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McNulty v. Commissioner, 157 T.C. No. 10

McNulty v. Commissioner (157 T.C. No. 10)

On November 18, 2021, the Tax Court issued its opinion in McNulty v. Commissioner, 157 T.C. No. 10. The primary issue presented in McNulty was whether the petitioner-wife received taxable distributions from her self-directed IRA equal to the cost of the American Eagle gold coins upon her receipt of the coins.

Held: All that glitters is gold, but, yeah, distributions happened.

Background to McNulty v. Commissioner

McNulty v. CommissionerDuring 2015, the petitioners decided to establish self-directed IRAs. Before doing so they researched self-directed IRAs online including having the IRA invest in American Eagle (AE) coins through an LLC owned by the IRA. During 2015 and 2016, Mr. McNulty used funds from his IRA to invest in a condominium and AE coins through an LLC structure. He engaged in prohibited transactions under IRC § 4975 with respect to his IRA.

In August 2015, Mrs. McNulty established a self-directed IRA and formed an LLC to which she would transfer IRA funds through purchases of membership interests and then purchase AE coins using IRA funds. On August 24, 2015, the petitioners formed Green Hill Holdings, LLC. Green Hill’s articles of organization, which were filed with the secretary of state of Rhode Island on August 25, 2015, state that Green Hill is a single-member LLC that is a disregarded entity for Federal tax purposes and its sole initial member was Mrs. McNulty’s IRA.

The petitioners were appointed Green Hill’s initial managers and were the managers during 2015 and 2016. The petitioners’ personal residence is Green Hill’s principal place of business. Green Hill opened a bank account over which petitioners had signatory authority. Finally, Green Hill obtained a Federal taxpayer identification number.

McNulty v. Commissioner, 157 T.C. No. 10
Controlling or aggressively helpful? If you have to ask your wife, you’re probably wrong. About everything. And twice on Tuesday.

Mrs. McNulty exercised sole control over her IRA’s investment decisions. She funded the IRA through direct transfers from two qualified retirement accounts. Upon Mrs. McNulty’s instruction $378,487 was transferred from an annuity to her IRA during 2015, and $48,375 was transferred from the 401(k) during 2016. Petitioners did not report any part of these transfers as gross income.

Mrs. McNulty instructed the IRA custodian to use her IRA funds to purchase membership interests in Green Hill.  It did, on three occasions.  For each investment she instructed the custodian to transfer the purchase price of the interests from the IRA to Green Hill’s bank account.

In turn, Mrs. McNulty, as the LLC’s manager, had Green Hill use almost all of the funds to purchase AE coins from Miles Franklin, Ltd. (Miles Franklin), an authorized coin dealer. The funds to purchase the coins were transferred from Green Hill’s bank account to Miles Franklin. The coins were shipped to petitioners’ personal residence and were stored in a safe there (safe) along with coins purchased with funds from Mr. McNulty’s IRA and coins purchased by petitioners directly (collectively, non-IRA assets)

For each year at issue, Miles Franklin provided a yearend valuation of the AE gold coins that it sold. It did not provide a valuation for the AE silver coins. It valued the 2015 AE gold coins as of December 31, 2015, at $347,680 and valued the 2015 and 2016 AE gold coins as of December 31, 2016, at $381,022.

The Returns and the Audit

Petitioners’ 2015 and 2016 tax returns were prepared by a CPA. Petitioners did not seek or receive advice from the CPA about the tax reporting with respect to their self-directed IRAs or their physical possession of AE coins purchased using funds from their IRAs or the LLC through which Mr. McNulty’s IRA held the condo. Nor did they disclose to their CPA that they had physical possession of the AE coins at their residence.

McNulty Nothing To Report
Neither did the McNultys.

In October 2018, the IRS issued a notice of deficiency for 2015 and 2016 to the petitioners, determining that they each received taxable distributions from their IRAs that they failed to report. The IRS also determined that they were liable for IRC § 6662(a), (b)(1), (2) accuracy-related penalties for both years for underpayments due to substantial understatements of income tax and, alternatively, negligence or disregard of rules or regulations, attributed to their failure to report the distributions. Finally, the IRS determined that the petitioners each received taxable distributions upon their receipt of the AE coins equal to the costs of the coins, including, with respect to Mrs. McNulty, taxable distributions of $374,000 and $37,380 for 2015 and 2016, respectively.

