AHG Investments, LLC, Alan Ginsburg, A Partner Other Than the Tax Matters Partner v. Commissioner

AHG INVESTMENTS, LLC, ALAN GINSBURG, A PARTNER OTHER
THAN THE TAX MATTERS PARTNER, PETITIONER
v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 3745–09. Filed March 14, 2013.
R issued a notice of final partnership administrative adjust-
ment (FPAA) determining adjustments to income on multiple
grounds. The FPAA also determined an I.R.C. sec. 6662 40%
gross valuation misstatement penalty, as well as other pen-
alties. P conceded the adjustments to income on grounds other
than valuation or basis in an attempt to avoid the gross valu-
ation misstatement penalty and filed a motion for partial
summary judgment that this penalty does not apply as a
matter of law. Held: A taxpayer may not avoid application of
the gross valuation misstatement penalty merely by conceding
on grounds unrelated to valuation or basis. We will deny P’s
motion for partial summary judgment.
Thomas A. Cullinan, for petitioner.
George W. Bezold, for respondent.
OPINION
GOEKE, Judge: This case is before the Court on petitioner’s
motion for partial summary judgment filed pursuant to Rule
121, 1 to which respondent objects. Respondent issued a
notice of final partnership administrative adjustment (FPAA)
to petitioner, a partner other than the tax matters partner
(TMP) of AHG Investments, LLC (AHG Investments). The
major adjustment in the FPAA was to disallow $10,069,505
in losses allocated to petitioner for taxable years 2001 and
2002. Petitioner conceded on grounds other than valuation or
basis that the FPAA adjustments were correct in an attempt
to avoid application of the 40% gross valuation misstatement
penalty and has filed a motion for partial summary judgment
that this penalty does not apply as a matter of law. For the
reasons stated herein, we will deny petitioner’s motion.
1 Unless otherwise indicated, all Rule references are to the Tax Court
Rules of Practice and Procedure, and all section references are to the Inter-
nal Revenue Code in effect for the years in issue.
73
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74 140 UNITED STATES TAX COURT REPORTS (73)
Background
The relevant facts are not in dispute. During the years at
issue petitioner was a partner other than the TMP of AHG
Investments. At the time the petition was filed he resided in
Florida. Also during the years at issue AHG Investments’
TMP was Helios Trading, LLC. At the time the petition was
filed the mailing address for Helios Trading, LLC, was in
Illinois. It was not established where AHG Investments’ prin-
cipal place of business was or whether AHG Investments had
been dissolved at the time the petition was filed.
Respondent’s FPAA enumerated 14 alternative grounds in
support of the adjustments and asserted 40% accuracy-
related penalties under section 6662 for the portions of the
underpayments of tax resulting from adjustments of partner-
ship items attributable to a gross valuation misstatement. 2
In the petition, petitioner conceded the FPAA adjustments
were correct on the ground that petitioner was not at risk
under section 465 and thus was not entitled to deduct certain
attributed losses. In an amendment to the petition, petitioner
also conceded that the FPAA adjustments were correct on the
ground that the transaction at issue did not have substantial
economic effect under section 1.704–1(b), Income Tax Regs.
Both section 465 and section 1.704–1(b), Income Tax Regs.,
were among the grounds on which respondent supported the
adjustments made in the FPAA.
Petitioner filed a motion for partial summary judgment
regarding the 40% gross valuation misstatement penalty,
arguing that this penalty does not apply as a matter of law
because petitioner conceded the correctness of adjustments
proposed in the FPAA on grounds unrelated to valuation or
basis. Respondent contests petitioner’s motion for partial
summary judgment.
2 Respondent
also determined 20% accuracy-related penalties applied to
the portion of each underpayment resulting from adjustments of partner-
ship items attributable to negligence or disregard of rules or regulations,
a substantial understatement of income tax, or a substantial valuation
misstatement.
