931 F.3d 1050
11th Cir.2019Background
- Highpoint contributed cash and Euro option contracts to Arbitrage (a Son-of-BOSS shelter) in 1999, claimed an inflated outside basis, withdrew and recognized a large capital loss on sale of the Euros.
- IRS issued an FPAA to Arbitrage finding the partnership a sham lacking economic substance, disallowing basis and losses, and stating a 40% gross valuation-misstatement penalty (I.R.C. § 6662(h)) would apply.
- The Court of Federal Claims (on partnership-level review) sustained the FPAA and the partnership-level determination that the penalty applied, leaving partners able to assert partner-level defenses later.
- IRS issued a Notice of Deficiency to Highpoint including the underlying deficiency and the 40% gross valuation-misstatement penalty; Highpoint petitioned the Tax Court and moved to restrain collection.
- The Tax Court held it lacked deficiency jurisdiction over the partnership-level valuation-misstatement penalty under I.R.C. § 6230(a)(2)(A)(i) and related Treasury regulations and denied the Motion to Restrain as to the penalty.
- The Eleventh Circuit affirmed, concluding the penalty "relates to" adjustments to partnership items (a computational adjustment) and therefore is excluded from Tax Court deficiency jurisdiction; partners may challenge the penalty later in refund or CDP proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Tax Court has deficiency-jurisdiction over a §6662(h) gross valuation-misstatement penalty that was determined at the partnership level where the partnership was found to be a sham | Highpoint: The penalty is an affected item requiring partner-level determinations (outside basis), so it must be subject to Tax Court deficiency proceedings | IRS: The penalty "relates to" an adjustment to a partnership item and is a computational adjustment excluded from Tax Court deficiency jurisdiction by §6230(a)(1)/(a)(2)(A)(i) and Treasury regs | Court: The penalty relates to a partnership-item adjustment and is excluded from Tax Court deficiency jurisdiction; Tax Court correctly denied restraint as to the penalty |
Key Cases Cited
- United States v. Woods, 571 U.S. 31 (2013) (TEFRA permits partnership-level courts to determine applicability of penalties that relate to partnership-item adjustments even if partner-level determinations are needed to impose them)
- Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (discussion of Son-of-BOSS shelters and partnership sham consequences)
- Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012) (definition and application of gross valuation-misstatement penalty)
- RJT Investments X v. Commissioner, 491 F.3d 732 (8th Cir. 2007) (sham partnership determinations qualify as partnership items)