United States v. Woods , 134 S. Ct. 557 ( 2013 )


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  • (Slip Opinion)              OCTOBER TERM, 2013                                       1
    
                                           Syllabus
    
             NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
           being done in connection with this case, at the time the opinion is issued.
           The syllabus constitutes no part of the opinion of the Court but has been
           prepared by the Reporter of Decisions for the convenience of the reader.
           See United States v. Detroit Timber & Lumber Co., 
    200 U.S. 321
    , 337.
    
    
    SUPREME COURT OF THE UNITED STATES
    
                                           Syllabus
    
                         UNITED STATES v. WOODS
    
    CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
                      THE FIFTH CIRCUIT
    
       No. 12–562.      Argued October 9, 2013—Decided December 3, 2013
    Respondent Gary Woods and his employer, Billy Joe McCombs, partici-
      pated in an offsetting-option tax shelter designed to generate large
      paper losses that they could use to reduce their taxable income. To
      that end, they purchased from Deutsche Bank a series of currency-
      option spreads. Each spread was a package consisting of a long op-
      tion, which Woods and McCombs purchased from Deutsche Bank and
      for which they paid a premium, and a short option, which Woods and
      McCombs sold to Deutsche Bank and for which they received a pre-
      mium. Because the premium paid for the long option was largely off-
      set by the premium received for the short option, the net cost of the
      package to Woods and McCombs was substantially less than the cost
      of the long option alone. Woods and McCombs contributed the
      spreads, along with cash, to two partnerships, which used the cash to
      purchase stock and currency. When calculating their basis in the
      partnership interests, Woods and McCombs considered only the long
      component of the spreads and disregarded the nearly offsetting short
      component. As a result, when the partnerships’ assets were disposed
      of for modest gains, Woods and McCombs claimed huge losses. Al-
      though they had contributed roughly $3.2 million in cash and spreads
      to the partnerships, they claimed losses of more than $45 million.
         The Internal Revenue Service sent each partnership a Notice of
      Final Partnership Administrative Adjustment, disregarding the
      partnerships for tax purposes and disallowing the related losses. It
      concluded that the partnerships were formed for the purpose of tax
      avoidance and thus lacked “economic substance,” i.e., they were
      shams. As there were no valid partnerships for tax purposes, the IRS
      determined that the partners could not claim a basis for their part-
      nership interests greater than zero and that any resulting tax under-
    2                     UNITED STATES v. WOODS
    
                                    Syllabus
    
        payments would be subject to a 40-percent penalty for gross valua-
        tion misstatements. Woods sought judicial review. The District
        Court held that the partnerships were properly disregarded as shams
        but that the valuation-misstatement penalty did not apply. The Fifth
        Circuit affirmed.
    Held:
        1. The District Court had jurisdiction to determine whether the
     partnerships’ lack of economic substance could justify imposing a
     valuation-misstatement penalty on the partners. Pp. 6–11.
           (a) Because a partnership does not pay federal income taxes, its
     taxable income and losses pass through to the partners. Under the
     Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the IRS
     initiates partnership-related tax proceedings at the partnership level
     to adjust “partnership items,” i.e., items relevant to the partnership
     as a whole. 
    26 U.S. C
    . §§6221, 6231(a)(3). Once the adjustments be-
     come final, the IRS may undertake further proceedings at the part-
     ner level to make any resulting “computational adjustments” in the
     tax liability of the individual partners.         §§6230(a)(1)–(2), (c),
     6231(a)(6). Pp. 6–7.
           (b) Under TEFRA’s framework, a court in a partnership-level
     proceeding has jurisdiction to determine “the applicability of any
     penalty . . . which relates to an adjustment to a partnership item.”
     §6226(f). A determination that a partnership lacks economic sub-
     stance is such an adjustment. TEFRA authorizes courts in partner-
     ship-level proceedings to provisionally determine the applicability of
     any penalty that could result from an adjustment to a partnership
     item, even though imposing the penalty requires a subsequent, part-
     ner-level proceeding. In that later proceeding, each partner may
     raise any reasons why the penalty may not be imposed on him specif-
     ically. Applying those principles here, the District Court had juris-
     diction to determine the applicability of the valuation-misstatement
     penalty. Pp. 7–11.
        2. The valuation-misstatement penalty applies in this case.
     Pp. 11–16.
           (a) A penalty applies to the portion of any underpayment that is
     “attributable to” a “substantial” or “gross” “valuation misstatement,”
     which exists where “the value of any property (or the adjusted basis
     of any property) claimed on any return of tax” exceeds by a specified
     percentage “the amount determined to be the correct amount of such
     valuation or adjusted basis (as the case may be).” §§6662(a), (b)(3),
     (e)(1)(A), (h). The penalty’s plain language makes it applicable here.
     Once the partnerships were deemed not to exist for tax purposes, no
     partner could legitimately claim a basis in his partnership interest
     greater than zero. Any underpayment resulting from use of a non-
                         Cite as: 571 U. S. ____ (2013)                      3
    