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(73) AHG INVS., LLC v. COMMISSIONER 75
Discussion
I. Summary Judgment
Rule 121(a) provides that either party may move for sum-
mary judgment upon all or any part of the legal issues in
controversy. Full or partial summary judgment may be
granted only if it is demonstrated that no genuine dispute
exists as to any material fact and that the issues presented
by the motion may be decided as a matter of law. See Rule
121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), aff ’d, 17 F.3d 965 (7th Cir. 1994). We conclude that
there is no genuine dispute as to any material fact and that
a decision may be rendered as a matter of law.
II. Gross Valuation Misstatement Penalty
Under section 6662(h), a taxpayer may be liable for a 40%
penalty on any portion of an underpayment of tax attrib-
utable to a gross valuation misstatement. A gross valuation
misstatement exists if the value or adjusted basis of any
property claimed on a tax return is 400% or more of the
amount determined to be the correct amount of such value
or adjusted basis. Sec. 6662(h)(2)(A). Whether there is a
gross valuation misstatement in the partnership context is
determined at the partnership level. Sec. 1.6662–5(h)(1),
Income Tax Regs.
We have previously held that when the Commissioner
asserts a ground unrelated to value or basis of property for
totally disallowing a deduction or credit and a taxpayer con-
cedes the deduction or credit on that ground, any under-
payment resulting from the concession is not attributable to
a gross valuation misstatement. 3 Bergmann v. Commis-
sioner, 137 T.C. 136, 145 (2011) (citing McCrary v. Commis-
sioner, 92 T.C. 827, 851–856 (1989)). Today we depart from
this holding, instead ruling that a taxpayer may not avoid
the gross valuation misstatement penalty merely by con-
3 In addition, we have extended that holding to situations where the tax-
payer does not state the specific ground upon which the concession of the
deduction or credit is based so long as the Commissioner has asserted
some ground other than value or basis for totally disallowing the relevant
deduction or credit. Bergmann v. Commissioner, 137 T.C. 136, 145 (2011)
(citing Rogers v. Commissioner, T.C. Memo. 1990–619, and Schachter v.
Commissioner, T.C. Memo. 1994–273).
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76 140 UNITED STATES TAX COURT REPORTS (73)
ceding a deduction or credit on a ground unrelated to value
or basis of property.
A. McCrary and Todd Cases
In McCrary v. Commissioner, 92 T.C. 827 (1989), the tax-
payers entered into a purported lease of a master recording
and claimed resulting investment tax credits. Before trial
they conceded that they were not entitled to the claimed
investment tax credit because the agreement was not a lease.
They did not contest the fair market value of the master
recording at trial, although other issues were addressed. We
held that the gross valuation misstatement penalty was inap-
plicable as a result of their concession. In disagreeing with
the Commissioner’s argument that a taxpayer cannot selec-
tively concede a ground for disallowance in order to avoid an
addition to tax, we relied on the logic of a prior Tax Court
case, Todd v. Commissioner, 89 T.C. 912 (1987) (Todd I),
aff ’d, 862 F.2d 540 (5th Cir. 1988) (Todd II). We also exten-
sively discussed and relied upon the Court of Appeals for the
Fifth Circuit’s affirmation of Todd I in Todd II.
The facts in Todd I were similar to those in McCrary; how-
ever, the taxpayers in Todd I did not make a concession on
a ground other than valuation or basis as in McCrary. 4
Rather, in Todd I we had already disallowed claimed deduc-
tions and credits on a ground other than valuation or basis
after a trial. Noonan v. Commissioner, T.C. Memo. 1986–449,
aff’d without published opinion sub nom. Hillendahl v.
Commissioner, 976 F.2d 737 (9th Cir. 2012).
