140 T.C. No. 7
UNITED STATES TAX COURT
AHG INVESTMENTS, LLC, ALAN GINSBURG, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3745-09. Filed March 14, 2013.
R issued a notice of final partnership administrative adjustment (FPAA) determining adjustments to income on multiple grounds. The FPAA also determined an I.R.C. sec. 6662 40% gross valuation misstatement penalty, as well as other penalties. P conceded the adjustments to income on grounds other than valuation or basis in an attempt to avoid the gross valuation misstatement penalty and filed a motion for partial summary judgment that this penalty does not apply as a matter of law.
Held: A taxpayer may not avoid application of the gross valuation misstatement penalty merely by conceding on grounds unrelated to valuation or basis. We will deny P’s motion for partial summary judgment. -2-
Thomas A. Cullinan, for petitioner.
George W. Bezold, for respondent.
OPINION
GOEKE, Judge: This case is before the Court on petitioner’s motion for
partial summary judgment filed pursuant to Rule 121,1 to which respondent objects.
Respondent issued a notice of final partnership administrative adjustment (FPAA) to
petitioner, a partner other than the tax matters partner (TMP) of AHG Investments,
LLC (AHG Investments). The major adjustment in the FPAA was to disallow
$10,069,505 in losses allocated to petitioner for taxable years 2001 and 2002.
Petitioner conceded on grounds other than valuation or basis that the FPAA
adjustments were correct in an attempt to avoid application of the 40% gross
valuation misstatement penalty and has filed a motion for partial summary judgment
that this penalty does not apply as a matter of law. For the reasons stated herein, we
will deny petitioner’s motion.
1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the years in issue. -3-
Background
The relevant facts are not in dispute. During the years at issue petitioner was
a partner other than the TMP of AHG Investments. At the time the petition was
filed he resided in Florida. Also during the years at issue AHG Investments’ TMP
was Helios Trading, LLC. At the time the petition was filed the mailing address for
Helios Trading, LLC, was in Illinois. It was not established where AHG
Investments’ principal place of business was or whether AHG Investments had been
dissolved at the time the petition was filed.
Respondent’s FPAA enumerated 14 alternative grounds in support of the
adjustments and asserted 40% accuracy-related penalties under section 6662(a) for
the portions of the underpayments of tax resulting from adjustments of partnership
items attributable to a gross valuation misstatement.2 In the petition, petitioner
conceded the FPAA adjustments were correct on the ground that petitioner was not
at risk under section 465 and thus was not entitled to deduct certain attributed
losses. In an amendment to the petition, petitioner also conceded that the FPAA
adjustments were correct on the ground that the transaction at issue did not have
2 Respondent also determined 20% accuracy-related penalties applied to the portion of each underpayment resulting from adjustments of partnership items attributable to negligence or disregard of the rules or regulations, a substantial understatement of income tax, or a substantial valuation misstatement. -4-
substantial economic effect under section 1.704-1(b), Income Tax Regs. Both
section 465 and section 1.704-1(b), Income Tax Regs., were among the grounds on
which respondent supported the adjustments made in the FPAA.
Petitioner filed a motion for partial summary judgment regarding the 40%
gross valuation misstatement penalty, arguing that this penalty does not apply as a
matter of law because petitioner conceded the correctness of adjustments proposed
in the FPAA on grounds unrelated to valuation or basis. Respondent contests
petitioner’s motion for partial summary judgment.
Discussion
I. Summary Judgment
Rule 121(a) provides that either party may move for summary judgment
upon all or any part of the legal issues in controversy. Full or partial summary
judgment may be granted only if it is demonstrated that no genuine dispute exists as
to any material fact and that the issues presented by the motion may be decided as a
matter of law. See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518,
520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). We conclude that there is no
genuine dispute as to any material fact and that a decision may be rendered as a
matter of law. -5-
II. Gross Valuation Misstatement Penalty
Under section 6662(h), a taxpayer may be liable for a 40% penalty on any
portion of an underpayment of tax attributable to a gross valuation misstatement. A
gross valuation misstatement exists if the value or adjusted basis of any property
claimed on a tax return is 400% or more of the amount determined to be the correct
amount of such value or adjusted basis. Sec. 6662(h)(2)(A). Whether there is a
gross valuation misstatement in the partnership context is determined at the
partnership level. Sec. 1.6662-5(h)(1), Income Tax Regs.
