t c no united_states tax_court taproot administrative services inc petitioner v commissioner of internal revenue respondent docket no filed date r determined that p is ineligible for s_corporation status in because its shareholder was a roth individual_retirement_account roth_ira as a consequence r determined that p is taxable as a c_corporation for held the roth_ira is not an eligible s_corporation shareholder p is taxable as a c_corporation for steven r mather and kenneth m barish for petitioner david w sorensen for respondent opinion wherry judge this case which involves a petition for redetermination of a deficiency for petitioner’s tax_year is before the court on respondent’s date motion for partial summary_judgment see rule a respondent argues that petitioner is not eligible for s_corporation status during because it had an ineligible shareholder--a roth individual_retirement_account roth_ira --during that year petitioner counters that a roth_ira is an eligible s_corporation shareholder and that petitioner’s s_corporation status remained intact for the reasons discussed below we agree with respondent background petitioner is a nevada corporation that elected s_corporation status and filed its tax_return on a form_1120s u s income_tax return for an s_corporation petitioner’s sole shareholder during was a custodial roth_ira account for the benefit of paul dimundo 1rule references are to the tax_court rules_of_practice and procedure unless otherwise noted section references are to the internal_revenue_code_of_1986 as amended and in effect for the tax_year at issue 2the form_1120s indicates that petitioner’s s election was effective date 3the account was held at the first trust co of onaga in onaga kansas respondent issued petitioner a notice_of_deficiency on date respondent made various determinations including that petitioner is taxable as a c_corporation for because it had an ineligible shareholder petitioner filed a petition with this court on date respondent moved for partial summary_judgment on the issues of whether petitioner is eligible for s_corporation status for federal tax purposes for and if not whether petitioner is treated as a c_corporation for that year petitioner contests that motion discussion a summary_judgment rule a allows a party to move for a summary adjudication in the moving party’s favor upon all or any part of the legal issues in controversy summary_judgment is appropriate if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b facts are viewed in the light most favorable to the nonmoving party 85_tc_812 the moving party bears the burden of demonstrating that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law 98_tc_518 affd 17_f3d_965 7th cir the court has considered the pleadings and other materials of record and concludes that there is no genuine justiciable issue of material fact whether a roth_ira is an eligible s_corporation shareholder is a legal question appropriate for decision by summary_judgment b s_corporations shareholder eligibility an s_corporation is not generally subject_to federal income taxes sec_1363 like a partnership it is a conduit through which income flows to its shareholders see 531_us_206 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 a qualifying small_business_corporation must affirmatively elect s_corporation status in order to be treated as an s_corporation for federal_income_tax purposes sec_1361 sec_1362 that s election terminates automatically and immediately if any of the eligibility rules is violated sec_1362 for example if an ineligible shareholder acquires stock in an s_corporation the s corporation’s s election 4although s_corporations generally do not pay federal_income_tax in some circumstances they may be subject_to corporate-level taxes on certain built-in gains and excess passive_investment_income see sec_1374 sec_1375 terminates on the date on which the ineligible shareholder acquired the stock sec_1362 sec_1_1362-2 income_tax regs if we agree with respondent that a roth_ira is an ineligible s_corporation shareholder then petitioner was not an s_corporation during and should be taxed as a c_corporation for that year the s_corporation eligibility rules which focus on both the corporate and shareholder levels are quite elaborate among those rules are detailed shareholder eligibility requirements that restrict the number and type of eligible s_corporation shareholders in general s_corporation shareholder eligibility is limited to domestic individuals estates certain trusts and certain exempt_organizations see sec_1361 c sec_1361 prescribed as of the tax_year at issue the types of trusts that are eligible s_corporation shareholders certain trusts permitted as shareholders -- a in general --for purposes of subsection b b the following trusts may be 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 iv a_trust created primarily to exercise the voting power of stock transferred to it v an electing_small_business_trust the list of eligible s_corporation shareholders has been anything but static when subchapter_s was first added to the internal_revenue_code in the only permissible s_corporation shareholders were domestic individuals and estates in the tax reform act of publaw_94_455 90_stat_1609 congress amended subchapter_s to allow certain trusts to own s_corporation stock in the small_business job protection act of publaw_104_188 sec a 110_stat_1785 congress amended sec_1361 and added sec_1361 to permit certain tax-exempt organizations to own s_corporation stock although it took effect after the tax_year at issue a more recent and more relevant congressional amendment permits a bank to make an s_corporation_election where the bank’ sec_5the list of permissible tax-exempt organizations that sec_1361 permits to own s_corporation stock includes qualified_pension profit-sharing and stock_bonus_plans within the meaning of sec_401 and exempt_organizations within the meaning of sec_501 and c petitioner’s roth_ira was not a qualified_pension profit-sharing or stock_bonus_plan under sec_401 nor an exempt_organization within the meaning of sec_501 petitioner does not argue to the contrary stock is held in a_trust that qualifies as an ira or a roth_ira see sec_1361 c iras7 provisions for traditional iras were enacted into the internal_revenue_code as part of the employee_retirement_income_security_act_of_1974 publaw_93_406 88_stat_959 the ira provisions were designed to create a system whereby employees not covered by qualified_retirement_plans would have the opportunity to set_aside at least some retirement savings on a tax-sheltered basis 108_tc_54 the basic tax characteristics of a traditional_ira are deductible contributions the accrual of tax-free earnings except with respect to sec_511 unrelated business 6the american_jobs_creation_act_of_2004 publaw_108_357 sec a 118_stat_1434 added that provision to sec_1361 the added clause applies only to bank stock held in an ira or a roth_ira as of date because of the temporal limitation a bank cannot qualify for an s_corporation_election where i any portion of its stock is held in a_trust that qualifies as an individual_retirement_account and ii such stock was transferred to the trust after date we will discuss that clause and what precipitated its addition to the internal_revenue_code later in this opinion 7although the internal_revenue_code refers only to iras and roth iras to distinguish between roth iras and non-roth iras in this opinion we refer to non-roth iras as traditional iras the parties seemingly agree that for purposes of eligibility as an s_corporation shareholder there is no difference between a traditional_ira and a roth_ira income and the inclusion of distributions in gross_income see sec_219 sec_408 d e roth iras are of more recent vintage having been created as part of the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_825 to further encourage individual savings the basic tax characteristics of a roth_ira are nondeductible_contributions the accrual of tax-free earnings and the exclusion of qualified distributions from gross_income see sec_408a c d and a sec_408 provides in pertinent part that the term ‘individual retirement account’ means a_trust created or organized in the united_states for the exclusive benefit of an individual or his beneficiaries however iras and roth iras can assume another legal form they can be custodial accounts 8ira distributions rolled over pursuant to sec_408 within days of receipt are excluded from the ira beneficiary’s gross_income in addition for taxable years after certain qualified charitable distributions of up to dollar_figure a year made by an ira trustee at the ira beneficiary’s direction may be excludable from the ira beneficiary’s income see sec_408 9the timing of the tax_benefit is the critical difference between traditional and roth iras a traditional_ira provides an immediate tax_benefit as contributions are deductible when distributions are eventually taken from a traditional_ira they will be included in gross_income and subject_to federal_income_tax in contrast there is no immediate tax_benefit to roth_ira contributions as they are not deductible the tax_benefit comes later when qualified distributions are taken from the roth_ira and are not included in gross_income and are therefore not subject_to federal_income_tax in that case they must be treated as trusts in order to qualify as iras see sec_408 in other words a custodial_account ira must be treated as a_trust in order for it to qualify as an ira under sec_408 d parties’ arguments petitioner has two arguments first petitioner argues that a custodial_account qualifying as an ira also meets the qualifications to be a shareholder of an s_corporation according to petitioner the beneficiary of the custodial account--in this case mr dimundo--should be considered the shareholder for purposes of sec_1361 in support of that argument petitioner cites sec_1_1361-1 income_tax regs which provides that 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 petitioner also cites revrul_66_266 