                                    Syllabus
    
      zero basis would therefore be “attributable to” the partner’s having
      claimed an “adjusted basis” in the partnerships that exceeded “the
      correct amount of such . . . adjusted basis.” §6662(e)(1)(A). And un-
      der the relevant Treasury Regulation, when an asset’s adjusted basis
      is zero, a valuation misstatement is automatically deemed gross.
      Pp. 11–12.
          (b) Woods’ contrary arguments are unpersuasive. The valuation-
      misstatement penalty encompasses misstatements that rest on legal
      as well as factual errors, so it is applicable to misstatements that rest
      on the use of a sham partnership. And the partnerships’ lack of eco-
      nomic substance is not an independent ground separate from the
      misstatement of basis in this case. Pp. 12–16.
    471 Fed. Appx. 320, reversed.
    
      SCALIA, J., delivered the opinion for a unanimous Court.
                            Cite as: 571 U. S. ____ (2013)                              1
    
                                 Opinion of the Court
    
         NOTICE: This opinion is subject to formal revision before publication in the
         preliminary print of the United States Reports. Readers are requested to
         notify the Reporter of Decisions, Supreme Court of the United States, Wash­
         ington, D. C. 20543, of any typographical or other formal errors, in order
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    SUPREME COURT OF THE UNITED STATES
                                       _________________
    
                                       No. 12–562
                                       _________________
    
    
       UNITED STATES, PETITIONER v. GARY WOODS
     ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF 
    
                APPEALS FOR THE FIFTH CIRCUIT
    
                                  [December 3, 2013]
    
    
      JUSTICE SCALIA delivered the opinion of the Court.
      We decide 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.
                                     I. The Facts
                                 A
      This case involves an offsetting-option tax shelter, vari­
    ants of which were marketed to high-income taxpayers in
    the late 1990’s. Tax shelters of this type sought to gener­
    ate large paper losses that a taxpayer could use to reduce
    taxable income. They did so by attempting to give the tax­
    payer an artificially high basis in a partnership interest,
    which enabled the taxpayer to claim a significant tax loss
    upon disposition of the interest. See IRS Notice 2000–44,
    2000–2 Cum. Bull. 255 (describing offsetting-option tax
    shelters).
      The particular tax shelter at issue in this case was
    developed by the now-defunct law firm Jenkens &
    Gilchrist and marketed by the accounting firm Ernst &
    2                 UNITED STATES v. WOODS
    
                          Opinion of the Court
    
    Young under the name “Current Options Bring Reward
    Alternatives,” or COBRA. Respondent Gary Woods and
    his employer, Billy Joe McCombs, agreed to participate in
    COBRA to reduce their tax liability for 1999. To that end,
    in November 1999 they created two general partnerships:
    one, Tesoro Drive Partners, to produce ordinary losses,
    and the other, SA Tesoro Investment Partners, to produce
    capital losses.
       Over the next two months, acting through their respec­
    tive wholly owned, limited liability companies, Woods and
    McCombs executed a series of transactions. First, they
    purchased from Deutsche Bank five 30-day currency­
    option spreads. Each of these option spreads was a pack­
    age consisting of a so-called long option, which entitled
    Woods and McCombs to receive a sum of money from
    Deutsche Bank if a certain currency exchange rate ex­
    ceeded a certain figure on a certain date, and a so-called
    short option, which entitled Deutsche Bank to receive a
    sum of money from Woods and McCombs if the exchange
    rate for the same currency on the same date exceeded a
    certain figure so close to the figure triggering the long
    option that both were likely to be triggered (or not to be
    triggered) on the fated date. Because the premium paid to
    Deutsche Bank for purchase of the long option was largely
    offset by the premium received from Deutsche Bank for
    sale of the short option, the net cost of the package to
    Woods and McCombs was substantially less than the cost
    of the long option alone. Specifically, the premiums paid
    for all five of the spreads’ long options totaled $46 million,
    and the premiums received for the five spreads’ short
    options totaled $43.7 million, so the net cost of the spreads
    was just $2.3 million. Woods and McCombs contributed
    the spreads to the partnerships along with about $900,000
    in cash. The partnerships used the cash to purchase
    assets—Canadian dollars for the partnership that sought
    to produce ordinary losses, and Sun Microsystems stock
                     Cite as: 571 U. S. ____ (2013)            3
    
