No. 13-1037

IN THE

Supreme Court of the United States

WFC HOLDINGS CORPORATION,

Petitioner,

v.

UNITED STATES OF AMERICA,

Respondent.__________________

On Petition for a Writ of Certiorari to the United States Court of Appeals for the Eighth Circuit

BRIEF AMICUS CURIAE OF

ATLANTIC LEGAL FOUNDATION

IN SUPPORT OF PETITIONER _

Martin S. Kaufman Counsel of Record ATLANTIC LEGAL FOUNDATION

2039 Palmer Avenue Larchmont, New York 10538 (914) 834-3322 mskaufman@atlanticlegal.org

Counsel for Amicus Curiae

March 31, 2014

i

QUESTION PRESENTED

Whether an objectively profitable transaction

can be disregarded for tax purposes under the

judge-made economic substance doctrine because

it was structured to achieve income tax deductions

authorized by the plain language of the Code.

ii

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 29.6 of the Rules of this Court,

amicus curiae Atlantic Legal Foundation states

the following:

Atlantic Legal Foundation is a not for profitcorporation incorporated under the laws of theCommonwealth of Pennsylvania and it has noshareholders or subsidiaries.

iii

TABLE OF CONTENTS

Page

QUESTION PRESENTED. . . . . . . . . . . . . . . . . . i

CORPORATE DISCLOSURE STATEMENT. . ii

TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . v

INTEREST OF AMICUS CURIAE. . . . . . . . . . . 1

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . 3

ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

I. CERTIORARI SHOULD BE GRANTED

TO RESOLVE A CONFLICT AMONG

CIRCUITS REGARDING WHETHER A

T R A N S A C T IO N D E S IG N E D T O

ACHIEVE BOTH NON-TAX ECONOMIC

BENEFITS AND TO REDUCE TAXES

M E E T S T H E “ E C O N O M I C

SUBSTANCE” TEST. . . . . . . . . . . . . . . . . 3

II. CERTIORARI SHOULD BE GRANTED

TO CLARIFY THE “ECONOMIC

SUBSTANCE” DOCTRINE. . . . . . . . . 10

iv

III. THE DECISION BELOW CREATES A

SUBJECTIVE, AMBIGUOUS AND

A R B I T R A R Y R U L E T H A T I S

INCONSISTENT WITH BUSINESS

REALITIES. . . . . . . . . . . . . . . . . . . . . . . 14

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . 18

v

TABLE OF AUTHORITIES

Page(s)

