McNulty v. Commissioner (2021): The Home-Storage Gold IRA Case

McNulty v. Commissioner is a widely discussed court decision about storing IRA-purchased gold at home. This page explains what the Tax Court decided, in plain English, using only the court's own opinion and the IRS. It is general information, not legal or tax advice. Where this page describes what a decision "means," that is an interpretation, and a tax attorney should be consulted about any real situation. For the wider set of rules, see our Gold IRA Rules guide.

The copy of the opinion cited here is hosted by a third party, The Tax Adviser, not by the court. It is a copy of the court's opinion, and the case is McNulty v. Commissioner, 157 T.C. No. 10 (filed November 18, 2021, Docket No. 1377-19).

What did the Tax Court decide in McNulty v. Commissioner?

The court decided two things in this part of the case.

1. The distribution issue. The IRS said Mrs. McNulty received taxable distributions from her IRA. The court wrote: "we hold she did." It held that Mrs. McNulty's possession of the gold and silver coins was a taxable distribution.
2. The penalty issue. The IRS also asserted penalties under section 6662(a) of the Internal Revenue Code. The court held the McNultys are liable for them. It found their understatements of income tax were substantial for both years. In its words, "They are not entitled to the reasonable cause defense, and we sustain the penalties for both years."

The final line of the opinion says "Decision will be entered under Rule 155." That means the exact dollar computation was left to follow the court's rulings.

What were the facts of the case?

These facts are as the opinion describes them.

• The McNultys lived in Rhode Island when they filed their petition. Mr. McNulty was a plant manager and Mrs. McNulty was a registered nurse.
• Mrs. McNulty had a self-directed IRA. She named Kingdom Trust Co. as the IRA custodian. The opinion says Kingdom Trust had no role in managing the LLC described below.
• She funded the IRA with direct transfers from two qualified retirement accounts. The opinion lists $378,487 in 2015 and $48,375 in 2016.
• She instructed the custodian to buy 375,000 membership units of an LLC called Green Hill at $1 per unit. The LLC was a single-member LLC treated as a disregarded entity for federal tax purposes. The McNultys were its managers in 2015 and 2016.
• Green Hill opened a bank account over which the McNultys had signatory authority.
• In 2015, Green Hill bought 320 one-ounce American Eagle gold coins for $374,000. In 2016 it bought 2,000 one-ounce American Eagle silver coins for $37,380. The opinion also records a further gold purchase in August 2016: the coins cost $6,731, and a $6,746 wire covered the coins plus insured shipping.
• The dealer's invoices listed Green Hill as the purchaser. The coins were shipped to the McNultys' home and kept in a safe there.
• The opinion says Mrs. McNulty exercised sole control over her IRA's investment decisions.
• The 2015 and 2016 returns were prepared by a certified public accountant. The opinion says the McNultys did not tell the accountant that they had physical possession of the coins.

The IRS determined income tax deficiencies of $250,558 for 2015 and $18,094 for 2016. Mrs. McNulty's part of the case concerned taxable distributions of $374,000 for 2015 and $37,380 for 2016. Mr. McNulty's IRA distributions ($295,554 for 2015 and $21,862 for 2016) were settled by the parties. He conceded that he received taxable distributions, and the contested issue for him was the penalties.

Why did the court say the coins were a distribution?

The court started with how the tax code defines an IRA. An IRA is a trust created for the exclusive benefit of an individual or beneficiaries. One requirement is that the IRA be a trust administered by a trustee that acts as a fiduciary. A custodial account can be treated as such a trust. The code also says IRA assets may not be commingled with other property except in a common trust fund or common investment fund.

The McNultys relied on the part of the law that lets an IRA hold certain bullion. As the IRS explains, buying a collectible with IRA money is generally treated as a distribution equal to its cost. Some coins and bullion of a certain fineness are excluded, but the IRS says bullion qualifies only "if a bank or approved non-bank trustee keeps physical possession of it" (IRS: Investments in collectibles).

