California Appellate Court Case: Award of Trustee Fees
Contributed by the ACTEC Fiduciary Litigation Committee.
2/26/10

Probate court abused its discretion in awarding fees to trustee without any explanation for what it concluded trustee had reasonably incurred those fees and without specifying the amount of that award. An assessment of reasonableness for a fee award depends not only on what fees were reasonably incurred but also on whether such fees are reasonably and prudently incurred for the trust.

Donahue v. Donahue - filed February 24, 2010, Fourth District, Div. Three

Cite as 2010 SOS 698

[Footnote:  the Trustee had a 45 member legal team from three separate law firms with billing rates up to 690/hr including many Fellows.  The appellant was represented by 2 attorneys who billed $375/hr.]

CA Supreme Court Decision - Conservatorship
Contributed by the ACTEC Fiduciary Litigation Committee.
2/26/10

Court hearing under the Lanterman-Petris-Short Act (a CA statutory conservatorship proceeding for an individual who is gravely disabled as a result of mental disorder [CA Welfare & Institutions Code Section 5000, et seq.]).  CA Supreme Court held that the conservatorship proceeding did not violate the Act or the conservatee’s constitutional right of due process by accepting the representation of conservatee’s attorney--that the conservatee was waiving his right to be present for hearing and was not contesting petition--where attorney personally discussed the proceedings with conservatee, and there was no allegation that attorney misrepresented the contents of that discussion.

Conservatorship of John L. - filed February 25, 2010

Cite as 2010 SOS 970

California Case - In Terrorem Will Clause and Anti-Lapse Statute
Contributed by the ACTEC Fiduciary Litigation Committee.
2/9/10

A statement in a testator's will expressing her desire not to provide for any unmentioned heirs and limiting recover to $1 for any unmentioned person who successfully claimed to be an heir did not manifest an intention to preclude predeceased residual beneficiary's issue from inheriting under Probate Code Sec. 21110(a)'s anti-lapse provision.

Estate of Tolman - filed February 11, 2010, Second District, Div. Eight

Cite as 2010 SOS 861

IRS Notice 2010-19 and CRTs
Contributed by the ACTEC Charitable Planning and Exempt Organizations Committee.
2/9/10

IRS Notice 2010-19 was issued on February 2, 2010 with apparent good intentions. The IRS says in the Notice that it was trying to discourage some misguided taxpayers from misinterpreting the language of Code section 2511(c) enacted as part of the 2001 Tax Act (“EGTRRA” for short). The plain language of section 2511(c) – which applies to gifts made after December 31, 2009 – says that “a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under [the grantor trust rules]....”

Few observers ever expected this law to have any application, as most expected some more permanent reform, or at least some extension, of the pre-2010 federal transfer tax before the end of December 2009. When nothing happened at the end of 2009, several commentators looked at the newly effective section 2511(c) and interpreted it perhaps to mean that transfers to grantor trusts cannot be completed gifts. Clearly, this is not what the quoted language says, but the uncertain commentators fell into the trap of concluding that the simple statement, followed by the word “unless” should lead to the conclusion -- nowhere stated in the law -- that a transfer to a trust wholly owned by the grantor or the grantor’s spouse shall not be treated as a transfer of property by gift. Unfortunately, the IRS in Notice 2010-19 , while purporting to clear up this misconception, created a significant new ambiguity of its own making.

The Notice states that “Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax. Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse under [the grantor trust rules]... is considered to be a transfer by gift of the entire interest in the property under section 2511(c).” Read literally, this guidance gives us a whole new set of rules applicable to charitable remainder trusts. And the new rules are not favorable to taxpayers who wish to use charitable remainder trusts in familiar ways.

Consider a typical charitable remainder trust established by A, who retains an income interest (in annuity trust or unitrust form). If A provides for a successive life interest after her death -- for example, an interest in an adult sister -- we have heretofore thought that we did not have a completed gift to the sister if A retained the right to revoke the sister’s interest by will at A’s death. But the Notice seems to say that if a retained power is not sufficient to render the trust a wholly grantor trust, and in the case of this CRT it is not, then the entire transfer is taxable currently as a gift (presumably, with a charitable deduction for the value of the charitable interest after the second death).

Indeed, it may even be the case that the income interest retained by A is taxable as a gift at the creation of the trust. The Notice suggests as much to some readers. There are other uncertainties.

