Benenson v. Commissioner of IRS
Filing
OPINION issued by Sandra L. Lynch, Appellate Judge; Norman H. Stahl, Appellate Judge and Rogeriee Thompson, Appellate Judge. Published. LYNCH Circuit Judge, dissenting. [16-2066, 16-2067].
Case: 16-2066
Document: 00117274894
Page: 1
Date Filed: 04/06/2018
Entry ID: 6161823
United States Court of Appeals
For the First Circuit
No. 16-2066
CLEMENT C. BENENSON,
Petitioner, Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
No. 16-2067
JAMES BENENSON III,
Petitioner, Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
APPEALS FROM THE UNITED STATES TAX COURT
[Hon. Kathleen Kerrigan, U.S. Tax Court Judge]
Before
Lynch, Stahl, and Thompson,
Circuit Judges.
Neal J. Block, with whom Robert S. Walton and Baker &
Mackenzie LLP was on brief, for appellants.
Ellen Page DelSole, Attorney, Tax Division, U.S. Department
of Justice, with whom David A. Hubbert, Acting Assistant Attorney
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General, Tax Division; Gilbert S. Rothenberg and Teresa E.
McLaughlin, Attorneys, Tax Division, U.S. Department of Justice,
were on brief, for appellee.
April 6, 2018
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STAHL, Circuit Judge.
Date Filed: 04/06/2018
Entry ID: 6161823
Clement Benenson ("Clement") and
James Benenson III ("James III") appeal from the Tax Court's ruling
that they owe an excise tax for contributions made to their Roth
individual
retirement
contribution limits.
accounts
("Roth
IRAs")
in
violation
of
Using the common-law substance over form
doctrine, the Commissioner of Internal Revenue recharacterized a
transaction Clement and James III entered into to reduce their
federal taxes, and the Tax Court affirmed.
v.
Comm'r,
109
T.C.M.
(CCH)
1612
Summa Holdings, Inc.
(2015).
After
careful
consideration, we find the transaction violates neither the letter
nor purpose of the relevant statutory provisions and therefore
reverse the Tax Court's decision.
I.
Summa Holdings is a C corporation and the parent of a
consolidated group of manufacturing companies with export sales.1
1
We define briefly C corporations and S corporations, as well
as the attendant costs and benefits these entities had at all times
relevant to this case:
A C corporation is a corporate entity that is
required to pay taxes on the income it earns.
If a C corporation decides to issue dividends
to its shareholders, the shareholders must pay
income tax on these dividends.
This
arrangement exposes shareholder dividends to
double taxation -- a C corporation's income is
taxed at the corporate level and the portion
of the C corporation's income that is passed
on to shareholders is taxed again at the
shareholder level.
An S corporation, by
contrast, is not taxed at the corporate level.
Instead, the responsibility for the payment of
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In 2008, Summa Holdings' largest shareholders were James Benenson,
Jr. and the James Benenson III and Clement Benenson Trust ("the
Trust").
James Benenson, Jr. and his wife Sharen are the trustees
of the Trust and Clement and James III are the beneficiaries. This
case arises from a transaction the Benensons and Summa Holdings
engineered to reduce their federal taxes through the use of
domestic international sales corporations ("DISCs") and Roth IRAs.
Congress created DISCs as a part of the Revenue Act of
1971, Pub. L. No. 92-178, 85 Stat. 497.
A company that produces
goods for export can contract to pay a DISC a commission from its
export sales.
The DISC pays no federal corporate income tax on
these commissions.
26 U.S.C. § 991.2
Once a DISC receives funds from the commissions, it may,
if it chooses, issue dividends to its shareholders.
The DISC's
shareholders "often will be the same individuals who own the export
taxes owed by the S corporation "passes
through" to its shareholders, who pay the tax
liability in proportion to each shareholder's
pro rata share of the S corporation.
An S
corporation
avoids
double
taxation
on
dividends because S-corporation income is only
taxed once -- at the shareholder level.
In re Northlake Foods, Inc., 715 F.3d 1251, 1253 n.2 (11th Cir.
2013).
2
The DISC's shareholders are taxed on any actual
distributions, the interest on the DISC's deferred tax liability,
26 U.S.C. § 995(f), and a small portion of the DISC's income that
is "deemed distributed" to them, 26 U.S.C. § 995(b)(1)(F)(i).
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company."
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Entry ID: 6161823
Summa Holdings, Inc. v. Comm'r, 848 F.3d 779, 782 (6th
Cir. 2017).
Thus, "the net effect of the DISC is to transfer
export revenue to the export company's shareholders as a dividend
without taxing it first as corporate income."
Id.
Congress created Roth IRAs as a part of the Taxpayer
Relief Act of 1997, Pub. L. No. 105-34, sec. 302, 111 Stat. at
825.
Different
contributions
to
from
a
the
Roth
rules
IRA
are
governing
not
traditional
deductible,
26
IRAs,
U.S.C.
§ 408A(c)(1), but qualified distributions from the account are not
taxed, 26 U.S.C. § 408A(d)(1).
Traditional and Roth IRAs are
subject to the same annual contribution limits, and in 2008, these
limits were set at $5,000.
26 U.S.C. §§ 219(b)(5)(A), 408A(c)(2).
If an IRA of either type exceeds the contribution limits, it is
subject to a 6% tax annually on the amount of excess contributions.
26 U.S.C. § 4973(a).
In 2004, the Internal Revenue Service ("IRS") released
Notice 2004-8 ("the Notice"), which described transactions some
taxpayers were entering into "to avoid the statutory limits on
contributions to a Roth IRA."
333.
I.R.S. Notice 2004-8, 2004-1 C.B.
The transactions described in the Notice involved a taxpayer
who owned a preexisting business, a Roth IRA maintained for the
taxpayer's benefit, and a corporation acquired by the Roth IRA.
Id.
The corporation owned by the Roth IRA would enter into an
agreement with the taxpayer's business whereby the business would
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transfer value to the corporation.
Id.
Entry ID: 6161823
The Notice described how
either the Roth IRA's purchase of shares in the corporation or the
transaction between the taxpayer's business and the corporation
would not be "fairly valued" and would therefore have "the effect
of shifting value into the Roth IRA" in excess of the contribution
limits.
Id.
The Notice declared that the IRS intended to deny or
reduce deductions made using these transactions.
Id.
On January 30, 2002, James III and Clement each deposited
$3,500 into individual Roth IRAs they had established a few weeks
earlier.
On January 31, 2002, each of the Roth IRAs paid $1,500
for 1,500 shares in JC Export, a newly formed DISC.
That same
day, the Roth IRAs sold their shares in JC Export to JC Export
Holding ("JC Holding"), a C corporation the Benensons also formed
that day.
Holding.
Each of the Roth IRAs received a 50% stake in JC
The parties agree that JC Holding:
was formed, in part, so that the Roth IRAs
would not have unrelated business income and
the associated tax reporting obligations and,
in part, so that the custodians of the Roth
IRAs
no
longer
would
be
involved
as
shareholders of JC Export and, thus, would
avoid being required to take shareholder
actions regarding JC Export.
