SCOTUS Reports

Tag: I.R.C. section 6662

  • McNulty v. Commissioner, 157 T.C. No. 10 (2021): Taxable Distributions from Self-Directed IRAs and Accuracy-Related Penalties

    McNulty v. Commissioner, 157 T. C. No. 10 (2021)

    In McNulty v. Commissioner, the U. S. Tax Court ruled that an IRA owner’s physical possession of American Eagle coins purchased through a self-directed IRA’s LLC investment constituted taxable distributions. The court also upheld accuracy-related penalties for unreported IRA distributions, emphasizing the necessity of fiduciary oversight for IRA assets. This decision clarifies that IRA owners cannot take unfettered control over IRA assets without tax consequences, reinforcing the importance of fiduciary and custodial requirements in retirement savings schemes.

    Parties

    Andrew McNulty and Donna McNulty, Petitioners, v. Commissioner of Internal Revenue, Respondent. The McNultys were the petitioners at both the trial and appeal levels, with the Commissioner of Internal Revenue as the respondent throughout the litigation.

    Facts

    Andrew and Donna McNulty established self-directed IRAs and directed the assets to invest in a single-member LLC. Donna McNulty managed the LLC and used IRA funds to purchase American Eagle (AE) coins, which she took physical possession of at her residence. The Commissioner determined that Donna McNulty received taxable distributions equal to the cost of the AE coins in the year she received them. Andrew McNulty directed his IRA to invest in AE coins and a condominium through an LLC, conceding taxable distributions but contesting accuracy-related penalties for failure to report these distributions.

    Procedural History

    The case was submitted for decision without trial under Tax Court Rule 122. The Commissioner determined income tax deficiencies and accuracy-related penalties for the years 2015 and 2016. The McNultys timely filed their petition and resided in Rhode Island during the relevant years. The parties settled issues related to Andrew McNulty’s IRA distributions, except for the penalties. The remaining issues for Donna McNulty were whether she received taxable distributions from her IRA and whether both McNultys were liable for accuracy-related penalties.

    Issue(s)

    Whether Donna McNulty received taxable distributions from her self-directed IRA upon her receipt of American Eagle coins purchased through an LLC owned by the IRA?

    Whether Andrew and Donna McNulty are liable for accuracy-related penalties under I. R. C. section 6662(a) for substantial understatements of income tax attributable to their failure to report taxable distributions from their IRAs?

    Rule(s) of Law

    I. R. C. section 408(a) requires that an IRA be administered by a trustee acting as a fiduciary, and the IRA assets must be kept separate from other property except in a common trust or investment fund. I. R. C. section 408(d)(1) includes the value of assets distributed from an IRA in the distributee’s gross income. I. R. C. section 6662(a) and (b)(2) impose accuracy-related penalties for substantial understatements of income tax, unless the taxpayer can show reasonable cause and good faith.

    Holding

    The Tax Court held that Donna McNulty received taxable distributions from her self-directed IRA equal to the cost of the AE coins upon her receipt of the coins. The court also held that both McNultys were liable for I. R. C. section 6662(a) accuracy-related penalties for substantial understatements of income tax attributable to their failure to report taxable distributions from their IRAs.

    Reasoning

    The court’s reasoning focused on the fundamental requirement that IRA assets be under the oversight of a qualified custodian or trustee to ensure compliance with the statutory scheme of IRAs. Donna McNulty’s physical possession of the AE coins allowed her complete and unfettered control over them, which is inconsistent with the fiduciary requirements of section 408(a). The court rejected the argument that the flush text of section 408(m)(3) allowed for an exception to custodial requirements, emphasizing that no such exception exists without clear statutory text. The court also noted that the McNultys failed to establish a reasonable cause defense for the penalties, as they did not seek or receive professional advice and did not disclose relevant information to their CPA.

    Disposition

    The Tax Court’s decision will be entered under Rule 155, affirming the Commissioner’s determination of taxable distributions and accuracy-related penalties.

    Significance/Impact

    This case clarifies that IRA owners cannot take physical possession of IRA assets without incurring tax consequences, reinforcing the importance of fiduciary oversight in the administration of IRAs. It also underscores the necessity for taxpayers to report IRA distributions accurately and seek professional advice when engaging in complex investment structures. The decision may impact the structuring of self-directed IRAs and LLCs, particularly in investments involving physical assets like coins, and serves as a reminder of the strict application of accuracy-related penalties for substantial understatements of income tax.

  • McNeill v. Commissioner, 148 T.C. 23 (2017): Jurisdiction in Collection Due Process Cases Involving Partnership Penalties

    McNeill v. Commissioner, 148 T. C. 23 (U. S. Tax Ct. 2017)

    In McNeill v. Commissioner, the U. S. Tax Court ruled that it has jurisdiction to review a Collection Due Process (CDP) determination concerning penalties related to partnership items, despite these penalties being excluded from the court’s deficiency jurisdiction under TEFRA. This decision clarifies the Tax Court’s authority in CDP cases post-amendment by the Pension Protection Act of 2006, ensuring taxpayers can contest collection actions for such penalties in the Tax Court, which is significant for those involved in partnership tax disputes.

