The Last Word on Valuation Misstatement Penalties in Sham Transaction Cases.

An issue that has divided lower courts was resolved on Tuesday, when the Supreme Court addressed the applicability of the substantial valuation misstatement penalties in the context of sham transactions. United States v. Woods, 2013 U.S. LEXIS 8776 (Dec. 3, 2013).

As I have noted previously, courts have been divided on the applicability of the valuation misstatement penalty under Section 6662 of the Internal Revenue Code to cases involving a sham transaction. The majority has taken the view that the penalty applies. See, e.g., Crispin v. Comm’r, 708 F.3d 507, 516 n.18 (3d Cir. 2013). Some circuits, however, have taken the view that a sham transaction case does not trigger the penalty because the overstatement is due to an improper deduction and not a valuation misstatement.Read More

Valuation Misstatement Penalty-Seventh Circuit Joins the Majority.

Courts have been divided on the applicability of the valuation misstatement penalty under Section 6662 of the Internal Revenue Code to cases involving a sham transaction. The majority has taken the view that the penalty applies. See, e.g., Crispin v. Comm’r, 708 F.3d 507, 516 n.18 (3d Cir. 2013). Several circuits, however, have taken the view that a sham transaction case does not trigger the penalty because the overstatement is due to an improper deduction and not a valuation misstatement. See, e.g., Keller v. Comm’r, 556 F.3d 1056, 1059-11 (9th Cir. 2009). The Supreme Court has granted certiorari in a case from the Fifth Circuit, so presumably the question will be resolved at some point.Read More

Holding a Bad Hand: The Third Circuit Addresses Economic Substance, Part II.

In part I, I covered the Third Circuit’s discussion of economic substance in Neal Crispin v. Commissioner, No. 12-2275 (3d Cir. Feb. 25, 2013). This post will address the Court’s treatment of penalties.

Mr. Crispin was assessed with a forty percent gross valuation penalty because he had claimed a basis that was inflated by 400 percent or more; this penalty was sustained by the Tax Court. There is a Circuit split on the applicability of valuation misstatement penalties in economic substance cases, but the Third Circuit previously concluded that the penalty was applicable in Merino v. Commissioner, 196 F.3d 147 (3d Cir.Read More

The Eleventh Circuit Looks at Valuation Misstatement Penalties.

Section 6662 of the Internal Revenue Code imposes a 20% penalty in various situations when a taxpayer is negligent; these include penalties for a “substantial valuation misstatement.” I.R.C. § 6662(b)(3). A substantial valuation misstatement occurs where the taxpayer claims a basis in property that is 150% or more of the correct value. I.R.C. § 6662(e)(1)(A). Moreover, the penalty is increased from 20% to 40% if the taxpayer overstates basis by 200% or more. I.R.C. § 6662(h)(1). Section 6662 also imposes a 20% penalty regime where a taxpayer enters into a transaction that lacks economic substance. I.R.C. § 6662(b)(6). Although there are alternative penalties, only one may be applied to a particular underpayment of tax.Read More