FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TAPROOT ADMINISTRATIVE SERVICES,
INC.,
No. 10-70892
Petitioner-Appellant,
v. Tax Ct. No.
15396-07
COMMISSIONER OF INTERNAL
OPINION
REVENUE,
Respondent-Appellee.
Appeal from a Decision of the United States Tax Court
Argued and Submitted
November 9, 2011—Pasadena, California
Filed March 21, 2012
Before: Mary M. Schroeder and Stephen Reinhardt,
Circuit Judges, and Henry E. Hudson, District Judge.*
Opinion by Judge Hudson
*The Honorable Henry E. Hudson, United States District Judge for the
Eastern District of Virginia, sitting by designation.
3299
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3301
COUNSEL
Steven R. Mather (argued), Kajan Mather and Barish, Beverly
Hills, California, for the petitioner-appellant.
John A. DiCicco, Acting Assistant Attorney General; Richard
Farber and John A. Dudeck (argued), Attorneys; U.S. Depart-
ment of Justice, Tax Division, Washington, D.C., for the
respondent-appellee.
3302 TAPROOT ADMINISTRATIVE SERVICES v. CIR
OPINION
HUDSON, District Judge:
Under the Internal Revenue Code, certain eligible corpora-
tions may elect S corporation status, thereby acting as pass-
through entities for federal taxation purposes. The rules gov-
erning eligibility to elect S corporation status restrict various
attributes those corporations may have, including the number
of shareholders, the classes of stock issued, and the types of
shareholders. The single question presented is whether a cor-
porate taxpayer is ineligible for S corporation status, and
therefore must be taxed as a C corporation, because its sole
shareholder is a custodial Roth Individual Retirement
Account (Roth IRA). Taproot Administrative Services, Inc.
(Taproot) contends that a Roth IRA cannot be distinguished
from its individual owner under a reasonable interpretation of
the governing statute. Adhering to this construction, Taproot
thus argues that it satisfies the S corporation requirements.
For the reasons that follow, we disagree with Taproot and
affirm the decision of the Tax Court.
I.
Qualifying small business corporations may affirmatively
elect S corporation status for federal income tax purposes.
I.R.C. §§ 1361(a), 1362(a)(1) (2006). Under I.R.C. §§ 1363(a)
and 1366(a)(1)(A), an S corporation’s “profits pass through
directly to its shareholders on a pro rata basis and are reported
on the shareholders’ individual tax returns.” Gitlitz v.
Comm’r, 531 U.S. 206, 209 (2001) (citing I.R.C.
§ 1366(a)(1)(A)). In this way, an S corporation serves as a
conduit through which income flows to its shareholders. Id.
(“Subchapter S allows shareholders of qualified corporations
to elect a ‘pass-through’ taxation system under which income
is subjected to only one level of taxation.”); see also Bufferd
v. Comm’r, 506 U.S. 523, 525 (1993).
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3303
To receive such favorable tax treatment under the statute,
a small business corporation must first meet all of the eligibil-
ity requirements before electing S corporation status.1 Eligi-
bility turns on three characteristics: (1) the number of
shareholders, (2) the class of stock, and (3) the types of share-
holders. I.R.C. § 1361(b).2 In pertinent part, the statute limits
eligible types of shareholders to domestic individuals, estates,
certain trusts, and certain tax-exempt entities. I.R.C.
§ 1361(b)(1)(B), (c)(2), (c)(6). As of the 2003 tax year,
§ 1361(c)(2)(A) permitted the following trusts to be eligible
shareholders:
(i) A trust all of which is treated (under subpart E
of part I of subchapter J of this chapter) as owned by
an individual who is a citizen or resident of the
United States.
(ii) A trust which was described in clause (i)
immediately before the death of the deemed owner
and which continues in existence after such death,
but only for the 2-year period beginning on the day
of the deemed owner’s death.
(iii) A trust with respect to stock transferred to
it pursuant to the terms of a will, but only for the 2-
year period beginning on the day on which such
stock is transferred to it.
1
Furthermore, any subsequent violation of one or more of the eligibility
rules automatically terminates a corporation’s S status. I.R.C. § 1362(a),
(d)(2). For example, if an eligible S corporation shareholder sells or other-
wise transfers his shares to an ineligible shareholder, the corporation’s sta-
tus as an S corporation terminates immediately as a matter of law on the
date of the transfer. I.R.C. § 1362(d)(2); Treas. Reg. § 1.1362-2(b)(2).
2
Section 1361(b)(1)(A) limits the total number of shareholders to 100
(during the 2003 tax year, however, § 1361(b)(1)(A) limited the total num-
ber of shareholders to seventy-five). See American Jobs Creation Act of
2004, Pub. L. 108-357 § 232(a), 118 Stat. 1434 (2004). Additionally, the
statute permits eligible S corporations to issue only one class of stock.
3304 TAPROOT ADMINISTRATIVE SERVICES v. CIR
(iv) A trust created primarily to exercise the vot-
ing power of stock transferred to it.
