In a recent decision, the United States Court of Appeals for the Sixth Circuit in Summa Holdings, Inc. v. Comm’r, 2017-1 U.S.T.C ¶50,155, (February 16, 2017) reversed the holding of the Tax Court, 109 TCM 1612 confirming the legitimacy of the strategy of using a Domestic International Sales Corporation (DISC) as a vehicle to fund a Roth IRA.  This decision is particularly noteworthy for individuals who have interests in businesses that sell products for export, as it highlights the tax advantages of using a DISC to sell export property and the powerful planning opportunity of utilizing a DISC to fund a Roth IRA.

A DISC is special type of corporation created in the tax code by Congress meant to encourage U.S. companies to sell products for export. The law accomplishes this by allowing a U.S. company (a supplier) to accrue and deduct commission expenses paid to a DISC (usually an entity owned by the shareholders of the supplier or their related entities) for sales of product to purchasers in foreign jurisdictions. A DISC is not subject to income tax and is permitted to invest its earnings in certain types of assets related to export activities. Absent such investment, a DISC is required to distribute excess cash to its shareholders. If earnings are deferred longer than one year, the shareholders of a DISC are required to pay an interest charge based upon the amount of deferred income. Earnings distributed from a DISC are taxable as qualified dividends to individual shareholders and as regular taxable dividends to corporate shareholders (without a corporate shareholder being able to claim a dividends received deduction). For a tax-exempt entity such as an IRA, a dividend received from a DISC is characterized as unrelated business taxable income subject to income tax at the tax rates applicable to estates and trusts.

Under current law, a DISC is particularly advantageous in converting ordinary income that would otherwise be recognized by the supplier into low-taxed qualified dividend income for a non-corporate shareholder. If the supplier is a C corporation, the effect of a DISC is further enhanced as the corporate level tax is effectively eliminated on amounts characterized as commissions paid to a DISC if such amounts are ultimately distributed to a non-corporate shareholder. Another effective technique, if properly structured, is to use a DISC to fund a Roth IRA, the earnings from which are not subject to tax upon distribution. This technique can result in substantially greater funding of a Roth IRA than might be achieved through contributions or conversions to a Roth IRA.

The taxpayers in Summa were the two largest shareholders of a manufacturer and also formed a DISC to earn commissions attributable to the manufacturer’s export sales. The taxpayers then established Roth IRAs, which each acquired the outstanding shares of the DISC for a modest amount ($1,500). Of particular importance in Summa was that the fair value of the DISC shares acquired by the Roth IRAs was not questioned by the IRS. The Roth IRAs then contributed the DISC shares to newly formed holding corporations to prevent the Roth IRAs from incurring tax-reporting obligations.
The purpose of this planning was to enable the taxpayers to avoid limits on contributions to Roth IRAs (generally $5,000 at the time and such contributions were prohibited once income exceeded certain modest thresholds) during tax years 2002 through 2008. Through the use of the DISC and associated planning, the taxpayers transferred over $5,000,000 to their Roth IRAs during the years at issue.

The IRS asserted, and the Tax Court originally upheld under substance-over-form principles, that manufacturer’s commission payments to the DISC followed by distributions held no economic purpose and were solely for the purpose of avoiding the limitations on the amounts that could be contributed to a Roth IRA. The IRS and the Tax Court re-characterized the commission payments as dividends from the manufacturer to its shareholders (taxpayers) followed by (excess) contributions to the taxpayers’ Roth IRAs.

On appeal, the Sixth Circuit rejected the substance-over-form argument and noted that the taxpayers utilized a DISC and the Roth IRAs for their Congressionally-sanctioned purposes–tax avoidance–and that the taxpayers complied with the relevant provisions of the law. Consequently, the Sixth Circuit held that the government could not undo transactions that the terms of the Internal Revenue Code expressly authorize, and that the IRS had no basis for re-characterizing the transactions and the law’s application to the transactions. The Sixth Circuit’s decision is a strong win for taxpayers in curbing the IRS’ ability to re-characterize certain transactions that comply with the law yet yield an unfavorable outcome to the government.

Our firm has successfully implemented tax-efficient planning related to utilizing DISCs to achieve the benefits described above, both with and without the use of a Roth IRA. If your business involves the export of property, we encourage you to contact us to discuss how implementation of structure utilizing a DISC can produce significant tax savings on the earnings from your business. For more information about this topic or our services, please contact us at or (212) 245-5900.


Hunter Norton, J.D.L., LL.M., CPA, is an accomplished Tax Director with FF&F. Prior to joining the firm, he spent 7 years as an attorney at Withers Bergman LLP, a tax-oriented law firm, and 8 years in the Tax practice with Deloitte. His areas of expertise include business and investment partnerships, cross-border tax matters, high net worth individuals, and family offices. Hunter’s experience also allows him to advise clients in income tax matters related to trusts, estates and grantors, and taxable gifts, as well as estate planning.