What the Recent McNulty vs. Commissioner Tax Court Case Suggests About This Risky IRA Practice

John Bowens, National Education Specialist, breaks down a recent tax course case that involved a Checkbook LLC IRA.

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MCNULTY v. COMMISSIONER OF INTERNAL REVENUE, examined the issue of the IRA owner having “unfettered control” over the assets held in the IRA account. Where this leaves the option of checkbook control remains a question. In the recent IRS case, the taxpayer formed an LLC, funding the LLC with cash from their IRA, then purchased precious metals.

The client physically stored these metals at their personal property. The tax court ruled this was a prohibited transaction, and the client suffered stiff consequences and penalties, effectively distributing the entire account and imposing a 20-percent penalty on top of the distribution tax.

The ruling reiterated the importance of a custodian when IRA assets are involved: “A custodian is required to maintain custody of the IRA assets, maintain the required records, and process transactions that involve IRA assets…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.”

Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional….(read more)

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