CASES

Black & Decker Corp. v. United States,

436 F.3d 431 (4th Cir. 2006).. . . . . . . . . . . . 5, 9

Boulware v. United States,

552 U.S. 421 (2008). . . . . . . . . . . . . . . . . . . . . 12

Coltec Indus., Inc. v. United States,

454 F.3d 1340 (Fed. Cir. 2006). . . . . . . . . . . 5, 9

Compaq Computer Corp. v. Commissioner,

277 F.3d 778 (5th Cir.2001). . . . . . . . . . . . . . 12

Dow Chemical Co. v. United States,

435 F.3d 594 (6th Cir. 2006).. . . . . . . . . . . . . 10

Frank Lyon Co. v. United States,

435 U.S. 561 (1978). . . . . . . . . . . . . 8, 11-12, 13

Friedman v. Commissioner,

869 F.2d 785 (4th Cir. 1989) . . . . . . . . . . . . . . 9

Gran v. Internal Revenue Serv.,

964 F.2d 822 (8th Cir.1992). . . . . . . . . . . . . 12

Gregory v. Helvering,

293 U.S. 465 (1935). . . . . . . . . . . . . . . . . passim

vi

Hanover Bank v. Commissioner,

369 U.S. 672 (1962). . . . . . . . . . . . . . . . . . . . . 17

Hertz Corp. v. Friend,

130 S. Ct. 1181 (2010). . . . . . . . . . . . . . . . . . . 14

IES Indus., Inc. v. United States,

253 F.3d 350 (8th Cir. 2001).. . . . . . . . . . . . . . 7

In re CM Holdings, Inc.,

301 F.3d 96 (3d Cir. 2002). . . . . . . . . . . . . . . 9

Jacobson v. Commissioner,

915 F.2d 832 (2d Cir. 1990). . . . . . . . . . . . . . . 9

Knetsch v. United States,

364 U.S. 361 (1960). . . . . . . . . . . . . . . . . passim

Sala v. United States,

613 F.3d 1249 (10th Cir. 2010).. . . . . . . . . . . 10

Shriver v. Comm'r,

899 F.2d 724 (8th Cir.1990). . . . . . . . . . . . . . 12

Sochin v. Commissioner,

843 F.2d 351 (9th Cir. 1988).. . . . . . . . . . . . . . 9

United Parcel Serv. of Am., Inc. v. Commissioner,

254 F.3d 1014 (11th Cir. 2001).. . . . . . 9, 13, 17

vii

United States v. Coplan,

703 F.3d 46 (2d Cir. 2012),

cert. denied, 134 S. Ct. 71 (2013). . . . . . . . . . . 8

WFC Holdings Corp. v. United States,

No. 07–3320 JRT/FLN, 2011 WL 4583817

(Sept. 30, 2011). . . . . . . . . . . . . . . . . . . . passim

WFC Holdings v. United States,

728 F.3d 736, 738 (8 Cir. 2013). . . . . . passimth

STATUTES AND REGULATIONS

Bank Holding Company Act of 1956,

12 U.S.C. §§ 1841, 1844. . . . . . . . . . . . . . . . . . 3

Health Care and Education Reconciliation

Act of 2010, Pub. L. No. 111-152, § 1409(e)(1),

124 Stat. 1029, 1070, 26 U.S.C. §7701(o)(5)(C)

(Supp. V 2011). . . . . . . . . . . . . . . . . . . . . . 17-18

Internal Revenue Code § 351,

26 U.S.C. § 351 (1994 & Supp. III 1998). 12-13

Internal Revenue Code § 7482(b)(1)(A)-(B),

26 U.S.C. § 7482(b)(1)(A)-(B). . . . . . . . . . . . . 10

“Regulation Y,” 12 C.F.R. pt. 225. . . . . . . . . . . . . 3

viii

OTHER MATERIALS

B. I. Bittker & L. Lokken, Federal Taxation

of Income, Estates and Gifts(2013).. . . . . . . . 15

Dep’t of the Treasury, The Problem of Corporate

Tax Shelters: Discussion, Analysis and

Legislative Proposals 94 (July 1999),

available at http://www.treasury.gov/

resource-center/ tax-policy/Documents/

ctswhite.pdf. . . . . . . . . . . . . . . . . . . . . . . . . . 14

L. Lederman, W(h)ither Economic Substance?,

95 Iowa L. Rev. 389, 392 (2010). . . . . . . . 14-15

J. F. Prusiecki, Coltec: A Case of

Misdirected Analysis of Economic

Substance, 112 Tax Notes 524

(Aug. 7, 2006). . . . . . . . . . . . . . . . . . . . . . . . . 15

S. Trivedi, Practitioners Examine

Economic Substance in Tax Shelter Cases,

394 Tax Notes 392 (January 23, 2012). . . . . 15

1

INTEREST OF AMICUS CURIAE1

The Atlantic Legal Foundation is a nonprofit,

nonpartisan public interest law firm. It provides

legal representation, without fee, to scientists,

parents, educators, other individuals, small

businesses and trade associations. The

Foundation’s mission is to advance the rule of law

in courts and before administrative agencies by

advocating for limited and efficient government,

free enterprise, individual liberty, school choice,

and sound science. The Foundation’s leadership

includes current and retired general counsels of

some of the nation’s largest and most respected

corporations, partners in prominent law firms and

distinguished legal scholars.

This case is of particular interest to the

Foundation because the decisions below put in

Pursuant to Rule 37.2(a), timely notice of intent to1

file this amicus brief was provided to the parties, theparties have consented to the filing of this amicus brief;Petitioner has lodged with the Court a “universal consent”;copies of the consent of the Solicitor General has beenlodged with the Clerk and amicus has complied with theconditions of such consent.

