Court Holds That Roth IRAs Cannot Be Shareholders In S Corporation

A taxpayer established a Roth IRA that he listed as the sole shareholder of the S corporation, Taproot Administrative Services, Inc. 

The Ninth Circuit Court of Appeals held in Taproot Administrative Services, Inc. v. Comm’r, that the taxpayer did not establish a valid S corporation. The court rejected the taxpayer’s argument that the court either should consider himself or the IRA as the corporation’s sole beneficiary. The court held that the IRA should not be treated like a grantor’s trust, which is taxed on its current income and permitted under S corporation eligibility rules. The court determined that because both IRAs and Roth IRAs are subject to deferred taxation, it is incompatible with current S corporation taxation rules. The court found support for its holding in Rev. Rul. 92-73, which states that IRAs cannot be S corporation shareholders. 

See Sally Schreiber, Roth IRAs Cannot Be S Corporations Shareholders, Ninth Circuit Holds, Journal of Accountancy, Mar. 22, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.