August 28, 2013
The government has filed its reply brief in the Supreme Court in Woods. See our reports on the opening briefs here and here. The discussion of the jurisdictional issue focuses less on the textual analysis set forth in the government’s opening brief and more on the policy implications of adopting the taxpayers’ position. The government asserts that the taxpayers’ reading of the statute would effectively “negate Congress’s grant of authority to courts in partnership-level proceedings to determine the applicability of penalties.”
On the merits, the reply brief devotes most of its attention to responding to the taxpayers’ threshold argument that the penalty is inapplicable because there was no valuation misstatement to begin with, which was not the rationale of the court of appeals’ opinion. The government relies heavily on the statutory reference to “adjusted basis,” noting that it is stated in the disjunctive and therefore should be read to apply to basis overstatements that have nothing to do with “fact-based” valuation misstatements. The merits discussion also adverts to policy, stating that there is nothing “objectionable about the fact that basis overstatements arising from sham transactions will nearly always trigger the 40% penalty for gross misstatements.” That is because “the most egregious misconduct–engaging in phony transactions to create an artificial basis–warrants the most severe sanction.”
We also link to an amicus brief inadvertently omitted from our previous report. This brief, filed by Penn Law School Professor David Shakow because the issue is one “in which he has a special interest and about which he has been engaged for some time in writing,” supports the taxpayers’ primary argument on the merits. The brief analyzes the statutory language in context, and examines the history of the statute — both the legislative history and its application before tax shelters became rampant — and concludes that the valuation misstatement penalty should not apply in the absence of an actual valuation misstatement. According to Professor Shakow, the IRS, with the acquiescence of many courts, is improperly “using the valuation misstatement penalty as a surrogate for a ‘tax shelter’ penalty that Congress has not authorized.”
Oral argument is scheduled for October 9.