Another IRS attack on gold coins

Discussion of the Gold portion of the Permanent Portfolio

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dopplerdave
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Another IRS attack on gold coins

Post by dopplerdave » Fri Dec 03, 2021 11:56 am

From the WSJ. Sorry for the long post, but the story is behind their paywall. (Bold emphasis is mine). This is really an outrage. She appeared to do everything right but got screwed anyway. Let's hope they win on appeal.
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A Couple Stored IRA Gold at Home. They Owe the IRS More Than $300,000.
Laura Saunders
6-8 minutes

It’s official: Owners of individual retirement accounts with assets invested in gold and silver coins can’t store them in a safe at their home.

So ruled the judge in a recent Tax Court case, Andrew McNulty et al. v. Commissioner. The decision will cost Mr. McNulty and his wife Donna dearly—taxes of nearly $270,000 on about $730,000 of IRA assets, plus penalties likely to exceed $50,000.

The ruling disallows a scheme that was heavily promoted several years ago, when radio and internet ads touted the benefits of using IRA assets to buy gold and silver coins and then store them at home or in a safe-deposit box. Promoters based pitches on a perceived ambiguity in the law, despite warnings from the Internal Revenue Service and legal specialists.

These pitches are less common now, but they’re still around. Savers who have bought into them or are considering such a move should reconsider right away.

The McNulty case has a broader lesson as well: It’s a cautionary tale showing how dangerous it can be to invest retirement-plan funds in alternative assets without proper guidance.

“Good tax advice may appear expensive, but it’s not as costly as blowing up your IRA,” says Warren Baker, an attorney with Fairview Law Group in Seattle who specializes in alternative-asset IRAs.

Here’s what happened in the McNulty case, starting with some background.

Savers who have tax-favored retirement plans such as traditional IRAs, Roth IRAs, and Solo 401(k)s usually invest the assets in securities like stocks, mutual funds and exchange-traded funds.

But they don’t have to. The law gives retirement-plan owners broad latitude in how they invest funds, as long as it’s not in collectibles like artwork, jewelry, antique furniture, cars, wine and such.

Ami Givon, a benefits attorney with GCA Law Partners in Mountain View, Calif., says he has seen retirement accounts holding investments in real estate, litigation funding, deeds of trust and cryptocurrency. Mr. Baker says he knows of an IRA investment in a sports franchise, and ProPublica’s reporting on Peter Thiel’s $5-billion Roth IRA said his account had large amounts of nontraded stock.

Savers investing in alternative assets must follow strict rules against self-dealing. Otherwise, they risk disaster. For example, an IRA owner can use account funds to invest in a rental property like a beach house. But if she uses it herself for a week of vacation, that’s a “prohibited transaction” that dissolves the IRA, triggering taxes and perhaps penalties.

The McNultys ran afoul of such rules. Their attorney, Thomas Quinn of McLaughlinQuinn in Providence, R.I., said they declined to comment on the case and are considering an appeal.

According to the decision, the couple in 2015 began moving nearly $750,000 of existing retirement-plan funds, including from a MetLife annuity and 401(k), into self-directed IRAs. Then they had the IRAs purchase shares in limited-liability companies that in turn invested about $730,000 in a condominium plus gold and silver American Eagle coins.

These moves are legal: The law allows IRAs to invest in physical gold and silver, and many savers hold alternative assets through LLCs to ease administration. By using an LLC, the IRA owner doesn’t have to ask the custodian to, say, cut a check to pay a plumber for repairs to a rental property within the IRA.

But in an IRS audit, Mr. McNulty, a Rhode Island-based plant manager at a sailcloth factory, conceded that he engaged in prohibited transactions in 2015 and 2016, although the decision didn’t say what they were. That dissolved his IRA and caused taxable IRA payouts to him of about $316,000.
More Tax Report

That left two issues for Tax Court Judge Joseph Robert Goeke to decide: whether Donna McNulty’s storage of about $411,000 of gold and silver American Eagle coins in a safe at her home was permitted under the law, and whether the couple owed stiff penalties for understating their tax. The couple lost on both issues.

According to the decision, Mrs. McNulty, a registered nurse, was careful with her IRA’s coins in some ways. She opened a bank account in the name of the LLC, documented the purchase of the coins, and labeled the coins as belonging to her IRA-owned LLC when she put them in the couple’s safe.

However, the judge ruled that her “unfettered control” of the coins, if upheld, would be ripe for abuse. He clarified what some saw as a gray area and said the law requires independent oversight of investments in coins or bullion by a third-party fiduciary—so it doesn’t allow for storage in a safe at home. Because that wasn’t allowed, Mrs. McNulty had a taxable payout from her IRA payout of the coins’ $411,000 value.