                         Opinion of the Court
    
    for the partnership that sought to produce capital losses.
    The partnerships then terminated the five option spreads
    in exchange for a lump-sum payment from Deutsche
    Bank.
      As the tax year drew to a close, Woods and McCombs
    transferred their interests in the partnerships to two S
    corporations. One corporation, Tesoro Drive Investors,
    Inc., received both partners’ interests in Tesoro Drive
    Partners; the other corporation, SA Tesoro Drive Inves­
    tors, Inc., received both partners’ interests in SA Tesoro
    Investment Partners. Since this left each partnership
    with only a single partner (the relevant S corporation), the
    partnerships were liquidated by operation of law, and
    their assets—the Canadian dollars and Sun Microsystems
    stock, plus the remaining cash—were deemed distributed
    to the corporations. The corporations then sold those
    assets for modest gains of about $2,000 on the Canadian
    dollars and about $57,000 on the stock. But instead of
    gains, the corporations reported huge losses: an ordinary
    loss of more than $13 million on the sale of the Canadian
    dollars and a capital loss of more than $32 million on the
    sale of the stock. The losses were allocated between
    Woods and McCombs as the corporations’ co-owners.
      The reason the corporations were able to claim such vast
    losses—the alchemy at the heart of an offsetting-options
    tax shelter—lay in how Woods and McCombs calculated
    the tax basis of their interests in the partnerships. Tax
    basis is the amount used as the cost of an asset when
    computing how much its owner gained or lost for tax
    purposes when disposing of it. See J. Downes & J. Good­
    man, Dictionary of Finance and Investment Terms 736
    (2010). A partner’s tax basis in a partnership interest—
    called “outside basis” to distinguish it from “inside basis,”
    the partnership’s basis in its own assets—is tied to the
    value of any assets the partner contributed to acquire the
    interest. See 
    26 U.S. C
    . §722. Collectively, Woods and
    4                UNITED STATES v. WOODS
    
                         Opinion of the Court
    
    McCombs contributed roughly $3.2 million in option
    spreads and cash to acquire their interests in the two
    partnerships. But for purposes of computing outside
    basis, Woods and McCombs considered only the long
    component of the spreads and disregarded the nearly offset­
    ting short component on the theory that it was “too con­
    tingent” to count. Brief for Respondent 14. As a result,
    they claimed a total adjusted outside basis of more than
    $48 million. Since the basis of property distributed to a
    partner by a liquidating partnership is equal to the ad­
    justed basis of the partner’s interest in the partnership
    (reduced by any cash distributed with the property), see
    §732(b), the inflated outside basis figure was carried over
    to the S corporations’ basis in the Canadian dollars and
    the stock, enabling the corporations to report enormous
    losses when those assets were sold. At the end of the day,
    Woods’ and McCombs’ $3.2 million investment generated
    tax losses that, if treated as valid, could have shielded
    more than $45 million of income from taxation.
                                  B
      The Internal Revenue Service, however, did not treat
    the COBRA-generated losses as valid. Instead, after
    auditing the partnerships’ tax returns, it issued to each
    partnership a Notice of Final Partnership Administrative
    Adjustment, or “FPAA.” In the FPAAs, the IRS deter­
    mined that the partnerships had been “formed and availed
    of solely for purposes of tax avoidance by artificially over­
    stating basis in the partnership interests of [the] purported
    partners.” App. 92, 146. Because the partnerships had
    “no business purpose other than tax avoidance,” the IRS
    said, they “lacked economic substance”—or, put more
    starkly, they were “sham[s]”—so the IRS would disregard
    them for tax purposes and disallow the related losses.
    Ibid. And because there were no valid partnerships for
    tax purposes, the IRS determined that the partners had
                        Cite as: 571 U. S. ____ (2013)                  5
    
                            Opinion of the Court
    
    “not established adjusted bases in their respective part­
    nership interests in an amount greater than zero,” id., at
    95, ¶7, 149, ¶7 so that any resulting tax underpayments
    would be subject to a 40-percent penalty for gross valua­
    tion misstatements, see 
    26 U.S. C
    . §6662(b)(3).
       Woods, as the tax-matters partner for both partner­
    ships, sought judicial review of the FPAAs pursuant to
    §6226(a). The District Court held that the partner-
    ships were properly disregarded as shams but that the
    valuation-misstatement penalty did not apply. The Govern­
    ment appealed the decision on the penalty to the Court of
    Appeals for the Fifth Circuit. While the appeal was pend­
    ing, the Fifth Circuit held in a similar case that, under
    Circuit precedent, the valuation-misstatement penalty
    does not apply when the relevant transaction is disregarded
    for lacking economic substance. Bemont Invs., LLC v.
    United States, 
    679 F.3d 339
    , 347–348 (2012). In a concur­
    rence joined by the other members of the panel, Judge
    Prado acknowledged that this rule was binding Circuit
    law but suggested that it was mistaken. See id., at 351–
    355. A different panel subsequently affirmed the District
    Court’s decision in this case in a one-paragraph opinion,
    declaring the issue “well settled.” 471 Fed. Appx. 320 (per
    curiam), reh’g denied (2012).1
       We granted certiorari to resolve a Circuit split over
    whether the valuation-misstatement penalty is applicable
    in these circumstances. 569 U. S. ___ (2013). See Bemont,
    supra, at 354–355 (Prado, J., concurring) (recognizing
    “near-unanimous opposition” to the Fifth Circuit’s rule).
    Because two Courts of Appeals have held that District
    Courts lacked jurisdiction to consider the valuation­
    ——————
        1 The District Court held that the partnerships did not have to be
    