1966_2_cb_356 and priv ltr rul plr date for the proposition that s_corporation stock held in a custodial_account for a disabled person or by a custodian under the uniform gifts 10private letter rulings may not be used or cited as precedent under sec_6110 but we assume that petitioner cites the private_letter_ruling as evidence of the practice of the commissioner see 369_us_672 magdalin v commissioner tcmemo_2008_293 n to minors act is treated as held by the disabled person or child petitioner’s other argument is that an ira is a grantor_trust that qualifies as an s_corporation shareholder under sec_1361 which provides that eligible s_corporation shareholders include 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 respondent argues that an ira custodial_account is very different from the custodial accounts that were the subjects of the revenue_ruling and the plr because in those instances the assets are held in a custodial_account for someone who can not legally hold them for themselves and the income is taxed currently respondent points to the sharp contrast between those situations and the instant one where a person who can legally hold the asset chooses to transfer such assets to the custodian so tax benefits can be achieved addressing petitioner’s other argument respondent points to revrul_92_ 1992_2_cb_224 in which the commissioner concluded that a_trust that qualifies as an ira is not a permitted shareholder of an s_corporation 11subpt e of pt i of subch j includes secs trusts that fall under those sections are often referred to as grantor trusts e roth iras are not eligible s_corporation shareholder sec_12 we begin by acknowledging that no statute or regulation in effect during explicitly prohibited a traditional or a roth_ira from owning s_corporation stockdollar_figure at that time the only legal authority specifically addressing the issue was revrul_92_73 supradollar_figure thus the legal issue presented in this case is one of first impression in our court deference to revenue rulings a ‘revenue ruling’ is an official interpretation by the service that has been published in the internal_revenue_bulletin revenue rulings are issued only by the national_office and are published for the information and guidance of taxpayers internal_revenue_service officials and others concerned sec_601_601 statement of procedural rules 12that is except for the limited transitory relief explicitly authorized by congress vis-a-vis s_corporation banks see supra p 13recently finalized sec_1_1361-1 income_tax regs contains such an explicit prohibition the regulation was effective date t d 2009_2_cb_898 14there is one judicial opinion involving a case in which neither the commissioner nor the united_states was a party that touched on but did not decide the issue see schuylkill skyport inn inc v rich civil no e d pa date all of the parties to this litigation recognize that if an ira is a shareholder of a corporation that corporation under the internal_revenue_code and regulations cannot be a valid subchapter ‘s’ corporation we are not bound by revenue rulings and applying the standard enunciated by the supreme court in 323_us_134 the weight if any that we afford them depends upon their persuasiveness and the consistency of the commissioner’s position over time see 129_tc_131 w e evaluate the revenue_ruling under the less deferential standard enunciated in 323_us_134 dollar_figure the 15see eg 64_tc_404 a revenue_ruling without more of course is simply the contention of one of the parties to the litigation and is entitled to no greater weight affd in part and revd in part on other grounds 613_f2d_770 9th cir in affirming that opinion in part the court_of_appeals concluded that the tax_court properly declined to defer to an unreasonable ruling estate of lang v commissioner f 2d pincite 16in 533_us_218 the supreme court recognized that there are various types of agency pronouncements that may be entitled to differing levels of deference and that the lowest level of deference--skidmore deference--has continuing vitality see id pincite chevron did nothing to eliminate skidmore’s holding that an agency’s interpretation may merit some deference whatever its form given the ‘specialized experience and broader investigations and information’ available to the agency quoting 323_us_134 id pincite concluding that a tariff classification ruling by the u s customs service may surely claim the merit of its writer’s thoroughness logic and expertness its fit with prior interpretations and any other sources of weight in so doing the supreme court set forth a two-prong test for determining whether to afford an agency pronouncement chevron_deference id pincite we hold that administrative implementation of a particular statutory provision qualifies for chevron_deference when it appears that congress delegated authority to the agency generally to make rules carrying the force of law and that the agency interpretation claiming deference was promulgated in the exercise of that authority see also 558_f3d_903 continued statement of procedural rules acknowledges the meaningful distinction to be drawn between regulations and revenue rulings continued 9th cir en_banc not every agency interpretation of its governing statute is entitled to chevron_deference however the department of the treasury and the internal_revenue_service issue various types of pronouncements including for example treasury decisions ie regulations revenue rulings revenue procedures technical_advice memorandums and private letter rulings those pronouncements warrant varying levels of judicial deference in accordance with the test set forth by the supreme court in united_states v mead corp supra revenue rulings do not warrant chevron_deference under the test set forth in united_states v mead corp supra because they clearly fail the test’s second prong see 568_f3d_662 8th cir analyzing a revenue_ruling using skidmore deference affg 130_tc_70 527_f3d_443 5th cir even assuming that revenue rulings satisfy the first prong of the mead test see sec_7805 they clearly fail the second id furthermore other circuit courts have uniformly held that revenue rulings are not entitled to chevron_deference string citation omitted see also 347_f3d_173 6th cir when promulgating revenue rulings the irs does not invoke its authority to make rules with the force of law specifically the irs does not claim for revenue rulings ‘the force and effect of treasury_department regulations ’ citing revproc_89_14 c b absent stipulation to the contrary the appropriate venue for an appeal of the decision in this case is the court_of_appeals for the ninth circuit in which there is strong support for affording revenue rulings skidmore deference see 528_f3d_703 9th cir we have held that generally revenue rulings are entitled at least to ‘skidmore deference ’ 300_f3d_1065 9th cir per curiam analyzing a revenue_ruling using skidmore deference 203_f3d_1099 9th cir though revenue rulings do not have the force of law they do constitute a body of experience and informed judgment to which we may look for guidance see sec_601_601 statement of procedural rules revenue rulings published in the bulletin do not have the force and effect of treasury_department regulations including treasury decisions but are published to provide precedents to be used in the disposition of other cases and may be cited and relied upon for that purpose persuasiveness of revrul_92_73 the rationale underlying revrul_92_73 supra is straightforward--traditional 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 sec_1361 are taxed currently on the trust’s share of such incomedollar_figure the revenue ruling’s rationale sensibly distinguishes iras from grantor trusts governed by sections 671-dollar_figure when a 17rev rul 1992_2_cb_224 was issued before the roth_ira provisions were enacted into the internal_revenue_code it referred to iras which we refer to as traditional iras 18although roth iras did not exist when the revenue_ruling was issued the commissioner would have had even more reason to distinguish roth iras from grantor trusts distributions from a traditional_ira are included in gross_income under sec_408 qualified distributions from a roth_ira are not includable in gross_income under sec_408a thus if a roth_ira qualified as an s_corporation shareholder tax alchemy in a free enterprise business context could be achieved this would grant an overwhelming competitive tax_benefit to a roth ira-owned business compared to a c_corporation competitor who is subject_to two levels of tax--one at the corporate level and another at the continued grantor or another person is treated under subpart e sec_671 and following as the owner of any portion of a_trust there are included in computing his tax_liability those items of income deduction and credit against tax attributable to or included in that portion sec_1_671-3 income_tax regs see 69_tc_165 when a grantor or other person has certain powers in respect of trust property that are tantamount to dominion and control_over such property the code ‘looks through’ the trust form and deems such grantor or other person to be the owner of the trust property and attributes the trust income to such person that of course is not the case with traditional and roth iras--earnings accrue tax free in both entitiesdollar_figure it follows that the tax continued shareholder level though it can be argued that the unrelated_business_income_tax ubit functions to plug this loophole it is not clear that the ubit would do so in a case like the instant one 19when revrul_92_73 supra was issued congress had not yet amended sec_1361 to permit certain tax-exempt entities to own s_corporation stock see supra p with the small_business jobs protection act of publaw_104_188 110_stat_1755 certain tax-exempt entities--including employee_stock_ownership_plans esops that satisfy the requirements of sec_401 a --became eligible s_corporation shareholders for the first time petitioner thoughtfully argues that the amendments undermine the rationale of revrul_92_73 