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First Circuit: IRS application of substance-over-form doctrine rejected

IRS application of substance-over-form doctrine

The U.S. Court of Appeals for the First Circuit reversed the findings of the U.S. Tax Court that the individual taxpayers owed excise tax for excess contributions made to their Roth IRAs.

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The taxpayers used a domestic international sales corporation (DISC) and Roth IRAs to reduce their federal taxes. The First Circuit rejected the IRS’s application of the substance-over-form doctrine to recharacterize the DISC-related payments to the Roth IRAs as contributions in excess of the contribution limits. 

The case is: Benenson v. Commissioner, No. 16-2066 and No. 16-2067 (1st Cir. April 6, 2018). Read the First Circuit’s decision (that includes a separate dissent): Benenson [PDF 72 KB]

Summary

The taxpayers (members of the same family) were the largest shareholders in a C corporation that was the parent corporation of a consolidated group of manufacturing companies with export sales. Through a series of transactions, the taxpayers transferred over $5 million from the company to the Roth IRAs. 

In 2012, the IRS issued notices of deficiency to the taxpayers (both corporate and individual taxpayers), and informed the taxpayers that the substance-over-form doctrine would be applied to reclassify the payments (even though it was agreed that the taxpayers had complied with the relevant provisions of the Code). The Tax Court upheld the deficiency determination.

The corporate taxpayer appealed to the Sixth Circuit, which in February 2017 reversed the Tax Court. Read TaxNewsFlash

The individual taxpayers appealed to the First Circuit, and that appellate court also reversed the Tax Court. The First Circuit majority found that the transaction did not violate the plain intent of the statutes and that the substance-over-form doctrine was not applicable.

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