Court Opinion

ID: 4474961
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:14.499243+00
Date Added: 2024-06-11T14:53:53.025390
License: Public Domain

Holmes, J., dissenting: In 2003, there were 2500 shares of stock in Taproot Administrative Services, Inc., titled “First Trust Company of Onega, as custodian for Paul DiMundo.” A regulation states that “[t]he person for whom stock of a corporation is held by a * * * custodian * * * is considered to be the shareholder of the corporation.”1 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.2 Since he is undoubtedly an individual, why exactly is it that Taproot is disqualified 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?3  And might we not be subtly assuming the conclusion by phrasing 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? 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,4 private letter rulings,5 and legislative nonhistory6 (i.e., the story of what some Congresses thought previous Congresses had decided, or even what some agencies told Congress the IRS thought that previous Congresses had decided.) I begin with the Code. Section 1361(b)(1)(B) 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)(2), or an organization described in subsection (c)(6)) 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. United States v. New Mexico, 536 F.2d 1324, 1328 (10th Cir. 1976). And the term “individual” means a human being. Jonson v. Commissioner, 353 F.3d 1181 (10th Cir. 2003), affg. 118 T.C. 106 (2002); see also Liddane v. Commissioner, T.C. Memo. 1998-259, affd. without published opinion 208 F.3d 206 (3d Cir. 2000). Section 7701(a)(1) 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 section 1361(b)(1)(B) as an “individual person?” — the holder, the beneficiary, or the account itself? The Secretary should be the one resolving such ambiguity in the Code. And he has. In 1995, the Secretary filled this particular gap with section 1.1361-l(e), 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.7] The Code doesn’t define “custodian”, but the dictionary definition is “one entrusted officially with guarding and keeping.” Merriam-Webster’s Third New International Dictionary 559 (2002). That fits here, and is similar to other uses of the word in federal law. See, e.g., 31 U.S.C. sec. 3302(a) (2006) (custodian as someone who keeps money safe without using it himself); Marshall v. Marshall, 547 U.S. 293, 310 n.4 (2006) (alien property custodian as someone who receives, holds, administers, and accounts 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-l(e)(l), 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 excerpt leads me to read the regulation as equating “beneficial 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 beneficial owner depends upon the terms of his contract with the custodian 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 partnership was distributed to his mother. Windheim v. Commissioner, T.C. Memo. 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 controlling.” Rev. Rul. 70-615, 1970-2 C.B. 169, clarified by Rev. Rul. 75-261, 1975-2 C.B. 350 (“accordingly, since under the facts in Revenue Ruling 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 litigation before the 1995 regulation. See, e.g., Wilson v. Commissioner, 560 F.2d 687, 689 (5th Cir. 1977) (beneficial ownership of stock, not mere record ownership or other formal indicia, determines who bears those tax consequences), affg. T.C. Memo. 1975-92; W & W Fertilizer Corp. v. United States, 208 Ct. Cl. 443, 527 F.2d 621, 626 (1975) (trusts, but not custodians, count as real parties in interest for consenting to subchapter S status); Kean v. Commissioner, 469 F.2d 1183, 1187 (9th Cir. 1972) (“‘share holders’ who must file a consent are not necessarily ‘shareholders of record’ but rather beneficial owners of shares”), affg. in part and revg. in part 51 T.C. 337 (1968); Danenberg v. Commissioner, 73 T.C. 370, 390 (1979) (beneficial ownership controls); CHM Co. v. Commissioner, 68 T.C. 31, 37 n.13 (1977); Hoffman v. Commissioner, 47 T.C. 218, 233-234 (1966) (beneficial ownership, not technical legal title, critical factor), affd. per curiam 391 F.2d 930 (5th Cir. 1968). But let’s assume on this motion for summary judgment that DiMundo (and not someone he’s designated) would be that beneficiary. As applied to this case, then, section 1.1361-l(e)(l), Income 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 agent (Onega) is considered to be the shareholder of an S corporation (Taproot).” This reading seems to make sense. Taproot cited Revenue Ruling 66-266, 1966-2 C.B. 356, and Priv. Ltr. Rui. 86-05-028 (Nov. 4, 1985) 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. [Majority op. note 20.] The reasoning of Revenue Ruling 66-266 needs to be qualified in light of 40 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 organizations (under sections 401(k) and 501) to ESOPs, QSSTs, trusts, corporations, and partnerships. The 1966 revenue ruling was important at the time for starting 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 section 1.1361-l(e), Income Tax Regs. — “nominee, guardian, custodian, 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.8  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 section 6321 federal tax lien, classifying IRAS as the debtor’s own property under 11 U.S.C. sec. 541 (2006). See, e.g., Schreiber v. United States, 163 Bankr. 