Supreme Court holds valuation misstatement penalties apply when partnerships lacked economic substance

Tax Controversy & Dispute Resolution ()

​The US Supreme Court issued a 9-0 opinion in United States v. Woods, ruling that:

  1. the lower District Court had jurisdiction to determine whether the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) partnerships’ lack of economic substance allowed for the imposition of the Section 6662 40% gross valuation misstatement penalty on the partners
  2. once the partnerships were declared shams, any tax underpayment from a partner using a non-zero basis in his partnership interests would be ‘attributable to’ claiming an adjusted basis in the partnerships that exceeded the correct adjusted basis, thereby invoking a valuation misstatement penalty under Section 6662.

In both the jurisdictional and penalty areas, the Supreme Court established principles that may be of substantial application beyond the facts of the Woods case.