CLEMENT C. BENENSON, Petitioner, Appellant,
COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee. JAMES BENENSON III, Petitioner, Appellant,
COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
APPEALS FROM THE UNITED STATES TAX COURT Hon. Kathleen
Kerrigan, U.S. Tax Court Judge
J. Block, with whom Robert S. Walton and Baker &
Mackenzie LLP was on brief, for appellants.
Page DelSole, Attorney, Tax Division, U.S. Department of
Justice, with whom David A. Hubbert, Acting Assistant
General, Tax Division; Gilbert S. Rothenberg and Teresa E.
McLaughlin, Attorneys, Tax Division, U.S. Department of
Justice, were on brief, for appellee.
Lynch, Stahl, and Thompson, Circuit Judges.
Benenson ("Clement") and James Benenson III
("James III") appeal from the Tax Court's
ruling that they owe an excise tax for contributions made to
their Roth individual retirement accounts ("Roth
IRAs") in violation of contribution limits. Using the
common-law substance over form doctrine, the Commissioner of
Internal Revenue recharacterized a transaction Clement and
James III entered into to reduce their federal taxes, and the
Tax Court affirmed. Summa Holdings, Inc. v.
Comm'r, 109 T.C.M. (CCH) 1612 (2015). After careful
consideration, we find the transaction violates neither the
letter nor purpose of the relevant statutory provisions and
therefore reverse the Tax Court's decision.
Holdings is a C corporation and the parent of a consolidated
group of manufacturing companies with export
sales. In 2008, Summa Holdings' largest
shareholders were James Benenson, Jr. and the James Benenson
III and Clement Benenson Trust ("the Trust"). James
Benenson, Jr. and his wife Sharen are the trustees of the
Trust and Clement and James III are the beneficiaries. This
case arises from a transaction the Benensons and Summa
Holdings engineered to reduce their federal taxes through the
use of domestic international sales corporations
("DISCs") and Roth IRAs.
created DISCs as a part of the Revenue Act of 1971, Pub. L.
No. 92-178, 85 Stat. 497. A company that produces goods for
export can contract to pay a DISC a commission from its
export sales. The DISC pays no federal corporate income tax
on these commissions. 26 U.S.C. § 991.
DISC receives funds from the commissions, it may, if it
chooses, issue dividends to its shareholders. The DISC's
shareholders "often will be the same individuals who own
the export company." Summa Holdings, Inc. v.
Comm'r, 848 F.3d 779, 782 (6th Cir. 2017). Thus,
"the net effect of the DISC is to transfer export
revenue to the export company's shareholders as a
dividend without taxing it first as corporate income."
created Roth IRAs as a part of the Taxpayer Relief Act of
1997, Pub. L. No. 105-34, sec. 302, 111 Stat. at 825.
Different from the rules governing traditional IRAs,
contributions to a Roth IRA are not deductible, 26 U.S.C.
§ 408A(c)(1), but qualified distributions from the
account are not taxed, 26 U.S.C. § 408A(d)(1).
Traditional and Roth IRAs are subject to the same annual
contribution limits, and in 2008, these limits were set at
$5, 000. 26 U.S.C. §§ 219(b)(5)(A), 408A(c)(2). If
an IRA of either type exceeds the contribution limits, it is
subject to a 6% tax annually on the amount of excess
contributions. 26 U.S.C. § 4973(a).
2004, the Internal Revenue Service ("IRS") released
Notice 2004-8 ("the Notice"), which described
transactions some taxpayers were entering into "to avoid
the statutory limits on contributions to a Roth IRA."
I.R.S. Notice 2004-8, 2004-1 C.B. 333. The transactions
described in the Notice involved a taxpayer who owned a
preexisting business, a Roth IRA maintained for the
taxpayer's benefit, and a corporation acquired by the
Roth IRA. Id. The corporation owned by the Roth IRA
would enter into an agreement with the taxpayer's
business whereby the business would transfer value to the
corporation. Id. The Notice described how either the
Roth IRA's purchase of shares in the corporation or the
transaction between the taxpayer's business and the
corporation would not be "fairly valued" and would
therefore have "the effect of shifting value into the
Roth IRA" in excess of the contribution limits.
