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Tax Court: Roth IRA can't own S corporation stock

September 30, 2009

The Tax Court yesterday took 26 pages to decide that a Roth IRA is not a qualified S corporation shareholder -- a lot of effort to come to an obvious answer. While that seems like a long road to get to the right place, it could have been worse. Four of the Tax Court judges took 31 pages to get to the wrong answer, in dissent.

The dissent, written by the florid Judge Holmes, gets philosophical towards the end:

This case is a reminder that tax law does not cascade into the real world through a single channel. It meanders instead through a vast delta, and any general principles tugged along by its current are just as likely to sink in the braided and re-braided rivulets of specific Code provisions and the murk of regulations as they are to survive and be useful in deciding real cases. Taproot thinks it found a course through the confluence of the subchapter S and IRA rules that it could successfully navigate.

Maybe so, but anybody who has tried to get down the Mississippi would tell you that it's best to stick to the main channel if you want to get down the river. Except for a narrow exception for banks, IRAs are not permitted to own S corporation stock.

Cite: Taproot Administrative Services Inc. v. Commissioner; 133 T.C. No. 9