Our fellow Erik Dryburgh has spoken with the author of the Notice. She has told him that the IRS is aware of the issues that the Notice creates for CRTs, but it appears that the IRS is comfortable for the moment with the ambiguity it has created, because the IRS does not know what Congress intended by section 2511(c). A number of ACTEC Fellows have requested clarification from the IRS on this important issue.

Interests in Family Limited Partnership Escape Estate Tax and Marital Deduction Challenge
Contributed by the ACTEC Business Planning Committee.
2/5/10

In Estate of Shurtz v. Commissioner, T.C. Memo 2010-21 (Feb. 3, 2010), the Tax Court rejected attempts by the Internal Revenue Service (i) to include in the decedent’s gross estate the value of the limited partnership’s underlying assets (ii) but to limit the marital deduction only to the discounted value of the decedent’s general and limited partnership interests. The Tax Court determined that, because the decedent formed the limited partnership in part to protect her investment in Mississippi timberland from litigation risks, and in part to facilitate continued efficient management of the timberland even after transferring partial ownership interests to other family members, Section 2036(a) of the Internal Revenue Code did not apply even though the decedent also wanted to reduce estate taxes. Since the Tax Court held that Section 2036(a) did not apply, it concluded that there was no mismatch between the value of the decedent’s interests for estate-tax inclusion purposes and their value for marital deduction purposes.

IRS Issues Guidance on Transfers in Trust Made in 2010
Contributed by the ACTEC Communications Committee.
2/5/10

The Internal Revenue Service released Notice 2010-19 describing the rule that apply to taxpayers making gifts in trust after December 31, 2009. According to the notice, a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property transferred. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.

Vermont Supreme Court Rules on Validity of Disclaimers
Contributed by the ACTEC State Laws Committee.
2/4/10

In Carvalho v. Carvalho, the Vermont Supreme Court held that, although disclaimers are generally irrevocable, they may be challenged on the grounds of undue influence, coercion, or incompetence. Moreover, the court applied the rule from will contest cases based on undue influence that, where the execution of the document occurred under suspicious circumstances (the disclaimer was facilitated by the contingent beneficiary of the estate and the lawyer who drafted the disclaimer and presented it to the disclaimant appeared to be representing parties with conflicting interests), the burden of going forward with the evidence shifts to the party who would benefit from document to show that it was not the product of undue influence.

Nebraska Supreme Court Malpractice Case
Contributed by the ACTEC State Laws Committee.
2/4/10

In Perez v. Stern, a widow hired a lawyer to pursue an wrongful death claim on behalf  of herself, her two minor children, and the deceased husband’s estate. The lawyer filed a complaint, but the action was dismissed because the complaint was not timely served. Almost three years later, the widow filed a malpractice action against the lawyer on behalf of herself and the children. The trial court granted the lawyer’s motion for summary judgment, ruling that the malpractice action was barred by the statute of limitations. The Nebraska Supreme Court reversed, holding that the lawyer owed an independent legal duty to the children and that, as to them, the statute of limitations was tolled by their minority.

Virginia Supreme Court Rules on Enforceability of No-Contest Clause
Contributed by the ACTEC State Laws Committee.
2/4/10

The Virginia Supreme Court, in Keener v. Keener, held that a no-contest provision in a revocable trust, like a no-contest provision in a will, should be strictly enforced according to its terms. The court concluded that one child’s application to the court to open the decedent’s estate as an intestate proceeding did not trigger the no-contest provision in the trust because it was not an objection to or contest of any provision of the trust.

Illinois Supreme Court Case on Tortious Interference with a Testamentary Expectation
Contributed by the ACTEC State Laws Committee.
2/4/10

In Shriners Hospitals for Children v. Bauman, the testator had signed a will in 1964 leaving her estate to the hospitals if she died without descendants. In 1999, she signed a new will naming her pastor as sole beneficiary. When she died in 2003, the 1999 will was probated. In 2006, the hospitals became aware of the 1964 will and brought an action to contest the 1999 will based on undue influence and fraud, and also asserted a tort claim for intentional interference with an expectancy of inheritance. The trial court dismissed all of the claims based on Illinois’s six-month limitation period for filing a will contest. The hospitals appealed only the dismissal of the tort claim. The Illinois Supreme Court held that the six-month statute did not bar the tort claim, but emphasized that its holding does not extend to a plaintiff who fails to bring a tort claim within the period for failing a will contest “where the will contest remedy was available.”

