IC-DISC below a Roth IRA Explained
The chart follows the structure the taxpayers built in Summa Holdings. In the beginning, two shareholders own both the operating company, Summa Holdings, Inc. (U.S.), and their respective Roth IRAs, while Summa makes a percentage of its sales to non-US customers as export sales.
Next, the two Roth IRAs fund and form an IC-DISC — here, JC Export Inc — with roughly $3,000 of the shareholders’ $3,500 of IRA contributions. The Roth IRAs then form a C-corporation holding company (JC Export Holding Inc) and contribute 100% of the IC-DISC stock to it, so the IC-DISC sits beneath a Roth-owned holding company.
In the ending structure, Summa Holdings enters into a contract to pay a commission to the IC-DISC for its export sales. An IC-DISC need not perform any actual sales activity to earn a commission; the operating company simply agrees to pay it. The commission (up to 4% of gross export receipts or 50% of taxable income from export sales) is deductible to Summa and is not subject to federal income tax at the IC-DISC level.
The IC-DISC distributes its earnings to JC Export Holding Inc, which pays corporate tax on the dividend, then distributes the after-tax amount to the Roth IRAs, where it grows tax-free. The Sixth Circuit held on February 17, 2017 that using an IC-DISC and Roth IRA together for tax planning in this way is permissible.