    “honored as legitimate for tax purposes” because they did not possess
    “ ‘economic substance.’ ” App. to Pet. for Cert. 19a. Woods did not
    appeal the District Court’s application of the economic-substance
    doctrine, so we express no view on it.
    6                UNITED STATES v. WOODS
    
                         Opinion of the Court
    
    misstatement penalty in similar circumstances, see Jade
    Trading, LLC v. United States, 
    598 F.3d 1372
    , 1380 (CA
    Fed. 2010); Petaluma FX Partners, LLC v. Commissioner,
    
    591 F.3d 649
    , 655–656 (CADC 2010), we ordered briefing
    on that question as well.
                   II. District-Court Jurisdiction 
    
                                  A
    
       We begin with a brief explanation of the statutory
    scheme for dealing with partnership-related tax matters.
    A partnership does not pay federal income taxes; instead,
    its taxable income and losses pass through to the partners.
    
    26 U.S. C
    . §701. A partnership must report its tax items
    on an information return, §6031(a), and the partners must
    report their distributive shares of the partnership’s tax
    items on their own individual returns, §§702, 704.
       Before 1982, the IRS had no way of correcting errors on
    a partnership’s return in a single, unified proceeding.
    Instead, tax matters pertaining to all the members of a
    partnership were dealt with just like tax matters pertain­
    ing only to a single taxpayer: through deficiency proceed­
    ings at the individual-taxpayer level.        See generally
    §§6211–6216 (2006 ed. and Supp. V). Deficiency proceed­
    ings require the IRS to issue a separate notice of deficien­
    cy to each taxpayer, §6212(a) (2006 ed.), who can file a
    petition in the Tax Court disputing the alleged deficiency
    before paying it, §6213(a). Having to use deficiency pro­
    ceedings for partnership-related tax matters led to du­
    plicative proceedings and the potential for inconsistent
    treatment of partners in the same partnership. Congress
    addressed those difficulties by enacting the Tax Treatment
    of Partnership Items Act of 1982, as Title IV of the Tax
    Equity and Fiscal Responsibility Act of 1982 (TEFRA). 96
    Stat. 648 (codified as amended at 
    26 U.S. C
    . §§6221–6232
    (2006 ed. and Supp. V)).
       Under TEFRA, partnership-related tax matters are
                     Cite as: 571 U. S. ____ (2013)            7
    
                         Opinion of the Court
    
    addressed in two stages. First, the IRS must initiate
    proceedings at the partnership level to adjust “partnership
    items,” those relevant to the partnership as a whole.
    §§6221, 6231(a)(3). It must issue an FPAA notifying the
    partners of any adjustments to partnership items,
    §6223(a)(2), and the partners may seek judicial review of
    those adjustments, §6226(a)–(b). Once the adjustments to
    partnership items have become final, the IRS may under­
    take further proceedings at the partner level to make any
    resulting “computational adjustments” in the tax liability
    of the individual partners. §6231(a)(6). Most computa­
    tional adjustments may be directly assessed against the
    partners, bypassing deficiency proceedings and permitting
    the partners to challenge the assessments only in post­
    payment refund actions. §6230(a)(1), (c). Deficiency
    proceedings are still required, however, for certain com­
    putational adjustments that are attributable to “affected
    items,” that is, items that are affected by (but are not
    themselves) partnership items.           §§6230(a)(2)(A)(i),
    6231(a)(5).
                                  B
       Under the TEFRA framework, a court in a partnership­
    level proceeding like this one has jurisdiction to determine
    not just partnership items, but also “the applicability of
    any penalty . . . which relates to an adjustment to a part­
    nership item.” §6226(f). As both sides agree, a determina­
    tion that a partnership lacks economic substance is an
    adjustment to a partnership item. Thus, the jurisdictional
    question here boils down to whether the valuation­
    misstatement penalty “relates to” the determination that
    the partnerships Woods and McCombs created were
    shams.
       The Government’s theory of why the penalty was trig­
    gered is based on a straightforward relationship between
    the economic-substance determination and the penalty. In
    8                UNITED STATES v. WOODS
    
