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Case Seems to Suggest an IRA Holder Could Not Be Considered a Fiduciary, But IRS Guidance Suggests Otherwise

Greenlee v. Commissioner, T.C. Memo 1996-378

When a plan trustee participates in the decision to cause a plan to make a loan to an entity in which the trustee owns a significant ownership interest, the IRS will likely consider the loan a prohibited transaction, as it did in Technical Advice Memorandum 9119002. In the Greenlee case, however, there was an independent trustee that had the discretion to loan funds and the Tax Court held that was sufficient t20o preclude a finding that the transaction was prohibited.

Mr. Greenlee was an attorney who operated his practice through his 100% owned professional corporation, Gaylord W. Greenlee, P.C. He was the sole participant and administrator of the company’s profit sharing plan. As administrator, Greenlee had the exclusive authority to control and manage the operation and administration of the plan. But he was not the plan trustee. Union National Bank of Pittsburgh was the sole trustee of the plan and generally speaking had sole and complete discretion to invest trust assets as it saw fit, although it could not cause the plan to engage in any prohibited transaction.

Mr. Greenlee, as plan administrator, requested the bank, as trustee, to lend $60,000 to Tag Land, Inc., a company in which Mr. Greenlee owned an 18% interest. The bank’s trust investment committee approved the loan transaction. The loan bore interest at 15%, was evidenced by a note and was secured by a lien on a tract of land worth at least $375,000.

As a plan administrator, Mr. Greenlee was clearly a fiduciary even though he was not a plan trustee. Section 4975(e)(3)(C) provides that a fiduciary includes a person who has any discretionary authority or discretionary responsibility in the administration of a plan. As Mr. Greenlee had discretion to manage the administrative aspects of his company’s plan, he was a fiduciary and therefore a disqualified person.

However, because Mr. Greenlee did not use any of the authority, control, or responsibility that made him a fiduciary to lend the $60,000 to Tag Land, the loan was not prohibited under 4975(c)(1)(E). As plan administrator, Greenlee, had the discretion to manage the administrative operations of the plan. On the other hand, Greenlee did not have discretion to manage and invest the plan assets – that was the trustee’s responsibility and here the bank (as trustee) had the sole discretion whether or not to make the loan. Notably, the Court placed great weight on the fact that Greenlee was absent at the trustee’s discussions regarding the advisability of the loan and that the trustee independently approved the investment. Accordingly, the trustee (the bank), rather than the plan administrator (Greenlee), dealt with the income or assets of the plan when making the loan.

The Tax Court acknowledged that Greenlee requested the trustee to make the loan to a corporation in which he held an 18% interest but the Court said that this recommendation was simply a suggestion. The bank, as trustee, had sole discretion to make investment decisions for the plan and had the authority to accept or reject Greenlee’s recommendation.

It should be noted that while there was no prohibited transaction in this case because the administrator merely requested that the loans be made, the result could (and probably would) be different where the administrator directs the trustee to make the loan. Some tax practitioners have attempted to use the Greenlee case to claim that it is possible for an IRA holder to relinquish a fiduciary relationship to his or her IRA. The IRS has held strongly that in almost all cases, an IRA holder is by default a fiduciary to his or her IRA and such a fiduciary relationship cannot be disconnected.

Determining Whether a Specific Transaction is a Prohibited Transaction

Through an arrangement between the IRS and the Department of Labor (DOL), it is the DOL’s responsibility to determine whether a specific transaction is a prohibited transaction and to issue prohibited transaction exemptions. When the IRS discovers what appears to be a prohibited transaction in an individual’s IRA, it turns the matter over to the DOL to make the determination. The DOL reviews the situation and responds to the IRS, which in turn responds to the taxpayer. If the IRA granter wants to apply for a prohibited transaction exemption, he or she must apply to the DOL. The DOL has the authority to issue prohibited transaction exemptions. Some, known as “prohibited transaction class exemptions” (PTCEs), are available for anyone’s reliance, while others, called “individual prohibited transaction exemptions” (PTEs), are issued only to the applicant.

To learn more about the application of the prohibited transactions to a specific self-directed IRA investment, please contact one of our self-directed retirement experts at 800-472-0646.

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