Distribution of Coins from Self-Directed Check Book IRA Taxable; Penalties Imposed

A. Mcnulty, 157 TC —, No. 10, Dec. 61,950

Delivery of coins to the owner of a self-directed “Check Book IRA” was taxable income even though she took the coins as manager of the IRA’s LLC. 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. The fact that the Check Book IRA website said this would not be treated as a taxable distribution did not constitute reasonable cause for escaping understatement penalties.

Background

A husband and wife each established a self-directed IRA and directed assets held in the IRA to invest in a single-member limited liability company (LLC). The wife was the manager of the LLC that her IRA invested in. She directed the LLC to purchase American Eagle coins and took physical possession of the coins. The IRS treated this as a taxable distribution in the year she received physical custody of the coins. The husband directed his IRA to invest in these kinds of coins and a condominium through an LLC. He conceded that he received taxable distributions from these transactions but contested understatement penalties for the failure to report the distributions.

Custody

According to the court, IRA owners cannot have unfettered command over the IRA assets without tax consequences. A qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds.

Penalties

Understatement penalties were imposed even though the Check Book IRA website said that taking possession of the property as manager of the LLC would not be treated as a taxable distribution. The court was skeptical about treating viewing the Check Book’s website as seeking professional advice upon which a reasonable person could rely. The taxpayers did not seek or receive any advice from their C.P.A., who prepared their returns, regarding their self-directed IRAs. They failed to disclose the relevant information to their C.P.A. They were both professionals. They liquidated nearly $750,000 from their existing qualified retirement accounts to invest in a questionable internet scheme without disclosing the transactions to their C.P.A.