In analyzing the gross valuation misstatement penalty
statute (section 6659 at the time), the Court of Appeals for
the Fifth Circuit in Todd II stated that ‘‘Unfortunately, none
of the formal legislative history provides a method for calcu-
lating whether a given tax underpayment is attributable to
a valuation overstatement.’’ Todd II, 862 F.2d at 542. The
Court of Appeals proceeded to adopt the same formula we
applied in Todd I, stating:
4 In Todd v. Commissioner, 89 T.C. 912, 919 (1987) (Todd I), aff ’d, 862
F.2d 540 (5th Cir. 1988) (Todd II), we recognized the potential for a tax-
payer to concede on a ground other than valuation or basis, posing a rhe-
torical question: [‘‘I]f a taxpayer were to concede that an asset was not
placed in service and that no deductions or credits are allowable in order
to avoid an addition to tax, could that concession reasonably be refused?’’
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(73) AHG INVS., LLC v. COMMISSIONER 77
Such a formula is found, however, in the General Explanation of the
Economic Recovery Tax Act of 1981, or ‘‘blue book,’’ prepared by the staff
of the Joint Committee on Taxation. Though not technically legislative
history, the Supreme Court relied on a similar blue book in construing
part of the Tax Reform Act of 1969, calling the document a ‘‘compelling
contemporary indication’’ of the intended effect of the statute. The com-
mittee staff explained § 6659’s operation as follows:
‘‘The portion of a tax underpayment that is attributable to a valuation
overstatement will be determined after taking into account any other
proper adjustments to tax liability. Thus, the underpayment resulting
from a valuation overstatement will be determined by comparing the
taxpayer’s (1) actual tax liability (i.e., the tax liability that results from
a proper valuation and which takes into account any other proper
adjustments) with (2) actual tax liability as reduced by taking into
account the valuation overstatement. The difference between these two
amounts will be the underpayment that is attributable to the valuation
overstatement.’’
* * * * * * *
Applying this formula, the Tax Court determined that no portion of the
Todds’ tax underpayment was attributable to their valuation overstate-
ments. The Todds’ actual tax liability, * * * did not differ from their
actual tax liability adjusted for the valuation overstatements. In other
words * * * the Todds’ valuation of the property supposedly generating
the tax benefits had no impact whatsoever on the amount of tax actually
owed. Since the legislative history of § 6659 provides no alternative
method of applying the statute, we are persuaded that the formula con-
tained in the committee staff ’s explanation evidences congressional
intent with respect to calculating underpayments subject to the penalty.
[Id. at 542–543 (fn. refs. omitted) (quoting Staff of the Joint Com-
mittee on Taxation, General Explanation of the Economic Recovery Tax
Act of 1981, at 333 (J. Comm. Print 1981) (Blue Book)).]
The Court of Appeals in Todd II also quoted an example
from the Blue Book which states:
‘‘The determination of the portion of a tax underpayment that is attrib-
utable to a valuation overstatement may be illustrated by the following
example. Assume that in 1982 an individual files a joint return showing
taxable income of $40,000 and tax liability of $9,195. Assume, further,
that a $30,000 deduction which was claimed by the taxpayer as the
result of a valuation overstatement is adjusted down to $10,000, and
that another deduction of $20,000 is disallowed totally for reasons apart
from the valuation overstatement. These adjustments result in correct
taxable income of $80,000 and correct tax liability of $27,505. Accord-
ingly, the underpayment due to the valuation overstatement is the dif-
ference between the tax on $80,000 ($27,505) and the tax on $60,000
($17,505) (i.e., actual tax liability reduced by taking into account the
deductions disallowed because of the valuation overstatement), or $9,800
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78 140 UNITED STATES TAX COURT REPORTS (73)
[sic].’’ [Todd II, 862 F.2d at 543 (alteration in original) (fn. ref. omitted)
(quoting Blue Book at 333 n.2).]
The Court of Appeals concluded that ‘‘Congress intended
* * * [the Blue Book] formula to be applied in determining
liability for the’’ gross valuation misstatement penalty. Id.
