1 5 0 T.C. No . 7

UNITED STATES TAX COURT

CELIA M AZZEI, Pet i t i o n er v . COM MISSIONER OF INTERNAL REVENUE, Res p o n den t ANGELO L. M A ZZEI AND M ARY E. M AZZEI, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 1 6 7 0 2 -0 9 , 1 6 77 9 -0 9
. Fi l edM arch 5 , 2 0 18
.

Ps en t eredi n t o a p rep ack ag ed p l an t o s av e t ax es b y ro u t i n g fu n d s fro m

th ei r fam il y

b u s i n es s th ro u g h a Berm u d a-b as edfo rei g n s al es co rp o rat i on (FSC) an dth en i n t o Ro th IRAs creat edfo r t h i s p u rp o s e. Pu rs uan tt o th is p l an , i n 1 9 9 8 each P d irect l y co nt ri b u t ed $ 2 ,0 0 0, the ap p l icab l e co n tri bu t i o n l i m it , t o h i s o r h er n ewl y creat ed Ro th IRA, wh i ch th en p ai d a n o m i nal am o u n tfo r s t ocki n th e FSC. Fro m 1 99 8 t o 2 0 0 2 Ps ro u t edp aym en t s t o t al in g $ 53 3 , 0 5 7 fro m th ei r fam i l y b u s i n es s , th ro u gh th e FSC, an di n t o th ei r Ro th IRAs
. Ps co n t en dth atwe s h ou l dres p ectthe fo rm o f th es e tran s act i o ns as p aym en t s fro m Ps ’ b u s in es s t o th e FSC, fo l l owedb y p aym en t s o f d i v i d en ds b y th e FSC t o t h e Ro th IRAs . R co n t en d s th at th e p aym en t s fro m

th e FSC t o Ps ’ Ro th IRAs rep res en t ed , i n s ub s t an ce, co n tri b u t i o ns fro m Ps t o thei r Ro th IRAs . R co nt en d s th at- 2
-

b ecau s e t hes e p aym en t s ex ceed edPs ’ co n tri b u t io n l i m i t s fo r t hei r Ro th IRAs , Ps are l iab l e fo r ex ci s e t ax es u n d er I.R.C. s ec. 4 9 7 3
. Hel d : Onth e fact s p res en t ed , Ps an dn o t th ei r Ro th IRAs were th e o wn ers , fo r Fed eral t ax p u rp os es , o f t h e FSC s t o ck ; i n s ub s t an ce th e FSC d i vi den d s were i n co m e t o Ps , wh o co n tri b u t edth e fu n d s t o th ei r Ro th IRAs . Su m

m a Ho l d i n g s , In c. v . Co m m i s si o n er, 8 4 8 F.3 d 7 7 9 (6 th Ci r. 2 0 17 ), rev ’ g T.C. M em o . 2 0 1 5-1 1 9 , d i s t i n gu i s h ed
. Hel d , fu rt h er, p u rs u an tt o I.R.C. s ec. 4 9 7 3 Ps are l i ab l e fo r ex ci se t ax es on ex ces s co n tri b u t i o n s t o th ei r Ro th IRAs
. Hel d , fu rt h er, R’ s i m

p o s i t i o n o f ad d i ti o n s t o t ax u n der I.R.C. s ec. 6 6 5 1 (a)(1 ) an d(2 ) i s n o ts u s t ai n ed
.
Lewi s Ri ch ardW al t o n an dLewi s Ri ch ardW al t o n , J r., fo r p et i t i o n ers . Eri n Kat h l een Sal el , Kath l een A. Tag ni , an dM i l es B. Fu l l er, fo r res p o n d en t
.

CONTENTS FINDINGS OF FACT
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 I. W GA’ s FSC/ IRA Pro g ram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 II. Pet it i o n ers ’ Co n tri b u t i o n Li m i t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 III. Pet i t i on ers ’ En tran ce In t o W GA’ s FSC/ IRA Pro g ram . . . . . . . . . . . . . 1 0 A. Op erat io ns Pro cedu re M em o ran du m . . . . . . . . . . . . . . . . . . . . . . 1 2 B. Co m m i s s i o n Ag reem en t
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2- 3
- C. Serv i ces Ag reem en t
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 D. M an ag em en tAg reem en t
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 E. Sh areh o l d ers ’ Ag reem en t
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 F. Co m pl i an ce Gu i d e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 IV. Op erat i o n s o f the FSC/ IRA Pro gram . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 V. Pro cedu ral Back g ro un d
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 OPINION
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 I. Bu rd en o f Pro o f
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 II. St atu t o ry

Fram ewo rk : Ro th IRAs an dEx ces s Co n tri b u t i o n s . . . . . . . . 1 9 III. Th e Part i es ’ Arg u m en ts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 IV. Gen eral Pri n ci p l es : Sub st an ce Ov er Fo rm . . . . . . . . . . . . . . . . . . . . . . 2 4 V. Th e FSC Pro v i s i o n s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 A. Rel ax edTran s fer Pri ci n g Ru l es . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 B. Effect iv e Tax Rat e Cu t fo r Qu al i fy i n g In co m e . . . . . . . . . . . . . . 3 3 C. Ap pl i cat i on o f FSC Ru l es t o Pet i t i o n ers ’ Tran s act i o n s . . . . . . . . 3 5 D. Th e Li m i tedSco p e o f th e FSC Pro v i s i o ns . . . . . . . . . . . . . . . . . 3 6 VI. Th e Paym en t s t o th e Ro th IRAs W ere Co n tri bu t i o ns . . . . . . . . . . . . . . 3 8 A. Th e Ro th IRAs W ere Ex p o s edt o No Ri s k
. . . . . . . . . . . . . . . . . . 4 3 B. Th e Ro th IRAs Co u l dEx p ect No Up s i d e Ben efi ts
. . . . . . . . . . . 4 7- 4
- C. Co n cl us i on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9 VII. Pet i ti o n ers ’ Co un t erarg u m en t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 A. Su m m a Ho l d i n g s II
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 B. Pet it i o n ers ’ Own ers h i p Arg u m en t
. . . . . . . . . . . . . . . . . . . . . . . . 5 5 C. Pet it i o n ers ’ Co n g res s i o n al Pu rp o s e Arg u m en t s . . . . . . . . . . . . . 5 7 VIII. Res p o ns e t o Di s s en t
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 9 A. Our An al y s i s Do es No t Sh am o r Di s reg ard An y

En t i t i es . . . . . . 5 9 B. Ou r An al y s i s Pro p erl y Co n s i d ers th e Fact s as a Who l e. . . . . . . . 5 9 C. Th e Sub s t an ce In qu i ry Is Ap p ro p ri at e. . . . . . . . . . . . . . . . . . . . . 6 0 D. Our Ap p ro ach Ap p ro p ri at el y Co n s i d ers Val u e. . . . . . . . . . . . . . 6 3 E. Th e Di s s en t ’ s Hy

p o th et i cal M i s co ncei v es Ou r An al y s is
. . . . . . . 6 5 F. Th e Di s sen t’ s Ap p ro ach Lack s Supp o rt i n th e Co de.
. . . . . . . . . 6 7 IX. Co n cl u s io n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8 X. Ad d i t io n s t o Tax
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9- 5
-

THORNTON, Jud g e: By n o t ice o f d efi ci en cy , res po n d en t d et erm i n ed
ex ci s e t ax d efi ci en ci es fo r An g el o an dM ary M azzei fo r 2 0 0 2 -0 7 , an dad d i t i o n s t o t ax u n der s ect i o n 6 6 5 1 (a)(1 ) an d(2 ): 1 Ad d i t io n s t o t ax Year Defi ci en cy Sec. 6 6 5 1(a)(1 ) Sec. 6 6 5 1(a)(2 ) 2 0 0 2 $ 6,6 3 7 $ 1 ,4 9 3 $ 1 ,6 5 9 2 0 0 3 9 ,4 0 8 2 ,1 1 6 2 ,3 5 2 2 0 0 4 1 0,5 2 3 2 ,3 6 7 ( 1 ) 2 0 0 5 1 1,3 4 9 2 ,5 5 3 ( 1 ) 2 0 0 6 1 3,7 5 9 3 ,0 9 5 ( 1 ) 2 0 0 7 1 5,9 1 4 3 ,5 8 0 ( 1 )

1 Am o u n t s t o b e d et erm i n ed
. In a s ep arat e n o t i ce o f d efi ci en cy , res p o nd en t d et erm i n edex ci s e t ax d efi ci en ci es fo r Cel i a M azzei fo r 2 0 0 2 -0 7 , an dad d i t i o ns t o t ax u nd er s ect i on 6 6 5 1 (a)(1 ) an d(2 ):

1 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e (Co de) i n effect fo r th e rel ev an ty ear, u n les s o th erwi s e i n d i cat ed . Al l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. M o n et ary am o u n ts are ro u n d edt o th e n eares td o l l ar.- 6
- Ad d i t io n s t o t ax

Year Defi ci en cy Sec. 6 6 5 1(a)(1 ) Sec. 6 6 5 1(a)(2 ) 2 0 0 2 $ 4,8 8 9 $ 1 ,1 0 0 $ 1 ,2 2 2 2 0 0 3 6 ,1 4 8 1 ,3 8 3 1 ,5 3 7 2 0 0 4 6 ,3 7 2 1 ,4 3 3 ( 1 ) 2 0 0 5 6 ,8 1 7 1 ,5 3 3 ( 1 ) 2 0 0 6 7 ,8 5 0 1 ,7 6 6 ( 1 ) 2 0 0 7 8 ,6 1 6 1 ,9 3 8 ( 1 )

1 Am o u n t s t o b e d et erm i n ed
. Wh i l e res i d i ng i n Cal i fo rn i a, p et i t i o n ers t i m el y p et i t io n ed thi s Co u rtwi t h
res p ectt o b o th n o ti ces o f d efi ci en cy . Th es e cas es h av e b een co n s ol i d at edfo r t ri al , b ri efi n g , an d o p i n io n . Th e i s s ues fo r d eci s i on are (1 ) wh et h er p et it i o n ers are l i ab l e fo r ex ci s e t ax es u nd er s ect io n 4 9 7 3 fo r 2 0 0 2 -0 7 an d (2 ) wh ether p et it io n ers are l i ab l e fo r s ect io n 6 6 5 1 (a)(1 ) an d(2 ) ad d i t i o n s t o t ax . FINDINGS OF FACT An g el o M azzei g radu at edfro m co l l eg e wi th a s ci en ce d eg ree i n i n du s tri al t ech n o l o g y

an da m i n o r i n b u s i n es s ad m i n i s trat i o n . In1 97 7 h e fi l ed h i s fi rs t p at en tap p l i cat io n fo r an “ i nject o r t h atm i xes ch em i cal s wi th wat er (fo r u s e p ri m ari l y i n ag ri cu l tu re).” 2 M r. M azzei g o tp at en t No . 4 ,1 2 3 ,8 0 0--“ Mi xer

2 M r. M azzei ’ s i nject o rs u s e a v en tu ri t o i n tro du ce v ari o u s ad d i t i v es t o a m o vi n g s tream

o f fl u i d(i .e., h i s i n

ject o rs u s e t h e s am e p ri nci p l e em p l oy edi n a carb u ret o r).- 7
-

In ject o r”--an di n 1 9 7 8 , s eei n g b u s i n es s p o t en ti al i n h i s i dea, h e an dh i s wi fe, M ary M azzei , fo rm edthe M azzei In j ect o r Co rp . (In

ject o r Co rp .), an S co rp o rat i on . 3 In i t i al l y M rs . M azzei was v ery

act i v e i n th e b u si n es s an d was In ject or Co rp .’ s b o o kk eep er. Sh e s ti l l d i s cu s s es th e b u s i n es s wi th M r. M azzei b uti s n o l o n g er an em

p l o y ee. M r. an dM rs . M azzei ’ s d au g h t er, Cel i a M azzei , h as t ak en a
m u ch m o re act i v e ro le i n th e b u s i n es s . Aft er g radu at i n g fro m co l leg e wi th a d eg ree i n m at h em at i cs , s h e b ecam e v i ce p res i d en to f res earch an dd ev el o pm en tfo r In ject o r Co rp . an ds t i l l wo rk s wi t h h er fat h er t o i n v en tn ew p ro du ct s . Sh e n o w
o wn s 1 0 % o f b o th ALM Co rp ., s ee i n fra p . 9 , an d In ject or Co rp . Aft er i t s i n cep t i o n i n 1 97 8 In ject o r Co rp . g rew qui ck l y an db y i t s s eco n d y ear s t art edwo rk i n g wi th d is tri b u to rs t o m ark etan ds el l i t s p ro du ct s . Ino r ab o u t 1 9 8 4 In ject o r Co rp . s t art eds el li n g o v ers eas thro u g h fo rei g n d i st ri bu t o rs . Al th o u g h s al es h av e fl u ctu at ed , b y 1 9 9 8 ex p orts al es p ro v i d eda rel i ab l e s tream o f i n co m e. To d ay , M r. M azzei h as p at en t s i n th e Un i t edSt at es an ds ev eral fo rei g n
co u nt ri es i n cl u d i n g Can ad a an d J ap an . He h as al s o ad ap t edh i s i n ject ors fo r
s ev eral d i fferen t i n du s tri es , i ncl u d i n g wat er t reat m en t , wi n e p ro du ct i on , an ds p a
m an u fact u ri n g .

3 AnS co rp o rat i o n i s a d om es ti c co rp o rat i o n t ax ed u nd er s ub ch ap ter S o f ch ap ter 1 o f t h e Co d e. A C co rp o rat i o n i s a co rp o rat i on t ax edu n der s ub ch ap t er C o f ch ap t er 1 o f t h e Co de. In ject o r Co rp . el ect edS co rp o rat i o n s t atus i n 1 98 9
.- 8
-

I. W GA’ s FSC/ IRA Pro g ram Th e s am e y ear M r. M azzei g o th i s p at en t , h e jo i n edth e W es t ern Gro wers As s oci at i o n (W GA)--a t rad e as s o ci at i o n fo r farm ers . So m et i m e i n the 1 9 90 s W GA b eg an creat i ng an d s el l i n g i n t eres ts i n fo rei g n s al es co rp o rat i o n s (FSCs ) t o i t s m em b ers . FSCs were fo rei g n co rp o rat i o n s wh i ch el ect edt o b e t ax edu n d er
n o w-rep eal eds ect i on s 9 2 1 -9 2 7
. 4 W GA’ s FSCs were l o cat edi n Berm u d a an d
m an ag edb y

a co m pan y cal l ed Qu ai l St reet M an ag em en t(Qu ai l St reet ). 5 To p art i ci p at e i n W GA’ s FSC/ in d i v i du al ret i rem en tacco u n t(IRA) p ro gram , th e i n d i v i du al s h areh o l d ers o r o wn ers o f W G A’ s co rp o rat e o r p as s th ro u g h m em b ers h ad t o hav e s el f-d i rect eds ect i o n 4 0 8 IRAs (t rad it i on al IRAs ), wh i ch th e
s h areh o ld ers o r o wn ers us edt o p u rch as e s t o ck i n o n e o f W GA’ s FSCs . Wh en

4 In res p o n s e t o a W o rl dTrad e Org an i zat i o n (W TO) ru l in g th atd ecl aredth e FSC reg i m e a p ro hi b i t edex p o rts ub si dy , Co n g res s p h as edo utthe FSC p ro v i s i o n s . See Ap p el l at e Bo dy

Rep o rt , Un i t edSt at es --Tax Treat m en t fo r “ Fo rei g n Sal es Co rp o rat i o n s ”: Reco u rs e t o Art i cl e 2 1 .5 o f t h e DSU b y th e Eu ro pean Co m m u n i t i es , W TO Do c. W T/ DS1 08 / A B/ RW(ad o p t edJ an . 1 4 , 2 0 0 2 ). Anact i v e FSC ex i s t i n g o n Sep t em

b er 3 0 , 2 0 0 0 , co u ldg en eral l y co n t i n u e t o recei v e t h e u s u al FSC b en efi t s fo r t ran s act i o n s o ccu rri ng i n the o rd i n ary co u rs e o f trad e o r b u s i n es s b efo re J an u ary

1 , 2 0 02 , o r o ccu rri n g aft er Decem ber 3 1 , 2 0 0 1 , i f p u rs u an tt o a co n tract i n effect o n Sep t em b er 3 0 , 2 0 0 0 . See FSC Rep eal an dEx trat erri t o ral In co m e Ex cl u s i on Acto f 2 0 0 0 , Pub
. L. No . 1 0 6 -5 1 9 , 1 14 St at . 2 4 2 3
. W GA s h u t d o wni t s FSC/ IRA p ro g ram as a res u l to f t h e rep eal
. 5 W GA h adfo rm ed Qu ai l St reet fo r u s e i n i n su ran ce p ro g ram s fo r W GA m em b ers . Th e s am e h an d fu l o f em p l o y ees th atm an ag ed th o s e p ro gram s ab s o rb ed th e FSC act i v i t i es i n to th ei r ro ut i n es .- 9
-

s ect i on 4 0 8 A Ro th IRAs (Ro th IRAs ) were ad d edt o th e Co d e i n Au g u s t1 9 9 7 , s ee Tax pay er Rel i ef Acto f 1 9 9 7 , Pub . L. No
. 1 0 5 -3 4 , s ec. 3 0 2 , 1 1 1 St at . at 8 2 5 , W GA ch an gedi t s p ro g ram , s ubs t itu t i n g Ro th IRAs fo r t rad it i on al IRAs . W G A m ark et ed i t s FSC/ IRA p ro g ram

t o i t s m em

b ers , em p h as i zi n g t h atth e FSC/ IRA s tru ctu re
wo u l dp ro v i d e t ax b en efi t s wi th o u tan y l o s s o f co n tro l o v er t h e b u si n es s . II. Pet i t i on ers ’ Co n tri b u t i o n Li m i t s Co n tri bu t i o n s t o a Ro th IRA are l i m i t edacco rd in g t o a s t atu t ory fo rm u l a. See s ec. 4 0 8 A(c)(2 ). Th e l i m i t at i o n fo r an y y ear d ecreas es as th e t ax p ay er’ s
m o di fi edad

ju s t edg ro s s i nco m e (M A GI) i n creas es ; i f M AGI i s h ig h en o u gh , th e l i m i tat i on i s reduced t o zero . See s ec. 4 0 8 A(c)(3 ). Pet i t i o ners ’ p re-1 99 8 co n tri b u ti o n l i m i t s were cu s t o m ari l y zero , b u t as a
res u l t o f s o m e res tru cturi ng , p et i t i o ners cl ai m th atth ey each h ada res p ect i v e
co n tri b u t i o n l i m i to f $ 2 ,0 00 fo r 1 9 9 8. Th ei r res tru ctu ri n g i s a b i t m y s t eri o u s ev en aft er t ri al . M r. an d M rs . M azzei each s t art edwi th 4 5 % o f In ject or Co rp . Cel i a M azzei o wn edth e rem ai n i n g 1 0 %. Pet i t i o ners o rg an i zed an o th er S co rp o rat i o n , ALM Co rp ., o wnedi n th e s am e p ro p ort i o n s . ALM Co rp . an dIn ject o r Co rp . th en- 1 0 -

fo rm edan LLC n am edM azzei In ject o r Co . (In

ject or Co .), wh i ch was treat edfo r t ax p u rp o s es as a p art n ers hi p . 6 Res p o n d en td es cri b es th i s res tru cturi n g b uth as n o tch al l en g edi t , s o we d eem res p o n d en t t o h av e wai v edo r co nced edan y i s su e wi th res p ectt o i t
. Acco rd in g ly , we fi n d t h ateach p et i ti o n er’ s co n tri b u t i o n l i m itwas $ 2 ,0 00 fo r 1 9 9 8
. Each p et it i o ner’ s co n tri b u t i o n l i m i t was zero fo r 1 9 9 9 , 2 0 0 0, 2 0 0 1 , an d2 0 0 2
. 7 III. Pet i t io n ers ’ En tran ce In t o W GA’ s FSC/ IRA Pro g ram In Feb ru ary

1 9 9 8 In ject o r Co . ap pl i edt o W GA’ s FSC/ IRA p ro g ram . In ject o r Co .’ s ap p l i cat io n t o t h e p ro g ram v al u edi t s an n u al ex p o rts al es at ap p ro x i m at el y $ 1 .5 m i l l io n . On ce In ject o r Co . was accep t edi n t o the p ro g ram , each p et i t i o n er o p en ed a s el f-d i rect edRo th IRA an dco n tri b u t ed $ 2,0 0 0 . Each

6 Acco rd i n g t o res p on d en t , p et i t i o n ers h adIn ject o r Co . ad o p ta t ax y ear en d in g o n J an u ary

3 1 an drep o rtal l th e i n

ject o r-rel at eds al es act i v i t ies , wh i l e In ject o r Co rp . m ai n t ai n ed i t s cal en d ar t ax y ear an drep ort edo n l y ex p en s es . Becau s e i n co m e p as s ed th ro u g h fro m a p art n ers h i p i s rep o rt ed b y p art n ers fo r t h e y ear i n wh i ch th e p art n ers h i p ’ s t ax y ear cl o s es , p et i t i o n ers cl ai m edthatth e d i s p ari ty i n t ax y ears co up l edwi th th e s el ect i v e s ep arat i o n o f s al es act i v i ty rep o rt i n g fro m

ex p en s e rep o rt i n g res u l t edi n a n etl o s s fl o w i n g th ro u g h t o p et i t i o n ers fro m th ei r S co rp o rat i o n s i n 1 9 9 8 . Co n s equ en tl y , each p et i t i o n er cl ai m edth ath is o r h er res pect i v e M AGI was l o w en o u g h t o p erm i t co n tri b u t i o n o f $ 2 ,0 0 0 t o h i s o r h er res p ect i v e Ro th IRA i n 1 9 98
.

7 Pet i t i on ers ’ retu rn s fo r 1 9 9 9 -0 2 s h ow t h ateach p et i t i o ner’ s M AGI was s u ffi ci en t l y

l arg e t o redu ce t h e s ec. 4 0 8 A(c)(2 ) co n tri bu t io n l i m i tt o zero . Th e p art i es h av e n o td is p ut edth i s p o i n t
.- 1 1 -

p et i t i o n er t h en d i rect edh i s o r h er res p ect i v e Ro th IRA t o b u y o n e-t hi rdo f a n ew
acco u n t in s i d e o ne o f W GA’ s FSCs
. Un d er fo rm er s ect i on 9 27 (g ), i f an FSC “ m ai nt ai n [ed ] a s ep arat e acco u n t fo r tran s act io n s wi th each s h areh o ld er”, each s ep arat e acco u n twas t o b e t reat edas a
s ep arat e co rp o rat i o n . By v i rtu e o f t h i s p ro v is i on , m u lt i p l e W GA m em

b ers co u l d
s h are o n e o f W GA’ s FSCs wi tho u ti n t erm i ng l i n g th ei r fi n an ces . Each o f p et i t i o n ers ’ th ree Ro th IRAs fo rm al l y p u rch as ed3 3 -1 / 3 s h ares o f o n e o f W GA’ s FSCs at$ 5 p er s h are; al t o g eth er, t h e Ro th IRAs p ai d$ 5 0 0 fo r 1 0 0 s h ares . Th e
s h ares fo rm al l y

p u rch as edb y

p et i t i o n ers ’ Ro th IRAs were al l at tri b ut ab l e t o a
s i ng l e, n ew, an dem

p ty “ s ep arat e acco u n t ”. Th ere were n o o th er s h ares at tri b u t ab l e t o th i s s ep arat e acco u n t
. When we refer t o “p et i t i o n ers ’ FSC” o r “ t h e FSC”, we m ean p et it i o n ers ’ s ep arat e acco u nt , treat edas a s ep arat e co rp o rat i o n
u n d er s ect i o n 9 2 7 (g ). In ject o r Co . recei v eda p ack eto f p ro gram m at eri al s t h ati n cl u d ed : (1 ) an
o p erat i o n s p ro cedure m em o ran du m ; (2 ) a fo rei g n t rad e co m m i s s i o n , s al e, l i cen s e, l eas e, an ds erv i ces ag reem en t(co m m i s s i o n ag reem en t ); (3 ) an ex p o rt -rel at ed
s erv i ces ag reem en t(s erv i ces ag reem en t ); (4 ) a m an ag em en tag reem en t ; (5 ) a
s h areh o ld ers ’ ag reem en t ; an d(6 ) a co m p l i an ce g u i d e p rep aredb y Pri ce W at erh o u s e, LLP, d es cri b i n g t ax an dreco rd k eep i ng i s su es as s o ci at edwi th th e- 1 2 -

IRA/ FSC p ro g ram . Each ag reem en twas ex ecu tedearl y i n 1 9 9 8
. 8 W e wi l l b ri efl y d i s cu s s each i t em . A. Op erat io ns Pro cedu re M em o ran du m Th e o p erat i o n s p ro cedure m em o ran du m p ro v i d edan o verv i ew o f t h e p ack et
an d a g en eral ex p l an at i o n o f h o w th e FSC/ IRA p ro g ram was t o o p erat e. B. Co m m i s s i o n Ag reem en t Th e co m m i ss i o n ag reem en t p ro v i d edthatp et i t i on ers ’ FSC wo u l dp erfo rm a
v ari et y o f ex p o rt -rel at edact i v i t i es fo r In ject o r Co .; i n ex ch an g e, In ject o r Co . was t o p ay a co m m i s s i o n . Th e co m

m i s s i o n ag reem en ts p eci fi edth atIn ject o r Co
. ret ai n ed th e p ower t o d eci d e wh et h er t o p ay a co m m i s s io n . Fo r ex am

p l e, t h e ag reem en ts p eci fi edth atan y s erv i ces co m m i s s i on
s h al l b e ag reedup o n b y

th e p art i es an d m ay

v ary fro m

t i m e t o t i m e b y m u tu al ag reem en t , s o as t o p ro v i de t he m ax i m u m [F] ed eral i n co m e t ax b en efi t s t o * * * [In

ject o r Co
. ] an d[t h e] FSC * * * . * * * [In ject o r Co .] s h al l h av e t h e fi n al d eci s io n as t o wh et h er [t h e] FSC i s co n s i d eredt o h av e s ol i ci t edo r p ro m ot eda t ran s act io n wi th a cu s t om er an dm ay

p ro s p ect i v el y

o r ret ro act i v el y ad d o r d el et e tran s act i o ns en t i t li n g [t h e] FSC t o a co m m is s i o n .

8 Th e co m m i s s i o n an ds erv i ces ag reem en t s were s i g n edb y M r. M azzei (as p res i den to f In

ject o r Co
. ) an d b y

Do n al dG. Dres s l er (as v i ce p res i d en to f t h e FSC). Th e m an ag em en tag reem en twas s i g n ed b y M r. M azzei (as p res id en to f In ject o r Co .) an d b y

Do n al d G. Dres s ler (as v i ce p res i d en to f t h e FSC) an dal s o b y M arkM o ffat(p res i d en t o f Qu ai l St reet ). Th e s h areh o l d ers ’ ag reem en twas s i g n ed twi ce b y M r. Dres s ler (as v i ce p res i d en t o f t h e FSC an das v i ce p res i d en to f Qu ai l St reet ).- 1 3 -

(Id en t i cal p ro v i s i o n s ex i s t edfo r o th er ty pes o f p aym en t s .) C. Serv i ces Ag reem en t Th e s erv i ces ag reem en t , wh i ch was ex ecu t eds i m u l t an eo u s l y

wi th th e
co m m i s s io n ag reem en t(as req ui redb y th e co m m i s s io n ag reem en t), p ro v i dedth at al l o f t h e act iv it i es co n tract edt o th e FSC h adt o b e d el eg at edb ack t o In ject o r Co ., i n ex ch an g e fo r a fee wh i ch co ul dn otex ceed th e co m m is s i o n p ai db y

In ject o r Co
. D. M an ag em en tAg reem en t Th e m an ag em en t ag reem en tp ro v i d edth atIn ject o r Co . wo u l d p ay

a fee t o Qu ai l St reet t o ad m i n i st er i ts p art i ci p at i o n i n th e IRA/ FSC p ro g ram . Th e
m an ag em en tag reem en ts p eci fi edth at(1 ) t h e fee wo u ldb e eq u al t o 0 .0 0 1 o f t h e FSC’ s fo rei g n trad i n g g ro s s recei p ts 9 an dthat(2 ) t h e fee wo u ldb e atl eas t$ 3 ,5 0 0
an d atm o s t$ 1 0 , 0 0 0
. E. Sh areh o l d ers ’ Ag reem en t Th e s h areh o ld ers ’ ag reem en tp ro v id edth at“ [e] arn i ng s i n t h e fo rm o f
co m m i s s io n s o n b u s i n es s o ri g i n at edb y each s h areh o l d er s h al l b e cred i t edt o th e

9 “ Fo rei g n trad i n g g ro s s recei p t s ” was d efi n edi n s ec. 9 2 4 . See i n fra n o t e 2 3
.- 1 4 -

res p ect i ve s h areh o l d er’ s s ep arat e acco u n t .” 1 0 Th i s ag reem en tal s o req u iredeach
s h areh o ld er t o p ay

i t s s h are o f an y

an n u al m ai n ten an ce co s t s fo r t h e FSC. 1 1 Ad d it i on al l y , th e s h areh o l d ers ’ ag reem en ts p eci fi edth atth e $ 5 00 p u rch as e p ri ce fo r 1 0 0 s h ares o f FSC s t ocki n cl u d ed$ 1 o f “p ai d-i n cap i t al ” an d $ 4 9 9 o f

“p ai d -i n s u rp l u s ”. Th e s h areh o l d ers ’ ag reem en tal s o res tri ct edth e s al e o f t h e FSC
s t ocki n at l eas ttwo way s : (1 ) an y s h areh o l der t h atwi s hedt o s el l i t s s t o ckn eed ed th e ap p ro v al o f t h e FSC’ s d i rect o rs 1 2 an d(2 ) t h e s al e p ri ce fo r t h e FSC s t o ckwas
s etas the “ p ai d -i n cap i t al ” am ou n t , i .e., $ 1
. F. Co m pl i an ce Gu i d e Th e co m p l i an ce g u i d e ad v i s edIn

ject or Co . o n h ow t o rep o rti t s act i v i t i es i n i t s acco u n t i n g reco rd s an do n i t s t ax retu rn s. In th e ag g reg at e, t h e ag reem en ts d es cri b edab o v e d i d n otreq u i re t h e FSC t o p erfo rm an y ex p o rt -rel at edact iv i t i es fo r In ject o r Co
. , an d an y

p aym en t s t o th e FSC were o p t i o n al (ex cep t i n g a few m an ag em en tan do perat io nal fees p ai dt o

1 0 As n o t ed , p et i t i o n ers ’ th ree Ro th IRAs o wn eds h ares i n a s i n gl e “ s ep arat e acco u n t ” i n s i d e o n e o f W GA’ s FSCs , an d th atacco un twas treat edas a s ep arat e co rp o rat i o n u n der s ec. 9 2 7 (g ).

