concurring: I agree with much of the majority opinion but write to supplement the argument therein.
In this case, we must decide whether a Roth ira is a proper shareholder of an S corporation. Because the Roth IRA is a custodial account, petitioner argues that, pursuant to section 1.1361-l(e)(l), Income Tax Regs., its beneficiary, Mr. DiMundo, is considered the shareholder of the S corporation. Mr. DiMundo, of course, would be a proper S corporation shareholder.
I agree with Judge Holmes as to the meaning of section 1.1361-l(e)(l), Income Tax Regs. Yet acceptance of that meaning is only the starting point for an analysis of the interaction between the rules governing S corporations and those governing IRAs. See, e.g., Boys Markets, Inc. v. Retail Clerks Union, Local 770, 398 U.S. 235, 250 (1970) (“Statutory interpretation requires more than concentration upon isolated words; rather, consideration must be given to the total corpus of pertinent law and the policies that inspired ostensibly inconsistent provisions.”).
Custodial accounts constituting IRAs are accorded special (tax-exempt) treatment by section 408(e)(1). The general rule for custodial accounts (as the majority notes, see majority op. note 20) is flowthrough taxation of the beneficiary; i.e., current inclusion of income, etc. That tax treatment is a key characteristic of custodial accounts and, presumably, the rationale for considering the beneficiary of a custodial account that holds S corporation stock to be a shareholder of the S corporation. The S corporation thus earns income that (thanks to the regulation) is considered to flow directly to the beneficiary of the custodial account. Custodial accounts qualifying as IRAs, however, preclude that flowthrough tax treatment, either deferring taxation of (what is still pretax) income (traditional IRA) or exempting that income entirely (Roth IRA).1 For that reason, a custodial account qualifying as an IRA utterly subverts the rationale for the attribution rule in the regulation. Thus, I do not consider the regulation as authority that a custodial account qualifying as an IRA is a proper shareholder of an S corporation.2
In short, the critical attributes of an IRA — i.e., deferral of or exemption from taxation — are antithetical to the rationale for permitting custodial accounts to be shareholders of S corporations. Section 408 affords exceptional (and highly favorable) tax treatment to certain custodial accounts. For that reason, IRAs are different in kind from regular custodial accounts and thus are not eligible S corporation shareholders.
Gale, Thornton, Marvel, Goeke, and Wherry, JJ., agree with this concurring opinion.In his dissent, Judge Holmes quotes sec. 1.1361-l(e)(l), Income Tax Regs., as follows: “Ordinarily, the person who would have to include in gross income dividends distributed with respect to the stock of the corporation (if the corporation were a C corporation) is considered to be the shareholder of the corporation.” Dissenting op. p. 218. Yet the effect (indeed, the purpose) of sec. 408 is to alter the tax dynamics of that distribution — the person who owns C corporation stock through an IRA need not (of course) include in gross income any dividend so distributed.
Judge Holmes argues that “the stakes are not that great”. Dissenting op. p. 236. But that misses the point. I suggest that, regardless of the financial stakes, the logic of the statute precludes the result petitioner seeks.