We have for many years counseled clients to beware of arrangements that give IRA owners complete “checkbook control” over their IRA assets. Exactly where that line is drawn is unclear. The court acknowledged that an IRA owner may act as a “conduit or agent” of the IRA custodian for certain purposes, but only so long as that does not result in constructive receipt of IRA assets. Personal control over the IRA assets by an IRA owner is against the very nature of an IRA.” This, the opinion suggests, could cause the nominal trustee or custodian to not be the trustee or custodian in fact. “Independent oversight by a third-party fiduciary to track and monitor investment activities is one of the key aspects of the statutory scheme…. While the court acknowledged that an IRA owner always has the right to fully direct the investment of his/her IRA assets, including investing those assets into a single-member LLC, “IRA owners cannot have unfettered command over the IRA assets without tax consequences.” Specifically, the court noted that an IRA custodian “is required to be responsible for the management and disposition of property held in a self-directed IRA,” including maintaining custody of the assets, maintaining required records and “processing transactions” involving IRA assets. It first went through a rather lengthy discussion of why the structure here violated the basic rule of Code section 408(a) that an IRA trustee must be a bank or IRS-approved non-bank custodian who will “administer” the trust in accordance with the requirements of section 408. In fact, however, the court treated this as a secondary argument. If the court relied solely upon the foregoing analysis, the case would be rather unremarkable. However, based on the plain language of the text and legislative history, the court found that no such exception exists. ” Some marketers have seized on this language as indicating that the custody requirements do not apply to coins. With respect to bullion, the exception applies “if such bullion is in the physical possession of a trustee. Internal Revenue Code section 408(m) generally prohibits the investment of assets of an IRA (and any self-directed qualified plan account) in certain “collectibles” including precious metals however, there are exceptions for certain coins (AE coins meet this exception) and bullion. The above facts appear to have been discovered on audit of the taxpayer’s individual returns, though it is not clear how the details were uncovered. The court stated that the IRA custodian “did not have any role in the management of, the purchase of the AE coins, or the administration of assets or the IRA assets.” The custodian did file annual Forms 5498 reporting the value of the IRA assets, but solely relied on the owner’s reported valuation for the LLC. She then used the bank account to buy the coins and used invoices and shipping receipts to identify the LLC as the actual purchaser. With the servicer’s assistance, the wife directed the IRA custodian to form a single-member LLC for which she was appointed manager, and to transfer cash from the IRA to a bank account established in the name of the LLC. The actual custodian was a separate trust company. The facts indicate that she engaged a third-party servicer who advertised the purported tax loophole that allowed individuals to purchase American Eagle coins with their IRAs and store them at home. No prohibited transactions were asserted against the wife the sole question is whether she violated the requirement that the assets of an IRA must be held in the custody of a bank or a qualified non-bank custodian. The facts suggest that the husband – who also had a checkbook LLC invested in coins and real estate – had engaged in some form of prohibited transaction and thus did not contest the assertion that he had a deemed distribution of his IRA assets, only resulting penalties. The case actually involved self-directed IRAs owned by a husband and wife. In doing so, the court found that she had “unfettered command” over the her IRA assets, with no “independent oversight” by the custodian, resulting in a deemed distribution of those assets. More importantly, however, the taxpayer did not buy the coins directly through her IRA, but using a separate bank account in the name of a “checkbook LLC” created by and held by her IRA. Tax Court reached the not surprising conclusion that an individual who purchased American Eagle gold coins using her IRA received a de facto distribution of those coins when she took physical possession and stored them at home.
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