Private Company & Private Equity
Laws Regarding Private Company Ownership by an IRA
IRC § 1361 (b)(1), IRS Letter Ruling 199929029, April 27, 1999. – The only restriction to company ownership for IRAs is that IRAs may not own shares of S corporations as an IRA does not qualify as an S corporation shareholder.
IRC § 4975 (e)(2)(G) – An IRA should not invest into a company that is owned 50% or more by disqualified persons as to the purchase of stock or units would constitute a transaction with a disqualified person (the company) and would result in a per se prohibited transaction.
IRC § 4975 (c)(1)(F) –If an IRA owner is part of management that runs the hedge fund or private offering company, then the investment from his or her IRA into the company that he or she (or other disqualified persons) manages may constitute a self-dealing prohibited transaction.
Notice 2004-8, Abusive Roth IRA Transactions states that specific structures whereby a Roth IRA owner corporation engages in transactions with the Roth IRA owner or other related parties. These transactions must be disclosed as a listed transaction by a Roth IRA owner via IRS form 8886.
15 U.S.C. 77d(6) – Section of the code regarding Crowdfunding. Self-directed retirement plans may invest into Crowdfunding offerings.
IRC § 511 – Unrelated Business Income Tax (UBIT), which applies to the ordinary income (e.g. not passive) received by an IRA.
IRC § 513 – Exemptions from UBIT tax. The following are exempt, real estate rental income, interest income, dividend income, royalty income, interest income.
Private Company Ownership Subject to UBIT Tax
SUBJECT TO UBIT TAX
NOT SUBJECT TO UBIT TAX
|Restaurant that is an LLC or other pass-through company.||Restaurant that is a C corporation and pays corporate taxes.|
|Software company that is an LLC and sells technology services or products.||LLC or LP that owns rental property and receives rental income.|
|Real estate development LLC who conducts non-passive real estate activities.||LLC or LP that lends money and receives interest income.|
|Real estate company that consistently buys and sells real property on a short-term (less than a year hold) basis.||LLC or LP that owns mineral or intellectual property and licenses it for royalty|
Opinions and Notices
DOL Advisory Opinion 2000-10A – If a company is owned 49% or less by disqualified persons, then it is possible for the IRA to invest into the company as it is not a per se prohibited transaction, but such investment still must be analyzed to ensure that there is not a self-dealing prohibited transaction.
DOL Private Letter Ruling 8009091 – If the IRA owner or a disqualified person is an officer, director, or highly compensated employee of a company where his or her IRA plans to invest, the IRA’s investment may constitute a self-dealing prohibited transaction if the IRA owner personally benefits in their officer or direction position by having his or her IRA invest.
17 CFR 230.501 – Accredited investor – In order for an IRA to qualify as an accredited investor, the IRA owner must qualify. 1. Annual income of over $200,000 single, or $300,000 married, in each of the past 2 years. 2. Net worth in excess of $1,000,000, not including equity in investor’s personal residence.