T.C. Memo. 2011-58 

UNITED STATES TAX COURT

ERIN N. HELLWEG, ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 14502-08, 14523-08, Filed March 9, 2011.

 14525-08, 14527-08.

Ps held ownership interests in and controlled an S

corporation. Ps’ Roth IRAs formed a DISC which entered into

a commission agreement with the S corporation. For excise

tax purposes only, R recharacterized commission payments

from the S corporation to the DISC as distributions to Ps

followed by Ps’ contribution of the proceeds to their Roth

IRAs. R determined that Ps were each liable for: (1)

Excise taxes on excess contributions to their Roth IRAs

under sec. 4973, I.R.C.; (2) an accuracy-related penalty

under sec. 6662(a), I.R.C.; and (3) additions to tax under

sec. 6651(a)(1), I.R.C., for failing to file the appropriate

information returns.

1Cases of the following petitioners are consolidated

herewith: Tara L. Slaight, docket No. 14523-08; Tyler D.

Hellweg, docket No. 14525-08; and Zachary D. Slaight, docket No.

14527-08.
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Held: The transactions must be treated consistently

for sec. 4973, I.R.C., and income tax purposes.

Held, further, the commission payments from Ps’ S

corporation do not represent excess contributions to Ps’

Roth IRAs.

Held, further, Ps are not liable for excise taxes under

sec. 4973, I.R.C.

Held, further, Ps are not liable for accuracy-related

penalties under sec. 6662(a), I.R.C.

Held, further, Ps are not liable for additions to tax

under sec. 6651(a)(1), I.R.C.

Neal J. Block, Robert S. Walton, Brian C. Dursch, and 

John M. Carnahan III, for petitioners.

Peter N. Scharff, for respondent.

MEMORANDUM OPINION

NIMS, Judge: This matter is before the Court on

petitioners’ motion for summary judgment under Rule 121 (Motion).

For each petitioner, respondent determined the following

deficiencies, penalty, and additions with respect to his or her

Federal income tax:

Penalty Additions to Tax

Year Deficiency1 Sec. 6662A2 Sec. 6651(a)(1)

2004 $6,038 $1,207.60 --

2005 12,038 -- $3,010

2006 16,877 -- 4,219
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1It is not apparent from the record why respondent

determined identical deficiencies, penalties, and

additions to tax for all four petitioners when the

amounts distributed by ADF International Sales Co. to

ENH International Sales Corp., TDH International Sales

Corp., TLS International Sales Corp., and ZDS

International Sales Corp. were not identical.

2Respondent determined in the alternative that if

petitioners are not liable for the accuracy-related

penalty under sec. 6662A, then they are liable for the

accuracy-related penalty under sec. 6662(a). 

Respondent concedes that petitioners are not liable for the

accuracy-related penalty under section 6662A. Following that

concession, the issues for consideration are: (1) Whether

petitioners are liable for excise taxes under section 4973; (2)

whether petitioners are liable for accuracy-related penalties

under section 6662(a); and (3) whether petitioners are liable for

additions to tax under section 6651(a)(1). Unless otherwise

indicated, all section references are to the Internal Revenue

Code in effect for the years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

Background

For the purposes of deciding the Motion only, the following

facts are derived from the affidavits and exhibits submitted by

the parties and the parties’ pleadings.

Petitioners Erin Hellweg, Tyler Hellweg, and Zachary Slaight

resided in Missouri when they filed their petitions. Petitioner

Tara Slaight resided in Texas when she filed her petition. 
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Petitioners held ownership interests in and controlled

American Dehydrated Foods, Inc. (ADF), an S corporation which

began operations in 1978 and manufactured ingredients for the pet

food and specialty feed industries. At all relevant times, ADF

was owned by 15 related shareholders, including petitioners.

Before the years in issue petitioners each established a

Roth IRA. The Roth IRAs each subscribed to 25 percent of the

previously unissued stock of ADF International Sales Co. (ADF

International), which elected to be treated as a domestic

international sales corporation (DISC). Each of the Roth IRAs

subsequently contributed its ownership interest in ADF

International to a C corporation in exchange for all of that

corporation’s previously unissued stock; following the

contributions, Erin Hellweg’s Roth IRA owned ENH International

Sales Corp. (ENH), Tyler Hellweg’s Roth IRA owned TDH

International Sales Corp. (TDH), Tara Slaight’s Roth IRA owned

TLS International Sales Corp. (TLS), and Zachary Slaight’s Roth

IRA owned ZDS International Sales Corp. (ZDS).

