Brian" <bpbiv[at]yahoo.com> wrote:

- quote -

Thank you, Brian. You raised many good points and have given me an
idea of where to go with this. I have yet to get a copy of the plan
documents. I'll review them with these items in mind, and see where it
goes from there.

I haven't run away from this yet.

Deborah King

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Deborah King <dking[at]nospamherehansgen.org> wrote:

- quote -

Sounds like self-dealing to me. Transactions with a related
party, which includes a corporation you control, are
prohibited transactions that, if detected, should disqualify
the 401(k) altogether. This is exactly the sort of
self-dealing the related-party transaction rules are meant
to prohibit.

--
Chris Green

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"Deborah King" <dking[at]nospamherehansgen.org> wrote:

- quote -

If they have set up a 401(k) plan properly they have created
a trust. Check the plan document, as it probably states the
name of the trustee. In a self-directed plan like this
there's a good chance that your clients are the trustees of
the trust (the plan). I don't think that there is a problem
per se with their owning shares as trustees of the
plan/trust.

The questions I would have would be:

1. Was the resolution regarding the ownership of the corp-
oration concurrent with formation and funding? If the
resolution came later it tends to look like window-dressing
to fix something done incorrectly at the inception and may
not hold up.

2. Is there some Panamanian law prohibition against plan
ownership of the Panamanian corporation shares? If so, you
may have a problem arguing to the IRS and DOL that the plan
actually owns shares that Panamanian law prohibits it from
owning.

3. Did the 401(k) plan contribute all of the capital to the
corporation? If not, and if the plan ends up with all of
the stock, the couple has made an indirect contribution to
the plan by contributing capital to a corporation the plan
owns or by funding the corporation and then giving the stock
to the plan.

4. Does the trust qualify as a "U.S. Person" under the CFC
rules under 7701(a)(30). If it is not a U.S. Person, then
it won't meet the CFC definition. (I don't know the answer
there - haven't had occasion to look at it on a qualified
plan.)

5. Does the corporation qualify as a passive foreign
investment company? There's another layer of testing and
reporting if it does.

6. Is the CFC treated desirable? For real property
investments many qualified plans form title-holding
companies to protect against liability from holding real
property directly. Section 501(c)(2) provides an exemption
for a corporation that is organized exclusively to hold
title to property, collect income generated by the property,
and turn over the income (less expense) to a qualified plan
or other exempt organization. Section 501(c)(2) entities
must be wholly owned by a single tax-exempt parent.
Electing to tax it in the U.S. and then getting the
501(c)(2) exemption may give you less trouble than the
annual reporting for a CFC.

7. Does the plan document allow the trustees to invest in
foreign corporations that are not publicly traded?

8. Are there other plan participants besides the two owners?
If so, there may be issues regarding suitability of the
investment for the other plan participants that may cause
issues with the Department of Labor.

Good luck!

Brian Bivona, CPA

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Deborah King wrote:

- quote -

A self directed 401(k) has to have a trustee not related to
the sponsor or the participants. Maybe this could disqualify
the whole 401(k).

--
Frederick E. Jorden http://Tax-Accounting-Payroll.com
7825 Midlothian Tpk - 207 Richmond, VA 23235-5247
EMAIL knowtax[at]bigfoot.com
(804) 320-6210 FAX (804) 320-6211

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Taxpayers, a US couple living in Panama, have set up a
Panamanian corporation to purchase income producing property
for their self-directed 401(k)s. They, not the 401k, own the
corporation shares. They have passed a resolution that
states that their ownership of the corp is in their capacity
as trustees of their respective retirement plans. They want
to treat the corporation as a CFC and file a 5471. All
income is supposed to go through to the 401k. Apart from the
resolution, there is no trust.

ERISA issues aside, is this even possible? I can't imagine
how this income should be treated. Should I run away
screaming?

Thanks,

Deborah King

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