The Supreme Court of the United States announced decisions in two cases today:

Atlantic Marine Constr. Co. v. United States Dist. Court for Western Dist. Of Tex., No. 12-929: Petitioner Atlantic Marine Construction Co. is a Virginia corporation that entered into a subcontract with J-Crew Management, Inc., a Texas corporation. When a dispute arose between the parties, J-Crew filed suit in the Western District of Texas notwithstanding a forum-selection clause in the subcontract stating that disputes would be litigated in Virginia. Atlantic Marine moved to dismiss, contending venue was “wrong” under 28 U.S.C. §1406(a), and “improper” under Fed. R. Civ. P. 12(b)(3). It also alternatively moved to transfer to the Eastern District of Virginia pursuant to 28 U.S.C. §1404(a). The District Court denied both motions, determining that §1404(a) is the exclusive procedural mechanism for enforcing a forum-selection clause pointing to another federal forum, but that, after balancing various factors, transfer here was inappropriate. The Fifth Circuit denied Atlantic Marine’s petition for a writ of mandamus. Today, the Court held that that a forum selection clause may not be enforced by motions to dismiss under 28 U.S.C. §1406(a) or Fed. R. Civ. P. 12(b)(3), but instead should be enforced by a motion to transfer under 28 U.S.C. §1404(a). The Court, however, reversed, holding that the District Court and Court of Appeals had misapplied the §1404(a) standard, given that, when a forum selection clause is at issue, a district court should transfer the case unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.

The Court's decision is available here.

United States v. Woods, No. 12-562: In this case, the Court took up the question of whether the penalty for tax underpayments attributable to valuation misstatements, 26 U.S.C. §6662(b)(3), is applicable to an underpayment resulting from a basis-inflating transaction subsequently disregarded for lack of economic substance. Respondent Gary Woods and his employer, Billy Joe McCombs, engaged in an offsetting-option tax shelter designed to generate large paper losses that they could use to reduce their taxable income. They did so by participating in a tax shelter entitled “Current Options Bring Reward Alternatives” (“COBRA”), and created two general partnerships to that end. Using COBRA, Woods’ and McComb’s investment of $3.2 million generated tax losses that, if treated as valid, could have shielded more than $45 million from taxation. The IRS, however, sent the partnerships a Notice of Final Partnership Administrative Adjustment, which disregarded the partnerships for tax purposes and disallowed the related losses on the basis that these partnerships were shams lacking in “economic substance.” The IRS then determined that because there were no valid partnerships for tax purposes, the partners could not claim a basis for their partnership interests greater than zero, and that any tax underpayments would be subject to a valuation-misstatement penalty under 26 U.S.C. §6662(b)(3). Woods sought judicial review, in which the District Court held that the partnerships were properly disregarded, but that the valuation-misstatement penalty did not apply. The Fifth Circuit affirmed, based on circuit precedent that the valuation-misstatement penalty does not apply when the relevant transaction is disregarded for lacking economic substance. Today, the Court reversed. The Court first determined that the District Court had jurisdiction in this partnership-level proceeding to determine the applicability of the valuation-misstatement penalty, and then held that under the plain statutory language of the penalty, it is applicable to tax underpayments resulting from the partners’ participation in the COBRA tax shelter.

The Court's decision is available here.