327, 334 (Bankr. N.D. Ill. 1994); Crystal Bar, Inc. v. Cosmic, Inc., 758 F. Supp. 543, 544, 551 (D.S.D. 1991); Deppisch v. United States, 227 Bankr. 806, 808-09 (Bankr. S.D. Ohio 1998). This gives the IRS the power to seize taxpayers’ property held in an IRA. See secs. 6331-6334; Kane v. Capital Guardian Trust Co., 145 F.3d 1218, 1223 (10th Cir. 1998) (right to liquidate IRA undoubtedly constituted a “right to property” subject to levy); Equitable Life Assurance Socy. of the United States v. Mischo, 363 F. Supp. 2d 1239, 1245-46 (E.D. Cal. 2005). 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 the instances contemplated by the regulation — where income attributable to S corporation stock (e.g., 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. * * * [Majority op. note 20.] I don’t think this is right — a custodial 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 Blackacre 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 custodian. 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 20 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(e)(1) 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 sometime 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(e)(1), Income Tax Regs. * * * But the language of section 408(e) subjecting iras to UBIT9 seems not that much different from the language of the Code’s excise taxes. Section 4041(a)(1)(A), 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, e.g., sec. 48.4041-4(b), Manufacturers & Retailers Excise Tax Regs. And, like section 408(e), section 3121(1)(4) 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. 218, the Code itself defines “person,” and custodial accounts are not on that list. See Eustice & Kuntz, Federal Income Taxation of S Corporations, par. 3.03[9] n.145 (4th ed. 2001) (“perhaps the account is not an entity at all, and the individual should count as the direct shareholder for purposes of IRC § 1361. See IRC § 408(h) for support.”).10 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.” Pahl v. Commissioner, 150 F.3d 1124, 1129 (9th Cir. 1998), affg. T.C. Memo. 1996-176. In various custodial account agreements preapproved by the IRS, the depositor (owner) is responsible for providing information to the custodian;11 he can combine IRAs to satisfy the minimum distribution requirements under section 408(a)(6);12 he can replace the custodian at any time;13 he is himself responsible for any fees, taxes and administrative expenses;14 and he directs and controls the investments in the account.15 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 accounts.16 Instead, it makes the key characteristic the beneficial enjoyment of the account. And the regulation itself lists other entities or exempt organizations as eligible owners of S corporation stock.17  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. 3.03[18], at 3-90 (Supp. 2 2009). And the Commissioner has adopted that distinction when it suits him. IRS Coordinated Issue Paper on S Corporation Tax Shelters, at 6 (Nov. 8, 2004) (“Because the exempt party appears to be simply a facilitator without beneficial ownership of the S corporation stock, the exempt party generally should not be treated as a shareholder for purposes of the allocation of income.”).18  So we have a regulation whose validity is unchallenged by either the majority or the Commissioner.19 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.” Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). The majority concedes as much. See majority op. note 20. 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 ownership 20 and gives us a reasonable answer to the question of 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 construing that language. I tag along. II. The majority’s conclusion rests on old Revenue Ruling 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 subject.21 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 1995 regulation against a background of steady expansion in S-corporation shareowning eligibility. 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 Ruling 92-73, 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 section 408(a) of the Internal Revenue Code a permitted shareholder of an S corporation under section 1361?” The ruling reviewed Code section 136 l(c)(2)(A)(i) and 1361(d)(1) and reasoned: A section 408(a) trust cannot also be a trust described in section 1361(c)(2)(A)(i) or a QSST treated as a trust described in section 1361(c)(2)(A)(i) because the rules that apply to a trust described in section 1361(c)(2)(A)(i) or QSST treated as such a trust are incompatible with the rules that apply to a section 408(a) trust. Therefore, a section 408(a) 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 section 408(a). The account in our case is not a trust; it’s a custodial account. Custodial account IRAs are not “true trusts.” Walsh v. Galloway, 308 Bankr. 709, 713-14 (Bankr. W.D. Pa. 2001) (section 408(a) limits the characterization of custodial-account IRAs as trusts to that section alone); see also infra p. 228. B. The majority’s lengthy discussion, see majority op. pp. 210-212, 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) 22  The majority steers us to section 408(h) to lash custodial accounts and trusts together. See majority op. p. 207. That section provides: SEC. 408(h). 