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WHITEPAPERCheckbook LLC IRA:Proceed with CautionWhat the Recent McNulty vs. Commissioner TaxCourt Case Suggests About This Risky IRA Practice
WHITEPAPERCheckbook LLC IRA: Proceed with CautionCheckbook LLC IRAs and variations thereof can be enticing for alternative asset investors, especiallywith respect to investing in assets like real estate and precious metals. However, a recent tax court case,MCNULTY v. COMMISSIONER OF INTERNAL REVENUE, examined the issue of the IRA owner having“unfettered control” over the assets held in the IRA account. Where this leaves the option of checkbookcontrol remains a question.In the recent IRS case, the taxpayer formed an LLC, funding the LLC with cash from their IRA, thenpurchased precious metals. The client physically stored these metals at their personal property. The taxcourt ruled this was a prohibited transaction, and the client suffered stiff consequences and penalties,effectively distributing the entire account and imposing a 20-percent penalty on top of the distribution tax.THERULING“Independent oversight by a third-party fiduciary to track and monitorinvestment 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 independentoversight that could prevent the owner from invading her retirementfunds. This lack of oversight is clearly inconsistent with the statutoryscheme. Personal control over the IRA assets by the IRA owner is againstthe very nature of an IRA.”McNulty vs. Commissioner, 157 T.C. No.10 (Nov. 18, 2021)The ruling reiterated the importance of a custodian when IRA assets are involved:“A custodian is required to maintain custody of the IRA assets, maintain the required records,and process transactions that involve IRA assets While an IRA owner may act as a conduit oragent of the IRA custodian; she may do so only as long as she is not in constructive or actualreceipt of the IRA assets.”1What This Ruling Means for Checkbook ControlThere are two primary concerns with the structure above, as addressed in the case:12Client had “unfettered control over the assets.” What this could mean in the future for thecheckbook IRA structure is unknown, but, at the very least, the tax court did not look favorablyupon a scenario where an IRA account holder has discretion without custodial oversight. Theline remains unclear as to how “unfettered control” will be defined and possibly expanded.The case was clear in that there must be independent oversight and there must be anapproved custodian for the IRA. As referenced in IRC 408(a)(2):“The trustee is a bank (as defined in subsection (n)) or such other person who demonstratesto the satisfaction of the Secretary that the manner in which such other person will administerthe trust will be consistent with the requirements of this section.”1 McNulty vs. Commissioner, 157 T.C. No. 10 (Nov. 18, 2021). nal-revenue-3 2022 Equity Trust . All rights reserved.Checkbook LLC IRA Whitepaper Pg. 1
WHITEPAPERCheckbook LLC IRA: Proceed with CautionA Storied PastThis is not the first-time checkbook LLC IRAs have come under scrutiny and review. In 2015, the GovernmentAccountability Office performed a study for the Senate Finance Committee:“Account owners who invest in an LLC inside an IRA with a checkbook control feature,which limits custodial involvement in transactions, also take on a heightened risk ofengaging in a prohibited transaction and losing their IRA’s tax-favored status.”2Rollovers as Business Startups (ROBS) PlansAnother scheme that has been on the radar of the IRS Tax-Exempt and Government Entities Divisionare Rollovers as Business Startups (ROBS) plans. See below from the November 5, 2008 Employee PlansNewsletter, produced by the Tax-Exempt and Government Entities Division:When ‘Too Good to Be True’ VeryWell May Be: Funding BusinessStartups with Plan AssetsOne [business funding method] that hasgained IRS’s attention, and coverage in thepress, is to withdraw money from existingretirement accounts and then channel it intoa new retirement plan. Though not statingthat these arrangements are noncompliantper se, the guidelines sound a warning callthat the IRA will scrutinize thesetransactions very carefully.Like many other recently marketed taxsavings strategies that appear to have beendesigned to take advantage of the law, ROBSarrangements, designed to fit within theexisting law and guidance, do not present a“home-free” result. In fact, they may violatethe law. That is what the IRS has beenfinding and what many practitioners havebeen telling their clients. In formulating