During the years in issue the following series of

transactions (Transaction) occurred. 

(1) ADF paid DISC commissions to ADF International on

ADF’s qualified export sales (ADF commission payments). 

ADF reported qualified export sales of $10,308,552 in

2004, $8,325,792 in 2005, and $7,365,851 in 2006. ADF
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International reported for those years DISC commissions

of $465,392, $334,315, and $297,052 and taxable income

of $463,557, $333,119, and $294,657, respectively. ADF

deducted the payment of these DISC commissions to ADF

International.

(2) As a result of its status as a DISC, ADF

International was deemed to have made distributions of

DISC income to ENH, TDH, TLS, and ZDS (the C

corporations) totaling $40,327 in 2004, $19,595 in

2005, and $17,333 in 2006. ADF International also made

actual distributions of DISC income to the C

corporations totaling $400,400 in 2004, $398,600 in

2005, and $320,400 in 2006. 

The C corporations reported and paid Federal

income tax on the dividend income attributable to both

the deemed and actual distributions. For 2004 to 2006

ENH reported dividend income of $100,152, $99,916, and

$80,510 and paid Federal income taxes of $22,063,

$21,943, and $15,349, respectively. TDH reported

dividend income of $100,152, $99,916, and $80,510 and

paid Federal income taxes of $22,063, $21,943, and

$15,349, respectively. TLS reported dividend income of

$100,152, $99,935, and $80,540 and paid Federal income

taxes of $22,063, $21,949, and $15,359, respectively. 
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ZDS reported dividend income of $100,153, $99,935, and

$80,540 and paid Federal income taxes of $22,063,

$21,949, and $15,359, respectively.

(3) Each of the C corporations then distributed some

amount as a dividend to the Roth IRA that owned it. 

The record is unclear as to the years for which the C

corporations issued dividends and the amounts.

Respondent audited ADF’s and petitioners’ 2004, 2005, and

2006 returns. At the conclusion of the ADF audit, respondent

issued letters to ADF and its shareholders stating that there

would be no changes to ADF’s 2004, 2005, and 2006 returns.

The audit of petitioners’ returns, however, resulted in

respondent’s issuing to petitioners statutory notices of

deficiency. In the notices of deficiency, respondent determined

that payments from ADF to the C corporations each represented: 

(1) A distribution from the recipient C corporation to the

petitioner whose Roth IRA owned that C corporation and (2) a

subsequent contribution by that petitioner to his or her Roth

IRA.2 Respondent determined that the amounts deemed contributed

to the Roth IRAs were excess contributions subject to the section

2Respondent has since amended his characterization of the

Transaction, as discussed infra. Also, the notices of deficiency

issued to Erin Hellweg, Tyler Hellweg, and Zachary Slaight

contain errors in that they each address the “Payments from

American Dehydrated Foods, Inc. to TLS International Sales

Corporation” rather than to ENH, TDH, and ZDS, respectively.
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4973 excise tax. For the 2004 tax year, respondent also

determined that petitioners were liable for a section 6662A

penalty (understatement of tax relating to involvement in a

reportable transaction) or, alternatively, for a section 6662(a)

penalty (underpayment of tax due to negligence or disregard of

rules or regulations). For the 2005 and 2006 tax years

respondent determined that petitioners were liable for additions

to tax under section 6651(a)(1) for failure to file Forms 5329,

Additional Taxes on Qualified Plans (Including IRAs) and Other

Tax-Favored Accounts.

On June 13, 2008, petitioners filed petitions with this

Court. On October 22, 2008, petitioners filed a motion to

consolidate their cases, which the Court granted. On October 22,

2008, petitioners also filed the Motion. 

Discussion

I. Respondent’s Objection to Exhibits

Respondent objected to exhibits K through CC of petitioners’

Second Supplemental Brief in Support of the Motion. These

exhibits contain information document requests made by respondent

when he audited ADF’s and petitioners’ returns. Petitioners

claim the exhibits show that discovery is unnecessary because

respondent has already had an opportunity to obtain all the

relevant information petitioners have. We have not examined

these exhibits, and our finding that summary judgment is
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appropriate does not depend upon what documents respondent

requested during the audits. Accordingly, respondent’s objection

is denied on the grounds of mootness.

II. Summary Judgment

Summary judgment may be granted when there is no genuine

issue of material fact and a decision may be rendered as a matter

of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.

