What about Swanson v. Commissioner? - Posted by Penny
Posted by Penny on May 27, 2007 at 18:37:47:
Please help me understand where I’ve misunderstood things. I’m not an attorney and I don’t play one on TV.
I read Swanson V. Commissioner. It basically ruled that an IRA could own a company (a C-corp in this case) with the IRA beneficiary as manager. One important distinction was that the manager could not receive any benefits (salary or other compensation), whatsoever, for services as manager in order to avoid the arms length/self dealing situations. Only the IRA benefitted in this case through the receipt of corporate dividends and was the sole shareholder upon the corporation’s formation, so how the corp was formed also seemed relevant. The IRS challenge of prohibited transactions was ruled invalid for this portion of the case.
As we all know, there are custodian/trustees out there that will allow a truly self directed IRA to invest in real estate and that IRS rules need to be followed to avoid prohibited transactions/disqualified persons involvement. The main issues that arise with using the trustee are timeliness in processing investment requests and fees for doing so.
What I have seen outlined in Diane Kennedy/Dolf de Roos book, “The Insider’s Guide to Tax-Free Real Estate Investments - Retire Rich Using Your IRA”, is the use of an IRA LLC. Your trustee is instructed to invest in the IRA LLC where the IRA is the sole member, then you as the manager have checkbook control of the invested funds to purchase allowable investments for the benefit of the IRA. It reduces trustee fees for writing checks, etc. and allows more timely action when you make offers on real estate.
This is discussed in some depth in chapters 9 and 10 of the book. It is also sometimes referred to as a checkbook IRA, checkbook control, etc. and there are various online companies that offer this with fees all over the map.
It seems that the Operational Agreement for the IRA LLC needs to have “special language” to address prohibited transactions, disqualified persons and other formation stuff, and that is my fundamental question. What is this special language needed?
Or where am I wrong with this?
Thanks for your help and patience, as I do not want to foul up my IRA.