1 1 Th e reco rdi s n o tcl ear, b uti t wo u l dap p ear t h atIn ject o r Co ., rat h er t h an th e Ro th IRAs , m ay

h av e p ai d t h es e fees
. 1 2 Th e o perat i on s p ro cedure m em oran du m s u g ges t s th atth e FSC’ s d i rect o rs were t o b e “ p ro v i d e[d ] ” b y th e FSC’ s m an ag em en tco m p an y , i .e., Qu ai l St reet
.- 1 5 -

Qu ai l St reet ). Th ati s , In

ject o r Co . ret ai n ed , atal l t i m es , the ri g h tn o tt o m ak e
co m m i s s io n p aym en t s t o th e FSC. IV. Op erat i o n s o f the FSC/ IRA Pro g ram Ev ery qu art er, Qu ai l St reet as k edIn ject o r Co . fo r a rep o rt o f i t s fo rei g n s al es fo r t h e p eri o d
. Th i s req u es ti n cl u d eda t em p l at e wo rk s h eetfo r rep o rt in g s al es . In ject o r Co . b o o kk eep ers were t o co m p l et e t h e rep o rtan dretu rni tt o Qu ai l St reet
. Qu ai l St reet wo u l d t h en co m p ut e t h e m ax i m

u m co m m i s s i o n p aym en tal l o wed
u n d er s ect i o n 9 2 5 (b ) an d as s oci at edt em p o raryreg u l at i o n s , s ee i n fra p p . 2 9 -3 4 , an d s en da l et t er i n v i t i ng p et i t i o n ers t o fu n dth ei r IRAs . In rel ev an t p art , th e l et t er
s ai d : Bas edo n th e recen tex p o rts al es an dco s ti n fo rm at i o n t h aty ou rep o rt ed , we cal cu l at e t h e am o u n t o f [$ X] i s du e [i .e., fo r Fed eral co rp orat e t ax o n the FSC] . To rei m b urs e u s fo r t h e qu art erl y FSC t ax th atwe p ai dt o th e IRS o n y o u r b eh al f, y o ur es ti m at ed FSC t ax p aym en to f [$ X] s h o u l d b e wi redt o th e ad dres s b el ow. If y o ual s o wi s h t o fu n dy o u r IRA acco u n t s atth i s t i m e, y oum ay wi re an ad d i ti o n al [$ Y] atth i s t i m e, fo r a t o t al o f [$ X + $ Y]
. In ject o r Co . m ad e reg u l ar p aym en t s t o t h e FSC, an di n t o t al b et ween 1 9 9 8
an d M arch 2 0 02 th e FSC p ai d $ 5 3 3,0 5 7 t o p et it i o n ers ’ Ro th IRAs :- 1 6 -

Ex p o rt Paym en t s Tax p ai d Am o u n td ep o s i t ed y ear t o FSC b y th e FSC i n t o IRAs 1 9 9 8 $ 15 7 ,9 6 6 $ 7 ,2 1 1 $ 1 5 0 ,7 5 4 1 9 9 9 1 3 9 ,6 8 2 6 ,3 77 1 3 3,3 0 6 2 0 0 0 1 3 8 ,0 9 5 6 ,3 04 1 3 1,7 9 1 2 0 0 1 1 2 2 ,8 1 2 5 ,6 07 1 1 7,2 0 6 To t al 5 3 3,0 5 7 (Fo r fu rt her ex p l an at i o n o f t h es e am o u nt s , s ee i n fra p p . 3 5 -3 6
. ) Pet i t i o ners p art i ci p at edi n W GA’ s FSC/ IRA p ro g ram wi th res p ectt o ex p o rt tran s act io n s o ccu rri n g fro m 1 9 9 8 -2 0 0 1 , b uts o m e o f t h e p aym en t s fro m th e FSC t o th e Ro th IRAs were m ad e i n th e y ear aft er th e ex p orttran s act io n s t o wh i ch th ey were at tri b u t ab l e. Th e fi n al p aym en t s fro m th e FSC were p ai do u ti n M arch 2 0 0 2
as W GA wo u n d up i t s FSC/ IRA p ro g ram . As o f t h e cl o se o f each y ear at i s s u e, p et i t i o n ers ’ Ro th IRAs h adth e fo l l o w i n g b al an ces : 1 3

1 3 Th e reco rdd oes n o ts h ow, n o r h av e t h e p art i es arg u ed , that(1 ) an y am ou n t s o th er th an th e p aym en t s fro m th e FSC t o th e Ro th IRAs were d ep o s i t ed i n t o th e Ro th IRAs (o ther t h an th e i n i t ial $ 2 ,0 0 0 co n tri b ut i o n s ) atan y t i m e o r t h at (2 ) an y am o u n t s were wi th drawn fro m th e Ro th IRAs b efo re t h e en do f 2 0 0 7
. Acco rd in g t o res p o nd en t , th e s um o f p et i t i o n ers ’ acco u n tb al an ces atth e cl o s e o f 2 0 0 2 was l es s than th e $ 5 3 3,0 5 7 p ai db y th e FSC b ecau s e o f i n v es t m en tl o s s es i n th e Ro th IRA acco u n t s.- 1 7 -

Year An g el o M azzei M ary M azzei Cel i a M azzei 2 0 0 2 $ 59 ,8 78 $ 5 0 ,7 53 $ 8 1 ,4 84 2 0 0 3 8 1 ,0 8 2 7 5 , 7 22 1 0 2 ,4 73 2 0 0 4 9 6 ,6 5 0 7 8 , 7 46 1 0 6 ,2 06 2 0 0 5 9 6 ,7 9 0 9 2 , 3 69 1 1 3 ,5 04 2 0 0 6 1 10 ,4 93 1 1 8 ,8 35 1 3 0 ,8 47 2 0 0 7 1 18 ,8 56 1 4 6 ,3 89 1 4 3 ,6 01 V. Pro cedu ral Back g ro un d Befo re en t eri n g i n t o th es e t ran sact i o n s, p et i t io n ers p res en tedth e t ran s act i o n p ap erwo rk t o th ei r acco u n t an t , M r. Bed k e, a t ax p art n er atan acco u n ti n g fi rm (wh ere h e h ad p ract i cedfo r 2 9 y ears ). Pet i t io n ers h adb een M r. Bed k e’ s cl i en t s fo r s ev eral y ears b efo re t hey s o u g h th i s ad v i ce ab o u tth ei r FSC t ran s act i on s , an d h e was fam i l i ar wi th th ei r b u si n es s . M r. Bed k e p rep aredp et i t i o ners ’ t ax retu rn s fo r each y ear at i s s u e. M r. Bed k e h adn o co n n ect i o n wi th W GA an dn o i n teres ti n , o r ex p ect at i o n o f p ro fi t s fro m , p et i t i o n ers ’ tran s act io n s . M r. Bed k e an dan o th er p art n er ath i s fi rm

rev i ewedp et i t i o n ers ’ i n fo rm at i o n an dad v i s edth em th atth ei r b u s i n es s co u l du s e an FSC. He al s o ad v i sedth em th ati twas n o t p ro h i b i t edfo r a Ro th IRA t o i n v es ti n an FSC. In Decem b er 2 0 03 th e IRS i s s u edNo t i ce 2 0 04 -8 , 2 0 0 4 -1 C.B. 3 3 3 , t o ad v is e t ax p ay ers th atth e IRS co n si d ereds o m e t ran s act i o n s u s i n g Ro th IRAs t o b e- 1 8 -

ab u si v e t ax -av oi d an ce t ran s act i o n s . 1 4 W i th th ei r Fo rm s 1 04 0 , U.S. In d i vi du al In co m e Tax Return , fo r t h e t ax y ears 2 0 0 4 -0 7 , p et i t io n ers fi ledp ro t ect iv e d i s cl os u res u s i n g Fo rm 88 8 6 , Rep o rt ab l e Tran s act i o n Di s cl o s u re St at em en t , wh i ch d i s cl os edth atth ey

p art i ci p at edi n a p ro g ram p o t en ti al l y

co v eredb y

No t i ce 2 0 0 4 -8 , s up ra. Pet i t i o n ers d i dn ot , h o wev er, fi l e Fo rm s 5 3 2 9, Ad d i t i o nal Tax es o n Qu al i fi edPl an s (In cl u d i n g IRAs ) an dOth er Tax -Fav o redAcco u n t s . Fo r 2 0 0 2-0 7 res po n d en tp rep areds ub st itu t e Fo rm s 5 3 2 9 fo r each p et i t i o ner
u n d er s ect i o n 6 0 2 0 (b ). In th e n o t i ce o f d efi ci en cy res po n d en td et erm i n edth atth e
s ect i on 4 9 7 3 ex ci s e t ax o n ex ces s co nt ri b u t i o n s was du e fro m each p et i t i o n er fo r each o f t h e y ears ati s s ue. OPINION Fro m 1 99 8 t o 2 0 0 2 p et i ti o n ers i n d i rect l y tran s ferred$ 5 3 3 ,0 5 7 fro m th ei r b u s i n es s t o th ei r Ro th IRAs b y ro u t i n g t hes e fu n d s t hro u gh an FSC. Res p o n d en t d et erm i n edth ati n s ub s t an ce t h es e t ran s fers rep res en t ed co n tri b u ti on s b y p et i t i o n ers t o th ei r Ro th IRAs . If res p o n d en ti s co rrect , th en p et it i on ers o we
ex ci s e t ax es u n d er s ect i on 4 9 7 3 fo r ex ces s co n tri b ut i on s t o t h ei r Ro th IRAs
.

1 4 No t i ce 2 0 0 4-8 , 2 0 0 4 -1 C.B. 3 3 3 , 3 3 4 , i d en t ifi es as p o ten t i al l y ab us i v e an arran g em en ti n wh i ch an i n di v i du al wh o o wn s a p reex i s t i n g b u s in es s s uch as a co rp o rat i o n o r s o l e p ro p ri et o rs h i p cau s es th e b u si n es s t o en g ag e i n tran s act i o n s wi th an o th er co rp o rat i o n , s ub s t an t i al l y al l th e s h ares o f wh i ch are o wn edb y o n e o r m o re Ro th IRAs m ai nt ai n edfo r t h e b en efi to f th e i n di v i du al
.- 1 9 -

Pet i t io n ers as s ertth atres p o n d en terred i n rech aract eri zi n g th e t ran s fers as
s o m et h in g o th er th an d i v i d en d s fro m th e FSC d i rect l y

t o th e Ro th IRAs . If p et i t i o n ers are co rrect , th en th ey are n o tl i ab l e fo r t h e s ect i on 4 9 7 3 ex ci s e t ax es . I. Bu rd en o f Pro o f Th e Co m m is s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h o se d et erm i n at i o n s erro n eo u s b y a p rep on d eran ce o f t he ev i d en ce. Ru l e 1 4 2 (a); W el ch
v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Pet i t i o n ers h av e n o targ ued th atth e b u rd ens h o u l d b e s h i ft edt o res p o n d en t
. II. St atu to ry

Fram ewo rk : Ro th IRAs an dEx ces s Co n tri b u t i o n s A Ro th IRA i s “ a t ru stcreat ed o r o rg an i zedi n th e Un it edSt at es fo r th e
ex cl u s i v e b en efi to f ani n di v i du al o r h i s b en efi ci ari es ”. See s ecs . 4 0 8 (a), 4 0 8 A(a). Co n tri b u t i o n s t o a Ro th IRA are n o td edu ct i b l e, i n co m e t h ataccru es i s t ax -free,
an d qu al i fi edd i st ri b u t i o ns are n o ti n cl u d edi n a t ax p ay er’ s g ro s s i n co m e. Sec. 4 0 8 A(c)(1 ), (d )(1 ); Tap ro o tAdm i n . Serv s . , In c. v . Co m m i s s io n er, 1 3 3 T.C. 2 0 2 , 2 0 6 (2 00 9 ), aff’ d, 6 7 9 F.3 d1 1 09 (9 th Ci r. 2 0 1 2 ). As n o ted , co n tri b u t i o n s t o a Ro th IRA are l i m i tedacco rd i n g t o a s t atu t o ry fo rm u l a. See s ec. 4 0 8 A(c). Co n tri b u t io n s i n ex ces s o f t h e y earl y l im i t at i o n are
n o td i rect l y

p ro h i b i ted , b u ts ect i o n 4 9 7 3(a) i m p o s es a 6 % t ax o n the l es s er o f- 2 0 -

ex ces s co n tri b u t i o n s rem ai n i n g i n a Ro th IRA o r t h e fai r m ark etv al u e o f t h e
acco u n t atth e cl o se o f t h e t ax ab l e y ear. Th e t ax n o to n l y ap p li es fo r t h e y ear a t ax p ay er m ad e an ex ces s co n tri b u t i o n b u tco n t i n u es t o ap pl y fo r each y ear u n t i l the t ax p ay er rem o ves an am o u n t co rres p o n d i n g t o th e ex ces s co n tri b u t i o n . Sec. 4 9 7 3 (b )(2 ). In 1 9 9 8 each p et i t i o n er d i rect l y co n tri b u t ed $ 2,0 0 0 t o h is o r h er res p ect i v e Ro th IRA, t h ereb y

m ax i n g o u t each p et i t i o ner’ s co n tri b u t io n l i m i tfo r t h aty ear. In al l rel ev an ty ears th ereaft er--1 9 9 9 t o 2 0 0 2 --each p et i t i o n er’ s co nt ri bu t i o n l i m i t
was zero . In ad d i t i o n t o m ak i n g in i t i al $ 2 ,0 0 0 co n tri b u t i o n s t o th ei r res p ect iv e Ro th IRAs i n 1 9 9 8 , p et i t io n ers al s o i n d i rect l y tran s ferred $ 5 3 3,0 5 7 fro m thei r b u s i n es s t o thei r Ro th IRAs b etw een 1 9 9 8 an d2 00 2 b y ro u t i n g th o s e fu n d s thro u g h an FSC. It i s u n d i s p ut edth at , i f t h o s e p aym en t s co ns t i tu t edco n tri b u ti o n s t o th e Ro t h IRAs , they

ex ceed edp et i t i o n ers ’ co n tri b u t i o n l im it s u n d er s ect i o n 4 0 8 Aan dwere th erefo re ex ces s co n tri b u ti o n s s ub jectt o s ect i o n 4 9 73 ex ci s e t ax es fo r t h e y ears at i s su e, 2 0 0 2 -0 7 . Co n s equ en t l y , th e d et erm i n at i v e qu es t i o n i s wh eth er t he p aym en t s- 2 1 -

fro m th e FSC t o the Ro th IRAs were “ co n tri b u t i o ns ” u n d er s ect i on s 4 08 A an d 4 9 7 3
. 1 5 Becau s e p et i t i o n ers ’ Ro th IRAs ex p eri en cedi n v es t m en t l o s s es , th e fai r
m ark etv al u e o f each acco u n ti n each y ear at i s s u e was l es s th an th e t ot al am o u n t
o f p aym en t s fro m

th e FSC t o each acco u n t. Acco rd i n g l y , i f th e p aym en t s fro m th e FSC were co n tri b u t i on s , th e am o u nto f ex ci s e t ax du e fro m each p et i t i o n er fo r each y ear fro m

2 0 0 2 -0 7 i s 6 % o f t h e fai r m ark etv al u e o f h i s o r h er res p ect i v e Ro th IRA acco u n t aty earen d
. 1 6

1 5 Th e i n co m e t ax treat m en to f t h e p aym en ts fro m th e FSC t o the Ro th IRAs i s n o tb efo re u s b ecau s e an y i n co m e t ax i ss u es fro m

1 9 98 -2 0 0 1 are b arred b y th e s ec. 6 5 01 s t atu t e o f l i m i t at i on s . See M azzei v . Co m m i s s i o n er, T.C. M em o . 2 0 1 4
- 5 5 , at* 1 2 (“ [F] or i n co m e t ax p u rp o s es the ap p li cab l e res p ect i v e p eri o d s o f l i m i tat i on s fo r t ax ab l e y ears 1 9 9 8 th ro u g h 2 0 0 1 duri n g wh i ch the M azzei p art n ers hi p / W es t ern Gro wers FSC t ran s act io n s h adt ak en p l ace h adex p i redb y th e t i m e res po n d en t l earn ed o f t h o s e t ran s act io n s du ri n g res p o n den t ’ s ex am i n at i o n [.] ”). Becau s e p et i t i o n ers d i d n o tfi le Fo rm s 5 3 29 , th e p eri o d s o f l i m i tat i o n s fo r ex ci s e t ax u n d er s ec. 4 9 73 n ev er b eg an t o ru n . See Pas ch al l v . Co m m i s s i o n er, 1 3 7 T.C. 8 , 1 5 -1 7 (2 0 11 ). Th erefo re t h e ex ci se t ax es res po n den ts eek s t o as s es s ag ai n s tp et i t i o n ers fo r t ax y ears 2 0 0 2-0 7 are n o tb arred b y th e s t atu t e o f l i m i tat i on s .

1 6 Th ati s , th e d efi ci en ci es l i s t eds upra p p. 5 -6 are co m pu t ed b y t ak i n g 6 % o f th e y earen d b al an ces l is t eds up ra p . 1 7
.- 2 2 -

III. Th e Part i es ’ Arg u m en t s Res p o n d en tco n t en d s th atth e p aym en t s t o th e Ro th IRAs were co n tri b u t i o n s wi th i n th e m ean i n g o f s ect i on s 4 0 8 A an d4 9 73 . Bro ad l y i n vo k i n g th e d o ct ri n e o f
s ub s t an ce o v er fo rm , res p o nd en tas k s u s “ t o rech aract eri ze p et i t i o ners ’ en ti re
s ch em e” o n t h e b as is o f al l th e fact s an dci rcu m s t an ces . Res p o n d en twan t s u s t o rech aract eri ze t h e en ti re FSC/ IRA p ro g ram as a d ev i ce fo r m ak i n g co nt ri bu t i o n s t o p et i t i o n ers ’ Ro th IRAs
. Pet i t i o ners co n t en dth atth e p aym en t s t o th e Ro th IRAs were n o t
co n tri b u t i o n s. Th ey

i n s i s tthatth e s ub s t an ce o v er fo rm d o ct ri n e i s “ arch ai c” an d th atwe m u s t res p ectth e fo rm

o f t h ei r t ran s act i o n s , wh i ch th ey s ay Co n g res s h as
s an ct i o n ed
. W e t h i nkb ot h p art ies ’ arg u m en t s fal l s h o rt , rel y i ng t o o m u ch o n b ro ad g en eral i zat i o ns an dh y

p o thes es . Res p o n d en t m ak es v ag u e referen ces t o

“ s ub s t an ce” b u tfai l s t o ex p l ai n i n an y d et ai l h o w th e s ub s t an t i ve eco n o m i c fact s
o f p et i ti o n ers ’ cas es sup po rtth e b ro ad rech aract eri zat i o n h e h as req u es t ed
. Si m i l arl y , p et i ti o n ers m ak e v ag u e referen ces t o v ari o u s s tatu t es b u t fai l t o ex p l ai n
ex act l y ho w th os e s t atu t es ap p l y t o th e fact s o f t h es e cas es o r ex act l y wh y th o s e
s t atu tes s h o u l db e t h ou g h tt o ex cu s e a l acko f s ub s t an ce.- 2 3 -

Th e Co u rto f Ap p eal s fo r t h e Ni nt h Ci rcu i t--t o wh ich an y ap p eal o f t h es e
cas es wo ul d o rd i nari l y

l i e--h as cau t i o n ed : Referen ce t o th e v ag u e t erm s “ fo rm ” an d“ s ub s t an ce,” wh i ch J u d g e Learn edHan d p o in t ed l y referred t o as “ an o dynes fo r t he p ai n s o f reas o n i ng , ” i s * * * i n ad equ at e t o d et erm i n e t he t ax treat m en t o f a p art i cu l ar t ran s act i o n . In s t ead , co u rt s m u s t m ak e a m o re s p eci fi c i n qu i ry , fi n di n g wh atth e fact s are an d d eci d i n g wh et h er t h os e fact s fal l wi th i n th e i n t en d eds co p e o f t he In t ern al Rev en ue Co d e p ro v i s io n ati s s u e. St ewartv . Co m

m is s i o n er, 7 1 4 F.2 d9 7 7 , 9 8 8 (9 th Ci r. 1 9 8 3 ) (qu o t i n g Co m m i s s i o n er v . San s o m e, 6 0 F.2 d 9 3 1 , 9 3 3 (2 dCi r. 1 9 3 2 ), rev ’ g 2 2 B.T.A. 1 1 7 1 (1 9 3 1)), aff’ g T.C. M em o . 1 9 8 2 -2 0 9
. W i th th atad m on i t i o n i n m in d , we res ol v e th es e cas es o n t h ei r p art i cu l ar fact s, ap p l y i n g the t ex to f t he rel ev an tCo d e p ro v i s i o n s . Fo r t h e reas on s d i s cu s s ed b el o w, we rejectp et i ti o n ers ’ b ro ad es t arg um en t --t h atth e s ub st an ce d o ct ri n es h av e
n o p l ace i n o u r an al y s i s . W e al s o rejectres po n d en t’ s req u es tfo r a co m p l et e rech aract eri zat i o n o f al l p et i t i o n ers ’ tran s act i o n s . In s tead , we res o l ve t h es e cas es
o n a n arro wer fact u al b as i s : W e co n cl u d e o n the b as is o f t h e fact s i n th e reco rd th atp et i t i o n ers , an dn o tth ei r Ro th IRAs , were t he s ub st an t i v e o wn ers o f t he FSC
s t ockatal l rel ev an tt i m es . Co n s equ en t ly , we co n cl u d e t h ati n s ub s t an ce t h e p aym en t s fro m

th e FSC were i n co m e t o p et i ti o n ers rat her t h an t o th ei r Ro th IRAs
an d th enex ces s co n tri b u t i o n s b y p et i t i o n ers t o th ei r Ro th IRAs
.- 2 4 -

IV. Gen eral Pri n ci p l es : Sub s t an ce Ov er Fo rm Th e Sup rem e Co u rtan dl o w er co u rt s (i n cl ud i n g th i s Co u rt ) h av e rep eat ed l y affi rm edth e s ub s tan ce o v er fo rm i n qu i ry . 1 7 W e recen t l y

ackn o wl ed g edth atco u rt s ap p ly i n g th e s o-cal ledeco n o m i c s ub s t an ce, s h am tran s act i o n , an ds ub s t an ce o v er fo rm d o ctri n es h av e n o tal way s u s edco n s i s t en tt erm i n o l o gy . CNT In v ’ rs , LLC v
. Co m m i s s i o n er, 1 4 4 T.C. 1 6 1 , 1 9 3 (2 0 1 5) (“ T h e d o ct ri n es ’ s ub s t an t iv e s i m il ari t i es
wo u l dn o t , al o ne, g en erat e u n cert ai n ty fo r t ax pay ers * * * i f co u rt s ap p l y i n g th e d o ct ri n es d i ds o u s i n g co n s is t en tt erm i n o l o gy . W e h av e n o t .”). Bu t

1 7 E.g ., Fran kLy o n Co . v . Un i t edSt at es , 4 3 5 U.S. 5 6 1 (1 9 7 8 ); Co o per v . Co m m i s s i o n er, 8 7 7 F.3 d1 0 8 6 , 1 0 9 1 (9 th Ci r. 2 0 1 7 ) (“ Ab ed ro ckp ri n ci p l e o f t ax l aw * * * i s thats ub st an ce co n tro l s o v er fo rm .”), aff’ g 1 4 3 T.C. 1 9 4 (2 01 4 ); San tan der Ho l d in gs USA, In c. v . Un i t edSt at es , 8 4 4 F.3 d1 5 (1 s t Ci r. 2 0 1 6 ); Ban k o f N.Y. M el lo n Co rp . v . Co m m i s s i o ner, 8 0 1 F.3 d1 0 4 (2 dCi r. 2 0 1 5 ), aff’ g 1 4 0 T.C. 1 5 (2 0 1 3 ) an d T.C. M em o . 2 0 1 3 -2 2 5 ; Harb o r Ban co rp v . Co m m i s s i o n er, 1 1 5 F.3 d7 2 2 , 7 2 9 (9 th Ci r. 1 9 9 7 ) (“ Iti s ax i o m at ic t h att ax l aw fo l l o w s s ub s t an ce an d n o tfo rm .”), aff’ g 1 0 5 T.C. 2 6 0 (1 9 9 5 ); St ewartv . Co m m i ss i o n er, 7 1 4 F.2 d9 7 7 , 9 8 7 -9 8 8 (9 th Ci r. 1 98 3 ) (ex p l ai n i n g th ati n m ak i ng a s ub s t an ce o ver fo rm arg u m en t , th e Co m

m i s s i o n er “ m ay

rel y o n a b o dy

o f l aw” i n cl u d i ng th e eco n o m i c s ub s t an ce an d b u s i n es s p u rp o se t es t s), aff’ g T.C. M em o . 1 9 8 2-2 0 9 ; J o h n Han co ck Li fe In s . Co . (U.S.A.) v
. Co m m i s s i o n er, 1 4 1 T.C. 1 (2 0 1 3 ); Lazaru s v . Co m m i s s i o n er, 5 8 T.C. 8 54 , 8 6 4 (1 9 7 2 ) (“ In l ay i n g th e fact s o f p et i t i o n ers ’ cas e al o n g s i d e t h e co nt ro l l i n g s t atut o ry p ro v i s i o n s , we are rem i n d edth atth e s ub s t an ce o f a t ran s act i o n rat h er t han th e fo rm i n wh i ch i ti s cas ti s d et erm i n at i v e o f t h e t ax co n seq u en ces u n l es s i tap p ears fro m an ex am in at i o n o f t h e s t atu t e th atfo rm i s t o g o v ern .”), aff’ d , 5 1 3 F.2 d 8 2 4 (9 th Ci r. 1 9 7 5 ); Bl o ckDev el o pers , LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 1 7 -1 4 2 , at* 2 7 (“ W e h av e ap p l i eds ubs t an ce-o v erfo rm ag ai n an dag ai n [.] ”); Po l own i akv . Co m m i s s io n er, T.C. M em o . 2 0 1 6 -3 1 , at * 1 8 (“ Gen eral l y , th e s ub s t an ce an dn o tth e fo rm o f a t ran s act io n d et erm i n es i t s t ax co n seq u en ces .”); Rep et t o v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2-1 6 8 (s am e).- 2 5 -

n o twi th s t an d i n g s o m e fl u i d i ty i n t erm i no l o g y , th es e s o -cal l ed“ d o ct ri n es ” s i m p l y refl ecta b o dy

o f cas el aw d es cri b i n g d i fferen t as pect s o f a wel l -reco g n izedan d accep t edg en eral i n qu i ry

i n t o th e p ract i cal eco n o m i c real i t ies u n d erl y i n g cl ai m ed t ax at tri b u t es . 1 8 Th e Co u rto f Ap p eal s fo r t h e Ni nt h Ci rcu i t h as s t at edth ati t“ g en eral l y ap p li es a t wo -p ro n g edi nqu i ry ad dres s i n g th e o b

j ect i v e n atu re o f t he t ran sact i o n (wh eth er i th as eco n o m i c s ub s tan ce b ey o n dt ax b en efi t s ) an d th e s ub ject iv e
m o ti v at i o n o f t h e t ax p ay er (wh et h er t h e t ax p ay er h ad a n o n -t ax b u s i n es s p u rp o s e fo r t h e t ran s act i o n ).” Red d am v . Co m m i s s i o n er, 7 55 F.3 d 1 0 5 1 , 1 0 5 7 (9 th Ci r. 2 0 1 4 ), aff’ g T.C. M em o . 2 0 1 2 -1 0 6; s ee al s o Ban ko f N.Y. M el l o n Co rp . v . Co m m i s s i o n er, 8 0 1 F.3 d1 0 4 , 1 1 5 (2 dCi r. 2 0 1 5 ), aff’ g 1 4 0 T.C. 1 5 (2 0 1 3 ) an d T.C. M em o . 2 01 3 -2 2 5 . As th e Co urto f Ap p eal s h as al s o n o t ed , h owev er, “ th e
eco n om i c s ub s t an ce d o ct ri n e i s n o ta ri g i dtwo -s t ep an al y s i s , b u ti n s t ead fo cu s es h o l i s t ical l y

o n wh et h er t h e t ran s act i o n h adan y p ract i cal eco no m i c effect s o th er th an th e creat i o n o f i n co m e t ax l o s s es . ” Red d am v . Co m m i s s i o n er, 7 55 F.3 dat

1 8 E.g ., Fran kLy o n , 4 3 5 U.S. at5 7 3 (“ In ap p l y i n g th i s d o ct ri n e o f s ub s t an ce o v er fo rm , th e Co u rth as l o o k edt o th e o bject i v e eco n om i c real i t i es o f a tran s act i o n rat h er t h ant o th e p art i cu l ar fo rm th e p art i es em

p lo y ed .”); Gi l m an v . Co m m i s s i o n er, 9 3 3 F.2 d1 4 3 , 1 4 8 (2 dCi r. 1 9 9 1 ) (“ Wh et her t he t erm i n o l o g y u s ed was th ato f ‘ eco n o m ic s ub s tan ce, s h am , o r s ect i o n 1 8 3 p ro fi tm o t i v at io n ’ was n o t cri t i cal ; wh atwas i m

p o rt an twas rel i an ce o n o b ject iv e fact o rs i n m ak in g th e an al y s i s.”), aff’ g T.C. M em o . 1 9 8 9 -6 8 4
.- 2 6 -

1 0 6 0 (i n t ern al qu o t at i o n m ark s an dci t at i o n s o m i t t ed ) (qu o t i ng Sack s v . Co m m i s s i o n er, 6 9 F.3 d9 8 2 , 9 8 8 (9 th Ci r. 1 99 5 ), rev ’ g T.C. M em o . 1 9 9 2-5 9 6 );
s ee al so Ban ko f N.Y. M el l o n Co rp . v . Co m m i s s i o ner, 8 0 1 F.3 dat1 1 5 (“ [T] h e t es t i s n o ta ri g i dtwo -s tep p ro ces s wi th d i s cret e p ro n g s ; rat h er, we em pl o y a ‘ fl ex i b l e’
an al y s i s wh ere b o th p ro n gs are fact o rs t o co ns i d er i n th e o v eral l i n qu iry i n t o a tran s act io n ’ s p ract ical eco n o m i c effect s .”). “ [B] u s in es s p urp o s e an d eco n om i c
s ub s t an ce are s i m

p l y m o re p reci s e fact o rs t o co n s i der i n t h e ap p l icat i o n o f t h i s
co u rt ’ s trad i ti o n al s ham

an al y s i s ”. Red d am

v . Co m m i s s i o n er, 7 5 5 F.3 dat1 0 5 9 (qu o ti n g So ch in v . Co m

m i s s i o n er, 8 4 3 F.2 d3 5 1 , 3 5 4 (9 th Ci r. 1 98 8 ), aff’ g 8 5 T.C. 9 6 8 (1 98 5 )). 1 9 M o reo v er, t h i s g en eral i n qu iry i s m erel y a co m m on s en s e ap p l i cat i o n o f t h e p l ai n l an g u ag e o f t h e Co d e t o th e p art i cu l ar eco n o m i c fact s o f each cas e. As th e

1 9 Th e d is s en t , s ee d i s s en t i n g o p . p p . 9 5 -9 7 , ch aract eri zes th e s ub s t an ce i n qu i ry i n a way

th at d i ffers fro m

th e p reced en t s o f t h e Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i t , wh i ch we h av e d i s cu s s ed , s ee s up ra p p . 2 3 -2 6 , an dfro m th e p reced en t s o f m an y

o th er ci rcu i t s an do f t h i s Co urt , s ee s up ra n o t e 1 7 . Wh ereas th es e p reced en t s d es cri b e o ne g en eral s ub s t an ce i n qu i ry as a fact s an d ci rcu m s t an ces i n qu iry i n t o th e p ract i cal eco n o m i c effect s o f a t ran s act i o n fo r t h e p u rp os e o f d et erm i n i ng wh et her t h e eco n o m i c fact s fal l wi th i n th e m ean in g o f t h e Co d e, e.g ., St ewartv . Co m m i s s i o n er, 7 1 4 F.2 dat9 8 8 , th e d is s en tat t em p t s t o draw a s h arp d i s ti n ct i on b etween the s ub s t an ce o v er fo rm an dth e eco n o m i c s ub s t an ce d o ct ri n es , ch aract eri zi n g th e fo rm er as a d o ctri n e ab o u t fact -fi n di n g an dth e l at t er as a d o ctri n e ab ou tqu es t i on s o f l aw. W e th in k th atth e p reced en t s o f t he Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i t req u i re u s t o carefu l l y co ns i d er t h e l aw, the fact s , an d th e ap p l i cat i o n o f l aw t o fact , al l i n th e l i g h to f eco n om i c real i ty .- 2 7 -

Co u rto f Ap p eal s fo r t h e Fi rs tCi rcu i trecen t l y p u ti t : “ Th e [F] ed eral i n co m e t ax i s , an d al way s h as b een , b as edo n s t atu t e. Th e eco n o m i c s ub st an ce d o ct ri n e, l i k e
o th er co m

m o n l aw t ax d o ctri nes , can thu s p erh ap s b es t b e t h o u g h to f as a t o o l o f
s t atu to ry i n t erp ret at i on ”. San tan d er Ho l d i n g s USA, In c. v . Un i t edSt at es , 8 4 4 F.3 d 1 5 , 2 1 (1 s tCi r. 2 0 1 6 ) (fn . ref. o m i t t ed ); s ee al s o Su m m a Ho l d i n g s , In c. v . Co m m i s s i o n er, 8 4 8 F.3 d7 7 9 , 7 8 5 (6 th Ci r. 2 0 1 7 ), rev ’ g T.C. M em o . 2 0 15 -1 1 9
. 2 0 W e h av e recen t l y

ap p l i edth e s ub s t an ce o ver fo rm d o ct ri n e i n s ev eral cas es
s i m i l ar t o p et i ti o n ers ’ . See Bl ockDev el o p ers , LLC v . Co m m is s io n er, T.C. M em o . 2 0 1 7 -1 4 2 ; Po l own i akv . Co m m i s s i o n er, T.C. M em o . 2 0 1 6-3 1 ; Rep et to v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -1 6 8 , 1 0 3 T.C.M . (CCH) 1 8 9 5 (2 0 1 2 ). In al l th o s e cas es , th e t ax pay ers d i rect edth ei r Ro th IRAs t o p u rch as e i n t eres t s i n a n ewl y fo rm edp art n ers h i p o r C co rp o rat i o n, wh i ch th en p u rp o rt ed l y p ro v i d eds erv i ces , o r

2 0 In Su m m a Ho l d i n g s , In c. v . Co m m i s s i o n er, 8 4 8 F.3 d7 79 , 7 8 8 (6 th Ci r. 2 0 1 7 ), rev ’ g T.C. M em o. 2 0 1 5 -1 1 9 , th e Co urto f Ap p eal s fo r t he Si x th Ci rcu i t m u sedthatth e s ub st an ce o ver fo rm i n qu i ry m i g htb e cri ti ci zed as a “ o n e-way s treet ” i n the Co m

m i ss i o n er’ s d i rect io n . Bu t as th e Co u rto f Ap p eal s fo r t h e Ni n t h Ci rcu i tn o t edl o ng ag o , i f a t ran s act i o n i s u n real , “ th en i t i s n o t* * * [t h e t ax p ay er] b u tth e Co m

m i s s i on er wh o s h o u l dh av e t h e s o l e p ower t o s u s t ai n o r d is reg ardthe effect o f t h e fi ct io n s i n ce o th erwi s e t h e o p p o rtu n it ies fo r m an i p u l at i o n o f t ax es are p ract i cal l y

u n ch eck ed
. ” M al et is v . Un i t edSt at es , 2 0 0 F.2 d9 7 , 9 8 (9 th Ci r. 1 9 5 2 ).
“ Th e p ract ical reas on fo r s u ch a ru l e i s t h ato th erwi s e t h e t ax pay er co u l d co m m en ce d o i n g b u s i n es s * * * [u s i n g a p art i cu lar fo rm ] an d , i f ev eryth i n g g o es wel l , real i ze t h e i n co m e t ax ad v an t ag es th erefro m ; b u t i f t h i n g s d o n o ttu rno u ts o wel l , m ay tu rn aro u ndan dd i scl ai m th e b u s i n es s fo rm

h e creat ed ”. Id
.- 2 8 -

p at en tl i cen s es , t o th e t ax p ay ers ’ o p erat i n g b u s i n es s es i n ex ch an g e fo r cas h . In Rep et t o , we h el dth atfu n ds ro u t edthro u g h a n ewl y fo rm edC co rp o rat i o n t o th e t ax p ay ers ’ Ro th IRAs rep res en t ed , i n s ub s t an ce, ex ces s co n tri b u ti o n s b ecau s e “ t h e p rep o n d eran ce o f cred i b l e ev i d en ce co m p el s a fi n d i n g th ati n s ubs t an ce th e
s erv i ces ag reem en t s an d th e res u l t in g p aym en t s were n o th i n g m o re t h an a
m ech an i s m

fo r t ran s ferri n g v al u e t o the Ro th IRAs .” Rep et t o v . Co m m is s i o n er, 1 0 3 T.C.M . (CCH) at 1 9 0 1
. 2 1 InPo l o wn i akan dBl o ckDev el o p ers , we l i k ewi s e l o o k edt o s ub s t an ce o v er fo rm i n h o l d i n g th at th e t ran s act i o n s ati ss u e i n tho s e
cas es res ul t edi n ex ces s co n tri b u t i o n s t o the t ax p ay ers ’ res p ect iv e Ro th IRAs
. Al th ou g h p et i t i o n ers ’ tran s act i o n s are s i m i l ar t o th o se co n s i dered i n Rep et t o , Po l o wn i ak , an dBl o ckDev el o p ers , a p ri n ci pal d i fferen ce i s th at p et i t i o n ers u s edan FSC i ns t eado f a p art n ers h i p o r C co rp o rat i o n . Pet i t i o n ers
s u g g es tth atb ecau s e t h ei r t ran s act i o ns i n cl u d edan FSC, we are n o t p erm i t t edt o
ex am i n e t h e s ub s t an ce o f an y p art o f t h ei r t ran s act i on s . W e d i s ag ree. As we d i s cu s s i n g reat er d et ai l b el o w, th e s co p e an deffect o f t h e FSC p ro v i s i o n s are

2 1 Th e Co u rto f Ap p eal s fo r t he Si x th Ci rcu i t d es cri b edth e res u lti n Rep et t o wi th ap p ro v al , as fo l l o w s : “ [W ] h en a fam i l y s et s up an o rd in ary

co rp orat io n o wn edb y Ro th IRAs an dp ay s th e co rp o rat i o n fees fo r s h am ‘ s erv i ces ’ th ati t n ev er p erfo rm ed , th e Co m m i s si o n er m ay

ri g h t l y refu se t o reco gn i ze t h e Ro th IRA’ s g ai n s as i n v es t m en t earn i n g s an d m ay recl as s i fy th em as co n tri b u ti o n s .” Su m m a Ho l di n g s , In c. v . Co m m i s si o ner, 8 4 8 F.3 dat7 8 5-7 8 6
.- 2 9 -

m o re l i m i t edth an p et i t i o n ers s u g g es t an dd o n o tfo recl o se o u r ap p l i cat io n o f
n o rm al s ub s t an ce p ri nci p l es t o p et it i o n ers ’ tran s act i o n s , atl eas t i n d eci d i n g wh o actu al l y o wn edth e FSC s t o ck
. Anu n d ers t an d i n g o f t h e act ual , l i m i t eds co p e o f t h e FSC p ro v i s i o n s , an d h o w they ap p l iedt o p et it i on ers ’ tran s act i o n s , requ i res s o m e ex p l an at i o n . W e tu rn t o tho s e m at t ers b efo re p ro ceed i n g wi th o u r an al y si s o f t h e s ubs t an ce o f p et i t i o n ers ’ tran s act i on s . V. Th e FSC Pro v i s i o n s Befo re t h ey

were p h as edo u t , 2 2 FSCs were fo rei g n co rp o rat i o n s el ect i n g t o b e t ax ed u n d er fo rm er s ect i on s 9 2 1 -9 2 7 , wh i ch p ro v i d edad v an t ag eo us i n co m e t ax treat m en tfo r ex p orti n co m e ro u t edth ro u g h an FSC. Th is t ax ad v an tag e was ach i ev edi n tw o way s . Fi rs t , th ro u g h a s eri es o f h i g h l y t ech n i cal ru les , the FSC p ro v is i o n s al l o wedt ax ab le i n co m e t o b e al l o cat edt o th e FSC b y rel ax i n g th e
s ect i on 4 8 2 tran s fer p ri ci n g ru l es th atg en eral ly ap p l y i n al l ocat i ng i n co m e an d d educt i o n s am o n g rel at edt ax p ay ers . Seco n d , th e FSC p ro vi s i o n s effect i v el y l o weredth e t ax rat e fo r qu al ify i n g ex p ort -rel at edt ax ab le i n co m e al lo cat edt o th e FSC.

