We all know the oft-repeated restatement of the Golden Rule: “The one who has the gold makes the rules.” Well, having the gold makes Andrew McNulty & Donna McNulty, 157 T. C. 10, filed 11/18/21*, fall foul of the Section 408 rules, because they took physical possession of the American Eagle (“AE”) gold coins their single-member LLCs bought with IRA money, thus triggering a distribution to the McNultys in the year when they got the gold. The nominal trustees of each IRA had no role in managing the LLCs or anything else.

Judge Goeke goes over the Section 408 tests.

“Respondent argues that Mrs. McNulty should be treated as having possession of the AE coins irrespective of [LLC]’s existence, her status as its manager, and its purported ownership of the coins. Petitioners counter that the AE coins were assets of [LLC] and Mrs. McNulty’s physical receipt of them did not constitute taxable distributions from her IRA. The parties’ arguments reveal numerous disagreements including whether Mrs. McNulty or her IRA was [LLC]’s sole member, who owned the AE coins, who held legal title to the AE coins, whether AE coins are bullion, whether the AE coins were commingled with non-IRA assets, and who can have physical possession of the AE coins purchased with IRA funds. We resolve this case on the answer to the last question and hold that Mrs. McNulty had taxable distributions from her IRA when she received physical custody of the AE coins irrespective of her status as [LLC]’s manager.” 157 T. C. 10, at p. 12, footnote omitted, but it says IRS concedes that Mrs. McN has not engaged in a prohibited transaction under sec. 4975 with respect to her IRA, its investment in LLC, or the purchase of AE coins.

The IRA trustee’s statutory duty is to lock up the assets; a self-directed IRA beneficiary can tell the trustee what to buy, sell, or hold (with certain self-dealing exceptions), but can’t get her hands on the goodies themselves. Mrs. McN locked up the American Eagle goldies all right, but in her own safe in her own residence.

Mrs. McN makes a great to-do over Section 408(m), which says her goldies aren’t collectibles, so an IRA can invest in them. OK, say IRS and Judge Goeke, but the trustee still has to hold them, not Mrs. McN, the beneficiary.

“A qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA. Sec. 1.408-2(e), Income Tax Regs. A custodian is required to maintain custody of the IRA assets, maintain the required records, and process transactions that involve IRA assets. See sec. 408(h) and (i); sec. 1.408-2(e)(4), (5)(i)(2), (iii), (vii), Income Tax Regs. The presence of such a fiduciary is fundamentally important to the statutory scheme of IRAs, which is intended to encourage retirement savings and to protect those savings for retirement. Independent oversight by a third-party fiduciary to track and monitor investment activities is one of the key aspects of the statutory scheme. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds. This lack of oversight is clearly inconsistent with the statutory scheme. Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.” 157 T. C. 10, at pp. 13-14.

And reliance on the website of the promoter isn’t enough to stave off the five-and-ten understatement chop.

The one who has the gold can make the rules, but has to pay the tax.

*McNulty 157 T C 10 11 18 21