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.] The emphasized phrase confines section 408(h)’s equation of trusts and custodial accounts to section 408. Section 408 places limits on IRAS on rollover contributions, on who can be a custodian, on what assets can be held in them, on whether they can be forfeited, or on whether their assets can be commingled. Section 408(h) simply directs us to these other parts of section 408. And we really should have spotted the obvious point that this revenue ruling — issued in 1992 — is most unlikely to be helpful 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 1995 regulation and the Commissioner’s later analysis of S-Corporation ownership eligibility for ESOPs. See Rev. Rul. 2003-27, 2003-1 C.B. 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 eras to own S-corporation stock”. See majority op. p. 213. The majority first notes that iras are not explicitly listed in section 1361 as eligible S-corporation shareholders. This is true, but the Supreme Court has repeatedly warned that “congressional silence lacks persuasive significance.” Brown v. Gardner, 513 U.S. 115, 121 (1994) (citation omitted); Wyeth v. Levine, 555 U.S. _, _, 129 S. Ct. 1187, 1216 (2009) (“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”); Rapanos v. United States, 547 U.S. 715, 749 (2006) (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 desiring to elect S status.” See majority op. p. 213. The majority’s reference here is to section 1361(c)(2)(A)(vi), added to the Code in 2004 by the American Jobs Creation Act of 2004, Pub. L. 108-357, sec. 233(a), 118 Stat. 1434.23 It makes trust IRAs eligible S corporation owners: (vi) In the case of a corporation which is a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(l) of the Federal Deposit Insurance Act (12 U.S.C. 1813 (w)(l)), a trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 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 2004 amendment was a “very narrow exception that allows IRAs to hold shares in S-corporation banks”, see majority op. p. 213, 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 exceptionally narrow focus. It was limited to trusts and did not include custodial accounts like DiMundo’s IRA. And its narrow focus matched the narrow problem it was aimed at — existing shareholders 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 congressional inaction] deserve little weight in the interpretive process.” Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 187 (1994). 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 bluntly: ‘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.’” Patterson v. McLean Credit Union, 491 U.S. 164, 175, n.1 (1989) (quoting Johnson v. Transp. Agency, Santa Clara County, 480 U.S. 616, 671-72 (1987) (Scalia, J., dissenting)). The GAO report quoted so extensively by both the Commissioner 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 longtime ban on banks’ being allowed to organize as S corporations that Congress didn’t lift until 1996.24  After 1996, 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 transactions 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 to purchase the subject securities from the IRAs. This can be accomplished by amending IRC §4975 or IRC §408 to alleviate 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. 41-42 (2003) (statement of C.R. “Rusty” Cloutier, President and Chief Executive Officer, MidSouth Bank, Chairman of the Independent Community Bankers of America); fia. 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,”25 GAO Report, app. IV at 47, nowhere did it cite any authority for this contention (though it’s reasonable to assume it had Revenue Ruling 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 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. at 61.] 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 corporation’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. at 6-7.] * * * * * * 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, at 49.] 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 at 19 (statement of Gregory F. Jenner, Deputy Assistant Secretary for Tax Policy, U.S. Department of the Treasury).] Since the 2004 amendment, several Congressmen have introduced bills to allow S-corporation stock to be held in IRAs of all types. The majority, see majority op. note 25, 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 Revenue Ruling 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 ambiguity in the Code. Redlark v. Commissioner, 141 F.3d 936, 939 (9th Cir. 1998), revg. 106 T.C. 31 (1996); Swallows Holding, Ltd. v. Commissioner, 126 T.C. 96, 157 (2006) (Halpern, J., dissenting), vacated 515 F.3d 162 (3d Cir. 2008). Here, the ambiguous term in the Code is “individual” in section 1361(b)(1)(B) and, as explained above, the regulation is a perfectly reasonable construction of that term. If, as also explained above, a custodial account 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 evidence 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.” Peoples Fed. Sav. & Loan Association v. Commissioner, 948 F.2d 289, 302-03 (6th Cir. 1991), revg. T.C. Memo. 