JC Export entered into agreements with Summa Holdings'
subsidiaries to receive DISC commissions.
payments
from
Summa
Holdings'
Once JC Export received
subsidiaries,
transferred the funds to JC Holding.
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it
immediately
After setting aside the
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amount it estimated it would owe in federal income taxes, JC
Holding immediately paid out the remainder of the funds to the
Roth
IRAs
as
a
dividend.
$1,477,028 to the Roth IRAs.
In
2008,
JC
Holding
transferred
By the end of 2008, the James III
Roth IRA was worth $3,145,086 and the Clement Roth IRA was worth
$3,135,236.
James III and Clement have stipulated that the "sole
reason for entering into the Transaction at Issue
. . .
was to
transfer money into the Roth IRAs so that income on assets in the
Roth IRAs could accumulate and be distributed on a tax-free basis."
They likewise stipulated that they had no non-tax business purpose
for establishing the Roth IRAs, JC Export, and JC Holding.
In 2012, the Commissioner issued a notice of deficiency
for the 2008 tax year to Summa Holdings, the Trust, and James III
and Clement. The Commissioner determined that the DISC commissions
paid to JC Export were not, in substance, DISC commissions; they
were in fact dividends to Summa Holdings' shareholders.
The
Commissioner viewed the resulting payments from JC Holding to the
Roth IRAs not as dividends, but as contributions to the Roth IRAs
in excess of the contribution limits.
The Tax Court affirmed the Commissioner's determination.
Summa Holdings, Inc. v. Comm'r, 109 T.C.M. (CCH) 1612 (2015).
Tax
Court
found
recharacterize
it
the
was
appropriate
transaction
under
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for
the
the
substance
The
Commissioner
over
to
form
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doctrine because the transaction's sole purpose was to "shift[]
millions of dollars into Roth IRAs in violation of the statutory
contribution limits."
Id. at *20.
Summa Holdings appealed to the Sixth Circuit, which
reversed the Tax Court's decision.
782.
Summa Holdings, 848 F.3d at
The Sixth Circuit found the Commissioner "had no basis for
recharacterizing the transactions" because the taxpayers had "used
the
DISC
and
Roth
IRAs
for
purposes -- tax avoidance."
their
congressionally
sanctioned
Id.
As Massachusetts residents, James III and Clement appeal
the Tax Court's decision to this court.
James Jr. and Sharen's
appeal is pending before the Second Circuit.
II.
Before
discussing
the
merits
of
their
appeal,
the
Benensons contend that the Sixth Circuit's ruling in Summa Holdings
prevents us from making an independent determination of the issues
in this case, invoking the principles of claim preclusion, issue
preclusion, and comity.
A.
We find otherwise.
Claim Preclusion
"[T]he essential elements of claim preclusion are (1) a
final judgment on the merits in an earlier action; (2) an identity
of the cause of action in both the earlier and later suits; and
(3) an identity of parties or privies in the two suits."
Kale v.
Combined Ins. Co. of Am., 924 F.2d 1161, 1165 (1st Cir. 1991)
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(citations omitted).
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The Sixth Circuit's decision was a final
judgment on the merits, but the second requirement for claim
preclusion is missing.
Each tax year is a different cause of action even when
the transaction being disputed and taxpayer is the same.
v. Sunnen, 333 U.S. 591, 598 (1948).
Comm'r
Different tax liabilities
owed by different taxpayers present different causes of action,
even where the liabilities arise from the same transaction.
See
Batchelor-Robjohns v. United States, 788 F.3d 1280, 1286-91 (11th
Cir. 2015).
Here, claim preclusion does not apply because we are
determining
whether
James
III
and
Clement
owe
excise
tax
liabilities for the year 2008, not whether Summa Holdings owes a
corporate tax liability for that year.
B.
Issue Preclusion
James III and Clement argue that because the Sixth
Circuit decided that the DISC commission was a deductible expense,
that there was no constructive dividend, and that there were no
excess contributions to their Roth IRAs, the Commissioner is
precluded from relitigating these issues in this court.
As
discussed above, the parties here are different from the parties
in Summa Holdings.
Generally, offensive issue preclusion cannot
apply against the government unless the parties to the litigation
are the same.
United States v. Mendoza, 464 U.S. 154, 162-63
(1984); United States v. Plat 20, Lot 17, 960 F.2d 200, 211 (1st
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James III and Clement claim they are in privity with
Summa Holdings and seek to introduce evidence regarding a 2012
share transfer whereby James III and Clement became the controlling
shareholders of Summa Holdings.
Because the 2012 transfer was not
submitted to the Tax Court, we will not consider it.
Based on the
record established below, James III and Clement cannot show that
they are in privity with Summa Holdings.
C.
Comity
Finally, comity does not force us to follow the Sixth
Circuit.
"Comity is not a rule of law, but one of practice,
convenience, and expediency."
Mast, Foos & Co. v. Stover Mfg.
Co., 177 U.S. 485, 488 (1900).
circuits'
decisions
rejecting them."
where
A circuit need not follow other
"there
appear
cogent
reasons
for
Popov v. Comm'r, 246 F.3d 1190, 1195 (9th Cir.
2001) (quoting Unger v. Comm'r, 936 F.2d 1316, 1320 (D.C. Cir.
1991)).
Of course, we will give the Sixth Circuit's decision "the
same respectful consideration that we would always accord to sister
circuits faced with an identical or similar case."
Kanter v.
Comm'r, 590 F.3d 410, 420 (7th Cir. 2009).
III.
We review the Tax Court's decision "in the same manner
and to the same extent as decisions of the district courts in civil
actions tried without a jury."
I.R.C. § 7482(a)(1).
We review
the Tax Court's legal interpretations de novo. Capital Video Corp.
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v. Comm'r, 311 F.3d 458, 463 (1st Cir. 2002).
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"The general
characterization of a transaction for tax purposes is a question
of law subject to review."
Santander Holdings USA, Inc. v. United
States, 844 F.3d 15, 23 (1st Cir. 2016) (quoting Frank Lyon Co. v.
United States, 435 U.S. 561, 581 n.16 (1978)).
The federal tax system "is, and always has been, based
on statute."
Id. at 21.
"[L]ike other common law tax doctrines,"
the substance over form doctrine3 "can thus perhaps best be thought
of as a tool of statutory interpretation."
Id.
Viewed in this
manner, the substance over form doctrine does not "tak[e] a
transaction entirely outside its statutory framework," but instead
"helps courts read tax statutes in a way that makes their technical
language
conform
more
precisely
with
Congressional
intent."
Dewees v. Comm'r, 870 F.2d 21, 35 (1st Cir. 1989) (Breyer, J.).
3
We will use the term "substance over form doctrine" as the
parties have, both below at the Tax Court and in their briefing to
us, although we note that "it might be more apt to say that
substance over form serves as a background principle, supporting
a group of related doctrines."
Linda D. Jellum, Codifying and
"Miscodifying" Judicial Anti-Abuse Tax Doctrines, 33 VA. TAX REV.