We have previously held that when the Commissioner asserts a ground
unrelated to value or basis of property for totally disallowing a deduction or credit
and a taxpayer concedes the deduction or credit on that ground, any underpayment
resulting from the concession is not attributable to a gross valuation misstatement.3
Bergmann v. Commissioner, 137 T.C. 136, 145 (2011) (citing McCrary v.
Commissioner, 92 T.C. 827, 851-856 (1989)). Today we depart from this holding,
instead ruling that a taxpayer may not avoid the gross valuation misstatement
3 In addition, we have extended that holding to situations where the taxpayer does not state the specific ground upon which the concession of the deduction or credit is based so long as the Commissioner has asserted some ground other than value or basis for totally disallowing the relevant deduction or credit. Bergmann v. Commissioner, 137 T.C. 136, 145 (2011) (citing Rogers v. Commissioner, T.C. Memo. 1990-619, and Schachter v. Commissioner, T.C. Memo. 1994-273). -6-
penalty merely by conceding a deduction or credit on a ground unrelated to value or
basis of property.
A. McCrary and Todd Cases
In McCrary v. Commissioner, 92 T.C. 827 (1989), the taxpayers entered into
a purported lease of a master recording and claimed resulting investment tax credits.
Before trial they conceded that they were not entitled to the claimed investment tax
credit because the agreement was not a lease. They did not contest the fair market
value of the master recording at trial, although other issues were addressed. We
held that the gross valuation misstatement penalty was inapplicable as a result of
their concession. In disagreeing with the Commissioner’s argument that a taxpayer
cannot selectively concede a ground for disallowance in order to avoid an addition
to tax, we relied on the logic of a prior Tax Court case, Todd v. Commissioner, 89
T.C. 912 (1987) (Todd I), aff’d, 862 F.2d 540 (5th Cir. 1988) (Todd II). We also
extensively discussed and relied upon the Court of Appeals for the Fifth Circuit’s
affirmation of Todd I in Todd II.
The facts in Todd I were similar to those in McCrary; however, the taxpayers
in Todd I did not make a concession on a ground other than valuation or basis as in -7-
McCrary.4 Rather, in Todd I we had already disallowed claimed deductions and
credits on a ground other than valuation or basis after a trial. Noonan v.
Commissioner, T.C. Memo. 1986-449, aff’d without published opinion sub nom.,
Hillendahl v. Commissioner, 976 F.2d 737 (9th Cir. 2012).
In analyzing the gross valuation misstatement penalty statute (section 6659 at
the time), the Court of Appeals for the Fifth Circuit in Todd II stated that
“Unfortunately, none of the formal legislative history provides a method for
calculating whether a given tax underpayment is attributable to a valuation
overstatement.” Todd II, 862 F.2d at 542. The Court of Appeals proceeded to
adopt the same formula we applied in Todd I, stating:
Such a formula is found, however, in the General Explanation of the Economic Recovery Tax Act of 1981, or “blue book,” prepared by the staff of the Joint Committee on Taxation. Though not technically legislative history, the Supreme Court relied on a similar blue book in construing part of the Tax Reform Act of 1969, calling the document a “compelling contemporary indication” of the intended effect of the statute. The committee staff explained § 6659’s operation as follows:
4 In Todd v. Commissioner, 89 T.C. 912, 919 (1987) (Todd I), aff’d, 862 F.2d 540 (5th Cir. 1988) (Todd II), we recognized the potential for a taxpayer to concede on a ground other than valuation or basis, posing a rhetorical question: [“I]f a taxpayer were to concede that an asset was not placed in service and that no deductions or credits are allowable in order to avoid an addition to tax, could that concession reasonably be refused?” -8-
“The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability. Thus, the underpayment resulting from a valuation overstatement will be determined by comparing the taxpayer’s (1) actual tax liability (i.e., the tax liability that results from a proper valuation and which takes into account any other proper adjustments) with (2) actual tax liability as reduced by taking into account the valuation overstatement. The difference between these two amounts will be the underpayment that is attributable to the valuation overstatement.”
