Summa Holdings, Inc. v. Commisioner of Internal Revenue

by
Tax attorneys advised the family to use a “domestic international sales corporation” (DISC) to transfer money from their family-owned company to Roth Individual Retirement Accounts. DISCs incentivize companies to export goods by deferring and lowering taxes on export income. An exporter avoids corporate income tax by paying the DISC “commissions” of up to 4% of gross receipts or 50% of net income from qualified exports. The DISC pays no tax on commission income up to $10,000,000, 26 U.S.C. 991, 995(b)(1)(E), and may hold onto the money indefinitely, though its shareholders must pay annual interest on their shares of deferred tax liability. Money and other assets may exit the DISC as dividends, taxable at the qualified dividend rate, which is lower than the corporate income rate that otherwise would apply to the export revenue. The IRS acknowledged that the family complied with the law, but reasoned that the effect of the transactions was to evade the Roth IRA contribution limits and applied the “substance-over-form doctrine” to recharacterize the transactions as dividends followed by excess Roth IRA contributions. The Tax Court affirmed. The Sixth Circuit reversed, stating: If the government can undo transactions that the terms of the Code expressly authorize, it’s fair to ask what the point of making these terms accessible to the taxpayer and binding on the tax collector is. “Form” is “substance” when it comes to law. View "Summa Holdings, Inc. v. Commisioner of Internal Revenue" on Justia Law