The Supreme Court held today, in United States v. Woods, that the valuation-misstatement penalty can apply to partners in a case in which a partnership is disregarded due to its lack of economic substance. In a unanimous decision, the Court first ruled that the district court had jurisdiction in a partnership-level proceeding, under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), to determine the applicability of the penalty because a determination that the partnership lacks economic substance “relates to an adjustment to a partnership item.” The Court then reversed the Fifth Circuit’s decision that the penalty did not apply in the case at bar. The Court held that the plain language of the valuation-misstatement penalty imposed a penalty because “no partner could legitimately claim a basis in his partnership interest greater than zero” when the partnership had been disregarded due to lack of economic substance. Thus, by having claimed basis in excess of that amount, the partners had been responsible for a valuation misstatement.
The opinion can be accessed via: 12/03/13 - United States v. Woods