Term: 2013
Docket: 12-562
United States v. Woods
- Pro
12-562 UNITED STATES V. WOODS DECISION BELOW: 471 Fed. Appx. 320 IN ADDITION TO THE QUESTION PRESENTED BY THE PETITION, THE PARTIES ARE DIRECTED TO BRIEF AND ARGUE THE FOLLOWING QUESTION: WHETHER THE DISTRICT COURT HAD JURISDICTION IN THIS CASE UNDER 26 U.S.C. §6226 TO CONSIDER THE SUBSTANTIAL VALUATION MISSTATEMENT PENALTY CERT. GRANTED 3/25/2013 QUESTION PRESENTED: Section 6662 of the Internal Revenue Code prescribes a penalty for an underpayment of federal income tax that is "attributable to" an overstatement of basis in property. 26 U.S.C. 6662(a), (b)(3), (e)(l)(A) and (h)(l). The question presented is as follows: Whether the overstatement penalty applies to an underpayment resulting from a determination that a transaction lacks economic substance because the sole purpose of the transaction was to generate a tax loss by artificially inflating the taxpayer's basis in property. LOWER COURT CASE NUMBER: 11-50487
In the United States v. Woods case of 2013, the Supreme Court ruled in favor of the government, affirming that a 40% penalty for tax underpayments due to overstatement of basis was applicable to partnerships involved in tax shelter activities. The court held that Gary Woods and his partner were liable for this penalty after they engaged in a scheme known as COBRA (Current Options Bring Reward Alternatives), which allowed them to claim large losses on their income taxes. These losses were artificially inflated by purchasing currency option spreads from Deutsche Bank and contributing these options along with cash into two newly formed partnerships. When these options expired, they claimed huge losses on their federal income-tax returns based on an overstated basis in partnership property - a tactic disallowed by IRS regulations.
In the dissenting opinion for United States v. Woods, Justice Scalia disagreed with the majority's decision to apply a 40% penalty on an underpayment of federal income tax attributable to valuation misstatements. He argued that this was not applicable in cases where taxpayers had claimed losses from transactions later disregarded by the IRS as shams. According to him, such transactions did not involve any factual inaccuracies about property value or basis but were rather legal disagreements over tax law interpretation and its application to given facts. Therefore, he believed that applying a valuation-misstatement penalty was inappropriate and inconsistent with Congress' intent when it enacted the relevant statutory provisions.