supra because esop participants are not taxed currently on an s corporation’s income petitioner argues further that the analysis used by respondent in revrul_92_73 was implicitly overturned by the enactment of the s_corporation_esop rules we respectfully disagree the amendments in no way bear on the commissioner’s ultimate conclusion in revrul_92_73 supra continued relationship between an individual beneficiary and a traditional or roth_ira is not governed by the grantor_trust provisions of subpart e of part i of subchapter_j sections dollar_figure continued that the federal_income_tax rules relating to grantor trusts are incompatible with the federal_income_tax rules relating to iras in other words the fact that congress has allowed certain tax- exempt entities including esops to own s_corporation stock does not mean ipso facto that iras and grantor trusts are treated the same for federal_income_tax purposes see staff of joint comm on taxation general explanation of tax legislation enacted in the 104th congress pincite j comm print moreover as explained later in this opinion had congress intended to allow iras to own s_corporation stock it would have said so explicitly and all available evidence reflects that congress has expressed a contrary intent 20whether an ira assumes the legal form of a custodial_account or a_trust is immaterial to whether an ira is an eligible s_corporation shareholder moreover the fact that mr dimundo’s roth_ira assumed the form of a custodial_account undercuts the grantor_trust argument although mr dimundo’s roth_ira is designated custodial it is deemed a_trust for purposes of sec_408 see sec_408 sec_408 provides that custodial_account iras are treated as trusts for purposes of this section --meaning for purposes of sec_408 and no other section of the internal_revenue_code this means that a custodial_account ira would not be treated as a_trust for purposes of sec_1361 and the grantor_trust provisions furthermore petitioner’s reliance on revrul_66_266 1966_2_cb_356 and priv ltr rul date for the proposition that we should look through the custodial_account to its owner for s_corporation shareholder eligibility purposes is unpersuasive the fact that the commissioner has applied the law liberally when dealing with s_corporation stock held for disabled individuals does not compel us to conclude that he must extend the same liberal application to all s_corporation stock held in custodial accounts whether the owners are disabled or not finally petitioner’s reliance on sec_1_1361-1 income_tax regs is unpersuasive paragraph e which is titled number of shareholders does not stand for the proposition that the tax law looks through an ira trust and treats its owner beneficiary as the shareholder for purposes of continued we also note that as a technical matter traditional and roth iras do not appear to be grantor trusts and their taxation is governed by sec_408 and sec_408a which are in subchapter_d part i of the internal_revenue_code unlike grantor trusts traditional and roth iras exist separate from their owners for federal_income_tax purposes were that not the case congress would not have needed to subject iras to the unrelated_business_income_tax ubit dollar_figure continued determining s_corporation shareholder eligibility unlike the instances contemplated by the regulation--where income attributable to s_corporation stock eg dividends flows through a nominee guardian custodian or an agent to the individual for whom the stock is held--such income does not flow through an ira to its beneficiary it is the ira’s income not the beneficiary’s an ira exists on its own--separate from its beneficiary--and under sec_408 is exempt from taxation unless ubit is triggered in which case the income_tax is paid_by the ira not its beneficiary although the ira’s accumulated income will under current law eventually be released to the beneficiary or successor beneficiary in a taxable traditional_ira or nontaxable roth_ira distribution stream some time in the future that does not make the ira a nominee guardian custodian or an agent of the beneficiary with respect to the s_corporation stock for purposes of sec_1_1361-1 income_tax regs see infra note the trust mr dimundo’s roth_ira and not mr dimundo the individual was petitioner’s sole shareholder 21the ubit which is provided for in secs functions to prevent tax-exempt organizations from unfairly using their tax-exempt status to compete with commercial businesses alumni association of the univ of or inc v commissioner tcmemo_1996_63 affd 193_f3d_1098 9th cir the internal_revenue_code imposes ubit on tax-exempt organizations including iras see sec_408 if the internal_revenue_code treated an ira’s owner as owning the ira’s income--rather than treating the ira as owning the income itself--congress would not have needed to subject iras to ubit in any event even assuming arguendo that traditional and roth iras could technically qualify as grantor trusts because of their owners’ powers and interests it would be nonsensical to treat them as such in the case of a grantor_trust the grantor is subject_to tax on the trust’s income and gains--the trust is simply a conduit through which the income and gains pass to the grantor see estate of o’connor v commissioner supra pincite see also hornberger v commissioner tcmemo_2000_42 n a grantor_trust is not subject_to the income_tax rather all of the income and deductions pertaining to a grantor_trust must be taken into account by the grantor affd 4_fedappx_174 4th cir dollar_figure in stark contrast the tax law does not look through iras and no federal_income_tax is paid on an ira’s income and gains except when ubit is triggered because the tax-free accrual of income and gains is one of the cornerstones of traditional and roth iras it would make no sense to treat iras as grantor trusts thereby ignoring one of their quintessential tax benefits as it stands an ira--and not its grantor or beneficiary--owns the ira’s income and gains and 22in fact a grantor_trust that is treated as owned by one person and meets the requirements of sec_1_671-4 income_tax regs need not obtain a separate tax identification_number sec_301_6109-1 proced admin regs and is not required to file a separate tax_return sec_1_671-4 income_tax regs instead the owner may report the trust’s income on his or her own return sec_408 exempts the ira from federal_income_tax except when ubit is triggered finally since issuing revrul_92_73 supra the commissioner has applied it consistently to all iras for example the commissioner regularly invokes revrul_92_73 supra in plrs addressing inadvertent termination waiver requests under sec_1362dollar_figure see eg priv ltr rul date priv ltr rul date priv ltr rul date other compelling reasons to reject the legal interpretation petitioner advocates of more significance than revrul_92_73 supra is the fact that there is no indication that congress ever intended to allow iras to own s_corporation stock the only available evidence suggests otherwise to begin with iras are not explicitly listed in sec_1361 as eligible s_corporation shareholders had congress intended to render iras eligible s_corporation shareholders it could have done so explicitly as it has in the limited case of banks desiring to elect s status see 485_us_535 if congress had intended instead that primary alcoholism not be deemed ‘willful misconduct’ for purposes of a as it had been deemed 23if an s corporation’s s election is inadvertently terminated for example because stock is issued to an ineligible shareholder the s_corporation can seek a plr deeming the termination inadvertent and permitting the s_corporation to retain its s_corporation status see sec_1362 for purposes of other veterans’ benefits statutes congress most certainly would have said so 293_us_84 if it had been intended to make an exemption in respect of such taxes in favor of nonresidents it is reasonable to suppose that congress would have said so in explicit terms instead of leaving the fate of taxes upon the large sums thus involved to depend upon the way in which a court might happen to construe the word ‘resident’--a most unsatisfactory substitute as the conflicting decisions in this and the next succeeding case bear witness fn ref omitted moreover the events that precipitated congress’ decision to carve out the very narrow exception that allows iras to hold shares in s_corporation banks reflect that except for that limited circumstance congress has not permitted iras to own s_corporation stock in a section of the gramm-leach-bliley act publaw_106_102 113_stat_1470 titled expanded small bank access to s_corporation treatment congress ordered the comptroller general of the united_states to conduct a study of possible revisions to the rules governing s_corporations including permitting shares of such corporations to be held in individual_retirement_accounts such a study would have been unnecessary if congress considered iras eligible s_corporation shareholders the comptroller general’s response came in the form of a date government accounting office gao report to congress the gao observed that although c-corporation banks are permitted to have ira shareholders if they wish to become s-corporations they must eliminate the ira shareholders and that treasury officials generally opposed this proposal because permitting iras to hold shares in s-corporation banks would create untaxed income for a potentially long period of time u s general accounting office banking taxation implications of proposed revisions governing s-corporations on community banks gao ggd-00-159 later in its report the gao noted that legal and accounting experts we interviewed indicated that eliminating ira shareholders increases the cost and length of the subchapter_s conversion process for banks and their shareholders and went on to explain why that is so id app iv pincite congress eventually acted by adding sec_1361 in see supra note that provision is a very narrow one it permits traditional and roth iras to be shareholders of s_corporation