The decision also came down hard on the McNultys’ reliance on their LLC provider’s advertisements instead of competent professional advice, calling home-storage gold IRAs a “questionable internet scheme.” It added that the McNultys didn’t act in good faith because they didn’t disclose information about their IRAs to the CPA who prepared their 2015 and 2016 tax returns.

As a result, the judge imposed accuracy penalties of 20% of the McNultys’ tax understatement under Section 6662(a) of the tax code. Based on the facts in the decision, the penalty comes to about $54,000.
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Re: Another IRS attack on gold coins

Post by dualstow » Fri Dec 03, 2021 9:18 pm

Was just about to post the same.
Not that anyone needs it with the text above, but here’s the link - https://www.wsj.com/articles/a-couple-s ... 1638527410
another day, another North Korean missile
let 2022 be the year of GOLD
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Re: Another IRS attack on gold coins

Post by I Shrugged » Sat Dec 04, 2021 7:43 pm

It's important to note that this was an attack on holding gold coins in your possession within an IRA. Absent the IRA, this would not have happened. Personally I can see no sense in having gold within an IRA.
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Re: Another IRS attack on gold coins

Post by Don » Sat Dec 04, 2021 8:51 pm

It seems that they somehow terminated the IRA in some fashion with their actions, making the assets held there taxable and with penalties.
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Re: Another IRS attack on gold coins

Post by Kbg » Sat Dec 04, 2021 9:38 pm

This thread = clickbait title.
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Re: Another IRS attack on gold coins

Post by dualstow » Sun Dec 05, 2021 9:55 am

It's disturbing that the ads are still running despite the messages from the IRS.
another day, another North Korean missile
let 2022 be the year of GOLD
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Re: Another IRS attack on gold coins

Post by dopplerdave » Wed Dec 08, 2021 11:25 am

Shrugged – I agree in general but if most of your savings are in a 401 or IRA, then it is hard to avoid having gold there.

KBG – Yes, the title sounds like click bait but it actually reflects my contempt for the IRS and its methods.

Now, I managed to find a detailed analysis of this decision prepared by a CPA who specializes is this sort of thing. For those of you who have the stomach for legal/accounting verbiage, it can be found on the website http://www.currentfederaltaxdevelopments.com . Look for the article by Ed Zollars.

Here is my problem with the IRS. It is supposedly legal to hold gold coins in a pension fund like an IRA. They set up all kinds of complicated conditions however that are ambiguous at best. If you are subject to an audit, then the logical thing to me would be to verify that the coins reportedly being held are in fact there. But instead of asking to be shown the coins, the IRS first demands to see all the paperwork. For example, when the coins were shipped, was the package addressed to the LLC created by the IRA or to the beneficiary?

Then a judge (who works for the IRS) decides that holding the coins inside a safe accessible to the beneficiary provides too easy access.

Make one mistake and your entire retirement savings is retroactively subject to the ordinary income tax in effect the year the mistake was made. Plus a penalty. My conclusion is that they really don’t want you holding gold coins in a tax deferred plan.
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Re: Another IRS attack on gold coins

Post by vnatale » Wed Dec 08, 2021 12:03 pm

dopplerdave wrote:
Wed Dec 08, 2021 11:25 am

Shrugged – I agree in general but if most of your savings are in a 401 or IRA, then it is hard to avoid having gold there.

KBG – Yes, the title sounds like click bait but it actually reflects my contempt for the IRS and its methods.

Now, I managed to find a detailed analysis of this decision prepared by a CPA who specializes is this sort of thing. For those of you who have the stomach for legal/accounting verbiage, it can be found on the website http://www.currentfederaltaxdevelopments.com . Look for the article by Ed Zollars.

Here is my problem with the IRS. It is supposedly legal to hold gold coins in a pension fund like an IRA. They set up all kinds of complicated conditions however that are ambiguous at best. If you are subject to an audit, then the logical thing to me would be to verify that the coins reportedly being held are in fact there. But instead of asking to be shown the coins, the IRS first demands to see all the paperwork. For example, when the coins were shipped, was the package addressed to the LLC created by the IRA or to the beneficiary?

Then a judge (who works for the IRS) decides that holding the coins inside a safe accessible to the beneficiary provides too easy access.

Make one mistake and your entire retirement savings is retroactively subject to the ordinary income tax in effect the year the mistake was made. Plus a penalty. My conclusion is that they really don’t want you holding gold coins in a tax deferred plan.


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Re: Another IRS attack on gold coins

Post by D1984 » Wed Dec 08, 2021 11:55 pm

dopplerdave wrote:
Wed Dec 08, 2021 11:25 am
Shrugged – I agree in general but if most of your savings are in a 401 or IRA, then it is hard to avoid having gold there.