579, 595 (2014); see also Santander, 844 F.3d at 19 n.3 (discussing
"two 'substance over form' doctrines, the 'step transaction' and
'conduit' doctrines") (emphasis added). This case does not involve
the "economic substance" doctrine, which also grew out of the
Supreme Court's decision in Gregory v. Helvering, 293 U.S. 465
(1935), but which focuses more specifically on examining whether
a transaction had "no business purpose or economic substance beyond
tax evasion." Santander, 844 F.3d at 23 (quoting Schussel v.
Werfel, 758 F.3d 82, 97 (1st Cir. 2014)); see also 26 U.S.C.
§ 7701(o).
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Under the substance over form doctrine, the taxpayer's
transaction "must be viewed as a whole," Comm'r v. Court Holding
Co.,
324
U.S.
331,
334
(1945),
to
determine
whether
"the
transaction upon its face lies outside the plain intent of the
statute."
Gregory v. Helvering, 293 U.S. 465, 470 (1937).
In
this way, we "look[] to the objective economic realities of a
transaction
rather
than
to
the
particular
form
employed."
Frank Lyon Co., 435 U.S. at 573.
the
parties
Courts use the
substance over form doctrine when a more wooden application of the
Code would "deprive the statutory provision in question of all
serious purpose" and would thereby "exalt artifice above reality."
Gregory, 293 U.S. at 470.
plain
intent
of
the
We therefore begin by determining the
statutory
provisions
underpinning
the
taxpayers' transaction.
Congress created DISCs as a "part of a package of
revisions to the tax code designed to stimulate economic activity."
LeCroy Research Sys. Corp. v. Comm'r, 751 F.2d 123, 124 (2d Cir.
1984).
"The DISC provisions in particular were designed to
'increase
our
payments.'"
exports
and
improve
an
unfavorable
Report,
of
Id. (quoting S. Rep. No. 92-437, at 1 (1971), as
reprinted in 1971 U.S.C.C.A.N. 1918, 1918)).
House
balance
domestic
corporations
were
According to the
being
"treated
less
favorably than those which manufacture abroad through the use of
foreign subsidiary corporations."
H.R. Rep. No. 92-533 (1971), as
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reprinted in 1971 U.S.C.C.A.N. 1825, 1872.
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DISCs would therefore
help "remove a present disadvantage of U.S. companies engaged in
export activities through domestic corporations."
Id.
Both Congress and the Treasury Department understood
that domestic export companies would use DISCs not only to reinvest
in their businesses, but also to increase returns for their
shareholders.
As
the
Sixth
Circuit
observed,
"[t]he
Code
authorizes companies to create DISCs as shell corporations that
can receive commissions and pay dividends that have no economic
substance at all."
Summa Holdings, 848 F.3d at 786.
994(a)
the
establishes
safe-harbor
price
rules
Section
for
DISC
commissions: if the commissions do not exceed 4% of gross receipts
of 50% of net income from qualified exports, the commissions cannot
be challenged under 26 U.S.C. § 482, which generally authorizes
the Treasury to reallocate income to "prevent artificial shifting,
milking,
or
distorting
of
the
true
net
incomes
of
commonly
controlled enterprises."
Comm'r v. First Sec. Bank of Utah, N.A.,
405 U.S. 394, 400 (1972).
Treasury Regulation § 1.994-1(a) states
that application of § 994(a) "does not depend on the extent to
which the DISC performs substantial economic functions . . . ."4
4
While Treasury Regulation § 1.994-1(a) may be read to
preclude some applications of the economic substance doctrine to
transactions involving DISCs, it does not, by itself, immunize the
Benensons' transaction from application of the separate, albeit
related, substance over form doctrine.
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By design, Congress and the Treasury Department allowed
domestic companies to defer taxation and pay out dividends to
shareholders through a structure that might otherwise run afoul of
the Code.
See Addison Int'l, Inc. v. Comm'r, 90 T.C. 1207, 1221
(1988); see also Summa Holdings, 848 F.3d at 786 ("By congressional
design, DISCs are all form and no substance . . . .").
In sum, we
agree with the Sixth Circuit that Congress created DISCs "to enable
exporters to defer corporate income tax."
Summa Holdings, 848
F.3d at 786.
At
a
basic
level,
the
parties
agree
that
Congress
designed Roth IRAs to incentivize long-term savings and investment
by allowing for tax-free distribution to beneficiaries over age 59
1/2.
The Commissioner, however, views the legislative purpose
behind § 408A somewhat more narrowly, contending that Congress
created Roth IRAs to incentivize savings "among America's working
population."
According to the Commissioner, the caps Congress
placed on contributions to Roth IRAs "reflect clear Congressional
intent to limit Roth IRAs' costs to the public fisc" and were meant
to ensure that Roth IRAs would not "be used to divert unlimited
business funds into tax-sheltered vehicles."5
5
The Commissioner's view finds some support in the
legislative history of the Taxpayer Relief Act of 1997. According
to the House Report, the Committee was "concerned about the
national savings rate." H.R. Rep. No. 105-148, at 337 (1997), as
reprinted in 1997 U.S.C.C.A.N 678, 731.
It observed that "the
ability to make deductible contributions" to a traditional IRA "is
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It bears repeating that traditional and Roth IRAs are
subject
to
the
same
annual
§§ 219(b)(5)(A), 408A(c)(2).
contribution
limits.
26
U.S.C.
Contributions to either form of IRA
that exceed the maximum allowed for deduction under § 219 are
subject to a 6% excise tax.
26 U.S.C. § 4973(a); see also Hellweg
v. Comm'r, 101 T.C.M. (CCH) 1261, 2011 WL 821090, at *9 (2011).
Roth IRAs are subject to some restrictions not found in
traditional IRAs.
The Code prevents some higher income taxpayers
from contributing to Roth IRAs.
26 U.S.C. § 408A(c)(3).
In 2008,
single taxpayers with over $116,000 in modified adjusted gross
income, as well as married taxpayers filing jointly with over
$169,000 in modified adjusted gross income, could not contribute
to Roth IRAs.
Individual Retirement Arrangements (IRAs), I.R.S.
Pub. No. 590, at 2 (Jan. 30, 2009).
These limitations suggest
that Congress was focused on providing a savings mechanism to
taxpayers of more modest means than the Benensons.
At the same time, the Commissioner does not dispute that
in 2002, James III and Clement were qualified to make the initial
contributions to their Roth IRAs.
And James III and Clement do
not
were
dispute
that
in
2008,
they
not
qualified
to
make
a significant savings incentive," but found that "this incentive
is not available to all taxpayers under present law." Id. The
Committee mentioned that "many Americans may have difficulty
saving enough to purchase a home," and that a new form of IRA could
help these individuals realize this "fundamental part of the
American dream." Id.
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contributions to their Roth IRAs because their annual incomes were
too
high.6
James
III
and
Clement
claim
that
no
one
made
contributions to their Roth IRAs in 2008; their Roth IRAs only
received dividends from the shares they owned in JC Holding.
