Bemont Investments, L.L.C. Ex Rel. Tax Matters Partner v. United States
679 F.3d 339
| 5th Cir. | 2012Background
- Bemont and BPB received FPAAs for 2001 and 2002, disallowing losses from a Son of BOSS–type currency hedge and applying four penalties under § 6662.
- District court granted partial summary judgment foreclosing the 40% gross valuation misstatement penalty.
- Trial court held Bemont’s 2001 FPAA time-barred but upheld disallowance of losses and penalties for 2002.
- Parties cross-appeal: government challenges timeliness ruling and 40% penalty; partnerships challenge the 20% negligence and the substantial understatement penalties.
- The court treats the listed-transaction disclosure regime (§ 6501(c)(10)) and the adequacy of 6112 disclosures as central to the limitations period and penalty analysis.
- The court ultimately reverses the time-bar ruling on Bemont 2001 and upholds the 20% penalties (negligence and substantial understatement) while affirming the denial of the 40% penalty.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 40% valuation misstatement penalty applies when the IRS fully disallows a deduction as a sham | Bemont/ BPB contend no 40% penalty due to lack of valuation reliance | United States argues penalty applies if there was a misstatement attributable to valuation | 40% penalty does not apply; transactions lacked economic substance and were fully disregarded |
| Whether the Bemont 2001 FPAA is time-barred by § 6501(c)(10) after undisclosed listed transactions | Partnerships argue the 1-year extension applies and 2001 FPAA is timely | Government argues no timely disclosure complied with § 6112/Reg. 301.6112-1T | FPAA for 2001 not time-barred; district court’s time-bar ruling reversed |
| Whether the 20% negligence penalty is proper | Partnerships fault the penalty defense and rely on reasonable cause/good faith | IRS argues negligence applies given lack of due care and reliance on advisor | 20% negligence penalty affirmed for both 2001 and 2002 |
| Whether the 20% substantial understatement penalty applies | Partnerships contend substantial authority or other defenses apply | IRS maintains substantial understatement penalty appropriate | Substantial understatement penalty upheld; substantial authority defense rejected |
| Whether the Streber framework governs substantial authority in this case | Streber supports factual basis for substantial authority | Streber does not apply; Treas. Reg. governs authority standards | Streber not applicable; substantial authority issue resolved against partnerships |
Key Cases Cited
- Todd v. Comm'r, 862 F.2d 540 (5th Cir. 1988) (valuation overstatement penalty; Blue Book guidance; attribution of tax underpayment)
- Heasley v. Comm'r, 902 F.2d 380 (5th Cir. 1990) (totally disallowed deductions negate valuation misstatement penalty)
- Streber v. Comm'r, 138 F.3d 216 (5th Cir. 1998) (substantial authority—fact vs. legal authority distinction; limitations on defenses)
- Fidelity Int'l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667 (1st Cir. 2011) (majority view rejecting Todd/Heasley against valuation penalty in sham contexts)
- Merino v. Comm'r, 196 F.3d 147 (3d Cir. 1999) (affirming valuation overstatement penalty where overvaluation essential to tax benefit)
- Zfass v. Comm'r, 118 F.3d 184 (4th Cir. 1997) (rejection of Todd/Heasley in valuation context where overstatement central to tax)