The Court in Todd II reasoned that other considerations
supported its holding, stating that ‘‘Congress may not have
wanted to burden the Tax Court with deciding difficult valu-
ation issues where a case could be easily decided on other
grounds’’ 5 and that ‘‘Congress may have wanted to moderate
the application of the section 6659 penalty so that it would
not be imposed on taxpayers whose overvaluation was irrele-
vant to the determination of their actual tax liability.’’ Id. at
544. The Court of Appeals additionally stated that its holding
would not lead to anomalous results, that the effects of its
holding ‘‘may not be as inequitable as’’ the Commissioner
claimed, and that ‘‘the fear that taxpayers will deny profit
motivation to avoid section 6659 penalties, is unimpressive.’’
Id. at 545. In McCrary, we quoted extensively portions of
Todd II relating to these considerations, finding the argu-
ment persuasive and adopting the rule in the case. McCrary
v. Commissioner, 92 T.C. at 853–854 (‘‘Following this lan-
guage, we feel compelled * * * to apply the formula referred
to by the Court of Appeals and in our Todd opinion[.]’’).
B. Cases Following McCrary and Todd
In addition to the Tax Court, the Court of Appeals for the
Ninth Circuit has also adopted the reasoning of and holding
in Todd II. 6 See Gainer v. Commissioner, 893 F.2d 225, 227
(9th Cir. 1990) (‘‘We agree with the reasoning employed by
the Fifth Circuit in Todd.’’), aff ’g T.C. Memo. 1988–416.
5 The Court of Appeals further stated that Congress saw the gross valu-
ation misstatement penalty ‘‘as a measure to help the Tax Court control
its docket.’’ Todd II, 862 F.2d at 544 (citing H.R. Conf. Rept. No. 98–861,
at 985 (1984), 1984–3 C.B. (Vol. 2) 1, 239).
6 The Supreme Court has not ruled on the issue addressed in Todd II,
but the U.S. Government has recently filed a petition for a writ of certio-
rari as a result of the Court of Appeals for the Fifth Circuit’s ruling for
the taxpayer on a closely related issue in Woods v. United States, 471 Fed.
Appx. 320 (5th Cir. 2012). The Supreme Court has not yet granted or de-
nied the Government’s petition.
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(73) AHG INVS., LLC v. COMMISSIONER 79
However, many other Courts of Appeals have rejected Todd
II as an incorrect interpretation of the Blue Book formula.
In Fid. Int’l Currency Advisor A Fund, LLC v. United
States, 661 F.3d 667 (1st Cir. 2011) (Fidelity International),
the Court of Appeals for the First Circuit encountered facts
similar to those in Todd I. In Fidelity International, 661 F.3d
at 673–674, the Court of Appeals reviewed Todd II and con-
cluded that ‘‘Todd rests on a misunderstanding of the sources
relied on’’ and noted that ‘‘the Ninth Circuit followed Todd’s
misreading in Gainer’’. The Court of Appeals for the First
Circuit noted that Todd II and Gainer represented a
minority view, in opposition to ‘‘the dominant view of the cir-
cuits that have addressed this issue.’’ Id. at 674. Regarding
the Blue Book formula relied on in Todd II, the Court of
Appeals in Fidelity International, 661 F.3d at 674, stated:
In our view, * * * [the Blue Book formula] is designed to avoid attrib-
uting to a basis or value misstatement an upward adjustment of taxes
that is unrelated to the overstatement but due solely to some other tax
reporting error * * *. This is surely what the quoted language means
in excluding from the overstatement penalty increased taxes due to ‘‘any
other proper adjustments.’’ This is quite different from excusing an over-
statement because it is one of two independent, rather than the sole,
cause of the same underreporting error.
In Alpha I, L.P. v. United States, 682 F.3d 1009 (Fed. Cir.
