Source: https://codes.findlaw.com/us/title-26-internal-revenue-code/26-usc-sect-4975.html
Timestamp: 2019-05-19 09:11:09
Document Index: 711226302

Matched Legal Cases: ['§ 4975', '§ 4975', '§ 4975', '§ 4975', 'art 1', '§ 4975', '§ 4975']

26 U.S.C. § 4975 - U.S. Code Title 26. Internal Revenue Code § 4975 | FindLaw
26 U.S.C. § 4975 - U.S. Code - Unannotated Title 26. Internal Revenue Code § 4975. Tax on prohibited transactions
(a) Initial taxes on disqualified person. --There is hereby imposed a tax on each prohibited transaction. The rate of tax shall be equal to 15 percent of the amount involved with respect to the prohibited transaction for each year (or part thereof) in the taxable period. The tax imposed by this subsection shall be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such).
(b) Additional taxes on disqualified person. --In any case in which an initial tax is imposed by subsection (a) on a prohibited transaction and the transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount involved. The tax imposed by this subsection shall be paid by any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such).
(c) Prohibited transaction.--
(1) General rule. --For purposes of this section, the term “prohibited transaction” means any direct or indirect--
(2) Special exemption. --The Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any disqualified person or transaction, orders of disqualified persons or transactions, from all or part of the restrictions imposed by paragraph (1) of this subsection. Action under this subparagraph may be taken only after consultation and coordination with the Secretary of Labor. The Secretary may not grant an exemption under this paragraph unless he finds that such exemption is--
(3) Special rule for individual retirement accounts. --An individual for whose benefit an individual retirement account is established and his beneficiaries shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) or if section 408(e)(4) applies to such account.
(4) Special rule for Archer MSAs. --An individual for whose benefit an Archer MSA (within the meaning of section 220(d) ) is established shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if section 220(e)(2) applies to such transaction.
(5) Special rule for Coverdell education savings accounts. --An individual for whose benefit a Coverdell education savings account is established and any contributor to such account shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if section 530(d) applies with respect to such transaction.
(6) Special rule for health savings accounts. --An individual for whose benefit a health savings account (within the meaning of section 223(d) ) is established shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be a health savings account by reason of the application of section 223(e)(2) to such account.
(d) Exemptions. --Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to--
(1) any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan--
(B) is not made available to highly compensated employees (within the meaning of section 414(q) ) in an amount greater than the amount made available to other employees,
(3) any loan to an 1 leveraged employee stock ownership plan (as defined in subsection (e)(7)), if--
(5) any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State if the plan pays no more than adequate consideration, and if each such insurer or insurers is--
(6) the provision of any ancillary service by a bank or similar financial institution supervised by the United States or a State, if such service is provided at not more than reasonable compensation, if such bank or other institution is a fiduciary of such plan, and if--
(B) the extent to which such ancillary service is provided is subject to specific guidelines issued by such bank or similar financial institution (as determined by the Secretary after consultation with Federal and State supervisory authority), and under such guidelines the bank or similar financial institution does not provide such ancillary service--
(8) any transaction between a plan and a common or collective trust fund or pooled investment fund maintained by a disqualified person which is a bank or trust company supervised by a State or Federal agency or between a plan and a pooled investment fund of an insurance company qualified to do business in a State if--
(14) any transaction required or permitted under part 1 of subtitle E of title IV or section 4223 of the Employee Retirement Income Security Act of 1974, but this paragraph shall not apply with respect to the application of subsection (c)(1)(E) or (F);
(16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if--
(A) such stock is in a bank (as defined in section 581 ) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act ( 12 U.S.C. 1813(w)(1) ), 2
(17) Any transaction in connection with the provision of investment advice described in subsection (e)(3)(B) to a participant or beneficiary in a plan that permits such participant or beneficiary to direct the investment of plan assets in an individual account, if--
(B) the requirements of subsection (f)(8) are met,
(18) any transaction involving the purchase or sale of securities, or other property (as determined by the Secretary of Labor), between a plan and a disqualified person (other than a fiduciary described in subsection (e)(3)) with respect to a plan if--
(C) the terms of the transaction, including the price, are at least as favorable to the plan as an arm's length transaction, and
(D) the compensation associated with the purchase and sale is not greater than the compensation associated with an arm's length 3 transaction with an unrelated party, 4