KBG – Yes, the title sounds like click bait but it actually reflects my contempt for the IRS and its methods.

Now, I managed to find a detailed analysis of this decision prepared by a CPA who specializes is this sort of thing. For those of you who have the stomach for legal/accounting verbiage, it can be found on the website http://www.currentfederaltaxdevelopments.com . Look for the article by Ed Zollars.

Here is my problem with the IRS. It is supposedly legal to hold gold coins in a pension fund like an IRA. They set up all kinds of complicated conditions however that are ambiguous at best. If you are subject to an audit, then the logical thing to me would be to verify that the coins reportedly being held are in fact there. But instead of asking to be shown the coins, the IRS first demands to see all the paperwork. For example, when the coins were shipped, was the package addressed to the LLC created by the IRA or to the beneficiary?

Then a judge (who works for the IRS) decides that holding the coins inside a safe accessible to the beneficiary provides too easy access.

Make one mistake and your entire retirement savings is retroactively subject to the ordinary income tax in effect the year the mistake was made. Plus a penalty. My conclusion is that they really don’t want you holding gold coins in a tax deferred plan.
The problem here wasn't there holding gold coins in an IRA per se; the law clearly allows that. The problem wasn't even how she bought and titled the coins (indeed, she appears to have dotted every "i" and crossed every "t" by having the coins titled in the IRA LLC's name, documenting the purchase of the coins as being by the IRA LLC and not by her directly, and paying for the coins with money from a bank account owned by the LLC). The problem was that she then chose to keep the coins in a safe at her house where she had direct access to them. Anyone who knows anything about how self-directed IRAs/checkbook LLC IRAs work would've known right off that doing so was just asking for trouble.

The current tax law in regards to IRA assets is that you cannot personally use them for your own benefit (or indeed theoretically even have access to them for your own benefit); I have a coworker at my former job who had a Roth IRA that he used to invest in real estate fix and flips and he refused to even go into the properties and spend any time in them between 11:55 PM and 12:01 AM lest the IRS potentially deem he used one for his own personal use by "spending the night in it". Maybe that's overkill but IMO if you want to have a self-directed IRA then that's probably the level of caution required. Better safe than sorry, and (unless there is a specific "safe harbor" provision in the statute of the tax law or in case law) don't EVER expect that the IRS will rule on an ambiguity in favor of the IRA owner. If you don't give the IRS any loose strings to pull then they can't even begin to take your sweater (i.e. your IRA) apart but if you give them just one tiny loose little string....

That aside, I do believe that Ms. McNulty acted in good faith (well, with the exception of not disclosing the transaction to her CPA and also with the fact that she didn't rely on a neutral 3rd party opinion by a tax lawyer or CPA rather than from an IRA LLC firm who had a vested interest in her dealing with them and thus that wouldn't have been inclined to tell her that she was treading on very thin legal ice tax law-wise beachhead if said firm did so she might choose not to go through with the transaction with them) and wasn't deliberately trying to self-deal, engage in a prohibited transaction, or purposefully violate the law....the problem is that under any reasonable interpretation of the law, having gold coins in a safe in your house that you did in fact have the keys to is clearly (at least to me) you having access to those assets for your own use, should you so desire to do so. By way of comparison and example, imagine trying to argue before a judge that the, say, half a kilo of coke or the post-May '86 machine gun you had in your home's safe that your friend put there (and that he confessed and fully admitted was his property and not yours even though you knew he put it there) was somehow legally not in your possession (and therefore you shouldn't be prosecuted for it) even though you knew he put it there and you had the key to the safe the whole time and he left immediately after he put it there and left you to your own devices.....the law would have you up on "constructive possession" charges so fast your head would spin...note that I'm not saying I agree with any laws banning cocaine or machine guns; just that under the current interpretation of Federal law any items in your safe that you knew about, willingly allowed to be placed there, and that you could theoretically access the whole time because you had the key to the safe would effectively be deemed to be in your possession. I don't see how the gold coins in the safe in this case could be said to have been deemed otherwise....I do note that (unlike cocaine or illegal firearms) owning gold coins is of course not a violation of the law per se but here the violation occurred because by constructively having the items (the gold coins) in her possession or available for her use she violated the law regarding IRA assets being available to or being used by a prohibited person (in this case the IRA owner herself) for their own personal use or benefit.

If Ms. McNulty had simply had the gold coins stored offsite (and not on her property) somewhere she didn't directly have access to or a key to then she likely would've been in the clear here; I would recommend that anyone who wants to own gold coins in an IRA have them stored by a third party custodian and not have them in any sort of storage or safekeeping that could be easily deemed directly in one's own possession or access.
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