Ohio Court of Appeals Case on Will Revocation Issue
Contributed by the ACTEC State Laws Committee.
2/4/10

The Ohio Court of Appeals held, in Horst v. Horst, that a testator’s marking an “X” across portions of the text of her will, blackening other language, writing in the margin, and crossing out other language did not amount to tearing, canceling, obliterating, or destroying the will so as to revoke it under the Ohio statute.

Delaware Court of Chancery Case on Trustee Prudent Investor Standard
Contributed by the ACTEC State Laws Committee.
2/4/10

In Merrill Lynch Trust Company, FSB v. Campbell, the Delaware Court of Chancery approved the trustee’s accounting for its administration of a charitable remainder unitrsut that had been established on the recommendation of the settlor’s Merrill Lynch, Pierce, Fenner & Smith, Inc. broker. The trust provided for a 10% payout rate for the life of the settler, then for her husband if he survived, and then for her three children until the last of them died, with the remainder to pass to five charities, which gave the trust an expected duration of approximately 50 years. This structure led the trustee to an investment strategy that heavily weighted equities and, when the market declined, the value of the trust fell by about 60%. The settler was unsuccessful in an arbitration proceeding against the brokerage firm, and then sought to remove the trustee. The trustee refused to resign unless the settler provided a release and, when she refused to provide the release, the trustee sought approval of its accounting. The court dismissed as time-barred the settlor’s counterclaim that she had been induced to enter into the trust by misleading misrepresentations and omissions on the part of the brokerage firm and the trustee. The trust agreement “set a nearly unreachable standard,” and, given the constraints of that agreement, the court held that the trustee had not breached the prudent investor standard.

Rhode Island - Domestic Partner’s Ability to Make Funeral Arrangements
Contributed by the ACTEC State Laws Committee.
2/4/10

The Rhode Island legislature has overridden the governor’s veto of a bill that allows a surviving domestic partner to make funeral arrangement for the deceased partner. The bill is available here and the veto override is reflected here.

Two New Decisions Arising out of California:
Contributed by the ACTEC Fiduciary Litigation Committee.
1/13/10

Conservatorship of Deidre B. (filed January 11, 2010, Fourth District, Div. Three ). The Appellate Court held that the trial court did not violate the conservatee’s due process rights by accepting a stipulation filed by her attorney which included the attorney’s sworn declaration that conservatee was told, understood, and agreed to its terms. The stipulation stated that the conservatee consented to reestablishment of conservatorship and waived her right to a formal hearing. The Appellate Court could not consider a post-judgment declaration, which was never presented to the trial court for a ruling, in which conservatee raised new factual allegations challenging her knowing consent to stipulated reestablishment. Instead, the Appellate Court decided that the appropriate procedure when a conservatee seeks to challenge his or her consent after entry of a stipulated judgment is to have any new factual allegations resolved at the trial court level through a petition for rehearing or a habeas petition.

Suleman v. Superior Court (Petersen)( filed January 8, 2010, Fourth District, Div. 3). In this case, involving the famous “Octomom,” the Appellate Court held that a non-relative petitioning for appointment of a guardian for a minor’s estate must establish standing under California Probate Code Sec. 1510(a) by pleading ultimate facts demonstrating financial misconduct or alleging other information sufficient to warrant court intervention in the management of minor’s money or other property. The Appellate Court noted that the test for determining whether a non-relative has standing to file a petition for appointment of a guardian is the same as test for determining whether petition’s allegations are sufficient to survive a motion to dismiss. The Appellate Court found that the probate court erred by ordering an investigation without providing mother with notice or an opportunity to be heard before issuing its order.

Annual Exclusion Denied for Gifts of Limited Partnership Interests
Contributed by the ACTEC Business Planning Committee.
1/6/10

Price v. Commissioner, T.C. Memo 2010-2 (Jan. 4, 2010), held that gifts of interests in a family limited partnership did not qualify for the annual exclusion for federal gift tax purposes. Tax Court Judge Thornton rejected the taxpayers’ attempts to distinguish Hackl v. Commissioner, 118 T.C. 279 (2002), aff’d 335 F.3d 664 (7th Cir. 2003).

