Page 122 - JoFA_2022

control over the IRA assets by the IRA Thus, taxpayers wishing to have IRA November, the Service announced that
owner is against the very nature of an investments in approved coins can avoid it does not acquiesce to a portion of the
IRA,” the court stated. Having deter- having physical or constructive receipt of holding by the Eighth Circuit in Mayo
mined that McNulty’s physical possession them by having them held, like bullion, Clinic, 997 F.3d 789 (8th Cir. 2021).
of the coins caused a taxable distribution, by a bank or approved nonbank trustee, Facts: Mayo Clinic is a not-for-
the court said it need not address the in an adequate vault, which clearly profit corporation and tax-exempt par-
commingling arguments, although it would not include a safe deposit box to ent organization of hospitals, clinics, and
noted that labeling assets alone probably which the owner (or, likely, anyone but the Mayo Clinic College of Medicine
does not prevent their commingling. The the trustee) has access. and Science. In 2003, 2005–2007, and
court also denied McNulty’s argument Custody issues aside, many financial 2010–2012, it received income from
that the trustee custody requirement for advisers question whether physical partnerships for which it claimed an ex-
bullion means there is no such require- coins or precious metals are a good IRA ception from unrelated business income
ment for coins. investment in the first place (see, e.g., tax (UBIT) on debt-financed property
The court also upheld the penalties, “How Investors Can Protect Against income under Sec. 514(c)(9)(C)(i) and
stating that Check Book’s “questionable Inflation,” JofA, Oct. 28, 2021). If an Sec. 170(b)(1)(A)(ii).
internet scheme” did not constitute account owner must take a required After an audit, the IRS assessed more
professional advice upon which taxpayers minimum distribution or other distribu- than $11.5 million in UBIT, denying
could rely for a reasonable-cause defense. tion, the coins or metal must first be that Mayo qualified as an educational
Furthermore, McNulty and her husband liquidated at the current price, which can organization for purposes of the UBIT
did not divulge the arrangement to the be volatile. exception under the statutes and Regs.
CPA who prepared their returns, the “There’s nothing wrong with col- Sec. 1.170A-9(c)(1) because Mayo’s
court noted. lecting gold coins, but I see it more as health care operations were more than
Observations: Coins as IRA assets a hobby or speculation than an invest- an incidental part of its activities. Mayo
under Sec. 408(m)(3)(A) are limited to ment,” said Chris Benson, CPA/PFS, paid the amount and sued for a refund
certain gold, silver, and platinum coins with L.K. Benson & Co. in Baltimore. in district court, which found the regula-
described in 31 U.S.C. Section 5112(a), Self-directed IRA owners desiring some tion invalid and held for Mayo (Mayo
(e), or (k), which are Treasury-minted exposure to gold could get it through Clinic, 412 F. Supp. 3d 1038 (D. Minn.
coins in specified sizes and currency shares in an exchange-traded fund that 2019); see “Tax Matters: Mayo Clinic
denominations and/or weights, or a “coin in turn invests in bullion, Benson said, Held to Be an Educational Organiza-
issued under the laws of any State.” The “but even then, it should be a small tion Despite Engaging in Noneduca-
bullion allowed under Sec. 408(m)(3)(B) percentage of the overall portfolio.” tional Activities,” JofA, Nov. 2019).
is gold, silver, platinum, or palladium of ■ McNulty, 157 T.C. No. 10 (2021) The government appealed, and in
at least as pure fineness as required in May 2021, the Eighth Circuit reversed,
satisfaction of a regulated futures con- — By Paul Bonner. finding the regulation partly valid, and
tract under the Commodity Exchange remanded the case for further proceed-
Act (7 U.S.C. Chapter 1). ings on whether Mayo qualified for the
While not binding guidance, a IRS diagnoses a defect income exclusion.
in Mayo Clinic
frequently asked question on the IRS Issues: Unrelated business taxable
website asks, “If my IRA invests in gold income of an exempt organization
or other bullion, can I store the bullion The Eighth Circuit’s decision subject to UBIT includes, under Sec.
in my home?” The IRS answers that bul- was a partial win for the Service, 514, income arising from debt-financed
lion must be in the physical possession which nonetheless does not property. However, certain qualified or-
of a bank or an IRS-approved nonbank acquiesce to the court’s holding ganizations may be exempt from UBIT
trustee. This rule also applies where regarding the formal-instruction with respect to income derived from,
an IRA-owned LLC buys the bullion, requirement for tax-exempt
the IRS advises. The IRS publishes a educational institutions.
list of its approved nonbank trustees.
Regs. Sec. 1.408-2(e) lays out general The IRS signaled it will continue to
fiduciary and fitness requirements for defend its regulatory requirement that
nonbank trustees, including that assets organizations primarily provide formal
requiring safekeeping must be depos- instruction to be considered educational
ited in an “adequate vault” (Regs. Sec. organizations under Sec. 170(b)(1)(A)(ii).
1.408-2(e)(5)(v)(B)). In an Action on Decision notice in

journalofaccountancy.com March 2022 | 29