Pursuant to Rule 37.6, amicus affirms that no counselfor any party authored this brief in whole or in part, and nocounsel or party made a monetary contribution intended tofund the preparation or submission of this brief. No personother than amicus curiae or its counsel made a monetarycontribution to the preparation or submission of this brief.

2

doubt the tax treatment of many kinds of business

transactions that have long been deemed

legitimate, impeding business planning. The

uncertainty created by the Eighth Circuit’s

unrealistic and amorphous standard and contrary

standards applied in other circuits threaten to

discourage business investment.

3

ARGUMENT

INTRODUCTION

Wells Fargo (WFC) went through two bank

mergers in the 1990's and, as a result, it had

leasehold interests in 21 offices it no longer needed

and that were “underwater,” i.e., the rent WFC

was obligated to pay was greater than the rental

income it could get from subleasing the properties.

See WFC Holdings v. United States, 728 F.3d 736,

738 (8 Cir. 2013).th

WFC’s wanted to to mitigate its real estate

losses, but was hampered by regulations

promulgated by the OCC applicable to its banking

subsidiaries. National banks are regulated by the

Office of the Comptroller of the Currency (OCC).

With some exceptions, the OCC does not allow

national banks to own real estate that is not

needed for banking operations (“other real estate

owned” or “ORE” leases), and national banks must

dispose of excess real estate within five years, but

can get extensions. Non-banking subsidiaries,

regulated by the Federal Reserve (the “Fed”)

pursuant to the Bank Holding Company Act of

1956, 12 U.S.C. §§ 1841, 1844, and “Regulation Y,”

12 C.F.R. pt. 225, are not required to dispose of

commercial leases no longer used for banking

purposes, but are merely required to administer

such properties “in an economically sensible

manner.” 728 F.3d at 738-39. Transferring leases

from a banking subsidiary to a non-banking

4

subsidiary would bring them under the Fed’s more

favorable regulations. 728 F.3d at 741.

KPMG, a national auditing and consulting firm,

in 1998 proposed to WFC an “economic liability

transaction,” which was designed to produce a

large capital loss by taking advantage of U.S. tax

rules. 728 F.3d at 739-40.

K P M G a d v i s e d W F C t h a t t h e

contingent-liability strategy required a non-tax

business purpose. 728 F.3d at 740. KPMG advised

WFC that the underwater leases could be used to

reduce its federal income tax liability. The plan

would accelerate future tax deductions to create

current losses that could be used to shield current

income from tax.

After identifying a suitable business purpose for

the plan, WFC completed the lease restructuring

transaction (LRT) with a holding company that it

controlled, Charter Holdings, Inc. (Charter) in

December 1999. It made a capital contribution of

government securities in which it had a basis of

$426 million to a subsidiary. It also contributed

the 21 leasehold interests in commercial

properties. The subsidiary issued 4,000 shares of

stock to WFC in exchange for the contributions

and assumed the obligations to pay rent under the

leases. 728 F.3d at 741-42.

Normally an assumption of liabilities by a

subsidiary is treated as if the subsidiary

distributed cash equal to the liabilities assumed to

5

the parent company and it reduces the basis the

parent company has in the shares of the

subsidiary. There is no basis reduction, however,

if the subsidiary will have a current deduction – in

this case for rent – when it pays the liabilities.

Thus WFC had a basis in the shares of the

subsidiary equal to the $426 million in government

securities it contributed for the shares. WFC sold

the shares to Lehman Brothers Inc. for $3.7

million and took a capital loss of $423 million. 728

F.3d at 739-42.

WFC did not claim the loss on its 1999 return as

originally filed, but in 2003 filed an amended

return on which it carried the loss back to 1996

and claimed a refund of $82.3 million for the 1996

tax year. In April 2007 the Internal Revenue

Service (IRS) disallowed the loss on grounds that

the transaction lacked economic substance. 728

F.3d at 742.

WFC brought a refund action in district court.

WFC Holdings Corp. v. United States, No. 07–3320

JRT/FLN, 2011 WL 4583817 (Sept. 30, 2011).

The district court agreed that WFC was entitled

to the claimed tax deduction under the plain

language of the Code, citing Coltec Indus., Inc. v.

United States, 454 F.3d 1340, 1348-52 (Fed. Cir.

2006); Black & Decker Corp. v. United States, 436

F.3d 431, 438-40 (4th Cir. 2006) (2011 WL 4583817

*31), but concluded that “the LRT was a tax-driven

transaction, designed and sold by an accounting

firm and developed by WFC’s tax department” in

6

conjunction with other business executives. 2011

WL 4583817 *34. The district rejected two of the

business justifications for the LRT – dealing with

good bank customers and providing incentives for

bank employees to dispose of unwanted leases –

because it found that WFC had not consistently

implemented those plans after the LRT. 2011 WL

4583817 *39. The district court found that the LRT

resulted in a genuine regulatory change that

generated profits for WFC (2011 WL 4583817 *36),

but it also found that this rationale did not “fully

explain” the structure of the LRT, especially why

Charter issued a new class of preferred stock or

why WFC sold the new preferred to Lehman

Brothers. 2011 WL 4583817 *36.

The district court concluded that the LRT lacked

economic substance because the stock sale from

“the transferring banks” to WFC and that

“bringing in Lehman had no non-tax economic

value to WFC, and yet increased transaction

costs.” 2011 WL 4583817 *45. The court reasoned

that the LRT was not profitable unless WFC’s

profit from the lease transfer exceeded the amount

of its claimed capital loss of $423 million. Id.

The district court recognized that the LRT had

generated tens of millions of dollars in pre-tax

profits, but did not attempt to calculate the profits

WFC actually realized because “[t]he Court cannot

isolate one part, or even a few parts, of one step of

a large, complex transaction and find that its

profit potential imbues the entire transaction with

7

substance which is otherwise lacking.” 2011 WL

4583817, at *48.

The Eighth Circuit affirmed. The court agreed

with the government that the profitability of the

LRT was irrelevant because WFC could have

achieved the lease transfer without also

structuring it to obtain a tax deduction. The court

reasoned that “the creation and sale to Lehman

Brothers of the Charter stock were crucial steps of

the LRT/stock transaction that had no practical

economic effect on WFC’s ability to remove the

Garland property from OCC oversight and develop

its profit potential.” 728 F.3d at 746. The court

accordingly concluded that “[v]iewing <the

transaction as a whole’ the LRT/stock transaction

did not create <a real potential for profit.’” App. 18a

(quoting IES Indus., Inc. v. United States, 253 F.3d

350, at 353, 356 (8th Cir. 2001)).

8

ARGUMENT

I. CERTIORARI SHOULD BE GRANTED

TO RESOLVE A CONFLICT AMONG

CIRCUITS REGARDING WHETHER A

T R A N S A C T I O N D E S I G N E D T O

ACHIEVE BOTH NON-TAX ECONOMIC

BENEFITS AND TO REDUCE TAXES

MEETS THE “ECONOMIC SUBSTANCE”

TEST.

The “common law” “economic substance”

doctrine derives from two Supreme Court cases:2

Gregory v. Helvering, 293 U.S. 465 (1935) and

Knetsch v. United States, 364 U.S. 361 (1960).

Under this doctrine, “the Court has looked to the

objective economic realities of a transaction rather

than to the particular form the parties employed.”)

Frank Lyon Co. v. United States, 435 U.S. 561, 573

(1978).

This direct and succinct statement has not,

however, been clearly or uniformly applied by the

lower courts. As the Second Circuit recently

observed, “[s]ince Gregory, the economic substance

doctrine ‘has been applied differently from circuit

to circuit and sometimes inconsistently within

circuits.’” United States v. Coplan, 703 F.3d 46, 91

(2d Cir. 2012), cert. denied, 134 S. Ct. 71 (2013)

(citation omitted).

Sometimes called the “sham transaction” rule.2

9

The Second, Third, Fourth, Ninth, and Eleventh

Circuits, a majority of the federal circuits to

address the issue, have held that the central test

under the economic substance doctrine is whether

the transaction had any practical economic effects

other than generating income tax benefits.

Jacobson v. Commissioner, 915 F.2d 832, 837 (2d

Cir. 1990); Sochin v. Commissioner, 843 F.2d 351,

354 (9th Cir. 1988); In re CM Holdings, Inc., 301

F.3d 96, 102 (3d Cir. 2002) (“[W]here a transaction

objectively affects the taxpayer’s net economic

position, legal relations, or non-tax business

interests, it will not be disregarded merely because

it was motivated by tax considerations.”) (internal

quotations omitted); Friedman v. Commissioner,

869 F.2d 785, 792 (4th Cir. 1989) (“A ‘sham’

transaction is one that has no economic effect

other than the creation of tax losses.”); United

Parcel Serv. of Am., Inc. v. Commissioner, 254 F.3d

1014, 1018 (11th Cir. 2001).

By 2006, as more and more tax shelter cases

reached the federal courts of appeals, decisions

issued by the various circuits coalesced around a

common element that required taxpayers to show

that their transactions, viewed objectively, offered

some non-tax benefit: see Black & Decker

Corporation v. United States, 436 F. 3d 431,

442-443 (4th Cir. 2006) (“The ultimate

determination of whether an activity is engaged in

for profit is to be made by reference to objective

standards,”(quoting Hines v. United States, 912 F.

2d 736, 740 (4th Cir. 1990)); Coltec Industries, Inc.

10

v. United States, 454 F. 3d 1340, 1356-57 (Fed. Cir.

2006) (“While the taxpayer’s subjective motivation

may be pertinent to the existence of a tax

avoidance purpose, all courts have looked at the

objective reality of the transaction [in] assessing

its economic substance.”).

Other circuits, however, have found transactions

to lack economic substance even where the

transaction was profitable because tax benefits

outweighed the non-tax profit, see Sala v. United

States, 613 F.3d 1249, 1253-54 (10th Cir. 2010), or

because the transaction contemplated actions not

“consistent with the taxpayer’s actual past

conduct.” Id.; Dow Chemical Co. v. United States,

435 F.3d 594, 601 (6th Cir. 2006).

The conflict among the circuits creates a risk

that taxpayers will be treated differently for tax

purposes based on where the taxpayer resides or

has its principal place of business because tax

refund cases must be brought in that venue. See 26

U.S.C. § 7482(b)(1)(A)-(B).

The Court should grant certiorari in this case to

establish a uniform national standard.

II. CERTIORARI SHOULD BE GRANTED

TO CLARIFY THE “ECONOM IC

SUBSTANCE” DOCTRINE.

The Court should grant certiorari to clarify and

reaffirm the principle it articulated more than 75

years ago: a transaction lacks economic substance

11

only if it has no objective economic or other

legitimate and valuable business non-tax benefits.

The decision below expands the economic

substance doctrine beyond the parameters

established by this Court. Since its decision in

Knetsch v. United States, 364 U.S. 361 (1960) this

Court has held that the “economic substance

doctrine” is limited to circumstances in which

“nothing of substance [is] to be realized . . . from [a]

transaction beyond a tax deduction.” 364 U.S. at

366 (emphasis supplied). If a transaction results in

non-trivial benefits apart from tax savings the tax-

payer is entitled to any tax benefits that flow from

the transaction under the tax code because a

taxpayer has a “legal right. . .to decrease the

amount of what otherwise would be his taxes, or

altogether avoid them, by means which the law

permits. . . .” Gregory v. Helvering, 293 U.S. 465,

469 (1935).

In Frank Lyon Co., the Court articulated the

standard for determining when a transaction

should be respected for tax purposes:

[W]here, as here, there is a genuine

multiple-party transaction with economic

substance which is compelled or encouraged

by business or regulatory realities, is imbued

with tax-independent considerations, and is

not shaped solely by tax-avoidance features

that have meaningless labels attached, the

12

Government should honor the allocation of

rights and duties effectuated by the parties.

435 U.S. at 566-568 (emphasis supplied).

Even the Eighth Circuit, prior to this case,

applied the economic substance test to hold that a

transaction will be characterized as a sham if “it is

not motivated by any economic purpose outside of

tax considerations” (the business purpose test),

and if it “is without economic substance because no

real potential for profit exists” (the economic

substance test). Shriver v. Comm'r, 899 F.2d 724,

725–26 (8th Cir.1990) (emphasis supplied); see also

Gran v. Internal Revenue Serv. (In re Gran), 964

F.2d 822, 825 (8th Cir.1992) (same).

