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IRS definition of arm's length transaction.

San Diego, CA |

In 2008 my self-directed IRA made a loan to a friend via a non-secured promissory note. The paperwork and distribution was handled by my broker (the custodian of my IRA). We ended up getting married in 2013 while she was still paying the loan back (also through my broker).

If there were no other legal, family, or financial connections between us before our marriage would this be considered an arm's length transaction?

Attorney Answers 2


  1. I think some more facts would be helpful. Was this an interest-free loan? In that case the IRS might be interested because it is losing the tax on the interest paid to you. Are you writing it off as a loss on an investment, and looking for a tax deduction? Other than those situations (and there may be more), I see no reason for the IRS to be interested. Furthermore, I think the burden of proof, at least initially, is on the IRS to produce evidence that is not an arm's length transaction. If the amount of money is significant, I would suggest you consult a tax attorney.


  2. Under IRC Section 408(e)(2) your IRA has lost its tax exempt status because it has engaged in a prohibited transaction under Section 4975. You need some very good advice to minimize the damage.