Based on Adam Bergman, a tax lawyer with the Gregory Law Group PLLC, supports the position that the retirement account can finance a recently recognized LLC without activating a prohibited trade. That is essential because many people still attempt to deny the legality of the self directed IRA LLC alternative even after a 1996 Tax Court riling and 2001 IRS opinion letter affirmed its validity.
In Ellis, the Tax Court rules that the investment of a husband’s IRA into a recently recognized LLC wasn’t a prohibited trade, but the payment of compensation to the husband from the LLC made up a prohibited trade. Mr. Ellis caused the development of the LLC where the founding members were his IRA, with a 98-percent membership interest, and a third party, with a 2-percentage interest. Later, Mr. Ellis created his IRA with funds spread from his 401k plan with his former company, after which the IRA made the first capital contribution to the LLC. This LLC was formed so that Mr. Ellis could sell used cars. Mr. Ellis transferred $319,000 from his 401k account to finance the LLC company.
In regards to making IRA investments- the IRS will not say which trades are permitted, but merely says what kinds of trades are prohibited. The IRA prohibited trade rules are summarized in Internal Revenue Code Sections 408 & 4975 and usually include the prohibition against using IRA funds to purchase life insurance, collectibles, or enter into any trade with a “disqualified individual”. In accordance with the Internal Revenue Code, a “disqualified individual” is typically defined as the IRA holder and some of their lineal descendants or some entity controlled by such individuals. In accordance with Mr. Bergman, “the usage of the unique function self directed IRA LLC to make the investment wasn’t what caused Mr. Ellis to participate in a prohibited trade, the issue was that Mr. Ellis paid himself a salary from the LLC which offended Internal revenue Code Section 4975. Even though the LLC and not the IRA was formally paying the citizen’s salary, the Tax Court reasoned that since the IRA was the sole holder of the LLC, which the LLC was the IRA’s only investment, the citizen a disqualified individual was basically being paid by his IRA.
In accordance with Mr. Bergman, the Ellis case is essential for two primary reasons. Primarily, it’s the initial instance that directly strengthens the legality of utilizing a recently recognized LLC to make IRA investments without activating a IRS prohibited trade. Second, it illustrates the need for working with tax professionals that have particular expertise working with all the quite complicated IRS rules concerning using retirement funds to create investments.
The IRA Financial Group was set up with several top law firm tax and ERISA attorneys who’ve worked at a few of the biggest law firms in America, including White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.