2 2 See s up ra n o t e 4
.- 3 0 -

A. Rel ax edTran s fer Pri ci n g Ru l es Sect io n 9 2 5 (a) p ro v i d edrel ax edtran s fer p ri ci n g ru l es fo r t h e s al e o f ex p o rt p ro p erty b y a d o m es ti c ex po rt i n g b u s i n es s (wh i ch the reg ul at i o n s cal l th e “ rel at ed
s up p li er”, s ee, e.g ., s ec. 1 .9 2 5(a)-1 T(b ), Tem p oraryIn co m e Tax Reg s., 5 2 Fed
. Reg
. 6 4 4 4 -6 4 45 (M ar. 3 , 1 9 8 7 )) t o a rel at edFSC (s al e 1 ), p ro v i d edth atth e FSC
res o l d t h atp ro p erty

t o a fo rei g n cu s t o m er (s al e 2 ). In p art i cu l ar, s ect i o n 9 2 5 (a) p erm i t t edan FSC an di t s rel at eds up p l i er t o u s e an y p ri ce t h ey

wi s hedfo r s al e 1 , p ro v id edth atth e t ax ab l e i n co m e d eri v edb y the FSC fro m

s al e 2 d i dn o tex ceed th e g reat es to f: 1 .8 3 % o f t h e “ fo rei g n trad i n g g ro s s recei p t s ” 2 3 o f s al e 2 , s ec. 9 2 5 (a)(1 ); 2 4 2 3 % o f t h e co m b i n edt ax ab l e i nco m e o f t h e FSC an di t s rel at ed
s up p li er fro m

s al e 1 an ds al e 2 , s ec. 9 2 5 (a)(2 ); an d t h e t ax ab l e i n co m e o f t he FSC
as co m p u t edaft er ap p ly i n g th e s ect i o n 4 8 2 m et ho dt o s al e 1 , s ec. 9 2 5 (a)(3 ). 2 5

2 3 Fo rei g n trad i n g g ro s s recei p ts were d efi n edi n s ec. 9 2 4 t o i ncl u d e g ro s s recei p t s fro m

ex p o rts al es o r co m

m i s s i o n tran s act i o n s . 2 4 Th e am o u ntco m

p u t edu n d er s ec. 9 2 5 (a)(1 ) co u l d n otex ceed twi ce t h e am ou n tco m

p u t edu n d er s ec. 9 2 5 (a)(2 )--i .e., 4 6 % o f th e co m b i n ed t ax ab l e i n co m e o f t h e FSC an di t s rel at eds up pl i er fro m s al e 1 an ds al e 2 . Sec. 9 2 5 (d ).
2 5 Th e FSC reg u lat i o n s referred t o th e fi rs t tw o m et h o ds as “ ad m in i s trat i v e p ri ci ng m et h o d s ” an d t o the t h irdm et h o das th e “ s ect i o n 4 8 2 m et h od ”. See, e.g ., s ec. 1 .9 2 5(a)-1 T(b )(1 ), Tem p o raryIn co m e Tax Reg s., 5 2 Fed . Reg . 6 4 4 4 (M ar. 3 , 1 9 8 7 ). Co l l ect i v el y

th ey are referred t o as “ tran s fer p ri ci n g m et h o d s ”. Id
. Sec. 9 2 5 (a) an d(c) p ro v i d edth atth e FSC an di t s rel at eds up pl ier co u l d (co n ti n u ed ...)- 3 1 -

M o re s i m pl y , s ect i o n 9 2 5 (a)(1 ) an d (2 ) al l o wedthe FSC an d i t s rel at ed
s up p li er t o s etth e s al e 1 p ri ce atan y am o un ts o l o n g as i twas ab o v e a cert ai n th res ho l d . Th e t h res h o l dv ari edd ep en d i n g o n the p ro fi t m arg i n o f t he o v eral l
ex p orttran s act i o n (b y

p ro fi tm arg i n , we m ean th e ag g reg at e t ax ab l e i n co m e fro m
s al e 1 an ds al e 2 d i v i dedb y th e g ro s s p ro ceed s fro m

s al e 2 ). Es s en t i al ly , i f t h e p ro fi t m arg i n was b el o w3 .9 8 %, th e FSC an di ts rel at eds upp l i er co u ldas s i g n a
m ax i m u m o f 4 6 % o f t h e co m

b i n edi n co m e t o th e FSC (b y ad ju s t in g th e s al e 1 tran s fer p ri ce). If t he p ro fi tm arg i n was b et ween 3 .9 8 % an d7 .9 6 %, th e m ax i m u m
am ou n to f t ax ab l e i n co m e as s i gn ab le v ari edi n v ers el y fro m 4 6 % t o 2 3%,
res p ect i vel y . If th e p ro fi t m arg i n ex ceed ed7 .9 6 %, th ey co ul das s ig n a m ax i m u m
o f 2 3 % o f t h e co m

b i n ed t ax ab l e i n co m e t o th e FSC. 2 6 Th e FSC an di t s rel at ed

2 5 (...co n t i nu ed ) ap p ly th e s ec. 9 2 5 (a)(1 ) an d(2 ) m et h o d s o nl y i f cert ai n req u i rem en t s were m et
. See s ec. 1 .9 2 5 (a)-1 T(b )(2 )(i i ), Tem p o raryIn co m e Tax Reg s ., 5 2 Fed
. Reg . 6 4 4 4- 6 4 4 5 (M ar. 3 , 1 9 8 7 ). Th es e m i n i m al req u i rem en t s , h owev er, co ul d b e co n tract ed t o an o th er p art y

(o r b ackt o th e rel at eds up p li er). See s ec. 9 2 5 (c); s ec. 1
. 9 2 5 (a)- 1 T(b )(2 )(i i ), Tem

p oraryIn co m e Tax Reg s ., s up ra. Th ati s , th e FSC an d i t s rel at ed s up p li er co u l d es s en t i al l y co n tract aro u n dth e s ec. 9 25 (c) req ui rem en t s (as h ap pen edi n p et i t i o ners ’ cas es ). Res p o n d en th as n o t arg uedth atth e s ec. 9 2 5 (c) req u i rem en t s were n o t m eti n th es e cas es . W e th erefo re d eem an y s u ch arg u m en t t o h av e b een wai v edo r co n ced ed
.

2 6 If t h e p ro fi tm arg i n o n an o v eral l ex po rttran s act i o n (i .e., t ax ab l e i n co m e fro m s al e 1 an ds al e 2 o v er g ro s s recei p t s fro m s al e 2 ) was b el o w 3 .9 8 % , then 1 .8 3% o f g ro s s recei p t s (i .e., 1 .8 3 % o f t h e g ro s s p ro ceed s o f s al e 2 ) wo u l d al way s (co n ti n u ed ...)- 3 2 -

s up p li er co u l d al s o ch o o s e t o d eal atarm ’ s l en g th (b u t p res um ab l y wo ul d d o s o
o n l y i f th atp ro v i d eda b et t er res u l tth an th e s ect i o n 9 2 5 (a)(1 ) an d(2 ) m et h o d s ). Sect io n 9 2 5 (b ) al l o wedth e FSC an di ts rel at eds upp l ier t o d ep artfro m th e
s ect i on 9 2 5 (a) p arad i g m

an dach i ev e s i m i l ar t ax res u lt s (wh i ch i s wh ath ap p en ed i n p et i ti o n ers ’ cas es ). See, e.g ., s ec. 1 .9 2 5(a)-1 T(d )(2 ), Tem p oraryIn co m e Tax Reg s., 5 2 Fed . Reg . 6 4 4 7 (M ar. 3 , 1 9 87 ). Th e rel at eds up p l i er was p erm it t edt o p ay th e FSC a “ co m

m is s i o n ” fo r s erv i ces (rel at i n g t o an ex p o rttran s act io n ) t h at
were n o t , i n s ub s t an ce, p erfo rm edb y th e FSC (al tho u g h t h e FSC co u l dp erfo rm
s u ch serv i ces i f i twi s h ed ). Id . Th ati s , fo r t h e p u rp os e o f co m p u t i n g “ th e t ax ab l e i n co m e” o f th e FSC an di ts rel at eds upp l i er u n d er s ect i o n 9 2 5(a), t he FSC an di t s rel at ed s up p l i er were al l o wedt o s et an dp ay a co m m i s s i o n fo r s erv i ces (t h atm i g h t
n o tactu al l y

h av e b een ren d ered ), s o l o ng as th e t ax ab le i n co m e d eri v edfro m th e

2 6 (...co n t i nu ed ) ex ceed 4 6% o f co m

b i n edt ax ab l e i n co m e (0 .0 3 98 × 0
. 4 6 = 0 .0 1 8 3 ), m ean i n g th at s ec. 9 2 5(a)(1 ), as cap p edb y sec. 9 2 5 (d ), s ee s up ra n o te 2 4, wo u l d al w ay s p ro v i d e th e m o s t ad v an t ag eo u s as s i gn m en to f t ax ab l e i n co m e t o th e FSC (as su m i n g t h at th e s ec. 4 8 2 m eth o dd i dn o tp ro v id e a b et t er res u l t ). If t h e p ro fi tm arg in was g reat er t h an 7 .9 6%, th en 2 3 % o f co m b i ned t ax ab l e i n co m e wo ul dal way s ex ceed 1 .8 3% o f g ro s s recei p t s (0 .0 7 9 6 × 0 .2 3 = 0 .0 1 8 3), m ean i ng th ats ec. 9 2 5 (a)(2 ) wo u l dal way s p ro vi d e t h e m os tad v an t ag eo us as s i gn m en t
. If t h e p ro fi t m arg i n was b et ween 3 .9 8 % an d7 .9 6 %, th en 1 .8 3 % o f g ro s s recei p t s wo u l dal way s b e b et ween 4 6 % an d 2 3% o f co m

b i n ed t ax ab l e i n co m e, m ean i n g th ats ec. 9 2 5 (a)(1 ) wo u l d al way s p ro v i d e t h e m o s t ad v an t ag eo u s as s i g n m en t(an dth e s ec. 9 2 5 (d ) cap wo u l d n o tap pl y ).- 3 3 -

co m m i s s io n p aym en tb y th e FSC d i d n o t ex ceed the am o u n t co m p u t edu n der
s ect i on 9 2 5 (a). See s ec. 9 2 5 (b ). In g en eral , th e rel at eds up pl i er wo u l dcarryo u t th e ex p o rts al e i t s el f (i .e., a s al e co rres p o nd i n g t o s al e 2 , ab ov e) an dth enp ay a
co m m i s s io n t o th e FSC eq u al t o th e t ax ab l e i nco m e th atwo u l dh av e b een at tri b u t edt o th e FSC, i f t h e s ect i o n 9 2 5 (a) p arad i g m h ad b een fo l l o wed
. Th e
co m m i s s io n p aym en twas d edu ct i b l e b y th e rel at eds up p l ier an dco n s t i tu ted fo rei gn trad i n g g ro ss recei p t s t o th e FSC. B. Effect iv e Tax Rat e Cu tfo r Qu al i fy i n g In co m e If a co rp o rat i o n qual i fi edas an FSC u n der s ect i o n 9 2 2 , i t s “ ex em p t fo rei g n trad e i nco m e” (EFTI) was n o tt ax edb y th e Un i t ed St at es (m o re p reci s el y , EFTI
was treat edas fo rei g n s ou rce i n co m e wh i ch was n o t effect iv el y co n n ect ed wi th th e
co n du ct o f a t rad e o r b u si n es s wi thi n the Un i t edSt at es ). See s ecs . 8 6 4 (c), 8 8 1 , 8 8 2 , 8 8 4 , 9 2 1 (a). 2 7 EFTI was g en eral l y

th e s u m o f: s i x t een twen ty -t hi rd s o f h o wev er m u ch

“ fo rei g n trad e i n co m e” o f t h e co rp o rat i o n was at tri b u t ab l e t o tran s act i o n s u t i l i zi n g th e s ect i o n 9 2 5 (a)(1 ) an d(2 ) m et h o d s ; an d 3 2 % o f an y rem ai n i n g fo rei g n trad e i n co m e--i .e., i n co m e co m pu t edu n d er t h e s ect i o n 4 8 2 m et h o d p u rs u an tt o s ect i o n 9 2 5 (a)(3 ). See s ecs . 9 2 3 (a), 9 25 (a) an d(b ); s ee al s o fo rm er s ec. 2 9 1(a)(4 ).

2 7 Res p o nd en tag rees th atp et i ti o n ers ’ FSC q u al i fi edu n d er s ec. 9 2 2.- 3 4 -

Fo rei g n trad e i n co m e was the g ro s s i n co m e at tri b u t ab l e t o fo rei g n trad in g g ro s s recei p t s. Sec. 9 23 (b ). 2 8 In s u m , s ect i o n 9 2 5 al l o wedp arto f t h e i n co m e fro m an ex p o rt tran sact i o n t o b e as s i g n edt o an FSC, an ds ect i o n 9 2 1 (a) ex cl u dedp arto f t h e as s i g n edi n co m e fro m th e t ax b as e, res u l t i n g i n an effect i v e t ax rat e cu tfo r ex p o rt i nco m e. M o reo v er, i f t h e rel ax edtran sfer p ri ci n g ru l es o f s ect i o n 9 2 5 (a)(1 ) an d(2 ) were
u s ed in s t eado f t h e n o rm al s ect i o n 4 8 2 ru l es , th en th e l o wer t h e p ro fi t m arg i n o n a p art i cu l ar ex p o rttran s act i o n , th e l o wer t h e effect i ve m arg in al t ax rat e fo r t hat tran s act io n (b ecau s e as th e p ro fi tm arg in d ecreas ed , the am o u n to f t ax ab l e i n co m e
as s i g n ab l e t o th e FSC i n creas ed ).

2 8 Sec. 9 2 4(b ) req ui red th at , fo r recei p t s t o b e t reat edas fo rei g n trad i ng g ro s s recei p t s, th e FSC h adt o b e m an ag edo u ts id e t h e Un i t edSt at es , s ee s ec. 9 2 4 (c), an d eco n om i c p ro ces s es wi th res pect t o the recei p t s h adt o t ak e p l ace o u ts i de o f t h e Un i ted St at es . Th ere was an ex cep t i o n , h o wev er, fo r “ s m al l FSCs ”, wh ich d i dn o t h av e t o m eetei th er req u irem en t . Secs . 9 2 2 (b ), 9 2 4 (b )(2 ), 9 2 7 (f). Pet i t i o n ers cl ai m , an dres p o n d en td oes n o td i s p u t e, t h atth ei r FSC was a s m al l FSC. If t h e FSC recei v ed o r accru edan y (1 ) fo rei g n trad e i n co m e th atwas n ei t h er EFTI n o r s ec. 9 2 3 (a)(2 ) n on ex em p ti n co m e, (2 ) i nt eres t , d i v i d en d s , ro y al t ies o r o th er i nv es t m en t i n co m e, o r (3 ) carry i n g ch arg es , th ato th er i nco m e was t ax edas i n co m e effect iv el y

co n n ect edwi th a Un i tedSt at es trad e o r b u s i n es s . Sec. 9 2 1 (d ). Di v id en ds fro m an FSC t o a co rp o rat e p aren t --u n l i k e m o st d i v i d en d s fro m a fo rei gn s ub s i d iary --were g en eral l y n o t t ax edb ecau s e t h e p aren trecei v eda 1 0 0 % d i v i d en d s recei v edd edu ct i o n fo r d i vi d en d s fro m an FSC. See s ec. 2 4 5 (c).- 3 5 -

C. Ap pl i cat i on o f FSC Ru l es t o Pet i t i o n ers ’ Tran s act i o n s Pu rs uan tt o s ect i o n 9 2 5 (a)(2 ) an d(b ), p et i t i o n ers as s ig nedt o th ei r FSC 2 3 %
o f t h e co m

b in edi n co m e fro m In

ject o r Co .’ s ex p o rts al es (co l u m n 2 , b el o w). 2 9 Th e t ax ab l e i n co m e o f t h ei r FSC was equ al t o s ev en twen ty -t hi rd s o f th e am o u n ts o
as s i g n ed(co l u m

n 3 ). See s ec. 9 2 3 (a)(3 ). Fo r each y ear fro m 1 99 8 t o 2 0 0 1 , th e t ax ab l e i n co m e o f t h e FSC was l es s th an $ 5 0 , 0 0 0, s o th e FSC was s ub j ectt o t ax at a 1 5 % co rp o rat e rat e (co l u m n 4 ). See s ec. 1 1 (b )(1 )(A). Th e d i fferen ce b et ween th e am o un tas s i g n ed t o th e FSC an dth e FSC t ax was p ai d , n o m i n al l y , as a d i v i d en d t o p et i t i o ners ’ Ro th IRAs (co l u m n 5 ). 3 0

2 9 Al l o f In ject o r Co .’ s ex p o rts al es i n 1 9 9 8 -2 00 1 h ada p ro fi tm arg i n o v er 7 .9 6%. Pet i t i o n ers u s edco m m i s s i o n tran s act i o n s, an dth e FSC p erfo rm ed few i f an y s erv i ces , s o th e s ec. 9 25 (a)(3 ) m et h o d, i
. e., th e n o rm al s ec. 4 8 2 m etho d , was n o tu s ed . Th erefo re, up t o 2 3 % o f t h e co m b i n edi n co m e fro m

In ject o r Co .’ s ex p orts al es was as s i gn ab l e t o th e FSC t h ro u g h co m m i s s i o n tran s act i o n s . See s up ra n o t e 2 6
.

3 0 An y fees p ai dt o Qu ai l St reet were b ui l ti n t o th e co m b i n edi n co m e cal cu l at io n , an di n p ract i ce s o m e o f t h e d i v i den d s m ay h av e b een p ai di n t h e y ear aft er t h e co m

m i ss i o n tran sact i o n s o ccu rred
.- 3 6 - (1 ) (2 ) (3 ) (4 ) (5 )

In co m e FSC Co m bi n ed as s ig n ed t ax ab l e Year i n co m e t o FSC i n co m e FSC t ax Di v i d en d s 1 9 9 8 $ 6 8 6 , 80 8 $ 1 5 7 ,9 6 6 $ 4 8 ,0 77 $ 7 , 2 11 $ 1 5 0 ,7 5 4 1 9 9 9 6 07 ,3 15 1 3 9 ,6 8 2 4 2 , 5 12 6 ,3 7 7 1 3 3,3 0 6 2 0 0 0 6 00 ,4 14 1 3 8 ,0 9 5 4 2 , 0 29 6 ,3 0 4 1 3 1,7 9 1 2 0 0 1 5 33 ,9 67 1 2 2 ,8 1 2 3 7 , 3 78 5 ,6 0 7 1 1 7 ,2 0 6 To tal 5 3 3,0 5 7 D. Th e Li m i tedSco pe o f t h e FSC Pro v i s i o ns Th ere were t h ree p art s t o p et i t i o n ers ’ tran s act i o n s . (1 ) Pet i t i o n ers creat ed
s el f-d i rect edRo th IRAs , wh i ch n o m i n al ly p u rch as eds t o cki n an FSC. Pet it i o n ers ’ b u s i n es s , In

ject o r Co ., s i m

u l t an eo u s l y

ex ecu t eda s eri es o f ag reem en t s wi th t h e FSC. 3 1 (2 ) Pet i t i o n ers ’ b u s i n es s m ad e a s eri es o f co m m i s s i o n p aym en t s t o th e FSC
u n d er s ect i o n 9 2 5 (b ). (3 ) Aft er wi th h o ld i ng t ax es , th e FSC p ai dthe b al an ce o f t h e p aym en t s t o p et i t io n ers ’ Ro th IRAs
. Pet i t i o ners cl ai m

th atth e s ub s t an ce d o ctri n es d o n otap p l y t o an y o f t h e th ree p art s o f t h ei r tran s act i o n s b ecau s e th e FSC s t atu t es ap pro v e o f t h e FSC fo rm wi th o u treg ardt o s ub s t an ce. Bu tn o th in g i n th es e s t atu t es o r t h e as s o ci at ed reg u l at i o n s s u g g es t s an y

ap pl i cat i o n t o th e fi rs tan dthi rdp art s o f p et i t i o n ers ’ tran s act io n s .

3 1 Pu rch as e an den tran ce i n t o al l co n tract s were each co n d it i on edo n th e o th er, an ds o we treat th is as o n e s t ep .- 3 7 -

As i l l u s trat edab o v e, i t i s tru e t h at s ect i o n s 9 21 -9 2 7 al l o weda l i m i t eds afe h arb o r fro m

s ect i on 4 8 2 fo r t h e s eco n dp arto f p et i t i o n ers ’ tran s act i o ns --t h e
co m m i s s io n p aym en t s t o th e FSC. Bu t s ect io n s 9 2 1 -9 27 m o d i fy o r rel ax th e
n o rm al ru l es o n l y fo r t h e p u rp o s e o f co m p u ti n g th e i n co m e t ax es o f t he FSC an d i t s rel at eds up p l ier an do n l y fo r s p eci fi c t ran s act i o ns b et ween the FSC an di t s rel at ed s up p l i er. In p art icu l ar, s ect i o n 9 2 5 (a) cl earl y s t at es th ati tal l o ws “ th e t ax ab l e i n co m e o f s uch FSC an d[t h e rel at eds up p l i er] ” t o b e b as edo n a t ran s fer p ri ce co m p u t edu nd er t h e t h ree t ran s fer p ri ci n g m et h o d s p ro v i d ed . Reg ard l es s o f wh at ev er l acko f s ub s t an ce i s ex cu s edb y s ect i o n 9 2 5 , th e p l ai n t erm s o f s ect i o n 9 2 5 ex t en dth atex cu s e, s p eci fi cal l y , o n l y fo r t h e p u rp o s e o f co m

p u ti n g “ th e t ax ab l e i n co m e” o f “ su ch FSC” an di t s rel at eds up p l i er. No p arto f t h e FSC s t atu t es an dreg u l at io n s s tat es , o r ev en i m p l ies , th at p u rch as es o r t ran s fers o f FSC s t o ck , o r an y tran s act i o n s atth e s h areh o l d er l ev el o r b et ween th e FSC an di t s o wn ers , are ex em p tfro m ap p l i cat i o n o f t he s ub s t an ce d o ct ri n es , wh i ch are o u r n o rm al “ t o o l [s ] o f s t atu t ory i n t erp ret at i o n”. San t an d er Ho l di n g s USA, In c. v . Co m m i s s i o n er, 8 4 4 F.3 dat2 1 . Th erefo re, th e n o rm al
s ub s t an ce d o ct ri n es ap p l y i n th es e cas es , atl eas tfo r th e p urp o s e o f d et erm i n i n g- 3 8 -

th e eco n om i c real it i es o f t h e rel at io n s h i p s am o ng p et i t i o n ers , thei r Ro th IRAs , an d th e FSC. 3 2 VI. Th e Paym en t s t o th e Ro th IRAs W ere Co n tri bu t i o ns . Un d er th e p l ai n t erm s o f s ect i o n 4 0 8A, v al u e m ay en t er a Ro th IRA i n o n l y two way s : as a co n tri b u t i o n , s ee s ec. 4 0 8 A (c), o r as i n co m e o n an i n v es tm en th el d b y th e Ro th IRA, s ee s ecs . 4 08 A(a), 4 0 8 (e)(1 ). Res p o nd en t arg u es th atth e p aym en t s were co n tri b u t i o n s b y p et i t i o n ers , wh ereas p et i t i o n ers arg u e t h atth e FSC p ai dd i v i d en d s, i .e., a fo rm o f i n co m e, d i rect l y

t o the Ro th IRAs . Th e cri t i cal qu es ti o n , th en , i s wh et h er th e fu n d s tran sferred fro m th e FSC t o p et it i o n ers ’ Ro t h IRAs were co n tri bu t i o n s (as res p o n d en t cl ai m s ) o r i nco m e (as p et i t i o n ers cl ai m ) t o th e Ro th IRAs
. Onth e reco rdb efo re u s , i ti s ev i d en tthatth e p aym en t s fro m th e FSC were d i v i d en d s t o s o m eo n e--ei th er t o p et i t i o n ers o r t o th ei r Ro th IRAs . Ano l d an d wel l -d ev el op edb o dy

o f l aw ex p l ai n s h o w we are t o d eci d e wh o , i n s ub s tan ce,

3 2 Th e reg u lat io n s s up p o rtth e co n cl u s i o n th atal th ou g h an FSC m ay l ack s ub s t an ce i n o n e s en se i ti s n otex em p tfro m n o rm al ap p l i cat i o n o f t h e Co de i n o th er s i tu at i o n s. Fo r i n s t an ce, t ran s act i o ns b et ween an FSC an d en t it i es o th er t han th e rel at eds up p l i er are s t il l s ub ject t o th e n o rm al tran s fer p ri ci ng ru l es . Sec. 1 .9 25 (a)-1 T(e)(2 ), Tem

p o raryIn co m e Tax Reg s., 5 2 Fed . Reg
. 6 4 4 8 (M ar. 3 , 1 9 8 7 ), p ro vi d es : “ In ap p ly i n g s ect i o n 4 8 2 t o a t ran s fer b y a FSC t o a rel at edp art y , th e p art i es [i .e., th e FSC an di t s rel at eds up p li er] are t reat edas i f t h ey were a s i n g l e en t i ty carry i n g o n al l th e fu n ct i o n s p erfo rm edb y th e FSC an di t s rel at ed s up p l i er wi th res p ect t o th e t ran s act i o n .”- 3 9 -

recei v es i n co m e u n d er th e Co d e. “ In an o rd i n ary cas e at tri b u t i o n o f i n co m e i s
res o l vedb y

as ki n g wh eth er a t ax p ay er ex erci s es co m p l et e d o m in i on o v er t h e i n co m e i n qu es t i o n . ” Co m m i s s i o n er v . Ban k s , 5 4 3 U.S. 4 2 6 , 4 3 4 (2 0 0 5 ) (ci t i n g Co m m i s s i o n er v . Gl en s haw Gl as s Co ., 3 4 8 U.S. 4 26 , 4 3 1 (1 9 55 )). In cas es wh ere a ri g h t t o recei v e i n co m e i s al l eg ed ly tran s ferred b efo re t h e i n co m e ari s es , co u rt s h av e h el d t h ata t ax p ay er recei v edi n co m e i f t h e t ax p ay er co n tro l l edth e s o urce o f th e i n co m e, ev en wh ere t h e t ax p ay er d id“ n o th av e d o m i n io n o v er t h e i nco m e at th e m o m en to f recei p t .” Id . Ino th er wo rd s, wh ere a t ax p ay er fo rm al l y tran s fers a ri gh t t o i n co m e t o an ot h er, th e qu es t i o n b eco m es wh et her t h e as s ig n o r ret ai n s d o m i n i o n o v er t h e i n co m e-g en erat i n g as s et , b ecau s e th e t ax pay er “ wh o o wn s o r co n tro l s th e s o urce o f t he i n co m e, al s o co n tro ls th e d i s p o s i t i o n o f t h atwh i ch h e co u l dh av e recei v edh i m s el f an dd i v ert s th e p aym en t fro m h im sel f t o o th ers as th e m ean s o f p ro cu ri n g t h e s at i s fact io n o f h i s wan t s .” * * * Lo o ki n g t o co n tro l o v er t h e i n co m e-g en erat i n g as s et , th en , p res erv es th e p ri n ci p l e t h ati n co m e s h ou l db e t ax edt o th e p art y wh o earn s t h e i n co m e an den

j o y s th e co n s equ en tb en efi t s . Id . at4 3 4 -4 3 5 (quo ti n g Hel veri n g v . Ho rs t , 3 1 1 U.S. 1 1 2 , 1 1 6 -1 1 7 (1 9 4 0 )). 3 3

3 3 Th e d is s en tqu es t i o n s th e ap p li cab i l i ty o f Co m m i ss i o n er v . Ban k s , 5 4 3 U.S. 4 2 6 (2 0 0 5 ), b ecau s e Ban k s i n v o l v edco n t i n g en cy fees rat h er t h an “ d i v i d en d s o r co rp o rat i o n s ”. See d i s s en t i ng o p . p . 8 9 . Bu tBan k s i s n o ts o t i g ht l y co n fi n ed
. As th e Sup rem e Co u rt ex pl ai n edi n Ban k s , i t s h o l d i n g i s b as edo n th e an t i ci p at o ry as s i g n m en to f i n co m e d o ct ri ne, t h e p ri nci p l e th ata “ t ax pay er can n o tex cl u de an eco n om i c g ai n fro m

g ro ss i n co m e b y

as s i g ni n g th e g ai n i n ad van ce t o an ot h er p art y .” Id . at4 3 3
. Th e Sup rem e Co u rth as cal l edth is “ th e fi rs t p ri n ci pl e o f (co n ti n u ed ...)- 4 0 -

In p et it i o n ers ’ cas es , th e “ i n co m e-g en erat i n g as set ” was th e FSC. 3 4 Pet i t io n ers s u g g es tth atwh en th ei r Ro th IRAs fo rm al l y p u rch as ed th e FSC, t h e Ro th IRAs th ereb y

acq u i redth e ri g h t(rep res en t ed b y th e FSC s t o ck ) t o recei v e i n co m e fro m

th e FSC. Bu ta fo rm al p u rch as e d o es n otn eces s ari l y m ean thatfo r t ax p u rp o s es th e Ro th IRAs s h ou l d b e t reat edas th e reci p i en t s o f i n co m e fro m the FSC; th e ques ti o n i s wh o h adp o wer an d co n tro l o v er t h e FSC o r o ver recei p to f th e d i v i d en di n co m e. As th e Sup rem e Co u rth as s t at ed : “ Th e cru ci al qu es t i o n
rem ai n s wh et h er t h e as s i g no r ret ai n s s u ffi ci en tp o wer an dco n tro l o v er t h e
as s i g n edp ro p ert y

o r o v er recei p to f t h e i n co m e t o m ak e i t reas o n ab l e t o treat h i m
as th e reci p i en to f t he i n co m e fo r t ax p u rp o s es .” Co m m i s si o n er v . Su n n en , 3 3 3 U.S. 5 9 1 , 6 0 4 (1 9 4 8 ). “ [T] ax at i o n i s n o ts o m uch co n cern edwi th th e refi n em en t s
o f t i t l e as i ti s wi th actu al co m m an d o v er t h e p ro p ert y t ax ed --t h e actu al b en efi t fo r wh i ch th e t ax i s p ai d .” Co rl i s s v . Bo wers , 2 8 1 U.S. 3 7 6 , 3 7 8 (1 9 3 0 ).