(v) An electing small business trust.3
Taxpayer Paul Di Mundo (Di Mundo) incorporated Taproot
Administrative Services, Inc. in the state of Nevada on Octo-
ber 2, 2002. Taproot elected S corporation status effective as
of the date of incorporation and filed its 2003 tax return on a
Form 1120S, U.S. Income Tax Return for an S Corporation.
On January 2, 2003, Taproot issued all outstanding shares of
its stock to a custodial Roth IRA account held at the First
Trust Co. of Onaga, in Onaga, Kansas, for the benefit of Di
Mundo.4 The custodial Roth IRA5 account remained Taproot’s
3
The categories of eligible Subchapter S shareholders, as originally
envisioned, have morphed considerably in passing years. At the time Con-
gress first added Subchapter S in 1958, the list of permissible shareholders
was limited to domestic individuals and estates. Over the years, Congress
has gradually expanded the limits of eligibility to include some trusts and
tax-exempt entities. In the Tax Reform Act of 1976, Congress extended
Subchapter S to certain trusts, Pub. L. No. 94-455, § 902(f), 90 Stat. 1609,
including what is commonly referred to as a grantor trust, “which is
treated as owned by an individual who is a citizen or resident of the United
States.” I.R.C. § 1361(c)(2)(A)(i). The amendment also granted eligibility
to voting trusts and electing small business trusts, among others. In 1996,
Congress amended the statute through the Small Business Job Protection
Act to permit certain tax-exempt organizations to own S corporation stock.
Pub. L. No. 104-188, § 1316(a), 110 Stat. 1785. Most notably, a 2004
amendment extended the types of eligible trusts to banks whose stock is
held in a trust qualifying as an IRA or a Roth IRA. American Jobs Cre-
ation Act of 2004, Pub. L. No. 108-357, § 233(a), 118 Stat. 1434 (2004).
That amendment, however, was enacted after the tax year here at issue.
4
Under I.R.C. § 408(a) and § 408A(a), the terms IRA and Roth IRA
generally refer to “a trust created or organized in the United States for the
exclusive benefit of an individual or his beneficiaries.” I.R.C. §§ 408(a),
408A(a). Both IRAs and Roth IRAs allow earnings on contributions to
accrue tax-free. The basic tax characteristics of a traditional IRA are (1)
deductible contributions, (2) the accrual of tax-free earnings (except with
respect to § 511 unrelated business income), and (3) the inclusion of distri-
butions in gross income. I.R.C. §§ 219(a), 408(a), (d)(1), (e). More
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3305
sole shareholder during the 2003 tax year. According to its
2003 tax return, Taproot earned a total income of $322,420.
Taproot reported total deductions of $320,191, resulting in a
net ordinary income of $2,229. Taproot also reported interest
income totaling $8,549.
On April 10, 2007, the Commissioner of the Internal Reve-
nue Service (I.R.S.) issued a notice of deficiency to Taproot
for the 2003 tax year. Among other findings,6 the Commis-
sioner determined that a Roth IRA did not qualify as an eligi-
ble shareholder of an S corporation. Consequently, Taproot
was deemed taxable as a C corporation for the 2003 tax year.
II.
In response to the Commissioner’s notice of deficiency,
Taproot filed a petition with the U.S. Tax Court arguing that
the individual beneficiary of a custodial account also qualify-
ing as a Roth IRA should be considered the shareholder for
purposes of the S corporation statute, or, in the alternative, a
Roth IRA should be treated as a grantor trust pursuant to
recently, Congress created Roth IRAs as part of the Taxpayer Relief Act
of 1997. Pub. L. No. 105-34, § 302, 111 Stat. 788, 825. Roth IRAs differ
from traditional IRAs in that contributions may not be deducted, and
future distributions are not taxable. I.R.C. § 408A(a), (c)(1), (d)(1), (2)(A).
5
Sections 408(h) and 408A(a) permit a custodial account to be treated
as an IRA or Roth IRA trust. In such cases, “[f]or purposes of [the statu-
tory] section, a custodial account shall be treated as a trust if the assets of
such account are held by a bank . . . and if the custodial account would,
except for the fact that it is not a trust, constitute an [IRA].” I.R.C.
§ 408(h); see also id. § 408A(a) (“[A] Roth IRA shall be treated for pur-
poses of this title in the same manner as an [IRA].”). Furthermore, the
“custodian of such an account shall be treated as the trustee thereof” for
the purposes of the statutory title. Id. § 408(h).
6
The I.R.S. also challenged the income and expenses reported by Tap-
root. The parties settled these issues. Thus, the only issue before this Court
on appeal is whether Taproot was eligible for S corporation status during
the 2003 tax year.
3306 TAPROOT ADMINISTRATIVE SERVICES v. CIR
§ 1361(c)(2)(A). Specifically, Taproot contended that as the
sole beneficiary of the DiMundo Roth IRA, DiMundo should
be considered the shareholder and, thus a qualifying individ-
ual for the purposes of the statute. According to Taproot,
DiMundo’s eligibility as such is governed by § 1.1361-1(e)(1)
of the Treasury Regulations. In relevant part, the regulation
provides that “[t]he person for whom stock of a corporation
is held by a nominee, guardian, custodian, or an agent is con-
sidered to be the shareholder of the corporation for purposes
of [the S corporation statute].” Treas. Reg. § 1.1361-1(e)(1).
