Swanson v. Commissioner, 106 T.C. 76 (1996)
Swanson v. Commissioner, 106 T.C. 76 (1996) is a landmark case confirming the ability of IRAs to create and invest in entities. Let’s delve into the details:
Background:
- Mr. Swanson, the central figure in this case, orchestrated a strategic move involving his IRAs. He set up two corporations, with the IRAs acting as their owners. Importantly, Mr. Swanson held the position of director in both corporations but did not personally own any stock.
Key Legal Points:
- Initial Formation and Stock Purchase:
- The Tax Court ruled that the initial formation of the company by the IRA was not a prohibited transaction under Internal Revenue Code Section 4975.
- Why? Because the sale of stock to the IRA did not qualify as a sale or exchange of property between a plan (the IRA) and a disqualified person, as defined in Code Section 4975©(1)(A).
- Dividends and IRA Assets:
- The court also clarified that the receipt of dividends by the IRA from the company was not a prohibited transaction.
- Why? Because these dividends did not become IRA assets until they were actually paid to the IRA.
- Management Functions:
- Mr. Swanson’s active involvement as a director of the company did not constitute a prohibited transaction.
- In other words, his performance of management functions within the company did not violate the rules governing IRAs.
- Entity Status:
- However, the Tax Court did acknowledge that after the creation of the entity, it became a “disqualified person.”
- This designation highlights the need for vigilance in ensuring ongoing compliance with IRA regulations.
Takeaway:
- The Swanson case affirmed that IRAs have the legal capacity to engage in business ventures by forming and investing in entities.
- While this ruling provided clarity, it also emphasized the importance of adhering to IRS guidelines to maintain the tax-advantaged status of IRAs.
