Tax Court Addresses Self-Directed IRA

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The recent Tax Court opinion in McNulty v. Commissioner, 157 T.C. No. 10 (2021) addressed whether distributions from a purported self-directed IRA were taxable.  The Court also took up the question of whether tax penalties were applicable under section 6662(a) and (b)(1).  Below is a summary of the facts and the key holdings/points of law.  We cover the case – and every other Tax Court case – in our weekly Tax Court in Brief series.

During tax year 2015, Mr. and Mrs. McNulty (the “Petitioners”) decided to establish self-directed IRAs. In particular, the Petitioners wanted to invest in certain assets through LLCs owned by the self-directed IRAs. In August 2015, Mrs. McNulty (1) established a self-directed IRA, naming Kingdom Trust Co. the IRA custodian; and (2) formed Green Hill Holdings, LLC (“Green Hill”), a single-member LLC with Mrs. McNulty’s IRA serving as Green Hill’s sole initial member (and the Petitioners serving as Green Hill’s initial managers).

Mrs. McNulty funded the IRA with direct transfers from two qualified retirement accounts during 2015 and 2016. She also instructed Kingdom Trust to use the IRA funds to purchase membership interests in Green Hill. Then, Mrs. McNulty, as manager, used the Green Hill funds to purchase American Eagle coins, and the coins were received and held by the Petitioners at their personal residence.

On October 30, 2018, the Internal Revenue Service issued to Petitioners a notice of deficiency for 2015 and 2016, determining (1) the Petitioners received distributions from their IRAs, and (2) the Petitioners were liable for Section 6662(a) and (b)(1) and (2) accuracy-related penalties for both years. The Petitioners petitioned the Tax Court and submitted the case for decision without trial under Rule 122.

Key Issues:

Primary Holdings:

Key Points of Law:

Insight: McNulty underscores the basic requirements for IRAs under Section 408 of the Internal Revenue Code. In particular, taxpayers should be mindful of the restrictions on IRAs—e.g., owners of self-directed IRAs may not take actual and unfettered possession of IRA assets. Further, the Tax Court notes that, with respect to the reasonable cause defense to accuracy-related penalties, failure to disclose pertinent facts to a taxpayer’s CPA shows a lack of good faith in tax reporting.


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