Taproot further supported this conclusion by citing Revenue
Ruling 66-266, 1966-2 C.B. 356, and I.R.S. Priv. Ltr. Rul. 86-
05-028 (Nov. 4, 1985) for the propositions that S corporation
stock held in a custodial account for a disabled person or by
a custodian under the Uniform Gifts to Minors Act, respec-
tively, should be treated as held by the disabled person or
child individually.
In the alternative, Taproot argued that a Roth IRA should
be classified as a grantor trust, which qualifies as an eligible
S corporation shareholder. Specifically, § 1361(c)(2)(A)(i)
extends shareholder eligibility to any grantor trust7 “all of
which is treated . . . as owned by an individual who is a citi-
zen or resident of the United States.”
The Tax Court rejected Taproot’s arguments, holding that
a Roth IRA could not be an S corporation shareholder under
the eligibility rules in place during 2003. As a result, Taproot
was ineligible for S corporation status in 2003 and was there-
fore a C corporation for federal income tax purposes. In artic-
ulating its reasoning, the Tax Court first acknowledged that
“no statute or regulation in effect during 2003 explicitly pro-
hibited a traditional or Roth IRA from owning S corporation
stock.” Taproot Admin. Serv. v. Comm’r, 133 T.C. 202, 208
7
Section 1361(c)(2)(A)(i) specifically references the sections of the
I.R.C. governing grantors and others treated as substantial owners of
trusts. See I.R.C. §§ 671-79.
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3307
(2009). The Tax Court then identified Revenue Ruling 92-73,
as providing the only guiding legal authority on the issue. Id.
Examining this ruling, in which the Commissioner held that
a trust that qualifies as an IRA is not a permitted shareholder
of an S corporation, the Tax Court concluded that the underly-
ing rationale was sound and comported with the apparent
intent of Congress, thus providing a compelling reason for its
decision. The Tax Court was also mindful that under Tap-
root’s theory of statutory construction, DiMundo would avoid
virtually all taxation on his S corporation profits.
In determining the requisite deference owed to a revenue
ruling, the Tax Court noted that it was not bound by the offi-
cial interpretations of the I.R.S., which “are published for the
information and guidance of taxpayers, I.R.S. officials, and
others concerned.” Id. (quoting Treas. Reg.
601.601(d)(2)(i)(a)). Rather, “applying the standard enunci-
ated by the Supreme Court in Skidmore v. Swift & Co., 323
U.S. 134, 140 (1944), the weight (if any) that [the court must]
afford them depends upon their persuasiveness and the consis-
tency of the Commissioner’s position over time.” Id. at
208-09.
Extending Skidmore deference to Revenue Ruling 92-73,
the Tax Court found the ruling to “sensibly distinguish[ ]
IRAs from grantor trusts.” Id. at 210. In making that determi-
nation, the Tax Court relied in part on the rationale of Reve-
nue Ruling 92-73, stating that:
[T]raditional IRAs are not eligible S corporation
shareholders because the beneficiary of a traditional
IRA is not taxed currently on the IRA’s share of the
S corporation’s income whereas the beneficiaries of
the permissible S corporation shareholder trusts
listed in section 1361(c)(2)(A) are taxed currently on
the trust’s share of such income.
3308 TAPROOT ADMINISTRATIVE SERVICES v. CIR
Id. The Tax Court also noted the functional difference
between IRAs and grantor trusts. Governed by distinct code
sections, traditional and Roth IRAs exist separately from their
owners for federal taxation purposes, while grantor trusts do
not.8
Turning to the second factor set forth in Skidmore, the Tax
Court also found that the Commissioner had applied the reve-
nue ruling consistently. In particular, the Tax Court cited the
Commissioner’s uniform citation to Revenue Ruling 92-73 in
private letter rulings addressing automatic terminations of S
corporation status upon stock acquisition by IRAs. Id.
Finally, the Tax Court shifted its attention to the legislative
intent behind the S corporation statute, finding the only avail-
able evidence to suggest that Congress did not intend to allow
IRAs to own S corporation stock. Id. Although at the time
Congress initially drafted the S corporations statute, both tra-
ditional and Roth IRAs had yet to be created,9 the Tax Court
reasoned that “had Congress intended to render IRAs eligible
S corporation shareholders, it could have done so explicitly,”
as it did with the narrow 2004 amendment allowing banks
with IRA shareholders to elect S status in specific circum-
stances.10 Id. at 213.
8
The Tax Court further noted the irrationality of imparting grantor status
to a traditional or Roth IRA. Particularly, because grantor trusts are simply
conduits through which income and gains pass to the grantor, the grantor
must account for any income and deductions pertaining to the trust. 133
T.C. at 212. Income attributable to a traditional or Roth IRA, on the other
hand, does not pass to the beneficiary for tax purposes. Moreover, the tax-
free accrual of income allowed at the IRA level is “one of the cornerstones
of traditional and Roth IRAs.” Id. Treating IRAs as grantor trusts would
eliminate that quintessential benefit. Id.
