Home > Resources > Is The IRA LLC Legit?
Is The IRA LLC Legit?
Is The IRA LLC Legit?
Is The IRA LLC Legit?
When we speak with clients about setting up an IRA LLC, the legitimacy of the IRA LLC often comes into question.
The IRA LLC is a legitimate structure for diversifying your retirement account with alternative assets. Proper setup and adherence to the IRS guidelines related to IRA prohibited transactions are essential for maintaining its legal tax-advantaged status.
In light of the Swanson v. Commissioner (1996) landmark court decision (which favored Swanson; see below) and the subsequent scrutiny by the US tax courts, the IRA LLC maintains legitimacy some nearly 30 years later.
However, despite the overwhelming evidence for the IRA LLC’s legitimacy, which we present in detail below, many prominent self-directed IRA custodians, with the exception of those listed on our site, still disregard the legitimacy of the IRA LLC.
It is impossible to know with 100% certainty the custodians’ motives for neglecting this powerful investment vehicle, although it could be attributed to ignorance, selective oversight, financial motivations, or a mix of these.
Based on the details provided below and our 19+ years of experience working with clients, we will demonstrate to you that the IRA LLC is still a legitimate investment vehicle and tax shelter.
The IRA LLC is a legal entity that can hold traditional and alternative investments when you decide to self directed a traditional and a Roth IRA. The IRA LLC gives you greater control over your investment choices and increases the safety of your retirement assets compared to investing through an IRA custodian alone.
IRA LLC Case Law
“Case law” refers to a collection of previous court decisions that interpret the law and serve as legal precedent. Case law also serves as an essential resource for investors interested in learning about the particulars of an IRA LLC and how the court views them.
Some court cases involving IRA LLCs and their outcomes are listed below for educational purposes only. In no way should the following information be considered a substitute for legal or tax advice from a licensed professional.
The court’s decisions can provide valuable insights into how the courts have interpreted the law involving IRA LLCs up to this point, guiding our understanding and revealing how they might interpret the law in the future.
Swanson v. Commissioner
Swanson v. Commissioner is a landmark case and sets a precedent for the IRA LLC entity and investment strategy. In this instance, Swanson established an IRA-owned entity that included his IRA and his children’s. Swanson named himself and his children as controlling directors of the IRA-owned entity.
The IRS challenged the legality of Swanson’s arrangement. In tax court, the court ruled in Swanson’s favor, resulting in the court having to reimburse Swanson for his legal charges.
“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…”
In The Wake Of The Swanson Case
Some argue that the Swanson case ruling establishes a precedent for the IRA LLC industry, but Swanson’s arrangement was far more aggressive than a typical IRA LLC.
Following the favorable Swanson ruling, a new era was born, helping cement the IRA LLC as a viable and legal option for IRA holders to direct their retirement savings.
Would You Like To Set Up An IRA LLC For Yourself?
Download our in-house IRA LLC checklist for free to create IRA LLCs for our clients. You will also receive a sample IRA LLC operating agreement to review.
Other Notable Court Cases Validating The IRA LLC
Ancira v. Commissioner (2002) is another tax court case where Ancira instructed his IRA custodian to send him a check for a private investment. Along with a check payable to the private investment was a Form 1099R reporting an IRA distribution to Ancira.
The IRS challenged Ancira because the check from his custodian constituted an IRA distribution. Ancira won the case because he essentially only acted as a conduit for the custodian 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…”
Observations Following Ancira v. Commissioner
The Ancira v. Commissioner case is powerful for the legitimacy of an IRA LLC (checkbook IRA) because Ancira took checkbook control to a whole new level… AND WON! The tax court ruled in favor of Ancira, further legitimizing the IRA LLC’s use (aka, the checkbook IRA) as a viable legal entity to purchase tax-favorable alternative investments.
Ancira’s legal team easily and convincingly demonstrated to the tax court that an IRA LLC can effectively control investments while maintaining its tax-advantaged status.
This ruling reinforces that checkbook control is an effective strategy to ensure that IRA funds are invested according to an individual’s wishes while complying with the law governing IRA prohibited transactions. The ruling also sets a precedent for future cases involving IRA LLCs, as you will see in the next notable court case, Ellis v. Commissioner.
Ellis v. Commissioner
Ellis v. Commissioner is a more recent and relevant IRA LLC case than the original Swanson v. Commissioner case discussed earlier. The Ellis v. Commissioner case determined that forming, capitalizing, and investing in an IRA LLC was legal and did not constitute a prohibited transaction.
“…the formation of CST, an entity owned by Ellis’s IRA. The 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, the petitioners did not engage in a prohibited transaction when they caused Mr. Ellis’ IRA to invest in CST.
Ellis v. Commissioner: Postmortem
While the court found the IRA LLC legitimate, it concluded that the salary payment to Ellis was an IRA-prohibited transaction. As a result, the court ruled that Ellis was liable for the income tax and penalties related to Ellis’ salary payment.
Lessons Learned Following The Ellis v. Commissioner Case:
- You must comply with the rules and regulations governing IRAs, even if you are self directed.
- The federal tax code restricts who an IRA can transact with.
- It’s an IRA-prohibited transaction for the owner of the IRA to receive a salary or compensation from the LLC and restrict the LLC from transacting with the IRA owner or persons disqualified from the IRA.
