by Mark O'DellJanuary 15, 2019

This past December another federal Appellate court, the Court of Appeals for the Second Circuit, handed down one more victory for the Taxpayer. The court ruled in favor of the Berenson family and their Summa Holdings business, the cases in which federal Appeals Courts have been consistently reversing the Tax Court and the objectives of the IRS who have sought to limit the benefits of using IC-DISCs as shareholders of Roth IRAs. This latest case is Benenson, Jr. 122 AFTR 2nd 2018-5497. In Summa Holdings, the IRS and Tax Court sought to penalize the Taxpayer and disallow a structure in which the Taxpayer used two Roth IRAs as the shareholders of a C corporation that held 100% of an IC-DISC, arguing that this was abusing substance over form and should preclude the Taxpayer of any benefit.

The contested Summa arrangement enabled the two Roth IRAs to receive and accumulate dividends from the C corporation – which first received annual dividends from the IC-DISC – without being subject to the usual Roth IRA contribution limitations as all earnings accumulate tax free under Code sec. 408A. Once the C corporation holding company paid the tax on the dividends received from the IC-DISC, it could remit the net funds as dividends without limitation to the Roths as the Appellate Courts ruled that the dividends were earnings on the Roths’ investment in the C corporation, rather than contributions subject to limitation. This structure enabled the Roths to accumulate several million dollars in just a few years.

To date, the Sixth Circuit Court of Appeals (Summa Holdings, (CA 6 02/16/2017) 119 AFTR 2nd 2017-787) and the First Circuit Court of Appeals (Benenson, (CA 1 04/6/2018) 121 AFTR 2nd 2018-1350) have also ruled on behalf of the Taxpayer. Now that the Second Circuit has joined in with their agreement, the strategy to use you IC-DISC as a means of funding of your Roth IRA without limitation looks more secure than ever.