It
is
are,
in
of
the
these
"dividends"
substance,
that
"contributions"
the
that
Commissioner
were
made
contends
in
excess
contribution limit.7
We look to how the Code defines a "contribution" in this
context.
Section 408A states that "[e]xcept as provided in this
section, a Roth IRA shall be treated for purposes of this title in
the same manner as an individual retirement plan." 26 U.S.C.
§ 408A(a).
The Code defines an IRA as "a trust created or
organized in the United States for the exclusive benefit of an
individual
or
his
beneficiaries"
that
meets
some
specific
requirements. 26 U.S.C. § 408(a). The first of these requirements
is that "no contribution will be accepted unless it is in cash."
26 U.S.C. § 408(a)(1).
6
In 2008, both James III and Clement reported income above
$500,000.
7
The Commissioner presented two alternative ways by which
the Roth IRAs received the "contributions": either James Jr.
received $2,239,006 in dividends from Summa as Summa's sole
shareholder, or James Jr. received $519,002 and the Benenson Trust
received $1,702,764 in dividends based on their ownership
interests in Summa. Summa Holdings, 109 T.C.M (CCH) at *11.
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Once a contribution is made in cash, the cash can be
invested, subject to certain limitations.
For example, an IRA
cannot invest in collectibles, including art, antiques, or stamps,
and still realize the tax benefits of an IRA.
26 U.S.C. § 408(m).
In almost all circumstances, IRAs are not permitted to own shares
in S corporations. 26 U.S.C. § 1361(c)(2)(A)(vi); see also Taproot
Admin. Servs., Inc. v. Comm'r, 679 F.3d 1109, 1110 (9th Cir. 2012).
The Code does, however, permit both traditional and Roth
IRAs to own shares in C corporations.
Taxpayers may, if they so
choose, direct IRAs to purchase shares of C corporations.
Ancira v. Comm'r, 119 T.C. 135, 138 (2002).
See
Many taxpayers, of
many income levels, own shares in C corporations through Roth IRAs
and traditional IRAs. See McGaugh v. Comm'r, 860 F.3d 1014, 1017
(7th Cir. 2017) (calling an IRA's purchase of stock in a privately
held company "a prototypical, permissible IRA transaction").
As
the Tax Court recognized below, one of the advantages of owning C
corporation shares in a Roth IRA is that "[d]ivdends paid on stock
held by a Roth IRA are considered earnings of the Roth IRA itself,
rather than contributions by the owner of the Roth IRA, and do not
count towards the contribution limits of section 408A."
Summa
Holdings, 109 T.C.M. (CCH) at *15 (citing Taproot Admin. Servs.,
Inc. v. Comm'r, 133 T.C. 202, 206 (2009)).
So, while contributions into Roth IRAs are limited each
year, earnings of Roth IRAs, including dividends from corporations
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owned by Roth IRAs, are not limited.
Entry ID: 6161823
This makes sense.
Few would
put money aside into retirement accounts without the expectation
that the money would grow over time in the accounts.
Dividends
from C corporations provide another avenue by which Roth IRA can
grow in value.
For some taxpayers, Roth IRAs are safe places to squirrel
away $5,000 in cash per year, with a hope of modest returns and
tax-free distribution at retirement.
For other, often wealthier,
taxpayers, Roth IRAs are strategic vehicles for investments in
companies, which may pay out substantial dividends.
Holdings, 848 F.3d at 789.
fundamental
purpose:
to
See Summa
Both uses comport with § 408A's
incentivize
long-term
savings
and
investment for retirement.
"The owner of an IRA is entitled to direct the investment
of the funds without forfeiting the tax benefits of an IRA."
McGaugh v. Comm'r, 111 T.C.M. (CCH) 1116, at *9 (2016), aff'd 860
F.3d 1014 (7th Cir. 2017).
So long as taxpayers are qualified to
make initial contributions, it does not appear to violate § 408A's
plain
intent
to
allow
their
contributions
to
grow
through
investment in qualified privately held companies, even during
periods where the taxpayers are no longer allowed to contribute,
and even if such growth occurs at a swift rate.
For people in the Benensons' position, a Roth IRA is an
extremely advantageous place to hold indirectly the shares and
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proceeds of a DISC.
Page: 19
Date Filed: 04/06/2018
Entry ID: 6161823
In 2008, JC Holding paid $1,477,028 in
dividends to James III and Clement's Roth IRAs, and "[t]he over $3
million in value that had accumulated in each of the Roth IRAs by
the end of 2008 was solely attributable to the initial $3500
contribution made in 2002 . . . , payments received from JC Holding
in
the
form
of
dividends,
and
earnings
investments made with such payments."
stemming
from
the
While James III and Clement
were prohibited from making Roth IRA contributions in 2008, they
were not prohibited from continuing to receive both returns on
their investments and dividends from the corporation owned by their
Roth IRAs.
Summa Holdings, 109 T.C.M. (CCH) at *15.
The Code contemplates IRA and corporate ownership of
DISC shares. Section 995 sets forth the ways in which shareholders
of DISCs are taxed on income from DISCs.
Section 995(g) speaks
directly to the treatment of tax-exempt shareholders of DISCs,
such as IRAs, and provides that distributions and dividends to
such shareholders "shall be treated as derived from the conduct of
an
unrelated
trade
or
business"
unrelated business income tax.
and
will
be
subject
the
The unrelated business income tax
is "set at the same rate as the corporate income tax."
Holdings, 848 F.3d at 782.
to
Summa
Under 26 U.S.C. § 246(d), dividends
from DISCs to corporations are subject to corporate income tax.
When §§ 995(g), 246(d), and 408A are read together, it
appears Congress understood that Roth IRAs could also hold proceeds
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from DISCs.
Page: 20
Date Filed: 04/06/2018
Entry ID: 6161823
Under § 995(g), if a Roth IRA owns DISC shares
directly, it will have to pay the unrelated business income tax.
Under § 246(d), if a Roth IRA owns a C corporation, and the C
corporation owns DISC shares, the C corporation will have to pay
the full corporate income tax on any dividends.
In the present
case, JC Holding paid income tax on the $2,161,965 it reported as
distributions from JC Export at the corporate tax rate.8
"We assume that Congress is aware of existing law when
it passes legislation."
32
(1990).
This
is
Miles v. Apex Marine Corp., 498 U.S. 19,
particularly
true
here,
where
Congress
commanded in § 408A that, unless otherwise provided, Roth IRAs are
to be treated in the same manner as traditional IRAs.
We can
therefore assume that when Congress created Roth IRAs, it was aware
that
traditional
IRAs
could
receive
dividends
from
both
C
corporations and DISCs and was comfortable with Roth IRAs engaging
in the same transactions, so long as a tax equal to the corporate
income tax, either under § 246(d) or under § 995(g), was paid.9
8
From its founding through 2008, JC Holding's board of
directors consisted of James Benenson Jr., James III, Clement, and
one other individual. James III and Clement have also served as
vice presidents and co-presidents during that same time period.
9
The Tax Court considered and rejected this same line of
reasoning below, calling it "logically erroneous."