518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). The moving

party bears the burden of proving there is no genuine issue of

material fact, and factual inferences will be read in a manner

most favorable to the party opposing summary judgment. Dahlstrom

v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982). The adverse party must

set forth specific facts showing that there is a genuine issue

for trial and may not rest on mere allegations or denials in his

pleadings. Rule 121(d).

Respondent contends that there is an issue as to what

petitioners’ respective ownership interests in ADF were and

therefore whether petitioners exercised control over ADF. 

Petitioners have, however, conceded that they controlled ADF

through direct and indirect ownership.

Respondent contends that there is an issue as to whether

petitioners’ purpose in arranging the Transaction was to avoid

the limit on IRA contributions. But since respondent has deemed
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the Transaction valid for income tax purposes (discussed infra),

he cannot now contend that the Transaction lacked a business

purpose.

Respondent contends that there is an issue as to what each

petitioner’s Roth IRA contribution limits were during the years

in issue. The amounts of the contribution limits are not in

issue because the payments from ADF exceed even the maximum

possible (i.e., unreduced) contribution limit under section

408A(c)(2). Thus, even if we were to decide in favor of

respondent, the extent to which those payments exceed the actual

contribution limits is merely a computational matter.

Respondent contends that material factual issues remain as

to whether the ADF commission payments were qualified DISC

commissions, whether DISC commissions may not be recharacterized

as excess contributions under section 4973, and whether the ADF

commission payments were, in substance, excess contributions to

petitioners’ Roth IRAs. However, these are legal issues that do

not require trial and can appropriately be decided as a matter of

law. 

Respondent nevertheless insists that summary judgment is not

appropriate because the facts underlying these legal issues are

in dispute. Respondent does not specify what those disputed

facts are and claims he is unable to do so because he has not had

a reasonable opportunity to conduct discovery. 
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While respondent may require discovery to obtain the

evidence necessary to resolve the factual issues that are in

dispute, the absence of discovery should not prevent him from

being able to identify what those disputed issues are. The

declaration of petitioners’ return preparer, Mr. Renkel, details

each leg of the Transaction, and respondent has not contested any

part of Mr. Renkel’s account of the Transaction. Since there is

no disagreement as to what happened, we do not see why discovery

is necessary. Respondent’s professed need for discovery is

nothing more than a fishing expedition. As we have previously

warned: “tax cases are to be thoroughly investigated before--

rather than after--the notice of deficiency is issued.” 

Westreco, Inc. v. Commissioner, T.C. Memo. 1990-501.

Accordingly, we find and hold that there is no genuine issue

of material fact and that judgment may be rendered as a matter of

law.

III. Section 4973 Excise Taxes

Section 4973 imposes a 6-percent excise tax on excess

contributions to IRAs.

Respondent contends that petitioners used the Transaction as

a vehicle to improperly shift value into their Roth IRAs. 

Respondent contends that, for excise tax purposes only, the

Transaction was therefore formalistic and not substantive. 

Respondent thus contends that the ADF commission payments
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represented, in substance, excess contributions to petitioners’

Roth IRAs. Respondent now argues that the Transaction should be

recharacterized as a distribution from ADF to petitioners

followed by petitioners’ contribution of the distribution

proceeds to their respective Roth IRAs.

Petitioners contend that the payment of DISC dividends to a

Roth IRA cannot be treated as an excess contribution because

Congress specifically addressed the ownership of a DISC by an IRA

when it enacted section 995(g) in response to Blue Bird Body Co.

& Affiliates v. Commissioner, docket No. 1345-87 (stipulated

decision entered Aug. 30, 1988).3

A DISC provides a mechanism for deferral of a portion of the

Federal income tax on income from exports. The DISC itself is

not taxed, but instead the DISC’s shareholders are currently

taxed on a portion of the DISC’s earnings in the form of a deemed

distribution. Secs. 991, 995(b)(1). This allows for deferral of

taxation on the remainder of the DISC’s earnings until those

earnings are actually distributed, the shareholders dispose of

their DISC stock in a taxable transaction, or the corporation

ceases to qualify as a DISC. Secs. 995(b)(2), (c), 996(a)(1). 

3Petitioners cite Blue Bird Body Co. because they contend

that Congress was aware of the issues raised therein. 