9
It was not until 1974, as part of the Employee Retirement Income
Security Act, that Congress enacted the original provisions creating IRAs.
Pub. L. No. 93-406, § 408, 88 Stat. 959.
10
Congress added § 1361(c)(2)(A)(vi) to the S corporation statute in
2004, permitting traditional and Roth IRAs to be shareholders of banks or
depository institution holding companies. However, this eligibility only
extends to stock held by IRAs on or before October 22, 2004.
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3309
Noting the fact that Congress passed the 2004 amendment
after the tax year at issue, the Tax Court posited that Congress
would not have “engaged in a useless act.” Id. at 214. This
was especially true in light of Congress’s 1999 directive to
“the Comptroller General of the United States to conduct a
study of possible revisions to the rules governing S corpora-
tions including ‘permitting shares of such corporations to be
held in individual retirement accounts.’ ” Id. at 213 (quoting
Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat.
1470 (1999)). Subsequently, the Tax Court voiced its reluc-
tance to find that Congress had sent the Comptroller General
on a “fool’s errand,” inviting it to reach a conclusion that
would have rendered “an entire clause of section 1361 mere
surplusage.” Id. at 214. For these reasons, the Tax Court con-
cluded that traditional and Roth IRAs were not eligible share-
holders under § 1361(b).
III.
We review the Tax Court’s grant of summary judgment de
novo. Miller v. Comm’r, 310 F.3d 640, 642 (9th Cir. 2002).
The record is reviewed in the light most favorable to the
appellant “to determine whether there is a genuine issue of
fact and whether the tax court applied the substantive law cor-
rectly.” Sierra Club Inc. v. Comm’r, 86 F.3d 1526, 1530 (9th
Cir. 1996) (internal quotation marks and citation omitted).
This appeal does not involve any disputed issues of fact.
Rather, the central question for review turns solely on whether
a custodial Roth IRA qualifies as an eligible shareholder for
the purpose of assessing S corporation taxation.
At the outset, we adopt the Tax Court’s reasoning; how-
ever, as observed in Judge Halpern’s concurring opinion,11 the
11
Judge Halpern, of the Tax Court, concluded that the plain meaning of
the regulation served only as a “starting point for an analysis of the inter-
action between the rules governing S corporations and those governing
IRAs.” 133 T.C. at 216 (Halpern, J., concurring). His concurrence then
3310 TAPROOT ADMINISTRATIVE SERVICES v. CIR
analysis requires further elaboration. In particular, the Tax
Court cabined its focus to the applicability of the statutory
provision recognizing grantor trusts as eligible shareholders to
Roth IRAs. This narrow perspective fails, however, to
squarely address Taproot’s alternative argument for eligibility
as the legal owner of the individual shares of stock compris-
ing the IRA.12 On appeal, Taproot therefore appears to con-
centrate the bulk of its argument on the contention that IRAs
and Roth IRAs as investment instruments are indistinguish-
able from their individual owners—in this case, Di Mundo.
Taproot maintains that the Di Mundo Roth IRA, which held
all of Taproot’s outstanding shares during the 2003 tax year,
functioned merely as the form of Di Mundo’s individual
investment account. Thus, under Taproot’s logic, the shares
were owned by an eligible shareholder within the meaning of
the S corporation statute. At minimum, Taproot claims that
the plain language of Treasury Regulation § 1.1361-1(e)(1)
explicitly authorizes those IRAs and Roth IRAs created as
custodial accounts to be shareholders of S corporations. In the
following part, we review the broader issue of IRA and Roth
IRA eligibility under the statute, and then address Treasury
Regulation § 1.1361-1(e)(1).
noted that IRAs violate the general rule of custodial accounts requiring
“flowthrough taxation of the beneficiary.” Id. According to the concur-
rence, the tax treatment is “the rationale for considering the beneficiary of
a custodial account that holds S corporation stock to be a shareholder of
the S corporation.” Id.
12
The Tax Court’s majority opinion merely references Treasury Regula-
tion § 1.1361-1(e)(1) in a footnote, concluding that Taproot’s reliance on
the regulation is misplaced. Specifically, the court observed that IRAs dif-
fer from the examples provided in the regulation in that the income attrib-
utable to the S corporation does not flow through to the beneficiary.
Rather, the IRA exists on its own, separate from the beneficiary, and any
income consequently belongs to the IRA. 133 T.C. at 211 n.20.
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3311
A.
Grounding its argument in statutory construction and legis-
lative history, Taproot first claims that both forms of IRAs
and Roth IRAs—trusts and custodial accounts—lack the
essential characteristics of a separate taxpayer and should
therefore be treated as indistinguishable from the individual
owners. Consequently, Taproot maintains that IRAs and Roth
IRAs should be deemed domestic individuals under the S cor-
poration eligibility rules. This argument, however, flounders
in a number of ways.
In support of its position, Taproot contends that because
IRAs and Roth IRAs do not file separate tax returns they
should not be considered separate taxpayers. Taproot cites to
statutory provisions merging IRAs with their individual own-
ers for excise tax purposes as further evidence that the I.R.S.
intended for IRAs and Roth IRAs to share the identity of their
individual owners for S corporation purposes. See, e.g., I.R.C.
