Neither a Solo 401k Nor an IRA can be an S Corp. Shareholder: Court Case

Court case Taproot Administrative Services v. Commissioner, 109 AFTR 2d 2012-1446, U.S. Court of Appeals for the 9th Circuit, 3/21/2012 affirms that retirement accounts (e.g., solo 401k plans and IRAs) cannot be shareholders in an S Corp.

In this case, the taxpayer formed a corporation, Taproot,  and elected S corporation status. Subsequently, the IRA owner issued all Taproot stock to his Roth IRA. The IRS deemed Taproot ineligible for S corporation status because an IRA is not an eligible shareholder. As a result, Taproot would be subject to tax as a C corporation.

Both the Tax Court and the Ninth Circuit Court of Appeals agreed with the IRS that IRAs are not eligible S corporation shareholders.

From a planning perspective, those IRA owners or solo 401k owners who want to invest their IRA or solo 401k in an entity for passive investing will generally form an LLC and have the IRA or solo 401k be the sole member and the LLC is then invested in buy and hold real estate, for example.  It is important to note that neither an IRA nor solo 401k funded entity such as an LLC can be operated as a business even if the IRA or solo 401k owner does not draw a salary. For those that wan to fund their own business that offers goods or services, this can be done under the ROBS 401k, which is different from and IRA or a solo 401k in that it can be invested in one’s own business and the individual can draw a fair salary.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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