case involves the deductibility of commissions paid by the taxpayer suma hold the two j c exporting a corporation which met all of the requirements for a domestic international sales corporation and for which the payments met all the requirements for sa of the raw fiery and disallowed the deduction on the basis of substance versus form relying almost entirely on the latest two thousand and four dash eight but what's your take on the substance of reform doctrine what is it how does it work i mean there it sounds i'm in the what they're saying is the case law allows them not just to tell us the economic realities of transaction but to recap it drys the whole thing to honor the purpose of various tax provisions and i'm sorry the the simple answer is that this court and almost every other court has had the situation recognized that because of the disks fragile structure being now required to have much substance minimum substance they have to code in the regulations provide that this corporation doing look relatively nothing is entitled to and safe harbor commissions as long as they meet the requirements of the code in the regulations would point out that in edison international this court joined with other circuits in the scribing the disk provisions as a promise by congress to the people taking advantage of the disk that if they met the technical requirements of the disk provisions they would receive the benefits promised by the government and out of you know buse of discretion on the part of the treasury or a part of the secretary to interfere with their promise i don't think i don't think the commissioner's position goes to the deaths i think it goes to the raffaele contribution limits yes but if you look at the roth ira contribution limits you'll see that the roth ira provides specifically in the don't you think this was basically a legislative malpractise that they they forgot about they being congress forgot about the rule that traditional iras and roth iras are treated the same unless the congress addressed the traditional iras ownership all of a disk and actually address the fact that there is an artificial shifting of income from a test or is there any is there any sensible reason for a traditional ira to own a disk you don't get any benefit out of it do you a traditional ira sure you still have the opportunity for appreciation of the this commission  dividends that doesn't help you because in a traditional ira it's taxed on the way out but during the what that any ira if you have it you're not texting the prime of the appreciation of the of the essence and therefore when there are withdrawn you get  ninety five g provisions dividends from a disk are taxed as unrelated business taxable income in order to equal the playing field between the ownership and an individual ownership to get a lower rate of tax on your distributions in the disc there's a number of factors that go into it but there are many companies many different is it still rational for a traditional ira or certainly we still say all idea for these things  that by deferring the time when you all the taxes you'll presumably be in a lower tax bracket when you take money out no it's your that's part of it but part of it's just being able to reinvest the earnings tax free until they are withdrawn now in case of  our beneficiaries of the ira they're in their thirty's and they were in their twenty's when that series were set up big even if they had a traditional ira they would have years and years and years of tax free build up before they would have to pay tax on the on their investment income normal structure as it was originally set up and used by corporations throughout the country was to have the disc income deferred from tax until it was distributed and during the up to for a period they got the period the build up  individual who owned a disk stock would be paying tax so they employed him implemented the unrelated business taxable income provision so that the distributions from the disc to the ira would be subject to tax at that time but afterwards the build up would still be allowed in the same manner as any other after tax contribution to nairobi so it's not correct that there is no reason to have a higher rate other than the provisions for the roth ira now the i mean it is pretty astonishing how much money was saved in this raffaele i mean it is pretty astonishing that this amount of money was able to build up and you know you column i guess commissions as opposed to contributions but  you're done looking at the whole thing should you sure say to yourself wow ok it actually is an aside i don't know that there was any substantial appreciation because if you look at the tax if they if if these these are beneficial owners individuals have received it on the disc stock and received disc dividends they would win tax and fifteen percent during the years of issue by holding their disk stock in a holding company which is owned by the roth i were thirty two or thirty three percent so the upfront cost was substantial and the build up of tax free income may not have been there great because of the fact that the income coming into the into the ira would still have to be reinvested in a profit so the point being is that they're still paying the upfront tax when the dividends are paid and we're paying that at thirty two percent yes no it's the disk in this case all were the stock was owned by two hoped by a holding company holding company was owned by the roth iras the dividends from the disk to the understand that but maybe i'm not following your argument i'm just saying once the rock fairies own the debts even though we'll hear from the government there's a thirty two percent tax on the dividends or commissions whatever going to call them that going to rough areas so i get the idea that you're still paying taxes it comes in those commissions are still a lot more than five thousand per year well that's correct but the we just remember