The Rules of an Individual Retirement Account (IRA)

For purposes of IRC § 408, an IRA means a trust created or organized for the exclusive benefit of an individual or his beneficiaries but only if the written governing instrument creating the trust meets certain enumerated requirements.[1] One requirement is that the IRA be a trust that is administered by a trustee that acts as a fiduciary.[2] Mrs. McNulty’s IRA is a custodial account. A custodial account may be treated as a trust for purposes of section 408 if it satisfies the requirements of IRC § 408(a).[3]

The trustee must be a bank (as defined in IRC § 408(n)) or such other person who demonstrates to the satisfaction of the IRS that the manner in which it will administer the trust will be consistent with the requirements of IRC § 408.[4] For a person to qualify as a trustee, the person must demonstrate by written application to the IRS that it meets the requirements set forth in the regulations for a trustee.[5] The applicant “must demonstrate in detail its ability to act within the accepted rules of fiduciary conduct.”[6]

McNulty offspring come out and playThe trustee must keep separate and distinct records with full information on each IRA.[7] If assets require safekeeping, the trustee must deposit them into an “adequate vault” and keep a permanent record of deposits and withdrawals from the vault.[8] The IRA asset cannot be commingled with other property except in a common trust fund or common investment fund.[9]

The IRS determined that Mrs. McNulty’s receipt of the AE coins constituted taxable distributions equal to their purchase price. The value of assets distributed from an IRA is included in the distributee’s gross income.[10] The parties do not dispute that the value of the AE coins equaled their cost.

Self-Directed IRAs

An owner of a self-directed IRA is entitled to direct how her IRA assets are invested without forfeiting the tax benefits of an IRA.[11] A self-directed IRA is permitted to invest in a single-member LLC.[12] However, IRA owners cannot have unfettered command over the IRA assets without tax consequences. It is on the basis of Mrs. McNulty’s control over the AE coins that she had taxable IRA distributions.

McNulty QualifiedA qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA.[13] A custodian is required to maintain custody of the IRA assets, maintain the required records, and process transactions that involve IRA assets.[14] The presence of such a fiduciary is fundamentally important to the statutory scheme of IRAs, which is intended to encourage retirement savings and to protect those savings for retirement.

Mrs. McNulty had complete, unfettered control over the AE coins and was free to use them in any way she chose. While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets.[15]

An owner of a self-directed IRA may not take actual and unfettered possession of the IRA assets. It is a basic axiom of tax law that taxpayers have income when they exercise complete dominion over it.[16] Constructive receipt occurs where funds are subject to the taxpayer’s unfettered command and she is free to enjoy them as she sees fit.[17]

McNulty Mine

Mrs. McNulty’s possession of the AE coins is a taxable distribution. Accordingly, the value of the coins is includible in her gross income.

Further, the plain text of IRC § 408 is that an IRA’s bullion that is not in the physical possession of a trustee is a collectible. The flush text does not address the fiduciary or custodial requirements of IRC § 408(a), and the Tax Court refused to interpret it to create an exception to those requirements in the absence of express wording that does so. Accordingly, Mrs. McNulty’s receipt of each purchase of the AE coins paid for with her IRA funds was a taxable distribution pursuant to IRC § 408(d).

(157 T.C. No. 10) McNulty v. Commissioner


  1. IRC § 408(a).
  2. IRC § 408(a)(2).
  3. IRC § 408(h).
  4. IRC § 408(a)(2).
  5. Treas. Reg. § 1.408-2(e)(1).
  6. Treas. Reg. § 1.408-2(e)(2) (defining a trustee); Treas. Reg. § 1.408-2(e)(5) (setting forth the requirements for a nonbank trustee).
  7. Treas. Reg. § 1.408-2(e)(5)(vii)(A).
  8. Treas. Reg. § 1.408-2(e)(v)(B).
  9. IRC § 408(a)(5); Treas. Reg. § 1.408-2(b)(5).
  10. See IRC § 408(d)(1) (providing that the amount received as a distribution from an IRA must be included in gross income and is taxable in the manner provided in IRC § 72).
  11. McGaugh v. Commissioner, T.C. Memo. 2016-28, at *9, aff’d, 860 F.3d 1014 (7th Cir. 2017).
  12. Swanson v. Commissioner, 106 T.C. 76 (1996); Ellis v. Commissioner, T.C. Memo. 2013-245 (holding that an IRA’s investment in a newly formed LLC was not a prohibited transaction because the LLC did not have any members when the investment was made and thus was not a disqualified person at that time), aff’d, 787 F.3d 1213 (8th Cir. 2015).
  13. Treas. Reg. § 1.408-2(e).
  14. See IRC § 408(h), (i); Treas. Reg. § 1.408-2(e)(4), (5)(i)(2), (iii), (vii).
  15. See Ancira v. Commissioner, 119 T.C. 135, 137-140 (2002) (holding no taxable distribution occurred when the IRA owner personally received a check that he could not negotiate, the funds were then used to acquire stock, and the stock certificate was issued in the IRA’s name); McGaugh, T.C. Memo. 2016-28, slip op. at *13-*14 (holding no taxable distribution occurred even if a stock certificate was in the IRA owner’s possession but it issued in the IRA’s name and thus the owner could not realize any benefits from it and did not have constructive receipt of IRA assets); Dabney v. Commissioner, T.C. Memo. 2014-108 (holding a taxable distribution occurred when real estate was titled in the IRA owner’s name).
  16. See Commissioner v. Banks, 543 U.S. 426, 434 (2005); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
  17. Ancira, 119 T.C. at 138-139.


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