Corporate Formation & Liquidation in Same Year Disregarded for Income Tax Purposes
Contributed by the ACTEC Business Planning Committee.
1/5/10

In PLR 200952036, a limited partnership decided to convert to a corporation to try to raise capital. When that strategy did not work, the corporation liquidated into a limited liability company in the same year in which the corporation was formed. The interests of the owners of the LLC were substantially similar in all material respects to their interests in the partnership, and the LLC agreed to make distributions to its owners as if the entity had never converted to a corporation. The IRS ruled favorably that the incorporation would be disregarded and, therefore, there was no taxable corporate liquidation upon the conversion of the corporation to an LLC. Private Letter Rulings (PLRs) are binding authority only on the taxpayers requesting them.

Federal Estate Tax Will Likely Expire January 1^st
Contributed by the ACTEC Communications Committee.
12/17/09

The federal estate tax will likely expire as scheduled January 1, 2010, as Senate Democratic leaders failed in an effort to pass a short-term extension to override the tax ’s expiration.  For more details see:  http://online.wsj.com/article/SB126098351451293981.html

California Case - No Violation of Trust’s No-Contest Clause
Contributed by the ACTEC Fiduciary Litigation Committee.
12/17/09

In a recent appellate Court case in California proposed modification petition requesting an order striking or modifying a special needs trust provision in a trust pursuant to California Probate Code Sec. 15409 did not violate trust’s no-contest clause.

Balian v. Balian - filed December 11, 2009, Second District, Div. Five

As a reminder, effective January 1, 2010, California by statutory change has  limited the effective of no-contest clause and abolished the use of declaratory relief actions to determine if a no-clause would be applicable to a proposed petition.

IRS Issues Proposed Rules on Basis Reporting
Contributed by the ACTEC Fiduciary Income Tax Committee.
12/16/09

Proposed regulations (REG-101896-09) issued by the IRS on December 16, 2009 on basis reporting reflect changes in the law made by the Energy Improvement and Extension Act of 2008 that require brokers, when reporting the sale of securities to the IRS, to include the customer’s adjusted basis in the sold securities and to classify any gain or loss as long-term or short-term. The proposed regulations also reflect changes in the law that alter how taxpayers compute basis when averaging the basis of shares acquired at different prices and expand the ability of taxpayers to compute basis by averaging.

Estate Tax and Graegin Loan
Contributed by the ACTEC Fiduciary Income Tax Committee.
12/15/09

In addition to finding that a transfer of stock to a family limited partnership (FLP) was a bona file sale and not includible in the decedent’s gross estate under section 2036(a), the Tax Court allowed an administration expense deduction under section 2053 for a portion of various professional fees and executor’s commissions.  However, with respect to a “Graegin” loan from the FLP to the estate, the court found the alleged loan to be unnecessary and the interest thereon not immediately deductible under section 2053(a)(2).

Estate of Black v. Commissioner, 133 T.C. No. 15, filed December 14, 2009.

California Trust Case - Spendthrift Trust Beneficiary/Trustee and Damages for Her Breach
Contributed by the ACTEC Fiduciary Litigation Committee.
12/08/09

The California Second District Appellate Court has held that the beneficiary of a spendthrift trust who also acted as trustee and committed a breach causing financial harm to the trust could have her interest in the trust estate impounded to satisfy a claim arising from her misfeasance because the damage resulting from her breach would otherwise be sustained by the beneficiaries.

Chatard v. Oveross - filed November 30, 2009, Second District, Div. Four

Cite as 2009 SOS 6904

Florida: Undue Influence Case
Contributed by the ACTEC Fiduciary Litigation Committee.
12/02/09

Trusts & Estates: Challenging Right to Revoke Trust

Settlor of revocable trust removed all assets from trust and titled them in joint tenancy with one of three sisters.  Upon Settlor’s death, successor Trustee of Decedent’s revocable trust filed suit against surviving joint tenant challenging the transfer of assets and termination of trust on the ground of incapacity.  In reliance on Florida National Bank of Palm Beach County v. Genova, 460 So. 2d 895 (Fla. 1984), trial court dismissed action which was upheld on appeal.  The time to challenge Settlor’s revocation as the product of undue influence was during Settlor’s lifetime, not after her death.
 