3 3 (...co n t i nu ed ) i n co m e t ax at i o n ”, i d. at4 3 4 , a p ri n ci pl e fi rs ten u nci at edi n s u ch cas es as Lu cas v . Earl , 2 8 1 U.S. 1 1 1 (1 9 30 ), an dCo rl is s v . Bo wers , 2 8 1 U.S. 3 7 6 , 3 78 (1 9 3 0 ). Th e as s i g n m en to f i n co m e d o ct ri ne h as b een ap p l i ed t o effo rt s t o s h ifti n co m e n o to n l y am on g i n d i v i du al s b u tal s o am o n g en t i t i es . See g en eral l y Bo ri s I. Bi tt k er & Lawren ce Lo kk en , Fed eral Tax at i o n o f In co m e, Es t at es , an dGi ft s , p ara. 7 5 .2 (W es t l aw 2 0 1 8 ).

3 4 Th e d is s en targ u es th atth e FSC was n o t an i n co m e-g en erat i n g as set . W e d i s ag ree. Al th o u g h t h e FSC m ay b e an u n u s u al en t i ty

i n s om e res p ect s , i t s t i l l g en erat es d i vi den d s , wh ich are i n co m e.- 4 1 -

As d es cri b edab o ve, s ect i o n 9 2 5 effect i v el y al l o wedas s i gn m en t o f i n co m e rel at i n g t o ex p o rttran s act i o n s fro m th e rel at ed s up p l i er t o th e FSC. Res p on d en t d o es no td is p u t e t hi s . Bu tth e qu es t i o n i s n o twh et h er i n co m e co u l db e as s i g n edt o th e FSC. Rat h er, th e qu es t i o n i s : Wh o o wn ed an dco n tro l l edth e FSC i n
s ub s t an ce? In cas es i n v o l v i ng th e s ub s t an ce o f o wn ers h i p , th e Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i th as l o o kedt o Fran kLy o n Co . v . Un i t edSt at es , 4 3 5 U.S. 5 6 1 (1 9 7 8 ),
an d t o Cas eb eer v . Co m

m i s si o ner, 9 0 9 F.2 d 1 3 6 0 (9 th Ci r. 1 9 90 ), aff’ g i n p art , rev ’ g i n p artLars en v . Co m m i s s i o ner, 8 9 T.C. 1 22 9 (1 9 8 7), an daff’ g Cas eb eer v . Co m m i s s i o n er, T.C. M em o . 1 9 8 7 -6 2 8 , M oo re v . Co m m i ss i on er, T.C. M em o . 1 9 8 7 -6 2 6 , an dSturm

v . Co m m i s s io n er, T.C. M em o . 1 9 8 7-6 2 5
. See Sack s v . Co m m i s s i o n er, 6 9 F.3 dat9 8 8 (“ Ou r an al yt i c t as k i s t o d eci d e wh et h er M r. Sack s ’
s al e an dl eas eb ackwas m o re l ik e Fran kLy on , o r m ore l ik e Cas eb eer.”). In Fran kLy o n , a b an k s ol da b u i l d i ng t o th e t ax p ay er, wh o l eas edth e b u i l d i n g b ackt o the b an k . Th e t ax p ay er fi n an cedth e p urch as e o f t h e b u i l d i n g wi th a reco u rs e l o an fro m a t h i rd -p art y l en der. Th e Co m m i s s i o n er t o o kth e p o s i t i on th atth e s al e an dl eas eb ackarran g em en t h adn o s ub s tan ce, an dth atth e tru e o wn er o f t h e b u il d i n g was th e b an k . As th e Co u rto f Ap peal s fo r t h e Ni n th Ci rcu i th as s t at ed :- 4 2 -

Th e Sup rem e Co u rth el dfo r t h e t ax p ay er * * * . Ins o h o l d i ng , th e Co u rts ai d“ m o s ts i gn i fi can t l y ” t h e * * * [t ax p ay er] , an dn o tth e b an k , was p ers o n al l y

l i ab l e o n th e l o an t o t h e t h i rdp arty l en d er. Th e * * * [t ax p ay er’ s ] p ers o n al l i ab i l i ty was s i g n i fi can t b ecau s e h e h ada “ real an ds ub s t an t i al ri s k ” s u ch th at , “ s ho u l dan yth i n g g o awry ” i n th e p lan t o h av e t h e b an k’ s ren tal way s co ver t h e o b l i g at i o n o n the n o t e, t h e * * * [t ax p ay er’ s] cap i tal an das s et s were ex p os ed . It al s o m at t eredt o th e d eci si o n t h atth e d ep reci at i o n d educt i o n s were n o tcreat edex n i h i lo b y p ap er s h u ffl in g; th e b an kwo ul dh av e b een en t i t l ed t o th em i f t h e i n v es t o r h adn o tp urch as ed th e real es t at e. Sack s v . Co m

m i s si o ner, 6 9 F.3 dat9 8 7 (i n t ern al ci t at i o n s o m i t t ed ). Th e Co u rto f Ap p eal s fo r t h e Ni nt h Ci rcu i t ex am in eda s i m i l ar arran g em en t i n Cas eb eer b u treach edth e o p p o s i t e res u ltb ecau s e wh en th e co u rt“p en et rat edth e p ap ers o st en s i bl y

s el l i ng an dl eas in g b ackth e co m p u t ers , i tb ecam e cl ear t h atth e i n v es t o rs h adn o th i n g atri s k an dn o th i ng t o g ai n ex cep t t ax b en efi t s. Th e
co m p u t er co m

pan y ret ai n edal l o f t h e b en efi t s an d ri s k s o f o wn ers h i p.” Id
. at9 8 8
. Th e t ax p ay er i n Cas eb eer u s eda n o nreco urs e fi n an ci ng arran g em en t (u nl i k e t h e t ax p ay er i n Fran kLy o n , wh o u s eda reco u rs e fi n an ci n g arran g em en t ). Fi n al l y , i n Sack s, an o ther s al e an dl eas eb ackcas e, t h e Co urto f Ap p eal s fo r th e Ni n th Ci rcu i tag ai n fo cu s edo n th e b en efi t s an dri s k s o f o wn ers h ip t o d et erm i n e wh eth er a s al e t ran s act i o n h ad“p ract i cal eco no m i c effect s ” i n ad d i t i o n t o the s h i ft i n g o f t ax b en efi ts . Id . Sack s fo cu s edo n wh ether t h e cl ai m ed p u rch as er was p ers o nal l y l i ab l e (reco u rs e o r n o n reco u rs e l i ab il i ty ), wh et h er t h e- 4 3 -

p ri ce p ai drep res en tedfai r m ark etv al ue, an dwh et h er “ p arto f th e s p ecu l at iv e ri s k ”
was s hi ft edt o the cl ai m edp u rch as er. Id . at9 9 0 -9 9 2. 3 5 Co n si s t en t wi th th e ap p ro ach o f Fran kLy on , Cas eb eer, an dSack s , we as k wh et h er p et i ti o n ers ’ Ro th IRAs were ex p o s edt o an y d o wn s i d e ri s k o r co u l dh av e
ex p ect edan y up s i d e b en efi t s fro m th ei r cl ai m edo wn ers h i p o f t h e FSC. In d o i n g
s o , we co n s i der al l th e fact s an dci rcu m s t an ces , k eep i n g i n m i ndth at “ [t ] h e h i g h
s t ak es i n t ax cas es , an dth e h i g h i n t el l i g en ce o f t ax l awy ers , m ak e[] i ti m p o s s i b l e t o h av e a s i m

p l e ch eck l i s to r ri g i d fo rm u l a fo r d et erm i n i n g wh et h er a t ran s act i o n i s
a s h am .” Id . at9 8 8 . Ins u m , we ex am i ne t h e en t i re t ran s act io n t o d eci de wh et h er
s ub s t an t i ve o wn ers h i p an dco n tro l o f t h e b en efi t s an db u rd en s rep res en t edb y th e FSC s t o ckwere t ran s ferred t o th e Ro th IRAs
. A. Th e Ro th IRAs W ere Ex p o s edt o No Ri s k
. In 1 9 9 8 each p et i t i o n er co n tri b u t eda s m al l s um o f cas h t o h is o r h er
res p ect i ve s el f-d i rect edRo th IRA. Anev ens m al l er p o rt io n o f t h atcas h --$ 5 0 0 i n t o t al --was p u rp ort ed ly

u s edb y th e Ro th IRAs t o p u rch as e t h e FSC s t ockfro m W GA. Pet i t i o n ers s u g g es tth atb ecau s e a s m al l s u m was p ai d t o s etup the en t i t y ,

3 5 Sack s v . Co m

m i s si o n er, 6 9 F.3 d 9 8 2 , 9 8 8 (9 th Ci r. 1 9 9 5 ), rev ’ g T.C. M em o. 1 9 9 2 -5 9 6 , al so b ri efl y d i s cu ss edan o ther fact o r: wh et h er t h e t ax p ay er’ s b u s i n es s was g en u i n e. W e t h i n kth atth i s fact o r i s i n ap p li cab l e b ecau s e--as p et i t i o n ers arg u e--an FSC n eedco n du ct l i t t l e i f an y s ub s t an t i v e b u si n es s o f i t s o wn .- 4 4 -

th ats u m i s a s ub s tan t i v e i n v es t m en t wh i ch th e Ro th IRAs s to o dt o l o s e. W e d i s ag ree. A “ d e m i n i m i s ri s kd o es n o tn eces s ari l y g i v e s ub s t an ce t o a t ran s act i o n th at i s o th erwi s e wi tho u tri s k .” J o h n Han co ckLi fe In s . Co . (U.S.A.) v
. Co m m i s s i o n er, 1 4 1 T.C. 1 , 9 4 (2 0 1 3 ) (ci t i n g ASA In v es t eri n g s P’ s hi p v . Co m m i s s i o ner, 2 0 1 F.3 d 5 0 5 , 5 1 4 -5 1 5 (D.C. Ci r. 2 0 00 ), aff’ g T.C. M em o . 1 9 9 8 -3 0 5 ). Pet i t i o n ers h av e n ot
s h o wn , an dth e reco rdd o es n o ts u g ges t , th atth e Ro th IRAs ev er p ai dan y co s t s o r fees o th er t h an th e i n i t i al $ 5 0 0 am o u n t . M o reo v er, t h e FSC was a co rp o rat e en ti t y ; th e Ro th IRAs were p ro t ect edfro m l iab i l it y b y th e FSC’ s co rp o rat e s h i el d , an d
n o th i n g i n th e reco rds u g ges ts th atcred i t o rs wo u l dh av e b een l i k el y t o p i erce t h e
co rp o rat e v ei l (n o r d o es the reco rds u gg es tth atth e FSC h adan y cred i t o rs , o th er th an p os s i b l y

In j ect o r Co
. ). Th erefo re, o n t h e b as i s o f t h e en ti re reco rd , we
co n cl u d e th atth e $ 5 0 0 p ri ce rep res en t ed atm o s ta d e m in im i s ri s k wh i ch was i n s u ffi ci en tt o g iv e s ub s t an ce t o th e Ro th IRAs ’ p urp o rt ed o wn ers h i p o f t he FSC
s t ock
. 3 6

3 6 Th e d is s en targ u es th atwe are wro n g t o as kwh et h er t he Ro th IRAs p u t an yth i n g atri s k ; i t s ay s th atu n d er o u r reas o ni n g , “ n o o ne co u ldev er o wnan FSC b ecau s e FSCs n ev er p u tcap i t al atri s k .” See d i s s en t in g o p. p . 9 1 . Bu t i t i s i n co rrect t o s u g ges t th at an FSC co u l dn ev er p u t cap i tal atri s k ; n o thi n g i n t h e Co d e p rev en t s an FSC s hareh o l d er fro m cap it al i zi n g i t s FSC. In an y ev en t , we are n o tco ncern edwi th wh et h er t h e FSC h adcap i t al atri s k ; we as k wh et h er t h e (co n ti n u ed ...)- 4 5 -

In an y ev en t , p et i ti o n ers h av e fai ledt o s h ow t hatth e n eg l ig i b l e $ 5 0 0

“p u rch as e p ri ce” o f t h e FSC s t o ckam o u n t edt o an yth i n g m o re th an a fee p ai dt o W GA t o s etup a n ew an dem p ty FSC. No th i n g i n th e reco rds u g g es t s th atth e p rearran g ed$ 5 0 0 “p ri ce” b o re an y rel at i o n s h i p t o th e act u al v al u e o f wh atwas p u rp ort ed l y

p u rch as ed , i .e., the FSC s t ock . Attri al th e p art ies ag reedth atth e
s t ocki n th e FSC was wo rt h o n l y $ 1 0 0 wh en i twas p u rch as ed . W e n ot e, h o wev er, th atwh et h er t h e v al u e o f t h e s t o ckwas $ 50 0 o r $ 1 0 0 atth e m o m en to f p u rch as e, th e s h areh o l d ers ’ ag reem en t(wh i ch was en t eredi n t o s i m u l t an eo u s l y

wi th th e p u rch as e) s p eci fi es th at , i f t h e Ro th IRAs were t o s el l th ei r FSC s t o ck , th e t o t al
s al e p ri ce fo r al l 1 0 0 s h ares was t o b e $ 1 , rat h er t h an $ 5 0 0 o r $ 1 0 0 . Th e fi x ed d i s crep an cy

b et ween th e p red et erm i n ed$ 5 0 0 p u rch as e p ri ce an dth e i m m u t ab l e $ 1
s al e p ri ce s tro n g l y

s u g g es t s th atal l b u tth e n o m i n al am ou n to f $ 1 was a fee fo r

3 6 (...co n t i nu ed ) p u t at i v e FSC s h areh o l d ers , i
. e., th e Ro th IRAs , b o re an y ri sk . W e ex am in e wh et h er t h e Ro th IRAs were ex p o s ed t o ri s kb ecau s e Fran kLy o n , Cas eb eer, an d Sack s each an al y zedth e t ax p ay er’ s fi n an ci n g arran g em en t s t o d et erm i n e wh et h er th e al l eg edo wn er was ex p o s edt o real eco no m i c ri s k
. Inacco rdwi th th es e p reced en t s , we ack no wl ed g e t h atth e p res en ce o f reco u rs e l iab i l i ty (o r s o m et h i n g s i m i l ar) wo u l dm ak e o wn ers h i p m o re l i k el y . Bu tth e Ro th IRAs were n ev er ex p os edt o ap p reci ab l e eco n o m i c ri s k ; the fu l l ex t en to f t h ei r ex p o su re was th e n eg li g i b l e am o u n t p ai dfo r t h e FSC s t ock
. Pet i t i o n ers ’ cas es are t h erefo re m o re s i m i l ar t o Cas eb eer (wh ere t h e co u rth el dag ai n s ta t ax pay er wh o u s edn o n reco u rs e fi nan ci n g ) t h an t o Fran k Ly o n o r Sack s (wh ere t h e co u rt s h el dfo r t ax p ay ers wh o u s ed reco u rs e fi nan ci n g).- 4 6 -

acces s t o th e FSC rat h er t han a p aym en t fo r p ro p ert y . Cf. Hewl et t -Pack ardCo
. v . Co m m i s s i o n er, 8 7 5 F.3 d4 9 4 (9 th Ci r. 2 0 17 ) (d i fferen t i at i n g b et ween fees an d b o n a fi d e l os ses ), aff’ g T.C. M em o . 2 0 1 2-1 3 5 . Co n s equ en t l y , co n s i d eri n g th e FSC s t o cki n the l i g h to f the s h areh o l ders ’ ag reem en t , we co ncl u d e t h atth e Ro t h IRAs p ai d o n l y

$ 1 fo r th e FSC s t o ck . Th e res twas a fee. Pet i t i o n ers h av e n o t ci t ed , n o r are we aware o f, an y au th o ri ty fo r t h e p ro p o si ti o n th ats u ch a fee i s cap ab l e o f l en di ng s ub s t an ce t o a s eri es o f t ran s act i o n s. 3 7 Pet i t i o ners al s o s u g g es tth atth ei r t ran s act io n s h av e s ub st an ce b ecau s e t h e Ro th IRAs were ev en tu al ly ex po s edt o ri s kwi th res p ectt o i nv es t m en t s p u rch as ed

3 7 Th e d is s en tas s ert s th atu n d er o ur reas o ni n g p et i t i o n ers “ co u l dn ’ th av e o wn edth e FSC ei th er”, b ecau s e p et i t i o n ers al so p u tn o th i n g atri s k
. See d i s s en t i n g o p . p . 9 1 . Th i s i s i n co rrect ; p et i t i o n ers were ex p o s edatal l t i m es t o th e u n d erl y i n g b u s i n es s ri sk , i .e., th at th ei r i n v es t m en ti n thei r ex p o rtb u s i n es s wo u l d d ecl i ne. Th e Ro th IRAs were n o tex p o s edt o thatri s kb ecau s e t h ey n ev er m ad e an i n v es t m en t(t h ey

p ai d o n l y

a n o m i n al am o u n tfo r t he FSC s t o ckan d n ev er cap i t al i zedth e FSC) an db ecau s e n o fi x edri gh tt o recei v e co m m i s s i o n p aym en ts was ev er t ran s ferredt o th e FSC (i .e., i f a fi x edri g h tt o recei ve a p o rt i o n o f th e ex p orti n co m e h adb een tran s ferred t o th e FSC, t h e v al u e o f th e FSC s t o ckwo u l d h av e v ari edwi th th e ex p o rtm ark etan dth e Ro th IRAs wo u l dh av e b een ex p o s ed t o the ri skth atthe ri g h t t o recei v e i n co m e h el db y th e FSC wo u l dd ecl i n e wi th th e ex p ortm ark et ). In an y ev en t , i n th es e cas es we are ex am i ni n g wh et h er t h e p u rch as e tran s act io n was s u ffi ci en tt o t ran s fer s ub st an t i v e o wn ers h i p t o t h e Ro th IRAs ; ri s k i s ju s t o ne fact o r t o b e co n si d ered
. Ev en i f p et i t i o n ers b o re l i t t l e ri s kwi th res p ect t o the FSC, t h ey

o wn edthe FSC b ecau se t h ey co n tro l l edev ery

as p ecto f i t s ex i s t en ce t h ro ug h the co n tract u al p o wers ret ai n edb y In ject o r Co . (d i s cu s s edi n th e n ex t s ect i o n ); th e Ro th IRAs (u n l i k e, fo r ex am p l e, t h e t ax p ay er i n Fran kLy o n ) p u t n o th i n g atri s kt o al t er t hi s o wn ers h ip equ at i o n .- 4 7 -

wi th al l eg ed d i v id en d s recei v edfro m th e FSC. Bu tan y

co n tri b u t io n i s ex po s edt o ri skwh en a Ro th IRA s ub s equ en t l y i n ves t s i t . Th e s ub s equen t ri s k d o es n o t tran s fo rm th e i ni t i al co n tri b u t i on i n t o i n co m e. Th e rel ev an tqu es t io n h ere i s wh et h er t h e FSC s t ockwas o wn ed , fo r t ax p u rp o s es , b y th e Ro th IRAs
. Th e fact th atth e Ro th IRAs were ev en tu al ly ex p o s edt o ri s k o n i n ves t m en t s m ad e wi th cas h d eri v edfro m th es e t ran s act i o n s i s i rrel ev an t
. B. Th e Ro th IRAs Co u l dEx p ect No Up s i d e Ben efi ts
. Becau s e p et i t i o n ers were i n co m p l et e co n tro l o f th ei r Ro th IRAs , th ei r b u s i n es s , an dthei r FSC, al l o f t h es e p art i es were rel at edfo r al l p ract i cal eco n o m i c p u rp os es . Co n s equ en t l y , we ap p l y h ei g ht en ed s cru ti n y

t o th es e t ran s act i o n s . See Bro wn v . Un it edSt at es , 3 2 9 F.3 d6 6 4, 6 7 3 (9 th Ci r. 2 0 0 3 ) (“ Th e p art ies are rel at ed , s o h ei g ht en eds cru t i n y i s ap p ro p ri at e.” (ci t i n g Ko rn fel dv . Co m m i s s i o n er, 1 3 7 F.3 d1 2 31 , 1 2 3 5 (1 0 th Ci r. 1 9 9 8 ), aff’ g T.C. M em o . 1 9 9 6-4 7 2 )). In d o i n g s o , we as k wh atb en efi t s an i n d ep en d en t h o l d er o f t h e FSC s to ckco u l dreal is t ical l y h av e ex p ect ed o n th e b as i s o f t h e “ o b ject i v e n atu re” o f t h e FSC s t o ck
. Red d am v . Co m m i s s i o n er, 7 5 5 F.3 dat1 0 57
. In ject o r Co . ret ai n edco m

p l et e co n tro l o ver wh et h er an y o f i t s ex po rt recei p t s wo u l dfl ow t o th e FSC i n an y y ear. Th e co m

m i ss i o n ag reem en tb et ween p et i t i o n ers ’ b u si n es s an dth e FSC s t at es : “ Atal l t i m es * * * [p et i t i o n ers ’ b u s i n es s ]- 4 8 -

s h al l h av e t h e d i s cret io n as t o wh en an dh o w m u ch i twi sh es t o p ay FSC an dn o
acco u n t recei v ab l e s h al l ev er ex i s t b et ween FSC an d* * * [p et i ti o n ers ’ b u s i n es s ] .” Co n s equ en t l y , n o i nd ep en d en th o l d er o f t h e FSC s t ockwo u l dh av e b een en t i t l ed t o , o r wo ul d h av e ex p ect ed , an y up s i d e; In

ject o r Co . ret ai nedco m

pl et e co n tro l
o v er wh et h er an y

p aym en t s wo u l dev er b e m ad e. Fu rt herm o re, In

ject o r Co .’ s co n tro l o v er up s i d e p ro fi t s ex ten d ed b ey o n dth e d i s cret i o n t o d i rect co m

m is s i o n p aym en t s t o th e FSC. Th e co m m i ss i o n ag reem en t al s o al lo wedIn

ject o r Co . t o reach i n t o th e FSC an d t ak e b ackan y p aym en t s th at h ad al read y

b een m ad e--i .e., u n d er t h e co m m i s s io n ag reem en t , p et i t i o n ers ’ b u s i n es s co n tro l l edan y

p ro fi t s ev en aft er t h o se p ro fi t s h adb een p ai dt o th e FSC. 3 8

3 8 M o re s p eci fi cal l y , th e co m m i s si o n ag reem en tp ro vi d ed thatan y am o u n t p ai dt o th e FSC b y

p et i t i o n ers ’ b u s i n es s
s h al l b e ag reedup o n b y

th e p art i es an d m ay

v ary fro m

t i m e t o t i m e b y m u tu al ag reem en t , s o as t o p ro v i de t he m ax i m u m [F] ed eral i n co m e t ax b en efi t s t o * * * [p et i t i o n ers ’ b u s i n es s] an d[t h e] FSC * * * . * * * [Pet i t i o n ers ’ b us i nes s] s h al l h av e t h e fi n al d eci s i o n as t o wh et h er [t h e] FSC i s co n s i dered t o h av e s o l i ci t ed o r p ro m o t eda t ran s act i o n wi th a cu s t om er an dm ay

p ro s p ect i v el y

o r ret ro act i v el y ad d o r d el et e tran s act i o ns en t i t li n g [t h e] FSC t o a co m m is s i o n . [Em

ph as i s ad d ed .] (Si m i l ar p ro v i s i o n s al s o ex i s t edfo r s al e, l icen s e, an d l eas e co m m i s si on s . ) Th e du rat i o n o f t h e p o w er t o ret ro act i v el y d el et e t ran sact io ns i s n ots p eci fi ed , b u t n o th i n g i n th e reco rdru l es o u tth e p o ss i bi l i ty thatp et i t i on ers ’ b u s i n es s co ul dh av e d el et eda t ran s act i o n ev enaft er t h e as s o ci at edco m m i s s i o n h ad b een p ai dt o th e FSC. In o th er wo rd s , In

ject o r Co . ret ai n edthe p o wer t o d eci d e--aft er t h e (co n ti n u ed ...)- 4 9 -

Onth es e fact s , n o i nd ep en den th o l d er o f t h e FSC s to ck co u l dreal i s ti cal l y h av e ex p ect ed t o recei v e an y b en efi t s (b efo re o r aft er t ax ) du e t o i t s fo rm al
o wn ers hi p o f th e FSC s to ck ; In ject o r Co . ret ai n edco n tro l o v er an y b en efi ts atal l rel ev an t t i m es . C. Co n cl us i on In fo rm , p et i t i o n ers ’ Ro th IRAs p u rch as edFSC s t o ckfo r $ 1 an d t h e FSC
s i m u l t an eo u s l y

en t eredi n t o a s eri es o f co n tract s wi th In ject or Co ., wh i ch were
ex ecu t edas p arto f t h e p l an o f p u rch as e. As d es cri b ed , th e Ro th IRAs effect i v el y p ai dn ot h i n g fo r t he FSC s t o ck , p u tn o th i ng atri s k , an dfro m an o bject iv e p ers p ect i v e, co u l dn o th av e ex p ect edan y b en efi t s . Fro m

th atn o m in al i ni t i al i n v es t m en t , p et i t i o n ers cl ai m thatth ei r Ro th IRAs earn edd i v id en d s t o t al i n g $ 5 3 3 ,0 5 7 o v er fo ur y ears . Co n si d eri ng al l th e fact s i n th e reco rd , h o wev er, i ti s ev i d en tth atth e Ro th IRAs ’ fo rm al p u rch as e o f t h e FSC s t o ckfo r $ 1 d i dn o trefl ect th e u n d erl y i n g

3 8 (...co n t i nu ed ) co m m i s s io n s were p ai d --t h atth e FSC was n o ten t i t l ed t o a co m m i ss i o n wi th res p ectt o a p art i cu l ar ex p o rttran s act i o n . Del et i o n o f t h e ex p o rttran s act i o n wo u l d h av e h adth e effect o f co n v ert i n g th e as s o ci at edco m m i s s i o n p aym en t i n to a l o an fro m In ject o r Co . t o t h e FSC u n d er a s ect i o n o f t h e co m m is s i o n ag reem en t d et ai li n g th e t reat m en to f o v erp aym en t s .- 5 0 -

real it y ; i .e., p et i ti o n ers ’ cap aci ty (t hro u g h In

ject o r Co .) 3 9 an dcl ear i n ten t io n t o d i rect In j ect o r Co
. t o m ak e l arg e co m m i s s io n p aym en ts t o t h e FSC. Th e fo rm o f th e t ran s act i o n s t h e Ro th IRAs en t eredi nt o d o es n otrefl ectth e u n derl y i n g rel at ed

p art y ex p ect at i o ns an di nt en t i o n s . Pet i t i o n ers ’ tran s act i o ns at t em p tt o u t i li ze t h i s
m i s m at ch b et ween s ub s t an ce an dfo rm t o d efeat the co n tri b u t io n l i m i t s . W e h av e
n o tfo u n dan y t ex tu al s up p o rti n the Co d e o r t h e reg u l at i o n s t h atwo u l dal lo w s u ch
a m is m at ch b et ween th e fo rm an ds ub s t an ce o f a p urch as e b y thes e Ro th IRAs
. W e t herefo re d i s reg ardth e p u rch as e. Fu rt herm o re, b ecau s e p et i t i o n ers (t h ro u g h v ari o u s p as s th ro u g h en t i t i es )
co n tro l l edev ery

as p ecto f the t ran s act i o n s i n qu es t i o n , we co n cl u d e t hatth ey , an d
n o tth ei r Ro th IRAs , were t h e o wn ers o f t h e FSC s to ckfo r Fed eral t ax p u rp o s es at al l rel ev an tt i m es . 4 0 Th e d i v id en d s fro m the FSC are t h erefo re p ro p erl y rech aract eri zedas d i v i d en d s fro m th e FSC t o p et i t i o n ers , fo l l o wedb y p et i t i o n ers ’
co n tri b u t i o n s o f t h es e am o u n t s t o th ei r res pect i v e Ro th IRAs . Al l o f t h es e p aym en t s ex ceed edth e ap p l i cab l e co n tri b u t io n l i m i t s an d were t h erefo re ex ces s

3 9 Pet i t i o ners ’ ex p o rtrecei p t s h adfl u ctu at edt o s o m e d eg ree o v er t h e y ears , b u tth ey h adrel i ab le an d es t ab l i s h edex p o rtrecei p t s wh en th ey en t eredth es e tran s act io n s .

4 0 W e n o te t h at , b ecau s e n o i n co m e t ax i s s u es are p res en t edi n th es e cas es , we n eedn o tan dd o n o tco n s i d er wh eth er t h e FSC was o wn edb y an dth ro u g h o n e o f p et i ti o n ers ’ p as s th ro u g h en ti t i es rat h er t h an d irect l y b y p et i t i o ners .- 5 1 -

co n tri b u t i o n s. W e th erefo re up h o l d res p o n d en t ’ s d et erm in at i o n o f ex ci s e t ax es
u n d er s ect i o n 4 9 7 3
. VII. Pet i t i o n ers ’ Co un t erarg u m en t s A. Su m m a Ho l d i n g s II Pet i t i o ners arg ue t h atth e reas o n i n g o f t h e Co u rto f Ap peal s fo r t h e Si x th Ci rcu i ti n Su m

m a Ho l d i ng s , In c. v . Co m m i s s i o n er (Su m

m a Ho l d in g s II), 8 4 8 F.3 d 7 7 9 --wh i ch rev ers ed i n part Su m m a Ho l d i n gs , In c. v . Co m m i s s i on er (Su m

m a Ho l di n g s I), T.C. M em o . 2 0 1 5 -1 1 9 --ap p l ies t o p et i t i o n ers ’ cas es an dp recl u d es ap p li cat io n o f t h e s ub s t an ce o v er fo rm d o ct ri n e. W e d is ag ree. W e are n o t b o u n d t o fo l l o w Su m

m a Ho ld i n g s II i n th es e cas es , wh i ch are ap peal ab l e t o th e Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i t i n th e ab s en ce o f a s ti p ul at i o n t o th e co n trary . See
s ec. 7 4 82 (b )(1 )(A), (2 ). In an y ev en t , th e h ol d i n g i n Su m m a Ho l d i n gs II p ert ai n ed t o a rel at edb u t d ifferen ti s s ue. In Su m m a Ho l d i n g s I a d o m es t i c i nt ern at i o n al s al es co rp orat i on (DISC) was
u s ed gen eral l y

i n th e s am e way

th e FSC was u s ed i n thes e cas es . 4 1 In di v i du al

4 1 DISCs are U.S. co rp o rat i o n s el ect i n g t o b e t ax ed u nd er s ecs . 9 9 1-9 9 7
. Secs . 9 91 -9 9 7 were en act edi n 1 9 7 1 an ds ub st an t i al ly m o d i fi edi n 1 98 4 b y

th e s am e actth ati n tro du cedFSCs t o th e Co d e. See Defi ci tRedu ct i o n Acto f 1 9 8 4 , Pub . L. No . 9 8 -3 6 9 , s ecs . 8 01 -8 0 5 , 9 8 St at . at9 8 5 -1 0 03 ; Rev en u e Acto f 1 9 7 1 , Pub . L. No . 9 2 -1 7 8 , s ecs . 5 01 -5 0 7 , 8 5 St at . at5 3 5 -5 5 3. FSCs were creat edt o rep l ace t he p re-1 9 8 4 v ers i o n o f DISCs . See g en eral l y Bo ri s I. Bi t t ker & J am es S.