                         Opinion of the Court
    
    the Government’s view, there can be no outside basis in a
    sham partnership (which, for tax purposes, does not exist),
    so any partner who underpaid his individual taxes by
    declaring an outside basis greater than zero committed a
    valuation misstatement. In other words, the penalty flows
    logically and inevitably from the economic-substance
    determination.
       Woods, however, argues that because outside basis is
    not a partnership item, but an affected item, a penalty
    that would rest on a misstatement of outside basis cannot
    be considered at the partnership level. He maintains, in
    short, that a penalty does not relate to a partnership-item
    adjustment if it “requires a partner-level determination,”
    regardless of “whether or not the penalty has a connection
    to a partnership item.” Brief for Respondent 27.
       Because §6226(f)’s “relates to” language is “essentially
    indeterminate,” we must resolve this dispute by looking to
    “the structure of [TEFRA] and its other provisions.” Mar-
    acich v. Spears, 
    570 U.S.
    ___, ___ (2013) (slip op., at 9)
    (internal quotation marks and brackets omitted). That
    inquiry makes clear that the District Court’s jurisdiction
    is not as narrow as Woods contends. Prohibiting courts in
    partnership-level proceedings from considering the ap­
    plicability of penalties that require partner-level inquiries
    would be inconsistent with the nature of the “applicabil­
    ity” determination that TEFRA requires.
       Under TEFRA’s two-stage structure, penalties for tax
    underpayment must be imposed at the partner level,
    because partnerships themselves pay no taxes. And im­
    posing a penalty always requires some determinations
    that can be made only at the partner level. Even where a
    partnership’s return contains significant errors, a partner
    may not have carried over those errors to his own return;
    or if he did, the errors may not have caused him to under­
    pay his taxes by a large enough amount to trigger the
    penalty; or if they did, the partner may nonetheless have
                     Cite as: 571 U. S. ____ (2013)           9
    
                         Opinion of the Court
    
    acted in good faith with reasonable cause, which is a bar
    to the imposition of many penalties, see §6664(c)(1). None
    of those issues can be conclusively determined at the
    partnership level. Yet notwithstanding that every pen­
    alty must be imposed in partner-level proceedings after
    partner-level determinations, TEFRA provides that the
    applicability of some penalties must be determined at
    the partnership level. The applicability determination is
    therefore inherently provisional; it is always contingent
    upon determinations that the court in a partnership-level
    proceeding does not have jurisdiction to make. Barring
    partnership-level courts from considering the applicability
    of penalties that cannot be imposed without partner-level
    inquiries would render TEFRA’s authorization to consider
    some penalties at the partnership level meaningless.
       Other provisions of TEFRA confirm that conclusion.
    One requires the IRS to use deficiency proceedings for
    computational adjustments that rest on “affected items
    which require partner level determinations (other than
    penalties . . . that relate to adjustments to partnership
    items).” §6230(a)(2)(A)(i). Another states that while a
    partnership-level determination “concerning the applica­
    bility of any penalty . . . which relates to an adjustment
    to a partnership item” is “conclusive” in a subsequent re­
    fund action, that does not prevent the partner from “as­
    sert[ing] any partner level defenses that may apply.”
    §6230(c)(4). Both these provisions assume that a penalty can
    relate to a partnership-item adjustment even if the penalty
    cannot be imposed without additional, partner-level
    determinations.
       These considerations lead us to reject Woods’ interpreta­
    tion of §6226(f). We hold that TEFRA gives courts in
    partnership-level proceedings jurisdiction to determine the
    applicability of any penalty that could result from an
    adjustment to a partnership item, even if imposing the
    penalty would also require determining affected or non­
    10               UNITED STATES v. WOODS
    
                         Opinion of the Court
    
    partnership items such as outside basis. The partnership­
    level applicability determination, we stress, is provisional:
    the court may decide only whether adjustments properly
    made at the partnership level have the potential to trigger
    the penalty. Each partner remains free to raise, in subse­
    quent, partner-level proceedings, any reasons why the
    penalty may not be imposed on him specifically.
       Applying the foregoing principles to this case, we con­
    clude that the District Court had jurisdiction to determine
    the applicability of the valuation-misstatement penalty—
    to determine, that is, whether the partnerships’ lack of
    economic substance (which all agree was properly decided
    at the partnership level) could justify imposing a valua­
    tion-misstatement penalty on the partners. When making
    that determination, the District Court was obliged to
    consider Woods’ arguments that the economic-substance
    determination was categorically incapable of triggering
    the penalty. Deferring consideration of those arguments
    until partner-level proceedings would replicate the precise
    evil that TEFRA sets out to remedy: duplicative proceed­
    ings, potentially leading to inconsistent results, on a ques­
    tion that applies equally to all of the partners.
       To be sure, the District Court could not make a formal ad­
    justment of any partner’s outside basis in this partnership­
    level proceeding. See Petaluma, 
    591 F. 3d
    , at 655. But
    it nonetheless could determine whether the adjustments
    it did make, including the economic-substance deter­
    mination, had the potential to trigger a penalty; and in
    doing so, it was not required to shut its eyes to the legal
    impossibility of any partner’s possessing an outside basis
    greater than zero in a partnership that, for tax purposes,
    did not exist. Each partner’s outside basis still must be
    adjusted at the partner level before the penalty can be
    imposed, but that poses no obstacle to a partnership-level
    court’s provisional consideration of whether the economic­
    substance determination is legally capable of triggering
                          Cite as: 571 U. S. ____ (2013)                     11
    