* * * * * * *
Applying this formula, the Tax Court determined that no portion of the Todds’ tax underpayment was attributable to their valuation overstatements. The Todds’ actual tax liability, * * * did not differ from their actual tax liability adjusted for the valuation overstatements. In other words * * * the Todds’ valuation of the property supposedly generating the tax benefits had no impact whatsoever on the amount of tax actually owed. Since the legislative history of § 6659 provides no alternative method of applying the statute, we are persuaded that the formula contained in the committee staff’s explanation evidences congressional intent with respect to calculating underpayments subject to the penalty.
Id. at 542-543 (fn. refs. omitted) (quoting Staff of the Joint Committee on Taxation,
General Explanation of the Economic Recovery Tax Act of 1981, at 333 (J. Comm.
Print 1981) (Blue Book)) . The Court of Appeals in Todd II also quoted an example
from the Blue Book which states:
“The determination of the portion of a tax underpayment that is attributable to a valuation overstatement may be illustrated by the following example. Assume that in 1982 an individual files a joint return showing taxable income of $40,000 and tax liability of $9,195. -9-
Assume, further, that a $30,000 deduction which was claimed by the taxpayer as the result of a valuation overstatement is adjusted down to $10,000, and that another deduction of $20,000 is disallowed totally for reasons apart from the valuation overstatement. These adjustments result in correct taxable income of $80,000 and correct tax liability of $27,505. Accordingly, the underpayment due to the valuation overstatement is the difference between the tax on $80,000 ($27,505) and the tax on $60,000 ($17,505) (i.e., actual tax liability reduced by taking into account the deductions disallowed because of the valuation overstatement), or $9,800 [sic].”
Todd II, 862 F.2d at 543 (alteration in original) (fn. ref. omitted) (quoting Blue
Book at 333 n.2). The Court of Appeals concluded that “Congress intended * * *
[the Blue Book] formula to be applied in determining liability for the” gross
valuation misstatement penalty. Id.
The Court in Todd II reasoned that other considerations supported its holding,
stating that “Congress may not have wanted to burden the Tax Court with deciding
difficult valuation issues where a case could be easily decided on other grounds”5
and that “Congress may have wanted to moderate the application of the section
6659 penalty so that it would not be imposed on taxpayers whose overvaluation was
irrelevant to the determination of their actual tax liability.” Id. at 544. The Court of
Appeals additionally stated that its holding would not lead to anomalous results, that
5 The Court of Appeals further stated that Congress saw the gross valuation misstatement penalty “as a measure to help the Tax Court control its docket.” Todd II, 862 F.2d at 544 (citing H.R. Conf. Rept. No. 98-861, at 985 (1984), 1984-3 C.B. (Vol. 2) 1, 239). - 10 -
the effects of its holding “may not be as inequitable as” the Commissioner claimed,
and that “the fear that taxpayers will deny profit motivation to avoid section 6659
penalties, is unimpressive.” Id. at 545. In McCrary, we quoted extensively portions
of Todd II relating to these considerations, finding the argument persuasive and
adopting the rule in the case. McCrary v. Commissioner, 92 T.C. at 853-854
(“Following this language, we feel compelled * * * to apply the formula referred to
by the Court of Appeals and in our Todd opinion[.]”).
B. Cases Following McCrary and Todd
In addition to the Tax Court, the Court of Appeals for the Ninth Circuit has
also adopted the reasoning of and holding in Todd II.6 See Gainer v. Commissioner,
893 F.2d 225, 227 (9th Cir. 1990) (“We agree with the reasoning employed by the
Fifth Circuit in Todd.”), aff’g T.C. Memo. 1988-416. However, many other Courts
of Appeals have rejected Todd II as an incorrect interpretation of the Blue Book
formula.