the traditional i also had contribution limits you're just saying this is like facebook or something if you buy fifteen hundred dollars shares of facebook and they're each worth a dollar a share at the very beginning and you luckily all the share appreciation and all of the dividends are shielded from the contribution limits were these are not the unusual and the point here isn't that under the disk provisions this dividends are not contributions they're dividends for all purposes of the code it's the broadening which all purposes of the code so that there is no problem with excess contributions because the description is already treat them as investment income and that is why set up this does for their multi million dollar company and use it to shift millions of dollars in toronto where it is one thing to just either clear out of the way or figure out where we are on it is there a section of the code that they violated and you got it the answer to that really is that this is a technically compliant transaction and the substance of reform doctrine has been recognized for decades going back to gregory vs hovering in the thirty's in the supreme court so it's the doctor let me give you my take on that doctrine and you tell me what i'm missing that doctor i thought started with economic realities economic substance doctrine so the code talks about income and when we decide whether something is income for tax purposes we're going to look through the form the parties have used in terms of what they've done which that makes perfect sense so we know that's one branch of this doctrine and that's sounds pretty good that we have sham transactions where they purport to be doing something but they're  not that that makes some sense but what i feel so what i would seems different here is you seem to be recount to rising what the law allows and that that's bothersome to me but i think that there are cases that have done that and i think the first of all the rogers case in the tenth circuit which you cite there briefly lays out the difference between the economic substance and sham type of doctrine and the substance of reform doctrine and they are related but different judicial doctrines and the sentence of reform doctrine has been recognized in cases circuitous route that couples together all these different legitimate steps to in the end end up with something that really is is it circumventing what kind of i intended what i see as your best argument for why this substance over form doctrine exists in its current form is that if you're not careful you're going to let taxpayers do things that really undermine the purpose of this or that code provision that is created not not undermine the text but undermine the purpose of this or that code provision exactly what seems problematic about that's a very broad doctrine but i'll say it exists it seems problematic about it here is the whole point of the disk provisions the whole point farai is to minimize taxes but in the service bizarre to say ah you are allowed to use them to minimize but oh you you were we minimize them and we get to come in and say you minimized them too incentive and it said you could put this limited amount of money which for two thousand and eight the year and she was five thousand dollars or out of curiosity there are some very wealthy people putting shares in the eighty's when they were low value which soon after were issued no one knows what's going to happen the shares whether it's facebook or something else they accumulate a lot of money millions and millions of dollars are you guys coming into those case and say whoa you're not working class well you're a millionaire first of all i have to stop you there but you don't do that do you have to stop you with your first premise that these wealthy individuals are doing that because congress put limits on a new income were guarding who can put money in iraq they're right so if you make as a single file or and in two thousand and eight more to their children and let them grow to one hundred million dollars if you know but you don't come in and say oh wait wait wait this is for working class people not the children of the rich do you come in and do that we don't  why not going to drive you know like a dress the difference here your honor such as a reform doctrine looks at whether something is set up for a tax avoidance scheme and the way congress structured the roth ira is they do permit some income under the certain amount to put this money and invest over time and if the market grows in legitimate corporate growth that's one thing but this was a situation where they stipulated this was designed for tax avoidance the dentist casey explorer j c hoping they were created for no other purpose has been lying had they happened everybody who puts money in iraq ira has to acknowledge it's for tax avoidance reasons but this was also not a legitimate investment this was a situation where suma was an existing company that already was generating profits and tell me i'm wrong about that i think it's pretty it's a very obvious challenge apolo i don't think there was a specific focus i think that was one of the factors that was what was the court looked at the court was saying you know look this is a situation where they're just using this to transfer of these funds and i think there was no evidence of corporate gross of the administrative decisions that the fifteen hundred shares were undervalued and that that was thrown out i think it's a way to substance  way of a number of factors in the tax avoidance motive is really a key factor and when that's conceded that they actually tried to set these schemes up to achieve that that is one indicator that this is not this was just set up to avoid taxes another indicator i think is the fact that they didn't ever use the disk for their different purposes just like the was designed just to say that you can have this transfer of this commission money without it having