Although it paid lip service to the principle that

taxpayers may structure their business

transactions in a manner that produces the least

amount of tax, citing Boulware v. United States,

552 U.S. 421, 430 n. 7 (2008) and Compaq

Computer Corp. v. Commissioner, 277 F.3d 778,

781 (5th Cir.2001), the decision below violated the

principles of Gregory and Knetsch by holding that

the LRT should be disregarded for tax purposes

under the economic substance doctrine even

though it was an objectively profitable transaction

wholly apart from tax benefits.

The court below concluded that the LRT lacked

economic substance because Wells Fargo

structured the lease transfer as a tax-free

exchange under Internal Revenue Code § 351 (26

13

U.S.C. § 351 (1994 & Supp. III 1998)), which

entitled it to recognize a capital loss deduction

under the Code when it sold to an unrelated third

party the preferred stock it received as part of the

exchange. The district court below held that

Charter’s issuance of a new class of preferred stock

and Wells Fargo’s subsequent sale of that stock

deprived the entire transaction of economic

substance despite the fact that the LRT was

profitable as a whole. The lower court held that the

lack of non-tax motivation for some components of

a “large complex transaction” undermined the

transaction’s business purpose. See 2011 WL

4583817 *46-*48.

The Eighth Circuit’s application of the economic

substance rule reflects a conflict among the circuits

over whether a transaction that objectively

changes a taxpayer’s economic position can

nevertheless be deemed to lack economic

substance. The majority of circuits hold, consistent

with Knetsch, that “a transaction ceases to merit

tax respect when it has no economic effects other

than the creation of tax benefits.” See United

Parcel Serv. of Am., Inc. v. Commissioner, 254 F.3d

1014, 1018 (11th Cir. 2001) (emphasis supplied,

internal quotations omitted). However, the Eighth

Circuit in holding a transaction to lack economic

substance even where the transaction was

profitable. This Court has not addressed the

economic substance doctrine since it decided Frank

Lyon. In that time, certain lower courts have, we

14

believe, perverted or at least muddled the Court’s

understanding of the economic substance doctrine.

III. THE DECISION BELOW CREATES A

SUBJECTIVE, AM BIGUOUS AND

A R B I T R A R Y R U L E T H A T I S

INCONSISTENT WITH BUSINESS

REALITIES.

This Court has recently recognized that

businesses find predictability “valuable [when]

making business and investment decisions.” Hertz

Corp. v. Friend, 130 S. Ct. 1181, 1193 (2010)). The

Eighth Circuit’s expansive and amorphous

standard, combined with the disparate application

of the doctrine in the circuits, creates legal

uncertainty that, conversely, has a deterrent effect

on business, commerce and investment.

In the very year the transaction at issue in this

case was consummated, the Treasury Department

acknowledge in a report to Congress that courts

have applied the economic substance principle

“unevenly” and that “a great deal of uncertainty

exists as to when and to what extent these

standards apply, how they apply, and how

taxpayers may rebut their assertions” and that the

principle (as applied) is subjective. Dep’t of the

Treasury, The Problem of Corporate Tax Shelters:

Discussion, Analysis and Legislative Proposals 94

( J u l y 1 9 9 9 ) , a v a i l a b l e a t

http://www.treasury.gov/resource-center/tax-policy/

Documents/ctswhite.pdf. One commentator has

described the economic substance doctrine as akin

15

to a “smell test.” See L. Lederman, W(h)ither

Economic Substance?, 95 Iowa L. Rev. 389, 392

(2010). Just last year, a leading treatise on tax

law, B. I. Bittker & L. Lokken, Federal Taxation of

Income, Estates and Gifts ¶ 4.3.1 & n.8 (2013)

described the economic substance and related

doctrines as “exquisitely uncertain.”