Id. The Notice declared that the IRS intended to
deny or reduce deductions made using these transactions.
January 30, 2002, James III and Clement each deposited $3,
500 into individual Roth IRAs they had established a few
weeks earlier. On January 31, 2002, each of the Roth IRAs
paid $1, 500 for 1, 500 shares in JC Export, a newly formed
DISC. That same day, the Roth IRAs sold their shares in JC
Export to JC Export Holding ("JC Holding"), a C
corporation the Benensons also formed that day. Each of the
Roth IRAs received a 50% stake in JC Holding. The parties
agree that JC Holding:
was formed, in part, so that the Roth IRAs would not have
unrelated business income and the associated tax reporting
obligations and, in part, so that the custodians of the Roth
IRAs no longer would be involved as shareholders of JC Export
and, thus, would avoid being required to take shareholder
actions regarding JC Export.
Export entered into agreements with Summa Holdings'
subsidiaries to receive DISC commissions. Once JC Export
received payments from Summa Holdings' subsidiaries, it
immediately transferred the funds to JC Holding. After
setting aside the amount it estimated it would owe in federal
income taxes, JC Holding immediately paid out the remainder
of the funds to the Roth IRAs as a dividend. In 2008, JC
Holding transferred $1, 477, 028 to the Roth IRAs. By the end
of 2008, the James III Roth IRA was worth $3, 145, 086 and
the Clement Roth IRA was worth $3, 135, 236.
III and Clement have stipulated that the "sole reason
for entering into the Transaction at Issue . . . was to
transfer money into the Roth IRAs so that income on assets in
the Roth IRAs could accumulate and be distributed on a
tax-free basis." They likewise stipulated that they had
no non-tax business purpose for establishing the Roth IRAs,
JC Export, and JC Holding.
2012, the Commissioner issued a notice of deficiency for the
2008 tax year to Summa Holdings, the Trust, and James III and
Clement. The Commissioner determined that the DISC
commissions paid to JC Export were not, in substance, DISC
commissions; they were in fact dividends to Summa
Holdings' shareholders. The Commissioner viewed the
resulting payments from JC Holding to the Roth IRAs not as
dividends, but as contributions to the Roth IRAs in excess of
the contribution limits.
Court affirmed the Commissioner's determination.
Summa Holdings, Inc. v. Comm'r, 109
T.C.M. (CCH) 1612 (2015). The Tax Court found it was
appropriate for the Commissioner to recharacterize the
transaction under the substance over form doctrine because
the transaction's sole purpose was to "shift
millions of dollars into Roth IRAs in violation of the
statutory contribution limits." Id. at *20.
Holdings appealed to the Sixth Circuit, which reversed the
Tax Court's decision. Summa Holdings, 848 F.3d
at 782. The Sixth Circuit found the Commissioner "had no
basis for recharacterizing the transactions" because the
taxpayers had "used the DISC and Roth IRAs for their
congressionally sanctioned purposes -- tax avoidance."
Massachusetts residents, James III and Clement appeal the Tax
Court's decision to this court. James Jr. and
Sharen's appeal is pending before the Second Circuit.
discussing the merits of their appeal, the Benensons contend
that the Sixth Circuit's ruling in Summa
Holdings prevents us from making an independent
determination of the issues in this case, invoking the
principles of claim preclusion, issue preclusion, and comity.
We find otherwise.
essential elements of claim preclusion are (1) a final
judgment on the merits in an earlier action; (2) an identity
of the cause of action in both the earlier and later suits;
and (3) an identity of parties or privies in the two
suits." Kale v. Combined Ins. Co. of
Am., 924 F.2d 1161, 1165 (1st Cir. 1991) (citations
omitted). The Sixth Circuit's decision was a final
judgment on the merits, but the second requirement for claim
preclusion is missing.
tax year is a different cause of action even when the
transaction being disputed and taxpayer is the same.
