An IRA trustee must be a bank or such other person who demonstrates that the manner in which it will administer the trust will be consistent with the requirements of IRC section 408.
For a person to qualify as a trustee, the person must demonstrate by written application to the IRS that it meets the requirements set forth under Regulation section 1.408-2(e)(1). The applicant must demonstrate in detail its ability to act within the accepted rules of fiduciary conduct.
The trustee must keep separate and distinct records with full information on each IRA. If assets require safekeeping, the trustee must deposit them into an adequate vault and keep a permanent record of deposits and withdrawals from the vault. The IRA asset cannot be commingled with other property except in a common trust fund or common investment fund.
Failure to meet these rules results in the IRA assets being treated as distributed to the IRA owner at fair market value as a taxable distribution.
The taxpayer in this case decided to establish a self-directed IRA.
Before doing so she researched self-directed IRAs online including having the IRA invest in American Eagle (AE) coins through an LLC owned by the IRA. The website used by the taxpayer said that an LLC owned by an IRA could invest in AE 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 no certificates of ownership for AE coins or any other documentation that establishes legal title.
Note: An AE coin is usually 1 ounce of either gold or silver bullion, worth what the going rate that gold or silver is trading for per ounce on an exchange for a particular day. Dealers will usually pay “spot price” to a seller (the current rate of gold or silver on that day), and charge a premium over “spot price” when they re-sell the coin to a buyer. AE coins are minted by the U.S. government. In recent years, the U.S. mint also produces platinum and palladium coins for investors to buy and sell. AE gold bullion coins are also available in smaller half-ounce, quarter-ounce, and one-tenth-ounce sizes. The U.S. mint does not sell AE coins directly to the public. They have to be purchased through an authorized dealer.
The online website where the taxpayer got her information helped to establish an LLC, and the taxpayer was appointed as manager of the LLC. The taxpayer’s personal residence was the principal place of business for the LLC, and the LLC also opened a bank account in which the taxpayer had signatory authority.
The taxpayer exercised sole control over her IRA investment decisions and funded the IRA through direct transfers from two qualified retirement accounts. The taxpayer did not report any part of the transfers as gross income. The taxpayer then used the funds to purchase AE coins from a coin dealer.
The IRS audited the taxpayer’s return and determined that the taxpayer received taxable distributions from her IRA
The IRS argued that the taxpayer received a taxable distribution when taking possession of the AE coins, irrespective of the LLC’s existence, her status as its manager, and its purported ownership of the coins.
The taxpayer argued that the AE coins were assets of the LLC and that her physical receipt of them did not constitute taxable distributions from her IRA. The court agreed with the IRS.
The court noted an owner of a self-directed IRA is entitled to direct how her IRA assets are invested without forfeiting the tax benefits of an IRA. However, IRA owners cannot have unfettered command over the IRA assets without tax consequences. It is on the basis of the taxpayer’s control over the AE coins that she had taxable IRA distributions.
The court explained that a qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA. A custodian is required to maintain custody of the IRA assets, maintain the required records, and process transactions that involve IRA assets. 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.