2012), the Court of Appeals for the Federal Circuit reversed
a Court of Federal Claims ruling that the gross valuation
misstatement penalty did not apply when a taxpayer con-
ceded the Commissioner’s adjustments on grounds other than
basis or valuation. The Court of Appeals noted that ‘‘The
Court of Federal Claims cited several cases to support its
decision to defer to the terms of the partnerships’ concession
without further scrutiny, two of which it found particularly
persuasive:’’ Todd II and Gainer. Id. at 1027–1028. The
Court of Appeals in Alpha I proceeded to reject ‘‘the legal
analysis employed in Todd and Gainer, finding it flawed in
material respects.’’ Id. at 1028. Reviewing the Blue Book for-
mula and example relied on in Todd II, the Court of Appeals
in Alpha I stated that
[t]he Blue Book, in sum, offers the unremarkable proposition that,
when the IRS disallows two different deductions, but only one disallow-
ance is based on a valuation misstatement, the valuation misstatement
penalty should apply only to the deduction taken on the valuation
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80 140 UNITED STATES TAX COURT REPORTS (73)
misstatement, not the other deduction, which is unrelated to valuation
misstatement.
The court in Todd mistakenly applied that simple rule to a situation
in which the same deduction is disallowed based on both valuation
misstatement- and non-valuation-misstatement theories. * * *
[Id. at 1029.]
The Court of Appeals concluded that ‘‘the flaws in the anal-
ysis employed in Todd and Gainer’’ were ‘‘apparent’’. Id.
In Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir.
2012), aff ’g T.C. Memo. 2011–195, the Court of Appeals for
the Eleventh Circuit affirmed a Tax Court case which held
the taxpayers liable for the gross valuation misstatement
penalty. 7 On appeal the taxpayers contended that because
the transaction lacked economic substance there was no
value or basis to misstate and therefore nothing to trigger
the valuation misstatement penalties. The taxpayers also
attempted to concede their position generally after losing in
the Tax Court.
Regarding the concession, the Court of Appeals in
Gustashaw stated that the taxpayer ‘‘did not raise this argu-
ment before the Tax Court, and we therefore decline to con-
sider it for the first time on appeal. * * * Even if we were
to consider this argument, it is substantially intertwined
with and relies on a minority line of cases whose reasoning
we reject infra.’’ Id. at 1135 n.5. The Court of Appeals
rejected the reasoning in Todd II and Gainer, stating that
the Court of Appeals in Todd II ‘‘misapplied’’ the Blue Book
guidance and echoed the previously quoted language of the
Court of Appeals for the First Circuit in Fidelity Inter-
national. See supra p. 79.
Even the Courts of Appeals for the Fifth and Ninth Cir-
cuits have strongly suggested that Todd II and Gainer are
erroneous, although both courts continue to follow the
holdings of those cases on the basis of stare decisis. In Keller
v. Commissioner, 556 F.3d 1056, 1061 (9th Cir. 2009), aff ’g
in part, rev’g in part T.C. Memo. 2006–131, the Court of
Appeals for the Ninth Circuit recognized ‘‘that many other
circuits have’’ rejected the logic of Gainer and that those cir-
7 TheTax Court case did not address Todd I or Todd II and distin-
guished Gainer v. Commissioner, 893 F.2d 225 (9th Cir. 1990). See
Gustashaw v. Commissioner, T.C. Memo. 2011–195, slip op. at 22–23,
aff ’d, 696 F.3d 1124 (11th Cir. 2012).
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(73) AHG INVS., LLC v. COMMISSIONER 81
cuits’ ‘‘sensible method of resolving overvaluation cases cuts
off at the pass what might seem to be an anomalous result—
allowing a party to avoid tax penalties by engaging in
behavior one might suppose would implicate more tax pen-
alties, not fewer.’’ However, the Court of Appeals declined to
follow the majority rule, stating: ‘‘Nonetheless, in this circuit
we are constrained by Gainer.’’ Id.
