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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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I need a tax attorney. Knows about IRA LLCs. Foreign IRA

Customer Question

I need a tax attorney. Knows about IRA LLC's. Foreign IRA LLC's. Mixing personal funds with IRA LLC funds. Anybody up to the challenge?
Submitted: 1 year ago.
Category: Tax
Expert:  socrateaser replied 1 year ago.
Hello.

What's up?
Customer: replied 1 year ago.

Hello. I am a Forex trader. The ultimate question at the end will be short and sweet, but a bit of complicated background is required first, so please bear with.


I have created a domestic IRA LLC with 2 members, my ira and my wife's ira. I did this because I needed to fund a foreign forex brokerage account and self-directed ira custodians will not do that directly. I conducted much research and professional consultations on IRA LLC's and ultimately decided that it was legal to take that approach. So, I established 2 separate foreign brokerage accounts, one with non-ira money and the other from the LLC. Then, long story short, the broker reduced the leverage needed to trade my systems safely and successfully, so I had to stop trading and withdraw the funds.


The next things to say at this point are 1.) I cannot trade with domestic, US based brokers because the leverage is too low, and also the other restrictions imposed by the infamous Dodd-Frank act. Therefore, I must use a foreign broker who is not encumbered by this act. 2.) The problem with this is that there are very few brokers who will accept US residents as clients I suppose because the DF act somehow affected them too. The few brokers that will accept US residents are all missing one or more features that I need to trade safely and successfully so this brings me to the real crux of the matter.


To get around these obstacles, I need to establish a foreign LLC through which I can do my trading and have the entire world of Forex brokers available to me, many of which offer all the features needed by any trader. So what I want to do is create the foreign company, and then fund it from two sources: personal funds and the existing domestic LLC which is owned by the 2 IRA accounts.


My previous research told me that the IRA LLC structure is tolerated by current IRS regs. That means that the two husband and wife IRAs are not related parties to each other and so it is OK for them to invest separately in the same LLC. My further research says that a company is not a related party if it is not at least 50% owned by related parties. In this case, the personal capital contribution of my wife and I to the foreign LLC would be about 30% while the domestic IRA LLC contribution would be about 70%. Therefore, it seems to me that it would not be a prohibited transaction, but I want to get an independent, professional opinion on it. I hope I have been clear on the issue. If not, please let me know. Thanks very much.

Expert:  socrateaser replied 1 year ago.
Okay, that's a pretty gnarly scenario.

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, based upon the plain meaning of the statute, either you and your spouse would each own a joint 100% of the foreign LLC, regardless of your respective capital contributions, or, arguably each of you would own at least 50% of the LLC, which means that your spouse would be a disqualified person, and your IRS would be subject to a 15% tax on your contributions to the foreign LLC.

I realize that you have already stated that the IRS "tolerates" this issue "with respect to current IRS regs." If you want me to consider this issue, please cite the regulation in support for this assertion, so that I can review and comment. Otherwise, my position at this point is that your contemplated transaction violates IRC 4975.

Hope this helps.
Customer: replied 1 year ago.

Thank you. I think the beginning of this starts with the ongoing debate about the validity of IRA LLC's. The internet is full of information about it, but here is one site that I selected that you may want to look at http://www.irafinancialgroup.com/selflaw.php/


 


We can research this till the cows come home, and I have, and I ultimately decided that it is legal, although riddled with many grey areas. So I would like us to begin by assuming that the domestic IRA LLC that is owned about 30/70 by our 2 IRA's is a legitimate IRA entity that can invest in anything that is not prohibited. As far as I can tell, investment in a foreign company is not prohibited.


 


Therefore, if a brand new foreign company is created with member 1 being the domestic IRA LLC having 70% ownership, and member 2 is a related party having 30% ownership (less than 50%), then where is the problem?


 


Thanks.

Expert:  socrateaser replied 1 year ago.
There's no problem, because you have front-loaded the premise that owning the LLC in combination with a family member is lawful. In my opinon, the premise is false, therefore the LLC violates the IRC. But, if you want to presume that the premise is true, then the LLC is legal, because there is no prohibition (that I can find) which prohibits you from owning a foreign LLC within an IRA.

Hope this helps.
Customer: replied 1 year ago.

OK, thanks. We are done then and I appreciate your help. But for the record, family members do not own the domestic LLC. It is their IRA's that are the owners and they are separate entities whose owners are not owners of the company, and the IRAs are not related parties to each other. The owners of the IRAs are managers of the company, not members. There's the grey area that Swanson vs. Commissioner, and subsequent IRS pubs are still being argued about.