being an arm's length transaction and it was designed to give corporations basically to put them on equal footing if they were a domestic corporation selling abroad with a corporation that a domestic worker in that use foreign subsidiaries that you don't have to go after them the two thousand  understanding and i think additionally i think there was another factor of the part of the delay was under the hell with case the court addressed this issue a similar situation and the commissioner had made income and excise and deductions and the court said those schemes are intertwined in the court and both types of adjustments have to be made and so i think it took time for the commissioner to sort of get ducks in a row and make the right adjustments in this case and bring this this case and i think that's that's part of the this wasn't addressed in the earlier one what do you want your take on the thing i asked you from the other side but i think this whole case arose because congress just made a mistake they didn't reali interrelation of traditional iras and but you know there's this provision that says normally we treat unless we say otherwise we treat traditional rock by our as the same people just didn't realize the opportunity for t and in this case for these sons if this were allowed they could invest for thirty years or so before they have to start taking money out and they you know and that lets all those earnings on the market be tax free but i think i think if it were the same sort of tre contravention of the contribution limits and in on a record where they didn't use the just for the deferral purposes and then got all that tax deferral i think that would be similarly problematic and we certainly haven't said we would you agree with mr block that the commissions are calling them commissions we characterize they were paying thirty two percent so the real problem isn't tax avoidance and that's the real problem is that these people should have been able to do r as at all i don't recall the top of my head what the corporate rate was so i can't tell you whether it's thirty percent or not but that would be in the code but certainly they they did pay tax and the real issue is is the not paid the ability to earn investment income without paying taxes as your honor said that in the roth ira you can invest this money you can put it in the market for years and years and you don't recognize any that isn't any or the money what i'm trying to figure out is what's called the corpus is being five million how much of that was taxed on the way i think at this point most of it was i think in this window we had the you know we had a recession and made it and i think it gets back to you know of a wealthy family that has or or individual has a business that's doing business abroad can use this mechanism to put money in roth ira hayes and basically have a tax free investment vehicle that's not available to the rest of us when congress intend be subject to not only the income limits but the amount of contribution per year limits and this is allowing intentional shifting of huge amounts of corporate what otherwise would be corporate profits and i think as an aircrew vicars in feldman the correct approach is to completely rehear the transaction is what it really was dividends to the shareholders and then payment into the roth iras which contravened the contribution limits and those cases demonstrates just so hard for me is i get three characterizing the actions why it's going to what the president and eric i think is very much on point and i think the seven circuits opinion feldman is a very good example as well of situations where the taxpayers particularly eric way up the court said every step of the transaction was legitimate and had economic substance but ultimately they were using these multiple steps to get to something that avoided tax that wasn't what congress intended and i think this rewards congress for the complexity of the code and for inattentiveness to these are problems w better for the courts to say hey you're bad fix it if you don't like this but we're not going to punish them for complying quote technically with the statute tommy means the words of the study what the courts have recognized is that they're always going to be and list number of as they say investor it's clear from these cuts back to my point if there's going to be you know why there's going to be an endless number of these because congress has made the code so complicated well i want them why then say to the commissioner you can just kind of look over this and when you're not happy with how it's working out you can fly right in and say time for recur well i think that it's not a matter of rewarding congress it's a matter of rewarding the taxpayers who come up with these schemes and you know the reality is that you know congress has lots of reasons that they may or may have not acted with respect to this you know amending the just provisions in particular the provisions have raised a lot of concerns abroad the  e were very much criticized by the european union and the world trade organization and then they were largely cut back because studies in empirical evidence show about who uses rob iras my strong suspicion is they're used by the wealthy i never studied that your honor but i think there are a lot of of lower middle income taxpayers who do put money in roth ira is because it's a very sensible savings device and i think that was what it was intended for and this certainly flies in the face of that  and i think you can't say you know if the courts aren't willing to step in and deal with these situations where you know as the d c circuit said in this investor and you have endless numbers of clever tax practitioners trying to figure out a way around the code you would just have a situation where there could be all sorts of abuses and i think that the supreme court and other courts of appeals and the circuit have all addressed