In Bemont Invs., L.L.C. v. United States, 679 F.3d 339 (5th
Cir. 2012), a three-judge panel of the Court of Appeals for
the Fifth Circuit again applied Todd II in rejecting applica-
tion of the gross valuation misstatement penalty. However,
all three judges joined a special concurrence by Judge Prado
which questioned the logic of Todd II. After noting that the
court’s ‘‘hands * * * [were] tied’’ because the court was
‘‘precedent-bound to follow’’ the Todd II rule, Judge Prado
discussed the Blue Book guidance, stating: ‘‘The Blue Book’s
formula and example are expressing a straightforward prin-
ciple in mathematical terms: Do not apply the valuation
overstatement penalty to a tax infraction, such as an
improper charitable deduction, that is unrelated to (i.e.,
incapable of being attributed to) the valuation overstate-
ment.’’ Id. at 351–352, 354 (Prado, J., concurring). Judge
Prado opined that ‘‘the Todd court misread the Blue Book’s
elementary guidance’’ and noted that opposition to Todd II is
‘‘near-unanimous.’’ Id. at 352, 354 (citing cases from the
Courts of Appeals for the First, Second, Third, Fourth, Sixth,
and Eighth Circuits). 8 Judge Prado finally disagreed with
Todd II on policy grounds, stating that the case ‘‘frustrates
the purpose of the valuation-misstatement penalty’’ by ‘‘cre-
ating * * * [a] perverse incentive structure’’ whereby tax-
payers are encouraged to not solely misstate the value of
assets, but to create even more ‘‘extreme scheme[s]’’ so that
they may concede a case on grounds other than basis or valu-
ation if found out. Id. at 355.
8 The
cited opinions were: Fid. Int’l Currency Advisor A Fund, LLC v.
United States, 661 F.3d 667, 673–674 (1st Cir. 2011); Merino v. Commis-
sioner, 196 F.3d 147, 158 (3d Cir. 1999), aff ’g T.C. Memo. 1997–385; Zfass
v. Commissioner, 118 F.3d 184, 191 (4th Cir. 1997), aff ’g T.C. Memo.
1996–167; Illes v. Commissioner, 982 F.2d 163, 167 (6th Cir. 1992), aff ’g
T.C. Memo. 1991–449; Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir.
1991), aff ’g T.C. Memo. 1989–684; and Massengill v. Commissioner, 876
F.2d 616, 619–620 (8th Cir. 1989), aff ’g T.C. Memo. 1988–427.
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82 140 UNITED STATES TAX COURT REPORTS (73)
C. Appellate Jurisdiction
It is not clear to which Court of Appeals an appeal of this
case would lie. Section 7482(b)(1)(E) provides that generally
a Tax Court decision following a petition under section 6226
(i.e., a petition resulting from issuance of an FPAA) shall be
appealable to the U.S. Court of Appeals for the circuit in
which ‘‘the principal place of business of the partnership’’ is
located. 9 However, section 7482(b)(1) provides that if section
7482(b)(1)(E) does not apply then ‘‘such decisions may be
reviewed by the Court of Appeals for the District of
Columbia.’’ In addition, section 7482(b)(2) provides that ‘‘Not-
withstanding the provisions of * * * [section 7482(b)(1)],
such decisions may be reviewed by any United States Court
of Appeals which may be designated by the Secretary and
the taxpayer by stipulation in writing.’’
Not only have the parties not established where AHG
Investments’ principal place of business was at the time the
petition under section 6226 was filed; it was not established
whether AHG Investments had a principal place of business
at that time. See, e.g., Peat Oil & Gas Assocs. v. Commis-
sioner, T.C. Memo. 1993–130, 1993 Tax Ct. Memo LEXIS
130, at *17 (parties failed to establish whether partnerships
at issue ‘‘had no principal place of business so that venue for
appeal is the Court of Appeals for the District of Columbia’’).
In addition, the parties have not stipulated (or otherwise
agreed) to appeal the case to a specific U.S. Court of Appeals.
See sec. 7482(b)(2).