 


Again, thank you for your opinion and best of luck always.

Customer: replied 1 year ago.
Relist: Other.
satisfied, but want more.
Expert:  socrateaser replied 1 year ago.

Hello again,

A few more thoughts:

1. Swanson v. Commissioner, 106 T.C. 76 (1996), concerns two separate transactions; (1) Swanson created a subsidiary business from the proceeds of the IRA in which he remained in control. But, Swanson didn't get any economic benefit from the transaction, because he didn't pay himself to manage the business entity. The IRA received all of the benefit -- so, there was no prohibited transaction or disqualified person involved. It was all Swanson's IRA -- and Swanson prevailed against the IRS on this issue; (2) Swanson sold a real estate property, in which his daughter subsequently resided and Swanson paid many of the bills for the property after sale. Swanson lost this part of the case to the IRS, because there was a disqualified person involved (his daughter).

2. U.S. Tax Court decisions (such as Swanson) are not the law of the United States of America. See, e.g. Hubbard v. US, 359 F. Supp. 2d 1123, fn. 5 (USDC WD WA 1/13/2005). The IRS can absolutely ignore a Tax Court decision, except with regard to the taxpayer involved in the case itself. Only if a federal district or appellate court declares the opinion precedent, is it valid for anyone else. So, while many tax practitioners tend to rely on U.S. Tax Court opinions, tax attorneys generally know that such a position may be fatal to a client's case, if the Tax Court opinion is appealed to an Article III court.

3. IRS Tax Publications are also not the law of the USA. Brombach v. C.I.R., T.C. Memo. 2012-265 (USTC 9/12/2012). Even the U.S. Tax Court itself recognizes this fact. In the entire history of the IRS, no taxpayer has ever held the Service liable for a mistake in one of its Publications -- because, the courts have held that taxpayers rely upon them "at their peril." Bizarre, but true.


The reason why I'm trying to cover all this, is because you expressly asked for a tax attorney (not a CPA, EA, tax preparer, etc.). And, while I have great respect for my colleagues who undertake their roles re tax preparation, accounting, auditing and dealing with the intricacies thereof (most of which, I routinely screw up myself, because they are so damn convoluted, and I don't know all the necessary details), reliance upon commercial websites that are selling IRA or other tax-related services is perilous, because they have a vested interest in avoiding the part of the story that does not cause the buyer to purchase their services.

Convincing an IRS internal or field auditor merely requires good documentation. The personnel follow the rules set forth for them in the Internal Revenue Manual.

Convincing the court that you have a valid legal argument to overcome the unambiguous language of the U.S. Tax Code is a very different animal -- especially when faced by an IRS litigation attorney on the other side of the courtroom. I understand your desire to accomplish your goal, and I'd like to see you do it. But, if were headed to court on this issue and your behalf, and you gave me your hypothetical as presented in this Q&A session, I'd be telling you to "think about a settlement," because by the narrowest of margins (50% v. 49%) -- you are going to lose to the IRS at trial.

Please don't shoot the messenger here. I'm trying to save you from a very costly error.

 

Note: When you "Relist" a question it means that I don't get paid. So, if you're satisfied with my services, then I would greatly appreciate your providing me with a positive rating, before you relist your question. Otherwise, I will receive nothing at all for my efforts in your behalf.

Hope this helps.

Customer: replied 1 year ago.

OK - sorry, I did not how the relist works. I was hoping to get a second opinion, like I would from a doctor! So far, I have not had contact with anyone else but if I decide to, I will have to figure out how that works. I have little experience with this system, but I will make sure that you get your credit.


 


Now back to my issue, I am still confused. What part or parts do you have a problem with and can you cite me the IRS language that prohibits it. My situation itself, and goal, are pretty simple really although the law regarding it seems not to be. So here's the short summary, one more time.


 


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? 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. 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.


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?


 


The next part is that I want the domestic IRA LLC to buy a majority share of a new, foreign LLC. I can find nowhere that this is a prohibited investment. It is not an insurance policy, collectable, 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.


 


 

Expert:  socrateaser replied 1 year ago.
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.

 

socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34831
Experience: Retired (mostly)
socrateaser and 6 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Thank you. Your opinion is very clear now. I am trying to "rate to finish" but i am being denied access to the subsequent page so I will have to contact customer support and work it out. I will see it through asap so you will get your rating (which will be excellent, by the way!). Thanks again.

Expert:  socrateaser replied 1 year ago.
You're welcome. We're all good here. Happy Labor Day Holiday to you and yours!

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