(19) any transaction involving the purchase or sale of securities, or other property (as determined by the Secretary of Labor), between a plan and a disqualified person if--
(D) if 5 the disqualified person has an ownership interest in the system or venue described in subparagraph (A), the system or venue has been authorized by the plan sponsor or other independent fiduciary for transactions described in this paragraph, and
(E) not less than 30 days prior to the initial transaction described in this paragraph executed through any system or venue described in subparagraph (A), a plan fiduciary is provided written or electronic notice of the execution of such transaction through such system or venue,
(20) transactions described in subparagraphs (A), (B), and (D) of subsection (c)(1) between a plan and a person that is a disqualified person other than a fiduciary (or an affiliate) who has or exercises any discretionary authority or control with respect to the investment of the plan assets involved in the transaction or renders investment advice (within the meaning of subsection (e)(3)(B)) with respect to those assets, solely by reason of providing services to the plan or solely by reason of a relationship to such a service provider described in subparagraph (F), (G), (H), or (I) of subsection (e)(2), or both, but only if in connection with such transaction the plan receives no less, nor pays no more, than adequate consideration,
(21) any foreign exchange transactions, between a bank or broker-dealer (or any affiliate of either) and a plan (as defined in this section) with respect to which such bank or broker-dealer (or affiliate) is a trustee, custodian, fiduciary, or other disqualified person person, 6 if--
(B) at the time the foreign exchange transaction is entered into, the terms of the transaction are not less favorable to the plan than the terms generally available in comparable arm's length foreign exchange transactions between unrelated parties, or the terms afforded by the bank or broker-dealer (or any affiliate of either) in comparable arm's-length foreign exchange transactions involving unrelated parties,
(D) the bank or broker-dealer (or any affiliate of either) does not have investment discretion, or provide investment advice, with respect to the transaction,
(22) any transaction described in subsection (c)(1)(A) involving the purchase and sale of a security between a plan and any other account managed by the same investment manager, if--
(E) each plan participating in the transaction has assets of at least $100,000,000, except that if the assets of a plan are invested in a master trust containing the assets of plans maintained by employers in the same controlled group (as defined in section 407(d)(7) of the Employee Retirement Income Security Act of 1974), the master trust has assets of at least $100,000,000
(I) the investment manager has designated an individual responsible for periodically reviewing such purchases and sales to ensure compliance with the written policies and procedures described in subparagraph (H), and following such review, the individual shall issue an annual written report no later than 90 days following the period to which it relates signed under penalty of perjury to the plan fiduciary who authorized cross trading under subparagraph (D) describing the steps performed during the course of the review, the level of compliance, and any specific instances of non- compliance.
The written report shall also notify the plan fiduciary of the plan's right to terminate participation in the investment manager's cross-trading program at any time, 7 or
(e) Definitions.--
(1) Plan. --For purposes of this section, the term “plan” means--
(A) a trust described in section 401(a) which forms a part of a plan, or a plan described in section 403(a) , which trust or plan is exempt from tax under section 501(a) ,
(B) an individual retirement account described in section 408(a) ,
(C) an individual retirement annuity described in section 408(b) ,
(D) an Archer MSA described in section 220(d) ,
(E) a health savings account described in section 223(d) ,
(F) a Coverdell education savings account described in section 530 , or
(2) Disqualified person. --For purposes of this section, the term “disqualified person” means a person who is--
(3) Fiduciary. --For purposes of this section, the term “fiduciary” means any person who--
(4) Stockholdings. --For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken into account indirect stockholdings which would be taken into account under section 267(c) , except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6).
(5) Partnerships; trusts. --For purposes of paragraphs (2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6).
(6) Member of family. --For purposes of paragraph (2)(F), the family of any individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.
(7) Employee stock ownership plan. --The term “employee stock ownership plan” means a defined contribution plan--
(A) which is a stock bonus plan which is qualified, or a stock bonus and a money purchase plan both of which are qualified under section 401(a) , and which are designed to invest primarily in qualifying employer securities; and
A plan shall not be treated as an employee stock ownership plan unless it meets the requirements of section 409(h) , section 409(o) , and, if applicable, section 409(n) , section 409(p) , and section 664(g) and, if the employer has a registration-type class of securities (as defined in section 409(e)(4) ), it meets the requirements of section 409(e) .
