And just when I announced my article praising the Roth IRAs, this happens:
In Taproot Administrative Services, Inc., No 10-70892 (9th Cir. 2012), the Ninth Circuit Court of Appeals (the “Court”) ruled that a Roth IRA cannot be a shareholder of a Sub S corporation. Why Not?
In this case, the Roth IRA was the corporation’s sole shareholder. According to the Court, the Internal Revenue Code (the “Code”) limits the types of shareholders of a Sub S corporation to domestic individuals, estates qualified plans’ tax-exempt trusts , and other certain trusts. Sections 1361(b)(1)(B), (c)(2), and (c)(6) of the Code. The eligible, other certain trusts are generally: (1) those which are treated as owned by an individual (sections 1361(c)(2)(A) and (d) of the Code), that is, grantor trusts, or (2) those which are qualified subchapter S trusts (sections 1361(c)(2)(A) and (d) of the Code).The Court ruled that the Roth IRA is not one of the types of shareholders that a Sub S corporation could have under those Code provisions. In making this determination, it rejected the arguments that the relevant owner is the individual who established and owned the Roth IRA, and that the Roth IRA should be treated as a grantor trust or a qualified subchapter S trust.
The result of the Court’s ruling is that the corporation in question must be treated as a C corporation, rather than as a Sub S corporation.