Retirement Life - The Benefits Of Being The Ant And Not The Grasshopper!
Retirement Life - The Benefits Of Being The Ant And Not
IRS Field Service Guidance (FSA) Memorandum 200128011 was the first IRS drafted viewpoint that
validated the judgment of Swanson that held that the funding of a brand-new entity by an Individual
Retirement Account for self-directing possessions was not a forbidden transaction pursuant to Code
An FSA is released by the Internal Revenue Service to IRS field representatives to assist them in the
conduct of tax audits.
USCorp is a domestic subchapter S Corporation. Father has a bulk of the shares of USCorp. Dad's 3
minor kids possess the remaining shares of USCorp equally. USCorp remains in the business of
offering Product A and some of its sales are made for export.
Father and each kid own different IRAs. Each of the four Individual retirement accounts got a 25 %
interest in FSC A, an international sales corporation ("FSC").
During Taxable Year 1, FSC A made a cash distribution to its IRA investors, from earnings and
revenues derived from international trade what do you think income associating with USCorp
exports. The IRAs owning FSC A each got an equivalent amount of funds.
Internal Revenue Service recommended that, based upon Swanson, neither issuance of stock in FSC
to Individual retirement accounts nor payment of dividends by FSC to Individual retirement accounts
constituted direct forbidden deal. o IRS cautioned that, based upon facts, transaction could be
Due to Swanson, the Internal Revenue Service concluded that a restricted transaction did not
happen under Code Area 4975(c)(1)(A) in the original issuance of the stock of FSC A to the IRAs.
Likewise, the IRS held that payment of dividends by FSC A to the Individual retirement accounts in
this case is not a prohibited transaction under Code Area 4975(c)(1)(D). The IRS even more
concluded that due to Swanson, the ownership of FSC A stock by the IRAs, together with the
payment of dividends by FSC A to the IRAs, must not make up a prohibited deal under Code Section
The Internal Revenue Service developed that the payments of dividends by an Individual Retirement
Account owned entity to an IRA would not constitute a prohibited transaction. Like the Tax Court in
Swanson, the IRS concluded that an investment into a newly established entity to make IRA
investments would not be a prohibited transaction pursuant to Internal Earnings Code mouse click
the following article Area 4975. The Internal Revenue Service, in confirming the Tax Court's
judgment in Swanson, appeared to suggest that the focus on whether a deal is prohibited pursuant
to Internal Revenue Service guidelines should be analyzed based on how IRA funds are invested not
on the structure made use of to effect the investment.
T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M).
On October 29, 2013, the Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M), held that
establishing an unique purpose restricted liability business ("LLC") making an investment did not
trigger a restricted transaction, as a newly developed LLC can not be deemed a disqualified
individual pursuant to Internal Profits Code Area 4975.
In TC Memo. 2013-245, Mr. Ellis retired with about $300,000 in his section 401(k) retirement plan,
which he consequently rolled over into a freshly developed self-directed IRA.
The taxpayer then developed an LLC taxed as a corporation and had his IRA move the $300,000 into
the LLC. The LLC was formed to engage in the business of used vehicle sales. The taxpayer managed
the used automobile business through the IRA LLC and received a modest salary.
The IRS suggested that the development of the LLC was a prohibited transaction under section
4975, which restricts self-dealing. The Tax Court disagreed, holding that even though the taxpayer
acted as a fiduciary to the Individual Retirement Account (and was for that reason a disqualified
individual under area 4975), the LLC itself was not a disqualified individual at the time of the
transfer. After the transfer, the LLC was a disqualified individual since it was possessed by the Mr.
Ellis's Individual Retirement Account, a disqualified person. In addition, the Internal Revenue
Service also claimed that the taxpayer had participated in a prohibited deal by getting an income
from the LLC. The court agreed with the IRS. Although the LLC (and not the Individual Retirement
Account) was formally paying the taxpayer's salary, the Tax Court concluded that given that the
Individual Retirement Account was the sole owner of the LLC, and that the LLC was the IRA's only
investment, the taxpayer (a disqualified person) was essentially being paid by his Individual
2013-245 is considerable because it directly validates the legality of the self-directed IRA LLC
solution by confirming that a retirement account can money a freshly established LLC without
activating a prohibited transaction. 2013-245 is important because it will certainly silence the little
portion of individuals still trying to deny the legality of the self-directed IRA LLC option even after
the Swanson Case and the 2001 IRS opinion letter confirmed its credibility.