- The IRA LLC offers you a great deal of flexibility as opposed to a standard IRA arrangement, but that doesn’t give you a license to break the IRA rules, even if you do so unintentionally.
- Before making any decisions regarding investments, especially those related to your IRA, seek professional advice.
To review the court’s document, visit the following link.
Department Of Labor (DOL) Advisory Opinions
In addition to the tax court rulings outlined above, the DOL Secretary of Labor has also issued many advisory opinions on IRA LLC’s structural validity.
The following relevant DOL advisory opinions from the Secretary of Labor’s website validate the IRA LLC’s legitimacy and should give you further peace of mind.
Following Presidential Reorganization Plan No. 4 of 1978, the Secretary of the Treasury (IRS) must defer interpretations to the Secretary of Labor (DOL). Thus, the Secretary of Labor has the legal authority to interpret IRS Code Section 4975, which addresses IRA-prohibited transactions.
Advisory Opinion 2000-10A:
Advisory Opinion 2000-10A states that the Department of Labor does not regard the general partner as disqualified under IRS Code Section 4975. However, the IRA owner acting as trustee of the IRA would disqualify the individual.
Section 4975 also prohibits individuals from receiving benefits that conflict with their fiduciary responsibilities.
The Department of Labor asserts that an individual acting as a general partner (similar to a manager) in an entity owned by an individual’s IRA and the IRAs of other family members (like an IRA LLC) remains in compliance with Section 4975 as long as they do not receive a salary or a fiduciary conflicting benefit from the entity.
To review Advisory Opinion 2000-10A, visit the link.
DOL Advisory Opinions 97-23A and 2005-03A
IRS Tax Code Governing IRAs
U.S. Code Title 26, Section 408, Traditional and Roth IRAs: Regulations and Requirements
U.S. Code Title 26 Section 408 is a section of the Internal Revenue Code that sets out rules governing the taxation of individual retirement accounts (IRAs). Section 408 informs investors concerning the types of investments they can make within their IRA accounts, their contribution limits, and the penalties for violating the prohibited transaction rules.
To learn more, check out U.S. Code Title 26, Section 408.
U.S. Code Title 26, Section 4975, Prohibited Transactions Involving Plan Assets
U.S. Code Title 26 Section 4975 is a part of the Internal Revenue Code, which outlines prohibited IRA transactions.
Violations of these prohibitions may result in the disqualification of your IRA and the forfeiture of its assets. In addition, taxes and penalties may apply to any income your IRA generates.
Generally, these prohibited transactions include engaging in self-dealing, borrowing money, or using an IRA asset as security for a loan, among other things.
Prohibited Transactions To Avoid In An IRA LLC
There are several categories of IRA prohibited transactions you must watch out for when investing in an IRA.
- IRA Prohibited Asset Transactions: This limits what assets you can purchase with your IRA.
- Extension of Personal Credit: You are not allowed to extend personal credit to your IRA by putting loans in your name on behalf of the IRA.
- Self-Dealing IRA Transactions: You cannot use, rent, or sell a property your IRA owns, such as a vacation home or an Airbnb, to yourself or another disqualified party, even if you or they pay market rental rates.
- Taking Personal Custody: You cannot take personal custody of any IRA-owned precious metals, such as gold bars, or digital assets, such as Bitcoin or any other cryptocurrency, stored in a cold wallet.
- Prohibited Step-Transactions: For example, you can’t sell a property you already own personally to your niece for $1 and, in turn, buy it back, even if she is not considered a disqualified party, and put it inside your IRA.
These investment transactions are prohibited because they might result in the assets of the IRA being used for personal gain rather than for the growth of the IRA itself. To understand more, check out U.S. Code Title 26, Section 4975, by visiting IRS.gov.
IRS Publications And Notices Regarding IRAs
The tax code, which Congress freely makes available to the public, contains IRA rules. Due to the tedious nature of the legal code, regulators will make “layman’s terms” publications and other valuable information available to the public. We have gathered some relevant sources for your review.
Publication 590-A, “Contributions to Individual Retirement Arrangements (IRAs):
IRS Publication 590 is a guide to individual retirement arrangements (IRAs), which provides information on setting up, maintaining, and rolling over IRAs. It also covers eligibility and contribution limits, distributions and withdrawal rules, and the tax treatment of IRAs.
To review IRS Publication 590-A, visit IRS.gov at https://www.irs.gov/pub/irs-pdf/p590a.pdf
Publication 590-B, “Distributions from Individual Retirement Arrangements (IRAs):
This publication covers the rules and requirements for taking distributions (withdrawals) from IRAs, including early withdrawals, required minimum distributions (RMDs), and tax implications.
To review IRS Publication 590-B, visit https://www.irs.gov/pub/irs-pdf/p590b.pdf
IRS Notice 2014-21, Guidance on the Taxation of Virtual Currencies (Cryptocurrencies) for Federal Tax Purposes:
IRS Notice 2014-21 addressed digital currencies like Bitcoin for the first time, solidifying the IRS’s stance for tax purposes. According to the IRS notice, digital currency is considered property, not legal tender, requiring federal tax reporting of gains and losses.
To review IRS Notice 2014-21