them through the substance over form doctrine and these tax payers knew that this was a listed transaction this was what i did find in the u s supreme court decision that applies substance over form the way you're using it here not sham transaction comic substance but the substance over form the way you're trying to use this case would be the best u s supreme court decision well i think the core holdings decision is probably minimising status well i think there are situations where a different transaction a different different steps were used to accomplish something but the statutes at issue in those cases where they tax minimizing that were just use aggressively as opposed to other statutes because that's what's funny about this case well i think this is a unique thing about this case but i think it's important to recognize that these tax minimising statutes are being used in a way they were intended by congress and all these cases that have applied and look at the economic reality have looked at the fact that these were situations where the taxpayers tried to do something congress didn't intend and that's what's what's been under under holdings the court is talking about whether the true nature of the transaction in piers the effective administration of the tax policies of congress here it seems to me we're talking about timing anything so why does allowing the amounts beyond what congress intended and basically creating an investment tax free investment vehicle for these wealthy individuals that congress didn't intend and let's and they're using the desk in a way that  everything it did except that the shareholders of the last corporation were the employees of the company i'm sorry the shareholders of what do you mean by the last corp we did j c holding yes in other words instead of it being the balance and to balance and shouldering who were the beneficiaries of this what if they'd done everything else the exact same way but the beneficiaries were all they gave the dish shares to low level  employees across the board they don't stick well for money well the first issue would be did they have incomes that would allow contributions to the disturbing the years that issue and the second issue would be did you know did they get them like you're going to give to employees half ownership in a des and then put millions of dollars into that so the way you would have set it up as you would have said everybody every time someone is getting more than five thousand a year we're going to void it right right and every time someone makes more than one hundred thirty two thousand whatever the income threshold was we're going for that but for everyone else we're going to go out that's how you would have had i think if you had a situation where like the employees all made under the income threshold and their interest in the disk really reflected the value you know  i an investment that was a real value in proportion to what they were getting in terms of just commissions as opposed to simply a mechanism for funneling money to them i think that would be ok if it were something where the corporation said who we're not going to play our employees we're going to set up this inquiry and i think you have to look at all the facts and circumstances involved in that case and so i think they're there for the questions in the court ok my time's expired thank you very much i thank  the situation there was not a list a transaction because none of the three requirements for you were there for notice two thousand and four to say were met and therefore it was not a list of transactions of the court to not have to consider that is where that to give the difference the reason why this thing got brought up in the middle of the game was that the service had issued documents saying that they were they respect the income tax consequences of the roth ira transactions they were only going after the excise tax was a statute of limitations problem in terms of going to two thousand and seven yes i don't think i got it i got it down but that's because they had said that they were going to respect the the this provisions rubber or anyone fifty four values  shares at two hundred dollars because that's the book value in eighty one fifty four values to stock at any given time and i'm just saying is it conceded in this case that that was fair it wasn't raised wasn't raised up on it's  you can take your regular irene rolled over into a roth ira and they're there for you avoid the five thousand dollar amounts even if you have a higher income you can have them out and there's no limit on that in terms of the wealth of the individual whatever's over form doctrine cases in the sense that this is a case this is unique because it's the only one that where the underlying provisions in the code that are at issue are all tax minimising provisions is that true or there are other cases out there dealing with substance over form where the statutes and transactions being we characterize dealt with tax minimising statutes i'm not sure because in our case we're not recurrent rising anything we're  simply following the agreement saying they're the ones doing the recapped arising and i'm just saying my question to her is this is funny because the underlying statutes whether the deaths of the raw attacks minimizing statutes so it's kind of funny to say you can tax minimize but just not too much and i'm just trying to figure out if any of these other substance over form cases dealt with tax minimising statues the way this one does not sure does all i know is so i mean basically what you're talking about is taxpayers doing what congress intended to i mean the next find that disingenuous that we're from saying that the congress made a mistake when congress seems to do exactly what it wanted to do and the point being on your excellent briefs and arguments thanks for answering our questions we appreciate it the case will be submitting the curtain call the next case