On December 3rd, 2013, the Supreme Court unanimously held in United States v. Woods that the 40% gross valuation misstatement penalty applies to a partner’s overstated outside basis when the partnership is disallowed as a sham. Mr. Woods engaged in an abusive partnership tax shelter that was marketed to high-income taxpayers. In finding that the partnership lacked economic substance, the lower court found that overstated basis constituted a gross valuation penalty under IRC § 6662. The Taxpayer challenged that finding by arguing, in part, that the penalty should not apply when the change in value is premised solely on a legal finding. The Supreme Court rejected the taxpayer’s argument and upheld application of the penalty even when the misstatement is the result of a legal, rather than a factual, finding.
Supreme Court in U.S. v. Woods Enforces Valuation Misstatement Penalty in Sham Transaction
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