(co n ti n u ed ...)- 5 2 -

t ax p ay ers o wn edRo th IRAs an da b us i n es s (wh i ch was o rg an i zedas a C
co rp o rat i o n). Th e Ro th IRAs n o m i n al l y o wn eds t o cki n a DISC. Th e C
co rp o rat i o n m ad e p aym en t s t o th e DISC (u n d er a s eto f s tatu t es an dreg u l at i o n s
s o m ewh ats i m il ar t o th o s e o f th e FSC reg i m e), an dth e DISC m ad e p aym en t s t o th e Ro th IRAs , wh i ch th e t ax p ay ers cl ai m edwere d i v i den di n co m e t o th e IRAs
. Ho l di n g fo r t h e Co m

m i ss io n er, we co n cl ud ed thati n s ub s t an ce t h e p aym en t s t o th e Ro th IRAs were co nt ri bu t i o n s an dn o ti n co m e fro m th e DISC. Th e t ax p ay ers b efo re t hi s Co urti n Su m m a Ho l d i n g s I were i n d iv i du al t ax p ay ers (wh o res i d edi n the Fi rs tan dSeco n dCi rcu it s ) an dthei r C co rp o rat i o n (wh ich h adi t s p ri nci p al p l ace o f b us i n es s i n the Si xt h Ci rcu i t). Al l o f t h es e t ax p ay ers ap p eal ed
. Th e o n l y t ax p ay er b efo re t h e Co u rto f Ap p eal s fo r t h e Si x t h Ci rcu i ti n Su m

m a Ho l d i ng s II was th e C co rp o rat i o n ; co n s equ en t l y th e i s s u e b efo re t h atco u rtwas l i m i t edt o wh et h er t h e co m m is s i o n s p ai dt o the DISC were d educt i b l e b y

th e t ax p ay ers ’ b u s i n es s , i .e., th e C co rp o rat i o n. Th e Co u rto f

4 1 (...co n t i nu ed ) Eu s ti ce, Fed eral In co m e Tax at i o n o f Co rp o rat i o n s an d Sh areh o l d ers , p ara. 1 5 .2 3 (W es t l aw 2 0 1 8 ). Th e FSC s t atu t es were rep eal edi n 2 0 0 0 , s ee s up ra n o t e 4 , b u t th e DISC p ro v i s i o n s rem ai n i n th e Co d e, as am en d ed
. Ing en eral , DISCs co n t i nu e t o al l o wa d eferral b en efi t ; i .e., qu al ify i n g ex p o rt -rel at edi n co m e h el di n a DISC i s n o ts ub jectt o cu rren tt ax at i o n. See s ecs . 9 91 -9 9 7 . DISC s h areh o l ders are, h o wev er, s ub

jectt o an an nu al i n t eres t ch arg e o n t ax es d eferred b y th e DISC. Sec. 9 9 5 (f).- 5 3 -

Ap p eal s fo r t h e Si x th Ci rcu i t d eci d edth atth e co m m i s s i o n s were d educt i bl e b u t ap p ro p ri at el y

d i dn otco ns i der t h e i s s u e o f wh et h er t h e p aym en t s t o th e Ro th IRAs
were co nt ri b u t i on s. Th ats h areh o l d er-l ev el i s s ue i s am o n g t h e i s s u es cu rren t l y b efo re t h e Co u rt s o f Ap p eal s fo r t h e Fi rs tan dSeco n dCi rcu it s , t o wh i ch th e i n d i v i du al t ax pay ers i n Su m m a Ho l d i n g s I h av e ap p eal ed (u n d er t h e n am es Ben en s o n v . Co m

m i s s i o n er, No s . 1 6 -2 0 6 6 an d 1 6 -2 0 6 7, an d Ben en s o n v . Co m m i s s i o n er, No . 1 6 -2 9 5 3 , res p ect i v el y ). Acco rd in g l y , as the cas e p res en t l y b efo re u s i nv o l v es o n l y

th e s h areh o l d er-l ev el i ss u e (an y co rp o rat e-l ev el i s s u es are b arred b y th e s t atu t e o f l i m i t at i o n s), t h e h o l d i n g i n Su m m a Ho l di n gs II i s n o t d i rect l y o n p o in t; th ato p i ni o n d i dn o tan al y ze t he p aym en t s t o th e Ro th IRAs , th e fact s s peci fi cal l y

rel at i n g t o th o s e p aym en t s , o r t h e o wn ers hi p o f th e DISC s t o ck fo r t ax p u rp o s es . M o reo v er, t h ere are d i fferen ces b etw een DISCs an d FSCs th atm ak e t h es e
cas es d i fferen tfro m

Su m m a Ho l d i n g s II. Paym en t s t o a DISC t h atare d is tri b u t ed t o i nd i v i du al s h areh o l d ers g en eral l y es cap e co rp o rat e-l ev el t ax at io n (wh i ch i s n o t tru e i n t he FSC cas e, as FSCs p ay co rp o rat e-l ev el t ax ), an dp aym en t s fro m a DISC t o a Ro th IRA are g en eral ly s ub jectt o an u n rel at ed b u s i n es s i nco m e t ax u n d er
s ect i on 9 9 5 (g ). See s ecs . 4 0 1(a), 4 0 8 (a), 4 0 8A(a), 5 0 1 (a), 5 1 1 , 9 9 5 (g ); s ee al s o- 5 4 -

s ec. 1 .9 2 1-2 (c), Q&A-6 , In co m e Tax Reg s . (ex p lai n in g h o w FSCs d i ffer fro m DISCs ). Pet i t i o ners at t em

p t t o an al o g i ze th ei r cas es t o th e DISC s i tu at i o n , arg u i n g th atb ecau s e Co ng res s ackn o wl ed g edo wn ers h ip o f DISCs b y IRAs wh en i tad d ed
s ect i on 9 9 5 (g ), s ee H.R. Rep t . No . 1 0 1 -2 4 7 , at 1 4 25 -1 4 2 6 (1 9 8 9 ), 1 98 9 U.S.C.C.A.N. 1 9 0 6 , 2 8 9 5 -2 8 9 6 , i tm u s tal s o h av e ap p ro v edg en eral l y o f av o i d an ce
o f t h e co n tri b u t i o n l i m i t s v i a rel at ed -p arty tran s act i on s , n o to n l y

fo r DISCs , b u t al s o fo r FSCs . W e d i s ag ree. Sect io n 9 9 5 (g ) res p o n ds s p eci fi cal l y t o DISC m ech an i cs (rat h er t h an t o el em en t s co m

m on t o b o th DISCs an d FSCs ), wh i ch --b efo re en act m en to f s ect i o n 9 9 5 (g )--al l o wedthe i n co m e ro u t edth ro u gh a DISC t o an IRA t o es cap e b o th
co rp o rat e- an ds h areh o l d er-l ev el t ax es en t i rel y . Co n g res s d et erm i n edthatth i s was t o o m u ch o f a b en efi tan di n res p o n s e p as s eds ect i o n 9 9 5(g ), wh i ch t ax es DISC d i v i d en d s t o IRAs . See H.R. Rep t . No . 1 0 1-2 4 7, at1 4 2 5, 1 9 8 9 U.S.C.C.A.N. at 2 8 9 5 (“ Th is treat m en t was i n t en d edt o p rev en tt ax ab le en ti t ies fro m s eek i n g t o
ex em p tact i v e b u s i n es s i n co m e fro m t ax [.] ”). FSC m ech an i cs are d i fferen t --u n l i k e DISCs , FSCs p ay a (l o wered ) co rp o rat e i n co m e t ax . In an y ev en t , al th ou g h s ect i o n 9 9 5 (g ) m ay co n t em p l at e o wn ers h i p o f DISCs b y IRAs i n g en eral , i n th es e cas es we are n o tco n cern edwi th th e o wn ers h i p o f- 5 5 -

FSCs i n g en eral ; rat h er o u r co n cern i s wh et h er, o n th e p art i cu lar fact s an d ci rcu m s t an ces o f t h es e cas es , p et i t i o n ers ’ Ro th IRAs o wn edth e FSC i n s ub s t an ce. As we h av e fo u nd , th es e cas es i n v o l v e rel at ed -p art y tran s act i on s wh i ch d i dn o ti n
s ub s t an ce t ran s fer an y

i n v es t m en tt o th e Ro th IRAs . Sect i o n 9 9 5(g ) t h erefo re d o es
n o tres o l v e t h e i s s u e b efo re u s . 4 2 B. Pet it i o n ers ’ Own ers h i p Arg u m en t Pet i t i o ners al s o arg u e t h atSwan s o n v . Co m m i s s i o n er, 1 06 T.C. 7 6 (1 9 9 6 ), Hel l weg v . Co m

m i s s io n er, T.C. M em o . 2 0 1 1 -5 8 , 1 0 1 T.C.M . (CCH) 1 2 6 1 (2 0 1 1 ),
an d Oh s m an v . Co m

m i s si o n er, T.C. M em o. 2 0 1 1 -9 8, i nd i cat e t h atRo th IRAs m ay
o wnFSC s t o ckan dthattherefo re t h e fo rm o f t h ei r t ran s act i o n s m u s tb e res p ect ed
. Bu t res p on d en t h as n otd i sp u t edth atRo th IRAs m ay s o m et i m es o wnFSC s t o ck , an d n o th i n g i n o u r h o l d i n g t o d ay s u g g es t s o th erwi s e. Th os e t h ree cas es d o n o t
s p eci fi cal l y

ad dres s wh et h er rel at ed -p art y tran s act i o n s wh i ch d o n o t i n s ub s t an ce tran s fer an y

i n v es t m en tt o a Ro th IRA can g i v e ri s e t o i n co m e fo r t h e Ro th IRA.

4 2 Th e d is s en t , s ee d i s s en t i n g o p . p . 8 1 , s i m i l arl y arg u es th at , b ecau s e t h e DISC an dFSC reg u lat io n s d o n o tp ro hi b i t o wn ers h i p b y i n d i v i du al s o r en t i t i es o th er t han th e rel at eds up pl i er, o wn ers hi p o f FSC s to ckb y Ro th IRAs i s p erm i t t ed u n d er t h e Co d e i n ev ery

ci rcu m s t an ce. Th e d i s s en t ’ s arg u m en t fai l s fo r t h e s am e reas on p et i t i o n ers ’ arg um en t s fai l s : Al lo wan ce fo r o wn ers h i p o f FSC s t ockb y Ro th IRAs i n g en eral d o es n ot m ean th atth e Co de al lo ws p et i t i o ners ’ s peci fi c p u rch as e tran s act i o n s.- 5 6 -

Rat h er, th o s e cas es ad dres s i s s ues th atare n o ts p eci fi cal l y p res en t edi n p et i t i o n ers ’
cas es . In Swan s o n v . Co m m i s s i o n er, 1 0 6 T.C. at8 6 -9 2 , th e Co u rt reject edth e Co m m i s s i o n er’ s arg u m en t s th ats ect i o ns 4 0 8 (e)(2 ) an d4 9 7 5 p ro h ib i t(1 ) a n ew
en t i ty fro m i ss ui n g al l o f i t s s t ockt o an IRA o r (2 ) an en t i ty wh o ll y o wn edb y

an IRA fro m i s s u in g d iv i d en ds t o th e IRA. Bu tres po n d en th as n o t as sert edth at
s ect i on s 4 0 8 (e)(2 ) an d4 97 5 , wh i ch ad dres s cert ai n p ro hi b it edtran s act io n s , ap p l y t o thes e cas es . Res po n d en t arg u es thes e cas es u nd er s ect i o n 4 9 7 3 , wh i ch p ert ai n s t o ex ces s co n tri bu t i o n s. Co n s equ en t l y p et i t i o n ers ’ rel i an ce o n Swan s o n i s
m i s p l aced
. In Hel l weg an d Oh s m an th e Co u rtreject edth e Co m m is s i o n er’ s at t em

p tt o rech aract eri ze t h e t ax p ay ers ’ tran s act io n s fo r t he p u rp o s es o f th e s ect i o n 4 9 7 3
ex ci s e t ax wi th o u tas sert i n g ad ju s t m en t s t o t h e t ax p ay ers ’ i n co m e t ax . InHel l weg
v . Co m m i s s i o n er, 1 0 1 T.C.M . (CCH) at 1 26 7 , we s t at ed : “ Ou r d eci s i on d o es n o t p rev en t th e Serv i ce fro m

rech aract eri zi ng th e [t ] ran s act io n co n s i s t en t l y fo r i n co m e t ax an dex ci s e t ax p u rp o s es .” As we d eci d ed i n an earl i er M em o ran du m Op i n i o n d en y i n g p et i ti o n ers ’ m o t i o n fo r s u m m ary ju d g m en t, M azzei v . Co m m i s s i o n er, T.C. M em o. 2 0 1 4 -5 5 , an y

i n co m e t ax i s s ues are b arred b y th e s t atu t e o f l i m it at io n s , an d
s o Hel l weg an d Oh s m an are i n ap p l i cab l e.- 5 7 -

C. Pet it i o n ers ’ Co n g res si o n al Pu rp o s e Arg u m en t s Pet i t i o ners arg ue t h atrech aract eri zi n g o wn ers h i p o f t h e FSC s to ckan dth e p aym en t s t o t h e Ro th IRAs wo u l dfru s trat e t h e co n g res s i o n al p u rp os e o f t h e FSC p ro v is i o n s . Bu tn o th i n g i n t h e FSC p ro v i s i on s s ug g es t s th atei th er t h e p l ai n l an g u ag e o f t h e Co d e (wh i ch we h av e d i s cu s s edi n d et ai l ab o v e), o r an y p urp o s e o f th e FSC reg i m e, wo u l d b e co n trav en ed o r fru s trat edb y d et erm i ni n g o wn ers h i p o f th e FSC s t o ck i n acco rdwi th s ub s t an ce an dch aract eri zi n g th e p aym en t s t o t h e Ro th IRAs i n acco rdwi th th ats ub s t an ce. Pet i t i o n ers h av e n o ti d en t i fi ed , n o r are
we aware o f, an y

s p eci fi c l eg is l at i v e p u rp o s e fo r t h e FSC p ro v i s i o n s o th er t h an t o p ro v id e a l ower co rp o rat e rat e fo r qu al i fy in g ex p o rt -rel at edi n co m e--s o m et h i n g p et i t i o n ers ach iev ed , i rres p ect i v e o f wh o o wn ed th e FSC s t o ck . Th ere was n o d i s cern i bl e l eg is l at i v e p urp os e t o al l o w t ax pay ers t o u s e FSCs t o d efeat th e
co n tri b u t i o n l i m i t s fo r Ro th IRAs , as p et i t i o n ers s eekt o d o . Pet i t i o ners al s o s u g g es tth atwe can n o trech aract eri ze t h es e t ran s act i o n s b ecau s e th at wo u ld ru n co n traryt o t h e co n g res s i o n al p u rp o se b eh i n ds ect i o n 4 0 8 A. Th ey

s eem t o s ug g es tthatwe can n o tm ak e a s ub s t an ce i n qu i ry b ecau s e th ere co u l dn ev er b e a n o nt ax b u s in es s p urp o s e fo r co n tri bu t i n g as s et s t o an IRA; th e o n ly reas o n t o co nt ri b ut e as s et s t o an IRA i s t o t ak e ad v an t ag e o f a
co n gres si o n al l y

s an ct i o n ed t ax redu ct i o n m ech an i s m . Pet i t io n ers ’ arg u m en tm i g h t- 5 8 -

h av e m o re fo rce i f t h ey

were cl ai m i n g th atthei r t ran s act i o n s res u l t ed i n
co n tri b u t i o n s; th en we m i g h tag ree t h atth ere n eedb e n o n o n tax b u s in es s p u rp o s e fo r t h o s e co n tri b u t i on s . Bu tp et i t i o ners cl ai m th atth ei r t ran s act i o ns g av e ri s e, n o t t o co n tri b u t i o n s , b u tt o i n co m e t o th e Ro th IRAs . W e h av e t h erefo re t es t ed p et i t i o n ers ’ i n co m e cl ai m i n acco rdwi th wel l -es tab l is h ed cas el aw b y as k i ng wh et h er t h e FSC was o wn edi n s ub st an ce b y th e Ro th IRAs . Our an al y s i s m erel y ap p li es th e fact o rs l ai do u ti n cas es l i k e Sack s v . Co m m i s s i o n er, 6 9 F.3 dat9 8 2
. Fi n al l y , p et i t i o n ers arg u e th atan y rech aract eri zat i o n o f t hei r t ran s act i o n s i s p ro h ib i t edb y

s ect i o n 1 .9 2 6 (a)-1 T(a), Tem p o raryIn co m e Tax Reg s ., 5 2 Fed . Reg
. 6 4 5 8 (M ar. 3 , 1 9 8 7 ), wh i ch p ro v i d ed : “ An y d i st ri bu t i o n b y

an FSC (o r fo rm er FSC) t o i t s s hareh o l d er wi th res p ectt o i t s s t o ck wi l l b e i ncl u d ib l e i n t h e
s h areh o ld er’ s g ro ss i n co m e i n acco rd an ce wi th th e p ro v i s i on s o f s ect i o n 3 0 1 .” Bu t th atreg u l at i o n d o es n o t i n d i cat e t h atwe s h o u l d d ep artfro m wel l-es t ab li s hed p ri n ci p l es i n d eci d i ng wh o , as a m at t er o f s ub s t an ce, t h e FSC “ s h areh ol d ers ” real l y were, co n s i d eri n g th e p ract i cal eco n om i c real i t i es o f th e t ran s act i o n s an dt ak i n g i n t o acco u n tth e act u al b en efi t s an d ri s k s o f o wners h i p .- 5 9 -

VIII. Res p o n s e t o Di s s en t A. Our An al y s i s Do es No tSh am o r Di s reg ard An y

En t i t i es . Th e d i ss en trefl ect s thro ug h o u tan i n co rrect b el i ef t h ato u r an al y s i s s h am s o r d i s reg ard s th e FSC o r t h e Ro th IRAs . To b e cl ear, we d o n o td i s reg ard , s h am , i g n o re, o r o therwi s e ch al l en g e t h e real i ty o f t h e FSC o r t h e Ro th IRAs as s u ch
u n d er t h e Co d e. In st ead , we ex am i n e t h e p u rch as e, b y th e Ro th IRAs , o f t h e FSC
s t ock . Th e d i s s en td o es n otex pl ai n wh y o ur an al y s i s o f t h i s p urch as e i s i nco rrect
. It s en t ire arg u m en trel at es t o wh y we s h o u ldn o t s h am

th e en t i t i es , wh i ch i n fact we d o n o td o . 4 3 B. Ou r An al y s i s Pro perl y Co n s i d ers th e Fact s as a Who l e. Th e d i ss en targ u es th atth e Co u rtcan n otl oo katth e n o m i n al am o u n t p ai d b y th e Ro th IRAs fo r t h e FSC s t o ck , o r at th e Ro th IRAs ’ rel at ed -p art y ex p ect at i o n s , i n t en t i o n s, an dp l an , o r at th e co m m o n co n tro l p res en t i n p et i t i on ers ’ tran s act i o n s b ecau s e, i t s ay s , an y o n e o f t h es e t h i n g s co u l db e u n o bject i o n ab l e i f co n s i d eredi n i s ol at i o n i n s om e h y

p o th et i cal s cen ari o . Bu to u r an al y s i s d o es n o td ep en dup o n
an y o n e o f t h es e fact o rs i n i s o lat i o n . Rat h er, co n s i deri n g al l th e fact s an d

4 3 Fo r ex am

pl e, t h e d i s sen tci t es M o l i n e Pro p s . v . Co m m i s s io n er, 3 1 9 U.S. 4 3 6 (1 94 3 ), an dd i s cu s s es b u s in es s p u rp o s e, arg ui n g t h atwe s h o ul d res p ectth e FSC. See d i s s en t in g o p . p . 9 2. Bu twe d o res p ectthe FSC. W e d o n o tap p l y a b u s i n es s p u rp o s e t es tt o th e FSC. M o l i n e Pro p s. i s t h erefo re i rrel ev an t
.- 6 0 -

ci rcu m s t an ces , we co n cl u de t h atthe p u rch as e o f t he FSC s t o ck b y th e Ro th IRAs , t o g et h er wi th t h e co n tract s th atwere en tered i n t o i n co n s i d erat i on o f t h atp u rch as e, creat ed an u n t en ab l e d i s crep an cy b etween th e fo rm

p et i t i o n ers cl ai m ed an dth e rel at ed -p art y

s ub s t an ce u n d erl y i n g th ei r tran s act i o n s . Info cu s in g o n th e v ari o u s fact ors i n d i v i du al ly , th e d is s en tfo rg et s th atth e an al y s i s , acco rd i n g t o t h e Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i t, m u s tb e “ ho l i s t i c[] ”. Red d am v . Co m m i s s i o n er, 7 5 5 F.3 dat 1 06 0
. C. Th e Sub s t an ce In qui ry Is Ap p ro p ri at e. Th e d i ss en targ u es th atth e s ub s tan ce d oct ri n es , h o w ev er ch aract eri zed , d o
n o tap pl y t o p et it i on ers ’ ci rcu m s t an ces b ecau s e, i ts ay s, th e Co d e p erm i t s p et i t i o n ers t o d o wh atth ey d i d
. W e s tro n g l y

d i s ag ree. Th e Co d e d o es n o t
ex p li ci t l y o r i m p l ici t l y au th o ri ze t h e Ro th IRAs ’ p urch as e o n th es e fact s . Hav i n g ex am i n edth e Ro th IRA an dFSC p ro v i si o n s, we h av e n o tfo u n d

--
n o r h as th e d i s sen t o ffered --an y t ex tual ev i d en ce t o s up p o rtth e n o t i o n th ata d i s crep an cy

b et ween s ubs t an ce an dfo rm i n th e p urch as e o f FSC s t o ck s h ou l db e i g n o red . Att em

p t i n g t o d efen ds u ch a n o t i o n , th e d i s sen ts ay s th atFSCs are n o t

“ m ean tt o d o an ythi n g ex cep t tran s fer v al u e t o g ett ax b en efi t s ”, s ee d is s en t i n g o p . p . 8 0, an dth at “ Co n g res s s et up b o th th e FSC s tru ctu re an dRo th IRAs n ott o h av e- 6 1 -

an y p u rp os e o th er t han t ax redu ct i o n o r av o i d an ce”, s ee i d . p . 9 7. Th es e o v erb ro ad
s t at em en t s refl ecta m i s un d ers t an d i n g o f h o w th e FSC p ro v i s i o ns wo rk
. It is tru e th ats ect i o n s 9 2 1 -9 2 7 p ro v i d ed FSCs a p art icu l ar ty p e o f t ax b en efi t , i .e., effect i v e rat e redu ct i o n fo r ex p orti n co m e. Bu tth atd o es n o tm ean , as th e d i s s en tap p aren t l y

th i n k s , th atth e p urp o se o f FSCs i s “ t ax av o i d an ce” wri t l arg e. As we h av e ex p l ai n ed , s ect i o n 9 2 5 p ro vi d es carefu l ly wo rd edex cep t i o n s t o
n o rm al tran s fer p ri ci ng ru l es . Th es e ex cep t i o n s al lo w “ th e t ax ab l e i n co m e o f s u ch FSC an d [t h e rel at eds upp l i er] ” t o b e b as edo n a t ran s fer p ri ce co m p ut edu n d er t h e th ree t ran s fer p ri ci n g m et ho d s p ro v i d ed . Th es e s p eci al tran s fer p ri ci n g m eth o d s ap p ly o n ly i f th e rel at eds up p l i er h as qu al i fy i n g ex p o rtrecei pt s o r m ak es an
ex p ort -rel at eds al e t o th e FSC. In s o far as an FSC d o es an yth i n g , th erefo re, o th er th an recei v i n g qual i fy i n g ex p o rtco m m is s io n s o r p u rch as i n g qual i fy i n g ex p o rt p ro p erty fro m a rel at eds up p li er, t h e FSC i s treat edn o d i fferen t ly fo r t ax p u rp o s es fro m th e way i t wo u l d b e t reat edi f i twere a C co rp orat io n . See, e.g ., s ec. 9 2 1 (d ). 4 4 Co ns equ en t ly , co n traryt o th e d i ss en t ’ s s u g g es t i on , an dfar fro m b ei n g a

4 4 Fo r ex am

pl e, i f a rel at eds up p l i er h adn o ex p o rt i n co m e i n a p art i cu l ar y ear, t he FSC wo u l d n o t b e ab l e t o p ri ce co m m i s si on s u n d er s ec. 9 2 5 ; th e s p eci al tran s fer p ri ci n g ru l es wo u l dn o tap p l y . Or i f an FSC an da rel at eds up p l i er at t em p t edt o m ak e co m

m is s i o n p aym en t s u n rel at edt o ex p o rt s wi tho u t th e FSC actu al l y ren d eri n g real s erv i ces t o th e rel at eds up p l ier, t h o s e co m m i s s i o n p aym en t s wo u l dl acks ub s tan ce--u n d er t he n o rm al s ub st an ce d o ct ri n es . No th in g i n the Co d e (co n ti n u ed ...)- 6 2 -

cart e b l an ch e ex cep t io n fro m th e s ub s t an ce d o ct ri n es fo r al l FSC t ran s act i o n s , th e t ex to f s ect i o n 9 2 5 ex t en d s ex cep t i o n s , s p eci fi cal l y , t o a v ery n arro ws eto f ci rcu m s t an ces , i .e., (1 ) co m m i s s i o n p aym en t s , s al es , et c. t h atare (2 ) rel at edt o
ex p orts al es i n a v ery

cl earl y d efi n edway

(3 ) b et ween p art i es th atare rel at ed (u n d er th e s ect i o n 4 8 2 d efi n i ti on o f a rel at edp art y ), o n e o f wh i ch i s a qu al i fy i n g FSC. Th ere i s n o d i s p u t e t h atth e req ui rem en ts fo r ap p l y i ng th e s ect i o n 9 2 5 p ri ci ng m et h o d s were m etwi th res p ectt o t h e co m m i s s io n p aym en ts b et ween In ject o r Co . an dthe FSC. Bu t th ati s n o tth e i s s u e h ere. Th e i s s u e i s wh et h er t h e fo rm o f t h e p u rch as e o f FSC s t o ckb y th e Ro th IRAs m

u s tacco rdwi th i t s
s ub s t an ce. An db ecau s e b y i t s o wnt erm s s ect i o n 9 2 5 d o es n otap p l y t o FSC s t o ck p u rch as e tran s act i o n s, th ere i s n o b as i s i n th e t ex to f t h e FSC p ro v is i on s , o r el s ewh ere i n the Co d e fo r t h atm at t er, t o co n cl u d e t hatwe s h o u l dtu rna b l in dey e t o the s ub s t an ce o f s u ch tran s act i o n s . In s h o rt , th e d i s sen t l eap s fro m an u n s up p o rt edb el i ef th atth e p urp o se o f
s ect i on s 9 2 1 -9 2 7 i s “ t ax av o id an ce” t o a co n cl us i o n th atth i s g en eral i zedp u rp o s e p recl u d es th e s ubs t an ce i n qu i ry wh en ev er FSCs h ap p ent o b e i n v o l v ed , ev en

4 4 (...co n t i nu ed ) s u g g es t s th atan FSC i s n o t al l o wedt o p erfo rm n o rm al (i .e., n o n -s ec. 9 2 5 ) tran s act io n s i n ad d i t i o n t o s ec. 9 2 5 tran s act io n s.- 6 3 -

th o u g h th ati n t erp ret at i o n wo u l dex t en d t h e ex cep t i on p ro v i d edi n s ect io n 9 2 5 b ey o n d i ts s t at ed term s. D. Our Ap p ro ach Ap p ro p ri at el y Co n s i d ers Val u e. Th e d i ss en ts u g ges ts th atth ere i s s o m et h i n g i n co rrect i n as k in g wh et h er wh atth e Ro th IRAs p ai dfo r t h e FSC s t o ckb o re an y rel at i o n t o th e fu tu re v al u e o f th e FSC. Bu tfai r m ark etv al u e i s th e p res en tv al u e o f fu tu re ex pect edcas h fl o ws . See, e.g
. , Es tat e o f O’ Co n nel l v . Co m m is s i o n er, 6 4 0 F.2 d2 4 9 , 2 5 2 (9 th Ci r. 1 9 8 1 ) (“ [E] x p ect ed fu tu re earn i ng s * * * are t he t ru e i n d i cat o rs o f p res en t wo rt h [.] ” (ci t i n g Rev . Ru l . 5 9 -6 0 , 1 9 5 9 -1 C.B. 2 3 7 )), aff’ g i n p art , rev ’ g i n p arto n an o th er i s su e T.C. M em o. 1 9 7 8 -1 9 1
. 4 5 W e h av e m erel y

ex am in edth e d i s co n n ectb etween th e cl ai m edfai r m ark et
v al u e o f t h e FSC s t o ck

an d th e rel at ed -p art y

v al u e o f t h e s am e s t ock , co n si d eri n g th atp et i t i o n ers co n tro ll edev ery as p ecto f t h ei r t ran sact io n s th ro ug h o ut . Th e qu es ti o n i s wh et her t h e fo rm al p u rch as e p ri ce an d co n tract s , wh i ch were en t ered i n t o wi th o u tth e b en efi t o f arm ’ s -l en g th p res s u re, cap tu re t he eco n om i c d eal

4 5 Th e d is s en tal s o d i s cu s s es s h areh o l d er b as i s , s ee d i s sen t i n g o p . p p . 9 1 -9 2 , wh i ch i s en t i rel y

b es i d e t h e p o i n t . Bas i s i s , as th e d i s s en tp oi n t s o u t , co s tp ai d
. Bu t th e factth atb as is fo l l o w s fro m co s td o es n o tm ean th atco st p ai d was equ al t o fai r m ark etv al u e.- 6 4 -

ad equat el y

en o u g h t o ju s t i fy

b as i n g th e t ax treat m en to f t h e t ran s act i o n s o n p et i t i o n ers ’ fo rm al ch aract eri zat i o n o f t h e d eal
. To b e cl ear, o n the b as i s o f t h e p ap erwo rkth atwas ex ecu ted , there was n o ch an ce th atco m

m i s s i o n p aym en t s wo u l db e m ad e, i n th e ab s en ce o f rel at ed -p art y
co n tro l . Th e co n tract s d o n o t req u i re o r ev eni n cen t i v i ze In ject o r Co
. t o m ak e
co m m i s s io n p aym en t s , an d s o n ei th er t h e FSC n o r an i n d ep en d en t h o l d er o f t h e FSC s t o ck , fro m

a fo rm al p ers p ect i v e, co u l d ex p ectt o recei v e an yth i n g . Pet i t io n ers ’ tran s act i o n s p ay o nl y i f t h e s am e p art i es co nt ro l b o th In ject o r Co . an d th e Ro th IRAs ; i .e., p aym en to n th e co nt ract s ati s s u e, i n th e ab s en ce o f rel at ed

p art y co n tro l , wo u l d b e g ratu i t o u s fro m In ject o r Co .’ s o r t h e FSC’ s p ers p ect i v e. Th e FSC s t o ckth erefo re h adn o fai r m ark et v al ue, i f al l o n e co ns i d ers i s th e cl ai m edfo rm

o f t he t ran s act i on s . 4 6

4 6 Th i s co m

p l et e l acko f fo rm al v al u e i s p reci s el y wh y p et i t i o n ers ’ s itu at i on d i ffers fro m

th atp res en t edi n Sack s v . Co m m i s s i o n er, 6 9 F.3 d 9 82 . InSack s th ere was a p o s s ib i l i ty

o f aft er-t ax retu rn o n th e fo rm al tran s act io n . By co n tras t , as we h av e n o t ed , s ee s up ra p . 4 9 , n o i n d ep en d en t h o l d er o f t h e FSC s to ck , co n s i d eri ng al l th e fo rm al as pect s o f t he d eal th atp et it i on ers m ad e, co u ldex p ectt o recei v e an y b en efi t s , b efo re o r aft er t ax . Sack s s t an d s fo r t h e p ro p o si t i o n th ata t ax p ay er can t ak e t ax effect s o r i n cen t i v es i nt o acco un twh en co n s id eri n g wh et h er t o m ak e an i n v es t m en t . By

co nt ras t , th e t ax b en efi t s p et i t i o n ers cl ai m h ere d ep en do n co m m i s s io n p aym en t s actu al ly b ei n g m ad e, an dthe co n tract s the p art i es t o th es e tran s act io n s en t eredi n t o d o n o treq u i re o r ev en i ncen t i v ize an y s u ch co m

m i s s i o n p aym en t s. Co ns equ en t ly , u n l i k e t h e s i tu at i o n i n Sack s , ev en th e aft er-t ax retu rn i s zero fro m an arm ’ s -l en g th ex am i n at i o n o f t h e fo rm p et i t io n ers cl ai m t o h av e (co n ti n u ed ...)- 6 5 -

M ean wh il e, t h e s ub st an t i v e v al u e, i .e., th e v al u e co ns i d eri n g eco n o m i c real it y , o f t h e FSC s to ck

t o th e Ro th IRAs was ex trem el y h i g h at th e m o m en to f p u rch as e, co n s i d eri ng p et i t i o n ers ’ cap aci ty an di n ten t i o n t o d i rect co m m i s s i o n p aym en t s fro m

In ject o r Co . t o t h e FSC. Ou r an al y s i s h as n o th i n g t o d o wi th i n v es t m en t“ h o p es ”, s ee d i s s en t i n g o p . p . 9 2 , an dev eryth i n g t o d o wi th the
eco n om i c real i ty

o f t h es e t ran s act i o n s , i n cl u d i n g t h e es t ab l i s h edcap aci ty an dcl ear i n t en t i o n t o m ak e p aym en t s. Co m p ari n g t h e n o n ex is ten tcl ai m edv al ue o f t h e FSC
s t ockwi th th e h i g h s ub s t an t iv e eco n o m i c v al ue o f t he s t o ck t o thes e p art i es , we fi nda d i s co n nect b et ween s ubs t an ce an dfo rm i n th e s t o ckp u rch as e, wh i ch as d es cri b edi s n o t s an ct i o nedb y s ect i o n 9 2 5 (o r an y

o th er s ect i o n ). Th e fo rm al FSC
s t ockp ri ce an dco n tract s d o n o trefl ectth e eco n o m i c real i ty o f t h e p u rch as e o f t h at
s t ock
. E. Th e Di s s en t ’ s Hy po th et i cal M i s co ncei v es Ou r An al y s is
. Th e d i ss en tcl ai m s , b izarrel y , th ato u r an al y s i s co u l d“ wreakh av oc” o n
m an y , “p erh ap s h un dredo f t h o u s an d s ”, o f s m al l co rp o rat i o ns . See d i s sen t i n g o p . p . 9 4. Th e d i s sen t’ s u n fo u n d edfears refl ect a s eri o u s m i s un d ers t an d i ng , as
ev i d en cedb y

wh atth e d is s en t s ay s n ex t :