                               Opinion of the Court
    
    the penalty.2
        III. Applicability of Valuation-Misstatement Penalty
                                   A
      Taxpayers who underpay their taxes due to a “valuation
    misstatement” may incur an accuracy-related penalty. A
    20-percent penalty applies to “the portion of any under­
    payment which is attributable to . . . [a]ny substantial
    valuation misstatement under chapter 1.” 
    26 U.S. C
    .
    §6662(a), (b)(3). Under the version of the penalty statute
    in effect when the transactions at issue here occurred,
         “there is a substantial valuation misstatement under
         chapter 1 if . . . the value of any property (or the ad­
         justed basis of any property) claimed on any return of
         tax imposed by chapter 1 is 200 percent or more of the
         amount determined to be the correct amount of such
         valuation or adjusted basis (as the case may be).”
         §6662(e)(1)(A) (2000 ed.).
    If the reported value or adjusted basis exceeds the correct
    ——————
       2 Some amici warn that our holding bodes an odd procedural result:
    
    The IRS will be able to assess the 40-percent penalty directly, but it
    will have to use deficiency proceedings to assess the tax underpayment
    upon which the penalty is imposed. See Brief for New Millennium
    Trading, LLC, et al. as Amici Curiae 12–13. That criticism assumes
    that the underpayment would not be exempt from deficiency proceed­
    ings because it would rest on outside basis, an “affected ite[m] . . . other
    than [a] penalt[y],” 
    26 U.S. C
    . §6230(a)(2)(A)(i). We need not resolve
    that question today, but we do not think amici’s answer necessarily
    follows. Even an underpayment attributable to an affected item is
    exempt so long as the affected item does not “require partner level
    determinations,” ibid.; see Bush v. United States, 
    655 F.3d 1323
    , 1330,
    1333–1334 (CA Fed. 2011) (en banc); and it is not readily apparent
    why additional partner-level determinations would be required before
    adjusting outside basis in a sham partnership. Cf. Petaluma FX
    Partners, LLC v. Commissioner, 
    591 F.3d 649
    , 655 (CADC 2010)
    (“If disregarding a partnership leads ineluctably to the conclusion that
    its partners have no outside basis, that should be just as obvious in
    partner-level proceedings as it is in partnership-level proceedings”).
    12                   UNITED STATES v. WOODS
    
                             Opinion of the Court
    
    amount by at least 400 percent, the valuation misstate­
    ment is considered not merely substantial, but “gross,”
    and the penalty increases to 40 percent. §6662(h).3
      The penalty’s plain language makes it applicable here.
    As we have explained, the COBRA transactions were
    designed to generate losses by enabling the partners to
    claim a high outside basis in the partnerships. But once
    the partnerships were deemed not to exist for tax purposes,
    no partner could legitimately claim an outside basis
    greater than zero. Accordingly, if a partner used an out­
    side basis figure greater than zero to claim losses on his
    tax return, and if deducting those losses caused the part­
    ner to underpay his taxes, then the resulting underpay­
    ment would be “attributable to” the partner’s having
    claimed an “adjusted basis” in the partnerships that ex­
    ceeded “the correct amount of such . . . adjusted basis.”
    §6662(e)(1)(A).
      An IRS regulation provides that when an asset’s true
    value or adjusted basis is zero, “[t]he value or adjusted
    basis claimed . . . is considered to be 400 percent or more
    of the correct amount,” so that the resulting valuation
    misstatement is automatically deemed gross and subject
    to the 40-percent penalty. Treas. Reg. §1.6662–5(g), 26
    CFR §1.6662–5(g) (2013).4
                                   B
         Against this straightforward application of the statute,
    ——————
      3 Congress has since lowered the thresholds for substantial and gross
    
    misstatements to 150 percent and 200 percent, respectively. See
    Pension Protection Act of 2006, §1219(a)(1)–(2), 120 Stat. 1083.
      4 An amicus suggests that this regulation is in tension with the math­
    
    ematical rule forbidding division by zero. See Brief for Prof. Amandeep
    S. Grewal as Amicus Curiae 20, n. 7; cf. Lee’s Summit v. Surface
    Transp. Bd., 
    231 F.3d 39
    , 41–42 (CADC 2000) (discussing “problems
    posed by applying [a] 100% increase standard to a baseline of zero”).
    Woods has not challenged the regulation before this Court, so we
    assume its validity for purposes of deciding this case.
                     Cite as: 571 U. S. ____ (2013)           13
    