Comm'r v. Sunnen, 333 U.S. 591, 598 (1948).
Different tax liabilities owed by different taxpayers present
different causes of action, even where the liabilities arise
from the same transaction. See Batchelor-Robjohns v.
United States, 788 F.3d 1280, 1286-91 (11th Cir.
2015). Here, claim preclusion does not apply because we are
determining whether James III and Clement owe excise tax
liabilities for the year 2008, not whether Summa Holdings
owes a corporate tax liability for that year.
III and Clement argue that because the Sixth Circuit decided
that the DISC commission was a deductible expense, that there
was no constructive dividend, and that there were no excess
contributions to their Roth IRAs, the Commissioner is
precluded from relitigating these issues in this court. As
discussed above, the parties here are different from the
parties in Summa Holdings. Generally, offensive
issue preclusion cannot apply against the government unless
the parties to the litigation are the same. United States
v. Mendoza, 464 U.S. 154, 162-63 (1984);
United States v. Plat 20, Lot 17, 960 F.2d
200, 211 (1st Cir. 1992). James III and Clement
claim they are in privity with Summa Holdings and seek to
introduce evidence regarding a 2012 share transfer whereby
James III and Clement became the controlling shareholders of
Summa Holdings. Because the 2012 transfer was not submitted
to the Tax Court, we will not consider it. Based on the
record established below, James III and Clement cannot show
that they are in privity with Summa Holdings.
comity does not force us to follow the Sixth Circuit.
"Comity is not a rule of law, but one of practice,
convenience, and expediency." Mast, Foos & Co.
v. Stover Mfg. Co., 177 U.S. 485, 488 (1900). A
circuit need not follow other circuits' decisions where
"there appear cogent reasons for rejecting them."
Popov v. Comm'r, 246 F.3d 1190, 1195
(9th Cir. 2001) (quoting Unger v.
Comm'r, 936 F.2d 1316, 1320 (D.C. Cir. 1991)).
Of course, we will give the Sixth Circuit's decision
"the same respectful consideration that we would always
accord to sister circuits faced with an identical or similar
case." Kanter v. Comm'r, 590 F.3d
410, 420 (7th Cir. 2009).
review the Tax Court's decision "in the same manner
and to the same extent as decisions of the district courts in
civil actions tried without a jury." I.R.C. §
7482(a)(1). We review the Tax Court's legal
interpretations de novo. Capital Video Corp. v.
Comm'r, 311 F.3d 458, 463 (1st Cir. 2002).
"The general characterization of a transaction for tax
purposes is a question of law subject to review."
Santander Holdings USA, Inc. v. United
States, 844 F.3d 15, 23 (1st Cir. 2016) (quoting
Frank Lyon Co. v. United States, 435 U.S.
561, 581 n.16 (1978)).
federal tax system "is, and always has been, based on
statute." Id. at 21. "[L]ike other common
law tax doctrines, " the substance over form
doctrine "can thus perhaps best be thought of
as a tool of statutory interpretation." Id.
Viewed in this manner, the substance over form doctrine does
not "tak[e] a transaction entirely outside its statutory
framework, " but instead "helps courts read tax
statutes in a way that makes their technical language conform
more precisely with Congressional intent." Dewees
v. Comm'r, 870 F.2d 21, 35 (1st Cir. 1989)
the substance over form doctrine, the taxpayer's
transaction "must be viewed as a whole, "
Comm'r v.Court Holding Co., 324 U.S.
331, 334 (1945), to determine whether "the transaction
upon its face lies outside the plain intent of the
statute." Gregory v.Helvering, 293
U.S. 465, 470 (1937). In this way, we "look to the
objective economic realities of a transaction rather than to
the particular form the parties employed." Frank
Lyon Co., 435 U.S. at 573. Courts use the substance over
form doctrine when a more wooden application of the Code
would "deprive the statutory provision in question of
all serious purpose" and would thereby "exalt
artifice above reality." Gregory, 293 ...