4 6 (...co n t i nu ed ) ad o pt ed
.- 6 6 -

By th e m ajo ri ty ’ s reas o n i n g, s o m eo n e wh o creat eda b u si n es s , i n co rp orat edi t, i s s u edh i m s el f 1 0 0 % o f t h e s t o cki n ex ch an g e fo r a s m al l cap i t al i n v es t m en t, an dco n ti n u edt o ru n th e d ay -t o -d ay o p erat i o n s wo u l dn’ treal l y o wnh i s co rp o rat i o n --es p eci al l y i f i twas a s u cces s . W e’ dh av e t o d i s reg ardth e co rp o rat i o n b ecau s e th e i n i t ial i n v es t m en twas t o o s m al l an dd i dn’ taccu rat el y p red i ctth e b u s i n es s ’ s fu tu re earn i n g s . See d is s en t i ng o p. p . 9 4. Th is i s n o n s en s e. Th e d i s s en t ’ s h y p o th et i cal s cen ari o
wo u l dn o ti n v o l ve a m i s m at ch b et ween s ub s t an ce an d fo rm . Atth e i n i t i al p o i n to f cap i t al i zat io n , th e fai r m ark etv al u e an d t h e s ub s t an t i v e eco n o m i c v al ue wo u l db e i d en t i cal an dequ al t o th e cap i t al i n v es t m en t . As th e d ay -t o-d ay o p erat i o n s
co m m en ced , th ati n i ti al v al ue wo u ldb eg i n t o ch an g e i n co n certwi th ch an g i n g
ex p ect at i o ns reg ard i n g fu tu re cas h fl o ws . Th e fai r m ark et v al u e an dth e
s ub s t an t i ve eco n o m i c v al u e o f t h e s t o ck wo u l drem ai n i d en t ical , wh eth er t h e b u s i n es s was a s u cces s o r n o t . Pet it i o n ers ’ s i tu at i o n i s d i fferen t b ecau s e atth e
m o m en to f p u rch as e p et it io n ers ’ fo rm al ch aract eri zat i o n o f t h e p u rch as e d i dn o t
m at ch th e u n d erl y i n g s ub st an t i v e an drel at ed -p art y eco n o m i cs . 4 7

4 7 Th e d is s en t , s ee d i s s en t i n g o p . p p . 1 0 0 -1 0 4 , at tem pt s t o co n tras t o u r ap p ro ach wi th th ato f Co t tag e Sav . As s o c. v . Co m m i s s i o ner, 4 9 9 U.S. 5 54 (1 9 9 1 ), Gi t l i tz v . Co m

m i s s i o n er, 5 3 1 U.S. 2 0 6 (2 0 0 1 ), Au s t in v . Co m m i s s i o n er, T.C. M em o. 2 0 1 7 -6 9 , an d Cat erp i ll ar Tract o r Co
. v . Un i tedSt at es , 2 1 8 Ct . Cl
. 5 1 7 (1 9 7 8). No n e o f t h es e cas es ad dres s es th e s ub s t an ce o f o wn ers h i p ari s i n g fro m a p u rch as e i n a rel at ed -p art y co n t ex t . Fo r ex am

p le, t h e Co m

m i s s i o n er d i dn ot ch al l en g e t h e p u rch as e t ran sact i o n i n Au s ti n ; as the Co urtfo un d , “ the co m p an y fu n d edth e ESOP wi th a $ 5 0 0,0 0 0 l o an * * * [an d t ] h es e fu n d s were u s edt o (co n ti n u ed ...)- 6 7 -

F. Th e Di s sen t’ s Ap p ro ach Lack s Supp o rt i n th e Co de. Th e d i ss en tco n cl u des b y d ecl ari n g that“ th e g reat t ex tu al i s t
co u nt errev ol u t i o n ” m ak es o u r ap pro ach “ un t en ab l e”. See d i s s en t i n g o p . p . 9 8
. Yetth e co rn ers t o ne o f t he d i s s en t ’ s an al y s is ap p ears t o b e i t s h i g h l y g en eral i zed cl ai m th atth e p u rp o s e o f a Ro th IRA o r an FSC i s t ax av o i dan ce. See i d
. p p . 8 7 , 9 3 . W e are u n aware o f an y s up p o rt , t ex tu al o r o th erwi s e, fo r s u ch a g en eral i zed cl ai m wi th res p ectt o s ect i o n s 4 0 8 A an d9 21 -9 2 7
. Rat h er t h ant ak i ng up arm s o n o ne s i d e o r an o th er o f s o m e g ran d

“ co u n t errev o l u t i o n ”, an d far fro m i g n o ri n g t h e t ex to f t he Co de, we m i n dth e t each i n g o f t h e Co urto f Ap p eal s fo r t h e Ni n th Ci rcu it , m ak i n g a “ m o re s p eci fi c i n qu i ry ” an d“ deci di ng wh et her * * * [t h e] fact s fal l wi th i n th e i n t en d eds co p e o f th e In t ern al Rev en u e Co d e p ro v i s io n [s ] ati ss u e.” St ewart v . Co m m i s s io n er, 7 1 4 F.2 dat 9 88 . Fo r t h e reas o n s ex p l ai n ed , p et i t io n ers h av e fai l edt o s h o w th atth ei r fact s fal l wi th i n th e s co p e o f t h e Co d e p ro v is i o n s ati s su e.

4 7 (...co n t i nu ed ) p u rch as e (o n th e b as i s o f an o u t s i de ap p rai s al ) 5 ,0 0 0 s h ares o f t he co m p an y ’ s co m m o n s t o ck .” Au s t in v . Co m m i s s i o ner, at * 8
. Th ere was n o d i s p u t e as t o wh et h er t h e ESOP o wn edthe s h ares i n s ub st an ce. See al s o Co t t ag e Sav . As s o c. v . Co m m i s s i o n er, 4 9 9 U.S. at5 6 8 (“ [T] h ere i s n o co n t en t i o n t h atth e t ran s act i o n s i n th i s cas e were n otco ndu ct ed atarm ’ s l en g th , o r t h atCo t t ag e Sav i ng s ret ai nedd e fact o o wn ers hi p o f t h e p art i ci p at i o n i n t eres t s[.] ”).- 6 8 -

IX. Co n cl u s i o n W e are m in d fu l th at“ [a] n y o n e m ay s o arran g e h i s affai rs th ath i s t ax es s h al l b e as l o w as p o s s ib le; h e i s n o t b o u n dt o ch o o s e t h atp at tern wh i ch wi l l b es tp ay th e Treas u ry ; there i s n o t ev en a p at ri o t i c du ty t o i n creas e o n e’ s t ax es .” Hel v eri n g
v . Greg o ry , 6 9 F.2 d8 0 9 , 8 1 0 (2 dCi r. 1 9 34 ), rev ’ g 2 7 B.T.A. 2 2 3 (1 9 32 ), aff’ d , 2 9 3 U.S. 4 6 5 (1 93 5 ). Bu tth i s d o es n o tm ean th at we s h ou l d i g n o re t h e s ub s t an ce
o f t h e t ax p ay er’ s tran s act io n s . As th e Sup rem e Co u rts t at ed i n Hi gg i n s v . Sm i t h , 3 0 8 U.S. 4 7 3 , 4 7 7 (1 9 4 0 ): A t ax p ay er i s free t o ad o p ts u ch o rg an i zat i o n fo r h is affai rs as h e m ay ch o o s e[,] * * * [b u to ] n th e o th er h an d , th e Go vern m en tm ay n o tb e req u iredt o acq u i es ce i n th e t ax p ay er’ s el ect i o n o f t h atfo rm * * *
. Th e Go v ern m en tm ay

l o o katactu al i t i es an dup o n d et erm i n at i o n th at th e fo rm em p l o y edfo r d o i n g b u s i n es s o r carry i n g o u tth e ch al l en g ed t ax ev en ti s u n real o r a s h am m ay s u st ai n o r d i s reg ardth e effect o f th e fi ct i on as b es ts erv es the p u rp o ses o f t h e t ax s t atu t e. W e h av e n o tfo u n d , n o r h av e p et i t i o ners o r t he d i s s en ti d en t i fi ed , s up p o rti n th e Co d e o r th e reg u lat i o n s fo r t h ei r cl ai m th atth e Ro th IRAs ’ p u rch as e o f t h e FSC s t o ckn eedh av e n o s ubs t an ce. As th e Co u rto f Ap p eal s fo r t h e Si xt h Ci rcu i t
recen t l y p u ti t : “ Wh en s o m eo n e cal l s a d o g a co w an dth en s eek s a s ub si dy p ro v id edb y

s t atu t e fo r co ws , the o b v i o u s res p on s e i s th atth is i s n o t wh at th e
s t atu te m ean s .” Su m

m a Ho l d i n g s II, 8 4 8 F.3 dat7 8 7 -7 8 8 (qu o t i n g J o s ep h- 6 9 -

Is en b erg h , “ M us i ng s o n Fo rm an dSub s tan ce i n Tax at io n : Fed eral Tax at i o n o f In co m es , Es tat es , an d G ift s ”, 4 9 U. Ch i . L. Rev . 8 59 , 8 6 5 (1 9 82 )). Wh en th e co u rt s d eci d e h o w t o cl as s i fy a t ran s act i o n , th ey fo cu s, qu i t e ap pro pri at el y , o n th e t ran s act i o n’ s wo rk ad ay real i t ies , n otth e l ab el s u s edb y

the t ax p ay ers . Tak e “ i n co m e.” If a t ax p ay er recei v es s o m et h i ng o f v al u e, * * * h e can cal l i twh at ev er h e wan t s --t h i s , th at , o r s o m et h in g el s e. Wh atth e t ax p ay er can n o t d o i s cl ai m th atthe l ab el h e affi xes o n the t ran s act i o n p recl u d es i tfro m b ei n g “ i n co m e” u n d er th e Co d e o r p rev en t s th e co u rt s fro m treat i n g i t as “ i n co m e” u n der t he Co d e. Id . at7 8 5 . Si m i l arl y , p et i ti on ers can n o t l ab el s ub s tan t i v e co n tri b u t i o n s t o th ei r Ro th IRAs “ in co m e” an dth ereb y s u cces s fu l l y

cl ai m ex em p t i on fro m

th e s ect i o n 4 9 7 3 ex ci s e t ax o n ex ces s co n tri b u t i o n s . 4 8 X. Ad d it i o n s t o Tax Res p o n d en tas sert s th atp et i t i o n ers are l i ab l e fo r ad d i t i o n s t o t ax u nd er
s ect i on 6 6 5 1 (a)(1 ) an d (2 ) fo r each y ear at i s su e. Res p o nd en th as th e b urd en o f p ro duct i o n . Sec. 7 49 1 (c). Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io n t o t ax fo r fai lu re t o t i m el y fi l e a t ax retu rn . Res p on d en th as m eth i s b urd en o f p ro du ct i o n b ecau s e p et it i o n ers

4 8 Th e d is s en tp o i n t s o ut th atth ere i s n o th i n g wro n g wi th “ ri ch p eo p l e b u y i n g co ws th ey d o n ’ to th erwi s e n eedi n o rd er t o g et* * * co w s ub si di es ”. See d i s s en t i n g o p . p . 1 0 0
. Bu twh eth er we cal l the o p erat i v e p ri n ci p l e eco n o m ic s ub s t an ce o r s ub s t an ce o v er fo rm , th e Co d e atl eas treq u ires u s t o as k wh et h er t h e t ax p ay er act u al l y

b o u g h tth e co ws , o r ju s tcl ai m s t o h av e d o n e s o .- 7 0 -

s t ip u l at edth atthey

d idn o tfi l e t h ei r Fo rm s 5 3 2 9 fo r each y ear at i s s u e. See Pas ch al l v . Co m

m i s s io n er, 1 3 7 T.C. 8 , 1 5 -1 7 (2 0 1 1 ). 4 9 Sect io n 6 6 5 1 (a)(2 ) i m

p o s es an ad d i t io n t o t ax fo r fai lu re t o t i m el y p ay a t ax
s h o wno n a ret u rn . Becau s e p et i t i o n ers fai ledt o fi l e th ei r Fo rm s 5 32 9 , res p o n d en t p rep areds ub s t itu t es fo r retu rn (SFRs ) u n d er s ect i o n 6 0 2 0 (b ) fo r each y ear an dfo r each p et i t i o n er. Th es e SFRs are t reat ed as p et it i on ers ’ retu rn s fo r p u rp o s es o f d et erm i n i n g th e ad d i t i o n t o t ax u n d er s ect i o n 6 6 5 1 (a)(2 ). See s ec. 6 0 2 0 (b ); Wh eel er v . Co m

m i s s i on er, 1 2 7 T.C. 2 0 0 , 2 0 8 -2 0 9 (2 0 06 ), aff’ d , 5 2 1 F.3 d 1 2 8 9 (1 0 th Ci r. 2 0 0 8 ). Pet i t i o n ers h av e n o td i sp u tedth e v al i d i ty o f t h e SFRs , n o r h av e th ey arg u edth atth ey

h av e p ai dan y

p ort i on o f t h e am o u n t s s h o wn o n th e SFRs
. Res po n d en th as th erefo re m eth i s b u rd en t o s h o w th atp et i t i o ners are l i ab l e fo r t h e
s ect i on 6 6 5 1 (a)(2 ) ad d it i o n t o t ax fo r fai l ure t o p ay a t ax s h o wno n a return fo r each y ear at i s s u e. Pet i t i o ners can av o i dth es e ad d i t i o n s t o t ax b y s h owi n g t h atthei r n o n fi l i n g
an d n o np aym en t were due t o reas o n ab l e cau s e an dn o twi l l fu l n eg l ect . See s ec. 6 6 5 1 (a)(1 ) an d(2 ). W i l l fu l n eg l ecti s d efi n ed as “ a co n s ci o u s , i n t en t i o n al fai l u re
o r reck l es s i n d i fferen ce.” Un i t edSt at es v . Bo y l e, 4 6 9 U.S. 2 41 , 2 45 (1 9 8 5 ).

4 9 Ad d i t i on s t o t ax u n der s ec. 6 6 5 1 are n o t s ub ject t o s ec. 6 75 1 , u n d er s ec. 6 7 5 1 (b )(2 )(A).- 7 1 -

Pet i t io n ers arg ue t h atth ei r fai l u res t o fi l e an dp ay were n o tdu e t o wi l l fu l n eg l ect , an d res p on d en t h as n otco n t es t edthatp o i nt . W e t h erefo re d eem res p on d en tt o h av e co n ced edth at p et i ti o n ers ’ fai l u res t o fi l e an d p ay were n o t du e t o wi l l fu l
n eg lect
. A fai l u re t o t im el y

fi l e o r p ay

i s du e t o reas o n ab le cau s e i f a t ax p ay er can
s h o w g o od -fai th rel i an ce o n p ro fes s i on al ad v i ce. Pi zza Pro Equ i p . Leas i n g , In c. v . Co m m i s s i o n er, 1 4 7 T.C. _

_ _ , _

_ _ (s l i p o p . at5 2 ) (No v . 1 7 , 2 0 16 ). Rel i an ce o n p ro fes s i on al ad v i ce i s reas o n ab l e cau s e i f: (1 ) t h e ad v i s er was a co m p et en t p ro fes s i on al wi th s uffi ci en tex pert i s e t o ju s t i fy rel i an ce; (2 ) t h e t ax p ay er p ro v i d ed
n eces s ary an daccu rat e i n fo rm at i o n t o th e ad v i s er; an d (3 ) t he t ax p ay er act ual l y rel i edo n th e ad v i s er’ s ju d g m en ti n g o o d fai th
. Id . (qu o t i ng Neo n at o lo gy As s o cs ., P.A. v . Co m

m i s s i on er, 1 1 5 T.C. 4 3 , 9 9 (2 00 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 0 2 ),
an d ex p l ai n i n g th at “ [w] h i l e Neo n at o l o gy As s o cs . d eal twi th s ect i o n 6 6 6 2
accu racy -rel at edp en al ti es , we h av e ap p l i edi ts tri p art i t e an al y s i s t o s ect i o n 6 6 5 1 ad d it i o n s t o t ax as wel l .”); Ch arl o t t e’ s Offi ce Bo u t i que v . Co m m is si o n er, 1 2 1 T.C. 8 9 , 1 0 9 -1 1 1 (2 0 0 3), aff’ d , 4 2 5 F.3 d1 2 0 3 (9 th Ci r. 2 00 5 ). Pet i t i o ners co n t en dth atth ey rel i edo n t h ei r acco u n t an tM r. Bed k e. Th ey
as s ertth atM r. Bed k e ad v is edth em th atth e FSC t ran s act i o n s were v al id . Atth e t i m e o f t ri al , M r. Bed k e was a t ax p art n er atan acco u n ti n g fi rm wh ere h e h ad- 7 2 -

p ract i cedfo r 2 9 y ears . W e fi n dth ath e was a co m p et en t p ro fes si on al wi th
s u ffi ci en tex p ert i s e t o ju st i fy rel i an ce. Pet i t i o ners h adb een M r. Bed k e’ s cl i en t s fo r s ev eral y ears , an dh e was th erefo re fam i l i ar wi th th ei r b u s i n es s . M r. Bed k e p rep ared p et i t io n ers ’ t ax retu rn s fo r each y ear at i s s u e. Pet i ti o n ers p res en t edth e FSC t ran s act i o n p ap erwo rkt o M r. Bed ke, wh o t es t ifi ed th ath e an dan o th er p art n er rev i ewedth e i n fo rm at i o n an d d et erm i n edth atp et i t i o n ers qu al i fi edt o u s e an FSC. He al so ad v i s edth em th ati t
was n otp ro h i bi tedfo r a Ro th IRA t o i n ves ti n an FSC. Up o n rev i ew o f t h e en t i re
reco rd , we are s at is fi edth atp et i t i o n ers p ro v i d edthe n eces s ary i nfo rm at i on t o M r. Bed ke. A t ax p ay er can n o t rel y

o n p ro fes si on al ad v i ce i f t h e p ro fes s i o n al was a p ro m o t er o f t h e t ran s act i o n . Neo n at o l og y As s o cs . , P.A. v . Co m

m i ss i o ner, 1 1 5 T.C. at9 8 . A p ro m o t er i s “ an ad v i s er wh o p art i ci p at ed i n s tru cturi n g th e tran s act io n o r i s o th erwi se rel at edt o , h as an i n t eres t i n , o r p ro fi t s fro m th e tran s act io n .” 1 06 Lt d . v . Co m m i s s i o n er, 1 3 6 T.C. 6 7 , 7 9 (2 0 1 1 ) (qu o ti ng Ti g ers Ey e Trad i n g , LLC v . Co m m i ss i o n er, T.C. M em o . 2 00 9 -1 2 1 ), aff’ d , 6 8 4 F.3 d8 4 (D.C. Ci r. 2 0 1 2 ). M r. Bed k e h adn o co n nect i o n t o W GA an d n o i n t eres t i n , o r p ro fi ts fro m , p et it i o n ers ’ tran s act i o n s . W e t h erefo re fi n dth atM r. Bed k e was n o ta p ro m o t er.- 7 3 -

Fi n al l y , we co n cl u d e t h atp et i t i o n ers ju s t i fi ab l y rel i edo n M r. Bed ke’ s ad v ice. M r. Bed k e rep res en t edp et i t i o n ers fo r a n u m b er o f y ears b efo re t h ey

cam e t o h i m s eek i n g ad v i ce ab o u tth e FSC t ran s act i o n s . M r. Bed k e ex am in edth e tran s act io n s wi th an o th er p artn er an dad v i s edp et i t i on ers th at th ey co u l du s e t h e FSC/ IRA p ro g ram . Acco rd i ng l y , p et i ti o n ers are n o tl i ab l e fo r s ect io n 6 65 1 (a)(1 ) o r (2 ) ad d it i o n s t o t ax . To refl ectthe fo reg o i n g , Deci s i o n s wi l l b e en t eredfo r
res p o nd en t as t o the d efi ci en ci es an d fo r p et i ti o n ers as t o th e ad d i t i o n s t o t ax . Rev i ewedb y

the Co u rt
. M ARVEL, VASQUEZ, GALE, GOEKE, GUSTAFSON, PARIS, KERRIGAN, LAUBER, NEGA, PUGH, an dASHFORD, J J ., ag ree wi th t h i s o p i n i o n o f t h e Co u rt
.- 7 4 -

PARIS an dPUGH, J J .: W e ag ree wi th th e o p i ni o n o f t he Co u rt an d wri t e
s ep arat el y

t o em p h as i ze th e fo ll o wi n g p oi n t s . Th e o p i n i o n o f t h e Co u rts h o u l d n o t b e co n s tru edas a req u i rem en tth atan FSC h av e s o m e s ub s t an ce b ey o n dth atp res cri b edb y s t atu t e. Th e o p i n i on o f t h e Co u rtd o es n otd i sreg ardth e Ro th IRAs o r th e FSC. It d o es n o t ad dres s an y i n co m e t ax i s s ues th at m ay ari se i n o ther cas es . Itd o es n o ts ay th at Ro th IRAs
m ay n ev er o wnFSCs . Itd o es n o td i s tu rb th e b en efi ts thatfl o w fro m th e fo rm at io n
o f t h e FSC. Th e s o l e i s su e we d eci d e t o d ay i s wh o i n s ub s t an ce o wn edth is FSC-- p et i t i o n ers o r t h ei r Ro th IRAs . Th e o p i ni o n o f t he Co u rtfo cu s es o n th e s ub s t an ce
o f a s i n g l e s tep : the p urp ort edp u rch as e o f FSC s to ckb y th e Ro th IRAs fo r t h e
n o m i n al p ri ce o f $ 1 , v iewedt o get h er wi th th e co n tract s th at were en t eredi n t o b y p et i t i o n ers , th ei r Ro th IRAs , an dIn ject or Co ., al l i n co n s i d erat i o n o f t h atn o m i nal p u rch as e. Th e o p i n i o n o f t h e Co u rtco n cl u d es thatp et i t i o n ers , n o tth ei r Ro th IRAs , o wn edth e FSC t h atwas s etup b y an dthro u g h W es t ern Gro wers As s o ci at i o n (W G A). Th i s co n cl u s i o n i s b as edup o n t h e fo l l o wi n g s p eci fi c fact s : (1 ) p et i t i o n ers each co n tri b ut ed$ 2 ,0 0 0 t o th ei r Ro th IRAs fo r 1 9 9 8 an dzero fo r 1 9 9 9 thro u g h 2 0 0 2 (am o un ts equ al t o p et i t i o n ers ’ res p ect i v e s ect i o n 4 0 8 A(c)- 7 5 -

co n tri b u t i o n l i m i t s fo r t h o s e y ears ); (2 ) wi th thes e i n i t i al co n tri b u t i o n s p et i t i o n ers
cau s ed th ei r s el f-d i rect ed Ro th IRAs t o fo rm al ly p urch as e t h e FSC’ s s t ockfro m W GA fo r t h e s t at edp ri ce o f $ 5 p er s h are fo r a t o t al o f $ 5 0 0 fo r 1 0 0 s h ares , o f wh i ch th e o p i ni on o f t he Co u rtco n cl u d es $ 4 9 9 o f t h e p u rch as e p ri ce was a fee rat h er t h anan i n v es t m en t , s ee o p . Ct . p . 4 5 -4 6; (3 ) at al l t i m es u n der t h e s t at ed t erm s o f t h e co n tract s b et ween th e FSC an dIn ject o r Co . p et it i on ers co n tro l l ed

-- th ro u g h In

ject o r Co .--t h e p ro fi t s t o b e earn edb y th e FSC an dth erefo re t h e am o u n t
o f d i s tri b u t i o n s fro m

th e FSC t o th e Ro th IRAs ; (4 ) wh en th e FSC s t o ck was p u rch as ed , p et i t i o n ers h adan es t ab li s h edcap aci ty t o m ak e l arg e co m

m i s s i o n p aym en t s t o t h e FSC b ecau s e o f es t ab l i sh edex p o rtrecei p ts ; an d (5 ) p et i t i o n ers i n t en d edt o fu n dth ei r Ro th IRAs th ro u gh th e FSC/ Ro th IRA p ro g ram u s i n g a p o rt i on o f t h o s e ex p o rtrecei p t s (an dp et i t i o n ers d i d i n factfu n dth ei r Ro th IRAs t o th e fu l les tex ten tp erm it tedth ro u g h o utth e y ears th e FSC/ Ro th IRA p ro g ram was i n p l ace). Onth es e s p eci fi c fact s th e o p i n i on o f t h e Co u rtco n cl ud es th atthe n o m i n al $ 1 p u rch as e p ri ce t h e Ro th IRAs p ai d fo r t h e FSC s t o ckd i d n o trefl ectth e
s ub s t an ce o f t h e t ran s act i o n i n th e l i gh to f p et i ti o n ers ’ es t ab l i s h edcap aci ty an d i n t en t i o n t o d i rect l arg e co m m i s s i o n p aym en t s fro m

In ject o r Co . t o th e FSC. See
o p . Ct . p . 4 9 -5 0. Th e Ro th IRAs ’ fo rm al l ack o f co n tro l o v er wh ether co m m i s s i o n- 7 6 -

p aym en t s wo u ldb e m ad e was th e b as i s fo r t he n o m i n al p ri ce t h atwas s etfo r t h e FSC s t o ck . Bu ti n s ub s t an ce t h ere was an es t ab l i sh edex p ect at i o n an d i n t en t i o n th atco m m i s s i o n p aym en t s wo ul db e m ad e, an dth e Ro th IRAs were d i rect edt o p u rch as e th e FSC s to cko n t he b as i s o f t hatex p ect at i o n an di n t en t i o n . Th e fo rm al b as i s fo r t h e p u rch as e p ri ce th erefo re d i dn o trefl ectth e s ub s t an ce o f t h e rel at ed

p art y tran s act i o n. Co n s equ en t l y , th e o p i n i on o f t h e Co u rtd i s reg ard s th e Ro th IRAs ’ p urch as e an dco n cl ud es th ati n s ub s t an ce p et i t i o n ers , wh o ret ai n ed
s ub s t an t i ve co nt ro l th ro u g h ou tal l as p ect s o f t h is tran s act i o n , o wn edth e FSC. Fo r t h es e reas on s we ag ree wi th th e o p i n io n o f th e Co u rt
. THORNTON, GOEKE, an dLAUBER, J J ., ag ree wi th th i s co n cu rri n g o p i n i o n .- 7 7 -

HOLM ES, J ., d i s s en t i n g: InSu m m a Ho l d i n g s , In c. v . Co m m is s io n er (Su m m a II), 8 4 8 F.3 d 77 9 , 7 8 1 (6 th Ci r. 2 0 17 ), rev ’ g T.C. M em o. 2 0 1 5 -1 1 9 , th e Si x th Ci rcu i t --i n th e co u rs e o f rev ers i n g o ur d eci si on i n a cas e n earl y i den t i cal t o th i s o n e--warn edth ata co u rt th atco n st ru es th e Tax Co d e ag ai ns ti t s l an g uag e an d i n fav o r o f ju d g e-m ad e d oct ri n e act s l i k e Cal ig u l a, wh o fam o us l y p o s tedt ax l aws i n fi n e p ri n tan ds o h i g h th at Ro m an s co u l dn o treadth em . See Su et . Cal . 4 1
. It is o u r cu s t o m

t o reco n s i d er an i s s u e wh en a ci rcu itco u rt rev ers es u s . An d t o d ay we h av e t o ch o o s e ei th er a wel l -reas o n edo p i n i on b y a h i g h l y res pect ed ju d g e i n Am eri ca’ s h eart l an d , o r Cal i g u l a. W e p i ckCal i g u l a. I g i n g erl y d i s s en t
. 1

1 Cal i g u la d i dn ’ tcare i f d i s s en t s were res p ect fu l o r n o t . See, e.g ., Su et . Cal
. 2 0 (fo rci n g u n s u cces s fu l o rat o rs t o b l o to u t th ei r wri t i n g s wi th s p o ng es o r t h ei r t o n g u es ), 2 7 (b u rn i n g au th o r al i v e fo r u s in g d o ub l e en t en dre), an d2 8 (o rd eri n g a s en at o r t o rn t o p i eces an dthen h av i n g th e p i eces drag ged th ro u g h th e s treet s ). Ou r Co u rti s s o m ewh at m o re co l l eg i al . When a m ajo ri ty d i s ag rees wi th th e o p i n i o n o f t h e ju d ge wh o tri es th e cas e, t h e cas e m ay b e reas s i g n edan d rewri t t en . See s ec. 7 4 6 0 ; Su cces s i on o f M cCo rdv . Co m m i s s i o n er, 4 6 1 F.3 d6 14 , 6 2 2 (5 th Ci r. 2 0 06 ), rev ’ g 1 2 0 T.C. 3 5 8 (2 0 0 3). Th es e d i s pu t es are al m o s tal w ay s ab o u t th e l aw an dn o tab o u tfact fi n d i n g . As th e t ri al ju d g e i n thes e cas es , I h av e rev iewed J u d g e Th o rn t o n’ s o p i n io n o f t h e Co u rtan dag ree wi th h i s fi n d i n g s o f fact s (wi t h o n e ex cep t i o n , s ee i n fra n o t e 9 ). I s p eci fi cal l y ag ree wi th h is fi n d i n g s reg ard i n g th e M azzei s ’ l iab i l i ty

fo r a p en al ty , wh i ch I wo u l d h av e m ad e o n th e b as i s o f m y o wno b s erv at i o n s o f th e t es t i m o n y an d o th er ev i d en ce recei veddu ri ng tri al i f I h ad (co n ti n u ed ...)- 7 8 -

I fi rs trev i ew t h e DISC an dRo th IRA reg i m es th atl edup t o Su m m a II an d t ak e a l oo katth atd eci s io n . I n ex tex pl ai n wh atth e p art i es h ere s ai d ab o utwh y i t
s h o u ldo r s h o u l dn ’ tco n tro l an d p o i n to u tth e b ig g es tp ro b l em s i n th e Co u rt ’ s
reas on i n g . Fi n al l y , I ex pl ai n wh y we s h o u l d h av e d eci d edth e cas es d i fferen t l y . I. As th e m ajo ri ty

ex p l ai n s, co n tri b u t i o n s t o a Ro th IRA aren ’ td edu ct i b l e,
earn i n g s accru e i n th e acco u n t t ax -free, an dqu al i fi edd i s tri b u t i o n s fro m th e
acco u n t aren ’ tp arto f a t ax p ay er’ s g ro s s i n co m e. Sec. 4 0 8 A(a), (c)(1 ), (d )(1 ) an d (2 )(A); Tap ro o tAdm i n. Serv s ., In c. v . Co m m i s s i o n er, 1 3 3 T.C. 2 0 2 , 2 0 6 (2 0 0 9 ), aff’ d , 6 7 9 F.3 d1 1 0 9 (9 th Ci r. 2 0 1 2 ). On ce fu n d s m ak e i ti n t o a Ro th IRA, t h ey ’ re g en eral l y n ev er t ax edag ai n , n o m at t er h o w th ey ’ re i n v es t edo r h o w m u ch th ey g rew t h ro u g h d i st ri b u t io n s o r cap i t al ap p reci at io n . Bu t th ere’ s a l i m i to n h o w
m u ch a t ax p ay er can co n tri b ut e, s ee s ec. 4 0 8 A(c)(2 ), an d t h e Co d e t ax es ex ces s
co n tri b u t i o n s 6 % each y ear t h ey rem ai n i n an acco u n t , s ec. 4 9 7 3 (a); s ee al s o Pas ch al l v . Co m

m i s s io n er, 1 3 7 T.C. 8 , 1 8 (2 0 1 1 ). 2

1 (...co n t in u ed ) n o tco ncl u d ed th atth i s s eri es o f t ran s act i o n s wo rk ed o n i t s m eri t s.

2 A s o m ewh atco m

p l i cat edfo rm

u la s et s th e an n u al co nt ri bu t i o n l i m i t s . See (co n ti n u ed ...)- 7 9 -

Becau s e Ro th IRAs o ffer s ub s t an t i al t ax b en efi t s , i t ’ s n o ts u rp ri s in g th at t ax p ay ers l o o kfo r way s t o g etm o re m on ey i n t o th em . Th at ’ s wh atth e t ax pay ers d i di n Rep et t o v . Co m

m is s i o n er, T.C. M em o . 2 0 1 2 -1 6 8 , 2 0 1 2 W L 2 1 6 0 4 4 0, Po l o wn i ak v . Co m

m is s i o n er, T.C. M em o . 2 0 16 -3 1 , an dBl o ckDev el op ers , LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 1 7 -1 4 2 . Ineach o f t h os e cas es , the t ax p ay ers h ad th ei r Ro th IRAs p u rch as e s h ares i n a n ewl y fo rm ed C co rp o rat io n 3 o r i nt eres t s i n
an LLC, 4 h adth ei r p reex i s t i n g b u si n es s es p ay th os e n ew en t i t i es fo r n o nex i s t en t
s erv i ces o r l i cen s es , an dth enh adth e en ti t ies d i s tri b u t e t h e p aym en ts --as d i v i d en d s
o r p art n ers h ip d i s tri b u t i o n s --i n t o th e Ro th IRAs . See Bl o ckDev el o pers , at* 8
-
* 1 4 ; Po l o wn i ak , at* 4 -* 7 ; Rep et t o , 2 0 12 W L 2 1 6 0 4 4 0 , at * 3 -* 5
.