The McNultys argued, in effect, that this exception let them hold the coins themselves. The court disagreed. It held that the language about bullion does not create an exception to the custodial and fiduciary requirements already found in section 408(a). The court said those requirements already existed, and that the rule about bullion did not add them. It also wrote: "Personal control over the IRA assets by the IRA owner is against the very nature of an IRA." The court's conclusion was: "Mrs. McNulty's possession of the AE coins is a taxable distribution."

The amount was the coins' cost. The opinion says the parties did not dispute that the value of the coins equaled their cost.

What did the court not decide?

The opinion is careful about what it left open. This matters because the case is often described more broadly than it was written.

• It did not decide whether the American Eagle coins are bullion. It said its conclusion holds whether or not they are.
• It did not resolve the commingling question. The court said it did not need to.
• It said its holding does not depend on Green Hill's status as a disregarded entity.

How the court handled the penalties

The IRS asserted penalties under section 6662(a) for underpayments due to substantial understatements of income tax and, alternatively, negligence or disregard of rules. The court's holding rests on the first ground. It found that the McNultys' understatements, caused by not reporting their IRA distributions, were substantial in both years.

The McNultys argued they had reasonable cause. The court said the most important factor is the taxpayer's effort to assess their proper tax liability, and the taxpayers carried the burden of proof. It noted that the accountant was not consulted about the IRA issues and that the coin possession was not disclosed to the accountant. The court wrote that "Such a failure to disclose pertinent facts shows a lack of good faith in tax reporting."

According to the opinion, in 2015 the website of the firm that marketed the arrangement, Check Book, advertised that an IRA-owned LLC could buy American Eagle coins and that owners could keep them at home "without tax consequences or penalties" if the coins were "titled" to an LLC. The court said the website is an advertisement of the firm's products and services, and it questioned whether the website or services could count as professional advice. It said the firm was not disinterested because it profited from the McNultys' purchase of its services. Citing 106 Ltd. v. Commissioner, it stated the rule that "reliance on an adviser who participated in structuring the transaction, i.e., a promoter, is not reasonable cause." The opinion's conclusion on penalties is quoted above.

Summary table: facts and holdings

What does this mean for home-storage marketing?

The following points are interpretations, not legal conclusions, and are drawn from the opinion and the IRS page cited above.

• Marketing that calls home storage "IRA approved." The opinion treated holding the coins personally as outside the IRA's custodial structure, even though an LLC owned by the IRA bought them. One reasonable reading is that an LLC wrapper did not change the result on these facts. The court said its holding did not depend on the LLC's disregarded status.
• A narrow, fact-specific decision. The court expressly left open some questions, so it should not be read as answering every possible structure. A tax attorney is the right person to say how it applies to any particular arrangement.
• Penalties on top of the tax. In this case the court rejected a reasonable-cause defense that relied on the promoter's website, and sustained the penalties.

If a seller says you can keep IRA metal at home, an independent tax or ERISA attorney can tell you how the McNulty case and the IRS position apply. For how the checkbook-style structures work in general, see checkbook IRA LLCs and precious metals.

What are the mistakes people make when reading this case?

• Assuming the number is a rule. The $374,000 is what these coins cost. It is not a limit or threshold.
• Using secondary sources for figures. Summaries of the case sometimes disagree on dollar amounts. This page takes its figures only from the opinion.
• Ignoring reporting. A distribution, including a deemed one, is reported on tax forms. For how that works, see Gold IRA reporting.
• Treating the IRS tax as the only cost. The IRS notes that a deemed distribution from a collectible purchase is generally taxed as ordinary income and that the 10% additional tax may apply to people under age 59 and a half.

Related questions

What was the McNulty v. Commissioner case about, in one sentence?

It was a dispute over whether gold and silver coins bought through an IRA-funded LLC and kept at the owners' home were a taxable distribution. The court said they were.

Does the case say all LLCs with IRA money are prohibited?

No. The opinion addresses the facts in front of the court. It did not rule on every structure, and it left some questions open, as listed above.

Where can I read the opinion?

A copy is hosted by The Tax Adviser. It is a third-party copy of the court's opinion, so check it against the court's own records if you need the official text.