Summa
Holdings, 109 T.C.M. (CCH) at *23. (citing Hellweg, 2011 WL 821090,
at *6). We agree that courts generally should be reluctant "to
infer the intent of one Congress from the views expressed by
another."
Sullivan v. Stroop, 496 U.S. 478, 494 n. 8 (1990).
However, by commanding courts to treat Roth IRAs in the same manner
as traditional IRAs, the 1997 Congress expressed its own intent to
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Entry ID: 6161823
Under these circumstances, we cannot conclude that the
Benensons' transaction "upon its face lies outside the plain intent
of the statute" such that approval of the transaction "deprive[s]
the statutory provision[s] in question of all serious purpose."
Gregory, 293 U.S. at 470.
As outlined above, both DISCs and Roth
IRAs "are designed for tax-reduction purposes."
848
F.3d
at
786.
The
Benensons
used
Summa Holdings,
DISCs,
a
unique,
congressionally designed corporate form their family's business
was authorized to employ, and Roth IRAs, a congressionally designed
retirement account all agree they were qualified to establish, to
engage in long-term saving with eventual tax-free distribution.
Such use violates neither the letter nor the spirit of the relevant
statutory provisions.
We are inclined to accept the congressionally sanctioned
solution to a potential tax avoidance problem, rather than relying
on a judicially crafted common law solution.
See Patsy v. Bd. of
Regents of State of Fla., 457 U.S. 496, 513 (1982) ("The very
difficulty of these policy considerations, and Congress' superior
institutional
competence
to
pursue
this
debate,
suggest
legislative not judicial solutions are preferable.").
that
Congress
added § 995(g) to ensure that some tax is paid when an IRA controls
subject Roth IRAs to the limits imposed by § 995(g). The 1997
Congress was not "silen[t]," Hellweg, 2011 WL 821090, at *6 -- it
declared that the existing statutory backdrop should apply to Roth
IRAs, including the existing solution for IRA ownership of DISCs.
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a DISC.
Page: 22
Date Filed: 04/06/2018
Entry ID: 6161823
Here, the money flowing into James III and Clement's Roth
IRAs was in fact taxed at the ordinary corporate income tax rate,
with the IRS receiving $885,841 in income tax from JC Holding.
Congress
has
revisited
the
DISC
program
on
several
occasions to address other perceived inequities caused by it.
See
Summa Holdings, 848 F.3d at 790 (citing Deficit Reduction Act of
1984, Pub. L. No. 98-369, § 801(a), 98 Stat. 494, 985).
It has
also revised the statutory framework surrounding Roth IRAs in a
manner that cuts against the Commissioner's view of Roth IRAs as
retirement tools available solely for the middle class.
See id.
at 789 (discussing "Congress's decision in 2005 to allow owners of
traditional IRAs . . . to roll them over into Roth IRAs no matter
how
many
assets
the
accounts
hold
or
how
high
the
owners'
incomes"). Yet, despite its active history of legislating in these
areas, Congress has not placed any further limits on transactions
like the Benensons'.
If Congress does not view § 995(g) and § 246(d) as
sufficient
solutions
to
the
potential
problem
raised
by
the
Benensons' transaction, it may choose to reexamine the law in this
area.
But, in our more limited role, we cannot say that our tacit
approval
of
the
Benensons'
transaction
deprives
the
existing
statutory framework of all serious purpose.
The Commissioner views the Benensons' transaction as
different
from
other
investments
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in
privately
held
companies
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because he claims there was no risk involved.
Entry ID: 6161823
But, to the extent
that risk was required, it came from reliance on the DISC.
The
benefit of James III and Clement's Roth IRAs is necessarily tied,
at least initially, to the success and profitability of Summa
Holdings' export companies.
If the export companies are not
thriving, then they will produce no DISC commissions.
DISC
commissions,
the
Benensons'
Roth
IRAs
would
Without
receive
no
dividends from JC Holding.
Moreover, if the Benensons' transaction presents a lower
risk than other potential investment structures, it is due to the
unique, congressionally designed DISC corporate form.
Congress
created DISCs to provide otherwise unavailable economic support to
domestic exporters.
choice.
We cannot, and do not, question this policy
All we can say is that "[i]f Congress sees DISC-Roth IRA
transactions of this sort as unwise or as a creating an improper
loophole, it should fix the problem."
Summa Holdings, 848 F.3d at
790.
That is not to say that all transactions involving tax
avoidance through Roth IRAs are immune from recharacterization
under the substance over form doctrine.
The Sixth Circuit cited
and discussed with approval the Tax Court's decision in Repetto v.
Commissoner, 103 T.C.M. (CCH) 1895, 2012 WL 2160440, at *9 (2012).
Summa Holdings, 848 F.3d at 785-86.
In Repetto, the taxpayers
established "an ordinary [C] corporation owned by Roth IRAs and
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Case: 16-2066
Document: 00117274894
pa[id]
the
performed,"
corporation
and
the
Page: 24
fees
Sixth
for
Date Filed: 04/06/2018
sham
Circuit
'services'
agreed
that,
Entry ID: 6161823
it
never
in
those
circumstances, "the Commissioner may rightly refuse to recognize
the Roth IRA's gains as investment earnings and may reclassify
them as contributions."
Id.
The Tax Court itself recently
recognized that "the substance-over-form doctrine is not something
the Commissioner can use to pound every Roth IRA transaction he
doesn't like."
Block Developers, LLC v. Comm'r, 114 T.C.M. (CCH)
68, at *30 (2017). Because C corporations "unlike DISCs, are meant
to have a real business purpose," the Commissioner retains the
power
to
recharacterize
transactions
"where
taxpayers
used
a
corporate form that lacked any substance to facilitate a taxavoidance scheme."
Id.
The Notice does not save the Commissioner's position.
It does not appear that the Benensons' transaction falls within
the Notice's scope.
The Notice describes transactions where "the
acquisition of shares, the transactions or both are not fairly
valued."
Notice 2004-8, 2004-1 C.B. 333.
Although the dissent
claims "the DISC shares were not purchased at market prices," the
Commissioner has never challenged the valuation of the shares the
Roth IRAs purchased in either JC Export or JC Holding.
Summa
Holdings, 848 F.3d at 783.10
10
Following oral argument, the Commissioner has brought to
our attention a recent split decision from the Tax Court, Mazzei
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Entry ID: 6161823
IV.
Some may call the Benensons' transaction clever.
Others
may call it unseemly. The sole question presented to us is whether
the Commissioner has the power to call it a violation of the Tax
Code.
We hold that he does not.
is not a smell test.
interpretation.
The substance over form doctrine
It is, in this circuit, a tool of statutory
When, as here, we find that the transaction does
v. Commissioner, 151 T.C. No. 7, 2018 WL 1168766 (Mar. 5, 2018).
Mazzei involved a transaction with some similarities to the
Benensons'. The petitioners in Mazzei used Roth IRAs to purchase
shares in a Foreign Sales Corporation (FSC), a then congressionally
designed corporate form with some similar features to a DISC.