Petitioners cannot, and do not, cite the case for any

precedential value because it was disposed of by stipulated

decision.
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A DISC sometimes does not generate the income it reports on

its returns and might otherwise not be recognized as a corporate

entity for tax purposes if it were not a DISC. Addison Intl.,

Inc. v. Commissioner, 90 T.C. 1207 (1988), affd. 887 F.2d 660

(6th Cir. 1989); Jet Research, Inc. v. Commissioner, T.C. Memo.

1990-463; see also sec. 1.992-1(a), Income Tax Regs. “The DISC

may be no more than a shell corporation, which performs no

functions other than to receive commissions on foreign sales made

by its parent.” Thomas Intl. Ltd. v. United States, 773 F.2d

300, 301 (Fed. Cir. 1985); Foley Mach. Co. v. Commissioner, 91

T.C. 434, 438 (1988); see also Jet Research, Inc. v.

Commissioner, supra.

Because Blue Bird Body Co. & Affiliates v. Commissioner,

supra, involved a DISC owned by a taxpayer’s tax-exempt section

501 profit-sharing trust, petitioners argue that Congress was

fully aware of the benefits of DISC ownership by tax-exempt

entities and chose to address the problem by enacting section

995(g), which subjects tax-exempt entities owning DISC stock to

the unrelated business income tax. Petitioners argue that the

fact that Congress could have prohibited transactions involving

DISCs owned by IRAs but chose not to do so indicates that

Congress was comfortable with IRAs’ holding DISC stock once

section 995(g) was enacted.
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We disagree with petitioners. Blue Bird is not mentioned

anywhere in the legislative history of section 995(g), and there

is no indication that Congress enacted the statute in response to

that case.

Even if we considered section 995(g) to be a response to

Blue Bird, Congress could not have addressed the excess

contribution issue because the issue was not raised in that case. 

In Blue Bird the taxpayer paid commissions to a DISC owned by the

taxpayer’s profit-sharing plan. The Internal Revenue Service

(Service) found the transaction offensive because in the absence

of section 995(g) the income tax on the deemed distributions from

the DISC would also be deferred. The Service never raised the

issue of whether the commissions represented excess contributions

subject to an excise tax and sought only to prevent complete

deferral of the income tax on the DISC’s income.

Petitioners’ argument is further unconvincing because it is

logically erroneous. In arriving at their conclusion that

Congress’ inactivity validates the Transaction here, petitioners

commit the fallacy of denying the antecedent. Quite obviously,

if Congress had enacted legislation (treating DISC dividends paid

to IRAs as excess contributions subject to section 4973), then

all such distributions would be treated as excess contributions. 

While the contrapositive (i.e., if not every such distribution is

treated as an excess contribution, then Congress must not have
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enacted such legislation) must be true, the inverse is not

necessarily so. Therefore, petitioners’ inference that Congress’

failure to enact such legislation means that all DISC dividends

paid to an IRA cannot be treated as excess contributions does not

follow. Congress’ inaction, assuming it was deliberate, may

merely represent a choice to determine whether such distributions

produce an excess contribution on a case-by-case basis according

to the facts and circumstances. Not every silence is pregnant. 

See Ill. Dept. of Pub. Aid v. Schweiker, 707 F.2d 273, 277 (7th

Cir. 1983).

Respondent argues that the facts and circumstances of the

present case do warrant a determination that the ADF commission

payments represent excess contributions to petitioners’ Roth

IRAs, as outlined in Notice 2004-8, 2004-1 C.B. 333.

Notice 2004-8, 2004-1 C.B. at 333, states that where a

taxpayer’s preexisting business enters into transactions with a

corporation owned by the taxpayer’s Roth IRA, in certain cases

“The acquisition of shares, the transactions or both are not

fairly valued and thus have the effect of shifting value into the

Roth IRA.” The notice identified three ways in which the Service

would attempt to challenge these transactions: (1) Apply section

482 to allocate income from the corporation to the taxpayer, the

preexisting business, or other entities under the control of the

taxpayer; (2) assert that under section 408(e)(2)(A) the
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transaction gives rise to one or more prohibited transactions

between a Roth IRA and a disqualified person described in section

4975(e)(2); and (3) assert that the substance of the transaction

is that the amount of the value shifted from the preexisting

business to the corporation is a payment to the taxpayer,

followed by a contribution by the taxpayer to the Roth IRA and a

contribution by the Roth IRA to the corporation.

