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. United States v. Wood, 133 S. Ct. 1632 (2013).

In the meantime, however, lower courts have cases to decide. Last week, the Seventh Circuit adopted the majority view, applying the valuation misstatement penalty to a sham transaction. Superior Trading LLC v. Comm’r, 2013 U.S. App. LEXIS 17814 (7th Cir. Aug. 26, 2013).

Jim Malone is a tax lawyer in Philadelphia. © 2013, Malone LLC.

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