Supreme Court Applies Valuation Misstatement Penalties

The U.S. Supreme Court unanimously decided this morning, per Justice Antonin Scalia‘s pen, that an IRS penalty applies for misstating a value on property (U.S. v. Gary Woods, 2013), reversing the Texas-based federal 5th Circuit Court of Appeals. Mr Woods and his employer, Mr McCombs, participated in an income-offsetting tax shelter in the 1990s marketed to high income earners. The tax shelter used a complicated series of investments and partnership interests to reduce their income for tax purposes. The district court found their partnership a sham – not surprising, since partnerships or corporations must have a legitimate business purpose, and avoiding taxes isn’t a legitimate business purpose. (Partnerships, corporations, or LLCs with legitimate business purposes are great for streamlining taxes, but the IRS doesn’t allow shams just to lower the tax bill. Lowering your taxes can be the icing, but you need a cake underneath the frosting, not just a pile of frosting you dub a “cake.”) But the courts wrestled with interpreting the IRS Code: the taxpayers had misstated property values. Could the IRS penalize them for misstating property values (e.g. “you lied about the value, and now owe a penalty for your dishonesty”), or would the IRS say “oops, you wrote down the wrong number, just pay us the difference”? The Supreme Court decided 9-0 that the IRS could penalize them for misstating the property value. The moral of Woods is the IRS can exact penalties for misstating property values, so be sure you have accurate appraisals and carefully prepare or review your tax filings. While Woods has some nice statutory interpretation quotes that legal eagles will enjoy (Justice Scalia has strong views on interpreting texts and statutes that often surface in scathing and witty dissents on various cultural issues, and is a lively writer and speaker – see A Matter of Interpretation (1997), Making Your Case (2008), and Reading Law (2012)), it’s not clear that Woods will have much impact beyond deciding that the IRS can penalize misstatements in property value.

My firm has experience working with individuals and families throughout the business and estate planning processes. If my law firm can help you or your family with your estate planningelder lawasset protectionbusiness law needs, or digital estate planning, call me (913-707-9220) or email me ( for a free, convenient appointment.

IRS CIRCULAR 230 Disclosure: Unless expressly stated otherwise, any U.S. federal tax advice contained in this blog post or links is not intended or written by Johnson Law KC LLC to be used to avoid IRS or other tax penalties, and any tax advice cannot be used to avoid penalties that may be imposed by the IRS.

(c) 2013, Stephen M. Johnson, Esq.


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