free to use them in any way she chose; and that this was true irrespective of Green Hill’s purported ownership of the American Eagle coins and her status as Green Hill’s man - ager. Once McNulty received the American Eagle coins, there were no limitations or restrictions on her use of the coins, even though she asserted she did not use them. Although an IRA owner may act as a conduit or agent of the IRA assets, an owner of a self-directed IRA may not take actual and unfettered possession of the IRA assets. It is a basic axiom of tax law that taxpayers have income when they exercise complete dominion over it. Construc- tive receipt occurs where funds are subject to the taxpay- er’s unfettered command, and she is free to enjoy them as she sees fit. The Tax Court concluded that McNulty’s possession of the American Eagle coins was a taxable distribution. Accordingly, the value of the coins was includible in her gross income. The Tax Court noted that the McNultys’ arguments to the contrary would make permissible a sit- uation that was ripe for abuse and would undermine the fiduciary requirements of the act. McNulty took position of the American Eagle coins and had complete control over them. Accordingly, she had taxable distributions from her IRA in excess of $300,000, a painful financial mistake. MORE LIMITATIONS COMING? We have long warned about the risks of the checkbook scheme. In my 2015 book “Finance Your Own Business,” the hazards were enumerated, with the conclusion being “The safer course is to stay away from Checkbook IRAs.” Interestingly, some promoters claim that the McNulty case is limited to situations in which gold coins were taken into personal possession. But that narrow view misreads the whole case. (Indeed, if they argue other - wise, ask for a legal opinion letter on the viability of the Checkbook LLC.) Remember when we said the court chose just one issue as a discussion point? The court mentioned numerous prohibited transactions (rule violations) and problems with the Checkbook scheme. But it focused on just the physical possession of the coins in this specific case. The court may be doing everyone else using a Check- book IRA a huge flavor. The court may be signaling that future limitations on the scheme are coming. The court may be giving everyone a head’s up that it’s time to change your Checkbook IRA structure. Be sure to talk to your own attorney about this. But here is a scenario to consider. Let’s say you are the man - ager of the LLC that controls your IRA investments. As
The court may be signaling that future limitations on the scheme are coming.
such, you have management control over your IRA assets. You are keenly aware that the court in the McNulty case started: “Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.” So, to clean things up, you need to step aside as manag- er of the Checkbook LLC. You appoint your CPA or attorney or other fiduciary as the manager so that you no longer have any personal control over your retirement assets. If the IRS ever questions you later about such a move, you tell the truth. You had initially been led to believe that the Checkbook IRA scheme was acceptable. But then you learned of the McNulty case, and in an attempt to follow IRS guidance you appointed a new, non-related fiduciary to serve as the LLC manager overseeing your personal IRA investments. You have made a “good faith” effort to be com - pliant with their rules in light of new information. Instead of doing nothing and by taking prompt corrective action, you are in a much better position to ask for forgiveness. The McNulty case is not the only challenge to the Checkbook LLC. Proposed legislation in Congress also seeks to crack down on IRA abuses. Talk to your profes- sionals now to stay ahead of what is coming. •
Garrett Sutton is a corporate attorney, asset protection expert, and best-selling author who has sold more than 900,000 books to guide entrepreneurs and investors. For more than 30 years, Sutton has helped entrepreneurs and real estate investors protect their assets and maximize their financial goals through sound management and asset protection strategies. The companies he founded, Corporate Direct and Sutton Law Center, have helped more than 10,000 clients protect their assets and incorporate their businesses.
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