banks but only to the extent of bank stock held by the iras as of date the legislative_history underlying that statutory amendment reflects that congress was acting to amend the law because of its belief that iras were ineligible s_corporation shareholders see h rept part pincite under present law an ira cannot be a shareholder of an s_corporation if petitioner is correct then that change in law--preceded by a congressionally mandated study--was unnecessary and in enacting sec_1361 congress engaged in a useless act after sending the comptroller general on a fool’s errand although interpretations by a subsequent congress of a previous congress’ legislative intent are not controlling we are reluctant to impute a useless act to congress and to reach a conclusion that renders an entire clause of sec_1361 mere surplusage see 302_f2d_204 9th cir we cannot assume that congress did a useless act the fact that congress saw fit to enact this amendment confirms our conclusion that there may be no offset in the computation of interest the trend toward increased flexibility for s_corporations means that the time may come when congress sees fit to allow iras to own stock in any s corporationdollar_figure for now as in that i sec_24although a subsequent congress’ view of a prior congress’ action is not controlling see 374_us_321 observing that ‘the views of a subsequent congress form a hazardous basis for inferring the intent of an earlier one’ quoting 361_us_304 a subsequent congress’ view is certainly entitled to weight in a case like this one see 444_us_572 w hile the views of subsequent congresses cannot override the unmistakable intent of the enacting one such views are entitled to significant weight and particularly so when the precise intent of the enacting congress is obscure citations omitted 25on date a bill was introduced in the senate that would expand s_corporation shareholder eligibility to include all continued not the case as a consequence mr dimundo’s roth_ira was not eligible to own shares in petitioner because it did petitioner was ineligible for s_corporation status in see sec_1362 petitioner is therefore a c_corporation for federal_income_tax purposes for the tax_year the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing an appropriate order will be issued granting respondent's motion for partial summary_judgment reviewed by the court colvin cohen wells halpern vasquez gale thornton marvel goeke gustafson and paris jj agree with this majority opinion continued traditional and roth iras by modifying sec_1361 see s 111th cong 1st sess sec a the same proposal was introduced in the senate in each of the two preceding congresses see s 110th cong 2d sess sec a s 109th cong 2d sess sec_102 halpern j 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 sec_1_1361-1 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 sec_1_1361-1 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 eg 398_us_235 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 sec_408 the general_rule for custodial accounts as the majority notes see majority op note is flowthrough taxation of the beneficiary ie 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 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 in short the critical attributes of an ira--ie deferral of or exemption from taxation--are antithetical to the rationale for permitting custodial accounts to be shareholders of s_corporations sec_408 affords exceptional and highly favorable tax treatment to certain custodial accounts for that 1in his dissent judge holmes quotes sec_1_1361-1 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 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 2judge holmes argues that the stakes are not that great dissenting op p but that misses the point i suggest that regardless of the financial stakes the logic of the statute precludes the result petitioner seeks 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 holmes j dissenting in there were shares of stock in taproot administrative services inc titled first trust company of onega as custodian for paul dimundo a regu- lation states that t he person for whom stock of a corporation is held by a custodian is considered to be the share- holder of the corporation the first trust company of onega is a custodian dimundo would therefore seem to be the person who is considered to be taproot’s shareholder since he is undoubt- edly an individual why exactly is it that taproot is disquali- fied from being an s_corporation if enough commentators say iras can’t be s-corporation shareholders or more precisely the irs says iras can’t be s_corporation shareholders does that make it so and might we not be subtly assuming the conclusion by phras- ing the questions that way when it might turn out to be the case that iras--at least some iras--don’t own property themselves but are instead a form of ownership sec_1_1361-1 income_tax regs the commissioner subtly restates the ownership by paraphrase variously stating in his motion that dimundo’s roth_ira was the shareholder mot pincite that the stock was held in a custodial ira account for the benefit of dimundo’s self-directed roth_ira mot pincite and that the stock was owned by the trust company as custodian for dimundo sorenson decl pincite we should of course not sort this out on a summary-judgment motion but instead assume the supportable facts most in taproot’s favor taproot and its companion cases are only a few of nearly a hundred pending before the court fourteen were assigned to my division but the parties settled them and decided to make taproot the test case i the majority’s analysis of this question--apart from a brief mention in a footnote see majority op note 20--drifts away from construing the regulation into an exegesis of a revenue_ruling dealing with iras set up as trusts private letter rulings and legislative nonhistory6 ie the story of what some congresses thought previous congresses had decided or even what some agen- cies told congress the irs thought that previous congresses had decided i begin with the code sec_1361 defines an s_corporation which the code more formally calls a small_business_corporation as a domestic_corporation which does not have as a shareholder a person other than an estate a_trust described in subsection c or an organization described in subsection c who is not an individual an s corporation’s shareholders must be somewhere on this list taproot argues that dimundo qualifies because he is an individual person that should be obvious when the code doesn't define a term courts try to construe it in accordance with its ordinary everyday meaning 536_f2d_1324 10th cir and the term individual means a human being 353_f3d_1181 10th cir affg 118_tc_106 see also liddane v commissioner t c see majority op p see majority op pp see majority op p memo affd without published opinion 208_f3d_206 3d cir sec_7701 includes individual in its list of those whom the code regards as persons along with a_trust estate partnership_association company or corporation but when property is held by a custodian for the benefit of another who counts under sec_1361 as an individual per- son --the holder the beneficiary or the account itself the secretary should be the one resolving such ambiguity in the code and he has in the secretary filled this particular gap with sec_1_1361-1 income_tax regs this regulation tells us who counts as an individual shareholder of an s_corporation 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 the regulation explains by example how to apply this general principle in the cases of ownership by a married couple by tenants in common or by joint_tenants but then it reverts to stating a general_rule for other ambiguous cases 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 id while sec_1_1361-1 income_tax regs is captioned number of shareholders and the majority apparently dismisses its relevance to the question of who may own s_corporation stock in part on that account see majority op note that argument is belied by the cross-reference to paragraphs f and g even if captions count section f income_tax regs shareholder must be an individual or estate does continued the code doesn’t define custodian but the dictionary definition is one entrusted officially with guarding and keep- ing merriam webster's third new international dictionary that fits here and is similar to other uses of the word in federal_law see eg u s c sec_3302 custo- dian as someone who keeps money safe without using it himself 547_us_293 n alien proper- ty custodian as someone who receives holds administers and ac- counts for money this seems to fit with what the onega trust company was doing for dimundo i conclude from this that onega actually is a custodian of the s-corporation stock that taproot’s stock is held by a custodian is not enough of course for it to qualify as an s_corporation let us go to the regulation again it states 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 for example a partnership may be a nominee 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 corporation does not qualify as a small_business_corporation sec_1_1361-1 income_tax regs emphasis added who then is the person for whom stock of a corporation is held the italicized phrase from the last sentence in the ex- cerpt leads me to read the regulation as equating beneficial continued tell us who qualifies as a shareholder and expressly includes in the list anyone who counts as a shareholder under sec_1 e income_tax regs owner with the person for whom stock of a corporation is held and this would mean in a case like this one that the correct question is who’s the beneficial_owner of the taproot stock held in the ira whether dimundo’s ira custodial_account makes him the bene- ficial owner depends upon the terms of his contract with the cus- todian and applicable local law we recently held for example that although a partner had title to a partnership_interest he was not its beneficial_owner because the income from the partner- ship was distributed to his