IRAs as Shareholders in Subchapter S Corporations – Who Is An “Individual”?

March 26, 2012 | Roger McEowen and Erika Eckley

A majority of the full U.S. Tax Court has ruled in a test case that a Roth IRA is not qualified to be a shareholder in an S corporation. The case presents an interesting analysis of who is an “individual” for purposes of being an eligible S corporation shareholder,with a majority of the Tax Court ultimately concluding that IRAs cannot be considered grantor trusts (which are eligible S corporation shareholders because the individual grantor is deemed to be the shareholder) in determining their eligibility as S corporation shareholders because the rules that apply to grantor trusts “are incompatible with the rules that apply to” IRAs.  In reaching its conclusion, the majority focused heavily on an IRS Revenue Ruling, ignored an existing Treasury Regulation on the matter and provided some insight as to the level of weight and authority practitioners and taxpayers can attach to various IRS pronouncements.

Full PDF: