Family Argues Tax Court Erred in Holding Them Liable for Excise Taxes

CELIA MAZZEI, et al.
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondentt-Appelleet.

In the United States Court of Appeals
for the Ninth Circuit

Appeal from the United States Tax Court
Case Nos. 16702-09 and 16779-09
Hon. Michael B. Thornton for the Majority of the Tax Court

OPENING BRIEF OF APPELLANT

WALTON & WALTON, LLP
Lewis R. Walton (SBN 41791)
L. Richard Walton (SBN 226703)
4640 Admiralty Way, Fifth Floor
Marina del Rey, California 90292
Telephone: (310) 496-5835
Facsimile: (310) 464-3057
E-Mail: rwalton@taxtriallawyers.com

Attorneys for Petitioners-Appellants,
Celia, Angelo and Mary Mazzei

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Table of Contents

I. INTRODUCTION

II. JURISDICTIONAL STATEMENT

III. STATUTORY AND REGULATORY AUTHORITIES

IV. ISSUES PRESENTED

V. STATEMENT OF THE CASE

VI. SUMMARY OF ARGUMENT

VII. DISCUSSION

VIII. FINAL THOUGHTS

Table of Authorities

CASES

Asarco LLC v. United Steel, 910 F.3d 485, 498 (9^th Cir. 2018)

Austin v. Commissioner, T.C. Memo. 2017-69

Bank of N.Y.Mellon v. Commissioner, 801 F.3d 104 (2d Cir. 2015)

Benenson v. Commissioner, 887 F.3d 511 (1^st Cir. 2018)

Bilski v. Commissioner, 69 F.3d 64 (1995)

Block v. Commissioner, T.C. Memo 2017-142

Caliber One v. Wade, 491 F.3d 1079 (9^th Cir. 2007)

Caterpillar Tractor Co. v. U.S., 218 Ct. Cl. 517, 526-8 (1978)

Colby v. J.C. Penney, 811 F.2d 1119 (7^th Cir. 1987)

Commissioner v. Banks, 543 U.S. 426 (2005)

Cooper v. Commissioner, 877 F.3d 1086 (9^th Cir. 2017)

Fabreeka Products v. Commissioner, 294 F.2d 876 (1^st Cir. 1961)

FDIC v. Castetter, 184 F.3d 1040 (9^th Cir. 1999)

Ford Motor Co. v. United States, 132 Fed. Cl. 104 (2017)

Frank Lyon Co. v. U.S., 435 U.S. 561 (1978)

Harbor Bancorp v. Commissioner, 115 F.3d 722 (9^th Cir. 1997)

Hall v. U.S., 566 U.S. 506 (2012)

Helvering v. Horst, 311 U.S. 112 (1940)

Hewlett-Packard v. Commissioner, 875 F.3d 494 (9^th Cir., 2017)

Henson v. Santander Consumer USA Inc. 137 S. Ct. 1718 (2017)

Jet Research, Inc. v. Commissioner, 1990 Tax Ct. Memo LEXIS 508

Kelley v. Commissioner, 45 F.3d 348 (9^th Cir., 1995)

LeCroy Research v. Commissioner, 751 F.2d 123 (2d Cir., 1984)

Lyon v. United States, 435 U.S. 561 (1978)

Magwood v. Patterson, 561 U.S. 320 (2010)

Mast, Foos & Co. v. Stover, 177 U.S. 485 (1900)

Miles v. Apex Marine Corp., 498 U.S. 19 (1990)

Newman v.Commissioner, 909 F.2d 159 (2d Cir.1990)

Ohsman v. Commissioner, T.C. Memo. 2011-98

Paschall v. Commissioner, 137 T.C. 8 (2011)

Popov v. Commissioner, 246 F.3d 1190 (9^th Cir., 2001)

Polowniak v. Commissioner, T.C. Memo 2016-13

Sacks v. Commissioner, 69 F.3d 982

Stewart v. Commissioner, 714 F.2d 977 (9^th Cir. 1983)

Summa Holdings, Inc. v. Commissioner, 848 F.3d 779 (6^th Cir. 2017)

STATUTES

26 U.S.C. § 245

26 U.S.C. § 408(A)(c)(1)

26 U.S.C. § 408(A)(d)(1)

26 U.S.C. § 408A(c)

26 U.S.C. § 482

26 U.S.C. § 921(d)

26 U.S.C. § 922

26 U.S.C. § 924

26 U.S.C. § 925

26 U.S.C. § 927

26 U.S.C.§ 6214

26 U.S.C.§ 7482(a)(1)

26 U.S.C.§ 7482(b)

26 U.S.C.§ 7482(c)

Public Law 105-34, § 302, 111 Stat. 825

RULES

Federal Rule of Appellate Procedure 13(a)(1)(A)

Tax Court Rule 162

Tax Court Rule 190

TREATISES

Linda Jellum, “Codifying and 'Miscodifying' Judicial Anti-Abuse Tax Doctrines”, 33 Va. L. Rev. 579, 596 (2014)

REGULATIONS

Temp. Reg. Section 1.925(a)-1T

Treas. Reg. § 1.921

Treas. Reg. Section 1.922-1

Treas. Reg. Section 1.922-11

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I. INTRODUCTION

When a taxpayer uses two tax-saving devices created by Congress to incentivize behavior the People's representatives have deemed worthy of tax breaks, can the Tax Court eliminate, by judicial fiction, the resulting tax benefits — because they worked too well?

That is the question before this Court, to which the First, Second, and Sixth Circuits have already answered “No.” Therein, taxpayers employed congressionally-created entities — Domestic International Sales Corporations (“DISCs”) and Roth IRA retirements plans — for tax benefits. Used together, the two structures worked too well, the Tax Court held. But the Sixth Circuit reversed: “Because Summa Holdings used the DISC and Roth IRAs for their congressionally sanctioned purpose — tax avoidance — the Commissioner had no basis for recharacterizing the transactions.” (Summa Holdings, Inc. v. Commissioner, 848 F.3d 779, 782 (6^th Cir. 2017) (“Summa Holdings”)).

The First Circuit also reversed the Tax Court, in Benenson v. Commissioner (887 F.3d 511 (1^st Cir. 2018) (“Benenson 1”), as did the Second Circuit in Benenson v. Commissioner, 910 F.3d 690 (2^nd Cir. 2018) (“Benenson 2”). “Some may call the Benensons' transaction clever. Others may call it unseemly. The sole question presented to us is whether the Commissioner has the power to call it a violation of the Tax Code. We hold that he does not.” Benenson 1, supra, 887 F.3d at 523.¹

DISCs were created by Congress to incentivize foreign sales of U.S. goods. (ER51, f.n. 41).² When the European Union complained about DISCs, Congress replaced them with Foreign Sales Corporations (“FSCs”), modified to placate foreign trading partners but still employing tax incentives. (Ibid.). It was conceded by the Commissioner in this case that there is no difference between FSCs and DISCs. (ER87).

In Summa and the Benenson decisions, the taxpayers' Roth IRAs owned DISC stock and received DISC dividends, resulting in attractive tax savings.³ Using a substance over form rationale, the Tax Court improperly redirected DISC dividends from the Roth IRAs to the taxpayers. Similarly, the Mazzei's Roth IRAs owned FSC stock and received FSC dividends. Having been reversed in Summa and the Benenson decisions, the Tax Court tried a new tack herein to reach the same result: a divided Tax Court — with the trial judge emphatically dissenting — found that the Mazzeis, not their Roth IRAs, were the “real” FSC stockholders. By ignoring the structure actually used by the Mazzeis, the Tax Court attempted through judicial fiction to avoid the holdings of Summa and the two Benenson decisions. As the deemed owners of the FSC stock, the Mazzeis “received” dividends and “over contributed” to their respective Roth IRAs, resulting in an excise tax.

Was the Tax Court right? Or did it merely repackage a thrice-rejected position in different terms?

II. JURISDICTIONAL STATEMENT

1. Lower Court Jurisdiction: The Tax Court had jurisdiction under 26 U.S.C.§ 6214.⁴

2. Jurisdiction For The Court Of Appeals: This Court has jurisdiction and venue under Sections 7482(a)(1); 7482(b); and 7482(c).

3. Date of Entry of Judgment Appealed From: The Tax Court entered its decision on March 6, 2018. Petitioners timely filed a Motion for Reconsideration on April 4, 2018, pursuant to Tax Court Rule 161 (ER DKT), and a Motion to Vacate or Revise the decision on April 5, 2018, pursuant to Tax Court Rule 162 (ER DKT). Both Motions were denied on May 24, 2018. U.S. Tax Court Rule 190 incorporates Federal Rule of Appellate Procedure 13(a)(1)(A), which provides that the time for filing an appeal from the Tax Court runs from the entry of the order denying those motions. Petitioners timely filed their Notice of Appeal to the U.S. Tax Court on August 22, 2018.

4. Final Judgment: The Appeal is from a final judgment disposing of all parties' claims.

III. STATUTORY AND REGULATORY AUTHORITIES

All relevant statutory and/or regulatory authorities appear in the Addendum to this Brief.

IV. ISSUES PRESENTED

1. Whether the Tax Court erred in finding that FSC stock, held by Petitioners' Roth IRAs, actually belonged to Petitioners.

2. Whether the Tax Court incorrectly utilized valuation principles in determining ownership of stock.

3. Whether the Tax Court incorrectly utilized risk-benefit analyses in determining ownership of stock.

4. Whether the Tax Court incorrectly employed a substance analysis in determining ownership of stock.

5. Whether the Tax Court erred in disregarding Congressional purpose.

V. STATEMENT OF THE CASE

A. Factual Background

This is the story of a small businessman who invented a device useful for pollution control and green technology. (RT 185/18-21; 181/23-25). With his wife and daughter, who helped as a youngster (RT 29/7-12), he started a small business in his garage (RT 54/12-20; 115/1-2; ER6-7). Seeking new markets, he began selling his devices overseas (ER7). Beset by foreign copies of his invention (ER138:68-71) he sought new marketing techniques (ER156: 118/2-4, 9-12; 123/13-25; 124/1-6). He learned of an entity created by Congress — commonly called an “FSC” — designed to promote foreign sales through tax incentives. (ER30). For sound business reasons, he joined the FSC program, and as a direct result of participating in the program Western Growers mailed hundreds of flyers for him each year, from which he obtained business.⁵ (ER155:49/16-22; ER156:132/1-25; 133/1, 4, 148/2-149/4; ER138:13,72-73). At that time, retirement was not his concern. (ER156:135/10-16). The FSC provided helpful foreign marketing assistance. (ER156:132/1-24; 152/9-14). He little realized that he would become the subject of an IRS test case upon which the Government would spend, in one useless “expert” alone, more than the entire amount of tax due. (ER6-7; ER156:11/25-12/17)⁶.

1. The Statutory Entities at Issue

There are three entities relevant herein, all created by Congress: Foreign Sales Corporations (“FSCs”) (ER8), Roth IRA retirement plans (“Roth IRAs”) (ER9), and Domestic International Sales Corporations (“DISCs”). (ER51-52).

Roth IRAs: Created by Congress in the Taxpayer Relief Act of 1997,⁷ Roth IRAs were funded by contributions from taxable income, which then accumulated tax free, along with accrued earnings, for tax-free distribution when the owner reached age 59-1/2. (ER19-20; I.R.C. §§ 408(A)(c)(1), 408(A)(d)(1)). This offered attractive tax advantages. (ER19). Contributions to Roth IRAs were and are subject to limitations. (ER20; Paschall v. Commissioner, 137 T.C. 8 (2011)).

DISCs: While the operative entity in this case was not a DISC, case law reversing the Tax Court, in cases similar to the one herein, involved DISCs. (ER51-53). DISCs and FSCs are treated the same for excise tax purposes. (ER87). DISCs were a creation of Congress in 1971. (ER51-52). Designed to stimulate foreign sales of U.S. goods, a DISC's qualified export income was not subject to taxation while so held. (ER53; I.R.C. §§ 991-997). DISCs were largely replaced by Congress with FSCs after an international trade dispute. (ER10, 51-2, f.n. 41).⁸

FSCs: After DISCs were largely abandoned due to international pressure, FSCs were another Congressional attempt to promote through tax savings the foreign sales of U.S. goods. (ER51-2 f/n). To placate the international trade community, Congress required an FSC to be managed outside the U.S. (ER34, f/n 28). Congress provided tax advantages to incentivize foreign sales (ER29; 80-81)⁹. These included relaxed transfer pricing rules (ER30-31), with which Petitioners complied. (ER31, f.n. 25).

For services related to export transactions, FSCs received commissions from U.S. firms. (ER32). Because the Congressional goal was trade promotion through tax incentives, the requirements were very loose: commissions were allowed even where services “were not, in substance, performed by the FSC.” (ER32, 80-81). Further, an FSC's “exempt foreign trade income” was not subject to U.S. tax. (ER33). “In sum, section 925 allowed part of the income from an export transaction to be assigned to an FSC . . . resulting in an effective tax rate cut for foreign income.” (ER34).

For small taxpayers, such as the Mazzeis — who can remember how they earned every penny of the $108,000 at issue herein — Congress went further. If, like the Mazzeis, you could not afford the complexity and technical requirements of a regular FSC, Congress created “shared FSCs,” in which multiple small companies could participate, each establishing a separate corporation within a small shared FSC. (Section 927(g)(3)). These Small FSCs were subject to even less regulation than large FSCs (Section 924(b)(2)(A)), and were designed to provide tax benefits to small exporters — with barely any legal formalities required of the Small FSC participant. (Code Section 922; Treas. Reg. Section 1.922-1).

FSCs, broadly exempted from ordinary business purpose requirements, had little business purpose other than tax savings. (ER81; Sections 924(a), 921-927; Temp. Reg. Section 1.925(a)-1T(a)(3)). Shared FSCs had fewer requirements still, a sort of dollar store FSC for small businesses. (Section 927(g)(2(A)). As created by Congress, they had virtually no substance whatever — except tax savings. (Code Section 922; Treas. Reg. Section 1.922-1; ER81).

A Roth IRA could own FSC stock, and an FSC's foreign trade income, received as a dividend, could, in theory, fund the retirement plan more rapidly than could contributions by FSC owners, who were subject to income restrictions. (ER20, 50-51). Thus, Code Sections 408A and 921-927, if combined, could result in attractive tax savings. (ER19, 33, 34). Indeed, other taxpayers had utilized similar Code sections: their names were Clement Benenson, James Benenson, and Summa Holdings, Inc. (ER52-53) — along with Hellweg, Slaight, and Ohsman. Every single one of those taxpayers ultimately prevailed against attacks by the Commissioner. The Mazzeis had every reason to think they, too, would prevail — and the Tax Court trial judge who actually heard the evidence agreed, penning a pointed (and poignant) dissent when the Tax Court en banc took the case away from him and went a different way.

2. Why the FSC Mattered to the Mazzeis

Petitioners marketed their products to foreign buyers (ER6-7) through their corporation, Injector Corp. (ER7). In 1998 they formed ALM Corp., which, in concert with Injector Corp., formed an LLC named Mazzei Injector Co. (“Injector Co.”). (ER9-10).

Struggling against foreign competition that copied Mazzei products, Petitioners decided in February of 1998 to participate in a small, shared FSC program offered by Western Growers Association, an agricultural trade association (“WGA”). (ER8, 10). They paid $3,500 to WGA to participate in the FSC. (RT 132/3-8). WGA's program required the Mazzeis to have self-directed Roth Individual Retirement Accounts that would purchase stock in the shared FSC. (ER8-9). Angelo, Mary, and daughter Celia each established Roth IRA plans, into which each contributed $2,000. (ER10, 20). Their contributions complied with Section 408A's income limits. (ER10).

Each Petitioner directed his/her IRA to buy 33-1/3 shares in FSC IV, one of WGA's Shared FSCs, at $5 per share (ER11), a total investment of $500 for 100 shares (ER11).¹⁰ FSC IV properly qualified as a shared FSC with the I.R.S. (ER138:14-15). At the time of stock purchase, the parties agreed that if the FSC stock were sold, the sale price for all 500 shares would be $1. (ER45). Far from being an unrealistic stock price, this valuation recognized that the stock was entirely dependent on the creative input and management of Angelo Mazzei. (ER155:50/11-14).

Injector Co. contracted with FSC IV to pay commissions for export-related activities. (ER12). In accordance with Treas. Reg. § 1.925(a)-1T(d)(2), the FSC was not required to perform export-related activities (ER32), and payments to FSC IV were optional: other than certain mandatory payments for management and operational fees, Injector Co. was not required to pay anything to the FSC. (ER14; for the reasons why, see Dissent, at ER81).

Each quarter, Injector Co. reported its foreign sales to FSC IV. (ER15). Through its management company, the FSC then submitted to Injector Co. the maximum commission allowable under Code section 925(b) and associated temporary Treasury Regulations, and invited payment. (ER15). FSC IV properly filed tax returns and paid taxes. (ER138:16-67). Over the course of four years, from 1998 to 2001, Injector Co. paid to the FSC a total of $558,555 (ER16) — in contrast to over $6.477 million received in Benenson. After reporting and paying taxes, the FSC paid $533,057 dividends to the Mazzeis' Roth IRAs (ER16).¹¹

Employing a broad substance-over-form attack on the transaction, the Commissioner determined the Mazzeis had constructively received the dividends paid to their Roth IRAs and then “over contributed” them to their Roth IRAs, resulting in excise tax deficiencies and penalties (ER5-6). Despite its stated intent to decide Mazzei on a “narrower factual basis”, the Tax Court utilized substance-over-form to find that stock, held in form by their Roth IRAs, was held, in substance, by the Mazzeis. (ER73).

B. Procedural History

On April 6, 2009, the Commissioner served Statutory Notices of Deficiency for tax years 2002 through 2007, asserting excise tax deficiencies against Angelo and Mary Mazzei of $67,590, section 6651(a)(1) penalties of $15,204, and section 6651(a)(2) penalties of $4,011. (ER1:2). Against Celia Mazzei, Respondent asserted excise tax deficiencies for tax years 2002 through 2007 of $40,692, section 6651(a)(1) penalties of $9,153, and section 6651(a)(2) penalties of $2,759. (ER1:2).

All three petitioned the Tax Court on July 13, 2009: Celia Mazzei in Docket No. 16702-09; Angelo and Mary Mazzei on July 13, 2009. (ER1:1). The cases were consolidated. (ERDKT). On December 14, 2012, all Petitioners moved for partial summary judgment, which was denied on April 1, 2014. (ERDKT)

The consolidated matters were tried on November 20, 2014 before the Hon. Mark Holmes. (ERDKT). On March 8, 2017, the Tax Court ordered Petitioners and Respondent to provide supplemental briefs on the impact of Summa Holdings, which reversed the Tax Court on issues similar to those in the Mazzei consolidated cases. (Docket). The Parties filed Briefs on March 29 and 30, 2017. On March 5, 2018, the cases were ordered submitted to Judge Michael Thornton, who on the same date entered an Opinion denying Petitioners relief on the excise tax issue and granting them relief from penalties. (ER:DKT). Eleven judges agreed with the decision, with five judges concurring. Trial Judge Mark V. Holmes dissented, with three judges joining different portions of the dissent.

On August 22, 2018, Petitioner's timely filed their Notice of Appeal. (ER180:1).

C. Rulings Presented For Review

Petitioners request review of the rulings that:

VI. SUMMARY OF ARGUMENT

FSCs and DISCs are treated the same for excise tax purposes. (ER87). Using Congressionally-sanctioned small shared FSC (RT 62/24-25; 63/1), Petitioners did what the First, Second, and Sixth Circuits allowed in Summa and the Benenson decisions, where a DISC was involved and where the Tax Court's imposition of excise taxes was reversed.

The decision herein reaches the same result reversed in Summa and the Benenson decisions, but by a more circuitous judicial process: instead of shamming the entire transaction, the Tax Court erroneously held that the Mazzeis' Roth IRAs were not the real holders of the FSC stock they purchased, and reassigned the stock to Mazzeis — thus imposing excise taxes, as in Summa and Benenson.

The Tax Court accomplishes this result by the following errors:

VII. DISCUSSION

A. Standard of Review

Tax Court findings of fact are reviewed for clear error, while its application of law is reviewed do novo. Newman v. Commissioner, 909 F.2d 159, 162 (2d Cir.1990). Application of substance over form to a transaction is a legal conclusion and not a question of fact. “The general characterization of a transaction for tax purposes is a question of law subject to review.” Sacks v. Commissioner, 69 F.3d 982 (9^th Cir. 1995); Frank Lyon Co. v. U.S., 435 U.S. 561, 581 f.n. 16 (1978). “We review the lower court's characterization of a transaction de novo . . .” Bank of N.Y.Mellon v. Commissioner, 801 F.3d 104, 112 (2d Cir. 2015).

B. The Mazzei Transaction Worked Under the Code

The Mazzeis engaged in the following transactions:

Each of the above followed the Code, and no facial attack under either the FSC or Roth IRA statutes was possible — or even attempted. (ER10-17, 87; ER139:1-3). That is an important point, since both transactions utilized Congressionally-mandated favorable tax treatment: first, for foreign sales income earned by exports, and second, the accumulation of tax free money in Roth IRAs. Nor was the Commissioner able to use any of the modern common law doctrines (e.g., economic substance, step transaction, and the like) to rid himself of these symbiotic tax benefits.

This reality left the Tax Court with only one way of denying the Mazzeis the fruit of their transaction: the use of an ancient common law principle from which the modern common law doctrines were derived. The continued viability of the substance over form principal¹³ notwithstanding, the Tax Court improbably used it (while claiming they didn't) to frustrate the Congressional intent behind both FSCs and Roth IRAs.

Did the Tax Court finally get it right, after being thrice reversed by three different Circuits on the same issue? The Mazzeis respectfully submit that it did not.

C. Comity Suggests Following The Summa And Benenson Decisions

Where an issue is before a Circuit Court of Appeals, deference is to be given to a prior decision of a sister court ruling on the same issue, to promote uniformity.

Comity is not a rule of law, but one of practice, convenience, and expediency . . . it has a substantial value in securing uniformity of decision, and discouraging repeated litigation of the same question. Mast, Foos & Co. v. Stover, 177 U.S. 485, 488 (1900).

This rule is especially important in Federal tax cases.

Uniformity of decisions among the circuits is vitally important on issues concerning the administration of tax laws. Thus the tax decisions of other circuits should be followed unless they are demonstrably erroneous . . . Popov v. Commissioner, 246 F.3d 1190, 1195 (9^th Cir., 2001).

While Summa and Benenson involved DISCs, FSCs and DISCs are identical for excise Tax purposes. (ER87 & ER166:1,4,14(fn)). The issues have factual “similarities.” Benenson 1, 887 F. 3d at 522, f.n. 10.

Bearing in mind the interest in . . . sparing the Supreme Court the burden of taking cases merely to resolve conflicts between the circuits, we give respectful consideration to the decisions of other courts of appeals and follow them whenever we can. Colby v. J.C. Penney, 811 F.2d 1119, 1123 (7^th Cir. 1987)

As set forth below, there is no reason for this Circuit to split with its sister Circuits.

D. Recharacterization Of FSC Stock Ownership Was Improper

“The sole issue we decide today is who in substance owned this FSC — petitioners or their Roth IRAs.” (ER74).

Since the Mazzeis complied with the relevant statutes, the next question is whether they violated Congressional intent, such that the form of their actual transaction should be ignored in favor of its perceived “substance.” They did not.

The Congressional objective for DISCs and FSCs was promotion of foreign sales of U.S. goods. Sections 924(a), 921-927, 245(c); Jet Research, Inc. v. Commissioner, 1990 Tax Ct. Memo LEXIS 508, at *30. As such, neither FSCs nor DISCs needed a business purpose: their only purpose was tax reduction — or, if one wants to use the language of the Sixth Circuit, “tax avoidance.” Summa, 848 F.3d at 786; ER87. Requirements for a small shared FSC were even less; they were created by Congress to have virtually no substance whatever, and were merely book entries in which 25 accounts shared a single FSC. Section 922; Treas. Reg. Section 1.922-1.

To effectively promote foreign sales, tax reduction had to be available to the exporter (Summa,848 F.3d at 782), and the Regulations recognized ownership of FSC stock by related parties. Treas. Reg. Section 1.922-1(f); see also ER29. Thus, an FSC transaction was anything but “arms-length.” Indeed, when Respondent's expert witness opined that the stock purchase price was “not consistent with arms-length levels,” the Judge Holms ordered that reference stricken. (RT 221/5-16).

Under case law as foundational as Helvering v. Horst, 311 U.S. 112 (1940), investment income is attributable to the owner of the investment. As owners of the FSC stock, Petitioners' Roth IRAs were the proper recipients of dividend income derived therefrom. In an effort to avoid this obvious conclusion, the Tax Court determined that the stock purchase price “did not reflect the substance of the related-party transaction.” (ER76).

The Tax Court's recourse to this rationale is understandable — if unavailing. Such a conclusion was obviously not their first choice: on facts identical for purposes of the outcome, the Tax Court has already been reversed by the First, Second and Sixth Circuits, where the taxpayers' Roth IRAs purchased stock of a DISC, from which they received dividend payments. (Summa, Benenson 1, and Benenson 2).¹⁴ As with the Mazzeis, these investment earnings could allow Roth IRA accounts to grow more rapidly than was possible from their holders' limited, initial annual contributions. Section 408A(c); Paschall v. Commissioner, 137 T.C. 8 (2011).

In Summa, the Sixth Circuit reversed the Tax Court for using substance over form to “undo transactions that the terms of the code expressly authorize.” (Summa, 848 F.3d at 782). The Benensons used “a congressionally innovated corporation — a 'domestic international sales corporation' (DISC) . . . to transfer money from their family-owned company to their sons' Roth Individual Retirement Accounts.” Id. at 781. Combining the tax advantages of a DISC with those of Roth IRAs provided tax benefits described in the Sixth Circuit's colorful language:

At this point, one can begin to see why the owner of a Roth IRA might add shares of a DISC to his account. The owner of a closely held export company could transfer money from the export company to the DISC, as the statute encourages, and pay some (or all) of that money as a dividend to its shareholders, allowing the money to enter the Roth IRA and grow there. (Id., at 783).

The Sixth Circuit held that neither the Commissioner nor the Court were entitled to re-write something Congress had intentionally created:

Congress created the DISC . . . for the purpose of lowering taxes. And Congress created Roth IRAs . . . for the purpose of lowering taxes. That these laws allow taxpayers to sidestep the Roth IRA contribution limits may be an unintended consequence . . . but it is a text-driven consequence no less. (Id., at 790).

The taxpayers in Summa followed the Code (Id. at 784, 790), as did the Mazzeis,¹⁵ but the Tax Court “applied the substance over form doctrine, to recharacterize the transactions as dividends from Summa Holdings to the Benensons, followed by excess Roth IRA contributions.” (Id. at 782). That ultimate result is also what happened to the Petitioners herein — but by a different route of judicial reasoning.

The Mazzei case had been tried and was under consideration by the Tax Court when Summa was decided, and the Court ordered additional briefing on the issue (ER 87), which Respondent and Petitioner provided. Notably, the Commissioner expressly did not argue or ask the Tax Court to decide the issue on the basis the Court ultimately used; far from it, the Commissioner conceded that FSCs were identical to DISCs for purposes of applying Summa Holdings and instead urged the Tax Court to revisit the Commissioner's loss in the Sixth Circuit by holding that substance over form did invalidate the transaction — in the hope this Court would split with its sister circuit. A year later, on March 5, 2018, the Court issued its report, giving the Commissioner that result, albeit by means of a slightly different analysis. Mazzei v. Commissioner 150 T.C. No. 7 (2018).

In so doing, the Mazzei Court seeks to distinguish Summa because the Summa taxpayers used DISCs, while Mazzei's used a FSC. (ER53). But that is a distinction the Commissioner expressly rejected and conceded they are identical for purposes of this case — and the distinctions the Tax Court tries to draw are highly technical, trending towards invisible: DISCs paid unrelated business income tax on their payments to a Roth IRA, while FSCs paid a corporate-level tax.¹⁶ In any event, the Tax Court dismissed the differences as unimportant to its ultimate analysis, which clearly was intended to avoid a repeat of Summa:

[W]e are not concerned with the ownership of FSCs in general; our concern is whether, on the particular facts and circumstances of these cases, petitioners' Roth IRAs owned the FSC in substance. (ER54-55, emph. suppl.)

Having been reversed by the Sixth Circuit for employing substance over form on facts legally identical to those herein, the Tax Court attempted to avoid using substance over form — by invoking substance over form, under the guise of “a narrower factual basis: “We conclude on the basis of facts in the record that petitioners, and not their Roth IRAs, were the substantive owners of the FSC stock at all times.” (ER 22-23).

Whatever the Tax Court's “factual basis” may have been, its legal vehicle was the same broad application of substance over form that was resoundingly rejected by the First, Second, and Sixth Circuits. Despite its announced intention of narrowing the analysis, the Tax Court did exactly what the Commissioner asked, and dismantled Petitioners' transactions as thoroughly as it had failed to do in Summa — by acknowledging Petitioners' FSC and Roth IRA entities, then determining that FSC stock owned in form by Petitioners' Roth IRAs was held, in substance, by Petitioners.

[W]e do not disregard, sham, ignore, or otherwise challenge the reality of the FSC or the Roth IRAs as such under the Code. Instead, we examine the purchase, by the Roth IRAs, of the FSC stock. (ER59)

Huh? So the Tax Court is not using substance over form to sham the entities, because the Sixth Circuit said that frustrated Congressional intent. It is, instead, using substance over form to sham the purchase of the FSC stock by the Mazzeis' Roth IRAs — so it can frustrate Congressional intent. Is that distinction even possible? The Congressional goal was to promote foreign sales of U.S. goods through tax advantages. Sections 921-927. To accomplish this, FSC stock needed to be owned by those personally interested in the tax benefits an FSC provided, resulting in related party transactions. Treas. Reg. Section 1.922-1(f) recognized this, allowing FSC ownership by such family-related entities as an estate and the beneficiaries of a trust.

Ownership of an FSC by the supplier whose goods it promoted was explicitly allowed.¹⁷ In Ford Motor Co. v. United States, 132 Fed. Cl. 104 (2017), Ford was the acknowledged owner of a large FSC that it formed. When Ford argued, on motion for summary judgment, that Ford and its FSC were substantially the same company (and hence entitled to interest netting), the Commissioner argued that the FSC was a viable separate entity, Ford's ownership notwithstanding, and the Court of Claims agreed. (Id. at 112).

Similarly, FSC stock herein was owned by related parties — just as the Code and Regulations allowed. To sham its stock ownership is, in essence, to sham the entity — and substance over form may not even apply to DISCs or FSCs:

Congress has itself elevated form over substance . . . by allowing exporters 'commission' deductions for payments that lack the economic substance generally associated with commissions, i.e., some service rendered by the payees. (Benenson 2, 910 F.3d at 695)

Given the Code-created relationship between an FSC and its related stockholder(s), and given that the Commissioner conceded in the Tax Court that FSCs are identical to DISCs, the Mazzeis submit it is similarly inappropriate to use substance over form to reassign FSC stock ownership.

Roth IRAs were similarly provided tax incentives to promote a policy goal:¹⁸ they could earn investment income. “Congress has made clear that corporations and other entities, including IRAs, may own shares in DISCs. 26 U.S.C. §§ 246(d), 995(g).” (Summa, 848 F.3d at 782). “[I]f only through a maze of cross-references, section 995(g) does allow both traditional and Roth IRAs to own DISCs, see secs. 401(a), 408(a), 408A(a), 501(a), 511, and Congress hasn't decided to change it.” (ER83). Since FSCs are treated the same as DISCs for these purposes (ER87), the Summa Court's reasoning applies to FSCs as well.

A Roth IRA that owned FSC stock could receive investment income greater than the IRA holder's limited annual contribution. Congress can hardly have been unaware of this potential interaction. Roth IRAs were part of the Taxpayer Relief Act of 1997, and FSCs had been around since the Deficit Reduction Act of 1984.

“We assume Congress is aware of existing law when it passes legislation.” Miles v. Apex Marine Corp., 498 U.S. 19, 32 (1990). And, as the Dissent pointed out, “Congress hasn't decided to change it.” (ER83, f.n. 6).

Against this, the Tax Court argues that “There was no discernable legislative purpose to allow taxpayers to use FSCs to defeat the contribution limits for Roth IRAs, as petitioners seek to do.” (ER57). How so?

(1) “The Code does not explicitly or implicitly authorize Roth IRAs' purchase on these facts.” (ER60).¹⁹

Perhaps not, but neither does it prohibit such a purchase. As pointed out above, a Congressional prohibition after all these years was inevitable — if that's what Congress intended. FSCs had been around for 13 years when Roth IRAs were created (Deficit Reduction Act of 1984; Taxpayer Relief Act of 1997). DISCs had been around for 26 (Revenue Act of 1971, Pub. L. No. 92-178). Yet nowhere do the Code or Regulations prohibit Roth IRA purchase of FSC stock on “these” or any other facts. As the Supreme Court said, “We assume Congress is aware of existing law when it passes legislation.” Miles, supra. Similarly, “[D]espite its active history of legislating in these areas, Congress has not placed any further limits on transactions like the Benensons'.” (Benenson, 887 F.3d at 521). Nor did Congress prohibit what the Mazzeis did.

While the Court found no “textual evidence” that a “discrepancy between substance and form . . . should be ignored” (ER60), it is easy in discussing tax policy for even experts to get lost in the weeds. Petitioners respectfully submit that in its desire to achieve what it believed to be the preferred tax result, the Tax Court missed something seen by the First, Second and Sixth Circuits: the whole purpose of an FSC was tax incentives, to promote foreign sales of U.S. goods — which worked best if the result was to maximize benefits from exports (Benenson 2, 910 F.3d at 694).

Congress saw this as well, by not prohibiting a tax synergy it is assumed to have understood when Roth IRA legislation was passed after creation of both DISCs and FSCs. So did the Treasury Secretary, in issuing Regulations that neither prohibited such a foreseeable transaction nor “explicitly or implicitly” constrained a Roth IRA's purchase of FSC stock, almost certainly to be held by related parties. (Treas. Regs. Section 1.922-1(f)). Even the Tax Court recognized that under Section 925 the exporter and the FSC would be related parties. (ER41).²⁰

In sum, the Tax Court arbitrarily divides Petitioners' transaction into three segments: sale of stock, contracts with Injector Co., and dividends to its shareholders. Parts 1 and 3 of that supposedly had no application in the “statutes or associated regulations.” (ER36). Thus, the Court reasons, there is no violation of Congressional intent in its Decision. But to accept the Court's premise, one must take seriously the notion that the FSC's commission payments from Injector Co. (acceptable to the Court) were unrelated to its sales agreements with Injector Co. (unacceptable). Or that payments of dividends, by a Code-created corporation to its foreseeably related stockholder, were somehow irrelevant to the Code (and hence also unacceptable).

The Court's reasoning is dependent on “substance doctrines.” (ER37) But this requires one to assume that Congressional purpose does not reach to such basics as stock issuance in the very structure Congress authorized. In its zeal to correct what it believes to be an unacceptable tax result, the Tax Court has strayed deep into territory the Summa and Benenson courts avoided.

Whether there is legislative history that shows anyone intended FSCs and Roth IRAs to work so well together for taxpayers like the Mazzeis shouldn't matter. Substance-over-form principles don't give courts free rein to choose results that fit their view of good tax policy. (ER103).

Exactly.

E. Congressional Inaction Militates Against Disturbing Symbiotic Use of Roth IRAs and FSCs

Nor is it likely the symbiotic benefits were unintended. While Congress was creating vehicles to benefit exporters, it also created vehicles by which taxpayers could better assure a reasonable income in their retirement years. Individual Retirement Accounts were created by Congress in 1974 as part of the Employee Retirement Income Security Act. As part of the Taxpayer Relief Act of 1997, Congress created the Roth IRA.

Both DISCs and IRAs have existed side by side from 1974 to the present. Roth IRAs, FSCs, and DISCs existed simultaneously from 1997 onward. Throughout this period, the Commissioner bitterly disputed an IRA's ownership of stock in DISCs/FSCs. In Swanson v. Commissioner, 106 T.C. 76 (1996), this Court held that an IRA's purchase of original issue stock in an FSC was appropriate.

Far from taking this into account and limiting IRA/Roth IRA ownership of FSCs/DISCs/ETIs/IC DISCs, Congress did nothing a year later when it enacted section 408A. Nor was Swanson the last effort by the Commissioner to unhorse an IRA or Roth IRA from an FSC investment. The issue arose again in Ohsman v. Commissioner, T.C. Memo. 2011-98, where this Court (again) held that Roth IRA ownership of a DISC is not a type of investment that Congress has expressly forbidden. (Id. at * 5-6; Hellweg v. Commissioner, T.C. Memo. 2011-58, at *30).

After decades of Respondent's tireless efforts to attack the tax benefits inherent in IRA/Roth IRA ownership of the various export-subsidy regimes enacted by Congress, and with full knowledge of the competing public policy imperatives, Congress has still done nothing to prohibit an IRA or Roth IRA from owning a FSC, DISC, or IC-DISC. A simple amendment to Section 408 could have accomplished that goal — if Congress desired to do so. Instead, a Roth IRA is still not prohibited by either statutory or regulatory law from investing in a tax-advantaged foreign sales entity.

As such, this Court must presume that Congress intentionally failed to act. (See, e.g., Caminetti v. U.S., 252 U.S. 470, 487-488 (1917) (prior case interpreting phrase “must be presumed to have been known to Congress when it enacted the law here involved.”)

F. The Tax Court's Analysis is Deeply Flawed

Instead of yielding to these realities and the weight of appellate authority, the Tax Court instead attacked a tax result it found objectionable by acknowledging the existence of an FSC, but then rejecting the way Roth IRAs purchased its stock. That makes about as much sense as acknowledging the existence of a child and then — because one disagrees with her motives — concluding that the mother is “in substance” a different person altogether. In service of this bizarre conclusion, the Tax Court employs risk/benefit and valuation analyses, unsupported by any authority remotely relevant to the FSC's unique Congressional construct or by any cogent valuation theory.

1. The Tax Court Improperly Employed Risk/Benefit and Valuation Tests To Reassign FSC Ownership

In finding against the Mazzeis, the Tax Court faced formidable challenges.

G. The Tax Court's Conclusions Cannot Withstand Legislative History

Facing repeated reversal, the Tax Court reached a fork in the judicial road: “it is evident that the payments from the FSC were dividends to someone — either to petitioners or to their Roth IRAs.” (ER38). Take one fork, and Roth IRAs would provide tax relief; take the other, and the tax burden would fall on the Mazzeis. (ER38).

The Court took the second, via two steps: First, conclude the FSC was an income-producing asset. (ER40). Second, determine the “real” owners of the FSC's income were the Mazzeis. (ER40, 50).

Petitioners respectfully submit that both steps were wrong.

1. The FSC Was Not An “Income-Producing” Entity

In determining that the FSC produced income, the Court utilized Commissioner v. Banks, a 2005 Supreme Court case having nothing to do with statutorily-created FSCs. Banks involved civil rights litigants who recovered judgment and paid, but did not report as income, their attorney fees. The Supreme Court held that Mr. Banks had retained dominion and control over the funds, resulting in attribution of income to him. (Commissioner v. Banks, 543 U.S. 426, 434 (2005)).

Citing Banks, the Tax Court determined that “In petitioners' cases, the 'income-generating asset' was the FSC” (ER40). How so? The FSC had zero right to any income unless and until such income was allocated to it by Injector Co. Without that income, the allocation of which was entirely discretionary with the Mazzeis, the FSC was totally worthless.

And as a matter of law, the FSC, as created by Congress, was a tax saving vehicle that served as a shameless conduit for funds earned by another entity and statutorily deemed to be of non-U.S. origin:

Exempt foreign trade income of a FSC shall be treated as foreign source income which is not effectively connected with the conduct of a trade or business within the United States. (Section 921(a)).

This is why “A DISC . . . does not generate the income which it enters on its books.” Addison v. Commissioner, 90 T.C. 1207, 1221 (1988). Similarly, FSC receipts from the “sale, exchange, or other disposition of export property” were considered “foreign trading gross receipts.” Section 924(a)(1). Section 925's complex transfer pricing rules allowed part of the income from an export transaction to be assigned to an FSC. Section 925(a)(1) & (2). But did that assignment make a Small FSC an income producing entity?²¹

The Small FSC herein (ER34, f.n. 28), was subject to reduced requirements. Receipts in excess of $5,000,000 would “not be taken into account in determining the exempt foreign trade income.” Section 924(b)(2)(B). It was exempt from the requirements of Sections 924(d) and 924(e). In connection with transfer pricing rules, “None of the activities need be performed outside the United States by a small FSC.” (Treas. Reg. § 1.925(a)-1T(b)(2)(ii)). Thus, small shared FSCs had even less business purpose than regular FSCs (Section 922, Treas. Reg. Section 1.922-1), which were “barely-there entities through which businesses could funnel 'foreign trading gross receipts' to largely escape corporate-level tax.” (ER81).²²

As the majority admits, Congress had created an entity entitled to receive:

a 'commission' for services (relating to an export transaction) that were not, in substance, performed by the FSC . . . the FSC and its related supplier were allowed to set and pay a commission for services that might not actually have been rendered . . . (ER32).

So was the Small FSC herein really an income-producing asset? Significant parts of its “income” (if any) were excluded under the Tax Code as foreign source income “not effectively connected with the conduct of a trade or business in the United States.” (Section 921(a)). Nor was it required to perform any services justifying payment of income. (Sections 921-927). Under Block, Polowniak and Repetto (which the Tax Court cites in support of its position, discussed infra), it would have been disregarded as a sham. But it wasn't a sham, and only because Congress said so.

An FSC was never judged by the same criteria applied to a typical business, since its sole business function was tax reduction (Sections 245(c), 925; Treas. Reg. Section 1.925(a)-1T(a)(3)). It needed no basis in economic reality, and existed solely to promote foreign trade, using tax benefits as the incentive. “Congress created the DISC program specifically to provide a tax incentive . . . to 'increase our exports and improve an unfavorable balance of payments.'” (LeCroy Research v. Commissioner, 751 F.2d 123, 124 (2d Cir., 1984); Benenson, 910 F.3d at 694-5). Yet the Court addresses FSC stock issuance as if substance analyses were somehow appropriate.

Against the Dissent's argument that a FSC was never an income-generating asset and that Injector Co. was the only entity generating income through the foreign sale of its products (ER90), the Majority argues that the dividends remitted by the FSC were “income.” (ER40, f.n. 34). But that argument flies in the face of the whole point of a FSC: its “congressionally sanctioned” flow of funds existed solely to reduce Injector Co.'s “effective tax rate on exports”? (ER90).

As such, the money coming into the FSC fails under Banks: income cannot be attributed where there is, legally, no income.

2. The Court's Stock Ownership Analyses Were Flawed

[T]he Commissioner had no basis for recharacterizing the transactions and no basis for recharacterizing the law's application to them. We reverse. (Benenson 2, 920 F.3d at 783, emph. in orig.).

If one gets by Step One, Banks and Benenson impose a second obstacle: ownership of FSC stock must somehow be re-assigned from the Roth IRAs to Petitioners. The Tax Court does this by determining that in purchasing the FSC stock: (a) The Roth IRAs undertook no risk (ER43); (b) The Roth IRAs could expect no benefits (ER47); and (c) The stock purchase price was too cheap (ER49). All three fail under the very precedent the Court cites.

a. “Risk” Was Improperly Used To Recharacterize Stock Ownership

In Benenson 1, the First Circuit rejected the argument that the Roth IRAs assumed insufficient risk.

[T]o the extent that risk was required, it came from reliance on the DISC. The benefit of James III and Clement's Roth IRAs is necessarily tied, at least initially, to the success and profitability of Summa Holdings' export companies . . . Without DISC commissions, the Benensons' Roth IRAs would received no dividends. (887 F.3d at 522).

So followed the Second Circuit in rejecting the risk argument:

Although the Commissioner argued the IRAs had assumed no investment risk . . . the degree to which the Roth IRAs would benefit from owning JC Holding depended on the success of Summa's export subsidiaries. (Benenson 2, 910 F.3d at 700).

As in Benenson, the Mazzei's FSC was entirely dependent on Angelo Mazzei's management. (ER155:50/11-24; ER156:131/13-23). Nevertheless, the Tax Court pursues the risk/benefit approach by citing a line of sales/leaseback cases in which the issue was whether the risks and benefits of a transaction justified a tax deduction, such as depreciation or interest costs. Each cited case also hinged on whether tax benefits were the only benefits present.

But those cases don't fit: here, deductions are not an issue, and for FSCs, tax benefits were the Congressional goal. (Lyon v. United States, 435 U.S. 561, 572 (1978) (the Court's “real and substantial risk” holding was limited to the facts: whether the risks and benefits of a transaction justified a tax deduction such as depreciation — not the issue here); Sacks v. Commissioner, 69 F.3d 982 (9^th Cir. 1995) (reversing the Tax Court because Sacks assumed the risk of a rise or fall in energy prices in connection with his water heaters, thus legitimating his transaction); Casebeer v. Commissioner, 909 F.2d 1360 (9^th Cir. 1990) (taxpayers dabbling in computer sales and leasebacks were denied depreciation and interest deductions because the transaction lacked economic substance).

Notably, in Sacks, the Tax Court had previously held against the taxpayer, saying his only motive was tax reduction. This Court disagreed:

The tax credits were intended to generate investments in alternate energy technologies that would not otherwise be made because of their low profitability. (Id. at 992, emph. suppl.)

In other words, there (as here) Congress had intentionally created tax benefits to promote a public policy. In Sacks, it was alternate energy; in Mazzei, it was marketing of green technology in foreign commerce (RT 181/23-25).

Relying on this inapt sale-leaseback authority, the Tax Court concluded the Mazzeis' Roth IRAs could not have legitimately owned the FSC stock because they “were exposed to no risk” (ER43) and, for variation, “were never exposed to appreciable economic risk.” (ER45, f/n 36)

But how is risk relevant to purchase of stock where: (1) the Code and Regulations require no business purpose (Sections 921-927), (2) under the Code, the only foreseeable risk is that the related parent company may fail, and (3) where shares will foreseeably be held by family members or family trusts? (Treas. Reg. Sec. 1.922).

While instructive in a normal tax-loss case, risk/benefit arguments ring tinny where, “to the extent that risk was required, it came from reliance” on a Congressionally-sanctioned U.S. exporter (Benenson 1, 887 F.3d at 522).

b. Benefit Analyses Were Improperly Used To Recharacterize Stock Ownership

The Tax Court reasons that “no independent holder of the FSC stock could realistically have expected to receive any benefit.” (ER49). With respect, this is a creative attempt to shoehorn “traditional sham analysis” into a situation where it does not fit. As structured by Congress, FSC shares were certain to never have an “independent holder” because — as the Tax Court points out — there was no benefit from FSC stock absent its relation with the related exporter.

The sole purpose of Sections 921-927 was stimulation of foreign trade by tax avoidance, a useful incentive only if realized by the U.S. seller who was the only person with an incentive to participate in a FSC. As such, Congress created a structure in which the holder(s) of FSC stock would not be an “independent holder.” Ford v. U.S., supra. Similarly, the Regulations expressly allowed family (or family entity) ownership of FSC stock. Treas. Reg. Section 1.922-1(f). Ownership of FSC stock by an “independent holder” was never contemplated: so why hang the Mazzeis for doing what Congress expected?

The Tax Court determined the Mazzeis' tax benefits were disproportional to their investment (ER49), and suggested that the Ninth Circuit's “two pronged analysis” should determine whether their transactions “had any practical effects other than the creation of tax losses.” (ER25; Reddam v. Commissioner 755 F.3d 1051, 1060 (9^th Cir. 2014), emph. in orig.). There, John Paul Reddam bought into a KPMG program (“OPIS”) engineered “to avoid U.S. regulatory rules that limit the amount of financing permissible in securities transactions.” (Id. at 1053). His plan was so “byzantine” the Ninth Circuit wisely offered a “Simplified Overview of Reddam's OPIS Transaction.” (Id. at 1054, 1055). The end result was a claimed loss of $50,200,000, “tax benefits not contemplated by a reasonable application of the language and purpose of the Code . . .” (Id. at 1057).

But a KPMG program “to avoid U.S. regulatory rules” is hardly relevant where the taxpayers admittedly followed the Code and reached a “text driven consequence.” (ER87; Summa, 848 F.3d at 790).

Here, the “practical effects” of FSCs were tax losses for the Government, explicitly designed to subsidize foreign trade. Section 924(a)).

For that reason, sham analysis, appropriately employed in Reddam, was rejected in Summa, where taxpayers employed Congressionally-created “shell corporations . . . that have no substance at all.” (884 F.3d at 786).

Similarly, Roth IRAs employed tax incentives for the social purpose of incentivizing retirement savings. (H.R. Rep. 105-148, at 337). Traditional substance over form and sham transaction analyses do not fit the unique structure of a Roth IRA buying stock in a FSC — even though the entity was related, as the Regulations allowed. (ER55). The commissions received by an FSC, and therefore the dividends it paid its stockholders, did not arise from any classic “economic reality”. Sections. 245(c), 925; Temp. Treas. Reg. Section 1.925(a)-1T(a)(3). Combine an export subsidizing entity with an IRA, and tax benefits result. If this was objectionable, especially after 45 years of peaceful coexistence in the Code, Congress alone can provide the remedy — “and Congress hasn't decided to change it.” (ER83).

Traditional benefit analyses hardly justify reassigning stock ownership where the relationships between an FSC, its contracting exporter, and its shareholder(s) were statutorily structured in a way designed to result in exactly what happened here.²³

c. The Tax Court Employed Flawed Valuation Analyses

Respondent proffered valuation expert Ken Nunes (“Nunez” in the trial transcript) (RT210/8-13), who at trial admitted that in order to have value, an asset must be saleable to a willing buyer (RT283/15-19). He failed to determine, however, whether the FSC herein could be legally sold to anyone. In fact, it could not: Section 7.1 of the Shareholders' agreement provided that “None of the issued and outstanding shares of stock of the company, nor any interest in them, may be sold, assigned, pledged, or otherwise transferred” (ER138:3-11), which Nunes failed to consider (ER157:283/20-25; 284/1-3) Yet the Court based its stock valuation analysis on hypothetical third-party owners, without acknowledging that there could be no third party owners or buyers of the FSC other than the Mazzeis.

Ironically, the Commissioner never wished to make stock value the issue: “Respondent's not attempting to challenge the value of the FSC shares.” (RT230/23-25). Yet valuation of the FSC stock was a major factor in the Tax Court's decision to re-assign ownership:

That is probably due, in some part, to the fact that the author of the majority opinion never heard the Commissioner's “expert” testify. Although that expert, Mr. Nunes, is not named in the Tax Court's Opinion, his flawed reasoning obviously was. Issues with that include:

• Nunes based his valuation forecast on an admitted error (RT266/16-25; 267/1-7).

• He valued Petitioners' S Corporation as a C corporation, did not know what the dividends received deduction is, and did not know how a small shared FSC differed from a large FSC under Code sections 921-927. (RT265/6-21).

• On four separate occasions Respondent failed to provide Nunes with critical information:

  (1) He was not provided historical financial data on Mazzei companies, and was instructed to use Feb. 1, 1998 as valuation date for Mazzei Injector Co. (ER157). Events subsequent to the valuation date are inadmissible for valuation, and after-discovered facts should not be used. Treas. Reg. § 10.2031-1(b); Ithaca Trust Co. v. U.S., 279 U.S. 151, 155 (1929). Ex post facto data is not a correct valuation method (RT241/17-21) and is contrary to Treasury Regulation 202031-1(b), Rev. Rule 59-60, and case law (RT243/9-19).

  (2) Despite telling Respondent he needed historical data (RT241/25, 242/1-2), he made economic forecasts based only on 1998 data (RT239/4-8, 11-25)

  (3) The Commissioner did not allow Nunes to interview Angelo Mazzei or reveal to him they had done so for two hours (RT250/14-20; 251/12-17; 255/14-19). As a result, Nunes erroneously based his economic forecast on assumptions that were in error (RT266/16-25; 267/1-7).

  (4) Nunes was not shown an entire banker's box of data the Mazzeis had timely provided (RT235/24-25; 236/1-4; 237/3-6; 10-12; Exh. 121P signed receipt by IRS; Exh. 120P RPD Response). Despite Nunes' claim (after examining the box) that it held only “two items that would have been helpful” (RT285/25-286/1), in reality the box contained important historical information from 1996 through 1999 (RT328/13-25; 329/1-3), that would have been important in his valuation (RT240/8-15)

• In prior Tax Court cases he had never been deprived of historical data (RT241/8-16)

• Respondent instructed him not to consider minority discounts for a small family-owned company (RT271/4-6). Yet discount for lack of marketability should have been considered (Estate of Maggos v. Comm'r, T.C. Memo 2000-129, *51-*53). The benchmark for liquidity is three business days (Hon. David Laro & Shannon Pratt, BUS. VAL. & TAXES: PROCEDURE, LAW & PERSPEC TIVE, p. 285 (Wiley 2004). Tellingly, Nunes did not know this basic principle of business valuation. (RT270/13)

Perhaps that is why the judge who did hear the evidence did not buy into the Tax Court's factual findings as to substantive ownership. (Compare footnote 1, on ER77 (“As the trial judge in these cases, I . . . agree with his findings of facts (with one exception . . .”), with footnote 9, on ER88 (“If this is a finding of fact, it is one with which I as the trial judge, would disagree.”))

To add insult to injury, the Commissioner conceded at trial that 1/3 of the FSC stock was worth $33.33 per share — and the Court excluded the Mazzei's expert from testifying to value on that basis, deeming in “irrelevant” in light of the concession. (ER156:189-ER157:208; ER138:74-160). Had this testimony been adduced, the Majority might have reached a different result as to stock value, which is discussed next.

d. The Tax Court's “$1” Stock Valuation Was Chimerical

Having cited sale and leaseback cases for the proposition that the FSC stock purchase failed risk/benefit analysis, even at a customary $500 purchase price (BNA Portfolio Export Tax Incentives 934 2d, p. 69; ER45), the Court then concluded that the purchase price was really only a mere $1:

“The opinion of the Court focuses on the substance of a single step: the purported purchase of FSC stock by the Roth IRAs for the nominal price of $1 . . .” (ER74).

With all due respect, that whimsical $1 conclusion defies logic, if one reflects for a moment on what Congress had designed. One cannot attack the way this transaction was structured without running headlong into the very reason it should be respected: shared FSCs were expressly created by Congress not to have substance, but to give a small exporter a competitive edge. (Section 922; Treas. Reg. Section 1.922-1; ER34). A small FSC was dependent on a U.S. supplier whose goods it could promote on the foreign market, and its shares were virtually worthless without that supplier, which foreseeably was a small, family-owned corporation. That stock value in their shared FSC was dependent on the skills of Angelo Mazzei (RT 50/11-14), and a shareholders' agreement was made fixing the price of all FSC shares at $1 only if the shares were ever sold to someone else. (ER45).

Even though Respondent's trial expert never considered the shareholders' agreement in his valuation analysis (RT 283/20-25; 284/1-3), and despite the fact that Respondent was “not attempting to challenge” FSC share value, the Court focused on it, and adopted this contingent price — applicable only in the improbable event of a stock sale to a third party — as the actual sale value of the stock, concluding that the agreement “strongly suggests” the real purchase price was $1. Having thus reasoned, and ignoring the $3,500 fee Petitioners paid to WGA (ER156:132/9-17; ER138:1-3,12), the Court concluded that $499 of the stock purchase price was actually “a fee for access to the FSC.” (ER45-46).

In support of that conclusion, the Court invoked Hewlett-Packard v. Commissioner, 875 F.3d 494, 499 (9^th Cir., 2017). But Hewlett-Packard was a debt-equity case where a taxpayer's purported loss, in exercising a put option to sell its shares, was held to be a fee paid for a tax shelter, not allowable as a tax deduction.

How does this relate to Mazzei? It does not. As this Court colorfully put it, Mazzei is not a corporate debt-equity “borscht” (Id. at 496). Debt and equity have nothing to do with Petitioners' transaction. FSC stock would be utterly worthless if separated from the exporting business with which it contracted. To envision FSC stock being routinely sold on the open market requires a degree of fictional creativity seldom seen outside Hollywood. (See Benenson 2, 910 F.3d at 694).

The Tax Court describes a “disconnect” between the claimed fair market value of FSC stock and its “related-party value” where Petitioners “controlled every aspect” of the transactions. (ER63). But FSC transactions were inherently related-party, explicitly recognized as such by the Code and Regulations.²⁴ The Court concludes “there was no chance that commission payments would be made, in the absence of related-party control”, and that FSC stock “had no fair market value” because “in the absence of related-party control . . . neither the FSC nor an independent holder of the FSC stock . . . could expect to receive anything.” (ER64) Exactly. Without any anticipated stream of certain revenue, value does not lie. Pratt & Laro, supra, Chapter 11, Income Valuation Methods.

Under the Code, FSCs and their suppliers were related, and under the Regulations, FSC owners were foreseeably related. Nonetheless, harking back to Nunes' “arms-length” argument (RT219/7), the Court opines that “the formal purchase price and contracts . . . were entered into without the benefit of arm's-length pressure” (ER63), thus challenging whether those agreements justified “the tax treatment of the transactions . . .” (ER63-64).

This ignores textual reality. Because of Congressional exemption from most of the relaxed requirements imposed on large FSCs, the Mazzeis' shared FSC was, in reality, simply an ongoing book entry as one of 25 accounts maintained in the shared FSC. As such, their Roth IRAs reasonably paid only $500 for their ownership interest in what, by Congressional design, was a bookkeeping entry that existed solely to give a small exporter a tax break. The term “fair market value” is virtually meaningless in this context, and incorrectly assumes that FSC stock would be an open market commodity.

It never was, and failing to recognize how a small FSC's special characteristics impacted its contracts and stock issuance, the Tax Court relied on sales/leaseback caselaw unrelated to the textual issues herein.

H. Petitioners' Contracts Were Not 'Too Good To Be True' Nor Did They Exhibit Unwarranted “Common Control”

The real inference of the Tax Court's holding is that the Mazzeis' tax results should be reversed because they were too good to be true — even though prior taxpayers, using DISCs instead of FSCs, won on appeal. To get there, the Tax Court found that the contracts between Injector Co. and the FSC exhibited unallowable common control, thus somehow tainting purchase of the FSC stock:

Utilizing provisions of the Code, Injector Co. and the FSC entered into agreements whereby: (1) FSC commissions would be agreed upon in order to provide “maximum federal income tax benefits”; and (2) Injector Co. retained the right to determine, prospectively or retrospectively, whether the FSC was entitled to a commission. (ER12, 48-49 f.n. 38).²⁵ Under these facts, the Court suggests, “no independent holder of the FSC stock could realistically have expected to receive any benefits . . .” (ER49).

The Court reasons that while the Code may have contemplated a related-party relationship between the FSC and its supplier, no such protection extended to the buyer of FSC stock. (ER37). But that argument ignores both Treas. Reg. Sections 1.922-1(f), and the fact that the only way to achieve the Congressional goal of subsidizing foreign trade was for the FSC to be owned by an interested party. The Court's reasoning was the same argument Ford Motor Company unsuccessfully made (132 Fed. Cl. at 110). There, as here, a related party owned the FSC, and the Commissioner successfully asserted the viability of the FSC rather than attacking its stock issuance to Ford.

Yet the Tax Court holds:

That conclusion concedes that the only issue herein is the Tax Court's use of the substance over form principal, and also ignores the fact that ownership of FSC stock by family-owned Roth IRAs was foreseeable and recurrent, and Congress cannot have been unaware of the tax results: Roth IRAs were part of the Taxpayer Relief Act of 1997; FSCs had been around since the Deficit Reduction Act of 1984.

Confronted by these textual realities, the Court relies on its conclusion that the FSC stock was bought for $1:

“Could not have expected any benefits?” The benefits received by the Roth IRAs are what occasion this litigation.

“Put nothing at risk?”

I. The Tax Court Ignores The Supreme Court's Recognition Of Statutory Intent And Textual Primacy

Despite the Court's attempt to decide only the issue of stock ownership, has this decision ignored Congressional intent?

The Summa and Benenson Courts recognized a danger: in its zeal to correct a perceived tax windfall, a court might be tempted — by whatever theory it chooses to employ — to re-write something intended by Congress.

A recently unanimous Supreme Court held:

[I]t is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done . . . “We cannot replace the actual text with speculation as to Congress' intent.”

(Henson v. Santander Consumer USA Inc. 137 S. Ct. 1718, 1725 (2017), quoting Magwood v. Patterson, 561 U.S. 320, 334 (2010)

Similarly, the Summa Court recognized “the Supreme Court's textually respectful methods of statutory interpretation.” Summa, 848 F.3d at 787. Substance over form should not “override statutory provisions whose only function is to enable tax savings.” Id. at 789. Otherwise, “Before long, allegations of tax avoidance begin to look like efforts at text avoidance.” (Id.) Travel too far down that judicial road, and one will miss the point Congress was trying to make — while usurping the exclusive province of the People's elected representatives.

Because the Mazzei transactions involve the interaction between two Code-created entities, each of which intentionally begets tax savings, and because these statutory issues challenge the Tax Court's substance over form analysis, it is worth reviewing how deeply the Supreme Court has deferred to the textual primacy of the Code.

1. “Transactions with no non-tax purpose” Do Not Justify the Tax Court's Judicial Restructuring

The Tax Court suggests that, absent a non-tax purpose, Petitioners' transaction should be judicially restructured. This was rejected in Benenson 2,910 F.3d at 700-701, and by the Supreme Court in Cottage Savings v. Commissioner. There, an S & L lender owned residential mortgage loans which had catastrophically declined in value when interest rates surged, and for which it could take an attractive tax loss. But reporting these losses would risk closure of the lender by the FHLB Board. To get around the problem, the Board concocted an arrangement where an S & L could avoid reporting its losses by exchanging its worthless mortgages with “substantially identical” mortgages held by another luckless S & L. After such an “exchange,” neither S & L would be required by the Board to formally report its financial loss position. But they still could, and did, report huge tax losses. Cottage Savings Ass'n. v. Commissioner, 499 U.S. 554, 556-557 (1991).

The Commissioner attacked this administrative arrangement on the basis that the properties exchanged, all being residential mortgages, were “economic substitutes” and were not “materially different” properties, as required for recognition of loss by Code Section 1001(a). Id. at 565. Reversing the Sixth Circuit, the Supreme Court followed the pure text of the Code and the Board's administrative regulation, even though the result was a massive tax benefit: “the Commissioner's approach ill serves the goal of administrative convenience that underlies the realization requirement” and is “incompatible with the structure of the Code.” (Id. at 565-566). Even though there were significant tax benefits, the Supreme Court respected textual authority.

Summa and the Benenson decisions are similar. Both cases recognized Congressional intent and followed the language of the Code. “That these laws allow taxpayers to sidestep Roth IRA contribution limits or to earn more tax-advantaged money than they otherwise might have, may be an unintended consequence of Congress's legislative actions, but it is a text-driven consequence no less.” (Summa, 848 F.3d at 790).

The Mazzei Court seeks to circumvent this result by “recognizing” the FSC and Roth IRAs, while destroying the transaction through a reassignment of FSC stock. In so doing, the Tax Court elevated its own feelings about substance over the form mandated by Congress. Nothing in the case law cited by the Tax Court, nor the old cases setting forth the substance over form principal countenances such a result.

Here, the Code allowed deductions where the only purpose was a tax deduction. To cite, as the Tax Court has done, commercial substance-over-form cases that require a non-tax purpose is to impose on the shareholder of FSC stock a judicially-created exception to a Congressionally legislated valid tax purpose.

2. Tax Synergy Between Two Code Provisions Is Not Objectionable

The Benenson decisions recognized, as did Summa, that one tax incentive could legitimately potentiate another, resulting in benefits to the taxpayers. Summa, 848 F.3d at 782; Benenson 1, 887 F.3d at 523. “[W]e begin with a basic point: The Internal Revenue Code allowed Summa Holdings and the Benensons to do what they did.” Summa, 848 F.3d at 784.

But these two recent cases do not stand alone. In Gitlitz v. Commissioner, multiple sections of the Code produced a windfall for taxpayers who owned an insolvent Subchapter S corporation. Various sections of the Code allowed the corporation to enjoy discharge of indebtedness, but to exclude that discharge from gross income because of insolvency, while also allowing the shareholders to fully deduct the corporation's losses — resulting in a tax bonanza. 531 U.S. 206 (2001).

The Commissioner claimed the taxpayers had used interactive Code sections to achieve a double benefit unintended by Congress. Despite lower courts' concerns about a tax double windfall, the Supreme Court followed the literal wording of Section 108(b)(1): “Because the Code's plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.” Id. at 220; accord Austin v. Commissioner, T.C. Memo. 2017-69, 32, quoting Summa at 790 (the Tax Court allowed all the income from an S corporation to flow to an employee stock ownership plan, creating potentially unintended tax benefits: “The Commissioner cannot fault taxpayers for making the most of the tax-minimizing opportunities Congress created.”); Caterpillar Tractor Co. v. U.S., 218 Ct. Cl. 517, 526-8 (1978) (earnings placed into DISC from another Congressionally-created foreign trade corporation created an allowable double tax benefit where, as here, the statute is unambiguous on its face . . . the Treasury has no power to supply an omission or create an exception not already in the statute . . . [and] Plaintiff fits solidly within the statute.)

2. The Tax Court Misused The Principle Of Reformation

Reformation of contracts has been broadly recognized by the Ninth Circuit. Asarco LLC v. United Steel, 910 F.3d 485, 498 (9^th Cir. 2018) (allowing arbitrator to reform a contract, despite contractual prohibitions, so as “to make [the contract] reflect the terms the parties actually agreed upon.”); Caliber One v. Wade, 491 F.3d 1079, 1083 (9^th Cir. 2007) (reformation of mutual mistake); Kelley v. Commissioner, 45 F.3d 348, 352 (9^th Cir., 1995) (upholding Tax Court authority to reform IRS Forms 872-A to reflect a date different from that argued by the taxpayers).

