The Checkbook Control IRA LLC Solution is a Tax Court and IRS approved investment solution for using IRA funds to make IRS approved investments. The IRA Checkbook Control has been a recognized retirement solution for the last 15 years. The idea 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) (“Swanson”). In Swanson, the Tax Court, in holding against the IRS, ruled that the funding of a new entity by an IRA for making IRA related investments was a permitted transaction and not prohibited pursuant to Internal Revenue Code Section 4975. The Swanson Case was later confirmed by the IRS in Field Service Advice Memorandum (FSA) 200128011.
The underlying facts in the Swanson case involved James Swanson’s combined use of two entities owned exclusively by his IRAs to defer income recognition. The IRS argued that the Swanson IRA transaction was a tax avoidance scheme.
To establish a Checkbook Control IRA LLC, a special purpose limited liability company (“LLC”) is formed. The LLC will be owned by the IRA and managed by the IRA holder (you). The retirement funds (IRA, Roth IRA, SEP, SIMPLE, 401(k), 403(b), 457(b), etc) would then be transferred or rolled over tax-free from the current IRA custodian to a new IRA Passive Custodian. An IRA Passive Custodian, unlike a traditional IRA custodian, allows for traditional as well as non-traditional investments such a real estate. The new IRA Passive Custodian would then transfer the IRA funds tax-free to the newly established special purpose IRA LLC. At that point, the IRA funds would be available for investment.
The question arises as to whether is it legal for the IRA holder (you) to serve as manager of the special purpose IRA LLC.
The Swanson case makes it clear that an IRA holder may serve as manager, director, or officer of the newly established entity owned by is or her IRA. The Tax Court held that Mr. Swanson was not a “disqualified person” as president and director of Worldwide until AFTER the stock was issued to IRA #1. Furthermore, the Tax Court held that Swanson was not a disqualified person as an officer or director of Worldwide pursuant to Section 4975(e)(2)(H) solely due to his “shareholding” in Worldwide as the constructive attribution rules provided under Internal Revenue Code Section 267 do not apply to someone in a non-shareholder capacity. In other words, by having the IRA invested in an entity such as an LLC of which the IRA owner is the manager, the Swanson Case suggests that the IRA holder can serve as manager of the LLC and have “checkbook control” over his or her IRA funds.