The Self Directed IRA with checkbook control, also known as the Self Directed IRA LLC “Checkbook Control” Structure has become the investment vehicle of choice for people looking to use their retirement funds to make real estate and other non-traditional investments tax-free and without custodian consent. The concept of using a special purpose entity owned by an IRA to make an investment was first reviewed by the Tax Court in Swanson V. Commissioner 106 T.C. 76 (1996). In Swanson, the Tax Court, in holding against the IRS, ruled that the capitalization of a new entity by an IRA for making IRA related investments was a permitted transaction and not prohibited pursuant to Code Section 4975. The Swanson Case was later affirmed by the IRS in Field Service Advice Memorandum (FSA) 200128011.
The Swanson case helped establish that an IRA holder is permitted to establish a new entity wholly owned by his or her IRA in order to make IRA investments. The Swanson case makes it clear that only after the IRA has acquired the stock of the newly established entity does the entity become a disqualified person. Said another way, the Tax Court is contending that the use of an entity owned wholly by an IRA is not material as to whether a prohibited transaction occurred. The use of a wholly owned entity to make an investment is essentially no different if the IRA made the investment itself with respect to the prohibited transaction rules. What is important in determining whether a prohibited transaction occurred is not whether the IRA made the investment directly or used a wholly owned newly established special purpose entity, but what investment was ultimately made using IRA funds.
What is interesting to note about the Swanson case, is that IRS conceded the prohibited transaction issue on July 12, 1993 when it filed a notice of no objection to an earlier motion by the Swansons’ for partial summary judgment on that issue. In other words, almost immediately after filing their claim that the Swanson’s engaged in a prohibited transaction by using a special purpose entity owned by an IRA to make the investment, the IRS dropped their argument and conceded that no prohibited transaction occurred. Furthermore, the IRS continued attempt to frivolously claim that a prohibited transaction occurred with respect against the IRS.
In sum, the Swanson case and the IRS Advisory Opinion help confirm the validity of using a special purpose entity to make IRA investments. This coupled with the growing popularity of the limited liability company (“LLC”) help fuel the rise of the Checkbook Control IRA structure.
When establishing a Self Directed IRA LLC Checkbook Control solution it is vital that you work with tax professionals who have expertise in the tax and ERISA area. The reason for this is that the structure is based off the Internal Revenue Code and the IRS Treasury Regulations and it is important to work with a tax professional who can properly navigate and understand the tax rules.
With an IRA Checkbook Control solution, a special purpose limited liability company (LLC) is formed. The LLC should be formed by a tax professional because there are a number of items that must be properly included on the Articles of Organization. The LLC is typically formed in the state where the IRA investment will be made. This is especially true if real estate will be the investment of choice. The IRA care of the IRA custodian would be the member (owner) of the LLC and the IRA holder would serve as the manager of the LLC.
With a self directed IRA real estate, one will no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with an IRA checkbook control solution, the retirement funds (i.e. IRA, Roth IRA, 401(k), 403(b), SEP, SIMPLE, etc) would be transferred tax-free to a new IRA custodian who would then the funds tax-free to a new self-directed IRA LLC bank account, which can be opened at any local bank, Once the funds have been transferred to the local IRA LLC bank account, the self directed IRA investment can be made by simply writing a check from the local IRA LLC bank account.