mother windheim v commissioner tcmemo_2009_136 and the commissioner himself has already ruled that for purposes of determining who is a shareholder under the provisions of subchapter_s of the code beneficial_ownership of the stock rather than technical legal_title is con- trolling revrul_70_615 1970_2_cb_169 clarified by revrul_75_261 1975_2_cb_350 accordingly since under the facts in revrul_70_615 the taxpayer held the share of stock as an accommodation for the transferor under an ‘acknowledgment of trust’ and had no beneficial_interest therein the taxpayer is properly characterized as a nominee and not as a trustee the problems with figuring out who exactly counted when a stock’s title was held by a nominee or agent caused much litiga- tion before the regulation see eg 560_f2d_687 5th cir beneficial_ownership_of_stock not mere record ownership or other formal indicia de- termines who bears those tax consequences affg tcmemo_1975_92 527_f2d_621 ct_cl trusts but not custodians count as real parties_in_interest for consenting to subchapter_s status 469_f2d_1183 9th cir ‘share- holders’ who must file a consent are not necessarily ‘sharehol- ders of record’ but rather beneficial owners of shares affg in part and revg in part 51_tc_337 73_tc_370 beneficial_ownership controls 68_tc_31 ndollar_figure 47_tc_218 beneficial_ownership not technical legal_title critical factor affd per curiam 391_f2d_930 5th cir but let’s assume on this motion for summary_judgment that dimundo and not someone he’s designated would be that benefici- ary as applied to this case then sec_1_1361-1 in- come tax regs would read for purposes of paragraph e limit on number of shareholders and paragraph f shareholders must be individuals the person for whom stock of the corporation is held paul dimundo by a nominee guardian custodian or an ag- ent onega is considered to be the shareholder of an s corpora- tion taproot this reading seems to make sense taproot cited revrul_66_266 1966_2_cb_356 and priv ltr rul date to support its reading of the regulation the commissioner seized on these pre-1995 citations and urged that they be read as limited to custodians for property held by minors and disabled persons the majority agreed the fact that the commissioner has applied the law liberally when dealing with s_corporation stock held for disabled individuals does not compel us to conclude that he must extend the same liberal application to all s_corporation stock held in custodial accounts whether the owners are disabled or not see majority op note the reasoning of revrul_66_266 needs to be qualified in light of years’ of amendments to the s_corporation rules amendments that have now created a legal environment where the initial rule--only individuals and estates of decedents can hold s_corporation stock in their own names--has been superseded by an expanding list of exceptions stretching from tax-exempt organi- zations under sec_401 and sec_501 to esops qssts trusts corporations and partnerships the revenue_ruling was important at the time for start- ing to erode the law’s focus on title but the regulation’s establishment as a general principle that title won't matter if stock is held by one entity for another was an avulsive change what matters now is whether the beneficial_owner of the stock is an eligible owner the list in sec_1_1361-1 e -- nominee guardian custo- dian or an agent --has no limitation based on the disability of any individual beneficiary and the use of the word custodian strongly suggests that a plain reading of the regulation supports the taxpayer’s position here bankruptcy courts which have some expertise in the area have no trouble holding that the beneficial_interest of a debtor in an ira held by a custodian or a trustee for that matter is attached by the sec_6321 federal_tax_lien classifying iras as the debtor’s own property under u s c sec_541 see eg schreiber v united_states bankr bankr n d ill 758_fsupp_543 d s d deppisch v united_states bankr bankr s d ohio this gives the irs the power to seize taxpayers’ property held in an ira see secs 145_f3d_1218 10th cir right to liquidate ira undoubtedly constituted a right to property subject_to levy 363_fsupp2d_1239 e d cal such cases suggest that the beneficial_owner of property held in a custodial individual_retirement_account is the owner of the ira nonetheless the majority dismisses the regulation’s applicability because that regulation does not stand for the proposition that the tax law looks through an ira trust and treats its owner beneficiary as the shareholder for purposes of determining s_corporation shareholder eligibility unlike it is striking that the commissioner chose to discuss the revenue_ruling and even private letter rulings in his brief but omitted any mention of what seems to be a directly-on-point regulation the instances contemplated by the regulation--where income attributable to s_corporation stock eg dividends flows through a nominee guardian custodian or an agent to the individual for whom the stock is held--such income does not flow through an ira to its beneficiary it is the ira's income not the beneficiary’s see majority op note i don't think this is right--a custo- dial ira is an account not a trust--and while it is certainly a method of owning something it’s not obvious that a custodial_account itself is an entity capable of owning anything one wouldn't say for example that blackacre was owned by a tenancy_by_the_entirety one would say that mr and mrs x owned black- acre as tenants_by_the_entirety and so the final question to ask of the regulation is whether a custodial_account is itself the person for whom stock of a corporation is held by a custo- dian the majority’s dismissal seems odd in light of the power of both bankruptcy courts and the collection arm of the irs to take property in iras to pay their owner’s debts in a way they never would if the ira were a legally distinct person the majority does make one textual argument it reasons in note that iras must be separate entities because unrelated_business_income_tax ubit is imposed on them an ira exists on its own--separate from its beneficiary-- and under sec_408 is exempt from taxation unless ubit is triggered in which case the income_tax is paid_by the ira not its beneficiary although the ira's accumula- ted income will under current law eventually be released to the beneficiary or successor beneficiary in a taxable traditional_ira or nontaxable roth_ira distribution stream some time in the future that does not make the ira a nominee guardian custodian or an agent of the benefici- ary with respect to the s_corporation stock for purposes of sec_1_1361-1 income_tax regs but the language of sec_408 subjecting iras to ubit9 seems not that much different from the language of the code’s excise_taxes sec_4041 for example imposes a tax on any liquid other than gasoline but no one would say that a gallon of diesel_fuel is a person instead regulations define what person is liable for the tax see eg sec_48 b manufacturers retailers excise_tax regs and like sec_408 sec_3121 refers to wages subject_to the taxes imposed by this chapter --obviously referring not to wages as a person owing a tax but wages earned by a person owing the tax and in context wages as the source of the tax’s payment the majority is ascribing tax incidence--who bears the tax liability--to rules about tax reporting and withholding the more fundamental problem with this reasoning is that as i’ve already noted supra p the code itself defines person and custodial accounts are not on that list see eustice kuntz federal income_taxation of s_corporations par n 4th ed perhaps the account is not an entity at all and the individual should count as the direct shareholder for purposes of sec_1361 see sec_408 for ubit is a tax imposed by sec_511 on the income of otherwise tax-exempt entities derived from a trade_or_business that is regularly engaged in and which is not substantially related to the reason the entity is tax-exempt--for example a pasta company owned by a law school c f mueller co v 190_f2d_120 3d 14_tc_922 sec_408 and sec_408a subject both traditional and roth iras to ubit support as the ninth circuit has held determining who is a beneficial shareholder requires analysis of the actual role the shareholder has played in corporate governance 150_f3d_1124 9th cir affg tcmemo_1996_176 in various custodial_account agreements preapproved by the irs the depositor owner is responsible for providing information to the custodian he can combine iras to satisfy the minimum distribution_requirements under sec_408 he can replace the custodian at any time he is in a private_letter_ruling not cited by the commissioner or the majority the irs decided long ago that the owner of s_corporation shares in a custodial_account is not the custodian or the account but the owner of the account priv ltr rul date we don’t rely on this ruling since the code forbids us from relying on private letter rulings as precedent even those cited by both parties and discussed briefly by the majority see sec_6110 the depositor agrees to provide the custodian with all information necessary to prepare any reports required by sec_408 and regulation sec_1_408-5 and sec_1_408-6 southwest securities inc individual retirement custodial_account agree- ment and disclosure statement sws par http www wisconsindiscount com pdfs iraagreement05_06 pdf see also fidelity investments fidelity ira and roth_ira custodial agreements fidelity art v ira and art vi roth http personal fidelity com accounts pdf custodials pdf the owner of two or more traditional iras may satisfy the minimum distribution_requirements described above by taking from one traditional_ira the amount required to satisfy the requirement for another in accordance with the regulations under sec_408 sws par fidelity art iv par ira td ameritrade clearing inc roth_ira disclosure statement custodial agreement ameritrade http www tdameritrade com forms amtd401 pdf art ii the depositor may at any time remove the custodian and replace the custodian