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Is there any truth to the rumor the IRS is no longer allowing self-directed IRA LLC structures to acquire Tax ID#s for the LLC?

By. Adam Bergman, Esq

Nothing could be father from the truth.  Like I do almost everyday on behalf of client, I acquired a Tax ID# for a self-directed IRA LLC client just yesterday.  The reason I am even writing this blog is because of a recent article I read on Zero Hedge that claimed that the IRS has begin disallowing Self-Directed IRA LLC structures and has started enforcing this position by not allowing Self-Directed IRA LLC structure to acquire a Tax ID# from the IRS website.  Nothing could be further from the trust.  Firstly, I was able to acquire a tax ID# for a Self-Directed IRA LLC just yesterday.  Secondly, the IRS would have no idea what the LLC is being used for because it is only asking for the name, address, and SS# or Tax ID# of the responsible party of the LLC.  Even if one included the relevant information of the IRA custodian, as the responsible party for the LLC, the IRS would have no idea whether the LLC would be used by the custodian for business matters or for an IRA held by the custodian.  Thirdly, Since 1993 the IRS has never challenged or disputed the Self-Directed IRA structure.  In fact, the IRS clearly established their position in Field Service Advice (FSA) Memorandum 200128011 that an IRA can own a wholly own entity to make investments without violating the prohibited transaction rules.

In sum, The IRS has never questioned the legality of the Self-Directed IRA structure since it conceded in Swanson V. Commissioner 106 T.C. 76 (1996) that investing IRA funds in a wholly owned entity is not a prohibited transaction.   Since 1993, tens of thousands of Self-Directed IRA LLC structures have been established and their validity has never come into question by the IRS.  In fact, a recent tax Court Case, Peek v. Commissioner 140 T.C. No. 12 (May 9, 2013) which involved the personal guarantee of a loan, was notable because it reinforced the legality that an IRA holder can use retirement funds to invest in a wholly owned entity which is controlled by him or her without triggering the IRA prohibited transaction rules.  In Peek, the IRS argued against a transaction by involving the prohibited transaction rules.  However, if it believed the Self-Directed IRA structure was invalid it could have certainly argued that point in Peek.


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Posted in IRA Financial Group, Self-Directed IRA