MacIntyre v. Wedell, 12 So. 3d 273 (Fla. 4th DCA 2009)

California: Trustee de son tort Case
Contributed by the ACTEC Fiduciary Litigation Committee.
12/02/09

Trusts & Estates: Trust Beneficiary Standing to Sue

Trust beneficiary had standing to sue fellow beneficiary for aiding trustee in transferring property out of trust in breach of trustee’s duties. Trial court erred in failing to consider and make necessary findings as to whether plaintiff could recover from defendant under a theory that after trustee’s death, defendant--by holding herself out as trustee and purporting to perform trustee’s duties--became a trustee de son tort and could thus be held liable for breach of those duties.

King v. Johnston - filed November 9, 2009, Fourth District, Div. One

Cite as 2009 SOS 6416 (--- Cal.Rptr.3d ----, 2009 WL 3720951, 09 Cal. Daily Op. Serv. 13,591, 2009 Daily Journal D.A.R. 15,871, Cal.App. 4 Dist., November 09, 2009 (NO. D054136)

Illinois: Elder Abuse Case
Contributed by the ACTEC Fiduciary Litigation Committee.
12/02/09

Elder Law: Third Party Consent to Trust Amendment/Revocation

An estate planning lawyer who sought to protect his elderly clients (perhaps, former clients) from improvidently changing their estate plan is vindicated by the Illinois Appellate Court, 3d District, in a unanimous decision.  
 
Dunn v. Patterson

Cite as Nos. 3-07-0881, & 3-08-0350 (Cons.) (3d Dist. Nov. 18, 2009) SCHMIDT (Will Co.) Reversed and remanded.

California: Clarification of Real Party in Interest Case
Contributed by the ACTEC Fiduciary Litigation Committee.
12/02/09

Trusts and Estates:  Who is the Real Party in Interest?  The Trust or the Trustee?

Where two individuals entered into a real estate partnership acting in their respective capacities as trustees of family trusts, the partners were the individuals, not the trusts. A trust is a relationship by which one person or entity holds property for the benefit of another and is not a separate entity from its trustees; trustees act as individuals when carrying out trust business.

Presta v. Tepper - filed October 28, 2009, publication ordered November 24, 2009, Fourth District, Div. Three

Cite as 2009 SOS 6795 (--- Cal.Rptr.3d ----, 2009 WL 3469176, 09 Cal. Daily Op. Serv. 14,132, Cal.App. 4 Dist., October 28, 2009)

Recent Developments in State Law
Contributed by the ACTEC State Laws Committee.
11/17/09

California law creates a presumptive disqualification of a care custodian from receiving a donative transfer from a dependent or elder adult, but with an exception for transfers to a care custodian who is the dependent adult’s spouse. In a case involving the estate of comedian and actor Richard Pryor, the California Court of Appeal, Second Appellate District, Division Four, refused to create an exception to the exception where the marriage to the care custodian was allegedly the product of undue influence and fraud. The opinion is available here.
 
Rhode Island Governor Donald L. Carcieri has vetoed a bill that would have given a decedent’s surviving domestic partner the right to make funeral arrangements for the deceased. The text of the bill is available here and the veto message is available here.
 
The Georgia Supreme Court has confirmed that, under Georgia law, a spouse seeking to enforce a pre-nuptial agreement must demonstrate that there was full and fair disclosure of all material facts, including that party’s income. The opinion is here.

Christiansen Decision Affirmed
Contributed by the ACTEC Business Planning Committee.
11/16/09

In Estate of Christiansen v. Commissioner, No. 08-3844 (8th Cir. Nov. 13, 2009), the United States Court of Appeals for the Eighth Circuit affirmed the decision of the United States Tax Court (130 T.C. 1 (2008)) that use of a formula disclaimer, based on values as finally determined for federal estate tax purposes, neither renders the amount of the federal estate tax charitable deduction subject to an impermissible contingency nor violates public policy. The result is to allow the estate tax charitable deduction for the portion of the disclaimed property passing directly to a qualified charity as a result of a valuation increase on audit.