anappropriate response to these arrangements,IRS evaluated not only the law, but balancedthis with policy objectives.ROBS plans are questionable in that theymay solely benefit one individual’s exchangeof tax-deferred assets for currently availablefunds. This stock exchange occurs insidewhat should otherwise be a retirement planfor the benefit of employees. Yet, from ourreview, few, if any, employees other than theindividual who initiates the transaction willactually benefit from the exchange.Furthermore, these arrangements arepredicated on stock valuations that arefrequently superficial and are administeredmore as a corporate funding vehicle than abona fide employee benefit program.32 GAO-17-102, Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets.Government Accountability Office, December 2016. https://www.gao.gov/assets/gao-17-102.pdf3 When ‘Too Good to Be True’ Very Well May Be: Funding Business Startups with Plan Assets. Employee Plans Newsletter, IRS Tax-Exempt and GovernmentEntities Division, November 5, 2008. https://www.irs.gov/pub/irs-tege/se1108.pdf 2022 Equity Trust . All rights reserved.Checkbook LLC IRA Whitepaper Pg. 2
WHITEPAPERCheckbook LLC IRA: Proceed with CautionCheckbook LLC IRA FAQsQ: If checkbook LLC IRAs are risky, how do I quickly conduct precious metals and real estate transactions?A: Using a custodian with access to technology systems, education, and service will be critical to your success.Here’s an overview of the technology Equity Trust provides to streamline your investing:myEQUITYOnline account managementsystem makes it easy to initiateinvestments, pay IRA-relatedbills, check account status,and more.Expense PassPrepaid card enables youto pay IRA-owned propertyexpenses without the needfor deposit coupons, checks,or expense-pay requests.Tenant OnlinePayment CenterAllows tenants ofyour IRA-ownedproperties to easilypay rent online.Mutual Fund WizardConveniently investin mutual funds andalternatives in thesame Equity Trustaccount.Q: I was advised by my legal professional to hold the property owned by my IRA in an LLC for assetprotection. How do I accomplish that?A: It is not that the LLC is off limits, but you must reach out to your legal professional to structure it properly,with a third party (non-disqualified person) as the manager of the LLC owned by your IRA. The followingdiagram depicts this structure:Funds from ETCIRA sent to LLCbank accountLLCAll investmentrelated expenses andprofits must flow toand from LLC bankaccount(Cash held at bank of choice)100% OWNER:Equity TrustSelf-DirectedIRA 2022 Equity Trust . All rights reserved.Equity Trust Company CustodianFBO [Client Name/Account Number] IRAMANAGER:Third party (non-disqualified person)Real EstateInvestmentCheckbook LLC IRA Whitepaper Pg. 3
WHITEPAPERCheckbook LLC IRA: Proceed with CautionThe Equity Trust AdvantageYou have your choice of self-directed IRA custodians. So why choose Equity Trust? The difference is clear: Nearly limitless investment options — including real estate, private entities, cryptocurrency, stocks, bonds,mutual funds, and more — easily managed without the use of checkbook control. More than 45 years of financial services experience, including as an industry leading custodian specializingin alternative assets Clients from all 50 states have entrusted us to be the administrator of over 34 billion in retirement assets(as of 8/31/21) State-chartered trust company registered with the state of South Dakota Named ‘Best Overall Self-Directed IRA Company’ by Investopedia, 2020-2022 State-of-the-art technology and features, including account management system myEQUITY and ExpensePass prepaid card, provide easy account and investment management capabilitiesTraining CenterStart educating yourself today — the right way!Real Estate Investing Closing and Titlingwith a Self-Directed AccountSelf-Directed Real Estate Investor OrientationInvesting in Precious Metals witha Self-Directed AccountSelf-Directed Real Estate Notes/Private LendingInvestor OrientationEquity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicatedby Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever makingan investment decision, please consult with your tax attorney or financial professional.ET-0113 01 2022 Equity Trust . All rights reserved.Checkbook LLC IRA Whitepaper Pg. 4
Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.” McNulty vs. Commissioner, 157 T.C. No.10 (Nov. 18, 2021) THE RULING Client had “unfettered control over the assets.” What this could mean in the future for the checkbook IRA structure is unknow
