As it’s April Fools’ Day, let me once again quote the Sage of Concord: “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.” Ralph Waldo Emerson, 1803-1882.

But consistency is foolish when an electing Section 927(f) foreign sales corporation meets the Section 4973 excise tax on Roth IRA contributions after it’s too late for IRS to reallocate the distributions from the FSC to the individual shareholders thereof (as their tax years have closed).

So says Judge Chiechi in Celia Mazzei, 2014 T. C. Memo. 55, filed 4/1/14 (happy palindrome day, by the way).

But some with long memories will cite my blogpost “Foolish Consistency”, 5/5/11, when Judge Nimms in Ohsman, 2011 T. C. Memo. 98, filed 5/3/11, gave IRS the right-about-face, when IRS treated the taxpayer one way for income tax purposes and another for excise tax (excessive Roth IRA contributions) purposes.

The game used to be (prior to 2004, when Notice 2004-08, 2004 IRB 4, 1/26/04*, the abusive IRA Notice, put paid to such shenanigans) that a business owned by the taxpayer would pay commissions or dividends to a C Corp, all the shares of which were owned by the taxpayer’s Roth IRA, getting around income tax (dividends or commissions actually property of taxpayer, not C Corp), and excise tax on excessive Roth contributions. And the C Corp would be a tax-favored vehicle, like a DISC or a FSC.

Well, IRS didn’t go after Celia’s income tax (because those years were closed, IRS didn’t pick up on the Roths, and fraud wasn’t alleged), so going after the excise tax is inconsistent, isn’t it?

No, says Judge Chiechi. IRS didn’t assess income tax against Celia because the years in question were closed years. Unlike Ohsman, IRS never tried to assess Celia’s additional income taxes, because if they had, it would have been futile.

But the Roths are still in play for excess contributions.

*IRB 2004-04 (Rev. January 26, 2004) – irb04-04