McNulty v. Comm'r of Internal Revenue

Each P established a self-directed individual retirement account (IRA) under I.R.C. sec. 408 and directed assets held in the IRA to invest in a single-member limited liability company (LLC). P-W was the manager of the LLC that her IRA invested in. She directed the LLC to purchase American Eagle (AE) coins and took physical possession of the coins. R determined that P-W received taxable distributions equal to the cost of the AE coins in the year P-W received physical custody of them. There is no dispute that the value of the coins is equal to their cost. P-H directed his IRA to invest in AE coins and a condominium through an LLC. He conceded that he received taxable distributions from these transactions but contested I.R.C. sec. 6662(a) penalties for the failure to report the distributions.

Held: P-W received taxable distributions from her self-directed IRA equal to the cost of the AE coins upon her receipt of the coins.

Held, further, Ps are liable for I.R.C. sec. 6662(a) penalties for substantial understatements of income tax attributable to their failure to report taxable distributions from their IRAs.

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Kathryn S. Windsor, Cory J. Bilodeau, and Thomas P. Quinn, for petitioners.

Molly H. Donohue and Nina P. Ching, for respondent.

OPINION

GOEKE, Judge

Respondent determined income tax deficiencies of $250, 558 and $18, 094 for taxable years 2015 and 2016, respectively, attributable to unreported taxable distributions from petitioners' respective self-directed individual retirement accounts (IRAs). He also determined that petitioners were liable for section 6662(a)^[1] accuracy-related penalties for both years. The parties have settled issues relating to the tax treatment of the distributions from Mr. McNulty's IRA except for whether petitioners are liable for the penalties attributable to underpayments resulting from the unreported distributions.

The remaining issues are whether Mrs. McNulty received taxable distributions from her IRA; we hold she did; and whether petitioners are liable for section 6662(a) penalties; we hold they are.

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Background

The parties have submitted this case for decision without trial under Rule 122. The facts have been stipulated or are otherwise undisputed and included in the record. See Rule 122(a).

Petitioners resided in Rhode Island when they timely filed their petition. They resided there during the years at issue and timely filed joint tax returns for 2015 and 2016. Both petitioners were employed professionals during the years at issue. Mr. McNulty was a plant manager for a sailcloth manufacturer, and Mrs. McNulty was a registered nurse.

1. Petitioners' Self-Directed IRAs

During 2015 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 section 4975 with respect to his IRA. During 2015 he received taxable IRA distributions of $295, 554 and reported $1, 595 of the distributions in gross income. During 2016 he received taxable distributions of $21, 862 and did not report any amount in gross income.

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In August 2015 Mrs. McNulty purchased services from Check Book IRA, LLC (Check Book), through its website, that included assistance in establishing a self-directed IRA and forming an LLC to which she would transfer IRA funds through purchases of membership interests and then purchase AE coins using IRA funds. During 2015 Check Book's website advertised that an LLC owned by an IRA could invest in AE coins and IRA owners could hold the coins at their homes without tax consequences or penalties so long as the coins were "titled" to an LLC. There are in the record no certificates of ownership for the AE coins or any other documentation that establishes legal title.

On August 19, 2015, Mrs. McNulty established a self-directed IRA using Check Book's services and named Kingdom Trust Co. (Kingdom Trust) the IRA custodian. Kingdom Trust is an independent qualified custodian under the Investment Advisers Act of 1940. On August 24, 2015, Check Book formed Green Hill Holdings, LLC (Green Hill). 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.

Petitioners were appointed Green Hill's initial managers and were the managers during 2015 and 2016. Petitioners' personal residence is Green Hill's

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principal place of business. Green Hill opened a bank account over which petitioners had signatory authority. With Check Book's assistance, Green Hill obtained a Federal taxpayer identification number.

2. Funding of Mrs. McNulty's IRA

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

Mrs. McNulty instructed Kingdom Trust to use her IRA funds to purchase membership interests in Green Hill. The IRA purchased membership interests on three occasions during 2015 and 2016 (Green Hill investments). For each investment Mrs. McNulty instructed Kingdom Trust to transfer the purchase price of the membership 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

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dealer. The funds to purchase the coins were transferred from Green Hill's bank account to Miles Franklin.

The invoices from Miles Franklin list Green Hill as the purchaser. However, the shipping labels identified Mrs. McNulty individually or along with her IRA as the recipient of the shipments. 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).^[2] The AE coins purchased with funds from Mrs. McNulty's IRA, through Green Hill, were labeled as such.

The first Green Hill investment and coin purchase occurred in August through September 2015 with the funds transferred from the MetLife annuity. Mrs. McNulty instructed Kingdom Trust to purchase 375, 000 membership units of Green Hill at $1 per unit for an investment of $375, 000. The funds for the purchase were wired from the IRA to Green Hill's bank account. Mrs. McNulty then had Green Hill purchase 320 one-ounce AE gold coins for $374, 000 from Miles Franklin (2015 AE gold coins), and $374, 000 was wired from Green Hill's bank account to Miles Franklin. Miles Franklin shipped the coins to petitioners'

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residence, addressed to "Donna McNulty Green Hill", where they were stored in the safe.

The second Green Hill investment and AE coin purchase occurred in late January through February 2016 with IRA funds that had been transferred from the 401(k). Mrs. McNulty instructed Kingdom Trust to purchase 43, 274.70 membership units of Green Hill at $1 per unit for an investment of $43, 274.70. Kingdom Trust wired $43, 274.70 from the IRA to Green Hill's bank account. Mrs. McNulty had Green Hill use part of the funds to purchase 2, 000 one-ounce AE silver coins for $37, 380 (2016 AE silver coins), and $37, 380 was wired from Green Hill's bank account to Miles Franklin. Miles Franklin shipped the coins to petitioners' residence, to "Green Hill * * * FBO Donna McNulty", where they were stored in the safe.

In August 2016 Green Hill used $6, 731 of the funds remaining in its bank account from the MetLife annuity and 401(k) transfers to purchase four one-ounce AE gold coins, two one-quarter-ounce AE gold coins, and one one-tenth-ounce AE gold coin (2016 AE gold coins). A payment of $6, 746 for the AE coins plus insured shipping was wired from Green Hill's bank account to Miles Franklin. Miles Franklin shipped the coins to "Donna McNulty" at petitioners' residence, where they were stored in the safe.

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The third Green Hill investment occurred in November to December 2016. Around November 20, 2016, Mrs. McNulty instructed Kingdom Trust to purchase 6, 898.92 membership units of Green Hill at $1 per unit for an investment of $6, 898.92. Approximately one week later, she instructed the custodian of her 401(k) to transfer $5, 101 from her 401(k) to her IRA. Thereafter, $6, 989.92 was wired from Mrs. McNulty's IRA to Green Hill's bank account. There was no purchase of AE coins after this investment.

3. Yearend Valuations and Reporting for Mrs. McNulty's IRA

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.

Kingdom Trust required Mrs. McNulty to provide a yearend valuation of her IRA's assets. She completed a valuation form that she submitted to Kingdom Trust on which she identified herself as Green Hill's sole owner and represented Green Hill's value as...