with a successor trustee or custodian of the depositor’s choice by giving days notice of such removal continued himself responsible for any fees taxes and administrative expenses and he directs and controls the investments in the accountdollar_figure such agreements--while obviously not controlling here- -at least suggest in their apparent uniformity that custodial- account iras would likely be found at trial to be under the control of their owners it is hard to see how they could be considered persons of their own instead of channels through which their owners direct and manage their investments and a longer look at the regulation shows that it doesn't make immediate taxability a defining characteristic of custodial accountsdollar_figure instead it makes the key characteristic the continued and replacement sws par b ameritrade art x all such fees taxes and other administrative expenses charged to the account shall be collected either from the assets in the account or from any contributions to or distributions from such account if not paid_by the depositor but the depositor shall be responsible for any deficiency sws par c fidelity art ix pars roth ameritrade c at the direction of the depositor the custodian shall invest all contributions to the account and earnings thereon in investments acceptable to the custodian the custodian shall have no duty other than to follow the written investment directions of the depositor and shall be under no duty to question said instructions and shall not be liable for any investment losses sustained by the depositor sws par fidelity art ix par roth ameritrade art vi another textual argument though unmade by the commissioner is to play with the distinction in sec_408 itself which treats custodial iras as trusts for purposes of this section but their custodians as trustees for purposes of this title emphases added the commissioner might have argued that because sec_1361 is part of this title then custodian in the regulation should be read to mean trustee treating the custodian as a trustee with its imposition by reference of recordkeeping duties like those found in section continued beneficial_enjoyment of the account and the regulation itself lists other entities or exempt_organizations as eligible owners of s_corporation stockdollar_figure indeed the relationship between the custodian and the s corporation’s stock was described by the leading treatise as the custodian’s holding nominal ownership versus the owner of the account’s beneficial_ownership see eustice kuntz federal income_taxation of s_corporations par pincite supp and the commissioner has adopted that distinction when it suits him irs coordinated_issue_paper on s_corporation tax_shelters pincite date because the exempt party appears to be simply a facilitator without beneficial_ownership of the s continued does not however mean that the custodial_account would become a_trust the secretary does know how to write regulations that would make that happen for example sec_401 governing qualified_pension and benefit plans says that for purposes of this title in the case of a custodial_account the person holding the assets of such account shall be treated as the trustee thereof but the regulation-- sec_1 f - c i income_tax regs --specifies that such a custodial_account is treated as a separate legal person which is exempt from income_tax under sec_501 in addition the person holding the assets of such account is treated as the trustee thereof emphases added the secretary put this language into sec_1_1361-1 income_tax regs see t d 1995_2_cb_135 he revisited the language in each potential_current_beneficiary of the esbt is counted as a shareholder of any s_corporation whose stock is owned by the esbt t d 2002_1_cb_1078 and less than a year ago providing that the beneficiary of an esbt or the beneficiary of an ira are considered the s_corporation shareholders t d 2008_2_cb_898 corporation stock the exempt party generally should not be treated as a shareholder for purposes of the allocation of income so we have a regulation whose validity is unchallenged by either the majority or the commissionerdollar_figure nor does it seem possible that such a challenge could have succeeded under chevron step one which tells us to ask whether congress has directly spoken to the precise question at issue 467_us_837 the majority concedes as much see majority op note chevron step two--whether the agency’s solution is reasonable-- seems equally easy to climb a focus on the beneficial_ownership_of_stock under a custodian’s control looks directly at who ultimately bears the benefits and risks of s_corporation stock ownership20 and gives us a reasonable answer to the question of coordinated issue papers like revenue rulings are drafted by irs attorneys and represent ‘merely the opinion of a lawyer in the agency and must be accepted as such’ and are ‘not binding on the courts ’ see n ind pub serv co v commissioner 105_tc_341 quoting 445_f2d_1142 5th cir affd 115_f3d_506 7th cir the ninth circuit long ago upheld the pre-1995 version of the regulation sec_1 d income_tax regs 469_f2d_1183 9th cir affg in part and revg in part 51_tc_337 see also 560_f2d_687 5th cir shareholders in close_corporations generally have some role however formal or minor in corporate governance bear a risk of corporate failure and stand to share in corporate successes the extent to which the individual in question exhibits these characteristics helps determine whether he is a beneficial shareholder affg tcmemo_1975_92 cited in continued whether dimundo can put his taproot stock in a custodial-account ira without triggering taproot’s transformation into a c_corporation the dispute within our court should have been on the meaning of the actual words of the regulation but the majority shifts its focus to a set of authorities that can't help us in constru- ing that language i tag along ii the majority’s conclusion rests on old revrul_92_73 rules relating to grantor trusts congressional inaction in response to the irs’s continuing reliance on the revenue_ruling in the plrs it issues and numerous statements by organizations hovering around congress about the current state of the irs’s views on the subjectdollar_figure while consistent these spotty indications are not controlling law but merely demonstrations that the authors of the plrs haven’t thought through the meaning of the regulation against a background of steady expansion in s-corporation shareowning eligibility continued christian grant subchapter_s taxation par dollar_figure 4th ed who must consent the majority admits that no statute or regulation in effect during explicitly prohibited a traditional or a roth_ira from owning s_corporation stock see majority op p it further argues that sec_1_1361-1 income_tax regs effective date contains such an explicit prohibition as we shall explain we do not think the amendment applies to iras in nonbank s_corporations and certainly not custodial iras which are governed by sec_1_1361-1 income_tax regs the three themes flowing through the majority opinion-- deference to the revenue_ruling and the commissioner’s continuing reliance on it disagreement with any characterization of iras as grantor trusts and such legislative_history as exists all spring from these authorities i will look at each a the majority packs most of its reasoning aboard revenue rul- ing which cursorily held that iras couldn’t be considered grantor trusts in determining their eligibility as s-corporation shareholders because the rules that apply to grantor trusts are incompatible with the rules that apply to iras yet the revenue_ruling answered a single question is a_trust that qualifies as an individual_retirement_account under sec_408 of the internal_revenue_code a permitted shareholder of an s_corporation under sec_1361 the ruling reviewed code sec_1361 and sec_1361 and reasoned a sec_408 trust cannot also be a_trust described in sec_1361 or a qsst treated as a_trust de- scribed in sec_1361 because the rules that apply to a_trust described in sec_1361 or qsst treated as such a_trust are incompatible with the rules that apply to a sec_408 trust therefore a sec_408 trust cannot satisfy the rules applicable to a_trust that is a permitted shareholder of an s_corporation emphases added this revenue_ruling is much too weak a plank to bear the load the majority puts on it first and foremost as emphasized above the ruling is aimed at iras held as trusts governed by sec_408 the account in our case is not a_trust it’s a custodial_account custodial_account iras are not true trusts walsh v galloway bankr bankr w d pa sec_408 limits the characterization of custodial-account iras as trusts to that section alone see also infra p b the majority’s lengthy discussion see majority op pp of iras as grantor trusts is understandable in light of the commissioner's own extended analysis along this line and his refusal to engage in the regulatory analysis that taproot did and to be fair taproot itself contributed to the misdirection by chasing the rabbit trail laid down by the commissioner dollar_figure the majority steers us to sec_408 to lash custodial accounts and trusts together see majority op pp that section provides sec_408 custodial accounts --for purposes of this section a custodial_account shall be treated as a_trust if the assets of such account are held by a bank as defined in subsection n or another person who demonstrates to the satisfaction of the secretary that the manner in which he will administer the account will be consistent with the requirements of this section and if the custodial_account would except for the fact that it is not a_trust constitute an individual_retirement_account described in subsection a emphasis added we note without opining on its consequences that the revenue_ruling preceded by a few years congress’s and amendments to the s-corporation rules to provide that an employee_stock_ownership_plan esop under sec_401 could be a shareholder of an s_corporation although the tax treatment of an esop_beneficiary is