The United States Court of Appeals for the Sixth Circuit was called upon to decide what is the law when applied to tax.
It should be an easy question since Congress writes the tax law making a big political deal about every word enacted.
If anyone wants to know what the tax is as applied to them, then the answer should be that you just read it as written and that should be that.
But it isn’t.
As far as the Congress and Treasury are concerned, the written words of the tax law mean as written unless they don’t.
It’s as if Lewis Carrol’s Wonderland is Washington, D.C. and they operate like the Mad Hatter’s tea party.
SparkNotes (as good a source as any on these sort of things) describes this as:
In Wonderland, chaos is the ruling principle, but a strange sense of order still exists. “The Mad Hatter, the March Hare, and the Dormouse point out to Alice that saying what she means and meaning what she says are not the same thing. Alice has said that she cannot take ‘more’ tea even though she has not had any yet. However, as the Mad Hatter points out, Alice can indeed take ‘more’ even though she has not taken any, since ‘it’s very easy to take more than nothing.’ The language games at the tea party underscore the inconsistency of Wonderland but also imply that the ordering principles that govern Alice’s world are just as arbitrary.
Just recently, the Court of Appeals for the Sixth Circuit came to the startling realization that the application of the tax law to the taxpayer in question made no sense.
The government used the substance-over-form doctrine to prove up its assertion that the taxpayer owed more money. The lower court bought it and, no doubt, the government expected the Appellate Court would rubber stamp the decision.
Unfortunately for the government, the Appellate Court has judges who pay attention.
The facts of the case involved a tax structure which combined two specific tax provision of the Code which provide the taxpayers with tax reduction.
The Court stated, “In today’s case, however, the Commissioner of the Internal Revenue Service denied relief to a set of taxpayers who complied in full with the printed and accessible words of the tax laws.”
As to the Commissioner, “He acknowledged that the family complied with the relevant provisions. And he acknowledged that the purpose of the relevant provisions was to lower tax.”
Instead, the Commissioner applied the “substance over form doctrine,” recharacterized the transactions and demanded more tax. Plus, penalties to boot.
The Court recognized the Commissioners arguments as trying to justify the unjustifiable.
Every taxpayer and tax professional must stop and think about what the Court said. The decision is deeply profound.
“Each word of the ‘substance-over-form-doctrine,’ at least as the Commissioner has used the term here, should give pause.”
If the government can undo transactions that the terms of the Code expressly authorize, it’s fair to ask what the point of making these terms accessible to the taxpayer and binding on the tax collector is.”
“’Form’ is ‘substance’ when it comes to law. The words of the law (its form) determine content (its substance). How odd, then, to permit the tax collector to reverse the sequence—to allow him to determine the substance of the law and to make it govern ‘over’ the written form of the law—and to call it a ‘doctrine’ no less.”
“Only a parody of a purpose-based approach to interpretation, unanchored to the statutory text, could justify one a way-way use of this power.”
The Commissioner of the Internal Revenue doesn’t use power in a vacuum. Everything the Commissioner does is at the urging and with the stamp of approval of Congress.
More than a decision about a tax issue, the Court of Appeals recognized with astonishing clarity the madness of just how the tax law is applied.
With this precision of reasoning and lucidity, Circuit Court Judge Sutton, who wrote the Opinion for the Sixth Circuit, ought to be high on the list of nominees to the Supreme Court.
Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.