Swanson v. Commissioner, 106 T.C. 76 (1996)

Swanson v. Commissioner, 106 T.C. 76 (1996) is a landmark case confirming the ability of IRAs to create and invest in entities. Mr. Swanson caused his IRAs to form and own two corporations. He was director of each but never owned any stock himself. Mr. Swanson then directed the custodian of the IRA to purchase all the original issue stock of the entity.

The Tax Court held that initial formation of the company by the IRA is not a prohibited transaction under Internal Revenue Code Section 4975 because the sale of stock to the IRA was not a sale or exchange of property between a plan (the IRA) and a disqualified person within the meaning of Code Section 4975(c)(1)(A).

The Tax Court also held that receipt of dividends by the IRA from the company was not a prohibited transaction because the dividends did not become IRA assets until they were paid . The Tax Court also held that Mr. Swanson’s performance of management functions, as director of the company, was not a prohibited transaction. However, the Tax Court did state that after creation of the entity, the entity became a “disqualified person”.