2 (...co n t in u ed ) s ec. 4 0 8A(c)(2 ). Wh en th e M azzei s b eg an th ei r FSC p l an , th e l i m itwas g en eral l y $ 2 ,0 0 0 p er y ear. See s ecs . 4 0 8 A(c), 2 1 9 (b )(1 )(A). To d ay thatl i m i ti s g en eral l y $ 5 ,5 0 0 . See s ecs . 4 0 8 A(c), 2 1 9 (b )(5 )(A)-(C).

3 “ C co rp o rat i o n ” i s t ax jarg o n fo r a co rp o rat i o n n o t t ax edu n der s ub ch ap t er S o f t h e Co d e. A C co rp o rat i o n’ s n eti n co m e i s t ax ed twi ce--fi rs tat the co rp o rat e l ev el , an dag ai n atth e i nd iv i du al l ev el wh enthe s h areh o l ders recei v e d is tri b u t i o n s o f p ro fi t s i n th e fo rm

o f d i v i d en d s . 4 LLC s tan d s fo r l i m i t edl i ab i l i ty co m p an y . LLCs are creat u res o f s tat e s t atu te an dare a fo rm of b u s i n es s o wn ers h i p t h atal l ows o n e o r m o re p eo p l e o r o rg an i zat i o n s t o i n ves t i n an en t i t y th at p ro v i d es them

wi th l i m i t edl i ab i l i ty . An LLC wi th m o re t h an o ne m em b er i s g en eral l y t ax edas a p art n ers hi p b y d efau l t
. Sec. 3 0 1.7 7 0 1 -3 (b )(1 )(i ), Pro ced . & Ad m i n. Reg s .- 8 0 -

Th e Co m m is s i o n er d o es n ’ t l i k e t h i s s o rt o f t h i n g . See No t i ce 2 0 0 4 -8 , 2 0 0 4
- 1 C.B. 3 3 3 ; Su m

m a Ho l d i n g s, In c. v . Co m m i ss i o n er (Su m

m a I), T.C. M em o . 2 0 1 5 -1 1 9 , at* 15 -* 1 6 . He s ay s th atn o n -arm ’ s-l en gt h p aym en t s fro m a p reex i s t in g b u s i n es s t o a rel at edRo th IRA-o wn eden t i ty are real l y

d i s tri b u t i o n s t o
s h areh o ld ers fo l l o wedb y co nt ri b u t i o n s t o th e Ro th IRA. See No t i ce 2 0 0 4 -8 , 2 0 0 4 -1 C.B. 3 3 3 . InRep et to , Po l o wn i ak , an dBl o ckDev el o p ers we ag reed . See Bl o ck Dev el o p ers , at* 3 0 ; Po l o wn i ak , at* 2 1 -* 2 2 ; Rep et t o , 2 0 1 2 W L 2 16 0 4 4 0 , at
* 9 -* 11 ; . Ineach o f th os e cas es we d i s reg ard eda Ro th IRA-o wn ed C co rp o rat i o n
o r LLC b ecau s e i td i dn ’ tactu al l y d o an yth in g --each en t i ty was “ n o th i n g m o re t h an
a m ech an i s m

fo r tran sferri n g v al u e t o th e Ro th IRAs .” Rep et t o , 2 0 1 2 W L 2 1 6 0 4 4 0 , at* 9 ; s ee al s o Bl o ckDev el o p ers , at* 3 0 -* 3 1; Po l o wn i ak , at* 2 1-* 2 2
. 5 Becau s e d i s tri b u t io n s (s u ch as d i vi d en ds o r cap i t al g ai n s ) t o an IRA are u n l i m i t ed , an d co n tri b u t i o n s are v ery l i m it ed , th e Co m

m i s s i o ner u s u al l y

b en efi t s fro m
recas t i n g “ d i s tri b u ti o ns ” as “ co n t ri b u t i o n s ”. So m e t y p es o f en t i t i es aren ’ tm ean tt o d o an yth i n g ex cep ttran s fer v al u e t o g ett ax b en efi ts . A d om es t ic i n t ern at i o n al s al es co rp orat i o n (DISC) i s s et up t o

5 In reach i n g i t s h o ld in g i n Bl o ckDev el op ers , LLC v . Co m m i s s i o n er, T.C. M em o. 2 0 1 7 -1 4 2 , at * 3 0 , th i s d i v i s i o n o f t h e Co u rts tres s edth at“ th e s ub s t an ceo v er-fo rm

d o ct ri n e i s n o t s om et h i n g th e Co m m i s s i o ner can u s e t o p ou n d ev ery Ro th IRA t ran sact i o n h e d o es n’ tl i k e.”- 8 1 -

recei v e co m

m is s i o n p aym en t s --u s ual l y i n ex ch an g e fo r n o th i n g--fro m a b u s i n es s th atex p o rt s s o th ati tcan th en d i s tri b u te t h em t o th e b u s i n es s ’ s s h areh ol d ers as i n co m e th atwas l eftu n t ax edatth e co rp o rat e l ev el . Secs . 9 9 1 , 9 9 5(a) an d(b )(1 );
s ec. 1 .9 9 4-1 (a)(2 ), In co m e Tax Reg s .; s ee Su m m a II, 8 4 8 F.3 dat7 8 2; Ad d i s o n In t ’ l , In c. v . Co m

m i s s i on er, 8 8 7 F.2 d6 6 0 , 6 6 6 (6 th Ci r. 1 9 8 9 ), aff’ g 9 0 T.C. 1 2 0 7 (1 9 8 8); Hel l w eg v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 1 -5 8 , 2 01 1 W L 8 21 0 90 , at* 5
. FSCs were v ery s im i lar--b arel y -t h ere en t i t i es th ro u gh wh i ch b u s i n es s es co ul d fu n n el “ fo rei g n trad i n g g ro ss recei pt s ” t o l arg el y es cap e co rp o rat e-l ev el t ax . See
s ecs . 9 2 4(a), 9 21 -9 27 , 2 4 5 (c); s ec. 1 .9 2 5(a)-1 T(a)(3 ), Tem p o rary In co m e Tax Reg s., 5 2 Fed . Reg . 6 4 4 4 (M ar. 3 , 1 9 87 ). Un li k e o th er t y p es o f co rp o rat i o ns , DISCs an dFSCs d on ’ tn eeda b u s i n es s p u rp o s e--t h ey ’ re i n ten t i o n al l y n o th i n g
m o re th an way s t o reduce ex p o rt ers ’ effect iv e t ax rat es . See, e.g ., Su m m a II, 8 4 8 F.3 dat 7 86 (DISCs are “ s h el l co rp o rat i o n s * * * thath av e n o eco n o m i c s ub s t an ce atal l ”); cf. Bl o ckDev el o p ers , at* 3 1 (LLCs “ m ean tt o h av e a real b u si n es s p u rp os e”). An d th e reg u l at i on s m ad e cl ear t h atDISCs an d FSCs d i dn o th av e t o b e o wn edb y

th e o p erat i n g b u s i n es s th at was actu al l y ex po rt i n g g o o d s . See s ec. 1 .9 22 -1 (f), In co m e Tax Reg s . (m et h odfo r co u n t i n g i nd i v i du al s, co rp o rat i on s , es t at es , tru st s , an dp art n ers hi p s fo r FSC’ s 2 5 -s hareh o l d er l i m i t ); s ec. 1 .9 9 2
- 2 (b )(1 )(i i i ), In co m e Tax Reg s . (DISC el ect i o n m et h o d s fo r s h areh o l d ers wh o are- 8 2 -

i n d i v i du al s , m i n o rs , es t at es , an dtru s t s ). Th i s m ean tthato wn ers o f cl o sel y h el d
ex p ort i n g b u s i nes s es co ul ds etup DISCs o r FSCs th atth ey th em s el v es --o r a fam i l y tru s t, o r th e o wn er’ s ch i l dren , o r o th er p art ies rel at edt o th em --o wn ed
. So wh ath ap p en s wh en an o p erat i n g b u s i n es s m ak es p aym en t s t o a DISC-- wh i ch i s n o th i n g b u ta v eh i cl e fo r t ax redu ct i o n --an dthe DISC t hen p ay s d i v i d en d s t o a Ro th IRA--a t y p e o f acco un t al s o d es i g nedt o p ro du ce t ax b en efi t s ? Th at ’ s es s en t i al ly

th e s i tu at i on we ad dres s edi n Su m m a I; an dex cep t fo r t h e fact th ati ti n v o l v eda DISC rat h er t h an an FSC, i t ’ s th e M azzei s ’ s i tu at i o n , t o o . In Su m m a I, at * 2 2 , we rech aract eri zedth e p aym en t s --wh i ch h adn o n o n t ax b u s i n es s p u rp os e--as d i v i d en d s fo l l o wedb y co n tri b u t i o n s t o th e Ro th IRAs . W e d eci d ed th at“ s ub st an ce o ver fo rm p ri n ci p l es ” al lo wedu s t o d o th atev en th o ug h th e t ax p ay ers h adco m

pl iedwi th th e act u al t ex to f t h e Co d e. See i d . at* 1 7 -* 2 2
.

II. Th e Si x th Ci rcu i ts ai d we were wro n g . Su m m a II, 8 4 8 F.3 dat7 8 2 , 7 9 0 . In
rev ers i ng u s , i tem

p h as i zed th atDISCs n eces s ari l y l ackeco n o m i c s ub s t an ce. Id . at 7 8 9 . An d i tfo u n d th ats ect io n 9 9 5 (g )--wh i ch m ak es t ax -ex em p t en t i ti es p ay
u n rel at edb u s i nes s i n co m e t ax (UBIT) o n d is tri b u t i o n s th ey recei v e fro m

DISCs
--- 8 3 -

“ m ad e cl ear” t h atIRAs co u l do wnDISCs
. 6 Id . at7 8 2 . Itth erefo re co n cl u dedth at th e Co d e s peci fi cal ly

al l o wedth e t ax p ay ers there t o d o wh atth ey d i d , an dth at
n ei th er t h e Co m

m i ss io n er n o r th e co u rt s h adan y reas o n t o u se s ub s t an ce-o v erfo rm p ri n ci p l es t o rech aract eri ze t h e t ran s act i on s . Id . at7 8 2 , 7 8 4 , 7 90
. Su m m a II s ai dth ats ub s t an ce-o v er-fo rm p ri n ci p l es ex i s tt o p rev en t t ax p ay ers fro m

cal l in g a t ran s act i o n s om ethi n g i t ’ s n o ti n o rd er t o av oi dt ax . See i d . at7 8 5 -8 6 . An d i tcarefu l l y co n s i d ered cas es wh ere co u rt s ap p l i edth o s e p ri n ci p l es ap p ro p ri at el y . Id . at7 8 5 -8 6 . Fo r ex am p l e, i td i s cu s s ed Di ed ri ch v . Co m m i s s i o n er, 4 5 7 U.S. 1 9 1 , 1 9 6 -9 7 (1 9 8 2 ), wh ere t h e Sup rem e Co u rth el dth ata d o n o r wh o tran s ferred p ro p ert y o n the co n di t i o n thatth e reci p i en tp ay th e g i ftt ax
o n i treal l y

ju s ts o l dth e p ro p erty

fo r t h e am ou n t o f t h e t ax . Su m m a II, 8 4 8 F.3 dat 7 8 5 . Ital s o ap p ro v edo f d i s reg ard i n g “ s h am ” tran s act i o ns th atu se “ n o m in al l y i n d ep en den t ” en t i t i es t o d i sg u i s e eco n o m i c real i ty . See i d . (ci t i n g W el l s Farg o &

6 Su m m a II m ay

b e p u sh i n g i ta b i twh en i t s ay s th at b y en act i n g s ect i o n 9 9 5 (g ) Co n g res s “ m ad e cl ear” t h atIRAs co u ldo wnDISCs . Pen si o n p l an s an d ch ari t i es s eem

t o h av e b een th e t y

p es o f t ax -ex em

pts h areh o l d ers Co n g res s h adi n m i n d . See H.R. Rep t . No . 1 0 1 -2 4 7 , at1 4 25 -2 6 (1 9 8 9 ), 1 9 8 9 U.S.C.C.A.N. 1 9 0 6 , 2 8 9 5 -9 6 . An dCo n g res s cert ai n l y was n ’ tth i n k i n g ab o u tRo th IRAs , wh i ch i t d i dn ’ tcreat e u nt i l al m os t a d ecad e aft er s ect i on 9 9 5 (g ) b ecam e effect i v e. See Tax pay er Rel i ef Acto f 1 9 9 7 , Pub . L. No
. 1 0 5 -3 4 , s ec. 3 0 2 , 1 1 1 St at . at 8 2 5
. Nev erth el es s , an di f o n l y th ro u g h a m aze o f cro s s -referen ces , s ect i o n 9 9 5 (g ) d o es al l o w b o th trad i t i o n al an dRo th IRAs t o o wn DISCs , s ee s ecs . 4 0 1 (a), 4 0 8(a), 4 0 8 A(a), 5 0 1 (a), 5 1 1 , an dCo n g res s h as n ’ td eci d edt o ch an g e i t
.- 8 4 -

Co . v . Un i t edSt at es , 6 4 1 F.3 d1 3 1 9 , 1 3 2 5 (Fed . Ci r. 2 0 1 1), an d Ri ch ard so n v . Co m m i s s i o n er, 5 0 9 F.3 d7 3 6 , 7 4 1 (6 th Ci r. 2 0 0 7 ), aff’ g T.C. M em o . 2 0 0 6 -6 9 ). 7 Su m m a II, at7 8 6, p u tRep p et t o i n th i s cat eg o ry . Sub s t an ce-o v er-fo rm p ri n ci p l es b eco m e wo rri s om e, acco rd i n g t o Su m m a II, wh en th e Co m

m i s s io n er rech aract eri zes i n t o h i gh er-t ax fo rm s t ran s act i o n s th at h av e eco no m i c s ubs t an ce an dco m p l y wi th th e Co d e. Id . Th e co u rttraced th e Co m m i s s i o n er’ s cl ai m

t o th i s p o wer t o an ex p an s i v e read i n g o f Co m m i s s i o n er v . Co u rtHo l d i ng Co ., 3 2 4 U.S. 3 3 1 , 3 3 3 (1 9 4 5 ), wh ere t h e Sup rem e Co u rt s ai dth ata
co rp o rat i o n t h atd i s tri b u t ed a b u i l d i n g t o s h areh o ld ers wh o i m m ed iat el y s o l di t real ly ju s ts o l dthe b ui ld i n g t o th e b u y er d i rect l y . 8 See Su m m a II, 8 4 8 F.3 dat7 8 6
. Su m m a II n o tedthatwh en ap p ly i n g Co u rtHo l d in g “ the l in e b et ween d is reg ard in g

7 Oth er ex am

p les th e co u rtd i scu s s es ap p ro v i n g l y i n cl u d e Greg o ry v . Hel v eri n g , 2 9 3 U.S. 4 6 5 , 4 68 -6 9 (1 9 3 5 ) (rech aract eri zi ng p u rp o rt ed
“ reo rg an i zat i o n” t h atwas ju s t s h u ffl i n g s hares fro m o n e en t i ty

t o an o th er t o av o i d cap i t al g ai n s t ax ), an d Kn et s ch v . Un i tedSt at es , 3 6 4 U.S. 3 61 , 3 65 -6 6 (1 96 0 ) (rech aract eri zi ng a “ l o an ” t h ath adn o b u s in es s fu n ct io n o r tru e o b l i gat i on t o p ay ).

8 Co m m i s si o ner v . Co u rtHo l d i n g Co
. , 3 2 4 U.S. 3 3 1 (1 9 4 5), p erh ap s s h o u ld n ’ tt ak e t oo m

u ch b l am e fo r t h e Co m

m i s si on er’ s cl ai m . Th atd eci s i on tu rn edo n th e fact th at th e co rp o rat i o n h adn eg o t i at edth e s al e an d recei v eda d ep os i tfro m

th e b u y er b efo re t h e s h areh o l d ers real i zedwh atth e t ax co n s equ en ces wo u l db e an dd i s tri b ut edth e b ui l d i n g t o th em s el v es . Id . at3 3 3
. Ex p l ai n i n g Co u rt Ho l di n g i n a l at er cas e, t h e Sup rem e Co u rts ai dth atth e s al e t h ere was real l y co m p l et e b efo re t h e d i s reg ard edd i s tri b u t i o n o ccu rred . Un it ed St at es v . Cu m b erl an dPub. Serv . Co
. , 3 3 8 U.S. 4 5 1 , 4 5 3 (1 95 0 ). Inth atcas e, t h e Co u rt reco g n izedan as s etd i s tri b u t i o n fo l l owedb y th e s al e o f t ho s e as s et s. Id . at4 5 6
.- 8 5 -

a t oo -cl ev er-b y -h al f acco u n t i n g tri ckan dn ul li fy i n g a Co d e-s up p o rt edt ax m i n i m i zi n g tran sact i o n can b e el u s i v e.” Id
. at7 8 7 . Ital s o ackn o wl ed g ed th atth e Si x th Ci rcu i ti t s el f h as s tru g g l edwi th th i s d i s ti n ct i o n : Fo r ex am p l e, qu o ti n g Es t at e o f Kl u en er v . Co m m i ss io n er, 1 5 4 F.3 d6 3 0 , 6 3 6 (6 th Ci r. 1 99 8 ), aff’ g i n p art , rev ’ g i n p art T.C. M em o . 1 9 9 6 -5 1 9 , th e co urts ai dthat“ th e Co m m i s s i o n er
m ay rech aract eri ze t ran s act i o n s , ev en th o s e wi th eco n o m i c s ub s t an ce, i f t h ey h av e
n o ‘ v al i d , n o n -t ax b u s in es s p u rp o s e.’ ” Su m m a II, 8 4 8 F.3 dat7 8 7
. An di n Aero qu i p -Vi ck ers , In c. v . Co m m i s s i o n er, 3 47 F.3 d 1 73 , 1 8 3 (6 th Ci r. 2 0 03 ), rev ’ g Tri n o v a Co rp . v . Co m

m is s i o n er, 1 0 8 T.C. 6 8 (1 99 7 ), th e Su m m a II Co u rtrecal l ed , th e Si x th Ci rcu i td ecl i n edt o treat a s eri es o f tran s act i o n s as a reo rg an i zat io n b ecau s e th e t ax p ay er was m o ti v at edp ri m ari l y b y t ax s av i n g s. See Su m

m a II, 8 4 8 F.3 dat 7 87
. Su m m a II al s o s u rv ey edcas es fro m o th er ci rcu i t s th atl ik ewi s e “ s trad d l e t h e l i ne b et ween h o ld i n g th atth e t ran s act i o ns were a s h am an ds u gg es t in g th atth e Co m m i s s i o n er h as a b ro adp ower t o rech aract eri ze t ran s act i on s thatm in i m i ze t ax es .” Id . Th e co u rtp oi n t ed t o Fel d m an v . Co m m i s s i on er, 7 7 9 F.3 d4 48 , 4 5 7 (7 th Ci r. 2 0 1 5 ), aff’ g T.C. M em o . 2 0 1 1 -2 9 7 , wh i ch d i s reg ard eda s h am l o anm ean t
o n l y t o av o i di n co m e t ax ; So u th g at e M as t er Fu n d, LLC v . Un i t edSt at es , 6 5 9 F.3 d 4 6 6 , 4 9 1 -9 2 (5 th Ci r. 2 0 1 1 ), wh i ch d i s reg ard eda p artn ers h i p; an dRo g ers v .- 8 6 -

Un i ted St at es , 2 8 1 F.3 d1 10 8 , 1 1 1 3-1 8 (1 0 th Ci r. 2 0 0 2), wh i ch rech aract eri zeda

“ l o an ” t hath adn o h o p e fo r rep aym en t
. See Su m m a II, 8 4 8 F.3 dat 7 8 7 . Th e co u rt
em ph as i zed , h o wev er, t h atev enth o se cas es d o n ’ th o ldth ata “ t ax -av o i d an ce
m o ti v e al o n e m ay

n u ll i fy an o th erwi s e Co d e-co m

p l i an t an d s ub s t an t i v e s eto f tran s act io n s .” Id
. Fo l l owi n g th i s s u rv ey , th e co urts ai d th at“ [t ] h e s ub st an ce-o v er-fo rm d o ct ri n e * * * m ak es s en s e o n l y wh en i t h o l d s tru e t o i ts ro o t s --wh en th e t ax p ay er’ s fo rm al ch aract eri zat i o n o f a t ran sact i o n fai ls t o cap tu re eco n o m i c real it y an dwo u l d d i s t o rtth e m ean in g o f t h e Co d e i n th e p ro ces s.” Id . Th e co u rt rei t erat edth ati d en ti fy in g s u ch tran s act i o n s can b e t ri cky , b u t th at th e o n es b efo re i t w ere “ cl earl y

o n t h e l eg i t im at e s i d e o f t h e l i n e.” Id . at7 88 . Itp o i n t edo u tth at th e “ Co m m i ss i o n er’ s effo rtt o recl as s i fy [t he t ax p ay er’ s ] tran sact io n s as d i v i d en d s fo l l o w edb y

Ro th IRA co n tri b ut i o n s d o es n o tcap tu re eco n o m i c real i ty an y b et ter th an d es cri b i n g t h em

as DISC co m

m i s s i o ns fo l l o wedb y

d i v i den d s,” an dth at
s ub s t an ce-o v er-fo rm p ri n ci p les d o n ’ t al l o w th e Co m m i s s i o n er t o rech aract eri ze a tran s act io n m erel y

t o i ncreas e th e am o un t o f t ax du e. Id
. Su m m a II co ncl u d edwi th th e h o l d i n g th ats ub s t an ce-o ver-fo rm p ri n ci p l es
can ’ to v erri d e “ st atu to ry

p ro v is i o n s wh o s e o n l y

fu n ct i o n i s t o en ab l e t ax s av i n g s ”
u n d er t h e Co d e. Id
. at 7 8 9
. An di tfo u n d t h atDISCs were i n t h atcat eg o ry ,- 8 7 -

m ean i n g th atthey

d i dn ’ tn eedeco no m i c s ub s t an ce t o b e res p ect ed
. Id . It
ex p lai n edth at “ [t ] h e p o i n t o f [DISCs ] is t ax av o i d an ce. Th e Co m m i s s io n er can n o t p l ace ad h o c l i m i t s o n t h em b y i n v o k i ng a s t atu t ory

p u rp o s e * * * th ath as l i t t l e rel ev an ce t o th e t ex t -d ri v en fu n ct i o n o f t h es e p o rt i o n s o f t h e Co de.” Id . Ino th er
wo rd s , th e t al i sm an o f a s t atu t e’ s p u rp o s e “ can n o tb e i n v o k edt o s av e t h e s t atu t e fro m i t s el f.” Id . Th ere’ s n o d en y i n g t h es e p ro v is i on s creat eda s o rto f l o o ph o l e i n th e Co d e, b u tth e Si x th Ci rcu i ts ai di n Su m m a II t h ati ti s Co ng res s ’ s jo b t o s ew i t
up . Id . at7 9 0
. III. Aft er t h e Si x th Ci rcu i trel eas ed Su m m a II we t o l dth e p art i es h ere t o s ub m i t
s up p lem en t al b ri efs . Th e M azzei s an dth e Co m m i s s io n er ag reedth atthe o n l y d i fferen ce b et ween th es e cas es an d Su m m a II was thatth e M azzei s u sedan FSC i n s t eado f a DISC. Th e Co m m i s s i o ner s ai dth i s d i fferen ce s h o u l dn ’ taffect o u r
an al y s i s, an dh e ad m i t t edth atth e M azzei s fo l l owedal l o f t he n eces s ary fo rm al i t i es . He n ev ert h el es s s ai dwe s h o u l di g no re Su m m a II b ecau se i t’ s fro m

a d i fferen t ci rcu itan do n l y th e co m m i s s i o n p aym en t s’ d edu ct i bi l i ty was p ro p erl y b efo re t h e co u rt th ere. He s ai dwe s h o u ldi n s t eadfo l l o w Co u rt Ho l d i n g , l o o kat th e t ran s act i o n as a wh o l e, an dd eci de t h e cas es b as edo n h i s v iews o f th e s t atu t e’ s i n t en t , n o tth e Co d e’ s p l ai n l an g u ag e.- 8 8 -

Th e M azzei s u rg edu s t o fo l l o w Su m m a II’ s reas o ni n g . Th ey

s ai dth ey
s h o u ldg etth e FSC an dRo th IRA t ax b en efi t s th e Co d e ex p l ici t l y p ro v i d es an d th atth e Co m

m i ss io n er s h o u l dn ’ tg ett o rewri te s t atu t es b as edo n h is m us i n g s ab o u t
co n gres si o n al i n t en t . An dth ey s ai dth atthei r u s e o f an FSC i n s teado f a C
co rp o rat i o n was en ou g h t o d is t i n gu i s h th es e cas es fro m Rep et t o . Th e m ajo ri ty

m o s tl y s i d es wi th the Co m

m i s s i on er an dfi n d s th atth e M azzei s were t h e FSC’ s s ub st an t i v e o wn ers atal l rel ev an t t i m es . 9 See o p . Ct
. p . 2 3. It s jo u rn ey t o th i s p ro b l em at i c co n cl u s i o n b eg i n s p ro m i s i n g ly en o u gh --wi t h
an as tu t e ex p l an at i o n o f t h e t ran s act i o n ati s s u e. It p o i n ts o u tth atl i k e t h e t ax p ay ers i n Rep et t o , Po l o wn i ak , an d Bl o ck Dev el o p ers , th e M azzei s u s eda t y p e
o f co rp o rat i o n t o ro u t e m o n ey fro m th ei r o p erat i n g b u si n es s i n to th ei r Ro th IRAs
. It ev en h i g hl i g h ts th e s i n gl e rel ev an td ifferen ce b et ween th os e cas es an dth e o n es

9 If t h i s i s a fi n d i n g o f fact , i ti s o ne wi th wh i ch I as th e t ri al ju d g e, wo u l d d i s ag ree. Itap p ears , h o wev er, t h atth e qu es ti o n o f “ s ub s tan t i v e” o wn ers h i p m i g h t b e s o m et h i n g o f a m i x edqu es t i o n o f l aw an dfact . If s o, i t wo u l dap p ear t hatth i s “ fi n d i n g” i s actu al l y

a co n cl u s io n o f l aw b as edo n th e u n d erl y i n g fact s s p eci fi c t o th es e cas es ab ou tth e M azzei s ’ o p erat i o n o f th ei r FSC, o perat i n g co m p an y , an d Ro th IRAs . See Cas eb eer v . Co m m is s io n er, 9 0 9 F.2 d1 3 6 0, 1 3 6 5 (9 th Ci r. 1 9 9 0 ) (d et erm i n at i o n thattran sact i o n l ack edeco n om i c s ub s t an ce i s fact ual fi n di n g rev i ewedo n ly

fo r cl ear erro r o n ap p eal ), aff’ g i n p art , rev ’ g i n p art8 9 T.C. 1 2 2 9 (1 9 8 7), an daff’ g T.C. M em o . 1 9 87 -6 2 5 , T.C. M em o. 1 9 8 7 -6 2 6 , an d T.C. M em o . 1 9 8 7 -6 2 8 ; b u ts ee Sack s v . Co m m i s s i o n er, 6 9 F.3 d 9 82 , 9 8 6 (9 th Ci r. 1 9 9 5) (d et erm i n at i o n thattran sact i o n a s h am i s rev i ewedfo r cl ear erro r o n u n d erl y i n g fact s an d d

e n o vo fo r co rrect n es s o f l eg al s tan d ard ), rev ’ g T.C. M em o . 1 9 9 2 -5 9 6
.- 8 9 -

b efo re u s : Th e M azzei s u sedan FSC, n o ta DISC, an dn o ta C co rp o rat i o n o r an LLC. Th e m ajo ri ty

ackn o w l ed g es , s ee o p . Ct . p . 3 2 , th atth e Co d e req u i res u s t o
res p ectcert ai n p aym en t s a b us i n es s m ak es t o an FSC i n ex ch an g e fo r n o th i n g , ev en th o u g h we wo u l dn ’ td o th atfo r m o s tty p es o f co rp orat i o n s . It al s o ack n owl ed ges th atth e Co d e l et s b u s i n es s es d edu ctth es e p aym en ts ev en th o u g h th ey aren ’ t “ o rd in ary

an d n eces s ary .” See s ec. 1 62 . Itreco g n i zes th atwe treat th es e p aym en t s as i n co m e t o th e FSC, an d i tfi n d s th atth e FSC h ere p ai dt ax o n th i s i n co m e. 1 0 Ital s o real i zes th atth e fu n d s th e FSC p ai d o utwere d i v i d en d s . Up t o th i s p o i n tth e m ajo ri ty ’ s ap p ro ach i sn ’ tm u ch d i fferen tfro m th ato f Su m m a II. Bu to n ce i tturn s t o th e Ro th IRAs ’ o wn ers h i p o f t he FSC, t h i n gs g et wei rd
. Th e m ajo ri ty

creat es a “ d o m i n i o n an dco n tro l ” t es tt o d et erm i n e wh o real l y g et s FSC d i v i den d s . See o p. Ct . p . 3 9 . Ins up p o rto f i t s n o vel ap p ro ach i td o es n ’ t ci t e an y cas es ab o u td i v i d en d s o r co rp o rat i o n s --i ns t ead , i trel i es o n l y o n Co m m i s s i o n er v . Ban k s , 5 4 3 U.S. 4 26 , 4 3 4 (2 0 0 5), wh i ch s ay s th atth e p o rt i o n o f a ju d g m en t th atg o es t o an at t o rn ey ’ s co n t i n g en cy fee i s s t i l l i n co m e t o th e l i t i g an t
. Th ere, t h e Sup rem e Co u rts ai dco n t in g en cy fees are an t i ci p at o ry

as s i g n m en t s o f

1 0 I s p eci fi cal l y

ag ree wi th th es e fi n d i n g s o f fact
.- 9 0 -

i n co m e ev entho u g h th e am o u n ti s u n cert ai n , b ecau s e t h e cl i en t atal l rel ev an t t i m es co n tro l l edth e “ i n co m e-g en erat i n g as s et ”--n am el y , th e cau se o f act i o n
res u l ti n g fro m

h i s i n jury . Id . at4 3 4-3 5
. An al o g i zi n g th es e cas es t o Ban k s , th e m ajo ri ty cal l s th e FSC an i n co m eg en erat i ng as s et . See o p . Ct
. p . 4 0 . Th at ’ s wro n g . In ject o r Co . was the o p erat i n g b u s i n es s th atactu al l y

g en erat edi n co m e. Th e FSC was a co n g res s io n al l y
s an ct i o n edv eh i cl e fo r redu ci n g In ject o r Co .’ s effect i v e t ax rat e o n ex p o rt s . Al l th e FSC d i d was accep tp aym en t s fo r n o th i n g an dd i st ri b u t e a l arg e p o rt i on o f th em as d i v i d en d s. Aft er m i s tak en l y

i d en t i fy i n g th e FSC as an i n co m e-g en erat i n g as s et , th e
m ajo ri ty ap p l i es co n s tru ct i v e-o wn ers h i p t es t s fro m a s eri es o f s al e-l eas eb ackcas es wh ere co u rt s s ai dthe p art y th ati n cu rred ri s kwas th e tru e o wn er, n am el y : Fran k Ly o n Co . v . Un i t edSt at es , 4 35 U.S. 5 6 1 , 5 8 1 , 5 8 4 (1 97 8 ); Cas eb eer v Co m m i s s i o n er, 9 0 9 F.2 d1 3 6 0 , 1 3 7 0 (9 th Ci r. 1 9 9 0 ), aff’ g i n p art , rev ’ g i n p art8 9 T.C. 1 2 2 9 (1 9 8 7 ), an daff’ g T.C. M em o . 1 9 8 7 -6 2 5 , T.C. M em o. 1 9 87 -6 2 6 , an d T.C. M em o . 1 98 7 -6 2 8 ; an dSack s v . Co m m i s s i on er, 6 9 F.3 d9 8 2 (9 th Ci r. 1 9 9 5 ),
rev ’ g T.C. M em o . 1 9 9 2-5 96
. 1 1 Try i n g t o ap p l y th i s p ri n ci p l e h ere, t h e m ajo ri ty

1 1 Th es e are cu ri o u s cas es t o ci t e i n s up p o rto f ap p ly i ng s ubs t an ce-o ver-fo rm p ri n ci p l es . InFran k Ly o n Co . v . Un i t edSt at es , 4 3 5 U.S. 5 6 1 , 5 8 4 (1 9 7 8 ), th e (co n ti n u ed ...)- 9 1 -

s ay s that th e Ro th IRAs d i dn ’ tactu al l y o wn th e FSC b ecau s e th ey ’ d p ai ds o l i t t l e fo r i t . See o p . Ct . p . 4 3 -4 4 . Bu tth e M azzei s al so p u tn o th i n g atri s k t o g etth e FSC, s o b y

the m ajo ri ty ’ s reas on i n g th ey co u l dn’ th av e o wn ed th e FSC ei th er. In fact , n o o n e co u l dev er o wnan FSC b ecau s e FSCs n ev er p utcap i t al at ri s k
. Th e m ajo ri ty

th en as ks an o th er q ues t i o n : Di d wh atth e Ro th IRAs p ai dfo r th e FSC h av e an y

rel at i o n t o i t s fu tu re v al u e? Th e m ajo ri ty s ay s i td id n ’ t , wh i ch i t fi nd s i s an ot h er s i g n th atth e Ro th IRAs d i dn ’ to wn th e FSC. See o p . Ct . p . 4 5
.

