IRA Trustee Agreement Does Not Allow Investment In Land, So Owner's Withdrawal To Buy Land Nets 10 Percent Penalty and Penalty For Substantial Understatement.

The petitioner had an IRA and placed it with a company with trustee agreements specifying that investments of IRA account funds only allowed in financial instruments.  The petitioner ordered a cash withdrawal and checked Code 1 Box on the withdrawal slip which meant that the petitioner was making an early withdrawal with no known exception.  The funds were wired to purchase the land and title was taken in the petitioner's name.  IRS asserted the 10 percent early withdrawal penalty and the 25 percent penalty for substantial understatement.  The court determined that terms of trustee agreement controlled, and the petitioner purchased the land personally with the IRA funds.   Court noted that a trustee-to-trustee transfer to a trustee that could invest in land would have been allowed.  Dabney v. Comr., 2014 T.C. Memo. 108.