(8) Qualifying employer security. --The term “qualifying employer security” means any employer security within the meaning of section 409(l) . If any moneys or other property of a plan are invested in shares of an investment company registered under the Investment Company Act of 1940, the investment shall not cause that investment company or that investment company's investment adviser or principal underwriter to be treated as a fiduciary or a disqualified person for purposes of this section, except when an investment company or its investment adviser or principal underwriter acts in connection with a plan covering employees of the investment company, its investment adviser, or its principal underwriter.
(9) Section made applicable to withdrawal liability payment funds. --For purposes of this section--
(A) In general. --The term “plan” includes a trust described in section 501(c)(22) .
(B) Disqualified person. --In the case of any trust to which this section applies by reason of subparagraph (A), the term “disqualified person” includes any person who is a disqualified person with respect to any plan to which such trust is permitted to make payments under section 4223 of the Employee Retirement Income Security Act of 1974.
(f) Other definitions and special rules. --For purposes of this section--
(1) Joint and several liability. --If more than one person is liable under subsection (a) or (b) with respect to any one prohibited transaction, all such persons shall be jointly and severally liable under such subsection with respect to such transaction.
(2) Taxable period. --The term “taxable period” means, with respect to any prohibited transaction, the period beginning with the date on which the prohibited transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of deficiency with respect to the tax imposed by subsection (a) under section 6212 ,
(3) Sale or exchange; encumbered property. --A transfer of real or personal property by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer.
(4) Amount involved. --The term “amount involved” means, with respect to a prohibited transaction, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in paragraphs (2) and (10) of subsection (d) the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value--
(5) Correction. --The terms “correction” and “correct” mean, with respect to a prohibited transaction, undoing the transaction to the extent possible, but in any case placing the plan in a financial position not worse than that in which it would be if the disqualified person were acting under the highest fiduciary standards.
(6) Exemptions not to apply to certain transactions.--
(A) In general. --In the case of a trust described in section 401(a) which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (as defined in section 401(c)(3) ), the exemptions provided by subsection (d) (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly--
any such owner-employee, a member of the family (as defined in section 267(c)(4) ) of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.
(B) Special rules for shareholder-employees, etc.--
(i) In general. --For purposes of subparagraph (A), the following shall be treated as owner-employees:
(II) A participant or beneficiary of an individual retirement plan (as defined in section 7701(a)(37) ).
(III) An employer or association of employees which establishes such an individual retirement plan under section 408(c) .
(ii) Exception for certain transactions involving shareholder-employees. --Subparagraph (A)(iii) shall not apply to a transaction which consists of a sale of employer securities to an employee stock ownership plan (as defined in subsection (e)(7)) by a shareholder-employee, a member of the family (as defined in section 267(c)(4) ) of such shareholder-employee, or a corporation in which such a shareholder-employee owns stock representing a 50 percent or greater interest described in subparagraph (A).
(iii) Loan exception. --For purposes of subparagraph (A)(i), the term “owner-employee” shall only include a person described in subclause (II) or (III) of clause (i).
(C) Shareholder-employee. --For purposes of subparagraph (B), the term “shareholder-employee” means an employee or officer of an S corporation who owns (or is considered as owning within the meaning of section 318(a)(1) ) more than 5 percent of the outstanding stock of the corporation on any day during the taxable year of such corporation.
(7) S corporation repayment of loans for qualifying employer securities. --A plan shall not be treated as violating the requirements of section 401 or 409 or subsection (e)(7) , or as engaging in a prohibited transaction for purposes of subsection (d)(3), merely by reason of any distribution (as described in section 1368(a) ) with respect to S corporation stock that constitutes qualifying employer securities, which in accordance with the plan provisions is used to make payments on a loan described in subsection (d)(3) the proceeds of which were used to acquire such qualifying employer securities (whether or not allocated to participants). The preceding sentence shall not apply in the case of a distribution which is paid with respect to any employer security which is allocated to a participant unless the plan provides that employer securities with a fair market value of not less than the amount of such distribution are allocated to such participant for the year which (but for the preceding sentence) such distribution would have been allocated to such participant.
(8) Provision of investment advice to participant and beneficiaries.--
(A) In general. --The prohibitions provided in subsection (c) shall not apply to transactions described in subsection (d)(17) if the investment advice provided by a fiduciary adviser is provided under an eligible investment advice arrangement.
