New Tax Court Case Confirms Validity of “Checkbook Control” Self-Directed IRA LLC Structure, According to IRA Financial Group Tax Attorney

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TC Memo 2013-245 confirms legality of using self-directed IRA LLC to make investments without triggering an IRS prohibited transaction

TC Memo 2013-245 confirms legality of using self-directed IRA LLC to make investments without triggering an IRS prohibited transaction

If Mr. Ellis has worked with the IRA Financial Group to establish his “checkbook control” IRA LLC, he would have been told that he could have used an LLC to make an investment in the LLC business, but not would be able to earn a salary

The Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M) recently held that establishing a special purpose limited liability company (“LLC”) to make an investment did not trigger a prohibited transaction as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975. According to Adam Bergman, a tax attorney with the IRA Financial Group, the impact of the impact of this ruling is enormous because it directly supports the position that a retirement account can fund a newly established LLC without triggering a prohibited transaction. This is very important because some people still try to deny the legality of the self directed IRA LLC solution even after a 1996 Tax Court riling and 2001 IRS opinion letter confirmed its validity.

In Ellis, the Tax Court rules that an investment of a husband’s IRA into a newly established LLC was not a prohibited transaction, but the payment of compensation to the husband by the LLC constituted a prohibited transaction. Mr. Ellis caused the creation of the LLC where the founding members were his IRA, with a 98-percent membership interest, and a third party, with a 2-percent interest. Subsequently, Mr. Ellis created his IRA with funds distributed from his 401(k) plan with his former employer, after which the IRA made the initial capital contribution to the LLC. This LLC was formed so that Mr. Ellis could sell used cars. He transferred $319,000 from his 401(k) account to fund the LLC business.

When it comes to making IRA investments the IRS does not state which transactions are allowed, but only states what types of transactions are prohibited. The IRA prohibited transaction rules are outlined in Internal Revenue Code Sections 408 & 4975 and generally involve the prohibition against using IRA funds to buy life insurance, collectibles, or enter into any transaction with a “disqualified person”. As per the Internal Revenue Code, a “disqualified person” is generally defined as the IRA holder and any of his or her lineal descendants or any entity controlled by such person(s). According to Mr. Bergman, “the use of the special purpose self-directed IRA LLC to make the investment was not what caused Mr. Ellis to engage in a prohibited transaction, the problem was that Mr. Ellis paid himself a salary from the LLC which violated Internal revenue Code Section 4975. Although the LLC (and not the IRA) was officially paying the taxpayer's salary, the Tax Court concluded that since the IRA 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 IRA.

“If Mr. Ellis has worked with the IRA Financial Group to establish his “checkbook control” IRA LLC, he would have been told that he could have used an LLC to make an investment in the LLC business, although, the investment would have to be 100% passive and he would not have been able to be involved in the business in any way, including earning a salary, “ stated Fred Horner, a tax partner with the IRA Financial Group.

According to Mr. Bergman, the Ellis case is important for two main reasons. Firstly, it is the first case that directly reinforces the legality of using a newly established LLC to make IRA investments without triggering a IRS prohibited transaction. Secondly, it demonstrates the importance of working with tax professionals who have specific expertise working with the very complex IRS rules concerning using retirement funds to make investments.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market's leading “checkbook control Self Directed IRA Facilitator. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Jaclyn Baily
IRA Financial Group, LLC
+1 (800) 472-0646 Ext: 9
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