equivalent to that of a traditional_ira owner and the income of an esop is taxed under sec_72 when distributed to the beneficiary just like an ira’s is the emphasized phrase confines sec_408’s equation of trusts and custodial accounts to sec_408 sec_408 places limits on iras on rollover_contributions on who can be a custo- dian on what assets can be held in them on whether they can be forfeited or on whether their assets can be commingled sec_408 simply directs us to these other parts of sec_408 and we really should have spotted the obvious point that this revenue ruling--issued in 1992--is most unlikely to be help- ful in deciding the meaning of a regulation issued three years later revenue rulings don’t trump regulations we thus agree with taproot that revenue_ruling 92-73's skimpy analysis if relevant at all to this case was overturned by the regula- tion and the commissioner's later analysis of s-corporation ow- nership eligibility for esops see revrul_2003_27 2003_1_cb_597 c what really seems to lead the majority to its conclusion is less the old revenue_ruling and grantor-trust rules than its extensive consideration of public policy and what it concludes from the fact that there is no indication that congress ever intended to allow iras to own s-corporation stock see majority op p the majority first notes that iras are not explicitly listed in sec_1361 as eligible s-corporation shareholders this is true but the supreme court has repeatedly warned that congressional silence lacks persuasive significance 513_us_115 citation omitted wyeth v levine u s ___ ___ 129_sct_1187 the relevance is not in any inferences that the court may draw from congressional silence about the motivations or policies underlying congress’ failure to act 547_us_715 noting the court's oft-expressed skepticism towards reading the tea leaves of congressional inaction the majority next argues that had congress intended to render iras eligible s-corporation shareholders it could have done so explicitly as it has in the limited case of banks de- siring to elect s status see majority op p the major- ity’s reference here is to sec_1361 added to the code in by the american_jobs_creation_act_of_2004 publaw_108_357 sec a stat dollar_figure it makes trust iras eligible s_corporation owners vi in the case of a corporation which is a bank as defined in sec_581 or a depository_institution holding_company as defined in sec_3 of the federal deposit insurance act u s c w a_trust which constitutes an individual_retirement_account under section following this amendment the secretary added subdivision vii to sec_1_1361-1 income_tax regs in the case of a corporation which is a bank a_trust which constitutes an individual_retirement_account under sec_408 including one designated as a roth_ira under sec_408a but only to the extent of the stock held by such trust in such bank or company as of date individual_retirement_accounts including roth iras are not otherwise eligible s_corporation shareholders while not an issue discussed by the majority note that the new regulation applies only to iras set up as trusts and may in context apply only to banks or bank holding_companies organized as s_corporations in any event it applies only prospectively after the year involved here a including one designated as a roth_ira under sec_408a but only to the extent of the stock held by such trust in such bank or company as of the date of the enactment of this clause while we agree with the majority that the amendment was a very narrow exception that allows iras to hold shares in s- corporation banks see majority op p we disagree with the majority about its significance as a window into the mind of congress on the general eligibility of s-corporation shareholders to hold their stock in iras first the amendment had an excep- tionally narrow focus it was limited to trusts and did not in- clude custodial accounts like dimundo’s ira and its narrow focus matched the narrow problem it was aimed at--existing share- holders of small banks who held their stock in iras even when congress amends parts of a statute the supreme court has warned us that as a general matter the arguments of congres- sional inaction deserve little weight in the interpretive pro- cess 511_us_164 and the narrow focus of congress’s attention should make us even more cautious-- when as here congress has not comprehensively revised a statutory scheme but has made only isolated amendments we have spoken more blunt- ly ‘it is impossible to assert with any degree of assurance that congressional failure to act represents affirmative congressional approval of the court's statutory interpretation ’ 491_us_164 n quoting 480_us_616 scalia j dissenting the gao report quoted so extensively by both the commis- sioner and the majority only adds more ballast to my emphasis on the narrowness of this problem--the impact of the old law on community banks the amendment was simply a specific solution offered to a particular problem itself a consequence of a long- time ban on banks’ being allowed to organize as s_corporations that congress didn’t lift until dollar_figure after banks faced a costly and complicated process to convert from being a c to an s_corporation if they had employees who had tucked their shares into iras the chairman of the independent community bankers of america icba described the obstacles iras often hold significant portions of bank stock thereby limiting banks' ability to elect s_corporation status in many cases banks find it virtually impossible to eliminate the significant amount of stock owned by iras due to capital constraints t he owner of the ira is a disqualified party and is prohibited from purchasing the community bank's stock from the ira iras that participate in prohibited transac- tions taint the entire fund and the tax exemption is lost the account ceases to be an ira on the first day of the taxable_year in which the prohibited_transaction occurs the department of labor has granted exemptions on a case-by-case basis from the prohibited_transaction rules when the ira wanted to sell stock to a disqualified party however applications must be submitted for each individual case and are time consuming and expensive icba recommends allowing owners of iras holding the stock of a community bank making the s_corporation_election small_business job protection act of publaw_104_188 110_stat_1785 amending sec_1361 before this act banks couldn’t be s_corporations to purchase the subject securities from the iras this can be accomplished by amending sec_4975 or sec_408 to allevi- ate the penalty associated with an ira selling one of its assets to its owner hearing on s_corporation reforms before the subcomm on select revenue measures of the house comm on ways and means 108th cong 1st sess statement of c r rusty cloutier president and chief_executive_officer midsouth bank chairman of the independent community bankers of america fn refs omitted the gao focused on this problem and consulted legal and accounting experts treasury officials and others solely on the cost and delays of eliminating ira shareholders when a bank converted to s status and while the gao's report did note iras are not eligible to be s-corporation shareholders under present law gao report app iv pincite nowhere did it cite any authority for this contention though it’s reasonable to assume it had revrul_92_73 in mind the secretary responded to the gao study in a short letter he referred to a series of proposals related to banks organized as s_corporations and commented that his discussion was limited to the particular subject of the potential impact of the proposal on community banks he then went on to address the specific problem the prohibition of iras as shareholders also creates difficulties only for banks that had been previously organized as c corporations it is important to emphasize in the text of the report that a substantial gao rep pincite number of banks are already operating as s_corporations and therefore have presumably not found these provisions which are necessary in our view for the reasons discussed above insurmountable gao rep pincite the most interesting part of treasury’s response is its suggestion that the real problem with s_corporation shareholders’ putting their stocks in iras was the possibility that the corpor- ation’s operating_profit might go untaxed for quite a while treasury officials generally opposed this proposal because permitting iras to hold shares in s_corporation banks would create untaxed income for a potentially long period of time id pincite treasury indicated that if iras were allowed to be s_corporation shareholders from a policy standpoint the unrelated_business_income_tax should be imposed which parallels similar tax treatment of other pension funds id app iv pincite the deputy assistant treasury secretary for tax policy repeated those concerns our support however is explicitly conditioned on the s_corporation income earned in the ira being treated as unrelated_business_taxable_income we are concerned that if enacted subsequent efforts will be made that would make such income not subject_to ubit as was done in the case of esops thus eliminating any and all tax on such income hearings supra pincite statement of gregory f jenner deputy assistant secretary for tax policy u s department of the treasury since the amendment several congressmen have intro- duced bills to allow s-corporation stock to be held in iras of all types the majority see majority op note cites the failure of these efforts as additional support for inferring a prohibition on owning s_corporation stock in iras but asking why congress hasn’t amended the code to reverse revrul_92_73 isn’t the right way to look at the problem in a system like tax law so heavily dependent on regulations to fill the inevitable gaps the right questions are what does a regulation mean and does it stay within the boundaries marked out in the code chevron doesn't tell us to ask why congress didn't do what the regulation does it tells us to ask whether the regulation