Section 482 authorizes the Secretary to allocate income

among commonly controlled entities. Classification of the

transaction as a prohibited transaction under section

408(e)(2)(A) results in a deemed distribution of the IRA’s assets

to the taxpayer that is included in the taxpayer’s income and is

subject to a 10-percent additional tax. See secs. 72(t),

408(e)(2)(B). In cases where the Service attacks the substance

of the transaction, the Notice states: 

the Service will deny or reduce the deduction to the

Business; may require the Business, if the Business is a

corporation, to recognize gain on the transfer under 

§ 311(b); and may require inclusion of the payment in the

income of the Taxpayer (for example, as a taxable dividend

if the Business is a C corporation). * * * [Notice 2004-8,

2004-1 C.B. at 333; emphasis added.] 

Thus, Notice 2004-8, supra, clearly assumes that an income tax

adjustment will be made no matter which of the three avenues of

attack the Service chooses. 

Service notices do not carry the force of law, see Standley

v. Commissioner, 99 T.C. 259, 267 n.8 (1992), affd. without
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published opinion 24 F.3d 249 (9th Cir. 1994), and are therefore

not accorded deference under Chevron U.S.A. Inc. v. Natural Res.

Def. Council, Inc., 467 U.S. 837, 843-844 (1984); see United

States v. Mead Corp., 533 U.S. 218 (2001). Although they may be

entitled to deference under Skidmore v. Swift & Co., 323 U.S. 134

(1944), see United States v. Mead Corp., supra, we need not

decide whether Notice 2004-8, supra, should be given Skidmore

deference because the Transaction does not fall within the scope

of the notice.

In contrast to the transactions described in Notice 2004-8,

supra, respondent has apparently deemed the Transaction to be

fairly valued. Pursuant to Notice 2004-8, supra, reallocation of

income or recharacterization of the Transaction should have

resulted in: (1) Refund of income taxes paid by the C

corporations on the dividend income from ADF International, (2)

reduction or denial of the deductions claimed by ADF for the ADF

commission payments, (3) additional passthrough S corporation

income to petitioners from ADF, and (4) income to petitioners

under section 1368 to the extent, if any, the distributions they

were deemed to have received from ADF exceeded their bases in

ADF. Respondent made no such adjustments and, in fact, issued a

no-change letter to ADF. Respondent made no section 482

adjustment. Respondent could not assert the Transaction was a

prohibited transaction under section 408(e)(2)(A) because of our
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decision in Swanson v. Commissioner, 106 T.C. 76 (1996)

(discussed infra). In the absence of fraud or an illegal purpose

behind the Transaction, respondent could not challenge the

substance of the Transaction for income tax purposes because to

do so would require the existence of ADF International to be

disregarded, which would frustrate the congressional intent

behind the creation of the DISC regime. See Addison Intl., Inc.

v. Commissioner, 90 T.C. 1207 (1988); Jet Research, Inc. v.

Commissioner, T.C. Memo. 1990-463.

In the absence of a challenge to the Transaction using any

of the three methods delineated in Notice 2004-8, supra,

respondent tries a variation of the notice’s third approach. 

Respondent argues that the Transaction, while being valid for

income tax purposes, lacks substance for excise tax purposes

only. 

While respondent’s position that the Transaction

simultaneously does and does not have substance seems rather

incongruous, respondent argues that inconsistent treatment is

permissible because the excise tax and income tax regimes are

completely independent of one another. Respondent argues that

“The safe harbor rules [of section 1.994-1(a)(1), Income Tax

Regs.] affect the treatment of the commissions solely for income

tax purposes, not for other purposes, such as the excise tax

provisions at issue in these cases.” In support of that

proposition, respondent directs our attention to Rev. Rul. 81-54,
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1981-1 C.B. 476. Respondent claims that “Under Revenue Ruling

81-54, commissions paid to [a] DISC by * * * [a corporation] were

treated as gifts for gift tax purposes despite the fact that for

income tax purposes the commissions could qualify under the safe

harbor rules.” 

In Rev. Rul. 81-54, supra, three shareholders of a

corporation formed a DISC. The shareholders transferred gifts of

their DISC stock to trusts created for the benefit of their

children, and the corporation subsequently entered into a

commission agreement with the DISC. The revenue ruling

determined that annual DISC commissions paid by the corporation

would be treated as continuing “gifts of profits that would

otherwise flow to * * * [the corporation] in the absence of the

agreement with the DISC” as each commission payment was made. 

Id., 1981-1 C.B. at 477.

Rev. Rul. 81-54, supra, does not address the income tax

consequences of the recharacterization of the DISC commissions.

