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McNulty Case Reaffirms Physical Possession Rules

McNulty Case

The recent court case, McNulty v. Commissioner has reaffirmed the physical possession rule. Although there hasn’t been much guidance in the past, this case shows why you should not hold IRS-approved metals and coins personally. It’s a clear violation of Internal Revenue Code Section 408(m). Here is what we know about the case.

McNulty Case – Summary

The McNulty’s’ established a Self-Directed IRA under I.R.C. sec. 408 and directed assets held in the IRA to invest in a single-member LLC. Ms. McNulty was the manager of the LLC that her IRA invested in. She directed it to purchase American Eagle coins and took physical possession of the coins. The IRS determined that the McNulty’s received taxable distributions equal to the cost of the coins in the year they received physical custody of them.

The Facts of the McNulty Case

In August 2015 Mrs. McNulty purchased services from Check Book IRA, LLC through its website, that included assistance in establishing a Self-Directed IRA. She then formed an LLC to which she would transfer IRA funds through purchases of membership interests. From there, she purchased American Eagle coins using IRA funds.

During 2015, Check Book’s website advertised that an LLC owned by an IRA could invest in the 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 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. the IRA custodian. They are an independent qualified custodian under the Investment Advisers Act of 1940.

On August 24, 2015, Check Book formed Green Hill Holdings, LLC. 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 principal place of business. Green Hill opened a bank account over which petitioners had signatory authority.

During 2015 and 2016 Mr. McNulty used funds from his IRA to invest in a condominium and American Eagle coins through an LLC structure. 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 and a 401(k) plan.

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 American Eagle coins from Miles Franklin, Ltd. 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 along with coins purchased with funds from Mr. McNulty’s IRA and coins purchased by petitioners directly. The 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 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 American Eagle gold coins for $374,000 from Miles Franklin and that money was wired from Green Hill’s bank account to Miles Franklin. Miles Franklin shipped the coins to petitioners. residence, addressed to “Donna McNulty Green Hill”, where they were stored in the safe.

The second Green Hill investment and 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 American Eagle silver coins for $37,380, and the funds were 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 annuity and 401(k) transfers to purchase four one-ounce American Eagle gold coins, two one-quarter-ounce American Eagle gold coins, and one one-tenth-ounce American Eagle gold coin. A payment of $6,746 for the 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.

Kingdom Trust filed Form 5498, IRA Contribution Information, with the IRS for 2015 and 2016, reporting the IRA’s fair market values of $349,856 and $388,247, respectively. The 2015 Form 5498 omitted Green Hill’s year-end bank account balance, and the 2016 Form omitted the value of the 2016 silver coins. Kingdom Trust did not have any role in the management of Green Hill, the purchase of the coins, or the administration of Green Hill’s assets or the IRA assets.

The above facts appear to have been discovered on audit of the taxpayer’s individual returns, though it is not clear how the details were uncovered.


IRC section 408(m) generally prohibits the investment of assets of an IRA (and any self-directed qualified plan account) in certain “collectibles” including precious metals; however, there are exceptions for certain coins (American Eagle coins meet this exception) and bullion.

With respect to bullion, the exception applies “if such bullion is in the physical possession of a trustee [which is a bank or qualified non-bank custodian].”  Some unscrupulous marketers have made false assertions that custody requirements do not apply to coins.  However, based on the plain language of the text and legislative history, the court found that no such exception exists.

The surprising aspect of the Court’s opinion is how long it is.  The Court simply needed to rule that holding the coins at home violated IRC 408(m).  The facts were not at issue and holding coins at home in an IRA clearly violates IRC 408(m).

As stated:

“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”

The Court focus on the taxpayer’s “control” of an IRA asset can have far reaching implications for Self-Directed IRA LLC clients beyond bullion coins.  

In outlining its argument, the Court cites numerous cases confirming that an IRA can own an LLC and that the IRA owner is entitled to direct how his or her IRA assets are invested without forfeiting the tax benefits of an IRA. Though, the Court stated, “IRA owners cannot have unfettered command over the IRA assets without tax consequences. It is on the basis of Mrs. McNulty’s control over the AE coins that she had taxable IRA distributions.

The use of the term “unfettered command” goes above and beyond the analysis of bullion coins and IRC 408(m) and could potentially be used in the framework of an IRA owning other alternative assets.

The McNulty case will not impact Self-Directed IRA LLC investors investing in most alternative assets, such as real estate, notes, private placements, investment funds, private businesses, since there is no potential for the IRA owner to have “unfettered control” over the underlying asset.

For example, Ancira v. Commissioner, 119 T.C. 135, 137-140 (2002), held that no taxable distribution occurred when the IRA owner personally received a check that he could not negotiate. The funds were then used to acquire stock, and the stock certificate was issued in the IRA’s name.

Furthermore, in McGaugh v. Commissioner, the court held that no taxable distribution occurred even if a stock certificate was in the IRA owner’s possession but it was issued in the IRA’s name and thus the owner could not realize any benefits from it and did not have constructive receipt of IRA assets.

In this case, Mrs. McNulty had complete, unfettered control over the American Eagle coins and was free to use them in any way she chose. This is true irrespective of Green Hill’s purported ownership of the coins and her status as Green Hill’s manager.

Once she received the coins, there were no limitations or restrictions on her use of them, even though she asserts on brief that she did not use them.

While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets.

What About Cryptos?

However, in the case of digital assets, such as cryptocurrencies, holding the cryptos in a cold wallet that is controlled by the IRA owner would provide the IRA owner with “unfettered control” over the IRA asset even though IRC 408(m) does not apply to cryptos.

The majority of crypto investors tend to hold the cryptos on a licensed exchange, such as Bitstamp, which controls the private key and prevents the IRA owner from having constructive or actual receipt of the IRA owned cryptos. However, a number of clients wish to hold their IRA-owned cryptos on a cold wallet for security purposes.

A cold wallet can be detached from the internet. Hardware wallets and paper wallets are both cold wallet options. Hardware wallets use a physical medium — typically in the shape of a USB stick — to store the wallet’s private keys, making them de facto unreachable to hackers or other malicious parties. 


The McNulty case should have been a very short and bland opinion since the facts concerning holding coins in an IRA at home so clearly violates IRC 408(m). Instead, the Court sought to focus on the criteria of “control” to determine whether an IRA owner holding assets in a Self-Directed IRA LLC triggered a taxable distribution. 

The McNulty case will have very little impact on most Self-Directed IRA LLCs since case law is clear that holding stock certificates, deeds, and other forms of ownership documentation does not trigger a taxable distribution.  However, in the case of digital assets, such as cryptocurrencies, held in a cold wallet off an exchange by the IRA holder directly, the opinion would seem to suggest that this could trigger a taxable distribution as the IRA owner would have “unfettered control” over the IRA owned cryptocurrencies.

The good news is that the majority of Crypto IRA clients hold their cryptos on a licensed and insured crypto exchange in the name of the IRA.  For those IRA owners wishing to hold IRA-owned cryptos on a cold wallet off the exchange directly for security purposes, solutions exist, such as dual signatures, that allows the IRA owner to hold the cryptos on a cold wallet but without “unfettered control.”


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