June 3, 2021
Ninth Circuit reverses Tax Court, concluding form of taxpayers’ transaction followed congressional intent despite its substance
In Mazzei v. Commissioner, the Ninth Circuit has reversed a Tax Court decision for the IRS. The taxpayers had established a foreign sales corporation (FSC) and made their Roth IRAs its shareholders; their export company then paid commissions to the FSC, which returned its income as dividends to the IRAs; no tax was paid when the funds went into the IRAs or on qualified withdrawals from them. The appeals court concluded that, in drafting the FSC statute, Congress had expressly allowed the form of this transaction to prevail over its substance, so the Tax Court erred in applying the substance-over-form doctrine.