On the basis of the record before us, it appears that an
appeal of this case would lie to the Court of Appeals for the
D.C. Circuit, 10 which has not ruled on the gross valuation
misstatement penalty issue. There is no evidence that an
appeal would lie to the Court of Appeals for the Fifth or
Ninth Circuit.
9 For
purposes of sec. 7482(b)(1), a partnership’s principal place of busi-
ness shall be determined as of the time the petition under sec. 6226 was
filed with the Tax Court.
10 While it appears AHG Investments was dissolved at some point after
2001, the status of AHG Investments was not conclusively established for
purposes of petitioner’s motion.
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(73) AHG INVS., LLC v. COMMISSIONER 83
D. Stare Decisis and Departure From Todd and McCrary
In Vasquez v. Hillery, 474 U.S. 254, 265–266 (1986), the
Supreme Court stated:
[T]he important doctrine of stare decisis [is] the means by which we
ensure that the law will not merely change erratically, but will develop
in a principled and intelligible fashion. * * * While stare decisis is not
an inexorable command, the careful observer will discern that any
detours from the straight path of stare decisis in our past have occurred
for articulable reasons, and only when the Court has felt obliged ‘‘to
bring its opinions into agreement with experience and with facts newly
ascertained.’’ Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 412
(1932) (Brandeis, J., dissenting).
Our history does not impose any rigid formula to constrain the Court
in the disposition of cases. Rather, its lesson is that every successful pro-
ponent of overruling precedent has borne the heavy burden of per-
suading the Court that changes in society or in the law dictate that the
values served by stare decisis yield in favor of a greater objective. * * *
We have stated that stare decisis ‘‘generally requires that
we follow the holding of a previously decided case, absent
special justification. This doctrine is of particular importance
when the antecedent case involves statutory construction.’’
Sec. State Bank v. Commissioner, 111 T.C. 210, 213–214
(1998), aff ’d, 214 F.3d 1254 (10th Cir. 2000); see also
Hesselink v. Commissioner, 97 T.C. 94, 99–100 (1991); BLAK
Invs. v. Commissioner, T.C. Memo. 2012–273, at *10. ‘‘There-
fore, respondent bears the heavy burden of persuading us
that we should overrule our established precedent.’’ BLAK
Invs. v. Commissioner, at *10.
We find that respondent has met his burden to persuade
us to overrule our precedent established by Todd I and
McCrary. In those cases we reasoned that if another ground
besides valuation overstatement supports a deficiency, that
deficiency cannot be attributable to a valuation overstate-
ment. However, the alternative view has been adopted by the
majority of the U.S. Courts of Appeals. These Courts of
Appeals have reached the same result as the dissent in
McCrary. See McCrary v. Commissioner, 92 T.C. at 860–866
(Gerber, J., dissenting). Even the Courts of Appeals for the
Fifth and Ninth Circuits (which continue to follow the
minority rule) have strongly suggested that the majority rule
is the correct one.
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84 140 UNITED STATES TAX COURT REPORTS (73)
Today we depart from our precedent following the minority
rule and side with the majority rule. By doing so we recog-
nize that an underpayment of tax may be attributable to a
valuation misstatement even when the Commissioner’s deter-
mination of an underpayment of tax may also be sustained
on a ground unrelated to basis or valuation. We agree with
Judge Prado of the Court of Appeals for the Fifth Circuit
that the Blue Book’s formula and example merely express ‘‘a
straightforward principle in mathematical terms: Do not
apply the valuation overstatement penalty to a tax infrac-
tion, such as an improper charitable deduction, that is unre-
lated to (i.e., incapable of being attributed to) the valuation
overstatement.’’ 11 Bemont Invs., L.L.C., 679 F.3d at 352
(Prado, J., concurring).
In reaching our holding we have considered factors other
than those relating to the Blue Book formula and example.
The most prominent of these secondary factors regards
judicial economy. In McCrary we supported our decision in
part by noting that it would encourage taxpayers to settle
cases involving the valuation misstatement penalty and thus
avoid trials on difficult valuation issues. See McCrary v.