The reasoning of the court below that Wells

Fargo’s tax department drove the transaction and

therefore there was no subjective non-tax business

purpose for engaging in the transaction ignores the

realities of corporate business planning, part of

which involves managing a company’s exposure to

various liabilities, including taxes. Virtually all

complex, sophisticated corporate transactions

involve tax advisers – usually both in-house and

retained specialists (accountants, lawyers and,

sometimes, bankers). The fact that the taxpayer

calculates the tax implications and benefits early

on in designing the transaction should not defeat

a business purpose claim. See S. Trivedi,

Practitioners Examine Economic Substance in Tax

Shelter Cases, 394 Tax Notes 392 (January 23,

2012). Any transaction that involves tax planning

is likely to have one or more aspects or elements

that are tax motivated and serve no non-tax

purposes, even though the transaction as a whole

serves legitimate business purpose and achieves

non-tax benefits for the taxpayer. See J.F.

Prusiecki, Coltec: A Case of Misdirected Analysis of

Economic Substance, 112 Tax Notes 524, 527 (Aug.

7, 2006).

16

Tax planning by sophisticated taxpayers,

including most large companies, frequently

involves structuring economically significant

transactions to reap non-tax economic benefits and

to minimize tax burdens. The Eighth Circuit’s

approach – that a profitable transaction that is

also structured to achieve tax benefits lacks

economic substance – threatens to deprive

economic actors of the ability to engage in what

has heretofore been considered permissible tax

planning, is at odds with this Court’s statement in

Gregory that it is a taxpayer’s “legal right. . .to

decrease the amount of what otherwise would be

his taxes, or altogether avoid them, by means

which the law permits. . . .” 293 U.S. at 469.

A hypothetical illustrates the disconnect from

common business practice and the harmful

uncertainty inherent in the Eighth Circuit’s

approach: Assume that a transaction can be

carried out in two ways, and both yield positive

non-tax benefits. One would result in higher

non-tax benefits, but is less profitable overall

because of its tax treatment. The other, although

less profitable before taxes is overall more

profitable because it has more favorable tax

treatment. Does the overall more profitable option

pass the economic substance test, even though its

greater profitability is the result of tax

advantages? The Eighth Circuit’s decision would

seem to require the company to make the

irrational choice of opting for the first transaction.

Requiring a “tax-independent reason for a

17

taxpayer to choose between” different ways of

structuring a transaction “would prohibit

tax-planning.” United Parcel Serv. of Am., Inc. v.

Commissioner, 254 F.3d 1014, 1019 (11th Cir.

2001).

The “standard” as applied below would permit

the IRS and courts to disregard legitimate

business transactions that comply with the clear

language of the Code. The economic substance

doctrine should not be used to deprive taxpayers of

benefits conferred by the Code itself because the

transaction appears to a judge to be out of the

ordinary or “unfair,” or to correct perceived

congressional lapses. The courts “are bound by the

meaning of the words used by Congress, taken in

light of the pertinent legislative history,” Hanover

Bank v. Commissioner, 369 U.S. 672, 682 (1962),

and it “is not within [the judiciary’s] province” “to

do what the legislative branch. . . failed to do or

elected not to do.”). Id. at 688. Gregory and3

In 2010, Congress enacted new Code section3

7701(o), which appears to reconcile a circuit split regardingthe economic substance doctrine (it adopted the“conjunctive” test, rather than the “disjunctive” testadopted by some circuits), it was not intended to abrogatethis Court’s prior decisions. Under the new section 7701(o),the economic substance doctrine will apply when it is“relevant,” but Congress did not define or explain what“relevant” means and added further confused the issue byadding “whether the economic substance doctrine isrelevant to a transaction shall be made in the same manner

(continued...)

18

Knetsch honor that precept, but the Eighth Circuit

did not.

CONCLUSION

For the foregoing reasons, amicus curiae urges

the Court to grant the petition for a writ of

certiorari.

March 31, 2014

Respectfully submitted,

Martin S. Kaufman

Counsel of Record

ATLANTIC LEGAL FOUNDATION

2039 Palmer Avenue

Larchmont, New York 10538

(914) 834-3322

mskaufman@atlanticlegal.org

Counsel for Amicus Curiae

(...continued)3

as if this subsection had never been enacted.” 26 U.S.C.§7701(o)(5)(C) (Supp. V 2011). The new section applies onlyto transactions occurring after March 30, 2010 and thusdoes not affect this case. Health Care and EducationReconciliation Act of 2010, Pub. L. No. 111-152, §1409(e)(1), 124 Stat. 1029, 1070.