However, respondent’s position that a transaction may be treated

differently under different tax regimes seems, on the surface, to

have some support in cases which have held that the income and

gift tax statutes are not read in conjunction with one another

(i.e., are not in pari materia). See United States v. Davis, 370

U.S. 65 (1962); Farid-Es-Sultaneh v. Commissioner, 160 F.2d 812

(2d Cir. 1947), revg. 6 T.C. 652 (1946).
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In Farid-Es-Sultaneh, the taxpayer sold stock which she had

acquired pursuant to a prenuptial agreement in exchange for the

release of her marital rights. In calculating her income tax

liability on the sale, the taxpayer treated the acquisition as a

purchase and used as a basis the stock’s fair market value at the

time she acquired the stock (i.e., cost basis). The Commissioner

treated the acquisition as one by gift and determined the

taxpayer’s basis to be that of the transferor (i.e., carryover

basis) instead.

The Court of Appeals for the Second Circuit noted that the

transfer was defined by the gift tax statutes as a gift. The

Revenue Act of 1932, ch. 209, sec. 503, 47 Stat. 247, provided

that “Where property is transferred for less than an adequate and

full consideration in money or money’s worth, then the amount by

which the value of the property exceeded the value of the

consideration shall, for the purpose of the tax imposed by this

title, be deemed a gift”. For gift tax purposes, the release of

the taxpayer’s marital rights could not be considered adequate

and full “consideration in money or money’s worth” because

section 804 of the same act, 47 Stat. 280, expressly provided

that it was not. Farid-Es-Sultaneh v. Commissioner, supra at

814. Although that statute was an estate tax statute, the

Supreme Court had held in Merrill v. Fahs, 324 U.S. 308 (1945),
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that it also extended to the gift tax regime since the gift and

estate tax statutes were to be construed together.

For income tax purposes, however, the Court of Appeals

observed that there was no statute comparable to section 804 of

the act and held that the income and gift tax statutes do not

relate to the same matter. Therefore, in the absence of a

statute treating the release of marital rights as inadequate

consideration for income tax purposes, the court declined to

depart from “the usual legal effect to proof that a transfer was

made for a fair consideration”. Farid-Es-Sultaneh v.

Commissioner, supra at 814. The court thus held that the

taxpayer had acquired the stock by purchase despite the fact that

the transferor could have been liable for gift tax if the gift

tax had been in effect at the time of the transfer.

In United States v. Davis, supra, the Supreme Court held

that the taxpayer’s transfer of appreciated property to his

former wife under a marital settlement agreement was a taxable

event. In deciding that the exchange of the stock for the

release of the former wife’s marital rights could not be a gift,

the Court stated that it was not constrained by the gift and

estate tax statutes and thereby approved of the Court of Appeals’

holding in Farid-Es-Sultaneh. Id. at 69 n.6. 

The present case, however, is distinguishable in that there

is no excise tax statute which necessitates the Transaction’s
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being treated differently for excise tax purposes. As the

Supreme Court explained in Davis: 

Cases in which this Court has held transfers of property in

exchange for the release of marital rights subject to gift

taxes are based not on the premise that such transactions

are inherently gifts but on the concept that in the

contemplation of the gift tax statute they are to be taxed

as gifts. * * * [Id.]

To the contrary, the excise tax statute in issue here, section

4973, compels consistent treatment of the Transaction because

that statute is intertwined with and inseparable from the income

tax regime. Section 4973(a) imposes the 6-percent excise tax on

the amount of the excess contributions. As to a traditional IRA,

an “excess contribution” is defined in part as the excess of the

amount contributed over the amount allowable as a deduction under

section 219. Sec. 4973(b). As to a Roth IRA, an “excess

contribution” is defined in part as the excess of the amount

contributed over the amount allowable as a contribution under

section 408A(c)(2) and (3). Sec. 4973(f). Section 408A(c)(2)

sets the initial Roth IRA contribution limit as the maximum

amount allowable as a deduction under section 219 reduced by the

aggregate contributions to other individual retirement plans. 

Section 408A(c)(3) reduces that amount once the taxpayer’s

adjusted gross income exceeds a threshold amount. Thus, the

section 4973 excise tax cannot be determined without regard to

the taxpayer’s income tax because sections 219 and 408A(c)(2) and
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(3) are income tax provisions and section 408A(c)(3) in

particular refers to the taxpayer’s adjusted gross income.

