MOIC Matrix & Five-Tier Waterfall — SD-IRA Investment Review

Private placement minority equity in operating-company holdco | Tax-impact framework for client review
Prepared by: MyCPAPro, P.C. For internal review & client discussion Capital: $250,000 SD-IRA → 19% Class A

1. Structure at a Glance

Investor
SD-IRA — $250K cash
19% equity stake (Class A Participating Preferred + Common allocation TBD by share-class architecture)
Operator
81% common + PG on debt
Provides services, signs personal guarantees on operating-co debt. Must not be a §4975 disqualified person.
Holdco
LLC taxed as C-corp
UBTI blocker. Pays 21% federal + 8.84% CA = ~28% effective on operating income before distribution.
Operating Subs
3 wholly-owned C-corps
Restaurant/tavern · Fix & flip · Construction. Each operates as separate sub for liability isolation.
Tax-priority lens. Because the investor is an SD-IRA, the analysis is not "ordinary vs. capital" — it is "does the structure preserve the §512(b)(1) dividend exclusion at every tier so the C-corp blocker actually blocks UBTI." Every dollar that flows through as a dividend or qualifying redemption is tax-free to the IRA. Every dollar recharacterized as something else (compensation, debt interest with control implications, prohibited transaction proceeds) is catastrophic.

2. The MOIC Matrix

Floor and ceiling are anchored to IRR benchmarks reasonable for private-placement minority equity in operating businesses (~18–27% range), with both sitting above the pref+capital baseline so Tier 3 has economic substance.

Hold Period Pref + Cap
Baseline1		 FLOOR CEILING Tier 3 $ Range
(on $250K)
MOIC Total $ IRR MOIC Total $ IRR
Year 1 1.16x
$290K		 1.25x $313K 25.0% 1.40x $350K 40.0% $23K – $60K
Year 2 1.35x
$337K		 1.45x $363K 20.4% 1.70x $425K 30.4% $26K – $88K
Year 3 1.57x
$392K		 1.70x $425K 19.3% 2.05x $513K 27.3% $33K – $121K
Year 4 1.82x
$455K		 2.00x $500K 18.9% 2.45x $613K 25.1% $45K – $158K
Year 5+ 2.12x
$529K		 2.30x $575K 18.1% 2.90x $725K 23.7% $46K – $196K

1 Pref + Capital baseline assumes 15% preferred return compounded daily on $250K, plus return of $250K capital. Tier 3 floor/ceiling sit above this number — Tier 3 is the additional MOIC layer between the floor/ceiling and Tier 4 catch-up trigger.

3. Five-Tier Waterfall — Mechanics & Worked Example

Worked example: Year 3 exit, $750K total distributable to investor stake (3.0x gross). Tracks where every dollar lands.

Tier Description Calculation (Yr 3) Allocated Tax Treatment to SD-IRA
T1 Preferred Return
15% daily-compounded on outstanding capital until paid		 $250K × (e0.45 − 1)
= $142K		 $142K Dividend from C-corp. Excluded from UBTI under §512(b)(1). Tax-free at IRA level.
T2 Return of Capital
Original $250K investment returned		 $250K $250K Stock redemption (preferred §302 sale/exchange treatment) or return-of-basis dividend. Either way, tax-free at IRA level.
T3 MOIC True-up
Top up to ceiling MOIC for the hold period (Yr 3 ceiling = 2.05x)		 $513K − ($142K + $250K)
= $121K		 $121K Dividend or redemption proceeds. Excluded from UBTI under §512(b)(1). Tax-free at IRA level.
T4 Operator Catch-Up
Operator receives distributions until total received matches investor's Tier 1+3 economic split on a 50/50 basis		 Operator catch-up $
(no $ to investor)		 $0 to investor N/A — flows to operator's Class B common.
T5 50/50 Overage
Remaining proceeds split equally		 Investor 50% share
(of post-T4 residual)		 balance Dividend on common-equivalent (post Class A conversion or via tracking provision). Tax-free at IRA level.
Investor total at Yr 3, ceiling exit (before T5) $513K 2.05x MOIC · 27.3% IRR · $0 tax at IRA level

4. SD-IRA Tax Treatment by Tier — The #1 Priority Lens

Tier Form of Distribution UBTI Status UDFI Status Risk Flag
T1 Pref Dividend on Class A Preferred Excluded — §512(b)(1) None — IRA has no debt Debt recharacterization risk (see §6 below)
T2 ROC Stock redemption / liquidating distribution Excluded — §512(b)(1) or §512(b)(5) None §302 qualification documentation needed
T3 MOIC Dividend or redemption proceeds Excluded — §512(b)(1) or §512(b)(5) None Reasonable-rate documentation (private-placement comps)
T5 Overage Common dividend / capital gain on conversion Excluded — §512(b)(1) or §512(b)(5) None Class structure must support pro-rata mechanic
Bottom line on tax impact. Every tier flowing to the SD-IRA passes through a C-corp blocker as either a dividend (§512(b)(1)) or a redemption/sale (§512(b)(5)). Both are statutory UBTI exclusions. Result: $0 of UBTI / UDFI at the IRA level across all five tiers — provided the §4975 and §512(b)(13) safeguards in §5 hold.
The cost of the blocker. The C-corp wrapper pays 21% federal + 8.84% CA on operating income (~28% combined) before any distribution. This is the price of UBTI blocking. A side-by-side after-tax comparison vs. direct partnership investment (which would generate UBTI on operating income at IRA's trust-rate tax of up to 37%) generally favors the C-corp blocker, but should be modeled on actual projected sub-level income.

