Swanson v. Commissioner

The case of Swanson v. Commissioner 106 T.C. 76 (1996) was a landmark case impacting the self directed IRA industry. This case essentially created a new type of self directed IRA – the self directed IRA LLC. Here are the most important aspects of the case as relate to the self directed IRA structure. To read through the full case description, click here.

In 1985 Mr. Swanson created a new company called Worldwide – which was actually a Domestic International Sales Corporation (DISC). When the company was created, all 2,500 shares of Worldwide’s stock were immediately purchased in entirety by Mr. Swanson’s IRA.

In 1992 the IRS discovered Mr. Swanson’s structure, and deemed that it was a prohibited transaction. The IRS argued that the sale of Worldwide’s stock, along with the subsequent dividend payments from Worldwide into the IRA where prohibited.

Swanson, argued back with the following:

At all pertinent times IRA #1 was the sole shareholder of Worldwide; (2) since the 2,500 shares of Worldwide issued to IRA #1 were original issue, no sale or exchange of the stock occurred; (3) from and after the dates of his appointment as director and president of Worldwide, Mr. Swanson engaged in no activities on behalf of Worldwide 83*83 which benefited him other than as a beneficiary of IRA #1; (4) IRA #1 was not maintained, sponsored, or contributed to by Worldwide during the years at issue; (5) at no time did Worldwide have any active employees

At the end of the day, the court ruled in favor of Swanson, and not only that, but the court also ruled that the IRS reimburse Swanson for reasonable attorney’s fees – which is no small feat. Here is the official statement issued by the court:

We find that it was unreasonable for respondent to maintain that a prohibited transaction occurred when Worldwide’s stock was acquired by IRA #1. The stock acquired in that transaction was newly issued—prior to that point in time, Worldwide had no shares or shareholders. A corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). It was only after Worldwide issued its stock to IRA #1 that petitioner held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person under section 4975(e)(2)(G). Accordingly, the issuance of stock to 89*89 IRA #1 did not, within the plain meaning of section 4975(c)(1)(A), qualify as a “sale or exchange, or leasing, of any property between a plan and a disqualified person”. (Emphasis added.) Therefore, respondent’s litigation position with respect to this issue was unreasonable as a matter of both law and fact.