But Kelley is limited: Form 872-A is not a contract, but a unilateral waiver of defense by the taxpayer. Bilski v. Commissioner, 69 F.3d 64 (1995).

As seen in Ninth Circuit authority, reformation should be used to conform a transaction to the intent of the parties, not to rewrite the parties' intent to achieve a result. Herein the Tax Court has done just that. The parties' intent was clear: as between Mazzei's, their Roth IRAs, and WGA, everyone intended for the Roth IRAs to own the shared FSC stock. Instead of recognizing the parties' intent, the Tax Court arrived at a desired tax result and reformed the parties' intentions to achieve it. The Tax Court thus improperly inverts the reformation process by seeking a result and then changing the parties' clearly expressed intent.

J. The Tax Court Misapplies Substance-Over-Form Authority

“[T]he substance-over-form doctrine is not something the Commissioner can use to pound every Roth-IRA transaction he doesn't like.” Block v. Commissioner, T.C. Memo 2017-142, at *30.

1. 9^th Circuit Authority is Miscited

With a view toward possible Ninth Circuit review (ER23), the Tax Court cites case law for the use of substance over form and/or the economic substance doctrine. Mazzeis respectfully submit that the cited authority is misapplied, both as to facts and issues.

Cooper v. Commissioner, 877 F.3d 1086 (9^th Cir. 2017), cited at ER24, f/n 17, is fraught with Code violations such as incomplete transfer of patent rights and a meritless deduction of a “bad debt,” not totally worthless and hence not deductible under Section 166. But that has nothing to do with this case, where the Code was followed to a “T”, to fulfil the Congressional mandate to create “effective rate reduction for export income” (ER61), through “commission payments . . . between parties that are related . . . one of which is a qualifying FSC.” (ER62, emph. suppl.). Issue FSC stock to a Roth IRA, and tax savings potentiated. (ER49-50). But that combination does not invoke Cooper, which relied upon Code violations that do not exist here. (ER87).

The other cases relied upon by the Tax Court are likewise inapt. Harbor Bancorp v. Commissioner, 115 F.3d 722 (9^th Cir. 1997), cited at ER24 f.n. 17, involved arbitrage bonds and sham dating of documents. Stewart v. Commissioner, 714 F.2d 977 (9^th Cir. 1983), cited at ER24, f.n. 17, involved condemnation proceedings and a sale of securities by the taxpayer to his controlled (non-FSC) corporation, which the Court held to be a mere conduit for sale of appreciated securities. Again, nothing close to these facts.

Far more on point is a pithy quote from Stewart:

“There are circumstances, however, 'when form — and form alone — determine the tax consequences of a transaction', regardless of its underlying 'substance' or 'purpose'.” (Stewart, 714 F.2d at 988).

This, the Mazzeis submit, is the issue the First, Second, and Sixth Circuits encountered, and which now confronts this Court. In Mazzei, the issue is not an arbitrage bond transaction, partial transfer of patent rights, or transfer of condemnation rights from a taxpayer to a non-FSC corporation. The issue is much more focused: can the substance over form principal be used to recharacterize stock ownership because two Congressionally-designed entities worked together too well? FSCs and Roths were intended by Congress to motivate behavior through tax benefits. Thus, an analysis of how much is paid for stock, and under what terms — while useful in cases such as Cooper, Stewart, and Reddam — ignores the careful structure, and practical effect, of what Congress created. Traditional substance over form analyses in the sale/leaseback cases cited by the Tax Court are inapposite to a Roth IRA buying stock in an entity which, under the Code, had no purpose except tax benefits.

Hence, the Court's cited cases lead the Tax Court in a direction that is convenient, but with an untenable destination: the Tax Court cannot sham the ownership of a FSC's stock without thereby shamming the FSC.

Where, as here, Congress has explicitly removed the requirement for economic substance, sham analysis is inappropriate — at least in the Sixth Circuit's opinion, which recognized “the 'sham' transaction doctrine” (Summa, 848 F.3d at 785), and then refused to apply it where “The Code authorizes companies to create DISCs as shell corporations . . . that have no substance at all.” (Id. at 786, 789). So, too, fails business purpose and economic substance where the entity being purchased is, by Congressional design, “all form and no substance” (Id. at 786).²⁷

Petitioners chose to use FSCs and Roth IRAs in concert, and while the Tax Court believes “the Code does not explicitly or implicitly authorize the Roth IRAs' purchase on these facts” (ER60), neither can the Tax Court cite any statutory prohibition thereof.²⁸

Appellate authority with respect to FSCs, DISCs, and Roth IRAs consists primarily of the three recent cases, each of which have reversed the Tax Court on both the result and the reasoning in Mazzei. Far from giving this Court a compelling reason to depart from its sister Circuits, the Tax Court has instead offered a partial repaint of the same, failed analysis — bolstered by inapt authority and ludicrous conclusions as to stock value. Since there is not a single case that agrees with the Tax Court's analysis, it falls back on old sale-leaseback cases that have nothing to do with the unique issue of using two Code-sanctioned transactions at the same time.

Ownership of FSC stock by another tax-advantaged entity, even where resulting tax savings potentiated each other, should not invalidate the Mazzeis transaction–not until Congress decided to remedy what the Court perceived as a problem.²⁹

In Lazarus v. Commissioner, affirmed by the Ninth Circuit, the Tax Court held that substance rather than form “is determinative of the tax consequences, unless it appears from an examination of the statute that form is to govern.” (Lazarus v. Commissioner, 58 T.C. 854, 864 (emph. suppl.), aff'd 513 F.2d 824 (9^th Cir., 1975). While Lazarus was an estate and gift tax matter, it articulates the dispositive issue herein: under the Code, form governs.

2. Prior Tax Court Decisions Were Misapplied

The Tax Court cites several of its own cases where taxpayers did exactly that. But none of those involved FSCs, DISCs, or other Code-structured entities.

Block Developers, LLC v. Commissioner (T.C. Memo 2017-142) involved a domestic partnership, not a FSC, which engaged in no real business activity, and was created to funnel money to a Roth IRA. In Polowniak v. Commissioner, T.C. Memo 2016-13, taxpayers had their Roth IRAs purchase stock, not in an FSC but in a domestic corporation that was unable to demonstrate performance of any services in exchange for payments it received. Similarly, in Repetto v. Commissioner (T.C. Memo 2012-168) the taxpayers' Roth IRAs received payment for sham services completely unrelated to FSCs or DISCs (Id. at *28) — a fact noted by the Second Circuit (Benenson 2, 910 F.3d at 701).

In each cited case, the Tax Court disregarded corporations or LLCs that did nothing except serve as vehicles for getting money into Roth IRAs. But none of them were FSCs. Not surprisingly, the Summa court agreed that the sham services found in Repetto were unjustified. 848 F.3d at 785-786. But in citing that in footnote 21, the Tax Court misses Summa's very next sentence: “But these economic-substance principles — which undergird the traditional use of the substance-over-form doctrine — do not give the Commissioner purchasing power here.” (Id. at 786).

None of the cited Tax Court cases involved the unique issue of a Code-sanctioned entity that was required to have no economic purpose other than tax reduction. Yet construing them as being factually “similar,” the Court criticizes the “substance” of the Mazzei transaction. (ER28). Limiting the FSC provisions of the Code and Regulations, the Tax Court applies “normal substance principles to petitioners' transactions — at least in deciding who actually owned the FSC stock.” (ER29; emph. suppl.)³⁰

VIII. FINAL THOUGHTS

Granting the government's proposition that these taxpayers have found a hole in the dike, we believe it one that calls for the application of the Congressional thumb, not the court's. (Fabreeka Products v. Commissioner, 294 F.2d 876, 879 (1^st Cir. 1961)).

There are occasions when, for reasons grounded in policy goals, Congress creates transactions that have no non-tax purpose. (Cottage Savings Ass'n. v. Commissioner, supra). There are even occasions where taxpayers employ two legislative provisions which, in combination, provide benefits Congress may not have foreseen, but which are available from the plain text of the Code. (Gitlitz v. Commissioner, supra). Here, the safest assumption is that after decades of inaction, the Congress was well aware of the benefits from the IRA/FSC interaction and consciously allowed them to remain. Hall v. U.S., 566 U.S. 506, 516 (2012)

Against that, the Tax Court decided to take one last run at a concept that has failed spectacularly in every appellate court to consider it. In so doing, that Court ignored those holdings, the textual primacy of the Code, the faulty work product of Commissioner's “expert,” and the Commissioner's repeatedly-stated litigation position of “not challenging stock valuation.” The Tax Court thereby created a fictitious $1 stock purchase price, based on case law that is factually and legally inapposite.

Whether hiding behind the fig leaf of “stock ownership,” or understood for what it really is — yet another “substance over form” attack on a transaction the Tax Court just doesn't like — the Tax Court's dislike of a perceived tax windfall does not justify the result herein, by whatever theory it is reached. If there really is a hole in the tax revenue dike, the Congressional “thumb” — not the Tax Court's — should be applied.

WHEREFORE, premises considered, the Mazzeis respectfully ask this Court to reverse that portion of the Opinion and Decision of the United States Tax Court finding them liable for excise taxes.

Date: January 25, 2019

Respectfully submitted,

WALTON & WALTON, LLP

By: Lewis R. Walton

By: L. Richard Walton

Attorneys for Appellants