Gain From Surrender of Insurance Policy Is Ordinary Income
11/11/09

On November 3, 2009, the U.S. Tax Court held that the gain from the surrender of a life insurance policy was ordinary income and not capital gain. Barr v. Commissioner, T.C., No. 8705-08, T.C. Memo. 2009-250. Lillian Barr is the mother of petitioner Harvey Barr. In 1980, Lillian bought a life insurance policy to help her children pay the anticipated estate tax liability after her passing. Harvey has been an attorney since 1964 and is admitted to practice in the U.S. Tax Court. In 2005, Lillian and Harvey decided the policy was no longer necessary, and Harvey, as the owner of the policy, surrendered it. Harvey did not include any of the proceeds of surrender in his gross income on his 2005 return, although the transaction was reported on Forms 1099-R and 1099-DIV. The Tax Court found that the gain from the surrender of the life insurance policy was ordinary income, and that the Harvey and his wife, who filed a joint return, were liable for the accuracy-related penalty. The Tax Court’s treatment of the proceeds of surrender is consistent with reasoning and results of Revenue Ruling 2009-13, 2009-21 I.R.B. 1029.

California: Determination of Trust Settlor’s Capacity
Contributed by the ACTEC Fiduciary Litigation Committee.
11/03/09

Rands v. Rands (September 30, 2009), Second District, Div. Six (Cite as 2009 SOS 6195)

Husband and wife established a revocable trust that included a provision for establishing a settlor’s incapacity by written cerifications from two physicians. Under this provision, the determination of incapactity could be revoked by the same procedure. Two of settlor’s treating physicians certified that he was mentally incompetent. One year later, two other physicians certified that the settlor was no longer mentally incompetent. On appeal, the Court held that the later certifications of mental competence were insufficient to reestablish competence because neither of the physicians who found settlor to be mentally competent was aware of the earlier certifications of mental incompetence.

New Jersey: Probate Attorneys’ Fees
Contributed by the ACTEC Fiduciary Litigation Committee.
11/03/09

38-2-5740 I/M/O Will of Riley, App. Div. (per curiam)

This case involves an appeal by the executrix of an award of counsel fees to plaintiff , an unsuccessful proponent of a purported codicil to the decedent’s will, and of the denial of the executrix’s application for sanctions against plaintiff. The panel affirms the fee award and the decision regarding sanctions, finding that the probate judge did not abuse her discretion. The panel remands to the Probate Court for verification (a) that the litigation is being funded by plaintiffs, and not a third-party ; (b) of the amount, if any, that has been paid to counsel by plaintiffs ; (c) of the amount, if any, still owed to ensure that counsel is or has been paid the full amount of the award ; and (d) that Rule 4:42-9(a)(3) is not being used to reimburse fees paid or payable by a non-party.

California Supreme Court: No-Contest Clause in Trust Agreement
Contributed by the ACTEC Fiduciary Litigation Committee.
11/03/09

Johnson v. Greenelsh (October 29, 2009), CA Supreme Court Cite as 2009 SOS 6223

The California Supreme Court determined that challenging a surviving spouse’s mental capacity to transfer trust assets and to appoint a successor trustee did not violate the no-contest clause contained in a trust agreement. The Court drew a distinction between a proceeding contesting a settlor’s mental competence to exercise rights under a trust, and one in which the action contesting a settlor’s mental competence would constitute an attack on the trust itself because such action would effectively nuliffy the estate plan established by the trust.

Disproportionate Distribution Can Be Cured After the Fact to Avoid Termination of S Election
Contributed by the ACTEC Business Planning Committee.
11/02/09

In Private Letter Ruling 200944018, the IRS ruled that, when disproportionate distributions were made by an S corporation in one year, corrective action taken in the following year cured any inadvertent termination of the corporation’s S election that might have occurred. The fact that the corrective action was necessarily non-pro-rata did not itself cause any second-class-of stock problem. A PLR is binding only on the taxpayer requesting it.

Roth IRA Cannot Be Shareholder Of S Corporation
Contributed by the ACTEC Business Planning Committee.
10/22/09

The United States Tax Court held recently that a Roth IRA could not be a shareholder of an S corporation, even prior to the recent issuance of a Treasury Regulation which says that, except in very limited circumstances. The case is Taproot Administrative Services, Inc. v. Commissioner, 133 T.C. No. 9 (September 29, 2009). Treasury Regulation 1.1361-1(h)(1)(vii), which became final on August 13, 2008, now provides specifically that individual retirement accounts (including Roth IRAs) are not eligible S corporation shareholders, unless they satisfy the narrow exception created in Code Section 1361(c)(2)(A)(vi) for stock in a bank or depositary institution holding company that was held by the IRA or Roth IRA as of October 22, 2004.