Wednesday, March 22, 2017

Sixth Circuit Limits Scope of Substance Over Form Doctrine

The U.S. Court of Appeals for the Sixth Circuit recently dealt a significant taxpayer victory in Summa Holdings, Inc. v. Commissioner, No. 16-1712 (Decided February 16, 2017), and limited the government's ability to assert the substance over form doctrine to dismantle the taxpayer's combination plan of providing estate planning wealth shifting benefits to younger generation family members using a domestic international sales corporation (DISC) shelter in tandem with Roth IRA's.

In Summa, the taxpayer father operated an exporting business, and his two sons established their own Roth IRA's, with initial contributions of $3,500 each.  Shortly thereafter, the Roth IRAs as sole shareholders invested $1,500 of capital each in newly formed JC Export, which was established as DISC.  Under the tax law, DISCs can receive up to 10% of an affiliated company's export sales revenue as "sales commissions" as so designated by Congress, which commissions are deductible by the affiliated export company and tax exempt to the DISC.  However, DISC dividends to shareholders are subject to up to 33% income taxes to the DISC as unrelated business taxable income, which was paid by JC Export.  However then the DISC paid the remaining funds to the son's Roth IRA accounts. Over a period of years and by 2008, each Roth IRA had accumulated over $3 million under this plan.

The IRS argued that in substance, Summa Holdings paid a non-deductible dividend to it's shareholders, who were Mr. Benenson and a trust for the benefit of his sons.  The U.S. Tax Court agreed and decided the case in favor of the IRS.

On appeal, the 6th Circuit reversed the Tax Court and held that the substance over form doctrine did not and could not apply to circumstances where the substance of a tax statute enacted by Congress was defined by the IRS through re-characterizing transactions which adhered to the form prescribed by Congress.  The 6th Circuit reasoned that while the substance over form doctrine could be used to prevent a taxpayer from distorting a transaction's true substance by adopting a masquerading transactional form inconsistent with economic reality, here Congress expressly sanctioned using a shell DISC and/or a Roth IRA in form only to achieve an artificial but Congressional permitted tax benefit, as a matter of "congressional design."

The 6th Circuit referred to this type of transaction as "Code compliant" form of tax advantaged transaction that did not follow a devious path in its form but straightforward steps as authorized by Congress.  And quoting Judge Hand in Helverling v. Gregory, 69 F. 2d 809 (2d Cir. 1934), the 6th Circuit reiterated that "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury, " and added that if Congress by design and through the Code authorizes a set of "formal" transactions the taxpayer entered into, "it is of no consequence that it  was all an elaborate scheme to get rid of income taxes."  Consequently, the 6th Circuit refused to adopt the alternative two step narrative of the Commissioner re-characterizing the DISC commissions as constructive dividends follow by excessive Roth IRA contribution.

Our Firm predicts that a huge amount of discussion and debate in the tax scholarship and in the tax press will ensue from this decision.  Stay tuned.

Wednesday, August 12, 2015


The North Carolina Court of Appeals recently decided in Fowler v. North Carolina Department of Revenue, No. COA-14-1302 (August 8, 2015) that the owners of a construction company in Raleigh owed none of the $10.4 million capital gains tax from the sale of their business claimed by the NCDOR, because they changed tax residency to Florida a few weeks before the sale closing.  This has been a very highly contested case and the taxpayers have won for the third time, first at trial before an administrative law judge, then before the NC Superior Court, then before the Court of Appeals.

The Fowler case is significant because of the complex nature of the facts and the trial court's findings that they intended to change their domicile to Florida right before selling their business due to the steps they took to achieve the change (including buying a larger new home in Florida, starting a Florida business, changing their address) even though their steps were less than perfect and even though they had continuing contacts with North Carolina by keeping their old home, and continuing to work for the company's buyer after the sale for a temporary period of time.

Our Firm was handled the taxpayer's administrative appeal in the case and served as co-counsel at trial.  Our view is that the Court of Appeals decision was a just one when all the change of domicile factors are analyzed, and that it is not necessary for a taxpayer to sever every single tie with the prior state of domicile to change to another state, which is consistent with tax residency decisions in other states, most notably of which is the Allen Page case in Minnesota.

For more information, contact Curtis Elliott at 704-372-6322 or

Wednesday, May 27, 2015

Crummey Trusts Continue to Be Approved By Tax Court

The U.S. Tax Court recently held in Mikel v. Commissioner, T.C. Memo 2015-64 that so called "Crummey" gifts of $12,000 each to 60 trust beneficiaries qualified for the annual gift tax exclusion as present interest gifts.  The IRS argued that although the trust beneficiaries had legally enforceable rights of withdrawal over those funds, they were unlikely to assert those rights under the trust's no-contest clause.  The Tax Court disagreed, and found the withdrawal demands could not be legally resisted by the Trustee of the trust and that the in terrorem provisions would not necessarily deter the beneficiaries from pursuing judicial relief as a practical matter.