6 The Supreme Court has not ruled on the issue addressed in Todd II, but the U.S. Government has recently filed a petition for a writ of certiorari as a result of the Court of Appeals for the Fifth Circuit’s ruling for the taxpayer on a closely related issue in Woods v. United States, 471 Fed. Appx. 320 (5th Cir. 2012). The Supreme Court has not yet granted or denied the Government’s petition. - 11 -
In Fid. Int’l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667
(1st Cir. 2011) (Fidelity International), the Court of Appeals for the First Circuit
encountered facts similar to those in Todd I. In Fidelity International, 661 F.3d at
673-674, the Court of Appeals reviewed Todd II and concluded that “Todd rests on
a misunderstanding of the sources relied on” and noted that “the Ninth Circuit
followed Todd’s misreading in Gainer”. The Court of Appeals for the First Circuit
noted that Todd II and Gainer represented a minority view, in opposition to “the
dominant view of the circuits that have addressed this issue.” Id. at 674. Regarding
the Blue Book formula relied on in Todd II, the Court of Appeals in Fidelity
International, 661 F.3d at 674, stated:
In our view, * * * [the Blue Book formula] is designed to avoid attributing to a basis or value misstatement an upward adjustment of taxes that is unrelated to the overstatement but due solely to some other tax reporting error * * *. This is surely what the quoted language means in excluding from the overstatement penalty increased taxes due to “any other proper adjustments.” This is quite different from excusing an overstatement because it is one of two independent, rather than the sole, cause of the same underreporting error.
In Alpha I, L.P. v. United States, 682 F.3d 1009 (Fed. Cir. 2012), the Court
of Appeals for the Federal Circuit reversed a Court of Federal Claims ruling that the
gross valuation misstatement penalty did not apply when a taxpayer conceded the
Commissioner’s adjustments on grounds other than basis or valuation. The Court of - 12 -
Appeals noted that “The Court of Federal Claims cited several cases to support its
decision to defer to the terms of the partnerships’ concession without further
scrutiny, two of which it found particularly persuasive:” Todd II and Gainer. Id. at
1027-1028. The Court of Appeals in Alpha I proceeded to reject “the legal analysis
employed in Todd and Gainer, finding it flawed in material respects.” Id. at 1028.
Reviewing the Blue Book formula and example relied on in Todd II, the Court of
Appeals in Alpha I stated that
The Blue Book, in sum, offers the unremarkable proposition that, when the IRS disallows two different deductions, but only one disallowance is based on a valuation misstatement, the valuation misstatement penalty should apply only to the deduction taken on the valuation misstatement, not the other deduction, which is unrelated to valuation misstatement.
The court in Todd mistakenly applied that simple rule to a situation in which the same deduction is disallowed based on both valuation misstatement- and non-valuation-misstatement theories. ***
Id. at 1029. The Court of Appeals concluded that “the flaws in the analysis
employed in Todd and Gainer” were “apparent”. Id.
In Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012), aff’g T.C.
Memo. 2011-195, the Court of Appeals for the Eleventh Circuit affirmed a Tax
Court case which held the taxpayers liable for the gross valuation misstatement - 13 -
penalty.7 On appeal the taxpayers contended that because the transaction lacked
economic substance there was no value or basis to misstate and therefore nothing to
trigger the valuation misstatement penalties. The taxpayers also attempted to
concede their position generally after losing in the Tax Court.
Regarding the concession, the Court of Appeals in Gustashaw stated that the
taxpayer “did not raise this argument before the Tax Court, and we therefore decline
to consider it for the first time on appeal. * * * Even if we were to consider this
argument, it is substantially intertwined with and relies on a minority line of cases
whose reasoning we reject infra.” Id. at 1135 n.5. The Court of Appeals rejected
the reasoning in Todd II and Gainer, stating that the Court of Appeals in Todd II
“misapplied” the Blue Book guidance and echoed the previously quoted language of
the Court of Appeals for the First Circuit in Fidelity International. See supra p. 11.