                         Opinion of the Court
    
    Woods’ primary argument is that the economic-substance
    determination did not result in a “valuation misstate­
    ment.” He asserts that the statutory terms “value” and
    “valuation” connote “a factual—rather than legal—
    concept,” and that the penalty therefore applies only to
    factual misrepresentations about an asset’s worth or cost,
    not to misrepresentations that rest on legal errors (like
    the use of a sham partnership). Brief for Respondent 35.
      We are not convinced. To begin, we doubt that “value”
    is limited to factual issues and excludes threshold legal
    determinations. Cf. Powers v. Commissioner, 
    312 U.S. 259
    , 260 (1941) (“[W]hat criterion should be employed for
    determining the ‘value’ of the gifts is a question of law”);
    Chapman Glen Ltd. v. Commissioner, 140 T. C. No. 15,
    2013 WL2319282, *17 (2013) (“[T]hree approaches are
    used to determine the fair market value of property,” and
    “which approach to apply in a case is a question of law”).
    But even if “value” were limited to factual matters, the
    statute refers to “value” or “adjusted basis,” and there is
    no justification for extending that limitation to the latter
    term, which plainly incorporates legal inquiries. An as­
    set’s “basis” is simply its cost, 
    26 U.S. C
    . §1012(a) (2006
    ed., Supp. V), but calculating its “adjusted basis” requires
    the application of a host of legal rules, see §§1011(a) (2006
    ed.), 1016 (2006 ed. and Supp. V), including specialized
    rules for calculating the adjusted basis of a partner’s
    interest in a partnership, see §705 (2006 ed.). The statute
    contains no indication that the misapplication of one of
    those legal rules cannot trigger the penalty. Were we to
    hold otherwise, we would read the word “adjusted” out of
    the statute.
      To overcome the plain meaning of “adjusted basis,”
    Woods asks us to interpret the parentheses in the statutory
    phrase “the value of any property (or the adjusted basis of
    any property)” as a signal that “adjusted basis” is merely
    explanatory or illustrative and has no meaning inde­
    14                UNITED STATES v. WOODS
    
                          Opinion of the Court
    
    pendent of “value.” The parentheses cannot bear that
    much weight, given the compelling textual evidence to the
    contrary. For one thing, the terms reappear later in the
    same sentence sans parentheses—in the phrase “such
    valuation or adjusted basis.” Moreover, the operative
    terms are connected by the conjunction “or.” While that
    can sometimes introduce an appositive—a word or phrase
    that is synonymous with what precedes it (“Vienna or
    Wien,” “Batman or the Caped Crusader”)—its ordinary
    use is almost always disjunctive, that is, the words it
    connects are to “be given separate meanings.” Reiter v.
    Sonotone Corp., 
    442 U.S. 330
    , 339 (1979). And, of course,
    there is no way that “adjusted basis” could be regarded as
    synonymous with “value.” Finally, the terms’ second
    disjunctive appearance is followed by “as the case may be,”
    which eliminates any lingering doubt that the preceding
    items are alternatives. See New Oxford American Dic­
    tionary 269 (3d ed. 2010). The parentheses thus do not
    justify “rob[bing] the term [‘adjusted basis’] of its inde­
    pendent and ordinary significance.” Reiter, supra, at
    338–339.
       Our holding that the valuation-misstatement penalty
    encompasses legal as well as factual misstatements of
    adjusted basis does not make superfluous the new penalty
    that Congress enacted in 2010 for transactions lacking in
    economic substance, see §1409(b)(2), 124 Stat. 1068–1069
    (codified at 
    26 U.S. C
    . §6662(b)(6) (2006 ed., Supp. V)).
    The new penalty covers all sham transactions, including
    those that do not cause the taxpayer to misrepresent value
    or basis; thus, it can apply in situations where the valuation­
    misstatement penalty cannot. And the fact that both
    penalties are potentially applicable to sham transactions
    resulting in valuation misstatements is not problematic.
    Congress recognized that penalties might overlap in a
    given case, and it addressed that possibility by providing
    that a taxpayer generally cannot receive more than one
                         Cite as: 571 U. S. ____ (2013)                   15
    
                              Opinion of the Court
    
    accuracy-related penalty for the same underpayment. See
    §6662(b) (2006 ed. and Supp. V).5
                                  C
      In the alternative, Woods argues that any underpay­
    ment of tax in this case would be “attributable,” not to
    the misstatements of outside basis, but rather to the deter­
    mination that the partnerships were shams—which he
    describes as an “independent legal ground.” Brief for
    Respondent 46. That is the rationale that the Fifth
    and Ninth Circuits have adopted for refusing to apply
    the valuation-misstatement penalty in cases like this,
    although both courts have voiced doubts about it. See
    Bemont, 
    679 F. 3d
    , at 347–348; id., at 351–355 (Prado, J.,
    concurring); Keller v. Commissioner, 
    556 F.3d 1056
    , 1060–
    1061 (CA9 2009).
      We reject the argument’s premise: The economic­
    substance determination and the basis misstatement are
    not “independent” of one another. This is not a case where
    a valuation misstatement is a mere side effect of a sham
    transaction. Rather, the overstatement of outside basis
    was the linchpin of the COBRA tax shelter and the mech­
    anism by which Woods and McCombs sought to reduce
    their taxable income. As Judge Prado observed, in this
    type of tax shelter, “the basis misstatement and the trans­
    action’s lack of economic substance are inextricably inter­
    twined,” so “attributing the tax underpayment only to the
    artificiality of the transaction and not to the basis over­
    
    ——————
      5 We  do not consider Woods’ arguments based on legislative history.
    Whether or not legislative history is ever relevant, it need not be
    consulted when, as here, the statutory text is unambiguous. Mohamad
    v. Palestinian Authority, 
    566 U.S.
    ___, ___ (2012) (slip op., at 8). Nor
    do we evaluate the claim that application of the penalty to legal rather
    than factual misrepresentations is a recent innovation. An agency’s
    failure to assert a power, even if prolonged, cannot alter the plain
    meaning of a statute.
    16               UNITED STATES v. WOODS
    
                         Opinion of the Court
    
    valuation is making a false distinction.” Bemont, supra, at
    354 (concurring opinion). In short, the partners underpaid
    their taxes because they overstated their outside basis,
    and they overstated their outside basis because the part­
    nerships were shams. We therefore have no difficulty
    concluding that any underpayment resulting from the
    COBRA tax shelter is attributable to the partners’ misrep­
    resentation of outside basis (a valuation misstatement).
       Woods contends, however, that a document known as
    the “Blue Book” compels a different result. See General
    Explanation of the Economic Recovery Tax Act of 1981
    (Pub. L. 97–34), 97 Cong., 1st Sess., 333, and n. 2 (Jt.
    Comm. Print 1980). Blue Books are prepared by the staff
    of the Joint Committee on Taxation as commentaries on
    recently passed tax laws. They are “written after passage
    of the legislation and therefore d[o] not inform the deci­
    sions of the members of Congress who vot[e] in favor of the
    [law].” Flood v. United States, 
    33 F.3d 1174
    , 1178 (CA9
    1994). We have held that such “[p]ost-enactment legisla­
    tive history (a contradiction in terms) is not a legitimate
    tool of statutory interpretation.” Bruesewitz v. Wyeth
    LLC, 
    562 U.S.
    ___, ___ (2011) (slip op., at 17–18); accord,
    Federal Nat. Mortgage Assn. v. United States, 
    379 F.3d 1303
    , 1309 (CA Fed. 2004) (dismissing Blue Book as
    “a post-enactment explanation”). While we have relied on
    similar documents in the past, see FPC v. Memphis Light,
    Gas & Water Div., 
    411 U.S. 458
    , 471–472 (1973), our more
    recent precedents disapprove of that practice. Of course
    the Blue Book, like a law review article, may be relevant
    to the extent it is persuasive. But the passage at issue
    here does not persuade. It concerns a situation quite
    different from the one we confront: two separate, non­
    overlapping underpayments, only one of which is attribut­
    able to a valuation misstatement.
                     Cite as: 571 U. S. ____ (2013) 
             17
    
                         Opinion of the Court 
    
    
                            *    *    * 
    
      The District Court had jurisdiction in this partnership­
    level proceeding to determine the applicability of the
    valuation-misstatement penalty, and the penalty is appli­
    cable to tax underpayments resulting from the partners’
    participation in the COBRA tax shelter. The judgment of
    the Court of Appeals is reversed.
                                               It is so ordered.
    

Document Info

DocketNumber: 12-562

Citation Numbers: 134 S. Ct. 557, 187 L. Ed. 2d 472, 2013 U.S. LEXIS 8776

Filed Date: 12/3/2013

Precedential Status: Precedential

Modified Date: 12/5/2017

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