5. §4975 Prohibited Transaction Compliance Checklist

Any failure here unwinds the entire IRA — full distribution deemed taken, taxes plus penalties on full IRA balance. These are non-negotiable.

6. UBTI / UDFI Analysis — Why the Blocker Holds

Risk Vector Position Mitigation Required
UBTI from operating income C-corp blocker stops flow-through. SD-IRA receives only dividends/redemption proceeds, both excluded under §512(b). Maintain C-corp election. Avoid any check-the-box conversions during hold period.
UDFI from acquisition debt Debt is at sub level, guaranteed by operator. SD-IRA itself takes on no debt. UDFI applies only to debt-financed property held by the IRA, not by a corporation it owns stock in. Confirm IRA never co-signs, never pledges IRA assets as collateral, never extends margin/recourse to operator.
§512(b)(13) controlled organization Triggers when tax-exempt org owns >50% (vote or value). At 19%, well below threshold — passive income exclusions remain intact even if any tier is recharacterized as interest/rent/royalty. Monitor. If investor adds capital, do not breach 50% (vote OR value) — including via any conversion mechanic in T5 overage that reshuffles ownership.
Plan asset / VCOC analysis All three subs are operating companies (production/sale of goods or services). Operating company exception to plan-asset look-through generally satisfied. Document each sub's operating-company status annually. Avoid investment-company drift (e.g., fix-flip transitioning to passive rental holdings without restructuring).

7. §385 Debt vs. Equity — Defending the 15% Pref

A 15% daily-compounding cumulative pref reads like debt economics. If recharacterized as debt, downstream consequences differ at C-corp level (deductibility) and IRA level (interest income may still qualify as §512(b)(1) excluded for non-controlled corps — which we are at 19%, so still safe — but loses preferred dividend characterization for any future restructuring). Defensible equity features to embed in charter:

8. Share-Class Architecture (Critical — Cannot Run This Waterfall on Single Class)

In a C-corp, distributions are dividends and must be pro-rata within a class. The five-tier waterfall cannot be executed on a single class of common. Two classes minimum required.
Class Holder Economic Rights
Class A Participating Preferred SD-IRA (100% of class) $250K original issue price · 15% cumulative compounding pref (T1) · $250K liquidation preference (T2) · participation cap at exit-year ceiling MOIC (T3) · converts to common-equivalent at ceiling for T5
Class B Common Operator (majority) + SD-IRA (minority allocation to land at 19% economic) Residual after Class A preferences satisfied · receives T4 catch-up exclusively · participates pro-rata in T5 overage

The "19% stock" framing translates to: SD-IRA holds 100% of Class A Preferred + a smaller share of Class B Common, calibrated so total economic ownership of residual common-equivalent = 19% post-conversion. Charter, certificate of designation, and stockholders' agreement must be drafted around this architecture before issuance.

9. Documentation Required (Contemporaneous)

10. Open Decision Points for Client Discussion

Decision Options Recommended Position
Pref rate level 12% / 15% / 18%, simple vs compounded 15% daily-compounded acceptable if matrix above adopted; debt-recharacterization features mitigated per §7
Floor MOIC anchor 1.25x flat / scaled by hold period Scaled by hold period (matrix above) — flat 1.25x at Yr 4–5 is below pref+cap and economically void
Ceiling MOIC anchor Hard cap / soft cap with sliding scale Hard cap per matrix — preserves T4 catch-up trigger, protects T5 50/50 as the real upside per client priority
T4 catch-up speed 100% to operator until parity / 80/20 / 50/50 split during catch-up 100% to operator until parity — cleanest mechanically, fastest path to T5
T5 mechanism Class A converts / tracking provision / management incentive grant Class A conversion at ceiling — clean tax characterization, single share class post-conversion
Sub structure Three C-corp subs / three LLC subs disregarded to holdco / mix Three C-corp subs — preserves blocker integrity. LLC disregarded subs would pierce the blocker for IRA purposes.
This document is prepared for internal review and client discussion purposes only. It does not constitute tax or legal advice and is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties under the Internal Revenue Code. The structure described involves significant complexity in §4975 prohibited transaction analysis, §512 UBTI/UDFI rules, §385 debt-equity characterization, and state-law securities and entity formation. Final structure must be reviewed by ERISA counsel and securities counsel, and supported by contemporaneous independent valuation, before implementation. Numbers in worked examples are illustrative.