    Parties

    Corbin A. McNeill and Dorice S. McNeill, as Petitioners, v. Commissioner of Internal Revenue, as Respondent.

    Facts

    In 2003, Corbin A. McNeill, after retiring, invested in a distressed asset/debt (DAD) transaction by purchasing an 89. 1% interest in GUISAN, LLC, which held Brazilian consumer debt. GUISAN contributed this debt to LABAITE, LLC, another partnership. A subsequent sale of these receivables by LABAITE resulted in a claimed loss, which the McNeills reported on their 2003 joint federal income tax return. The IRS issued a notice of final partnership administrative adjustment (FPAA) to LABAITE’s partners, disallowing the loss and asserting an accuracy-related penalty under I. R. C. section 6662. The McNeills paid the tax liability and interest but not the penalty. After the IRS assessed the penalty and initiated collection procedures, the McNeills requested a CDP hearing, challenging the penalty’s assessment. The IRS Appeals officer issued a notice sustaining the collection action, asserting that the McNeills could not raise the issue of their underlying tax liability.

    Procedural History

    The McNeills, as GUISAN’s tax matters partner, filed a complaint in the U. S. District Court for the District of Connecticut for judicial review of the 2003 FPAA. They made an estimated deposit to satisfy jurisdictional requirements but not the section 6662 penalty. The case was voluntarily dismissed with prejudice by the McNeills, and the District Court deemed the FPAA correct without adjudicating partner-level defenses. Following the IRS’s assessment of the penalty and subsequent collection notices, the McNeills requested a CDP hearing, which resulted in a notice of determination sustaining the collection action. The McNeills timely filed a petition with the Tax Court, challenging the Tax Court’s jurisdiction over the case due to the penalty’s exclusion from deficiency procedures under I. R. C. section 6230(a)(2)(A)(i).

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction under I. R. C. section 6330(d)(1), as amended by the Pension Protection Act of 2006, to review a CDP determination when the underlying tax liability consists solely of a penalty that relates to an adjustment to a partnership item excluded from deficiency procedures by I. R. C. section 6230(a)(2)(A)(i)?

    Rule(s) of Law

    I. R. C. section 6330(d)(1) provides the Tax Court with jurisdiction to review a notice of determination issued pursuant to a CDP hearing. This jurisdiction was expanded by the Pension Protection Act of 2006 to include all such notices, regardless of the underlying liability’s type. I. R. C. section 6221 mandates that the tax treatment of partnership items and related penalties be determined at the partnership level. I. R. C. section 6230(a)(2)(A)(i) excludes penalties relating to partnership item adjustments from deficiency procedures.

    Holding

    The U. S. Tax Court holds that it has jurisdiction to review the Commissioner’s determination in the CDP case concerning the asserted I. R. C. section 6662(a) penalty, despite the penalty being excluded from the Tax Court’s deficiency jurisdiction under I. R. C. sections 6221 and 6230.

    Reasoning

    The Tax Court’s jurisdiction in CDP cases is governed by I. R. C. section 6330(d)(1), which was amended in 2006 to grant the Tax Court exclusive jurisdiction over all CDP determinations. The amendment aimed to provide taxpayers with a single venue for contesting collection actions. The court noted that prior to the amendment, it lacked jurisdiction over penalties not subject to deficiency proceedings, such as those under I. R. C. section 6662 related to partnership items. However, the 2006 amendment intended to expand the court’s jurisdiction to include review of all collection determinations, regardless of the type of underlying liability. The court cited cases like Yari v. Commissioner, Mason v. Commissioner, and Callahan v. Commissioner, which upheld the Tax Court’s jurisdiction in similar situations. The court reasoned that the legislative intent behind the amendment was to ensure that taxpayers could contest collection actions for all types of liabilities in the Tax Court, thereby overriding the exclusion of certain penalties from deficiency jurisdiction in the context of CDP review.

    Disposition

    The U. S. Tax Court asserts jurisdiction over the case and will proceed to address the remaining issues in a separate opinion.

    Significance/Impact

    The McNeill decision is doctrinally significant as it clarifies the Tax Court’s jurisdiction in CDP cases involving penalties related to partnership items post-Pension Protection Act of 2006. This ruling ensures that taxpayers can challenge collection actions for such penalties in the Tax Court, which is crucial for those involved in partnership tax disputes. The decision aligns with the legislative intent to streamline the review process for collection actions and provides a clearer path for taxpayers to contest IRS determinations without the necessity of separate refund litigation for partner-level defenses. Subsequent courts have treated this ruling as authoritative in determining the scope of the Tax Court’s jurisdiction in similar cases, impacting legal practice by offering a more unified approach to resolving disputes over penalties related to partnership items.