Even the Courts of Appeals for the Fifth and Ninth Circuits have strongly
suggested that Todd II and Gainer are erroneous, although both courts continue to
follow the holdings of those cases on the basis of stare decisis. In Keller v.
7 The Tax Court case did not address Todd I or Todd II and distinguished Gainer v. Commissioner, 893 F.2d 225 (9th Cir. 1990). See Gustashaw v. Commissioner, T.C. Memo. 2011-195, slip op. at 22-23, aff’d, 696 F.3d 1124 (11th Cir. 2012). - 14 -
Commissioner, 556 F.3d 1056, 1061 (9th Cir. 2009), aff’g in part, rev’g in part T.C.
Memo. 2006-131, the Court of Appeals for the Ninth Circuit recognized “that many
other circuits have” rejected the logic of Gainer and that those circuits’ “sensible
method of resolving overvaluation cases cuts off at the pass what might seem to be
an anomalous result--allowing a party to avoid tax penalties by engaging in behavior
one might suppose would implicate more tax penalties, not fewer.” However, the
Court of Appeals declined to follow the majority rule, stating: “Nonetheless, in this
circuit we are constrained by Gainer.” Id.
In Bemont Invs., L.L.C. v. United States, 679 F.3d 339 (5th Cir. 2012), a
three-judge panel of the Court of Appeals for the Fifth Circuit again applied Todd II
in rejecting application of the gross valuation misstatement penalty. However, all
three judges joined a special concurrence by Judge Prado which questioned the
logic of Todd II. After noting that the court’s “hands * * * [were] tied” because the
court was “precedent-bound to follow” the Todd II rule, Judge Prado discussed the
Blue Book guidance, stating: “The Blue Book’s formula and example are
expressing a straightforward principle in mathematical terms: Do not apply the
valuation overstatement penalty to a tax infraction, such as an improper charitable
deduction, that is unrelated to (i.e., incapable of being attributed to) the valuation
overstatement.” Id. at 351-352, 354 (Prado, J., concurring). Judge Prado opined - 15 -
that “the Todd court misread the Blue Book’s elementary guidance” and noted that
opposition to Todd II is “near-unanimous.” Id. at 352, 354 (citing cases from the
Courts of Appeals for the First, Second, Third, Fourth, Sixth, and Eighth Circuits).8
Judge Prado finally disagreed with Todd II on policy grounds, stating that the case
“frustrates the purpose of the valuation-misstatement penalty” by “creating * * * [a]
perverse incentive structure” whereby taxpayers are encouraged to not solely
misstate the value of assets, but to create even more “extreme scheme[s]” so that
they may concede a case on grounds other than basis or valuation if found out. Id.
at 355.
C. Appellate Jurisdiction
It is not clear to which Court of Appeals an appeal of this case would lie.
Section 7482(b)(1)(E) provides that generally a Tax Court decision following a
petition under section 6626 (i.e., a petition resulting from issuance of an FPAA)
shall be appealable to the U.S. Court of Appeals for the circuit in which “the
8 The cited opinions were: Fid. Int’l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667, 673-674 (1st Cir. 2011); Merino v. Commissioner, 196 F.3d 147, 158 (3d Cir. 1999), aff’g T.C. Memo. 1997-385; Zfass v. Commissioner, 118 F.3d 184, 191 (4th Cir. 1997), aff’g T.C. Memo. 1996-167; Illes v. Commissioner, 982 F.2d 163, 167 (6th Cir. 1992), aff’g T.C. Memo. 1991-449; Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), aff’g T.C. Memo. 1989-684; and Massengill v. Commissioner, 876 F.2d 616, 619-620 (8th Cir. 1989), aff’g T.C. Memo. 1988-427. - 16 -
principal place of business of the partnership” is located.9 However, section
7482(b)(1) provides that if section 7482(b)(1)(E) does not apply then “such
decisions may be reviewed by the Court of Appeals for the District of Columbia.”
