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IRA LLC Case Law

IRA LLC Case Law

 

Case laws are ruling in prior tax court cases that give interpretations of the law.  These previous interpretations can be cited as precedents for understanding the law or help clarify a specific point.  Below is a gathering of cases that can be relied upon as IRA LLC law.

Swanson v. Commissioner– this is a landmark Tax Court case for the IRA LLC strategy.  Swanson, an individual, formed an IRA-owned entity (which was owned by his IRA and the IRAs of his three children).  He controlled the entity in his capacity as a President.  IRS challenged Swanson on this arrangement, and when it escalated to the tax court, the court found no fault with the arrangement, and Swanson was awarded for legal expenses.

“We find that it was unreasonable for [the IRS] to maintain that a prohibited transaction occurred when Worldwide’s stock was acquired by [Swanson’s IRA]…the issuance of stock to [Swanson’s IRA] did not, within the plain meaning of section 4975(c)(1)(A), qualify as a sale or exchange, or leasing, of any property between a plan and a disqualified person…Therefore, [the IRS’s] litigation position with respect to this issue was unreasonable as a matter of both law and fact….”

The Swanson case may have set a precedent for the IRA LLC industry.  Swanson’s arrangement was much more aggressive than the typical IRA LLC and gave great incite into what to do and what not to do.

Ancira v. Commissioner is a tax court case precisely on point for the IRA LLC.  In this case, because the custodian refused to hold the check, Ancira instructed his IRA custodian to send him the check for the private investment.  Included with the check, made payable to the private investment, was a Form 1099R, reporting it as an IRA distribution to Ancira.  This Form 1099R and the fact that the distribution was not reported on the personal return is what prompted IRS to consider it to be a distribution.  Ancira challenged the IRS’ findings and took the case to Tax Court.  In Tax Court , IRS challenged Ancira based on the argument the check from his custodian should be considered an IRA distribution.  Ancira won the case because he essentially only acted as a conduit for the custodian, because the custodian refued to hold the check and never physically took possession of the IRA funds:

“The IRA was a custodial account, and Pershing was the trustee thereof, as well as the holder of the assets in the account…Petitioner exercised his right, under the IRA agreement, to direct investments of the IRA assets…petitioner acted as a conduit for Pershing…We are not aware of any provisions of the Internal Revenue Code, applicable regulations, or case law that prohibit a taxpayer from acting as a conduit for an IRA trustee….”

This is a powerful case for checkbook IRAs because Ancira took checkbook control to a new level – AND WON!

Ellis v. Commissioner.  This is a a more recent, more relevant case than Swanson v. Commissioner, for the IRA LLC.  Some institutions still continue to refuse to recognize Swanson v. Commissioner.  In this case, the Tax Court court found that forming, capitalizing, and using an IRA LLC to invest would not trigger prohibited transaction rules.:

“…the formation of CST, an entity owned by Ellis’s IRA.  The end result of this transaction was the creation of a new entity, CST, with Mr. Ellis’ IRA as a founding member…CST had no outstanding owners or ownership interests before the initial capital contribution and therefore could not be a disqualified person at the time of the investment by Mr. Ellis IRA.  Accordingly, petitioners did not engage in a prohibited transaction when they caused Mr. Ellis’ IRA to invest in CST…”

While this case is very much on point, it did point out one not to do.  In Ellis, the court did determine that his IRA entered into a prohibited transaction when he caused the IRA LLC to pay him a salary.

 

This information is for informational purposes only.  It is not intended to substitute for competent legal, tax, or investment advice.  Much of the information herein merely quotes public information.  This information is subject to change at anytime, and you are encouraged to check back frequently for updates.

 

Also See

What We Do

U.S. Code Title 26 Section 408

Self-Directed IRAs- Prohibited Transactions

Real Estate IRA

26 U.S. Code § 4975- Tax On Prohibited Transactions

 

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