Self-Directed IRA: American Eagle Coins at Home

The Tax Court held in McNulty v. Commissioner that owners of self-directed IRAs that buy American Eagle coins must keep the coins in the hands of a custodian. Failure to do so means immediate and full taxation when the IRA owner takes delivery of the coins.

IRAs and “Coins at Home”

Before the McNulty decision, it was unclear whether IRA owners could keep these coins at home.

On the one hand, IRAs are required to have a custodian or trustee hold any assets. It was okay for the IRA owner to be a “conduit” for a check or stock certificate to a custodian. But it was not okay to deposit the check or endorse the certificate or keep them in a drawer for safekeeping.

On the other hand, the only provision in the Internal Revenue Code (IRC) that talks specifically about coins and IRAs says that, although a self-directed IRA cannot hold “collectibles,” gold or silver coins (including American Eagles), and bullion do not count as collectibles, though bullion must be in the physical possession of a trustee. That’s a mouthful, but what it boils down to a self-directed IRA can have gold or silver coins, and it can have bullion if it the bullion is kept in the hands of a custodian. 

Comment: One could be forgiven for reading that provision to say that, in contrast to bullion, coins do not have to be held by a custodian. 

All IRAs Require Custodians

The Tax Court took the view that no matter how one reads the IRC passage about coins and bullion, the trustee or custodian requirement is an essential element of what it means to qualify as an IRA. Indeed, this requirement appears up near the top of the main IRC section governing IRAs, Code Sec. 408(a). The fact that it may be possible that a passage at the end of Code Sec. 408(m) regarding an exception to the “no collectibles” rule could be read to imply an exception to the custodian rule for coins does not change that.

Accordingly, the when the taxpayers took delivery of the coins and put them in their safe at home rather than take them to a custodian, the delivery was treated as a taxable IRA distribution.

Penalties for Getting This Wrong Before the Rule was Settled

Despite the ambiguity in the law requiring litigation before the Tax Court to resolve, taxpayers had to pay an understatement of tax penalty. 

The court acknowledged that in cases where the law is unsettled or debatable it is not right to impose a penalty on taxpayers who made a reasonable attempt to obey. Relying on a CPA’s advice, for example, is definitely a good excuse.

In this case, however, the taxpayers never mentioned their self-directed IRA their CPA whose job it was to prepare the tax returns for the relevant years. This might suggest they did not want to take a chance on having their CPA properly report the income.

The taxpayers’ research relied mostly on Check Book IRA’s website and phone conversation with their customer service when setting up their self-directed IRAs. As far as the court was concerned, these were basically advertisements.

Conclusion

The penalty may seem harsh given that the IRS itself may have gotten it wrong on their website at one time or another, and it’s the Tax Court after all that’s ignoring the clear implications of IRC language. However, if the court had held that reliance on the Check Book IRA website and customer service counted as an excuse, the court would be saying to online tax services and their potential customers that saying things that turn out to be wrong can protect their customers from penalties.