In addition, section 7482(b)(2) provides that “Notwithstanding the provisions of
* * * [section 7482(b)(1)], such decisions may be reviewed by any United States
Court of Appeals which may be designated by the Secretary and the taxpayer by
stipulation in writing.”
Not only have the parties not established where AHG Investment’s principal
place of business was at the time the petition under section 6226 was filed; it was
not established whether AHG Investments had a principal place of business at that
time. See, e.g., Peat Oil & Gas Assocs. v. Commissioner, T.C. Memo. 1993-130,
1993 Tax Ct. Memo LEXIS 130, at *17 (parties failed to establish whether
partnerships at issue “had no principal place of business so that venue for appeal is
the Court of Appeals for the District of Columbia”). In addition, the parties have
not stipulated (or otherwise agreed) to appeal the case to a specific U.S. Court of
Appeals. See sec. 7482(b)(2).
9 For purposes of sec. 7482(b)(1), a partnership’s principal place of business shall be determined as of the time the petition under sec. 6226 was filed with the Tax Court. - 17 -
On the basis of the record before us, it appears that an appeal of this case
would lie to the Court of Appeals for the D.C. Circuit,10 which has not ruled on the
gross valuation misstatement penalty issue. There is no evidence that an appeal
would lie to the Court of Appeals for the Fifth or Ninth Circuit.
D. Stare Decisis and Departure From Todd and McCrary
In Vasquez v. Hillery, 474 U.S. 254, 265-266 (1986), the Supreme Court
stated:
[T]he important doctrine of stare decisis [is] the means by which we ensure that the law will not merely change erratically, but will develop in a principled and intelligible fashion. * * * While stare decisis is not an inexorable command, the careful observer will discern that any detours from the straight path of stare decisis in our past have occurred for articulable reasons, and only when the Court has felt obliged “to bring its opinions into agreement with experience and with facts newly ascertained.” Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 412 (1932) (Brandeis, J., dissenting).
Our history does not impose any rigid formula to constrain the Court in the disposition of cases. Rather, its lesson is that every successful proponent of overruling precedent has borne the heavy burden of persuading the Court that changes in society or in the law dictate that the values served by stare decisis yield in favor of a greater objective. * * *
10 While it appears AHG Investments was dissolved at some point after 2001, the status of AHG Investments was not conclusively established for purposes of petitioner’s motion. - 18 -
We have stated that stare decisis “generally requires that we follow the
holding of a previously decided case, absent special justification. This doctrine is of
particular importance when the antecedent case involves statutory construction.”
Sec. State Bank v. Commissioner, 111 T.C. 210, 213-214 (1998), aff’d, 214 F.3d
1254 (10th Cir. 2000); see also Hesselink v. Commissioner, 97 T.C. 94, 99-100
(1991); BLAK Invs. v. Commissioner, T.C. Memo. 2012-273, at *10. “Therefore,
respondent bears the heavy burden of persuading us that we should overrule our
established precedent.” BLAK Invs. v. Commissioner, at *10.
We find that respondent has met his burden to persuade us to overrule our
precedent established by Todd I and McCrary. In those cases we reasoned that if
another ground besides valuation overstatement supports a deficiency, that
deficiency cannot be attributable to a valuation overstatement. However, the
alternative view has been adopted by the majority of the U.S. Courts of Appeals.
These Courts of Appeals have reached the same result as the dissent in McCrary.
See McCrary v. Commissioner, 92 T.C. at 860-866 (Gerber, J., dissenting). Even
the Courts of Appeals for the Fifth and Ninth Circuits (which continue to follow the
minority rule) have strongly suggested that the majority rule is the correct one.
Today we depart from our precedent following the minority rule and side with
the majority rule. By doing so we recognize that an underpayment of tax may be - 19 -
attributable to a valuation misstatement even when the Commissioner’s
determination of an underpayment of tax may also be sustained on a ground
unrelated to basis or valuation. We agree with Judge Prado of the Court of Appeals
for the Fifth Circuit that the Blue Book’s formula and example merely express “a
straightforward principle in mathematical terms: Do not apply the valuation
overstatement penalty to a tax infraction, such as an improper charitable deduction,
that is unrelated to (i.e., incapable of being attributed to) the valuation
overstatement.”11 Bemont Invs., L.L.C., 679 F.3d at 352 (Prado, J., concurring).
