Is a Checkbook IRA Legal?

The ability to invest retirement funds in a newly established limited liability company (“LLC”) owned by an IRA and managed by the IRA holder was deemed legal by the Tax Court and IRS in the Tax Court case Swanson V. Commissioner 106 T.C. 76 (1996). The IRS later confirmed the ruling in Swanson by releasing IRS Field Service Advice Memorandum 200128011 (“FSA 200128011”).

A Tax Court confirmed that the use of a newly established LLC owned by an IRA and managed by the IRA holder would not trigger a prohibited transaction on October 2013, in Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M) (“TC Memo 2013-245”). This case held that establishing a special purpose LLC to make an investment did not trigger a prohibited transaction, as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975.

IRS FSA (Field Service Advice) Memorandum 200128011 was the first IRS drafted opinion that confirmed the ruling of Swanson that held that the funding of a new entity by an IRA for self-directing assets was not a prohibited transaction pursuant to Code Section 4975.

The facts presented in the FSA clearly mirrored those in the Swanson case.

Is a Checkbook IRA Legal?

So what About the Tax Court in TC memo, 2013-245?

The IRS claimed the taxpayer had engaged in a prohibited transaction by receiving a salary from the LLC. The court agreed with the IRS on this point. Although the LLC (and not the IRA) was officially paying the taxpayer’s salary, the Tax Court concluded that since the IRA was the sole owner of the LLC, and that the LLC was the IRA’s only investment, the taxpayer (a disqualified person) was essentially being paid by his IRA.

The impact of the Tax Court’s ruling in TC Memo. 2013-245 is significant because it directly confirms the legality of the self-directed IRA LLC solution by validating that a retirement account can fund a newly established LLC without triggering a prohibited transaction.

As confirmed in Swanson and later by the IRS in Field Service Advice Memorandum 200128011 and TC Memo 2013-245, using retirement funds to invest in a newly established LLC wholly owned by an IRA and managed by the IRA holder is not a prohibited transaction.

In light of Swanson and TC memo 2013-245, it is evident that the Tax Court believes firmly that using IRA funds to invest in a newly established LLC will not trigger a prohibited transaction and is 100% legal.

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