(B) Eligible investment advice arrangement. --For purposes of this paragraph, the term “eligible investment advice arrangement” means an arrangement--
(i) which either--
(C) Investment advice program using computer model. --
(i) In general. --An investment advice program meets the requirements of this subparagraph if the requirements of clauses (ii), (iii), and (iv) are met.
(ii) Computer model. --The requirements of this clause are met if the investment advice provided under the investment advice program is provided pursuant to a computer model that--
(iii) Certification. --
(I) In general. --The requirements of this clause are met with respect to any investment advice program if an eligible investment expert certifies, prior to the utilization of the computer model and in accordance with rules prescribed by the Secretary of Labor, that the computer model meets the requirements of clause (ii).
(II) Renewal of certifications. --If, as determined under regulations prescribed by the Secretary of Labor, there are material modifications to a computer model, the requirements of this clause are met only if a certification described in subclause (I) is obtained with respect to the computer model as so modified.
(III) Eligible investment expert. --The term “eligible investment expert” means any person which meets such requirements as the Secretary of Labor may provide and which does not bear any material affiliation or contractual relationship with any investment adviser or a related person thereof (or any employee, agent, or registered representative of the investment adviser or related person).
(iv) Exclusivity of recommendation. --The requirements of this clause are met with respect to any investment advice program if--
(D) Express authorization by separate fiduciary. --The requirements of this subparagraph are met with respect to an arrangement if the arrangement is expressly authorized by a plan fiduciary other than the person offering the investment advice program, any person providing investment options under the plan, or any affiliate of either.
(E) Audits. --
(i) In general. --The requirements of this subparagraph are met if an independent auditor, who has appropriate technical training or experience and proficiency and so represents in writing--
(ii) Special rule for individual retirement and similar plans. --In the case of a plan described in subparagraphs (B) through (F) (and so much of subparagraph (G) as relates to such subparagraphs) of subsection (e)(1), in lieu of the requirements of clause (i), audits of the arrangement shall be conducted at such times and in such manner as the Secretary of Labor may prescribe.
(iii) Independent auditor. --For purposes of this subparagraph, an auditor is considered independent if it is not related to the person offering the arrangement to the plan and is not related to any person providing investment options under the plan.
(F) Disclosure. --The requirements of this subparagraph are met if--
(i) the fiduciary adviser provides to a participant or a beneficiary before the initial provision of the investment advice with regard to any security or other property offered as an investment option, a written notification (which may consist of notification by means of electronic communication)--
(I) of the role of any party that has a material affiliation or contractual relationship with the fiduciary adviser, 9 in the development of the investment advice program and in the selection of investment options available under the plan,
(V) the [FN10] manner, and under what circumstances, any participant or beneficiary information provided under the arrangement will be used or disclosed,
(ii) at all times during the provision of advisory services to the participant or beneficiary, the fiduciary adviser--
(G) Other conditions. --The requirements of this subparagraph are met if--
(iv) the terms of the sale, acquisition, or holding of the security or other property are at least as favorable to the plan as an arm's length [FN11] transaction would be.
(H) Standards for presentation of information. --
(i) In general. --The requirements of this subparagraph are met if the notification required to be provided to participants and beneficiaries under subparagraph (F)(i) is written in a clear and conspicuous manner and in a manner calculated to be understood by the average plan participant and is sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of the information required to be provided in the notification.
(ii) Model form for disclosure of fees and other compensation. --The Secretary of Labor shall issue a model form for the disclosure of fees and other compensation required in subparagraph (F)(i)(III) which meets the requirements of clause (i).
(I) Maintenance for 6 years of evidence of compliance. --The requirements of this subparagraph are met if a fiduciary adviser who has provided advice referred to in subparagraph (A) maintains, for a period of not less than 6 years after the provision of the advice, any records necessary for determining whether the requirements of the preceding provisions of this paragraph and of subsection (d)(17) have been met. A transaction prohibited under subsection (c) shall not be considered to have occurred solely because the records are lost or destroyed prior to the end of the 6-year period due to circumstances beyond the control of the fiduciary adviser.
