(Slip Opinion)
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` OCTOBER TERM, 2013
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`Syllabus
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`1
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` NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
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` being done in connection with this case, at the time the opinion is issued.
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` The syllabus constitutes no part of the opinion of the Court but has been
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` prepared by the Reporter of Decisions for the convenience of the reader.
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` See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.
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`SUPREME COURT OF THE UNITED STATES
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`Syllabus
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`UNITED STATES v. WOODS
`CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
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`THE FIFTH CIRCUIT
` No. 12–562. Argued October 9, 2013—Decided December 3, 2013
`
`Respondent Gary Woods and his employer, Billy Joe McCombs, partici-
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`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
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`package to Woods and McCombs was substantially less than the cost
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`of the long option alone. Woods and McCombs contributed the
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`spreads, along with cash, to two partnerships, which used the cash to
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`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
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`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.
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`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
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`shams. As there were no valid partnerships for tax purposes, the IRS
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`determined that the partners could not claim a basis for their part-
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`nership interests greater than zero and that any resulting tax under-
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`UNITED STATES v. WOODS
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`Syllabus
`payments would be subject to a 40-percent penalty for gross valua-
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`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:
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`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.
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`
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`(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
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` §§6230(a)(1)–(2), (c),
`tax liability of the individual partners.
`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
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`penalty. Pp. 7–11.
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`2. The valuation-misstatement penalty applies
`Pp. 11–16.
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`(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
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`partner could legitimately claim a basis in his partnership interest
`greater than zero. Any underpayment resulting from use of a non-
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`in this case.
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`Cite as: 571 U. S. ____ (2013)
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`Syllabus
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`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.
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`(b) Woods’ contrary arguments are unpersuasive. The valuation-
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`misstatement penalty encompasses misstatements that rest on legal
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`as well as factual errors, so it is applicable to misstatements that rest
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`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.
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`471 Fed. Appx. 320, reversed.
` SCALIA, J., delivered the opinion for a unanimous Court.
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` Cite as: 571 U. S. ____ (2013)
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`Opinion of the Court
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`1
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` NOTICE: This opinion is subject to formal revision before publication in the
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` preliminary print of the United States Reports. Readers are requested to
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` notify the Reporter of Decisions, Supreme Court of the United States, Wash­
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` ington, D. C. 20543, of any typographical or other formal errors, in order
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` that corrections may be made before the preliminary print goes to press.
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`SUPREME COURT OF THE UNITED STATES
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`_________________
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` 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
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`attributable to valuation misstatements, 26 U. S. C.
`§6662(b)(3), is applicable to an underpayment resulting
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`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
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`developed by the now-defunct law firm Jenkens &
`Gilchrist and marketed by the accounting firm Ernst &
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` UNITED STATES v. WOODS
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`Opinion of the Court
`Young under the name “Current Options Bring Reward
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`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
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`Opinion of the Court
`for the partnership that sought to produce capital losses.
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`The partnerships then terminated the five option spreads
`in exchange for a lump-sum payment from Deutsche
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`Bank.
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`As the tax year drew to a close, Woods and McCombs
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`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
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` UNITED STATES v. WOODS
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`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
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`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
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`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
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`starkly, they were “sham[s]”—so the IRS would disregard
`them for tax purposes and disallow the related losses.
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`Ibid. And because there were no valid partnerships for
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`tax purposes, the IRS determined that the partners had
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`Cite as: 571 U. S. ____ (2013)
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`Opinion of the Court
`“not established adjusted bases in their respective part­
`nership interests in an amount greater than zero,” id., at
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`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-
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`ships were properly disregarded as shams but that the
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`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
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`curiam), reh’g denied (2012).1
`We granted certiorari to resolve a Circuit split over
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`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
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`Courts lacked jurisdiction to consider the valuation­
`——————
`1The District Court held that the partnerships did not have to be
`“honored as legitimate for tax purposes” because they did not possess
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`“ ‘economic substance.’ ” App. to Pet. for Cert. 19a. Woods did not
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`appeal the District Court’s application of the economic-substance
`doctrine, so we express no view on it.
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` UNITED STATES v. WOODS
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`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
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`We begin with a brief explanation of the statutory
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`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
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`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.
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`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)).
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`Under TEFRA, partnership-related tax matters are
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`Opinion of the Court
`addressed in two stages. First, the IRS must initiate
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`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
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`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
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`§§6230(a)(2)(A)(i),
`themselves) partnership
`items.
`6231(a)(5).
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`B
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`Under the TEFRA framework, a court in a partnership­
`level proceeding like this one has jurisdiction to determine
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`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
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`misstatement penalty “relates to” the determination that
`the partnerships Woods and McCombs created were
`shams.
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`The Government’s theory of why the penalty was trig­
`gered is based on a straightforward relationship between
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`the economic-substance determination and the penalty. In
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` UNITED STATES v. WOODS
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`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
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`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
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`short, that a penalty does not relate to a partnership-item
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`adjustment if it “requires a partner-level determination,”
`regardless of “whether or not the penalty has a connection
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`to a partnership item.” Brief for Respondent 27.
`Because §6226(f)’s “relates to” language is “essentially
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`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
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`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
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`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
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`pay his taxes by a large enough amount to trigger the
`penalty; or if they did, the partner may nonetheless have
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`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
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`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
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`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
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`determinations.
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`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
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`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
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` UNITED STATES v. WOODS
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`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
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`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
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`10
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`Cite as: 571 U. S. ____ (2013)
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`Opinion of the Court
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`11
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` the penalty.2
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`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,
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`“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
`
`——————
`2Some 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
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`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”).
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`12
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`UNITED STATES v. WOODS
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`Opinion of the Court
`amount by at least 400 percent, the valuation misstate­
`ment is considered not merely substantial, but “gross,”
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`and the penalty increases to 40 percent. §6662(h).3
`
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`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
`
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`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
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`B
`Against this straightforward application of the statute,
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`3Congress has since lowered the thresholds for substantial and gross
`misstatements to 150 percent and 200 percent, respectively. See
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` Pension Protection Act of 2006, §1219(a)(1)–(2), 120 Stat. 1083.
` 4An 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.
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` Cite as: 571 U. S. ____ (2013)
`
`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