The Transaction being valid for income tax purposes, it must

also be valid for purposes of section 4973. Since respondent has

made no section 482 adjustment which would result in

distributions from ADF to petitioners for income tax purposes,

the ADF commission payments cannot be treated as distributions to

petitioners for purposes of the section 4973 excise tax. 

Therefore, the ADF commission payments do not constitute excess

contributions to petitioners’ Roth IRAs.

This case is distinguishable from Michael C. Hollen, D.D.S.,

P.C. v. Commissioner, T.C. Memo. 2011-2, where we sustained the

Service’s determination that a “dividend” paid by a corporate

taxpayer to its employee stock ownership trust (ESOT) represented

an excess contribution to the account of a participant in the

taxpayer’s related employee stock ownership plan (ESOP). There,

the taxpayer sought a declaratory judgment that the ESOP and the

ESOT were qualified for income tax purposes under section 401(a). 

The ESOT had borrowed money from the ESOP to purchase stock in

the taxpayer. The ESOT then used the proceeds of a $200,000

“dividend” from the taxpayer to partially repay the loan and

allocated an equivalent amount of stock to the accounts of the

ESOP participants. Most of that stock allocation went to the

account of Dr. Hollen, who was the principal shareholder, an
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employee, and a corporate officer of the taxpayer. Dr. Hollen

was also the ESOP’s administrator and the ESOT’s trustee. 

Pursuant to section 1.415-6(b), Income Tax Regs. (which

authorizes the Service “in an appropriate case, considering all

of the facts and circumstances, [to] treat transactions between

the plan and the employee or certain allocations to participants’

accounts as giving rise to annual additions”), the Service

treated $150,339 of the $200,000 “dividend” as an annual addition

to Dr. Hollen’s account. We held that the Service did not abuse

its discretion to make that recharacterization, because Dr.

Hollen used the loan and the associated “dividend” to generate a

deduction for the taxpayer for the principal payments on the

loans without any corresponding income recognition by either the

taxpayer or the ESOT. The resulting tax savings increased the

value of the stock held by the ESOT to Dr. Hollen’s benefit. 

Because the annual addition exceeded the section 415(c)

contribution limit, we upheld the Service’s determination that,

for income tax purposes, the ESOP and the ESOT were not qualified

trusts under section 401(a) and therefore not tax exempt under

section 501(a).

Respondent does not contest the characterization of the

Transaction for income tax purposes, and therefore we decide an

entirely different and much narrower issue: whether respondent

may characterize a transaction inconsistently for excise tax
-24-

purposes. We have not been asked to and do not decide what the

proper treatment of the Transaction is for income tax purposes. 

Although we held that an excess contribution to a retirement plan

had been made in Hollen, respondent’s approval of the Transaction

for income tax purposes compels a different result in the present

case. Whereas the Service properly used an income tax regulation

to recharacterize the Hollen transaction for income tax purposes,

respondent’s position that the Transaction is substantive for

income tax purposes undermines his attempted use of the

substance-over-form doctrine to recharacterize the Transaction

for excise tax purposes. 

Respondent nevertheless argues that petitioners should be

liable for the section 4973 excise tax because the Transaction

was not a type of IRA investment that Congress intended to

permit.

Congress has enumerated the types of transactions which IRAs

are prohibited from making in section 408(e)(2) through (5) and

(m). No part of the Transaction here is prohibited under any of

those provisions.

Section 408(e)(2)(A) provides that an IRA loses its exempt

status if it engages in any transaction prohibited by section

4975. Section 4975(c)(1) prohibits a specific list of

self-dealing transactions between a plan and a disqualified

person. We have previously held that a similar transaction was
-25-

not a prohibited transaction under section 4975(c)(1)(A) or (E). 

See Swanson v. Commissioner, 106 T.C. 76 (1996).

In Swanson, the taxpayer was the sole shareholder of an

existing S corporation. The taxpayer arranged for the

organization of a DISC (Worldwide), and one of his IRAs (IRA #1)

subscribed to the DISC’s original issue stock. The DISC

subsequently received commission payments from the S corporation

and paid dividends to the taxpayer’s IRA.

We held that the IRA’s acquisition of DISC stock could not

have been a prohibited transaction under section 4975(c)(1)(A)

because the DISC was not a disqualified person at that time. We

explained that 

The stock acquired in that transaction was newly issued--

prior to that point in time, Worldwide had no shares or

shareholders. A corporation without shares or shareholders

does not fit within the definition of a disqualified person

under section 4975(e)(2)(G). It was only after Worldwide

issued its stock to IRA #1 that petitioner held a beneficial

interest in Worldwide’s stock, thereby causing Worldwide to

become a disqualified person under section 4975(e)(2)(G). 