§ 408(o)(4). Additionally, Taproot notes the ability of the
I.R.S. to levy against IRA funds to satisfy the tax liabilities of
the underlying owner.13 See, e.g., Ameritrust Co. v. Derak-
shan, 830 F. Supp. 406, 410 (N.D. Ohio 1993).
We begin our analysis of this strand of Taproot’s argument
by identifying the level of deference to which an agency’s
statutory interpretation is entitled. As both parties concede,
I.R.S. revenue rulings are entitled to the degree of deference
articulated by the Supreme Court in Skidmore, 323 U.S. at
140, and United States v. Mead Corp., 533 U.S. 218, 228
(2001).14 Under Skidmore, the weight given to an agency’s
13
Pursuant to I.R.C. § 6331, “[i]f any person liable to pay any tax
neglects or refuses to pay the same within 10 days after notice and
demand, it shall be lawful for the Secretary to collect such tax . . . by levy
upon all property and rights to property . . . belonging to such person”
unless an exemption applies under § 6334. There is no exemption for IRA
or Roth IRA accounts under § 6334.
14
The Tax Court applied the less stringent Skidmore factors in its analy-
sis of Revenue Ruling 92-73, and both parties concede it is the appropriate
3312 TAPROOT ADMINISTRATIVE SERVICES v. CIR
interpretation depends on (1) the thoroughness and validity of
the agency’s reasoning; (2) the formality of the agency’s
interpretation; (3) the formality of the agency’s action; and (4)
all of those factors giving it the power to persuade, if lacking
power to control. Mead, 533 U.S. at 228.
In finding persuasive the I.R.S.’s interpretation of “individ-
ual” as excluding IRA and Roth IRA accounts, we employ the
familiar principle that “the words of statutes—including reve-
nue acts—should be interpreted where possible in their ordi-
nary, everyday senses.” Hanover Bank v. Comm’r, 369 U.S.
672, 687 (1962) (quoting Crane v. Comm’r, 331 U.S. 1, 6
(1947)); see also De Ganay v. Lederer, 250 U.S. 376, 381
(1919) (“[S]tatutory words are presumed to be used in their
ordinary and usual sense and with the meaning commonly
attributable to them.”). Here, the Internal Revenue Code does
not define the word “individual”; therefore, we interpret it in
accordance with its ordinary, everyday usage. Black’s Law
Dictionary defines the term “individual” as “1. Existing as an
indivisible entity. 2. Of or relating to a single person or thing,
as opposed to a group.” Black’s Law Dictionary (9th ed.
2009). More instructively, Webster’s Dictionary defines the
term “individual” as “a single human being as contrasted with
a social group or institution.” Webster’s Ninth New Colle-
giate Dictionary 615 (1987); see also Johnson v. Comm’r, 353
F.3d 1181, 1184 (10th Cir. 2003) (“When the word ‘individ-
ual’ is used elsewhere in the Internal Revenue Code, the con-
standard. This Court, however, has not definitely resolved the issue of
whether revenue rulings are entitled to Skidmore deference or the defer-
ence articulated by the Supreme Court in Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 843-844 (1984). See
Tualatin Valley Builders Supply, Inc. v. United States, 522 F.3d 937, 941,
941-42 (9th Cir. 2008) (stating that the “case law leaves unresolved the
question whether a revenue procedure should receive Chevron or Skid-
more deference” and declining to resolve the matter). We, too, decline to
resolve this question, as we conclude that the I.R.S.’s position is persua-
sive without affording Chevron deference to Revenue Ruling 92-73.
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3313
text almost always compels it to be construed to mean a
human being.”) (citing I.R.C. § 1(a), (c)).
[1] Taproot claims that both forms of IRAs—trusts and
custodial accounts—lack the essential attributes of a separate
tax-paying entity and consequently should be treated as
legally indistinguishable from their individual owners. Yet, it
provides neither persuasive reasoning nor convincing author-
ity for this conclusion. To the contrary, the reasoning behind
Revenue Ruling 92-73 unequivocally supports the opposite
result. As relied on by the Tax Court, this revenue ruling
specifies that a trust is a permitted shareholder only in cases
where the trust is described in § 1361(c)(2)(A)(i), or is a qual-
ified subchapter S trust (QSST) that is treated as a trust under
§ 1361(c)(2)(A)(i) pursuant to the election of the beneficiary.
Consequently, this excludes IRAs and Roth IRAs from eligi-
bility. The I.R.S. notes in its analysis that the beneficiary of
either a grantor trust or a QSST is taxed currently on the
trust’s share of S corporation income, deductions, and credits.
In contrast, the beneficiary of an IRA trust does not pay taxes
on income until distributions are made from the trust. Thus,
the IRA taxation rules are incompatible with the rules apply-
ing to § 1361(c)(2)(A)(i) or a QSST. Implicit in Revenue Rul-
ing 92-73 is the I.R.S.’s classification of IRAs and Roth IRAs
as trusts rather than individuals.
