A federal official has panned efforts by a beauty salon supply company owner to use an individual retirement account to help finance the construction of a warehouse.

Louis Campagna, chief of the fiduciary interpretations division at the U.S. Department of Labor, has written a letter, Advisory Opinion 2006-01A, suggesting that the proposed use of IRA assets appears to violate Labor Department regulations governing permitted retirement plan investments.

Debra Buchanan, a lawyer in Tacoma, Wash., filed a request for an advisory opinion on behalf of Salon Services and Supplies Inc., a corporation that is 68% owned by Miles and Sydney Barry and 32% owned by George Learned.

Berry cannot invest his IRA assets directly in Salon Services, because an IRA holder’s own business is a “disqualified person” in connection with IRA investments, Buchanan said. Disqualified persons cannot benefit from an IRA’s income or assets.

Miles Berry wants to get around that restriction by using an IRA to help start a separate company that would buy land, build a warehouse and lease the property to Salon Services, according to a summary of the proposed transaction given in Campagna’s letter.

Berry’s IRA would own 49% of the warehouse company stock, Learned would own 20%, and Robert Payne, Salon Services’ comptroller, would use his own IRA to buy a 31% stake.

Payne and Learned would manage the warehouse company, and Buchanan said Payne and Learned would be independent of Berry, according to the proposal summary.

The proposed transaction is probably prohibited partly because Payne is Salon Services’ comptroller, and Berry owns 68% of Salon Services, Campagna writes.

Because Payne is an employee of a company partly owned by Berry, he is a disqualified person in connection with investments by Berry’s IRA, Campagna writes.

Campagna writes that the proposed transaction also appears to be prohibited because Berry cannot get around restrictions on IRA holders investing in their own companies simply by becoming a minority shareholder in a separate company that would serve Salon Services.

“Regulation section 2509.75-2(c) and [Labor] Department opinions interpreting it have made clear that a prohibited transaction occurs when a plan invests in a corporation as part of an arrangement or understanding under which it is expected that the corporation will engage in a transaction with a party in interest (or disqualified person),” Campagna writes.

If Berry invested in the warehouse company and the warehouse company leased a warehouse to Salon Services, the lease would amount to a prohibited transaction between Berry and Salon Services, and it also might be a violation Berry’s fiduciary obligations to his IRA, Campagna writes.

Section 404(a) of the Employee Retirement Income Security Act prohibits an IRA fiduciary from making “an investment in a corporation of partnership for the purpose of avoiding the application of the fiduciary responsibilities of the act,” Campagna writes.

The advisory opinion is on the Web at Document Link