However, unlike the DISC program, which remains active to this
day, Congress repealed the FSC statutes in 2000. Id. at *2 n.4,
*18 n. 41. Although Mazzei contains a wide-ranging discussion of
the substance over form doctrine and the Sixth Circuit's decision
in Summa Holdings, its holding is quite narrow. In Mazzei, the
Tax Court viewed the Roth IRAs' initial purchase of FSC shares as
without substance and thereby found that "the payments from the
FSC were income to petitioners rather than to their Roth IRAs."
Id. at *8. As the concurrence in Mazzei explained:
The sole issue we decide today is who in
substance owned this FSC -- petitioners or
their Roth IRAs.
The opinion of the Court
focuses on the substance of a single step: the
purported purchase of FSC stock by the Roth
IRAs for the nominal price of $1, viewed
together with the contracts that were entered
into by petitioners, their Roth IRAs, and
Injector Co., all in consideration of that
nominal purchase.
Id. at *26 (Paris and Pugh, JJ., concurring)
Here, as we have said, the Commissioner has never challenged
directly the valuation of the shares the Benenson Roth IRAs
purchased in either JC Export or JC Holding. We therefore express
no view on whether such a challenge would be successful or would
change our analysis.
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Entry ID: 6161823
not violate the plain intent of the relevant statutes, we can push
the doctrine no further.
In such circumstances, to the extent we
accept "the government's proposition that these taxpayers have
found a hole in the dike, we believe it one that calls for the
application of the Congressional thumb, not the court's." Fabreeka
Prod. Co. v. Comm'r, 294 F.2d 876, 879 (1st Cir. 1961).
-Dissenting Opinion Follows-
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LYNCH, Circuit Judge, dissenting.
Entry ID: 6161823
With great respect
for my colleagues in the majority, I dissent because I think the
Tax Court's opinion must be affirmed.
The effect of the majority
decision will be to bless a device to eliminate the contribution
limits Congress has imposed on Roth IRAs.
The decision will cost
the public fisc millions of dollars in tax revenue.
This is an
important case, and in my view the majority gets it wrong and
violates rules of construction.
Congress, in creating DISCs, did not intend them to be
catch-all tax avoidance devices.
Congress did not intend DISCs to
cut
doctrines
through
circumstances.
common
law
tax
under
any
and
all
Congress intended exporters to use DISCs to defer
corporate income tax, and the Benensons did not use the DISC in
this case for that purpose.
They instead used it as a shield
against the application of the time-honored substance over form
doctrine in an effort impermissibly to funnel sums of money in the
millions of dollars each year into their Roth IRAs.
Congress has
never blessed such an arrangement, and the transaction at issue
flouts Congress's intent to limit Roth IRA contributions.
The
Commissioner was correct to recharacterize the transaction.
The
majority is incorrect to hold that, because Congress intended a
limited tax benefit through the use of a DISC, Congress intended,
without saying so, to implicitly set aside its limit on Roth IRA
contributions, an entirely different tax benefit.
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Case: 16-2066
A.
Document: 00117274894
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Entry ID: 6161823
The Substance of this Transaction
The substance over form doctrine is "best . . . thought
of as a tool of statutory interpretation."
Santander Holdings
USA, Inc. v. United States, 844 F.3d at 15, 21 (1st Cir. 2016).
The IRS's recharacterization of a transaction must be upheld when
the transaction "lies outside the plain intent of the statute."
Id. (quoting Gregory v. Helvering, 293 U.S. 465, 470 (1935)); see
also Knetsch v. United States, 364 U.S. 361, 365 (1960) ("[T]he
question for determination is whether what was done, apart from
the tax motive, was the thing which the statute intended." (quoting
Gregory, 293 U.S. at 469)).
Courts analyze various factors when determining whether,
under common law tax doctrines, a transaction is consistent with
congressional intent.
These factors include whether the entities
involved have no business purpose, Gregory, 293 U.S. at 469-70;
whether related entities were used to shift tax liabilities between
related taxpayers, see Palmer v. Comm'r, 354 F.2d 974, 975 (1st
Cir. 1965); whether the transaction used a circuitous route or
intermediary entities for the sole purpose of decreasing the
taxpayer's liability, Minn. Tea Co. v. Helvering, 302 U.S. 609,
613 (1938); and whether the entities involved assumed any risk,
see Merck & Co. v. United States, 652 F.3d 475, 484-85 (3d Cir.
2011).
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The
substance.
transaction
Page: 29
here
Date Filed: 04/06/2018
was
tax-gaming,
Entry ID: 6161823
devoid
of
The companies and Roth IRAs involved were all owned by
members of the same family, the DISC shares were not purchased at
market prices, and the sole reason for the transaction was to
circumvent the contribution limits for Roth IRAs.
In addition,
the parties agree that JC Export and JC Holding would not exist
but for this scheme, that those entities engaged in no business of
any kind, and that they served no purpose other than funneling
money into the Benensons' Roth IRAs.
It is equally clear that the transaction involved no
risk.
The majority claims that this transaction involved risk
because the benefit to the Roth IRAs "is necessarily tied, at least
initially, to the success and profitability of Summa Holdings'
export companies."
This is not accurate.
If Summa Holdings
becomes unprofitable, the Roth IRAs will lose nothing because the
money has already been transferred to them.
The purpose of this
tax scheme plainly was to circumvent the Roth IRA contribution
limitations, and that was accomplished as soon as JC Export paid
a dividend to the Roth IRAs.
The fact that Summa Holdings needed
to reach a certain level of success before engaging in this scheme
does not mean that the transaction involved economic risk.
James III and Clement purchased the outstanding shares
of JC Export for $1500 each and then received millions in dividends
from those shares over the next few years.
- 29 -
In effect, the
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Entry ID: 6161823
Benensons jammed millions of dollars into their Roth IRAs at a
time when their incomes were too high for them to contribute to
the IRAs at all, and that money can now be invested and distributed
tax-free.
This does not remotely resemble a real transaction of
economic substance.
In fact, Summa Holdings paid dividends to its
shareholders, who then contributed to the Roth IRAs.
Had this transaction used a C corporation (or an LLC or
almost any other type of entity) to pass money from Summa Holdings
into
the
Roth
appropriate.
IRAs,
recharacterization
would
clearly
be
See Repetto v. Comm'r, 103 T.C.M. (CCH) 1895, 2012
WL 2160440, at *9 (2012); Block Developers LLC v. Comm'r, 114
T.C.M. (CCH) 68, 2017 WL 3078319, at *11 (2017); Polowniak v.
Comm'r, 111 T.C.M. (CCH) 1132, 2016 WL 758360, at *8 (2016).
But
the Benensons found a different, albeit equally brazen, way to
skirt the Roth IRA contribution limitations: they used a DISC to
transfer the money from Summa Holdings to the Roth IRAs.
The
majority views that difference -- the use of a DISC -- as decisive.
The majority does so on the grounds that the substance over form
doctrine cannot apply here because DISC commissions do not need to
have economic substance, and, further, that Congress intended for
Roth IRAs to own DISCs.
I disagree.