[2] Applying Skidmore deference, we agree with the con-
clusion of the Tax Court that Revenue Ruling 92-73 provides
persuasive guidance that IRAs are ineligible for S corporation
shareholders. The distinguishing feature is the deferred
income tax treatment, which differentiates IRAs from benefi-
ciaries listed in § 1361(c)(2)(A) who are taxed currently on
the trust’s share of income. This revenue ruling turns on
sound reasoning. As noted by the Commissioner, the I.R.S.
has also applied Revenue Ruling 92-73 consistently since its
adoption, including in a host of private letter rulings that rely
upon the revenue ruling to address inadvertent termination
3314 TAPROOT ADMINISTRATIVE SERVICES v. CIR
waiver requests under I.R.C. § 1362(f). P8P8 15 See, e.g.,
I.R.S. Priv. Ltr. Rul. 2009-15-020 (Dec. 19, 2008); I.R.S.
Priv. Ltr. Rul. 2005-01-013 (Sept. 29, 2004).
Furthermore, despite Taproot’s argument to the contrary,
the legislative history of the S corporation statute favors lim-
ited eligibility. Taproot suggests that the Congressional his-
tory reflects a narrow intent to merely preserve the integrity
of the statute’s limitation on the number of S corporation
shareholders. In Taproot’s opinion, Congress’s overriding
concern has always been restricted to limiting the number of
S corporation shareholders, rather than the type.16 To support
15
Commissioner admits that private letter rulings may not be used or
cited as precedent under I.R.C. § 6110(k)(3); however, they may be used
as evidence of an administrative practice of the Commissioner. Thus, the
weight we accord Revenue Ruling 92-73 is further supported by the num-
ber of subsequent private letter rulings citing the revenue ruling as control-
ling. Indeed, forty-two private letter rulings have cited Revenue Ruling
92-73 for the proposition that IRAs are ineligible shareholders, thirty-two
of which occurred during or before the tax year at issue. See, e.g., I.R.S.
Priv. Ltr. Rul. 2003-16-012 (Apr. 18, 2003); I.R.S. Priv. Ltr. Rul. 2003-
09-018 (Feb. 28, 2003); I.R.S. Priv. Ltr. Rul. 2002-25-009 (Dec. 13,
2002).
16
At the time the S Corporation statute was enacted in 1958, the maxi-
mum number of shareholders was capped at ten. Additionally, only indi-
viduals and estates were permitted as shareholders. Technical
Amendments Act of 1958, Pub. L. 85-866 § 64(a), 72 Stat. 1650 (1958).
In 1977, the total number of shareholders was increased to fifteen follow-
ing a five-year waiting period. The statute also extended eligibility to
grantor trusts. Tax Reform Act of 1976, Pub. L. 94-455 § 902, 90 Stat.
1609 (1976). Two years later, Congress abolished the five-year waiting
period and universally capped the number of shareholders at fifteen. Eligi-
bility was expanded to bankruptcy estates, and Congress clarified that hus-
band, wife and heirs would be treated as one shareholder. Revenue Act of
1978, Pub. L. 95-600 § 341(a), 92 Stat. 2843 (1978). In 1982, Congress
increased the shareholder maximum to twenty-five and added certain
trusts as eligible shareholders. Economic Recovery Tax Act of 1981, Pub.
L. 97-34 § 233(a), 95 Stat. 250 (1981). Just one year later Congress again
increased the cap to thirty-five. Subchapter S Revision Act of 1982, Pub.
L. 97-354 § 2, 96 Stat. 1669 (1982). Congress then increased the maxi-
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3315
this position, Taproot cites the extension of the statute to
grantor trusts and voting trusts, as well as the 1997 amend-
ments adding employee stock ownership plans (ESOPs) and
charitable organizations to the list of permitted shareholders.
In Taproot’s view, the expansion in eligibility evidences Con-
gress’s intent to include IRAs as eligible shareholders.
[3] According to the legislative history of the ESOP eligi-
bility amendment, however, Congress did not envision IRAs
as permissible shareholders at the time of enactment. In
detailing the reasons for the amendment, the Joint Committee
for Taxation stated that “the provisions of subchapter S were
enacted in 1958 and substantially modified in 1982 on the
premise that all income of the S corporation (including all
gains on the sale of the stock) would be subject to a
shareholder-level income tax.” S. Rep. No. 104-281, at 61
(1996). Thus, in enacting the statute, Congress did not con-
template or intend eligibility for IRAs and other entities enti-
tled to deferred taxation.
Moreover, as noted by the Tax Court, there is no other indi-
cation that “Congress ever intended to allow IRAs to own S
corporation stock.” 133 T.C. at 213. In fact, the “only avail-
able evidence suggests otherwise.” Id. IRAs or Roth IRAs
were not explicitly listed in § 1361 as eligible S corporation
shareholders in 2003 or in any year prior. If at any point Con-
gress had intended IRA eligibility, it could have amended the
statute. In fact, in 2004 Congress explicitly extended share-
holder eligibility to IRAs in the limited case of bank corpora-
tions. See supra n. 3.
mum number of shareholders to seventy-five in 1997. At that time, Con-
gress also extended eligibility to employee stock ownership plans (ESOPs)
and affiliated group members. Small Business Job Protection Act of 1996,
Pub. L. 104-188 § 1301, 110 Stat. 1777 (1996). Following the tax year at
issue, Congress expanded the total number of shareholders to 100. Ameri-
can Jobs Creation Act of 2004, Pub. L. 108-357 § 232(a), 118 Stat. 1434
(2004).
