Taproot Administrative Services, Inc. v. Commissioner
2012 U.S. App. LEXIS 5865
| 9th Cir. | 2012Background
- Taproot elected S corporation status for 2003 and issued all stock to a custodial Roth IRA for Di Mundo; the Roth IRA remained Taproot's sole shareholder in 2003.
- IRS issued deficiency for 2003, arguing Roth IRAs are not eligible S shareholders; Taproot was therefore a C corporation for 2003.
- Tax Court upheld the IRS, concluding Roth IRAs are not eligible S shareholders under 1361(b) and Revenue Ruling 92-73; no statutory or regulatory provision in 2003 explicitly permitted IRA ownership.
- Tax Court treated Revenue Ruling 92-73 as persuasive Skidmore deference; found congressional intent against IRA ownership of S stock prior to 2004 amendment.
- On appeal, Ninth Circuit adopted Tax Court reasoning but elaborated to address Taproot’s alternative argument that custodial Roth IRAs are indistinguishable from individual owners under 1.1361-1(e)(1).
- The court affirmed the Tax Court’s decision, holding custodial Roth IRAs are not eligible S shareholders for 2003.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether custodial Roth IRAs qualify as S corporation shareholders | Taproot argues Roth IRAs should be treated as individual owners | Commissioner argues custodial Roth IRAs are not eligible shareholders under 1361(b) and 1.1361-1(e)(1) | Custodial Roth IRAs are ineligible shareholders; affirmed. |
| Whether Treasury Regulation 1.1361-1(e)(1) authorizes IRA custodians as shareholders | Taproot relies on regulation to treat the custodian's beneficiary as shareholder | Commissioner construes the regulation to exclude IRAs from shareholder attribution | Regulation does not authorize IRA custodians to extend S status; affirmed. |
| Whether Revenue Ruling 92-73 supports eligibility of IRAs for S status | Taproot relies on guidance treating IRAs like grantor/QSST trusts | Commissioner—IRAs are not eligible; ruling persuasive under Skidmore | Tax Court’s reliance on Rev. Rul. 92-73 is persuasive; IRAs ineligible. |
Key Cases Cited
- Gitlitz v. Comm'r, 531 U.S. 206 (2001) (S corporation pass-through taxation framework; eligibility prerequisites)
- Bufferd v. Comm'r, 506 U.S. 523 (1993) (S corporation pass-through structure; focus on eligibility)
- Skidmore v. Swift & Co., 323 U.S. 134 (1944) (deference to agency interpretations based on persuasiveness)
- United States v. Mead Corp., 533 U.S. 218 (2001) (agency interpretations—type of deference depends on context)
- Taproot Admin. Serv. v. Comm'r, 133 T.C. 202 (2009) (Tax Court held IRAs not eligible S shareholders; revenue ruling persuasive)