A question that we get asked frequently is whether an individual can receive compensation from a company in which his IRA owns an interest.

The IRS' position has long been that an IRA owner has a conflict of interest when he is in a position of authority, control or responsibility to determine how much compensation to pay himself, and thus, the payment of salary to the IRA owner, even indirectly by an IRA owned entity, is a prohibited transaction.

Recently the Court of Appeals for the Eighth Circuit in Ellis v. Commissioner, TC Memo 2013-245, affirmed CA8, 115 AFTR 2d ¶2015-805, No. 14-1310, affirmed this longstanding IRS position in holding that where an individual taxpayer's IRA owned the majority interest in the taxpayer's business through a limited liability company (LLC), the LLC’s payment of compensation to the taxpayer for his services to the LLC was a prohibited transaction resulting in disqualification of the IRA and a deemed distribution of its assets.

Prohibited transactions can subject the entire balance of an IRA account to immediate taxation and penalties. In light ofEllis and the draconian penalties that can result in such a situation, it is always best to consult ERISA counsel before making investments in non-publicly traded stocks and bonds through your IRA (or, for that matter, through any other qualified pension plan, such as a 401k plan).