Supreme Court Upholds 40 Percent Valuation Misstatement Penalty

US Supreme Court

The U.S. Supreme court recently upheld the 40 percent penalty in gross valuation misstatement when the partnerships involved were determined to be shams with no economic substance and as such, the partners’ outside basis in the partnership was zero.  The unanimous decision, written by Justice Scalia, resolved a split among the circuit courts as to whether the penalty applied.  The Fifth Circuit Court, where the case originated, and the Ninth Circuit held that the penalty did not apply when the transaction had been disregarded on the grounds of economic substance.  The ruling also settled a disagreement among the courts as to whether district courts have jurisdiction to determine whether the penalty applies in a partner-level proceeding.  For full details of the case involved in this highly important ruling, please visit the Journal of Accountancy.   

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