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A taxpayer is ineligible for S corporation status where the sole shareholder of the S corporation is a custodial Roth IRA, because a Roth IRA does not qualify as an individual and the IRA's tax deferral scheme would allow a taxpayer to avoid all taxation on S corporation profits.

Taxpayer Paul Di Mundo incorporated Taproot Administrative Services (“Taproot”) as an S corporation. After incorporation, Di Mundo issued all shares of Taproot’s stock to a custodial Roth IRA, which was Taproot’s sole shareholder in 2003. The Commissioner of the Internal Revenue Service (“I.R.S.”) notified Taproot that Roth IRAs do not qualify as an eligible shareholder of an S corporation and deemed Taproot a taxable C corporation. In 2003, two of the types of shareholders qualifying for S corporation status were domestic individuals and certain trusts. Taproot appealed the Tax Court’s grant of summary judgment, arguing that a Roth IRA should be treated as a qualifying individual and alternatively, as a grantor trust. Revenue Ruling 92-73 states that “traditional IRAs are not eligible S corporation shareholders because the beneficiary is not taxed currently on the IRA’s share of the S corporation’s income.” The key feature that renders IRAs ineligible as an S corporation shareholder is the deferred income tax scheme, where an IRA beneficiary does not pay taxes on income until distributions are made, in contrast to the beneficiary of an S corporation who is taxed currently on its income. Under Taproot’s argument, Di Mundo would avoid all taxation of his S corporation profits if the Roth IRA were the corporation’s sole shareholder. The Ninth Circuit concluded that Congress did not intend for IRAs to be S corporation shareholders because of this deferred taxation scheme. Implicit in Revenue Ruling 92-73 is that the I.R.S. treated IRAs as trusts rather than individuals. Additionally, Roth IRAs are distinguishable from custodial accounts involving minors or disabled individuals because of the deferred taxation scheme. AFFIRMED.