seem like a tangle of arcane tax issues in reality the issues are quite basic they become complicated only when one tries to apply common law judicial doctrines to the intersection of two entities that were entirely created by congress roth iras and foreign sales corporations congress gave both of those entities special tax benefits to promote very specific congressional goals saving for retirement and increasing foreign sales of united states goods i will point out that both of those policies of congress have co existed for forty years within the four corners of title twenty six dollars of the united states code both of them advanced purely federal tax driven congressional policy imperatives promote foreign sales promote retirement savings the fact that in over forty years congress has not only done nothing to prevent the two being used together but in fact starting with disks fisk injector that allows chemicals to be injected into a water stream purely through the rotation of water it's an ingeniously simple system it works it is used in farms across this country was facing competition from foreign competitors in italy and china congress wanted to give him an ability to lower his tax rate on qualifying foreign sales mr mazie took advantage of that and he combined that with a roth ira investment vehicle which again is created by congress and it's this court is looking for one glaring distinction between this case and every single case cited by the commissioner on brief it is this all of the substance over form principle cases from this circuit and other circuits have been used consistently to prevent a taxpayer from utilizing but it will tax code with some kind of state law machination the partnership for step up and basis intersections between corporate law on federal tax law and in every single one of those instances the courts looked at it and said taxpayers are utilizing federal tax savings to gether with state law that's not within congress's purview to create a tax savings that the congress did not intend what may seem sin here and in the structure of an f s e as congress designed it that you have a distribution and an arrangement among corporations that departs from the ordinary rules of economic substance that's clearly built into it and the courts have seemed to recognize it but why does that mean if congress has authorized this peculiar vehicle and recognizing that it is a bit of a shell corporation and that the controlling person will be on the receiving end it doesn't really invision that you're going to stick a roth ira in between the control of the f s e and the f s e so that you can get this further evasion of the contribution limits that part of it the putting the the in the structure that it envisions that part of it explain to me why that's consistent with what congress and vision certainly just because two points to your question the st is atheist a congressionally create shand entity absolutely compared to a disk where you actually have to have a state corporation with a board of officers with employees that do things a physically explicitly is nothing other than a bookkeeping entry so  absolutely agree with that supposition taking that to the next question how do we know what congress intended and should this court substitute its judgment for congress the commissioner points to a note from the joint committee on taxation from two thousand and eight identifying potentially abusive transactions between iras and various export subsidizing  did congress take any action prior to that to prevent this no and litigation regarding the validity of ira and roth ira's investing in export subsidizing entities goes all the way back to caterpillar in the one thousand nine hundred and seventy s this has been a long ongoing issue congress had to be aware of it because it's been litigated by the commissioner for decades the commissioner has lost the joint committee recognized that in two thousand eight and the great distinguishing thing to mine even assuming the court supposition that this transaction by passed contribution limits which you don't think is actually how it works even if one accepts that supposition the great problem that this court has is that the problem exists if it is one entirely within the four corners of title twenty six dollars congress created both things the tax payers energy acted nothing outside of congress's control in order to reach the result they got and if there is a fix for that it has to lie with congress not with the federal judiciary substituting policy judgments regarding contribution limits or anything else for what congress has allowed to occur for decades judge sutton had that view in the th circuit in soon the holdings judge regie in the nd circuit judge stall in the st circuit in the  two benenson cases all came to the same conclusion reached by judge holmes who was our trial judge in the tax court that it at the end of the day congress allowed it it's within the four corners of title do you see other cases of six  and st really addressed the issue that's in front of us because the closest one would be the st circuit but the st circuit has been expressed footnote distinguishing this very case as not something that resolving so or we've left with something we need to solve that the other three i'm not i don't believe you are your honor for the very simple reason that this case again presents a common law attack on a congressionally created transaction the reason that the st nd and six circuits shied away from nd guessing that based upon the commissioners other common law attacks was simply because the courts in those cases recognized that if congress created it it's congress as problem congress has to fix it not the federal judiciary and i think judge holmes put it well in his dissent in this  case one cannot construe the tax code against its language and in favor of judge made doctrine acting like collegial who famously posted tax laws and fine print and so high the romans could not read him this is not a case that requires judicial intervention to fix an abstention as that in the st nd in six circuits we submit is the correct result we think the only reason that the st circuit footnoted this case is because by the time  judge paul wrote that opinion this one was very actively pending everybody knew about it and the st circuit didn't want to opine on a set of facts that was not in front of it i don't think that the principles underlying any of those consequences in this case your honor are really a test case and mr mazie has been funding this