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 proposed, 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 bar.26  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 estates27  1966 — Revenue Rulings 65-90 and 66 — 266 allow minors or others under disabilities, whose property is held in custodial accounts or by estates, to be eligible S-corporation shareholders28  1974 — Traditional IRAs put in the Code29  1976 — Grantor trusts allowed to be S-corporation shareholders30  1992 — Revenue Ruling 92-73 holds that an IRA held by a trust is not a trust eligible to be an S-corporation shareholder31  1995 — Section 1.1361-l(e)(l), Income Tax Regs., is issued32  1996 — Banks are allowed to be organized as S corporations33  1997 — Roth IRAS are put in the Code34  2004 — iRAs already owning shares in banks converting to S corporation status are expressly made eligible shareholders35  This is a history of adhocery — Congress and the IRS finding solutions to new problems in the area as they arose. What makes the 1995 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 various 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. 3.03[9]; Blau et al., 1 S Corporations Federal Taxation par. 3.30 (2009). One can understand this caution — having even one ineligible shareholder triggers revocation of S-corporation status, sec. 1361(b)(1), with its immediate imposition of a second layer of taxation on profit distributions to the shareholders. This makes the absence of precedent on the question understandable — for a corporation that has shareholders who have put their stock in an IRA, electing S-corporation 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-corporation 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 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 shareholder level.” See majority op. note 18. But this underestimates the strengths of the Code’s other defenses against such shenanigans. There are numerous limitations on what can go in and out of an IRA — income-contribution limits, sec. 219; deadlines for contributions, sec. 219; penalties on prohibited transactions, sec. 4975; penalties on excess contributions, sec. 4973; etc.36 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 section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).” Sec. 408(e)(1). 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(a)(1); see also supra note 9. 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. 15395-07, included DiMundo’s concession of the penalty owed for making excess contributions to an IRA under section 4973, as well as his concession that he received 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 alchemy 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 $8,549 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. 7 Fed. Tax Coordinator 2d (RIA), pars. D-6916.1, D-6901 (2009) (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 rebraided 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.   Sec. 1.1361-l(e)(l), 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. at 2; that the stock was held in a custodial IRA account for the benefit of DiMundo’s self-directed Roth IRA, Mot. at 3; and that the stock was owned by the trust company as custodian for DiMundo, Sorenson Deck at 2. 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.    See majority op. p. 208.    See majority op. p. 212.    See majority op. p. 213.    Wbile section 1.1361-l(e), 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 20, that argument is belied by the cross-reference to paragraphs (f) and (g). Even if captions count, section 1.1361-1(0, Income Tax Regs. (“Shareholder must be an individual or estate”), does tell us who qualifies as a shareholder, and expressly includes in the list anyone who counts as a shareholder under section 1.1361-l(e), Income Tax Regs.    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.    UBIT is a tax imposed by section 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. Commissioner, 190 F.2d 120 (3d Cir. 1951), revg. 14 T.C. 922 (1950). Sections 408(e)(1) and 408A(a) subject both traditional and Roth IRAs to UBIT.    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 of the account but the owner of the account. Priv. Ltr. Rui. 80-10-028 (Dec. 11, 1979). 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(k)(3).    “The Depositor agrees to provide the Custodian with all information necessary to prepare any reports required by section 408(i) and Regulation sections 1.408-5 and 1.408-6.” Southwest Securities, Inc., Individual Retirement Custodial Account Agreement and Disclosure Statement (2002) (SWS), par. 5.01, http://www.wisconsindiscount.com/pdfs/IRAAgreement05__06.pdf. See also Fidelity Investments, Fidelity IRA and Roth IRA Custodial Agreements (2009) (Fidelity), art. V (IRA) and art. VI (Roth), http://personal.ftdelity.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 section 408(a)(6).” SWS, par. 4.06; Fidelity, art. IV, par. 6 (IRA); TD AMERITRADE Clearing, Inc., Roth IRA Disclosure Statement & Custodial Agreement (2007) (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 30 days notice of such removal and replacement.” SWS, par. 8.04(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. 8.05(c); Fidelity, art. IX, pars. 16, 18 (Roth); Ameritrade, 8.01(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. 9.01; Fidelity, art. IX, par. 2 (Roth); Ameritrade, art. VI.    Another textual argument, though unmade by the Commissioner, is to play with the distinction in section 408(h) itself, which treats custodial IRAs as trusts “for purposes of this section” but their custodians as trusteees “for purposes of this title.” (Emphases added.) The Commissioner might have argued that, because section 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 6047) 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, section 401(f) (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 — section 1.401(f)-l(c)(l)(i), Income Tax Regs. — specifies that “Such a custodial account * * * is treated as a separate legal person which is exempt from income tax under section 501(a). In addition, the person holding the assests of such account * * * is treated as the trustee thereof.” (Emphases added.)    