3316 TAPROOT ADMINISTRATIVE SERVICES v. CIR
Although this 2004 IRA eligibility amendment occurred
after the tax year at issue, and is therefore not controlling, see
United States v. Phila. Nat’l Bank, 374 U.S. 321, 348-49
(1963), the Commissioner argues that it should not be disre-
garded. Indeed, if IRAs and Roth IRAs qualified as eligible
shareholders in 2003, then the subsequent amendment would
have been completely unnecessary. As the Tax Court’s major-
ity opinion points out, this Court, as well as the Supreme
Court, see, e.g., Seatrain Shipbuilding Corp. v. Shell Oil Co.,
444 U.S. 572, 596 (1980), have held that a succeeding view
of Congress is certainly entitled to consideration in ascertain-
ing legislative intent. See, e.g., United States v. Hecla Mining
Co., 302 F.2d 204, 211 (9th Cir. 1961). Here, the 2004
amendment, coupled with the prior legislative history,
unequivocally supports the I.R.S.’s interpretation of the S cor-
poration statute and promulgation of Revenue Ruling 92-73.
B.
[4] Turning next to Treasury Regulation § 1.1361-1(e),
Taproot argues that this provision, which offers guidance on
assessing the number of shareholders for purposes of the S
corporation statute, directly authorizes ownership of S corpo-
ration stock by IRAs and Roth IRAs created as custodial
accounts. Furthermore, Taproot contends that the unambigu-
ous meaning of the regulation should be authoritative in this
matter over any informal agency guidance or policy interpre-
tations. In pertinent part, the regulation specifies that:
A corporation does not qualify as a small business
corporation if it has more than 75 shareholders (35
for taxable years beginning prior to January 1, 1997).
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. For example, if stock (owned
other than by a husband and wife) is owned by ten-
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3317
ants in common or joint tenants, each tenant in com-
mon or joint tenant is generally considered to be a
shareholder of the corporation . . . . The person for
whom stock of a corporation is held by a nominee,
guardian, custodian, or an agent is considered to be
the shareholder of the corporation for purposes of
this paragraph (e) and paragraphs (f) and (g) of this
section.17 For example, a partnership may be a nomi-
nee of S corporation stock for a person who qualifies
as a shareholder of an S corporation. However, if the
partnership is the beneficial owner of the stock, then
the partnership is the shareholder, and the corpora-
tion does not qualify as a small business corporation.
In addition, in the case of stock held for a minor
under a uniform gifts to minors act or similar statute,
the minor and not the custodian is the shareholder.
Treas. Reg. § 1.1361-1(e). As stated, the regulatory provision
also governs whether a stockholder qualifies as an individual
for purposes of the S corporation statute.
In Taproot’s opinion, the present case turns largely on the
construction of this regulation because the Di Mundo Roth
IRA was created as a custodial account. According to Tap-
root, under the plain language of the regulation, the Di Mundo
Roth IRA serves as a custodial account for the benefit of Di
Mundo, who is then treated as the shareholder for purposes of
S corporation eligibility. As noted by Taproot, prior to the
promulgation of this regulation, the I.R.S. issued a revenue
17
Paragraph (f) provides guidance on the terms “individual” and “es-
tate.” It explicitly indicates that the provision of paragraph (e) which clari-
fies ownership by a nominee, guardian, custodian or agent also applies to
the definition of an individual for purposes of the statute. According to the
paragraph,“[e]xcept as otherwise provided in paragraph (e)(1) (relating to
nominees), paragraph (h) (relating to certain trusts) of this section, a cor-
poration in which any shareholder is a corporation, partnership, or trust
does not qualify as a small business corporation.” Treas. Reg. § 1.1361-
1(f)(2003).
3318 TAPROOT ADMINISTRATIVE SERVICES v. CIR
ruling and a private letter ruling concluding that S corporation
stock held in a custodial account for a disabled person or by
a custodian under the Uniform Gifts to Minors Act should be
treated as held by the disabled person or child, individually.
See, e.g., Rev. Rul. 66-2666, 1966-2 C.B. 356 (stating that the
disabled beneficiary of a custodial arrangement is treated as
the shareholder); I.R.S. Priv. Ltr. Rul. 86-05-028 (Nov. 4,
1985) (holding that the individual beneficiary is considered
the shareholder under the Uniform Gifts to Minors Act).
The Commissioner argues in response that the language of
the regulation requires consideration of who ultimately bears
the tax responsibility from its application. Specifically, the
Commissioner finds instructive the regulatory provision stat-
ing that the shareholder of a corporation is “[o]rdinarily, the
person who would have to include in gross income dividends
distributed with respect to the stock of the corporation.”
Treas. Reg. § 1.1361-1(e). Accordingly, the current taxation
of income derived from the corporation to the beneficiary pro-
vides the rationale for treating the beneficiary of a custodial
account that holds S corporation stock as the shareholder.