Commissioner, 92 T.C. at 853–854.
Although our ruling today may reduce the number of cases
conceded by taxpayers attempting to avoid gross valuation
misstatement penalties, 12 concerns relating to judicial
economy are not a sufficient reason to disregard or continue
to incorrectly apply the clear formula and example in the
Blue Book. See id. at 863 (Gerber, J., dissenting) (‘‘Judicial
economy should apply to situations where alternative
grounds are available to support the same determination.’’).
Indeed, our ruling today may improve judicial economy in
the long term by discouraging taxpayers from engaging in
tax-avoidance practices. See Gustashaw v. Commissioner, 696
11 We
agree with McCrary v. Commissioner, 92 T.C. 827 (1989), and
Todd I that the Blue Book formula and example represent the correct
method of calculating the portion of an underpayment of tax to which the
gross valuation misstatement penalty may be applied (i.e., that the for-
mula represents how Congress intended the penalty to be applied). How-
ever, we rule today that the formula yields a different result than the re-
sult reached in those cases.
12 We acknowledge that our ruling today might lead to more trials on
questions of valuation.
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(73) AHG INVS., LLC v. COMMISSIONER 85
F.3d at 1136–1137; Alpha I, L.P., 682 F.3d at 1030 (‘‘An
interpretation of the statute that allows imposition of a valu-
ation misstatement penalty even when other grounds are
asserted furthers the congressional policy of deterring abu-
sive tax avoidance practices.’’); Bemont Invs., L.L.C., 679 F.3d
at 355 (Prado, J., concurring) (‘‘As a policy matter, the Todd
* * * rule could incentivize improper tax behavior.’’); Fidelity
International, 661 F.3d at 673 (although ‘‘alternative grounds
with lower or no penalties existed for disallowing the same
claimed losses,’’ such a fact ‘‘hardly detracts from the need to
penalize and discourage the gross value misstatements’’).
In addition, we find the other factors mentioned in
McCrary in support of its ruling (regarding equitable consid-
erations and moderation of penalties) to be similarly uncon-
vincing. Over the years certain taxpayers have purposefully
used the holdings in Todd I and McCrary to avoid gross valu-
ation misstatement penalties which would otherwise apply to
them. See Bemont Invs., L.L.C., 679 F.3d at 355 (Prado, J.,
concurring) (under the Todd II rule, ‘‘by crafting a more
extreme scheme and generating a deduction that is improper
not only due to a basis misstatement, but also for some other
reason’’ taxpayers have increased their ‘‘chance[s] of avoiding
the valuation-misstatement penalty’’). We believe that over
the years the actions taken by such taxpayers have
‘‘frustrate[d] the purpose of the valuation-misstatement pen-
alty’’. Id.
For the foregoing reasons, we conclude that a taxpayer
may not avoid application of the gross valuation
misstatement penalty merely by conceding on grounds unre-
lated to valuation or basis.
III. Conclusion
We hold that petitioner’s concessions under section 465
and section 1.704–1(b), Income Tax Regs., do not prevent
application of the gross valuation misstatement penalty to
the underpayments of tax as a matter of law. Therefore, we
will deny petitioner’s motion for partial summary judgment
under Rule 121. In reaching our holding, we have considered
all arguments made, and, to the extent not mentioned above,
we conclude they are moot, irrelevant, or without merit.
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86 140 UNITED STATES TAX COURT REPORTS (73)
To reflect the foregoing,
An appropriate order will be issued
denying petitioner’s motion for partial sum-
mary judgment.
Reviewed by the Court.
THORNTON, HALPERN, FOLEY, VASQUEZ, GALE, MARVEL,
WHERRY, KROUPA, HOLMES, PARIS, KERRIGAN, and LAUBER,
JJ., agree with this opinion of the Court.
GUSTAFSON, MORRISON, and BUCH, JJ., did not participate
in the consideration of this opinion.
f
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