is valid as a reasonable interpretation of an ambigu- ity in the code 141_f3d_936 9th cir revg 106_tc_31 126_tc_96 halpern j dissenting vacated 515_f3d_162 3d cir here the ambiguous term in the code is individual in sec_1361 and as ex- plained above the regulation is a perfectly reasonable construc- tion of that term if as also explained above a custodial ac- count is not a person but a way a person can own property then the regulation as applied certainly allows dimundo to hold his stock in a custodial_account even an ira the majority’s approach also veers toward relying on the doctrine_of legislative reenactment when it argues that congress has to have been aware of the irs's revenue_ruling and plrs but chose not to amend the code in response yet there is no evi- dence that congress knew of any code section or regulation or revenue_ruling or even plr on this matter this should have started caution flags fluttering the re-enactment_doctrine is most useful in situations where there is some indication that congress noted or considered the regulations in effect at the time of its action otherwise the doctrine may be as doubtful as the silence of the statutes and legislative_history to which it is applied 948_f2d_289 6th cir revg tcmemo_1990_129 iii but there remain two questions that seem to really trouble the majority why is it only now that anyone is making this argument and wouldn’t the system fall apart if people could hold s_corporation shares in their iras a whenever a novel legal argument about an old law is pro- posed a prudent judge should ask why no one’s ever thought of it before but whatever presumption of incorrectness novelty must bear it can’t be a complete bardollar_figure two university of chicago nobel laureates walking down a campus sidewalk one says to the other ‘there’s a dollar_figure-bill on the sidewalk in front of you ’ without looking down the other laureate retorts ‘no there isn’t ’ to which the first laureate says in some frustration ‘well look down it’s right there ’ the second laureate then closes off the debate ‘there couldn’t be if there were a dollar_figure-bill on the sidewalk someone would have picked it up ’ mckenzie book overview a defense of rational behavior in economics ch pincite merage school of business univ of cal irvine under development in but based on a long oral tradition on the hazards of picking up money from sidewalks see generally roberts v state p 2d continued and there’s a reasonable explanation for no one’s having raised the argument till now to understand it consider the question’s chronology 1958--subchapter s_corporations put in the code--ownership limited to individuals and estate sec_27 1966--revenue rulings and allow minors or others under disabilities whose property is held in custodial accounts or by estates to be eligible s- corporation shareholder sec_28 1974--traditional iras put in the code29 1976--grantor trusts allowed to be s-corporation shareholder sec_30 1992--revenue ruling holds that an ira held by a_trust is not a_trust eligible to be an s-corporation shareholder31 sec_1_1361-1 income_tax regs is issueddollar_figure continued okla crim app atkinson v birmingham a r i former secs were first added to the code by the technical amendments act of publaw_85_866 72_stat_1650 revenue rulings 1965_1_cb_428 and 1966_2_cb_356 employee_retirement_income_security_act_of_1974 publaw_93_406 88_stat_959 date tax reform act of publaw_94_455 90_stat_1609 revrul_92_73 1992_2_cb_224 t d 1995_2_cb_135 date former sec_1 d income_tax regs issued under former code sec_1371 provided that partnerships and trusts and not their partners or beneficiaries were treated as the shareholders in the secretary changed position and promulgated sec_1_1361-1 income_tax regs partially allowing more flexible s- continued 1996--banks are allowed to be organized as s_corporation sec_33 1997--roth iras are put in the code34 -- iras already owning shares in banks converting to s_corporation status are expressly made eligible shareholdersdollar_figure this is a history of adhocery--congress and the irs finding solutions to new problems in the area as they arose what makes the regulation so significant is that it marked the first time that the secretary chose to stop tweaking the list of eligible s-corporation shareholders and instead set up a general principle for dealing with a class of situations where variou sec_32 continued corporation ownership and possession the secretary put some extra thought into this when first proposed the regulation provided that in the case of a partnership the partnership and not its partners is considered to be the shareholder and the corporation does not qualify as a small_business_corporation following comments that questioned why stock held by a partner- ship as nominee could not be considered to be owned by the bene- ficiary the secretary reversed course and the final regulations provided that the person for whom a partnership holds s-corpora- tion stock will be treated as the shareholder t d c b pincite date his explanation for including par- tnerships on the list of eligible shareholders particularly when other flowthru entities were also added over the years suggests that preserving the tax dynamics of s-corporation distribu- tions see halpern j concurring op note was not his primary goal small_business job protection act of publaw_104_188 110_stat_1785 amending sec_1361 taxpayer_relief_act_of_1997 publaw_105_34 111_stat_825 the american_jobs_creation_act_of_2004 publaw_108_357 sec a 118_stat_1434 added that provision to sec_1361 entities exercised different attributes of ownership--title possession etc the problem is that the parts of the irs overseeing ira law don’t seem to have noticed this turn taken by the parts of the irs overseeing s-corporation law treatise writers have noticed but have nevertheless cautioned tax planners against taking the risk of challenging the service given the stakes involved see eustice kuntz supra par blau et al s corpora- tions federal taxation par dollar_figure one can understand this caution--having even one ineligible shareholder triggers revo- cation of s-corporation status sec_1361 with its immedi- ate imposition of a second layer of taxation on profit distribu- tions to the shareholders this makes the absence of precedent on the question understandable--for a corporation that has share- holders who have put their stock in an ira electing s-corpora- tion status could trigger excise_tax on excess_contributions sec_4973 penalties on prohibited_transactions sec_4975 and a tax on distributions from the affected corporation that will apply to all its shareholders b there is finally the objection that by allowing s-corpora- tion stock to be held in tax-deferred or tax-exempt ira accounts tax alchemy in a free enterprise business context could be achieved this would grant an overwhelming competitive tax bene- fit to a roth ira-owned business compared to a c_corporation competitor who is subject_to two levels of tax--one at the cor- porate level and another at the shareholder level see majority op note but this underestimates the strengths of the code’s other defenses against such shenanigans there are numerous li- mitations on what can go in and out of an ira--income-contribu- tion limits sec_219 deadlines for contributions sec_219 penalties on prohibited_transactions sec_4975 penalties on ex- cess contributions sec_4973 etcdollar_figure but even more importantly while custodial retirement accounts are generally exempt from tax on undistributed ira income they are still subject_to the taxes imposed by sec_511 relating to imposition of tax on unrelated_business_income of charitable etc organizations sec_408 it’s ubit not the revocation of s-corporation status that plugs any loophole while iras normally may hold a variety of investments including cash stocks and bonds they are exempt from tax on income derived from such investments this cluster of taproot-like cases all seem to feature investments such as real-estate and other small businesses that would generate ubit see sec_512 see also supra note that is certainly what seems to have been happening in this case and the two related to it the oral settlement in dimundo v commissioner docket no included dimundo’s conces- ignoring such constraints is presumably what led the commissioner to consider some schemes involving s_corporations and esops to be abusive tax transactions under sec_409 the secretary made them listed transactions under the tax_shelter regulations including its disclosure requirements see notice_2004_8 2004_1_cb_333 date sion of the penalty owed for making excess_contributions to an ira under sec_4973 as well as his concession that he re- ceived nearly a million dollars in unreported taxable dividends from the operating business standing in back of taproot that flowed into his custodial_account it really would be tax alche- my if such operating profits went untaxed in an ira but the solution is what the parties came up with here--a recognition that whether taxed as unrelated income or deemed dividends the income would nevertheless be taxed they did have dollar_figure of what they called interest left over and stipulated to the court that resolution of this summary- judgment motion would govern whether that trickle of an income stream would be taxed as c-corporation income or flow through to dimundo’s roth_ira the practical effect of ruling against the government here would likewise be much smaller than the majority fears given the breadth of the income that is subject_to ubit fed tax coordinator 2d ria pars d-6916 d-6901 characterization of the income and loss from s_corporation to tax-exempt_organization as unrelated_business_income applies regardless of the nature of such income 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 its route would be new but the stakes are not that great and the sky will remain standing if we had just read and applied the regulation as it is i respectfully dissent foley kroupa and morrison jj agree with this dissenting opinion