from the plan asset look-through rule’s operating company exception: STOP THE CONSTRUCTIVE OWNERSHIP DISQUALIFIED PERSON ENTITY CHAIN!!!!! In Peek, the self-directed Peek IRA and the self-directed Fleck IRA each owned 50% capital equity interest of the fire extinguisher sales operating company. In Ellis, the taxpayer’s self-directed IRA owned 98% of the used car sales operating company.

In both cases, the Tax Court’s holdings distill the proposition operating company section 4975(e)(2)(G) disqualified person status preempts the operating company exception to the plan asset look-through rule.[3] My paper, “Changes in Form 5498 Reporting And Foreseeable IRS Correction of Self-Directed ERISA Plan Fiduciary Abuses,” explains plan investment in a disqualified person is a weak-form fiduciary abuse.[4] As a result, the operating company’s assets in both the Peek and Ellis cases were deemed to be plan assets.

Prohibited transactions require the presence of two necessary elements: a disqualified person and plan assets. A Utah district court, in a private action, held the operating company exception to the plan asset look-through rule bars a determination the underlying assets involve plan assets.[5] Accordingly, transactions involving such assets cannot, as a matter of law, amount to a proscribed prohibited transaction.[6]

So, if you are planning a client’s self-directed ERISA plan investment in an operating company, make sure its capital equity interest investment level does not cause the operating company to be a section 4975(e)(2)(G) disqualified person. Also, pay attention to the existence of other potential self-directed ERISA plan weak-form fiduciary abuses such as section 512 UBTI or section 514 UDFI. Use C-corporations to avoid the application of those provisions and a determination incurring same is a weak-form fiduciary abuse that may eviscerate the operating company exception to the plan asset look-through rule.

My paper, “Self-Directed ERISA Plan Prohibited Transaction Chinese Walls” is available in my Tax Connections Tax Library. Also, my professional education course by the same title will soon be available as a TaxConnections education resource.

© 2014 David Randall Jenkins; All Rights Reserved.

[1] See, Peek v. Commissioner, 140 T.C. 12 (May 9, 2013).

[2] See, Ellis v. Commissioner, T.C. Memo 2013-245 (October 29, 2013).

[3] Department of Labor regulations governing the plan asset look-through rule may be found at 29 CFR §2510.3-101.

[4] This paper is available in my Tax Connections Tax Library.

[5] See, Middleton v. Stephenson, 2011 U.S. Dist. LEXIS 141495 (DC Utah, Central Division December 8, 2011). This case involved an ESOP. An ESOP can own 100% of the operating company without amounting to a disqualified person fiduciary abuse. Accordingly, 100% operating company capital equity interest ownership by an ESOP still results in successful application of the operating company exception to the plan asset look-through rule where its underlying assets are deemed not to involve plan assets.

[6] I refer to this effect as a “Prohibited Transaction Chinese Wall.”

*David Randall Jenkins, Ph.D., received his doctorate in accounting and a master’s in accounting with an emphasis in tax from the University of Arizona. He has taught financial, managerial, and tax accounting courses at both the graduate and undergraduate levels. Dr. Jenkins is an AACSB academically qualified business school and tax professor owing to his peer reviewed journal article publications. His company, Algorithm LLC (, is an IRS Approved Continuing Education Provider. Dr. Jenkins may be contacted at

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