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Self-Directed IRA Resources

Self-Directed IRA are generally permitted to engage in most types of investments, however, if a Self-Directed IRA engages in certain types of “prohibited transaction” or invests in life insurance or collectibles you may jeopardize the tax-deferred status of your IRA account. This could lead to the disqualification of the IRA and severe tax consequences. Therefore, it is important that you familiarize yourself with the IRA rules.

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”.

IRS Field Service Advice Number: 200128011 – In FSA 200128011 the IRS affirmed Swanson and stated: *”In light of Swanson, we conclude that a prohibited transaction did not occur under section 4975(c)(1)(A) in the original issuance of the stock of FSC A to the IRAs in this case. Similarly, we conclude that payment of dividends by FSC A to the IRAs in this case is not a prohibited transaction under section 4975(c)(1)(D). We further conclude, considering Swanson, that we should not maintain that the ownership of FSC A stock by the IRAs, together with the payment of dividends by FSC A to the IRAs, constitutes a prohibited transaction under section 4975(c)(1)(E).”*

For more info about self-directed IRAs, give the tax experts at the IRA Financial Group a call at 1-800-472-0646!

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Posted in IRA Financial Group, Self-Directed IRA