(J) Definitions. --For purposes of this paragraph and subsection (d)(17)--
(i) Fiduciary adviser. --The term “fiduciary adviser” means, with respect to a plan, a person who is a fiduciary of the plan by reason of the provision of investment advice referred to in subsection (e)(3)(B) by the person to a participant or beneficiary of the plan and who is--
(II) a bank or similar financial institution referred to in subsection (d)(4) or a savings association (as defined in section 3(b)(1) of the Federal Deposit Insurance Act ( 12 U.S.C. 1813(b)(1) ), but only if the advice is provided through a trust department of the bank or similar financial institution or savings association which is subject to periodic examination and review by Federal or State banking authorities,
(ii) Affiliate. --The term “affiliate” of another entity means an affiliated person of the entity (as defined in section 2(a)(3) of the Investment Company Act of 1940 ( 15 U.S.C. 80a-2(a)(3) )).
(iii) Registered representative. --The term “registered representative” of another entity means a person described in section 3(a)(18) of the Securities Exchange Act of 1934 ( 15 U.S.C. 78c(a)(18) ) (substituting the entity for the broker or dealer referred to in such section) or a person described in section 202(a)(17) of the Investment Advisers Act of 1940 ( 15 U.S.C. 80b-2(a)(17) ) (substituting the entity for the investment adviser referred to in such section).
(9) Block trade. --The term “block trade” means any trade of at least 10,000 shares or with a market value of at least $200,000 which will be allocated across two or more unrelated client accounts of a fiduciary.
(10) Adequate consideration. --The term “adequate consideration” means--
(A) in the case of a security for which there is a generally recognized market--
(11) Correction period. --
(A) In general. --For purposes of subsection (d)(23), the term “correction period” means the 14-day period beginning on the date on which the disqualified person discovers, or reasonably should have discovered, that the transaction would (without regard to this paragraph and subsection (d)(23)) constitute a prohibited transaction.
(i) Employer securities. --Subsection (d)(23) does not apply to any transaction between a plan and a plan sponsor or its affiliates that involves the acquisition or sale of an employer security (as defined in section 407(d)(1) of the Employee Retirement Income Security Act of 1974) or the acquisition, sale, or lease of employer real property (as defined in section 407(d)(2) of such Act).
(ii) Knowing prohibited transaction. --In the case of any disqualified person, subsection (d)(23) does not apply to a transaction if, at the time the transaction is entered into, the disqualified person knew (or reasonably should have known) that the transaction would (without regard to this paragraph) constitute a prohibited transaction.
(C) Abatement of tax where there is a correction. --If a transaction is not treated as a prohibited transaction by reason of subsection (d)(23), then no tax under subsections (a) and (b) shall be assessed with respect to such transaction, and if assessed the assessment shall be abated, and if collected shall be credited or refunded as an overpayment.
(D) Definitions. --For purposes of this paragraph and subsection (d)(23)--
(i) Security. --The term “security” has the meaning given such term by section 475(c)(2) (without regard to subparagraph (F)(iii) and the last sentence thereof).
(ii) Commodity. --The term “commodity” has the meaning given such term by section 475(e)(2) (without regard to subparagraph (D)(iii) thereof).
(iii) Correct. --The term “correct” means, with respect to a transaction--
(g) Application of section. --This section shall not apply--
(2) to a governmental plan (within the meaning of section 414(d) ); or
(3) to a church plan (within the meaning of section 414(e) ) with respect to which the election provided by section 410(d) has not been made.
(h) Notification of Secretary of Labor. --Before sending a notice of deficiency with respect to the tax imposed by subsection (a) or (b), the Secretary shall notify the Secretary of Labor and provide him a reasonable opportunity to obtain a correction of the prohibited transaction or to comment on the imposition of such tax.
(i) Cross reference.--
1 So in original. Probably should be “a”.
2 So in original. Another closing parenthesis probably should precede the comma.
3 So in original. Probably should be “arm’s-length”.
4 So in original. The comma probably should be a semicolon.
5 So in original. The word “if” probably should not appear.
7 So in original. The comma probably should be a semicolon.
8 So in original. Probably should be “subsection (d)(17)(A)(ii)”.
9 So in original. The comma probably should not appear.
10 So in original. Probably should be “of the”.
11 So in original. Probably should be “arm’s-length”.
Read this complete 26 U.S.C. § 4975 - U.S. Code - Unannotated Title 26. Internal Revenue Code § 4975. Tax on prohibited transactions on Westlaw