Supreme Court: Gross Valuation Misstatement Penalty Applies to Shelters

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The U.S. Supreme Court held that the 40 percent gross valuation misstatement penalty applies to overstated basis when the entire transaction is disallowed—as in many tax shelter partnerships—because “no partner could legitimately claim a basis in his partnership interest greater than zero” (United States v. Woods, U.S., No. 12-562, 12/3/13).
Justice Antonin Scalia, writing for the court in a unanimous decision, said that the district court had jurisdiction under the Tax Equity and Fiscal Responsibility Act (TEFRA) to provisionally determine the applicability of the valuation misstatement penalty at the partnership level, because the penalty resulted from an adjustment to a partnership item “even though imposing the penalty requires a subsequent, partner-level proceeding.”

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