"I usually root for the taxpayer, but this case was an exception. When I think it
borders on the self-evident that a favorable tax plan does not work and it turns
out that it does, I am very embarrassed. As it turns out the Tax Court and now
the Ninth Circuit agreed with me.”
Mayan calendar issues aside,
this year means one more year for you to harness the power of the Roth IRA as a
tax savvy means to create and eventually transfer wealth. Nevertheless, Roths
are not the silver tax bullet in all cases, as Peter Rielly of Forbes
recently pointed out in an article titled Hog
Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock.
Rielly writes about how Roths
and S Corps really don’t mix well. In many ways it’s unfortunate, but probably
also obvious, the powers of an S Corp can’t be combined with the powers of a
As many small business owners
already know, S Corporations can be supremely advantageous, if you’re in the
position to use one, because they can avoid corporate income tax.
The Roth, meanwhile, avoids tax
on future earnings by paying taxes on contributions upfront, rather than upon
eventual distributions. Together that would have made for some serious savings
for small business owners who also are thinking ahead and planning for their
eventual estate transfers.
So, as already foreshadowed
above, when it comes to combining Roths and S Corps you really cannot have your
cake and eat it too. Case law is against you. After all, the S Corp election is
only valid if all shareholders of the S Corp are valid, and a Roth IRA is
The case is Taproot
Administrative Services, Inc., Petitioner-Appellant, v. Commissioner of
Internal Revenue, Respondent-Appellee. I recommend reading the full
article, as there are more moving parts and other alternatives to consider.
(March 28, 2012) “Hog
Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock”