Tax Court reverses its position on valuation misstatement penalty; Supreme Court agrees to hear case on the issue.

AuthorBeavers, James A.

ABANDONING ITS OWN PRECEDENT, THE TAX Court held that a taxpayer may not avoid application of the gross valuation misstatement penalty by conceding that adjustments made in an IRS notice of final partnership administration adjustment (FPAA) were correct on grounds unrelated to valuation or basis. Shortly after, the Supreme Court agreed to hear a case from the Fifth Circuit involving the same issue.

[ILLUSTRATION OMITTED]

Background of Tax Court Case

During the years involved, Alan Ginsburg was a partner, but not the tax matters partner (TMP), of AHG Investments. The IRS issued an FPAA to Ginsburg. The major adjustment in the FPAA disallowed $10,069,505 in AHG losses that the partnership had allocated to Ginsburg for tax years 2001 and 2002. The FPAA listed 14 alternative grounds in support of the adjustments, including gross valuation misstatements of partnership items on the AHG return. Consequently, the IRS asserted a 40% accuracy-related penalty against Ginsburg under Sec. 6662(a) for the portion of his underpayment of tax attributable to gross valuation misstatements.

Ginsburg challenged the IRS's application of the gross valuation misstatement penalty in Tax Court. In his Tax Court petition, Ginsburg conceded the FPAA adjustments were correct on the ground that he was not at risk under Sec. 465 with respect to AHG and thus was not entitled to deduct certain attributed losses. In an amendment to the petition, Ginsburg also conceded that the FPAA adjustments were correct on the ground that the transaction at issue did not have substantial economic effect under Regs. Sec. 1.704-1(b). Both of these were among the grounds that the IRS listed in the FPAA as supporting the adjustments in it.

Ginsburg sought a ruling from the Tax Court that the 40% gross valuation misstatement penalty did not apply as a matter of law because he had conceded that proposed FPAA adjustments were correct on grounds unrelated to valuation or basis.

Valuation Misstatement and Gross Valuation Misstatement Penalties

Under Secs. 6662(a) and (b)(3), a taxpayer is subject to a 20% penalty for any underpayment that is attributable to a substantial valuation misstatement (the valuation misstatement penalty). There is a substantial valuation misstatement if the value or adjusted basis of any property claimed on any income tax return is 150% or more of the amount determined to be the correct amount.

This penalty, which was originally included in the same form in Sec. 6659, was the only valuation misstatement penalty until 2006. In that year, an increased penalty of 40% for gross valuation misstatements of 200% or more of the amount determined to...

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