out of principle not because of the the economics of the dollar amounts for him are less than a couple one hundred thousand dollars is not a lot of money at stake the issue is whether this circuit is going to create a precedent that it is proper for federal courts to nd guess transactions that exist entirely within the confines of my one script i am not aware of any other john in my eyes that is a test case correct my understanding again this is just informal discussions judged by beef with the trial team at the tax court i believe the commissioners intent if this attack on raw fire of export subsidising into these is not successful would be to do what i suggested and go to capitol hill and try to get a fix there i don't think they've got any other possible attack on this transaction every other temp they've made has failed but but if you were to lose then there are other there are other ra fire rates that may be at risk that is i would  any that you can identify that that were within the four corners of of title twenty six no your honor i don't know the but i can identify three cases where they were common law tax other than substance over form that the courts rejected transaction that existed only within the four corners of title twenty six dollars if it wasn't for congress fists wouldn't exist if it wasn't for congress rough iras wouldn't exist there's nothing done here other than combining the two and with that if i will morning in may it please the court could have gone from the department of justice representing the commissioner want to emphasize in this case it's about enforcing the codes limitation on annual contributions to the roth ira congressional congressional intent is being enforced here counsel talks about the four corners of the internal revenue code is this court has explained in the stewart decision and other courts have recognized on up to the supreme court doctrine and operate as the preface or the prologue to the internal revenue code and congress drafts rules when treasury draft rules are working under the assumption that the and the principle would be what the taxation applies to the substance of the transaction not merely its form but what do you say what you say that to mr walton's claim that the subsequent form all of those cases involves some kind of a common law doctoring but is that they involve some kind of state that the common law this is a common law doctrine order to in order sort of take apart what's happening under state law and that this is the only case in which it's within entirely federal law applicable i think that that's not accurate i mean the cases that we cite for example your courts brown decision state law had nothing to do with that was all about the federal tax code and that's the case where the issue is whether who paid the tax for purposes of the estate tax this is the federal understand but another example is the supreme court soon and decision which we will line on in the tax court a lie on a light on and in that case the the wife was the former owner of the license agreement but because the husband had such that it looks like the commissioner has conceded one is that that iraq can own stock in a disk or if this is that correct right the court to not question a court you know eyes and you're not questioning that here we are not question here we have the court analyzed that's explicit in the code with respect to a focus i'm sorry with respect to a desk and the commissioner concedes that the same principle applies to a disk even though it's not expressed in the code so we have not i'm sorry this is a fiscal is it really is just a shell operation is it really is i mean if we were to talk about sort of step transactions and somebody had tried to create this of their own you would have come in and said you can't you can't do that this is just a shell corporation but this is a shell corporation that congress has authorized to point to that your honor number one thess does not have to be just a bookkeeping entry as a tax court found in several places in the opinion do substantive things it can actually be capitalized in fact the promotional materials the taxpayer received in this case that this is on page twenty five excerpts of record the lawyers who are explaining health this operation that corporations dealing with foreign sales sort of a leg up cracked to encourage exports but what is key with the tax court held and with the congress is recognized in its reports describing out this operate is that this  are just like any other c corporation and all other tax rules apply to them except for into discrete areas and the two discrete areas are number one this is under nine hundred and twenty five dollars the export company can provide distribute can provide commission payments to the fisc and facts that otherwise would be disregarded because it lacks economic substance and wouldn't within a certain confines and then number two that the fisc income in this is under section  twenty one dollars a large portion of it will be exempt from from corporate tax in this case the tax payers enjoyed both of those benefits injector company was able to pay commissions to the fists for doing nothing and able to deduct on the taxes and the fisc in this case was able to exempt much of its income from taxation but for all other purposes the fiscus treated like any other corporation including the issue of the support that was a pretty big accept no bid for  issued i believe that all of them resolved except i think there is one pending before the i r s but then he is question about the ownership issue i understand that my hypothetical a very different tax consequences wouldn't have the tax advantages but suppose instead of having the flow of money the dividends out going to a roth ira suppose they just had it going to the kids bank accounts would you say that the kids did not and the kids own the stock so you just put the kids in the place of the roth ira i understand the tax concept with the kids not on the stock would you take the same position and treat that as the money actually flowing to the parents st and then to the kids would do the kids have control over the corporation everything else is the same thing just substitute the kids for the roth ira if they didn't have control they would not in fact be the substantive owner i think it would still be the same though of course in that situation the wouldn't challenge the ownership structure you respect the form you collect the taxes to flow and so it's the fact that this arrangement although following the same