The Self Directed IRA Structure has been in use for some 35 years, however, the concept of using an 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 ruling against the IRS, held that the funding of a new entity by an IRA for self-directing assets was a permitted transaction and not prohibited pursuant to Code Section 4975.
The Swanson case discusses with situation where one IRA owns one-hundred percent of a newly established entity. However, in some instances, additional funds are needed by the entity to pay for expenses or make additional investments. The Swanson case does not address this issue, however, a number of custodian and attorneys take the position that since the only benefit the IRA holders’ would experience as a result of the additional investment into the new entity would be a benefit they would be entitled to as beneficiary of the IRA, which is exempted from the prohibited transaction rules pursuant to Code Section 4975(d)(9), the additional IRA investment into a newly established entity would not trigger a prohibited transaction.
It is our opinion that because the IRA owns 100% of the LLC, making additional contributions to a self-directed IRA would provide no personal benefit to any disqualified person. In addition, all the custodian we work with allow the individual IRA holder to make additional contributions to the IRA LLC. What the IRS is concerned with is for someone to personally benefit from the transaction, well in the case of an IRA LLC owned 100% by IRAs, making additional contributions will not provide any personal benefit. The only benefit one would be receiving is as beneficiary as the IRA, which pursuant to 4975(d)(9) is exempt from the prohibited transaction rules.