1 1 (...co n t i nu ed ) Sup rem e Co u rts ai d“ s o l on g as the l es s o r ret ai n s s i g n i fi can t an d g en u i n e at tri b u t es o f t h e t rad i t i o n al l es s o r s t atu s , th e fo rm o f t h e tran s act i o n ad o pt edb y th e p art i es g o v ern s fo r t ax p u rp os es .” Cas eb eer p ri m ari ly h ol d s th atth e t ax pay ers th ere weren ’ ten t i t l edt o s ect i o n 4 6 5 d edu ct i on s b ecau s e t h ey were “ p ro t ect edag ai n s t l o s s ” u n d er t h e m ean i n g o f s ect i o n 4 6 5 (b )(4 ). 9 0 9 F.2 d at1 3 7 0
. Sack s i s p erh ap s an ev enweak er au th o ri ty fo r t h e m ajo ri ty . Th ere we al l o wedth e Co m m i s si o n er t o rech aract eri ze a t ran s act i o n b ecau s e t h e t ax p ay er wo ul d n oth av e en t eredi n t o i t b u tfo r t ax cred i t s wi th o u t wh i ch th e t ran s act io n wo ul dn’ th av e b een p ro fi t ab l e. See Sack s v . Co m

m i s s io n er, T.C. M em o. 1 9 9 2 -5 9 6 , 1 9 9 2 W L 2 5 2 9 4 8 , at* 3 5 , rev ’ d, 6 9 F.3 d 9 8 2 . Th e Ni n th Ci rcu i trev ers edu s an d ex pl ai n ed : If t h e Co m

m i s s i on er were p erm i t t edt o d en y t ax b en efi t s wh en th e i n v es t m en t s wo u l d n o th av e b een m ad e b u t fo r t he t ax ad v an t ag es , th en o n l y tho s e i n v es t m en t s wo u ldb e m ad e wh i ch wo u l dh av e b een m ad e wi th ou t th e Co n gres s i o n al d eci s io n t o fav o r t h em . Th e t ax cred it s were i n t en d edt o g en erat e i n v es t m en ts i n al tern at i v e en erg y t ech no l o g ies th at wo u l dn o to th erwi se b e m ad e b ecau s e o f t h ei r l o w p ro fi t ab i l it y . Yetth e Co m m i s s i on er i n t h i s cas e at b ar p ro p o s es t o u s e t h e reas o n Co n g res s creat edthe t ax b en efi t s as a g ro u ndfo r d en y i n g th em . Sack s , 6 9 F.3 dat9 9 2 (i n t ern al ci t at i o n s o m i tt ed ).- 9 2 -

Bu t th e Co de d o es n’ treq u i re a fo u n d in g s h areh o l d er t o t ak e as h i s b as i s wh ath e h o p es th e earn i n g s o n h i s i nv es t m en twi ll b e--i treq u i res h i m t o t ak e as h i s b as i s
o n l y the co s to r am o u nt o f wh at ev er h e co n tri b u ted . Secs . 3 51 , 3 58 (a); s ee al s o
s ec. 1 0 12 (b as is i s co s t ). An d t h e Co de cert ai nl y d o es n ’ ttreath i s co rp o rat io n as a
s o l e p ro p ri et o rs h i p i f i ttu rn s o u tt o b e p ro fi t ab le. Wh atthe M azzei s ’ Ro th IRAs p ai dfo r t h e FSC s t o cki s m ean i n g l es s --wh i ch m i g h tb e wh y th e Co m m i s s io n er d i dn ’ tch al l en g e i t
. St i l l try i n g t o s h o eh o rnth es e cas es i n t o a s al e-l eas eb ackfram ewo rk , th e
m ajo ri ty th en s ay s th atb ecau se In ject o r Co . co n tro l l edh o wm u ch cas h wen ti n t o th e FSC, an u n rel at edRo th IRA co u l dn ’ th av e ex pect edan y up si d e b en efi t s fro m i t s s m al l i n v es t m en t . See o p . Ct . p p . 4 7 -4 9 . Th at ’ s tru e, b u tp ro v es t oo m u ch --an y
co m m o n ly co n tro l l edco rp o rat i o n s b et ween wh ich th e o wn ers co ul dread ju s t
co n tract ual ri g ht s atan y

t im e wo u l db e i n th e s am e s i tu at io n . Th e m ajo ri ty ’ s ap p l i cat i o n o f s al e-l eas eb ackan al y s is al s o m i s s es a l arg er p o i n t . Th e Sup rem e Co u rtt el l s u s t o res p ecta co rp o rat i on fo r t ax p u rp o s es as l o n g as i t ’ s a real b u s i n es s o r i t s p u rp o s e i s th e “ equ i v al en to f b u s i nes s act i v i ty .” M o l i ne Pro p s ., In c. v . Co m m i s s i o n er, 3 1 9 U.S. 4 3 6 , 4 3 9 (1 9 4 3 ). An dth e reg u l at i o n s s ay

th atan FSC--a co rp o rat i o n --can recei ve co m m i s s i o n s b as edn o t o n th e n o rm al tran s fer-p ri ci n g ru l es b u to n a s t atu t o ry fo rm u l a u n rel at edt o eco n o m i c- 9 3 -

real it y . See, e.g
. , s ec. 9 25 (a); s ec. 1 .9 2 5 (a)-1 T(a)(1 ), Tem p o raryIn co m e Tax Reg s., 5 2 Fed . Reg . 6 4 4 3 -4 4 (M ar. 3 , 1 9 8 7 ). So as l o n g as an FSC co m p l i es wi t h th e s t atu t e, we res p ecti tas i f i th ada real b u s i n es s p u rp o s e--i td o es n ’ td o
an yth i n g , b u tth e Co de an d reg u l at i o n s g i v e i t th e “ equ i v al en to f b u si n es s act i vi ty .” Th e s am e i s es s en t i al l y tru e fo r Ro th IRAs --t h ey h av e n o n o n t ax p u rp os e, b utth e Co d e g ran t s th em t ax b en efi t s i f t h ey

co m p ly wi th cert ai n fo rm al i t i es . Sec. 4 0 8A; s ee Su m m a II, 8 4 8 F.3 dat7 89 (p o in to f Ro th IRA i s t ax
av o id an ce). An d h ere t h e Co m m i s s i o n er co n ced es th atth e M azzei s o b s erv ed th o s e fo rm al i t i es . M o l in e Pro p ert ies was ab o u ti n co m e t ax , s ee 3 1 9 U.S. at4 3 8, n o tth e ex ci s e t ax es ati s s u e h ere, b utth atd o es n ’ tch an g e an yth in g . InHel l weg we h el d th atwe h av e t o treat tran s act io n s th e s am e way fo r ex ci s e t ax as we d o fo r i n co m e t ax . 2 0 1 1 W L 8 2 1 0 9 0 , at * 9 . Th ere we refu s edt o rech aract eri ze d i s tri b u t i o n s fro m a DISC t o a Ro th IRA fo r ex ci s e-t ax p u rp o s es b ecau s e t h e Co m m i s s i on er d i dn ’ tal s o
m ak e i n co m e-t ax ad

ju st m en t s. 1 2 Id . So i f we wo u l dres p ect FSCs an dRo th IRAs

1 2 Th e Co m

m i s s i o n er h ere al s o d oes n ’ ts eek t o red et erm i n e i n co m e t ax , b u t o n l y b ecau s e t he s t atu te o f l i m i t at i o n s h as ru n --h e s ay s i f i th ad n’ t , h e’ d red et erm i n e t h e i n co m e t ax t o o . W e p rev i o u s l y d eci d edthi s was en o u g h o f a d i s t i n ct i o n fro m

Hel lweg t o l etth es e cas es g o fo rwardo n t h e ex ci s e-t ax i s s u e al o n e. M azzei v . Co m

m i s s i o ner, T.C. M em o. 2 0 14 -5 5, at* 1 2 -* 1 3
.- 9 4 -

fo r i n co m e-t ax p u rp o s es , we al s o wo u l d h av e t o res p ectth em fo r ex ci se-t ax p u rp os es . Th e m ajo ri ty ’ s d o m i n i o n-an d-co n tro l t es two u l d wreakh av oc o n m an y -- p erh ap s h u n dred s o f th o u s an d s--o f s m al l i n d i v i du al l y - o r fam i l y -o wn ed
co rp o rat i o ns were we ev er t o ap p l y i tfo r an yth i n g o th er t h an d i s p os i n g o f t h es e
cas es . By

th e m ajo ri ty ’ s reas o n i n g , s o m eo n e wh o creat eda b us i n es s , i n co rp o rat ed i t , i s s u edh i m s el f 1 0 0 % o f t h e s t o cki n ex ch an ge fo r a s m al l cap i t al i n v es t m en t , an d co n t i n u ed t o ru n th e d ay -t o -d ay o p erat i o n s wo u ld n ’ treal l y o wnh i s
co rp o rat i o n--es p eci al l y if i twas a s u cces s. W e’ dh av e t o d i s reg ardth e co rp o rat i o n b ecau s e th e i n i t ial i n ves tm en twas t oo s m al l an d d id n ’ taccu rat el y p red i ct th e b u s i n es s ’ s fu tu re earn i ng s . Th e m ajo ri ty ’ s at t em

p tt o d i s t i n g u i s h Su m

m a II i s al s o p ro b l em at i c. Its ay s th atSu m m a II h adb efo re i t o n l y

th e d o m es t i c co m

p an y ’ s co m

m i ss i o n p aym en t s t o th e DISC an dth ati tth erefo re d o es n ’ to ffer an y g u id an ce reg ard i n g the FSC’ s p aym en t o f d i v i d en d s t o th e Ro th IRAs . See o p . Ct
. p p . 5 2 -5 3. Bu tSu m m a II
ex am i n edth e wh o l e t ran s act io n wh en i tques t i o nedwh eth er s ub s t an ce-o v er-fo rm p ri n ci p l es ap p li ed . See 8 4 8 F.3 dat7 8 4, 7 8 8 . Ith adt o b ecau s e th e Co m m i s s i o n er d i dn ’ tju strech aract eri ze an i n di v i du al co m p o n en to f th e tran s act i o n--h e rech aract eri zedth e wh o le t h in g. See i d . at7 8 2
.- 9 5 -

Th e m ajo ri ty

al s o fi n d s i ts i gn i fi can tth atthe M azzei s u s edan FSC i n s t ead
o f a DISC. Itp o i n t s o utth atth es e en t i t i es wo rkd i fferen t l y --DISC p aym en t s t o an IRA are s ub

jectt o UBIT, s ee s ec. 9 9 5 (g ), wh ereas FSCs p ay s om e i n co m e t ax at th e co rp o rat e l ev el , s ee s ec. 9 2 1 (a); s ec. 1
. 9 2 1 -2 (c), Q&A-6 , In co m e Tax Reg s . Bu t th os e d i fferen ces d o n ’ t affect wh o actu al l y o wn s them --es p eci al l y

u nd er t h e
m ajo ri ty ’ s d o m i n i o n -an d-co n tro l t es t . Th e Co m m i ss i o n er h i m s el f d oes n ’ tev en th i n kth e M azzei s’ u s e o f an FSC i n s t eado f a DISC m ak es a d i fferen ce--h e ju s t d o es n’ twan t u s t o fo l l ow Su m m a II. IV. A. Th e Co m m is s i o n er m ay

b e t ry in g t o s ew t h e wro n g l ab el o n t o th es e cas es , as h e u ses i n h i s b ri efs m u ch th e s am e l an g u ag e co urt s u s e i n th ei r o p in i o ns wh en th ey i nv o k e t h e eco n o m i c-s ub s t an ce d oct ri n e. Th ere’ s o v erl ap b et ween s ub s t an ceo v er-fo rm

p ri n ci p l es an deco n o m i c-s ub s t an ce d o ct ri n e, b u t o n e way o f t h i n k i n g ab o uts ub s t an ce-o v er-fo rm i s th ati ti s a ru l e o f t ax l aw t h atd i rect s co u rt s t o d eci d e
am bi g uo u s ques t i on s o f

f a ct b y l o o k i n g t o the real i t i es o f a s i tuat i on an dn o tth e l ab el s p art i es p u t o n th em . (If a k en n el an da t ax p ay er ag ree t h ata t ai l i s a l eg , a t ax p ay er m i g h ts ay h e h as a fi v e-l eg g edd o g . Bu tu n l es s th e Co d e o r reg ul at i o n s t el l u s d ifferen t l y , h i s d o g s t i l l h as o n l y fo u r l eg s fo r t ax l aw.)- 9 6 -

On e way o f t h i n k i n g ab ou teco n o m i c-s ub s t an ce d oct ri n e i s t h at i t i s a ru l e o f t ax l aw t h atd i rect s co u rt s t o d eci d e qu es t i o n s o f la wb y co n s tru i n g am

b ig u o u s p art s o f t h e Co d e b y

l o o k i n g t o th e eco n o m i c real i t i es o f t h e s i tu at i o n an d n o tth e l ab el s p art i es p u t o n th em . “ Part n ers h i p ”, un d er s t at e l aw, m ay b e d efi n ed as an y
en t i ty th ati d en t i fi es i t s el f as a p art n ers h ip i n p ap erwo rkfi l edwi th th e s ecret ary o f
s t at e. Bu twh en , wi tho u tm o re s p eci fi ci ty , th e Co d e s ay s “p art ners h i p ” co u rt s l oo k fo r a co m m o n i n t en t io n t o co l l ect i v el y p u rs u e a jo i nteco n o m i c o u t co m e. See, e.g ., Sup eri o r Trad i n g , LLC v . Co m m i s s i o n er,1 3 7 T.C. 7 0 , 8 1 -8 2 (2 0 1 1 ) (d i s reg ard i n g p art n ers hi p wh ere p art i es l ack edco m m o n i n t en t i o n t o co l l ect i v el y p u rs ue jo i n t
eco n om i c o u t co m e), aff’ d , 7 2 8 F.3 d6 7 6 (7 th Ci r. 2 0 13 ); M ark el l Co ., In c. v . Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -8 6 , at* 3 1 (d i s reg ard i n g p art n ers h i p wh ere t h ere
was l i t t l e p ro o f t h atb u si n es s was a jo i n tv en ture). Th ati s atl eas ta p l au s i b le way o f u nd ers t an di n g t h e d o ct ri n e’ s o ri g in i n Greg o ry v . Hel v eri n g , 2 9 3 U
. S. 4 6 5 , 4 6 9 -7 0 (1 9 3 5 ), wh ere t h e Co u rt h el d t h at wh en Co ng res s g av e t ax b en efi t s t o “ reo rg an izat i o n[s ] ”, i tm ean to nl y tran sact i o n s th atactu al l y ch an geda t ax pay er’ s eco n o m i c real i ty o r h adn o nt ax co n s equ en ces , ev en th o u g h Co n g res s d i dn ’ tex act l y s ay s o . To d ay

th e eco no m i c-s ubs t an ce d o ct ri n e i s p arto f t h e Co d e. Sec. 7 7 0 1 (o ). Bu tthe Co de al so warn s u s th ati ti s n ’ t- 9 7 -

al way s rel ev an t
. See i d
. (b eg i nn i n g “ [i ] n t h e cas e o f an y tran sact i o n t o wh ich th e
eco n om i c s ub s t an ce d o ct ri n e i s rel ev an t ”). Nei ther o f t h es e d o ct ri n es h el p s th e Co m m i s s i o n er h ere. Th es e cas es are n ot ab o uts ub s t an ce o v er fo rm , b ecau s e t h e M azzei s ’ FSC i s ex act l y wh ati t p urp o rt s t o b e: a co rp orat i o n (o r, m o re accu rat el y , an acco u n twi th i n a co rp orat i o n )
o rg an i zedp reci s el y

i n acco rdwi th the s t atu t o ry ru l es . Th e Co m

m i s si o n er d o es n ’ t d i s p u t e t h i s . Th ei r Ro th IRAs were l i k ewi s e ju s twh atth ey p u rp o rt edt o b e--t h e Co m m i s s i o n er d o es n ’ td i s p ut e t h i s ei th er. Th e eco n o m i c-s ub s tan ce d o ct ri n e al s o d o es n ’ t ap p l y h ere. If i ti s a ru l e o f
s t atu to ry co n s tru ct i o n, there’ s l i t t l e t o co n st ru e h ere--Co ng res s s etup b o th th e FSC
s tru ctu re an dRo th IRAs n o tt o h av e an y p u rp os e o th er t h ant ax redu ct i o n o r
av o id an ce. Th e Co d e d efi n es b o th wi th g reat p reci s io n --t hey are n o tt erm s l i k e

“p art n ers h i p ” o r “ reo rg an i zat i o n ” o r “ i n t eres t ” wh ere co urt s h av e l o ng i m p o rt ed
m ean i n g fro m

o ut s id e t ax l aw an dd o n e s o wi th an ey e t o eco n om i c effect s an d
n o n t ax m o t i v at i o n . B. Wh at ’ s real l y

g o i n g o n h ere i s th atth e Co m m is si o n er d o es n ’ tl i k e t h atth e M azzei s t o o k t wo ty

p es o f t ax -ad v an t ag eden t i t i es an d m ad e t h em wo rkt o get h er. He ad m i t s as m

u ch wh en h e s ay s th ats ub s t an ce-o v er-fo rm p ri n ci p les s h o ul d- 9 8 -

p rev en t “ co n s equ en ces u n i nt en d edb y Co n g res s .” He wan ts t o b e ab l e t o rech aract eri ze an y

tran s act i on th ati n h is o p i n i on ach iev es a res u l t Co n gres s d i dn ’ t
an t i ci p at e, ev en i f t hattran sact io n co m p l i es wi th th e Co d e. Th ere’ s a d ifferen ce, t ho u g h , b et ween an arg u m en tth ata t ran s act i on i s i n co n s i s t en twi th co n g res s i on al i n t en tan dan arg u m en tth atthe Co m m i ss i o n er can rech aract eri ze a t ran s act i o n u n l es s a t ax pay er can s h o w th atCo n g res s i n t en d edt o l eth i m d o wh at h e d i d . On e i s an arg u m en tab o utwh ata s t atu t e m ean s , th e o t h er i s an as s ert i o n t h atth e IRS o r t h e co u rt s h av e a g en eral p o wer t o recas t tran s act io n s t o redu ce t ax b en efi t s u n l es s Co n g res s d en i edth at p ower fo r t h e tran s act io n ati s su e. Th at ’ s wh ati s g o i n g o n h ere. Th e m ajo ri ty ’ s ap pro ach --p erh ap s m ore
co m m o n i n t ax l aw t h an i n an y o th er l eg al s p eci al ty --i s t o ab an d o n g en eral p ri n ci p l es o f s t atu t ory co n s tru ct i o n i n fav o r o f u s in g ju d g e-m ad e d o ct ri nes th at
u n d erm i n e o r i gn o re t h e t ex to f t h e Co d e t o recas ttran s act i o n s t o av o i d“ ab u s e”. An dh ere “ ab u s e” m ean s s o m et h i n g l i k e a res ul t i nco n s i s t en twi th a ju d g e’ s n o t i o n
o f a Co de s ect i o n ’ s p u rp o s e. Th e g reat t ex tu al i s tco u n t errev o l u t io n o f th e l as tfew d ecad es m ak es th i s u n ten ab l e. A un an i m o u s Sup rem e Co u rt h el di n i t s fi rs t
o p i n i o n o f t h e cu rren t t erm :- 9 9 -

[W ] e res i s ts p ecu l at i ng wh et h er Co ng res s act edi n adv ert en t l y . See Hen s o n v . San t an d er Co n s u m er USA In c., 5 8 2 U.S. , - (2 0 1 7 ) (s l i p o p ., at9 -1 0) (“ [W ] e wi l l n o t p res um e wi th [res p o n d en t s] th atan y res ul tco n s i s t en t wi th th ei r acco u nto f t h e s t atu t e’ s o v erarch i ng g o al m

u stb e t h e l aw b u t wi l l p res u m e m o re m o d es t l y i n s t ead‘ that[t h e] l eg i sl atu re s ay s . . . wh ati tm ean s an d m ean s . . . wh ati ts ay s.’ ” (q u o t i ng Do d dv . Un it edSt at es , 5 4 5 U.S. 3 5 3 , 3 5 7 (2 0 0 5 ))); M ag w oo dv . Pat t ers o n , 5 6 1 U.S. 3 2 0 , 3 3 4 (2 0 1 0 ) (“ W e can n o trep l ace t he act u al t ex twi th s p ecu l at i o n as t o Co ng res s ’ i n t en t .”). * * * Ham er v . Nei g hb o rh o o dHo u s . Serv s . o f Ch i ., 5 8 3 U.S. , , 1 3 8 S. Ct . 1 3 , 2 0 (2 0 1 7). W e s h o u l d i n s t eadad o p t th e Si x th Ci rcu i t ’ s v i ew o f t h is --t h at s ub s tan ceo v er-fo rm

s i m pl y l et s co u rt s l o o katwh at ’ s real l y g o i n g o n reg ard l es s o f t h e l ab el s t ax p ay ers u s e. See Su m

m a II, 8 4 8 F.3 dat7 8 5 ; s ee al s o Greg o ry , 2 9 3 U.S. at4 6 9
- 7 0 . Th at way

t ax p ay ers can ’ tg ett ax b en efi t s ju s t b y cal li n g s o m et h i n g s om et h i n g i t ’ s n o t. As th e m ajo ri ty

p o in t s o u t , i f a t ax p ay er cal l edd o g s co ws an dthen cl ai m eds ub s i d i es fo r co ws , s ub s t an ce-o v er-fo rm p ri n ci p l es wo u l d l etu s d en y th o s e s ub s i d i es . See o p . Ct
. p . 6 8 ; s ee al s o Su m m a II, 8 4 8 F.3 dat7 8 7 -8 8 (q u o t i ng J o s ep h Is en b erg h , “ M u s i n g s o n Fo rm an d Sub st an ce i n Tax at i o n : Fed eral Tax at i o n o f In co m es , Es t at es , an dGi ft s , ” 4 9 U. Ch i . L. Rev . 8 5 9 , 8 6 5 (1 9 8 2 )).- 1 0 0 -

Bu t ri ch p eo p le b u y i n g co ws th ey d o n ’ to th erwi s e n eedi n o rd er t o g etth e co w
s ub s i d i es i s n ’ t th e s am e t h i n g . See i d
. 1 3 Th e eco n o m i c s ub s t an ce d o ct ri n e d oes n ’ th el p t h e Co m m is s i o n er h ere ei th er. If t h atd oct ri n e i s o n e o f s t atut o ry co ns tru ct i o n, Co n g res s s p eci fi cal l y tu rn edi to ff fo r FSCs wh en i tt o l d u s th at th e co m m i s s i o n s th ey

recei v e--an db y
ex t en s i o n th e d i vi d en d s th ey p ay --d o n ’ tn eeda b as i s i n eco n o m i c real i ty . See
s ecs . 2 4 5(c), 9 25 ; s ec. 1 .9 2 5 (a)-1 T(a)(3 ), Tem po raryIn co m e Tax Reg s , 5 2 Fed
. Reg
. 6 4 4 4 (M ar. 3 , 1 9 87 ). An d Co n g res s l i k ewi s e d i dn ’ treq u i re IRAs t o h av e an y p u rp os e o th er t h ant ax -ad v an t ag eds av i ng . I wo u l dth erefo re h o l d t h atwe h av e n o b as i s fo r rech aract eri zi n g th e t ran s act io n h ere--t h ere’ s n o s t atu t o ry am bi g u i ty an d Co n g res s s ai d eco n om i c s ub st an ce i s n ’ tn eces s ary . An d as we h av e al read y h el d , i f we co u l dn ’ trech aract eri ze a t ran s act i o n fo r i n co m e-t ax p u rp o s es , we can ’ t rech aract eri ze i t fo r ex ci s e-t ax p u rp o s es . Hel lweg , 2 0 1 1 W L 8 2 1 0 9 0 , at* 9
.

1 3 Pro fes s o r Is enb erg h g o es o n t o s ay th at“ [m ] an y

o f t h e d i ffi cu l t i es th at b ed ev i l th atp u rs u i t o f ‘ s ub s t an ce’ an d‘ fo rm ’ i n t ax at i on s t em fro m th e as s i m i l at i o n o f t h es e t wo p at tern s .” J o s ep h Is en b erg h, “ M u s i n g s o n Fo rm an d Sub s tan ce i n Tax at io n : Fed eral Tax at i o n o f In co m es , Es t at es , an dGi ft s ,” 4 9 U. Ch i
. L. Rev . 8 5 9 , 8 6 5-6 6 (1 9 8 2 ). He th en ex p l ai n s th atwe s h o u ld n ’ tu s e t h e “ rubri c o f fo rm

an ds ubs t an ce” t o co n fl at e i n s t an ces o f m i s l ab el i n g --wh ere rech aract eri zat i o n i s ap pro p ri at e--an dcas es wh ere a t ran s act i o n “ fal l s wi th i n th e s t atu te, b u t res ul t s i n a b adth i ng ” b ecau s e “ [m ] an y b adthi n gs * * * are p reci s el y wh atth ey p u rp o rtt o b e, an d t h erefo re can n otb e s wep tas i d e as s h am s .” Id . at8 6 6.- 1 0 1 - C. W e s h o u l d al way s rem em b er t h atth ere are t i m es i n t ax l aw wh ere co u rt s
o u g h tt o p u tfo rm

o v er s ub s t an ce, an ds ho u ldres p ecttran s act io n s t hath av e n o
n o n t ax p u rp o s e. Th at ’ s wh ath ap p en edi n Co t t ag e Sav i n g s As s o c. v . Co m m i s s i o n er, 4 9 9 U.S. 5 5 4 (1 9 9 1), wh ere t h e Sup rem e Co u rtres p ect eda tran s act io n th atcreat edd i fferen tl eg al ri g h t s o n p ap er--an dtrem en d o u s t ax l o s s es --b u t d i dn ’ tch an ge t h e t ax p ay er’ s eco n o m ic real it y . InM o l i n e Pro p ert i es th e Sup rem e Co u rts i m i l arl y

res p ect edth e co rp o rat i on th e t ax p ay er p uth i s real es t at e i n t o at th e s u g ges ti o n o f a cred i t o r ev en th ou g h th e co rp orat i o n h adn o b o o k s o r b an k acco u n t s . 3 1 9 U.S. at4 3 8 -3 9 . An d i n Sack s th e Ni n th Ci rcu i tres p ect eda tran s act io n th e t ax p ay er en t eredi n to t o g etren ewab le-en erg y cred i t s wi th o u t wh i ch th e t ran s act i o n wo u l dn ’ t h av e b een p ro fi t ab l e. 6 9 F.3 dat9 9 2. In cas es l i k e t h es e, co u rt s ap p l y th e l an g u ag e o f t he Co de ev en wh en t ax p ay ers d i s co ver t h attwo s ect i o ns i n t eract t o p ro v i d e b en efi t s Co n g res s l i k el y d i dn ’ ti n t en d , o r ev enfo res ee. Th e Suprem e Co u rts ai das m u ch i n Gi t l i t z v . Co m m i s s i o n er, 5 3 1 U.S. 2 0 6 (2 0 0 1). Th ere, i t h el dthatth e Co d e’ s p l ai n l an g u ag e l etan i ns o lv en tS co rp o rat i o n 1 4 ex cl ud e d i s ch arg e-o f-i n d eb t ed nes s i n co m e wh i l e

1 4 AnS co rp o rat i on i s a co rp o rat i o n g o vern edu n d er t h e l aws o f s ub ch ap t er S o f t h e In t ern al Rev enu e Co d e. S co rp orat i o n s g en eral l y d o n ’ tp ay

fed eral (co n ti n u ed ...)- 1 0 2 -

s i m u l t an eo u s l y

l et t i n g th e S co rp o rat i o n ’ s s o l v en ts h areh o ld ers treat i tas i nco m e th ati n creas edth ei r b as es ag ai n s twh i ch th ey co ul dt ak e d edu ct i o ns . Id
. at2 1 6 , 2 1 8 . Lo wer co u rt s h adwo rri edth atth is was a “ do ub l e wi n d fal l ” t h atCo n g res s d i dn ’ ti n t en d , b u t th e Suprem e Co u rth el dth at“ [b ] ecau s e t h e Co d e’ s p lai n t ex t p erm i t s the t ax p ay ers * * * t o recei v e t h es e b en efi t s , we n eedn o t ad dres s th i s p o l i cy co n cern .” Id . at2 1 9 -2 0
. W e o u rs el v es ap p l i eds i m i l ar reas o ni n g i n Au s ti n v . Co m m is si o n er, T.C. M em o. 2 0 1 7 -6 9 , at* 3 1 -* 3 5 , wh ere we refu s ed t o s ay th atan em

p l o y ee s t o ck
o wn ers hi p p lan ’ s (ESOP’ s ) 1 0 0 % o wn ers h i p o f an S co rp o rat i o n l ack edeco n o m i c
s ub s t an ce ev en th o ug h al l o f t he S co rp o rat i o n ’ s i n co m e fl o wedi nt o th e ESOP t ax free. Th ere we n o t edth ats ch ol ars qu es t i o ned“ th e wi sd o m o f Co n g res s’ d eci s i o n t o creat e t h e s t atu to ry

fram ewo rko f wh i ch p et i ti o n ers t o o k ad v an t ag e. Bu tth at fram ewo rk

d i dex i st .” Id . at* 3 2 . Th e ESOP was wh ati twas s up po s edt o b e--a way t o i n creas e “ ret i rem en ti n co m e s ecu ri ty ”--s o we up h el dth e s tru ctu re d es p i t e i t s u n i nt en d edb en efi t s . Id
. at* 3 4 . W e ev enci tedSu m m a II’ s p ro cl am at i o n th at

“ [t ] h e Co m

m is s i o n er can n o tfau l tt ax p ay ers fo r m ak in g th e m o s to f t h e t ax 1 4 (...co n t i nu ed ) i n co m e t ax b u t are, l i k e p art n ers h i ps , p as s thro u g h en ti t i es th at ch an n el i n co m e an d d educt i o n s t o th ei r o wn ers . See Gi t l i t z, 5 3 1 U.S. at 2 09
.- 1 0 3 -

m i n i m i zi n g o p p o rtu n i ti es Co n g res s creat ed .” Id . at 3 2 (ci ti n g Su m m a II, 8 4 8 F.3 d at7 9 0 ). Cat erp i l l ar Tract o r Co . v . Un i t edSt at es , 2 1 8 Ct . Cl
. 5 1 7 (1 9 7 8 ), al s o fo l l o ws th i s ap p ro ach . Th ere, t h e Co u rto f Cl ai m s s ai da co rp o rat i o n qu al ifi edas a DISC
ev en th o u g h al l o f the ex p o rts al es i t s co m m i ss i o n p aym en t s cam e fro m were t o a rel at ed W es t ern Hem i s p h ere t rad e co rp o rat i o n (W HTC)--an o th er t y p e o f ex p o rt en co urag i n g en t i ty

thatn o l o n g er ex i s t s . Id . at5 2 2
. 1 5 Th i s res u l t edi n a “ do ub l e b en efi t ” t h atth e Co m

m is s i o n er s ai dCo n g res s d i dn ’ ti n t en d an d th ata reg u l at i o n fo rb ad e. Id . at5 2 8 . Bu tth e Co u rtup h el dth e s tru ctu re b ecau s e i t “ fi t[] s o l i d l y wi th i n th e l i t eral l an g u ag e o f t he s t atu t e.” Id
. at5 2 7 . Ital s o n o t edth at th e t ax p ay er was d o i n g wh atth e Co d e al l o wed , n o th id i n g th e act u al tran sact io n b eh in da fi ct i t i o us s tru ctu re o r l ab el . See i d
. at5 3 0
. As d i dth e t ax p ay ers i n Gi t l i t z, Au s t i n , an dCat erp il l ar Tract o r, s o d i dth e M azzei s h ere--t h ey g rab b edfo r t wo b en efi ts th atth e Co de’ s t ex tp l ai n l y al l o ws . Wh et h er t h ere i s l eg i s lat i v e h i s t o ry th ats h o ws an y o ne i n t en dedFSCs an dRo th IRAs t o wo rks o wel l t og et h er fo r t ax p ay ers l i k e t he M azzei s s h o u l dn ’ t m at t er. Sub s tan ce-o v er-fo rm p ri n ci p les d o n ’ tg i v e co u rt s free rei n t o ch o os e res u l t s th atfi t

1 5 W HTCs were d efi n edi n s ect i o n s 9 2 1-9 2 2 , b u twere p has edo u tfro m 1 9 7 6 -1 9 8 0 . See Tax Refo rm Acto f 1 9 7 6 , Pub . L. No . 9 4-4 5 5 , s ec. 1 05 2 , 9 0 St at
. 1 6 4 7 -4 8
.- 1 0 4 -

th ei r v iew o f g o o d tax p ol i cy . Th ey s i m p ly t el l u s t o treat thi n g s as wh atth ey real ly are, n o m at t er wh att ax p ay ers cal l th em . Wh enCo n g res s creat edFSCs an d Ro th IRAs , i ts ai dth ey

d i dn ’ tn eedeco n o m i c s ub s t an ce an dt ax p ay ers wh o u s ed th em d i dn’ tn eedt o h av e a n o n t ax p u rp o s e. As l o n g as t ax p ay ers co m p l y wi th
s t atu to ry fo rm al it i es , s u ch en t i ti es are wh atth ey p u rp o rt t o b e, an dwe h av e t o
res p ectthem , ev en wh en th ey wo rkt o g et h er. Here t h e M azzei s fo l l o wedthe fo rm al i t i es an dd i dn ’ tp l ay wi th l ab el s . Wh en i tco m es t o FSCs an d Ro th IRAs , th at ’ s en ou g h. FOLEY an dBUCH (jo i n o n l y Part s I t h ro ug h IV) an dM ORRISON (jo i n s o n l y Part s I th ro u g h III), J J
. , ag ree wi th th i s d i s s en t
.