Should You Start Planning For Retirement In Your Twenties?

IRS Field Service Guidance (FSA) Memorandum 200128011 was the first IRS prepared viewpointthat validated the ruling of Swanson that held that the financing of a brand-new entity by anIndividual Retirement Account for self-directing possessions was not a restricted deal pursuant tolink web site Code Section 4975.

An FSA is issued by the IRS to IRS field agents to guide them in the conduct of tax audits.

USCorp is a domestic subchapter S Corporation. Daddy possesses a majority of the shares ofUSCorp. Dad's 3 minor kids own the remaining shares of USCorp equally. USCorp remains in thebusiness of offering Product A and some of its sales are made for export.

Dad and each kid own different Individual retirement accounts. Each of the 4 IRAs got a 25 %interest in FSC A, an international sales corporation ("FSC"). USCorp participated in service andcommission agreements with FSC A. FSC An agreed to serve as commission agent in connectionwith export sales made by USCorp, in exchange for commissions based upon the managementpricing guidelines appropriate to FSCs. USCorp likewise agreed to carry out particular services onbehalf of FSC A, such as soliciting and negotiating contracts, for which FSC A would reimburseUSCorp its actual costs.

During Taxable Year 1, FSC A made a money distribution to its Individual Retirement Accountshareholders, from revenues and revenues stemmed from foreign trade income relating to USCorpexports. The IRAs owning FSC A each received an equal amount of funds.

IRS recommended that, based on Swanson, neither issuance of stock in FSC to Individual retirementaccounts nor payment of dividends by FSC to Individual retirement accounts made up directrestricted deal. o Internal Revenue Service alerted that, based upon realities, deal could be indirect.

Because of Swanson, the Internal Revenue Service concluded that a forbidden deal did not happenunder Code Section 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 inthis case is not a forbidden transaction under Code Section 4975(c)(1)(D). The Internal RevenueService additionally concluded that because of Swanson, the ownership of FSC A stock by the IRAs,together with the payment of dividends by FSC A to the IRAs, ought to not constitute a prohibited

transaction under Code Section 4975(c)(1)(E).

The significance of FSA 200128011 is that the IRS confirmed the Tax Court's judgment in Swanson,which ruled versus the Internal Revenue Service. Like Swanson, the FSA recommended InternalRevenue Service representatives performing audits that the creation and ownership of a brand-newentity by an Individual Retirement Account for investment functions would not be considered arestricted deal under Code Section 4975. The Internal Revenue Service established that thepayments of dividends by an Individual Retirement Account owned entity to an IndividualRetirement Account would not make up a forbidden deal. Like the Tax Court in Swanson, the IRSconcluded that an investment into a newly established entity making IRA financial investmentswould not be a forbidden deal pursuant to Internal Income Code Section 4975. The Internal RevenueService, in verifying the Tax Court's ruling in Swanson, appeared to recommend that the focus onwhether a deal is forbidden pursuant to Internal Revenue Service rules should be analyzed basedupon how Individual Retirement Account funds are invested not on the structure made use of toeffect the investment. In other words, the kind of financial investment made with IndividualRetirement Account funds once contributed to the newly formed entity will figure out whether thetransaction news is prohibited under Internal Income Code Area 4975, not the car that was madeuse of to make 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 thatestablishing an unique purpose limited liability company ("LLC") to make an investment did notactivate a forbidden deal, as a recently developed LLC can not be deemed a disqualified individualpursuant to Internal Income Code Area 4975.

In TC Memo. 2013-245, Mr. Ellis retired with about $300,000 in his area 401(k) retirement plan,which he subsequently rolled over into a recently created self-directed Individual RetirementAccount.

The taxpayer then created an LLC taxed as a corporation and had his Individual Retirement Accounttransfer the $300,000 into the LLC. The LLC was formed to take part in the business of used carsales. The taxpayer managed the utilized vehicle business through the IRA LLC and received amodest income.

The IRS said that the development of the LLC was a restricted transaction under section 4975,which prohibits self-dealing. The Tax Court disagreed, holding that despite the fact that the taxpayeracted as a fiduciary to the IRA (and was therefore a disqualified person under section 4975), the LLCitself was not a disqualified person at the time of the transfer. After the transfer, the LLC was adisqualified individual since it was possessed by the Mr. Ellis's IRA, a disqualified individual.Furthermore, the Internal Revenue Service likewise declared that the taxpayer had actually takenpart in a prohibited transaction by receiving an income from the LLC. The court agreed with theInternal Revenue Service. The LLC (and not the Individual Retirement Account) was formally payingthe taxpayer's income, the Tax Court concluded that given that the IRA was the sole owner of theLLC, and that the LLC was the IRA's only investment, the taxpayer (a disqualified individual) wasessentially being paid by his Individual Retirement Account.

2013-245 is substantial since it directly validates the legality of the self-directed IndividualRetirement Account LLC option by verifying that a retirement account can fund a recently

established LLC without triggering a prohibited transaction. 2013-245 is essential since it willcertainly silence the small portion of people still trying to deny the legality of the self-directed IRALLC solution even after the Swanson Case and the 2001 IRS viewpoint letter verified its credibility.