formal ownership has a very different tax consequences than now you want to flip characterize the dividends as excess contributions without characterizing the commission payments coming into the entity or disregarding the entity and that is in fact exactly what happened in this case the tax court respected the tax benefits designed for the thess respected the fisc respected the commissions paid to the thess and only we characterized the ownership issue and this is similar to the situation in revenue  an excerpt of record button that situation because the export company retains such control of the flow of funds into the disc that the trust was deemed to receive gifts every time commission payments were paid into the into the disc rather than genuine earnings on investment and it's a similar situation here with the contributions last point i wanted to make is the tax payer talks about congress's inaction report congress deemed this transaction to be abusive it was encouraging treasury to enforce it under the substance of reform doctrine and then noted in truth two thousand and fourteen that the commissioner had been successful in the repetitive tax court case which is one of the notice two thousand and fourteen transactions that were we characterize under the substantive reform doctrine but i'd like to step back and make the bigger point that under the substantive reform doctrine as well as the related economic substance doctrine because is the preface to the code there is no reason for congress to have to come in fix the transaction it's been a den of fide as abusive in fact just congress generally does not from the partnership transaction that the supreme court address in the relatively recent woods decision was unanimous decision applying penalties to a partnership transaction that fully complied with the code but that lacked economic substance congress never made a fix criticize that transaction that honor getting something mom it's ensuring that the rules are applying to the substance not the form and i confided in another simple example congress has in the code that you can make a charitable contribution right so i  dollars to my to my college and take a deduction for that but what i can do and this is where the substance over form doctrine comes in is make a formal contribution my college on the understanding that the next day they're going to send the check back to me yes in form i have made a contribution to my college in substance i have not and it's not laziness that congress that doesn't have worn the code saying you can't make a cut a terrible contribution and then turn around and get it right i mean the desire already enormous it would be huge if congress had to try and think about you know what are all the possible ways that someone could say and try and get around our rules and a formal facade and this would've been a very very easy but whether it's an easy fix or not and it may not be such an easy fix keep in mind that it that the same two thousand and four dash eight transaction applies not just to this can this but also to corporations and so congress freak will leave it to the commissioner and the is congress in treasury is always playing catch up so to say that congress needs to fix it the treasury what run dry you know we didn't even find out about this transaction until years after it had taken place because there papered over they look like normal transactions until you start to dig in and a number of these transactions are mass marketed so it really is critical the cornerstone to affect of tax and force and this comes from the th circuit in southgate that there are these  al doctor and the do operate as a backup not to just create fixes where congress has made a mistake but to prevent taxpayers from twisting the language that congress has written coming up with a transaction that inform satisfies of rules  few points your honour's the question came up well what about the fact that the maisie's fis really by congressional decree had no economic substance code a small fee this has no requirements for anything other then no less than two dollars pieces of mail a year be sent out that wasn't a us tax requirement that was a deputy over requirement that was used to try to create the the fig leaf that there was something going on with the sanity other than subsidizing u s exports he invested in a small fee as there could be in his case were twenty four dollars other owners in that fist it was nothing more than a bookkeeping  backed into the investment vehicle designated by the taxpayer is recherche tourism we characterize the ball under the code you have sham congressional intent because the whole point of this was for american exporters to be able to control the cash flow and in mr maisie's case as it is structure i mean it runs it through this sham corporation for the tax purposes but it in visions that the same be something designated other than the extraordinarily of the individuals who can troll corporation isn't that that's the whole premise of the small fiske without control funds congressional intent is worthless because it's that's the way the system worked and i think their larger point is that if you have one person controlling the flow of that somehow shows that the whole transactions bad my point to the court is you can't sham this transaction shamming congressional intent in creating it because that's what congress wanted on that point this court fell in taproot congressional knowledge plus congressional inaction is congressional intent that case is critical to the outcome in this case because unlike a few years in some of the cases cited by the commissioner unlike revenue five thousand one hundred and fifty four which was a trust not a congressionally created entity this case has forty eight years of congressional inaction into areas that they have been legislating heavily and they've legislated regularly in routinely as to ayers rock fire as they have legislated regularly in routinely because the  their different structures they keep legislating in this area and i would leave the court with the essence of the argument is that well there were some rules that was just like a regular corporation except for two things all the other rules applied that isn't true it was a small fist economic substance was expressly disavowed by congress and the real question for this court is will it be issue a ruling the st that i'm aware of in this country that gives federal courts you know your time has expired i thank you thank  bernardino mountains community hospital district