TRUSTEE'S ENDORSEMENT OF PLAN LOAN TO HIS PARTNERSHIP WAS A PROHIBITED TRANSACTION.

UIL Number(s) 4975.00-00

                                             Date: * * *

1. Whether Individual A is a disqualified person as defined in Internal Revenue Code section 4975(e)(2)?

2. Whether Individual A engaged in a prohibited transaction under Code section 4975(c)?

3. Whether Individual A is subject to the excise tax imposed under Code section 4975(a)?

FACTS

Company M is a corporation which is wholly owned by Individual A and Individual A's spouse.

Company M adopted Plan X, a defined benefit plan, effective November 1, 1976. The Plan received a favorable determination letter on September 6, 1978. At the time of the transaction in question, Individual A was co-trustee of Trust B, which is the trust underlying Plan X. ¹

Partnership Y is a * * * partnership. At the time of the transaction in question, Individual A held a 39 percent ownership interest in the profits and capital of Partnership Y.

Documents submitted by the taxpayer's representative to the National Office indicate that on or about February 9, 1984, * * * was transferred from Trust B to Partnership Y, and that in March of 1984 Partnership Y began to make monthly interest payments upon this amount to Trust B. On January 15, 1985 Partnership Y signed an unsecured promissory note to Plan X, memorializing the loan of * * *. ² On April 14, 1987, Partnership Y made what it believed to be the final payment on this loan to the trust of Company M's money purchase plan. ³

LAW AND DISCUSSION

ISSUE 1:

The first issue concerns the status of Individual A as a "disqualified person" within the meaning of Code section 4975(e)(2).

Section 4975(e)(2) of the Code provides, in part, that the term "disqualified person" includes a person who is a fiduciary.

Section 4975(e)(3) of the Code provides, in part, that the term "fiduciary" includes an individual who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.

Individual A was a trustee of Plan X in February of 1984 when Plan X made the loan of * * * to Partnership Y. As a trustee, Individual A had authority and control over the management and disposition of Plan X assets. In a letter to the Service dated February 25, 1988, the taxpayer's representative stated, "(t)here is no dispute that (Individual A) as a Co-Trustee of (Trust B) is a 'fiduciary' within the meaning of Section 4975(e)(2)(A) (of the Code)." Therefore, we conclude that at the time of the transaction in question, Individual A was a "fiduciary" within the meaning of Code section 4975(e)(3), and a "disqualified person" within the meaning of Code section 4975(e)(2).

ISSUE 2:

The second issue concerns whether Individual A engaged in a prohibited transaction within the meaning of Code section 4975(c).

Section 4975(c)(1)(E) of the Code provides that the term "prohibited transaction" includes 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 interest or for his own account.

Section 54.4975-6(a)(5)(i) of the Income Tax Regulations states:

The prohibitions of sections 4975(c)(1)(E) and (F) supplement the other prohibitions of section 4975(c)(1) by imposing on disqualified persons who are fiduciaries a duty of undivided loyalty to the plans for which they act. These prohibitions are imposed upon fiduciaries to deter them from exercising the authority, control or responsibility with [sic] makes such persons fiduciaries when they have interests which may conflict with the interests of the plans for which they act. In such cases, the fiduciaries have interests in the transactions which may affect the exercise of their best judgment as fiduciaries.

During the time that Individual A was a fiduciary of Trust B, that trust made a loan to an entity (Partnership Y) in which Individual A had a significant ownership interest. There is nothing in the file to refute the assumption that Individual A, as co-trustee of Plan X, participated in the decision to make the loan in question to Partnership Y. Based on this assumption, individual A's simultaneous participation in (a) the decision to make a loan of Plan X assets to Partnership Y, and (b) the subsequent benefit to Partnership Y, constitutes dealing with the assets of Plan X for Individual A's own interest. Therefore, in regard to the transaction in question, Individual A engaged in a "prohibited transaction" within the meaning of Code section 4975(c).

ISSUE 3:

The third issue concerns whether Individual A is subject to the excise tax imposed under Code section 4975(a).

Unless there is an exemption, section 4975(a) of the Code imposes a tax equal to five percent of the amount involved with respect to a prohibited transaction for each year (or part thereof) in the taxable period. This tax is to be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such).

As discussed above, the loan in question from Plan X to Partnership Y was a prohibited transaction within the meaning of Code section 4975(c). Also as discussed above, at the time of the transaction in question, Individual A was a disqualified person within the meaning of Code section 4975(e)(2).

Individual A, as a partner with a substantial ownership interest in Partnership Y, stood to benefit personally from the loan in question. Therefore, by participating in the prohibited transaction, Individual A was acting in a capacity other than only as a fiduciary.

Sections 4975(c)(2) and (d) of the Code provide special exemptions and statutory exemptions, respectively, to the prohibited transaction rules. There is no statutory exemption for the type of prohibited transaction in question, nor is there any evidence that the Secretary of Labor has issued a special exemption as provided for under Code section 4975(c)(2). Accordingly, Individual A is subject to the excise tax imposed under Code section 4975(a).

CONCLUSION

Based on the foregoing, we conclude:

(1) at the time of the transaction in question, Individual A was a "disqualified person" within the meaning of Code section 4975(e)(2);

(2) in regard to the transaction in question, Individual A engaged in a "prohibited transaction" within the meaning of Code section 4975(c); and,

(3) in regard to the transaction in question, Individual A is subject to the excise tax imposed under Code section 4975(a).

² The promissory note from Partnership Y was transferred to the trust of Company M's money purchase plan, pursuant to the termination of Plan X.

³ In a letter dated March 8, 1990, Partnership Y agreed that it had underpaid the amount of interest due, and submitted a payment of * * *, which it represented to be full and final settlement for all interest charges on the note. In response to further calculation by the Service, Individual A submitted an additional amount of * * * on April 12, 1990.