* * * [Id. at 88; fn. refs. omitted.]

We also held that the DISC’s payment of dividends to the IRA

was not a prohibited transaction under section 4975(c)(1)(E)

because “there was no such direct or indirect dealing with the

income or assets of a plan, as the dividends paid by Worldwide

did not become income of IRA #1 until unqualifiedly made subject

to the demand of IRA #1.” Id. at 89.
-26-

Similarly, the acquisitions of ADF International stock by

petitioners’ Roth IRAs were also not prohibited transactions

under section 4975(c)(1)(A), (B), or (C) because ADF

International was not a disqualified person at the time of the

stock acquisitions. The C corporations’ payment of dividends to

the Roth IRAs was not a prohibited transaction under section

4975(c)(1)(D), (E), or (F) because the dividends were not income

of the Roth IRAs until they were received by the Roth IRAs.

The Transaction is also not prohibited under section

408(e)(3) because that provision deals with borrowing under or by

use of an individual retirement annuity. Section 408(e)(4) is

also inapplicable because no petitioner has pledged any portion

of a Roth IRA as security for a loan. Section 408(e)(5) is not

relevant because no part of any Roth IRA assets has been used to

purchase an endowment contract. Section 408(m) does not apply

because no Roth IRA invested in a collectible.

Contrary to respondent’s contention, the Transaction is not

a type of investment that Congress has expressly forbidden. To

add it to that list of statutorily prohibited transactions would

amount to judicial legislation.

Furthermore, even if we were to decide that Congress

intended to prohibit this type of transaction, we question

whether imposition of the section 4973 excise tax would be

appropriate. Participation in one of the above-mentioned
-27-

statutorily prohibited transactions results in a deemed

distribution from the IRA. See sec. 408(e)(2)(B), (3), (4), (5),

(m)(1). Such a distribution is included in the taxpayer’s gross

income and is subject to the section 72(t) 10-percent additional

income tax rather than the section 4973 excise tax.

While we are aware that Congress clearly intended to limit

the amounts of annual contributions to IRAs by enacting section

4973, our holding here does not negate that limitation. Our

decision does not prevent the Service from recharacterizing the

Transaction consistently for income tax and excise tax purposes. 

Nor does it prevent the Service from asserting that an excess

contribution was made when petitioners’ Roth IRAs subscribed to

the stock of ADF International if that stock had been

undervalued.4 In fact, Notice 2004-8, 2004-1 C.B. at 333,

contemplates the possibility that “The acquisition of shares 

* * * [is] not fairly valued”.

For these reasons, we hold that the ADF commission payments

do not represent excess contributions to petitioners’ Roth IRAs. 

Accordingly, we will grant petitioners summary judgment as to the

issue of their liability for excise taxes under section 4973.

4ADF International received hundreds of thousands of dollars

in DISC commissions each year from a well-established business,

and a 25-percent share in a company receiving such a steady

stream of income should have been worth a large amount.
-28-

IV. Section 6662(a) Penalty

Section 6662(a) and (b)(1) and (2) imposes an accuracyrelated penalty of 20 percent on the portion of an underpayment

attributable to negligence, disregard of rules or regulations, or

a substantial understatement of income tax. Because petitioners

are not liable for excise taxes under section 4973, they did not

make an underpayment of tax and are therefore not liable for the

section 6662(a) accuracy-related penalty.

Accordingly, we will grant petitioners summary judgment as

to the section 6662(a) penalty.

V. Section 6651(a)(1) Additions to Tax

Section 6651(a)(1) imposes a 5-percent addition to tax for

each month or portion thereof a required return is filed after

the prescribed due date. Taxpayers are required to file a Form

5329 for each year they have excess contributions to their IRA. 

See Frick v. Commissioner, T.C. Memo. 1989-86, affd. without

published opinion 916 F.2d 715 (7th Cir. 1990). Because

petitioners did not make excess contributions to their Roth IRAs,

they were not required to file Forms 5329 and are therefore not

liable for additions to tax under section 6651(a)(1).

Accordingly, we will grant petitioners summary judgment as

to the section 6651(a)(1) additions to tax.
-29-

We have considered all of the parties’ contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are irrelevant, moot, or without

merit.

To reflect the foregoing,

Appropriate orders and

decisions will be entered

granting petitioners’ Motion

for Summary Judgment.