I already have created an IRA LLC owned by 2 IRA's, mine and my wifes. What is in the IRS manual that prohibits this?
A: As previously mentioned, the IRS manual is not the law of the USA, so what's in the manual is irrelevant, because you cannot rely upon that as a source of legal authority.
I spent months searching and listening to both sides with competing interests. I even had a tax attorney set it up for me who provided an opinion letter.
A: If you received a "covered opinion" from a tax attorney, then you can hold the attorney liable for malpractice if his/her position was not substantially justified. Which would cover your losses, assuming that the attorney has sufficient professional liability insurance and assets to pay a damage award.
Regardless, I don't have access to your lawyer's opinion, so I can't evaluate it and comment intelligently (or unintelligently, as the case may be).
As a matter of statistical certainty, 50% of all lawyer opinions are wrong. That's why there are judges -- to declare a winner in each case -- which also means declaring a loser. So, just because you have an opinion letter, doesn't mean it's a correct opinion. A 50% chance of showers can produce rain, or not -- depending upon what actually happens in the physical universe.
Custodians don't want you to do it because it deprives them of control and fees. Setup companies want you to do it as that is their business. There is no arbiter except the customer, or an auditor, after it is too late. Regardless of my bias, I objectively decided that the companies were right as I could find nothing anywhere that said it was wrong (except for one custodian who made that case). And by the way, significant weight was given to my decision by the fact that custodians will do it and facilitate it even tho it is not in their interest. If they believed it was illegal, they would not do it.
A: Lots of things never get litigated. The IRS cannot take a position in Tax Court that is not "substantially justified." If the Service doesn't see a lot of people creating IRA LLCs with disqualified persons joining together, then the Service is not going to expend a lot of resources arguing about it in court. Even Uncle Sam has a budget, and the litigation office takes the cases it deems to provide the most bang for the buck.
So, you may get away with your current IRA model forever. But, I don't have the luxury of saying, "go for it." In this forum, I "justanswer" questions about the law. That means making a neutral dispassionate analysis and drawing a conclusion in the same manner as if I were sitting in judgment on the U.S. Tax Court bench. And, in my view, what you are now contemplating violates the Internal Revenue Code, because the other party in your transaction is your spouse, which means that she owns at least 50% of the value of the IRA LLC, and that fails the constructive ownership test of IRC 267(c)(2).
By owning an LLC with your spouse using assets from your IRA, you are commingling resources. She is getting the benefit of your IRA money, and you are getting the benefit of hers, because you are combining that money to accomplish a joint goal -- which apparently cannot be accomplished with only your money -- otherwise, you wouldn't be here asking the questions, because you wouldn't have any disqualified person issue. it would all be your IRA money and your LLC.
My understanding is that the 2 IRA's are not related parties to each other, and that would not even make sense. They cannot do business with each other, invest in each other, exchange assets, or any of that. In my mind, they simply each invested independently in the same company and where is that prohibited? So is this your major problem here, or is it the next part, or both?
A: Your investment is not in a company with $100,000,000 in assets (or if it is, then I don't know why you're here asking these kinds of complex tax questions, because you can hire the best lawyers in the business (except for me, because I'm not for hire anymore).
You're investing with your spouse in a small trading account with the objective to share profits, accomplished by your efforts. Thus you are transferring your personal efforts into profits of your spouse, and that is a prohibited transaction.
The next part is that I want the domestic IRA LLC to buy a majority share of a new, foreign LLC.
A: For clarity, I'm unaware of any LLC entity form available outside of the USA. So, while I understand what you're saying, the term "foreign LLC" may be a nonsequitur. What you're really creating is an offshore corporation or partnership. No matter. I don't think that your IRA investing in a foreign business is unlawful. I think that investing in the business with your spouse is unlawful, because she can drain profits from the business and bring them back into your marital estate.
I can find nowhere that this is a prohibited investment. It is not an insurance policy, collectible, or alcoholic beverage, it is an investment company. In addition, there will be a second member/owner, which will be a minority owner, and yes, that member will be a related party, me and my wife. But I read in the code, or some distillation of it, that this is OK because the related party member will own less than 50% of the company. So again, is it part 1, the IRA LLC that is a problem for you, or part 2 where that LLC invests in the same foreign company as a related minority owner, or both? If you can point me to the prohibiting language in the irc it would be helpful and again, I will make sure that you get your credit. Thank you for your help and patience with this difficult issue.
A: I explained this in the second paragraph of my first answer:
- IRC 4975 governs prohibited transactions among disqualified persons. Disqualified persons include owners of 50% or more beneficial interest in a partnership 4975(e)(2)(E)(ii). For partnerships, which include LLCs as a matter of well-established federal tax law, constructive ownership rules based upon IRC 267(c) apply to 4975(e)(2)(E)(ii). Under IRC 267(c)(2) a family member owns the partnership share owned by his or her spouse.
Therefore, by investing in the foreign (or domestic) LLC with your spouse, you each either own a joint 100% of the LLC, or you each own 50%, either of which makes your transfer of assets into the LLC a prohibited transaction to a disqualified person.
That's my objective analysis and conclusion. In my opinion, to the extent that your IRA is doing business with your spouse as a coinvestor, you are violating the IRC. It's a close call, but that's my judgment. If someone has a contrary argument, I'll certainly entertain it -- but the case law that you've provided thus far, and the commentary from the commercial website, doesn't convince me -- I think the case law is inapposite, and the legal conclusion of the website incorrect.
But, reasonable minds may differ.
Hope this helps.