Applying this logic, custodial IRAs and Roth IRAs are dif-
ferent in kind and therefore distinguishable from other custo-
dial accounts, such as those involving minors or disabled
individuals. The latter form of custodial account functions to
hold shares for a person who cannot otherwise legally hold
them. In such cases, income is taxed currently to that person,
in contrast to IRAs and Roth IRAs, where individuals who
could legally hold the underlying assets instead choose to
place them in such accounts, thereby deferring or exempting
taxation of any current income. This subverts the rationale for
the attribution rule in the regulation, and in the Commission-
er’s opinion, forecloses any extension of the regulation to
IRAs and Roth IRAs.
[5] Furthermore, the I.R.S. has consistently adopted this
interpretation in various private letter rulings by applying
TAPROOT ADMINISTRATIVE SERVICES v. CIR 3319
Revenue Ruling 92-73 to custodial IRAs in the same manner
as trust IRAs. See, e.g., I.R.S. Priv. Ltr. Rul. 2002-42-024
(Oct. 18, 2002) (finding S corporation status terminated at the
time shareholder transferred shares of the company’s stock to
a bank as custodian of another individual’s IRA); I.R.S. Priv.
Ltr. Rul. 96-44-030 (Nov. 1, 1996); I.R.S. Priv. Ltr. Rul. 95-
28-008 (Apr. 12, 1995); I.R.S. Priv. Ltr. Rul. 95-02-014 (Jan.
13, 1995).18 Although private letter rulings may not be used
or cited as precedent under I.R.C. § 6110(k)(3), they may be
used as evidence of an administrative practice of the Commis-
sioner. See, e.g., American Ass’n of Christian Schools Volun-
tary Employees Beneficiary Ass’n Welfare Plan Trust v.
United States, 850 F.2d 1510, 1515 n.6 (11th Cir. 1988) (cit-
ing Rowan Companies, Inc. v. United States, 452 U.S. 247,
261 n.17 (1981)). In the instant case, therefore, this pattern of
private letter rulings provides evidence of the agency’s uni-
form classification of custodial IRAs as identical to those cre-
ated as trusts for the purpose of applying Revenue Ruling 92-
73. Basic logic dictates that through the coalescence of custo-
dial IRAs with trust IRAs under Revenue Ruling 92-73, the
I.R.S. necessarily excludes custodial IRAs from the purview
of Treasury Regulation §1.1361-1(e).
In the final analysis, Taproot’s argument founders on the
shoals of logic and well-settled rules of regulatory interpreta-
tion. To adopt the position Taproot urges, this Court must
conclude that Congress consciously crafted a legislative
scheme enabling shareholders to employ Roth IRAs to perpet-
ually avoid any taxation on S corporation profits.19 The legis-
lative history and regulatory record foreclose this conclusion.
18
Without specifically referencing Revenue Ruling 92-73, the I.R.S. has
concluded in other private letter rulings that status as an S corporation ter-
minates at the time a custodial IRA acquires stock in that corporation. See
I.R.S. Priv. Ltr. Rul. 2000-31-046 (May 9, 2000); I.R.S. Priv. Ltr. Rul. 94-
51-055 (Dec. 23, 1994).
19
On appeal Taproot contends that the Tax Court’s underlying policy
concerns provided the true impetus for its decision. Particularly, the Tax
3320 TAPROOT ADMINISTRATIVE SERVICES v. CIR
As Judge Halpern sagely noted in his concurring opinion
below, “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 cor-
porations.” 133 T.C. at 216 (emphasis in original). This Court
embraces the I.R.S.’s narrow interpretation of Treasury Regu-
lation § 1.1361-1(e)(1), restricting its application to custodial
accounts in which corporate dividends are taxed in the same
year received.
[6] Moreover, for the reasons discussed above, we find
persuasive the agency’s opinion that ownership of custodial
IRAs and Roth IRAs should not be attributed to the underly-
ing individual for purposes of S corporation eligibility. To
hold otherwise would undermine the entire taxation structure
underlying individual retirement accounts.
Accordingly, the decision of the United States Tax Court is
AFFIRMED.
Court observed in a footnote that “tax alchemy” could be effectuated if
Roth IRAs qualified as eligible shareholders. This would enable S corpo-
rations to achieve an overwhelming benefit over C corporation competi-
tors which are subject to two levels of taxation. In drawing this
conclusion, the Tax Court expressed its skepticism that the Unrelated
Business Income Tax (UBIT) could adequately mitigate this tax advan-
tage. In general, the UBIT subjects the business earnings of tax-exempt
organizations to taxation, thereby functioning to prevent them “from
unfairly using their tax-exempt status to compete with commercial busi-
nesses.” Alumni Ass’n of the Univ. of Or., Inc. v. Comm’r, T.C. Memo.
1996-63, aff’d. 193 F.3d 1098 (9th Cir. 1999). Although Taproot contends
that the UBIT negates the Tax Court’s policy concerns, the Commissioner
correctly observes that I.R.C. § 512 generally excludes passive investment
income, such as interest income, from application of the UBIT. Thus, in
this case, the interest income at issue would not be subject to the UBIT.