In Part I of this series we defined a prohibited transaction, and in Part II we looked at who the disqualified persons are to your CheckBook IRA LLC.   Next, we’ll look at disqualified entities.  This is a bit trickier and is more involved than figuring out who are the disqualified or prohibited parties, so I’ll just hit the high points here.  If you are thinking of engaging in a transaction that may involve a prohibited or disqualified entity, give us a call and we’ll help you parse the issue.  Now let’s look at entities that are disqualified.

(NOTE : For purposes of this series, I will use disregarded and prohibited interchangeably; they mean the same thing.  So, a disqualified person is the same as a prohibited person or party, a prohibited entity is the same as a disqualified entity, etc…)

Once again, we’ll quote from USC›Title 26›Subtitle D›Chapter 43›§ 4975 (e)(2)(G):

(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), (B), (C), (D), or (E);

So, any entity that is owned 50% or more by any one or more disqualified persons is a disqualified entity.  Any transaction or dealings between that entity and the CheckBook IRA LLC would be a prohibited transaction.  Be careful here though, and pay attention to the part in (ii) “…or profits interest…”  According to the language, this only applies to a partnership, but it’s common in a general partnership for one party to receive income disproportionate to his equity interest.  So with a partnership, you need to be aware that it’s not just ownership interest, but profit interest as well.

It would be impossible to go through all the eventualities of what would constitute a disqualified entity.  Most people will never have to worry about this kind of thing because they won’t be dealing with these kinds of entities, but if you are thinking of dealing with an entity that has a disqualified person as an owner, part owner, or fiduciary, we’d be happy to look the investment over and make sure you’re on the right side of the prohibited transaction rules.

Invest intelligently.  Enjoy the rewards.

Prohibited Transaction Rules, Part I: An IRA LLC Primer

Prohibited Transaction Rules, Part II: Who is a Prohibited Person?

Prohibited Transaction Rules, Part IV: IRA LLC Examples