Do you know the difference between a marionette and a puppet? Both are moveable models, but while all marionettes are puppets, not all puppets are marionettes. The marionette is controlled by strings from above, while puppets may or may not have strings. For IRA distributions, the type of control you have over distributions – and how that control affects the taxability of the distribution — can come down to a similar fine distinction.
In T.C. Memo. 2016-28 (McGaugh), the taxpayer owned a self-directed IRA. A brokerage firm acted as custodian for the account, and the taxpayer could direct the firm as to what assets he wanted to buy or trade.
In 2011, the taxpayer requested the custodian use funds from the IRA to purchase 7,500 shares of a financial company stock in which he already owned a position. The custodian would not purchase the shares directly on the taxpayer’s behalf, so the taxpayer requested that the custodian initiate a wire transfer of $50,000 directly to the company in which he wanted to buy the stock.
On October 7, 2011, the custodian initiated, and the financial company received, the wire transfer. On November 28, 2011, the financial company issued the stock certificate in the name of the taxpayer’s IRA for the benefit of the taxpayer, as the taxpayer had requested.
The financial company claims the stock certificate was mailed to the custodian on or about the same day as the November 28, 2011, issuance date on the certificate. The custodian states that the stock certificate was not received until “early 2012,” more than 60 days after the wire transfer.
After receipt of the stock certificate, the custodian attempted to mail it to the taxpayer, but it was returned by the postal service at least twice.
Believing the transaction to be subject to the rollover rules, and believing the transfer to be outside the 60-day limit for a nontaxable rollover, the custodian reported the $50,000 transaction as a taxable distribution on Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” The custodian also refused to treat the stock as an asset of the IRA.
The IRS determined that the wire transfer issued by the custodian constituted a “distribution” from the taxpayer’s IRA and was includible in gross income. The IRS issued a notice of deficiency for the 2011 tax year with a $13,538 assessment of tax due.
The taxpayer says he merely acted as a conduit, or agent, for the custodian. He says there was no taxable distribution because all he did was pull the strings to get the transaction accomplished and he never had control of the funds.
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For the taxpayer.
There was no literal distribution of IRA funds to the taxpayer. The evidence shows that the custodian wired money to the financial company for which the financial company issued shares to the IRA. No cash, check, or wire transfer ever passed through the taxpayer’s hands, and he was therefore not a literal “payee or distributee” of any amount.
The taxpayer was, at most, a conduit of the IRA funds. The IRS evidently reckons that the foregoing account is an oversimplified description of the transaction, since the custodian declined to make a direct purchase and instead simply wired funds at the taxpayer’s instruction, thus arguably putting the funds at his discretion.
But if we adopt this perspective on the transaction and acknowledge the taxpayer as the director of the transaction, the outcome does not change. The owner of an IRA is entitled to direct the investment of the funds without forfeiting the tax benefits of an IRA.
Even acknowledging that the taxpayer pulled all the strings, it remains true that the funds the IRA released went straight to the investment and resulted in the stock being issued straight to the IRA.
If we analyze the situation for possible “constructive receipt” of the funds from the custodian by the taxpayer (and constructive transfer of the funds by him to the financial company), the outcome still does not change.
The taxpayer wished to acquire for his IRA stock that apparently could not be purchased directly by the custodian. He therefore arranged the purchase of stock, instructed the custodian to make the wire transfer to the financial company, and instructed the financial company to deliver the certificate directly to the custodian.
The taxpayer never personally handled any check by which the IRA funds were transmitted to the financial company. Instead, he requested that the custodian transfer the funds via wire transfer directly to the issuing company, and that transfer was duly made without the taxpayer’s interposition. The stock certificate was sent directly to the custodian.
We hold that the taxpayer did not receive a distribution when the custodian made the wire transfer to the financial company.