United States v. Woods

Summarized by:

  • Court: United States Supreme Court
  • Area(s) of Law: Tax Law
  • Date Filed: December 3, 2013
  • Case #: 12-562
  • Judge(s)/Court Below: Scalia, J., delivered the opinion for a unanimous Court.
  • Full Text Opinion

The District Court had jurisdiction to decide whether a partnerships' lack of economic substance justified a valuation-misstatement penalty on the partners.

Respondent used an offsetting-option tax shelter to generate large paper losses and thus reduce taxable income. The Internal Revenue Service disregarded the partnerships formed under the tax shelter concluding that they were shams. Respondent challenged assignment of a valuation misstatement tax penalty under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The district court held that the penalty was inapplicable where the transaction used to claim losses was invalid because the partnership lacked “economic substance." The Fifth Circuit affirmed. The Supreme Court granted certiorari to resolve a circuit split over this question.

The Supreme Court reversed the Fifth Circuit decision. TEFRA creates jurisdiction to determine partnership-level items and "the applicability of any penalty ... which relates to an adjustment to a partnership item.” Taking those requirements together, the Supreme Court held that the District Court had jurisdiction to determine whether the partnerships' lack of economic substance justified imposing a valuation misstatement penalty on the partners.

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