In reaching our holding we have considered factors other than those relating
to the Blue Book formula and example. The most prominent of these secondary
factors regards judicial economy. In McCrary we supported our decision in part by
noting that it would encourage taxpayers to settle cases involving the valuation
misstatement penalty and thus avoid trials on difficult valuation issues. See
McCrary v. Commissioner, 92 T.C. at 853-854.
11 We agree with McCrary v. Commissioner, 92 T.C. 827 (1989), and Todd I that the Blue Book formula and example represent the correct method of calculating the portion of an underpayment of tax to which the gross valuation misstatement penalty may be applied (i.e., that the formula represents how Congress intended the penalty to be applied). However we rule today that the formula yields a different result than the result reached in those cases. - 20 -
Although our ruling today may reduce the number of cases conceded by
taxpayers attempting to avoid gross valuation misstatement penalties,12 concerns
relating to judicial economy are not a sufficient reason to disregard or continue to
incorrectly apply the clear formula and example in the Blue Book. See id. at 863
(Gerber, J., dissenting) (“Judicial economy should apply to situations where
alternative grounds are available to support the same determination.”). Indeed, our
ruling today may improve judicial economy in the long term by discouraging
taxpayers from engaging in tax-avoidance practices. See Gustashaw v.
Commissioner, 696 F.3d at 1136-1137; Alpha I, L.P., 682 F.3d at 1030 (“An
interpretation of the statute that allows imposition of a valuation misstatement
penalty even when other grounds are asserted furthers the congressional policy of
deterring abusive tax avoidance practices.”); Bemont Invs., L.L.C., 679 F.3d at 355
(Prado, J., concurring) (“As a policy matter, the Todd * * * rule could incentivize
improper tax behavior.”); Fidelity International, 661 F.3d at 673 (although
“alternative grounds with lower or no penalties existed for disallowing the same
claimed losses,” such a fact “hardly detracts from the need to penalize and
discourage the gross value misstatements.”)
12 We acknowledge that our ruling today might lead to more trials on questions of valuation. - 21 -
In addition, we find the other factors mentioned in McCrary in support of its
ruling (regarding equitable considerations and moderation of penalties) to be
similarly unconvincing. Over the years certain taxpayers have purposefully used the
holdings in Todd I and McCrary to avoid gross valuation misstatement penalties
which would otherwise apply to them. See Bemont Invs., L.L.C., 679 F.3d at 355
(Prado, J., concurring) (under the Todd II rule, “by crafting a more extreme scheme
and generating a deduction that is improper not only due to a basis misstatement, but
also for some other reason” taxpayers have increased their “chance[s] of avoiding
the valuation-misstatement penalty”). We believe that over the years the actions
taken by such taxpayers have “frustrate[d] the purpose of the
valuation-misstatement penalty”. Id.
For the foregoing reasons, we conclude that a taxpayer may not avoid
application of the gross valuation misstatement penalty merely by conceding on
grounds unrelated to valuation or basis.
III. Conclusion
We hold that petitioner’s concessions under section 465 and section 1.704-
1(b), Income Tax Regs., do not prevent application of the gross valuation
misstatement penalty to the underpayments of tax as a matter of law. Therefore, we
will deny petitioner’s motion for partial summary judgment under Rule 121. In - 22 -
reaching our holding, we have considered all arguments made, and, to the extent not
mentioned above, we conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will be
issued denying petitioner’s motion for
partial summary judgment.
Reviewed by the Court.
THORNTON, HALPERN, FOLEY, VASQUEZ, GALE, MARVEL, WHERRY, KROUPA, HOLMES, PARIS, KERRIGAN, and LAUBER, JJ., agree with this opinion of the Court.
GUSTAFSON, MORRISON, and BUCH, JJ., did not participate in the consideration of this opinion.