Recent tax case serves as warning on IRAs and esoteric assets |
The judge in a recent Tax Court case, Andrew McNulty et al. v. Commissioner, rule that owners of IRAs with assets invested in gold and silver coins can’t store them in a safe at their home. 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, on top of taxes of nearly $270,000 on about $730,000 of IRA assets. The ruling disallows a scheme that was heavily promoted several years ago, when radio and internet ads based pitches on a perceived ambiguity in the law, despite warnings from the IRS and legal specialists. 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. Savers investing in alternative assets must follow strict rules against self-dealing; 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.