The DISC here was not used for the purpose
intended by Congress, but to evade the Roth IRA contribution
limits. The other statutory provisions adverted to by the majority
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Page: 31
do not support its conclusion.
Date Filed: 04/06/2018
Entry ID: 6161823
Congress did not intend the use of
DISCs to circumvent well established Roth IRA contribution limits
and certainly did not say so.
B.
Congressional Intent
DISCs are only insulated from the application of common
law tax doctrines in certain defined and narrow ways, see Treas.
Reg. § 1.994-1(a), because, without that narrow insulation, DISCs
could not serve their intended purpose.
DISCs are meant to reduce
the tax burden on exporters by allowing them to defer corporatelevel taxation.
H.R. Rep. No. 92-533 (1971), as reprinted in 1971
U.S.C.C.A.N. 1825, 1832, 1872.
If commissions paid from a company
with qualified export revenue to a DISC needed to have economic
substance,
intended.
these
provisions
could
not
function
as
Congress
But we are faced with a very different issue.
This
case is not about whether the IRS must honor the commissions paid
from Summa Holdings to JC Export for corporate income tax purposes;
it
is
about
whether
the
IRS
must
honor
the
Benensons'
characterization of the flow of money from Summa Holdings to the
Benensons' Roth IRAs for excise tax purposes.
1.
The Benensons' Use of a DISC
The use of the DISC here to evade the Roth IRA limits is
contrary to Congress's intended purpose for DISCs of corporate tax
deferral.
Because commissions paid to JC Export were immediately
distributed to JC Holding and JC Holding paid corporate tax on
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dividends received from JC Export, the DISC itself did not result
in a tax benefit to the Benenson family.
as much.
The Benensons conceded
They stipulated that the "sole reason for entering into
the Transaction at Issue . . . was to transfer money into the Roth
IRAs so that income on assets in the Roth IRAs could accumulate
and be distributed on a tax-free basis."
(emphasis added).
The
taxpayers made no mention of corporate tax deferral because there
was none.
The only reason a DISC was used as the intermediary was
as a device to attempt to escape the application of common law tax
doctrines.
That use is contrary to what Congress intended.
Congress created DISCs to advantage exporters by giving them a
corporate tax deferral benefit.
See 26 U.S.C. §§ 991-97; H.R.
Rep. No. 92-533 (1971), as reprinted in 1971 U.S.C.C.A.N. 1825,
1872.
DISCs' exemption from common law tax doctrines in that
limited area is a means of achieving that purpose, and goes no
further.
As a result, DISC commissions escape the use of common
law tax doctrines only to the extent necessary to achieve the
intended corporate tax deferral.
The use of a DISC does not grant
a taxpayer carte blanche to enter into artificial and economically
insubstantial transactions without fear of recharacterization.
Congress never said that DISCs can be used to avoid Roth IRA
contribution limits or that the substance over form doctrine did
not apply to DISCs.
Rather, the absence of such a statement is
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telling.
Congress
does
Page: 33
not
Date Filed: 04/06/2018
"hide
elephants
in
Entry ID: 6161823
mouseholes."
Whitman v. Am. Trucking Ass'ns, 531 U.S. 457, 468 (2001).
If
Congress had intended to exempt all transactions that involve DISCs
and Roth IRAs from the application of longstanding common law tax
doctrines, it would have said so directly.
2.
Sections 246(d), 995(g), and 408A
Having established that the DISC was not used for the
purpose of corporate tax deferral, we are left with the majority's
argument that the substance over form doctrine cannot apply here
because the separate provisions in 26 U.S.C. §§ 246(d), 995(g) and
408A
supposedly
evince
Congress's
permitted to own DISCs.
intent
that
Roth
IRAs
be
The Benensons never made a § 246(d)
argument, so that portion of the argument is waived.
See Negron-
Almeda v. Santiago, 528 F.3d 15, 25 (1st Cir. 2008).
In any case,
this line of reasoning is invalid. The majority's argument amounts
to the following: Congress took steps to make sure corporate-level
tax was paid on DISC income when a traditional IRA or a C
corporation
implicitly
was
involved,
approved
contribution limits.
using
and
a
so
it
DISC
must
to
have
silently
circumvent
Roth
and
IRA
The premise is accurate, but the conclusion
does not follow.
First, §§ 246(d) and 995(g) were enacted for a different
purpose: to eliminate tax avoidance opportunities, not to create
them.
Section 995(g) requires that traditional IRAs pay an
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unrelated business income tax on DISC commissions received.
U.S.C. §§ 995(g), 501(a).
26
This was in response to an avoidance
strategy where a DISC would pay a dividend to a traditional IRA in
order to avoid corporate income tax. H.R. Rep. No. 101-247 (1989),
as reprinted in 1989 U.S.C.C.A.N. 1906, 2895.
But ending a tax
avoidance scheme that was prevalent more than a decade before Roth
IRAs even existed is different from expressing an intention that
Roth IRAs own DISCs.
That is why, in an earlier case, the Tax
Court found it was "logically erroneous" to argue that Congress
validated the ownership of DISC stock by Roth IRAs when it adopted
§ 995(g) with the aim of preventing a different tax avoidance
strategy.
Hellweg v. Comm'r, 101 T.C.M. (CCH) 1261, 2011 WL
821090, at *6 (2011).
The same is true of § 246(d).
The dividends-received
deduction exists to avoid exposing corporate earnings to multiple
layers of corporate taxation.
H.R. Rep. No. 92-533 (1971) as
reprinted in 1971 U.S.C.C.A.N. 1825, 1903.
Section 246(d) was
passed in 1971 because DISCs do not pay corporate tax, so there is
no risk of exposing corporate earnings to multiple layers of
corporate taxation where the entity paying the dividend is a DISC.
Id.
This provision, enacted over twenty-five years before Roth
IRAs came into existence, does not mention or relate to traditional
or Roth IRAs.
See 26 U.S.C. § 246(d).
The fact that Congress
wanted to ensure that DISC income was exposed to at least one layer
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Document: 00117274894
corporate
income
tax
Page: 35
has
Date Filed: 04/06/2018
nothing
to
do
Entry ID: 6161823
with
Roth
IRA
contribution limits.
Even if the combination of these statutes did indicate
that Congress expected Roth IRAs to own DISC stock, that would not
help the Benensons' case at all.
Allowing IRAs to own DISC stock
is different from exempting transactions involving DISCs and IRAs
from common law tax doctrines and contribution limits.
Roth IRAs
are allowed to own C corporations, but that does not mean that the
substance over form doctrine cannot apply to C corporations used
to circumvent Roth IRA contribution limits.
held.
See Repetto, 2012 WL 20160440 at *16.
The Tax Court has so
The Tax Court here
never stated that Roth IRAs are prohibited from owning DISC stock.
The
Tax
Court's
holding
was
much
narrower:
this
specific
transaction was, in substance, a dividend to shareholders followed
by contributions to the Roth IRAs. Summa Holdings, Inc. v. Comm'r,
109 T.C.M. (CCH) 1612, 2015 WL 3993219, at *7 (2015).
The majority says Congress could have forbidden the
transaction
here
if
it
wanted.
