Case law is a set of prior rulings which have made interpretations of law and, therefore, can be cited as precedent. For your reference we have gathered cases that can be relied upon as IRA LLC law.
Swanson v. Commissioner – is a landmark case for the IRA LLC strategy. This is a tax court case where an individual (Swanson) formed an IRA owned entity (owned by his IRA and the IRAs of his 3 children) and controlled the entity in the capacity of director. The IRS initially challenged Swanson on the arrangement but when it was escalated to the tax court Swanson was awarded for legal expenses.
“We find that it was unreasonable for [the IRS] to maintain that a prohibited transaction occurred when Worldwides stock was acquired by [Swanson’s IRA]…the issuance of stock to [Swanson’s IRA] did not, within the plain meaning of section 4975(c)(1)(A), qualify as a sale or exchange, or leasing, of any property between a plan and a disqualified person…Therefore, [the IRS’s] litigation position with respect to this issue was unreasonable as a matter of both law and fact…”
Some would argue that the Swanson case sets a precedent for the IRA LLC industry but in reality Swansons arrangement was much more aggressive than a typical IRA LLC.
Ancira v. Commissioner – is a tax court case where an individual instructed his IRA custodian to send him a check for a private investment in which his custodian refused to hold. Along with a check made payable to the private investment was a form 1099R reporting an IRA distribution to Ancira. The IRS challenged Ancira on the basis that the check from his custodian constituted an IRA distribution. Ancira won the case because he essentially only acted as a conduit for the custodian and never physically took possession of the IRA funds:
“The IRA was a custodial account, and Pershing was the trustee thereof, as well as the holder of the assets in the account…Petitioner exercised his right, under the IRA agreement, to direct investments of the IRA assets…petitioner acted as a conduit for Pershing…We are not aware of any provisions of the Internal Revenue Code, applicable regulations, or case law that prohibit a taxpayer from acting as a conduit for an IRA trustee…”
This is a powerful case for checkbook IRAs because Ancira took checkbook control to a whole new level – AND WON!
Ellis v. Commissioner – is a more recent and more relevant IRA LLC case than Swanson v. Commissioner (which some institutions still refuse to recognize). The court held that forming, capitalizing and using an IRA LLC to make an investment would not trigger prohibited:
“…the formation of CST, an entity owned by Ellis’s IRA The end result of this transaction was the creation of a new entity, CST, with Mr. Ellis’ IRA as a founding member…CST had no outstanding owners or ownership interests before the initial capital contribution and therefore could not be a disqualified person at the time of the investment by Mr. Ellis IRA. Accordingly, petitioners did not engage in a prohibited transaction when they caused Mr. Ellis IRA to invest in CST…”
Unfortunately for Ellis, the court did determine that his IRA entered into a prohibited transaction when he caused the IRA LLC to pay him a salary.
The information contained on our Case Law page is for informational purposes only and is not intended to substitute competent legal, tax or investment advice. Much of the information herein merely quotes public information. This information is subject to change at any time and you are encouraged to check back frequently for updates.
