Second Circuit Also Reverses Tax Court’s Use of Substance-Over-Form for DISC Payments (Benenson, Jr., CA-2)

The Second Circuit Court of Appeals held that the Tax Court had no basis for applying the substance-over-form doctrine to payments made to or by domestic international sales corporations (DISCs). Payments from a manufacturing company to the DISC were commissions. Further, the dividends the DISC paid to its Roth IRA shareholders were not excess contributions.

Substance-Over-Form Does Not Apply to the Law

The Second Circuit  has joined the First and Sixth Circuits in reversing the Tax Court’s position in Summa Holdings, Inc., that payments from the parent of a closely held manufacturing group to a DISC were not commissions and the dividends the DISC paid to its Roth IRA shareholders were excess contributions. The court emphasized that the parent used the DISC and Roth IRAs for their congressionally-sanctioned, tax-minimizing purposes.

Why Three Appellate Courts Decisions for Summa Holdings?

Appeals from the Tax Court go to the federal appeals court of the circuit in which the parties reside. The Tax Court case, Summa Holdings, Inc., 109 TCM 1612, Dec. 60,335(M), TC Memo. 2015-119, involved three sets of sets of plaintiffs:

  • the taxpayers who reside in New York,
  • their sons in Massachusetts, and
  • their C corporation Ohio.

The Sixth Circuit opinion reversing Summa Holdings, Inc. is reported at 2017-1 ustc ¶50,155, and the First Citcuit’s opinion is reported at 2018-2 ustc ¶50,519.

Reversing and remanding, the Tax Court, 109 TCM 1612, Dec. 60,335(M), TC Memo. 2015-119.

J. Benenson, Jr., CA-2

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