The Secretary put this language into section 1.1361-l(e), Income Tax Regs. 1995. See T.D. 8600, 1995-2 C.B. 135. He revisited the language in 2002 (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. 8994, 2002 — 1 C.B. 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. 9422, 2008-2 C.B. 898.    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 T.C. 341, 350 (1995) (quoting Stubbs, Overbeck & Associates, Inc. v. United States, 445 F.2d 1142, 1146-47 (5th Cir. 1971)), affd. 115 F.3d 506 (7th Cir. 1997).    The Ninth Circuit long ago upheld the pre-1995 version of the regulation, sec. 1.1371— 1(d)(1), Income Tax Regs. Kean v. Commissioner, 469 F.2d 1183, 1187 (9th Cir. 1972), affg. in part and revg. in part 51 T.C. 337 (1968).    See also Wilson v. Commissioner, 560 F.2d 687, 690 (5th Cir. 1977) (“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 corpirate successes. The extent to which the individual in question exhibits these characteristics helps determine whether he is a beneficial shareholder.”), affg. T.C. Memo. 1975-92, cited in Christian & Grant, Subchapter S Taxation, par. 14.04 (4th ed. 2000) (“Who Must Consent”).    The majority admits “that no statute or regulation in effect during 2003 explicitly prohibited a traditional or a Roth IRA from owning S corporation stock.” See majority op. p. 208. It further argues that section 1.1361-l(h)(l)(vii), Income Tax Regs., effective Aug. 14, 2008, contains such an explicit prohibition. As we shall explain, we do not think the 2004 amendment applies to IRAs in nonbank S corporations, and certainly not custodial IRAs, which are governed by section 1.1361-l(e), Income Tax Regs.    We note, without opining on its consequences, that the revenue ruling preceded by a few years Congress’s 1996 and 1997 amendments to the S-corporation rules to provide that an employee stock ownership plan (ESOP) under section 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 section 72 when distributed to the beneficiary just like an IRA’s is.    Following this amendment, the Secretary added subdivision (vii) to section 1.1361 — 1(h)(1), Income Tax Regs. “In the case of a corporation which is a bank * * * a trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A, but but only to the extent of the stock held by such trust in such bank or company as of October 22, 2004. 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.    Small Business Job Protection Act of 1996, Pub L. 104-188, sec. 1315, 110 Stat. 1785 (amending sec. 1361(b)(2)(A)). Before this Act, banks couldn’t be S corporations.    GAO Rep. at 47.    “Two University of Chicago Nobel laureates walking down a campus sidewalk. One says to the other, ‘There’s a $20-bill on the sidewask 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 $20-bill on the sidewalk, someone would have picked it up.’” McKenzie, Book Overview: A Defense of Rational Behavior in Economics, ch. 1, at 3 (Merage School of Business, Univ. of Cal., Irvine (under development in 2008) (but based on a long oral tradition). On the hazards of picking up money from sidewalks, see generally Roberts v. State, 12 P.2d 701 (Okla. Crim. App. 1931); Atkinson v. Birmingham, 116 A. 205 (R.I. 1922).    Former secs. 1371 — 1377 were first added to the Code by the Technical Amendments Act of 1958, Pub L. 85-866, sec. 64, 72 Stat. 1650.    Revenue Rulings 65-90, 1965-1 C.B. 428, and 66-266, 1966-2 C.B. 356.    Employee Retirement Income Security Act of 1974, Pub. L. 93 — 406, sec. 2002(b), 88 Stat. 959, Sept. 2, 1974.    Tax Reform Act of 1976, Pub. L. 94-455, sec. 902(c)(2)(A), 90 Stat. 1609.    Revenue Ruling 92-73, 1992-2 C.B. 224.    T.D. 8600, 1995-2 C.B. 135 (July 21, 1995). Former section 1.1371 — 1(d)(1), Income Tax Regs., issued under former Code section 1371, provided that partnerships and trusts and not their partners or beneficiaries were treated as the shareholders. In 1995, the Secretary changed position and promulgated section 1.1361-1, Income Tax Regs., partially allowing more flexible S-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 partnership as nominee could not be considered to be owned by the beneficiary, the Secretary reversed course and the final regulations provided that the person for whom a partnership holds S-corporation stock will be treated as the shareholders. T.D. 8600, 1995-2 C.B. at 136 (July 21, 1995). His explanation for including partnerships 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 distributions, see Halpem, J., concurring op. note 1, was not his primary goal.    Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1315, 110 Stat. 1785 (amending sec. 1361(b)(2)(A)).    Taxpayer Relief Act of 1997, Pub L. 105-34, sec. 302(a), 111 Stat. 825.    The American Jobs Creation Act of 2004, Pub. L. 108-357, sec. 233(a), 118 Stat. 1434, added that provision to sec. 1361(c)(2)(A).    Ignoring such constraints is presumably what led the Commissioner to consider some schemes involving S corporations and ESOPs to be abusive tax transactions under section 409(p). The Secretary made them ‘listed transactions” under the tax shelter regulations, including its disclosure requirements. See Notice 2004-8, 2004-1 C.B. 333 (Jan. 26, 2004).