December 9, 2013
In a somewhat unusual move, the Ninth Circuit issued an order last week suggesting that the parties pursue mediation in the Bergmann case. The order came two days after the court heard oral argument. The order states that “the court believes this case may be appropriate for mediation” and therefore it is being referred to the Ninth Circuit’s Mediation Office. A mediator will then contact the parties to determine their interest, but the parties are not required to elect mediation. The Circuit Mediator is directed to report back to the panel by January 4. In the meantime, the court will … Read More
December 3, 2013
The Supreme Court this morning ruled 9-0 in favor of the government on both issues in Woods, holding that: (1) there is partnership-level TEFRA jurisdiction to consider the appropriateness of a penalty when the partnership is invalidated for lack of economic substance; and (2) the 40% valuation overstatement penalty can apply in that setting on the theory that the basis of a sham partnership is zero and therefore the taxpayers overstated their basis. See our prior coverage here. The opinion, authored by Justice Scalia, is concise and appears to resolve definitively both issues that had previously divided the … Read More
October 11, 2013
The Supreme Court held oral argument in United States v. Woods on October 9. As we have previously reported, the case presents two distinct questions: (1) a TEFRA jurisdictional question concerning whether the court could determine the applicability of the valuation overstatement penalty in a partnership-level proceeding; and (2) the merits question whether the 40% penalty applied when the partnership was found not to have economic substance and therefore the basis claimed by the taxpayers in the partnership was not recognized.
Most of the argument time for both advocates was spent on the jurisdictional issue, as the Justices often … Read More
October 2, 2013
It has been almost two years since the Fifth Circuit heard oral argument in the NPR Investments case, which involves a “son-of-BOSS” tax shelter and associated questions regarding penalties and jurisdiction under TEFRA. See our previous reports on the oral argument and describing the issues. Last week, the court issued an order directing the parties to file short “letter briefs,” answering some specific questions involving TEFRA jurisdiction over penalties. In particular, the court asked the parties to address how NPR compares to the Petaluma (D.C. Cir.) and Jade Trading (Fed. Cir.) cases in which the courts found a lack … Read More
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 … Read More
July 31, 2013
The taxpayers have filed their response brief in the Supreme Court in the Woods case, contending first that the courts lacked jurisdiction to impose the penalties requested by the IRS and, second, that, if jurisdiction exists, the Fifth Circuit correctly held that the valuation misstatement penalty could not be imposed.
On the jurisdictional point, the brief emphasizes the same basic point made by the courts that have questioned jurisdiction in similar partnership cases (see our previous report here) – namely, that the statute allows for partnership-level jurisdiction in a TEFRA proceeding only over a penalty that relates to adjustment … Read More
June 5, 2013
The government has filed its opening brief in the Supreme Court in the Woods case, which involves whether the 40% gross valuation overstatement penalty applies in the context of a basis-inflating transaction held not to have economic substance. See our earlier report here.
The government’s arguments on the question whether the penalty can be applied in these circumstances are similar to those discussed here previously and addressed in several court of appeals decisions. It relies on the “plain text” of the statute, arguing that “[t]he word ‘attributable’ means ‘capable of being attributed’” and therefore a finding of lack of … Read More
March 25, 2013
The Court this morning granted the government’s petition for certiorari in United States v. Woods, No. 12-562. As we recently reported, the issue presented in the petition concerns the applicability of the valuation overstatement penalty — specifically, whether tax underpayments are “attributable to” overstatements of basis when the inflated basis claim has been disallowed based on a finding that the underlying transactions lacked economic substance.
The Court also added a second question for the parties to brief — “Whether the district court had jurisdiction in this case under 26 U.S.C. section 6226 to consider the substantial valuation misstatement … Read More
March 13, 2013
The government has asked the Supreme Court to resolve a longstanding conflict in the circuits on the applicability of the penalty for valuation misstatements in United States v. Woods, No. 12-562.
The Code contains a variety of civil penalty provisions for conduct connected with underreporting of tax. The basic penalty is found in section 6662, which imposes an accuracy-related penalty for underpayments of tax “attributable to” different kinds of conduct, including negligence, substantial understatements of tax, and substantial overvaluations. The penalty is 20% of the portion of the underpayment “attributable to” the misconduct. I.R.C. § 6662(a), (b). Section 6662(e) … Read More
February 8, 2013
The Bergmanns participated in a listed transaction promoted by KPMG, known as the Short Option Strategy. When the Bergmanns filed their amended return in March 2004, the IRS had already served KPMG with summonses targeted at KMPG’s promotion of the Short Option Strategy. As discussed in an earlier post, the Tax Court held that the Bergmanns failed to timely file a qualified amended return and thus were subject to the 20-percent accuracy related penalty. Under the regulations in effect when the taxpayers filed their return, the time for filing a qualified amended return terminated when “any person described in … Read More