Appeal from the United States Tax Court.
No. 26476-12—Kathleen M. Kerrigan, Judge.
Argued: February 2, 2017
Decided and Filed: February 16, 2017
Before: SUHRHEINRICH, SUTTON, and McKEAGUE, Circuit Judges.
SUTTON, Circuit Judge. Caligula posted the tax laws in such fine print and so high that
his subjects could not read them. Suetonius, The Twelve Caesars, bk. 4, para. 41 (Robert
Graves, trans., 1957). That’s not a good idea, we can all agree. How can citizens comply with
what they can’t see? And how can anyone assess the tax collector’s exercise of power in that
setting? The Internal Revenue Code improves matters in one sense, as it is accessible to
everyone with the time and patience to pore over its provisions.
In today’s case, however, the Commissioner of the Internal Revenue Service denied relief
to a set of taxpayers who complied in full with the printed and accessible words of the tax laws.
The Benenson family, to its good fortune, had the time and patience (and money) to understand
how a complex set of tax provisions could lower its taxes. Tax attorneys advised the family to
use a congressionally innovated corporation—a “domestic international sales corporation”
(DISC) to be exact—to transfer money from their family-owned company to their sons’ Roth
Individual Retirement Accounts. When the family did just that, the Commissioner balked. He
acknowledged that the family had complied with the relevant provisions. And he acknowledged
that the purpose of the relevant provisions was to lower taxes. But he reasoned that the effect of
these transactions was to evade the contribution limits on Roth IRAs and applied the “substanceover-form
doctrine,” Appellee’s Br. 41, to recharacterize the transactions as dividends from
Summa Holdings to the Benensons followed by excess Roth IRA contributions. The Tax Court
upheld the Commissioner’s determination.
Each word of the “substance-over-form doctrine,” at least as the Commissioner has used
it here, should give pause. 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. The
words of law (its form) determine content (its substance). How odd, then, to permit the tax
collector to reverse the sequence—to allow him to determine the substance of a law and to make
it govern “over” the written form of the law—and to call it a “doctrine” no less.
As it turns out, the Commissioner does not have such sweeping authority. And neither do
we. Because Summa Holdings used the DISC and Roth IRAs for their congressionally
sanctioned purposes—tax avoidance—the Commissioner had no basis for recharacterizing the
transactions and no basis for recharacterizing the law’s application to them. We reverse.