But
the
absence
of
special
legislation to forbid this evasion of statutorily set contribution
limits is not permission to evade those limits.
As the Tax Court
stated in Hellweg, the legislation in this area "may merely
represent a choice to determine whether such distributions produce
an excess contribution on a case-by-case basis according to the
facts and circumstances. Not every silence is pregnant."
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2011 WL
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821090 at *6.
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The Tax Court made such a fact-specific decision
here, and nothing in §§ 246(d), 995(g), or 408A indicates Congress
intended anything different.
All the majority shows with its §§ 246(d), 995(g), and
408A
argument
is
that
Congress
may
traditional IRAs to own DISC stock.
have
intended
to
allow
But there is no reason to
believe that the substance over form doctrine would not have
applied if the Benensons had developed a scheme to circumvent the
contribution limit for traditional IRAs and if, in substance, that
scheme
was
a
distribution
to
shareholders
contribution to the traditional IRAs.
followed
by
a
There has not been a case
on this issue, likely because distributions from traditional IRAs
are not tax-free.
The crux of the majority's argument on this point is
that the substance over form doctrine cannot apply to a DISC
because the Roth IRA is allowed to own a DISC, and DISCs can avoid
common law tax doctrines.
That conclusion does not follow.
Indeed, this line of reasoning would allow IRA contribution limits
to
be
circumvented
at
will
and
is
inconsistent
with
the
longstanding substance over form doctrine.
As discussed below, there is no doubt that the substance
over form doctrine applies even to Code-compliant transactions.
The question then is whether DISC transactions are exempt from the
application of the substance over form doctrine where, as here,
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the DISC was not used for its congressionally intended purpose.
Because the exemption from common law tax doctrines is a means of
providing a corporate tax deferral benefit, I do not believe
transactions
involving
DISCs
are
exempt
from
common
law
tax
doctrines where the DISC was not used for Congress's intended
purpose.11
The Tax Court's ruling is far more consistent with
Congress's intent than is the majority's holding.
3.
Congressional Inaction
The majority implies that its holding is supported by
the fact that Congress has revisited the DISC provisions multiple
times without addressing the Benensons' scheme.
not briefed, so it is waived.
This argument was
See United States v. Zannino, 895
F.2d 1, 17 (1st Cir. 1990).
Even if the argument were not waived, it depends on an
assumption that is not true.
The record contains no suggestion
that, when Congress revisited the provisions at issue in this case,
11
While the Benensons did not benefit from any corporate
tax deferral here, they could have engineered the underlying scheme
to allow them to benefit from corporate tax deferral and circumvent
the Roth IRA contribution limits. Had the Benensons done so, that
would not alter my view as to the excise tax issue before us. The
exemption from common law tax doctrines applied to DISCs, which is
not even made explicit in statute, only exists to further
Congress's intended purpose.
Congress intended to facilitate
corporate tax deferral, not the circumvention of Roth IRA
contribution limits. As a result, even if the Benensons' entities
had engaged in corporate tax deferral, as they did not, that still
would not shield them from the application of the substance over
form doctrine for excise tax purposes.
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it was aware of this scheme and had proposed legislation to outlaw
it.
Even if legislation targeting the Benensons' scheme had been
introduced in Congress, courts have repeatedly advised against
construing congressional inaction as to proposed legislation as
approval of the status quo.
See, e.g., Aaron v. SEC, 446 U.S.
680, 694 n.11 (1980).
C.
Code-Compliant Transactions
The majority argues that if there is a problem here, it
is for Congress to resolve.
My response is that Congress created
the DISC provisions against the background of decades of common
law tax doctrines, under which such transactions are forbidden.
The
Benensons'
transaction
congressional intent.
that
an
intent.
clearly
incompatible
with
Further, Supreme Court precedent is clear
otherwise
recharacterized
is
where
Code-compliant
it
is
transaction
inconsistent
with
can
be
congressional
Comm'r v. Court Holding Co., 324 U.S. 331, 334 (1945);
Minn. Tea Co., 302 U.S. at 613; Deidrich v. Comm'r, 457 U.S. 191,
195-99 (1982); Gregory, 293 U.S. at 470 (1935) (recharacterizing
a transaction because "[t]he whole undertaking, though conducted
according to [the relevant Code section], was in fact an elaborate
and
devious
form
of
conveyance
masquerading
as
a
corporate
reorganization, and nothing else").
This circuit, other circuits, and the Tax Court agree
that
common
law
tax
doctrines
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See, e.g., Santander Holdings, 844 F.3d at 23
(holding that when a transaction is only designed to produce tax
gains instead of real gains, "it is an act of tax evasion that,
even if technically compliant, lies outside of the intent of the
Tax Code and so lacks economic substance"); BB&T Corp. v. United
States,
523
F.3d
461,
477
(4th
Cir.
2008)(finding
that
the
Commissioner was "entitled to recognize [the transaction] for what
it was, not what [the taxpayer] professed it to be"); Repetto,
2012 WL 20160440 at *9 ("Where a series of transactions, taken as
a whole . . . have no 'purpose, substance, or utility apart from
their anticipated tax consequences,' the transactions are not
recognized
for
Federal
tax
purposes."
(quoting
Goldstein
v.
Comm'r, 364 F.2d 734, 740 (2d Cir. 1966))).
I give weight to the Supreme Court's Court Holding
decision and do not think we can sidestep this precedent by
characterizing the opinion as "brief" and distinguish it, as one
circuit has done, by saying "it's hard to say whether the Court
determined that the liquidation before the sale was a sham or
recharacterized
the
minimizing effect."12
transactions
based
solely
on
their
tax-
Summa Holdings, Inc. v. Comm'r, 848 F.3d
12
I do agree with the majority that the Sixth Circuit's
decision in Summa Holdings, Inc. v. Commissioner, 848 F.3d 779
(6th Cir. 2017) has no preclusive effect here and comity does not
require that we adhere to the Sixth Circuit's views, much less on
the different question before us.
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In my view, Court Holding was clearly
announcing that the substance over form doctrine applied even where
the transaction was Code-compliant.
In that case, the Fifth
Circuit had found that the IRS could not recharacterize the
transaction in question because "the purpose to escape or reduce
taxation in making such a choice of procedure is not unlawful.
The procedure actually followed is taxable by the law applicable
to it."
Court Holding Co. v. Comm'r, 143 F.2d 823, 825 (5th Cir.
1944), rev'd, 324 U.S. 331 (1945).
The Supreme Court, without
stating that the transaction was a sham, overturned that decision
on the grounds that "[t]o permit the true nature of a transaction
to be disguised by mere formalisms, which exist solely to alter
tax
liabilities,
would
seriously
impair
administration of the tax policies of Congress."
324 U.S. at 334.
the
effective
Court Holding,
The Benensons admit that the transactions at
issue were mere formalisms created solely to alter tax liabilities;
Court Holding instructs that the Commissioner may take such facts
into account.
Id.
For these reasons, I respectfully dissent.
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