If you have an ongoing transaction (such as a lease or a loan with multiple payments) that is not a prohibited transaction at the time it is entered into, but an individual involved in the deal later becomes a party in interest, is the entire transaction a PT? I suppose there are two alternatives and those are: (1) that it is not a PT because the individual was not a PII at the time the transaction was entered into; or (2) that only those transactions that occur after the individual becomes a PII are considered PTs. Any thoughts?

While I have not looked up or know the factual answer to your question, logic dictates that is is now a PT.

If it were not a PT it would be a perfect way to enter into PTs. Such a loophole would have been closed by now after a few such transactions came to light. Even if not closed it could still be attacked as intent to evade, defraud or something similar.

As far as an item like a lease goes, not having been a PT at the start should not matter since either the next periodic payment or next renewal (whichever comes first) would occur with the person now as a party in interest and it should now be a PT.

I think the same "upon next payment" or "next cycle" situation applies to any such renewable or periodic transaction. This would fit with your option (2). My logic places the emphasis on the ongoing actions not on the initial action.

I agree with GBurns. Although the original transaction may not have been a PT at the time it was entered into, at the very least each payment on the lease or loan would be. The loan or lease may have to be unwound ASAP to minimize excise taxes.

I am curious, however, to find out how someone with whom the trust did an arm's length transaction later became a party in interest. (1) He was hired by the employer; (2) He purchased shares in the employer; (3) He became a joint venturer with an owner of the employer, or with the employer; (4) He married a party in interest. As you can see, these are all unusual circumstances, and the actual facts may cast doubt on the original transaction, which IRS/DOL could categorize as a sham from the outset if the situation that came to be was forseeable.