This favorable view of the trust's Crummey provisions provides further solace to estate planners and their clients that the use of Crummey trust gifts to multiple trust beneficiaries will be accorded present interest status per gift to enable the donor to make larger annual exclusion gifts to family trusts.  This case is a major positive case law development for practitioners and their clients.

Friday, November 7, 2014

IRS Appeals Addresses Estate Tax Case Development (2014)

The IRS Office of Appeals has addressed estate tax case procedures in accordance with its new "judicial approach and culture (AJAC).  One new procedure is a reduction in the number of days remaining on the statute of limitations Appeals will hold the case.

Another feature is that under AJAC, Appeals will not return a case to examinations if the case file is not fully developed factually by exam.

There are only two IRS teams nationwide which handle all E&G appeals, but the staff is dispersed in Chicago, Dallas, Houston, Indianapolis, New York, Philadelphia and Jacksonville, Fla.

Interestingly over 50% of estate and gift tax returns are filed in California.

Saturday, November 9, 2013

Estate and Gift Tax Litigation in the U. S. Tax Court

Curtis Elliott recently spoke as a panelist at a Webinar entitled "Litigating the Valuation of a Business" sponsored by  Mr. Elliott's presentation focused on estate and gift tax litigation in the U.S. Tax Court with particular emphasis on direct and cross examination of expert appraisers in tax cases, and a comparison of the various deposition and discovery rules in various litigation forums. 

For more details, see

For more details about Mr. Elliott's tax controversy practice, see

Saturday, October 12, 2013

Supreme Court Hears Oral Arguments in Woods: TEFRA Penalties and Outside Basis

The Supreme Court recently heard oral arguments in the Woods case.  The issue involved is whether the government can invoke TEFRA jurisdiction in a TEFRA proceeding at the partnership level to determine valuation overstatement penalties related to a partner's outside overstatement of basis in circumstances in which the partnership entity is found to have been a sham.  The issue turns on whether a penalty can be imposed on items such as outside basis, which are not partnership items in a TEFRA proceeding, leaving the taxpayer to present a reasonable cause and good faith defense to the penalty after the TEFRA proceeding is completed and the tax and penalty are paid, in a refund case.

The audio of the oral agruments before the Supreme Court in the Woods case can be found on the SCOTUS web sit.

Supreme Court Web Site

Monday, April 1, 2013

Sergio Garcia Wins Partial Victory in Tax Court

Pro golfer Sergio Garcia won a significant partial victory recently in  U.S. Tax Court.  In his case, Garcia v. Commissioner, 140 T.C. No. 6 (Docket 13649, Filed March 14, 2013), the IRS initially asserted that all of Sergio's endorsement income from TaylorMade was U.S. personal services income subject to U.S. tax.  Sergio, a resident of Switzerland, claimed that 85% of his contract with TaylorMade reflected his personal image and worldwide celebrity inconic status so that that income, as royalty income under the U.S.-Swiss tax treaty was exempt from U.S. income tax.

The Tax Court analyzed competing expert opinions from each side as to what the correct proportion of the endorsement income was attributable to personal services (personal appearances and golf tournament participation, etc.) and what was due to his name and likeness.  The Tax Court found that Sergio was the only "Global Icon" in TaylorMade's stable of golfers, which it defined as a premiere golfer who consistently ranks among the world''s best players, and who connects emotionally with golfers in all regions of the world, and who is a "TaylorMade Ambassador".  The Tax Court then refused to rely completely on either side's experts and instead looked to its own recent allocation case involving fellow PGA professional Retief Goosen.  In that case, Goosen v. Commissioner, 136 T.C. 547, the Tax Court found the allocation between personal services income and royalty income to be 50.50.  Here it distinguished Sergio's status and found that a 50-50 split was not appropriate for Sergio because he was TaylorMade's only "Global Icon" during the years at issue and a more prominent image status that was marketing more heavily by TaylorMade, in addition to having Sergio committed to using TaylorMade products on a "head to toe" basis, more extensively than Retief Goosen's contract.  But the Tax Court shaved the percentage of royalty income in Sergio's case down from 85% to 65%, and held that all of the U.S. source personal compensation under the endorsement agreement allocation and otherwise was subject to U.S. income taxation.

For a copy of this case, or any questions, please contact Curtis Elliott at 704-973-5328 or go to