Last Updated on February 7, 2020
The Self-Directed IRA is an IRS approved retirement plan that is like a Traditional IRA, but allows investors to purchase alternative assets, such as real estate and precious metals with their retirement funds. The Self-Directed IRA LLC structure was affirmed in the Tax Court case Swanson v. Commissioner, 106 T.C. 76 (1996), and further confirmed by the IRS in Field Service Advisory (FSA) 200128011 (April 6, 2001).
Swanson V. Commissioner
In Swanson v. Commissioner, 106 T.C. 76 (1996), the Tax Court, in ruling against the IRS that the funding of a new entity by an IRA for self directing assets was not a prohibited transaction, stated the following:
“We find that it was unreasonable for [the IRS] to maintain that a prohibited transaction occurred when Worldwide’s stock was acquired by IRA #1. The stock acquired in that transaction was newly issued — prior to that point in time, Worldwide had no shares or shareholders. A corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). It was only after Worldwide issued its stock to IRA #1 that petitioner held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person under section 4975(e)(2)(G).”
This conclusion was also acknowledged by the IRS in Field Service Advisory (FSA) 200128011 (April 6, 2001). In that FSA, the IRS stated:
“In light of Swanson, we conclude that a prohibited transaction did not occur under section 4975(c)(1)(A) in the original issuance of the stock of FSC A to the IRAs in this case. Similarly, we conclude that payment of dividends by FSC A to the IRAs in this case is not a prohibited transaction under section 4975(c)(1)(D). We further conclude, considering Swanson, that we should not maintain that the ownership of FSC A stock by the IRAs, together with the payment of dividends by FSC A to the IRAs, constitutes a prohibited transaction under section 4975(c)(1)(E).”
The “LLC” in a Self-Directed IRA
The choice of entity (LLC) should seemingly not affect the holding of the Swanson case or FSA 200128011. Rather, it is the fact of the newly issued equity interest in the newly formed entity that is pertinent. The IRS is cognizant of the hazards of litigation presented by pursuing this course as a mode of challenge. In Swanson, the Tax Court required the IRS to pay Swanson’s costs and attorney fees.
In light of Swanson and FSA 200128011, the formation and capitalization of a new LLC for purposes of self directing IRA investments in itself should not be considered a prohibited transaction under Internal Revenue Code Section 4975. We note, however, that transactions involving the LLC and a disqualified person or that directly or indirectly a disqualified person may be prohibited under Internal Revenue Code Section 4975.
IRS Approved Investments in a Self-Directed IRA LLC
Retirement investors can purchase almost any type of investment as long as it is federally legal and IRS approved. The IRS does not approve life insurance in collectibles, which includes certain coins. However, any other purchase the retirement investor chooses to make will be approved as long as there is no disqualified person on the other end.