Tax Court Addresses the Requirements for Substantial Compliance Relief (1/29/26)

In Aventis, Inc. v. Commissioners, 166 T.C. 1, No. 1 (1/28/26), TC here at Dkt 178 and GS here [to come], the Court held against the taxpayer’s claim of qualification for financial asset securitization investment trust (FASIT) status. I don’t intend to address what FASIT status actually is or why Aventis fought so hard to qualify. Digging into the underlying merits would require more time and mental energy than I can devote right now. I address solely the portion of the opinion dealing with the substantial compliance doctrine, which is the issue  of interest to most tax procedure enthusiasts.

The discussion of substantial compliance is at Slip Op. 33-35; I quote here only the portion stating a general rule that might be used in other contexts (Slip Op. 34-35, cleaned up by (i) omitting most for each sentence in the first paragraph and (ii) omittinig one case citation and shortening the next two paragraphs):

           When there is a failure to comply with the essential requirements of the governing statute, no defense of substantial compliance is available. When requirements relate “to the substance or essence of the statute,” we require “strict adherence to all statutory and regulatory requirements.” On the other hand, if requirements are “procedural or directory in that they are not of the essence of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance.”

           We have held that if a taxpayer wished to take advantage of subchapter S provisions, the taxpayer must comply with all of the statutorily mandated requirements.

             In Dirks v. Commissioner, T.C. Memo. 2004-138, aff’d, 154 F. App’x 614 (9th Cir. 2005), the Court declined to apply the substantial compliance doctrine to the statutory 60-day deadline applicable to individual retirement account rollovers under section 408(d)(3)(A) because “the 60-day rule is not regulatory but is found in the statute itself.”

Readers might want to review the post-trial simultaneous opening and simultaneous answering briefs in the docket entries, here:

• IRS simultaneous opening brief, Dkt # 174 (does not discuss substantial compliance).
• Petitioner Simultaneous Opening Brief, Dkt # 175, pp. 107-119 (at  p. 115, describing the IRS position as “nitpicky foot-faults”).
• IRS Simultaneous Answering Brief, Dkt #176, pp. 54-64.
• Petitioner Simultaneous Answering Brief, Dkt # 177, pp. 69-70 (note that Petitioner’s discussion is short because it is supposed to answer arguments in the IRS Simultaneous Opening Brief which did not address the issue of substantial compliance).