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The lending of money or other extension of credit between a
plan and a disqualified person generally is a prohibited
transaction. See sec. 4975(c)(1)(B). The plan lent money to
petitioner, who failed to make full repayment when due. As a
trustee, majority stockholder, president, and director,
petitioner was a disqualified person. See sec. 4975(e)(2);
Rutland v. Commissioner, 89 T.C. 1137, 1145 (1987) (stating that
the determination of whether an individual is a disqualified
person is made as of the time the loans originated).
Section 4975(d) provides that any loan made by a plan to a
disqualified person who is a participant of the plan shall not be
prohibited if the loan meets certain criteria (e.g., if the loan
is available to all participants or beneficiaries on a reasonably
equivalent basis, is made in accordance with specific plan
provisions regarding loans, and is adequately secured). See sec.
4975(d)(1). Petitioner’s loans do not meet the criteria because
the loans were not made in accordance with specific provisions
relating to the loans set forth in the plan (i.e., the loans were
made in excess of the plan’s amount limitations and without a
Qualified Waiver of Spouse) and were not adequately secured. See
sec. 4975(d)(1)(C), (E). Therefore, petitioner’s loans were
prohibited transactions to which the first-tier excise tax is
applicable.
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Last modified: May 25, 2011