United States v. Woods (12-562)
argument 12-562United States v. Woods
Supreme Court of the United States
1h 0m
7 speakers
8 chapters
transcribed 6 days ago
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What is the central jurisdictional question in United States v. Woods?
We'll hear argument first this morning in case 12-562, United States v. Woods. Mr. Stewart.
Mr. Chief Justice, and may it please the Court, the merits question in this case is whether the substantial valuation misstatement penalty applies when a taxpayer overstates his basis in property in connection with a transaction that is later determined to be a sham. The threshold jurisdictional question is whether the Court in this TEFRA partnership-level proceeding has authority to decide that merits issue. I'd like to begin with the jurisdictional question. And before I focus the Court's attention on the text, I'd like to make two quick preliminary observations about jurisdiction. The first is that the question we say is appropriate for resolution in partnership level proceedings is not whether any individual partner will actually be made to pay the penalty.
There's no question in this case that the determination whether the penalty will actually be imposed on individual partners and if so in what amount is properly reserved for partner level proceedings. The question is simply whether the court in the partnership level proceeding can make the threshold determination whether the sort of error that the IRS identifies on the partnership return can trigger a penalty down the road if the individual partner prepares his or her return in a manner consistent with the partnership return.
Excuse me. I thought I understood that to be your point in your brief, but there is one thing missing from here. I also thought you were saying that you could impose the penalty before the amount was determined on the partnership level, that the tax that you could without a notice of deficiency require payment up front?
MR. There are two separate questions here. The first is what can be determined at the partnership level. And once the partnership-level proceedings are complete, there are subsidiary partner-level proceedings. And some partner-level proceedings require a deficiency notice. Some partner-level proceedings do not. Now, it is part of our position that once the applicability of the penalty has been determined at the partnership level, the penalty can then be imposed on individual partners in partner-level proceedings without a deficiency notice. It can still be challenged through a refund proceeding. But because there's never the imposition of additional tax or penalties on the partnership itself.
That is the incongruity of your position in my mind. You claim that the decision of whether or not or what the true value is of the basis and how much needs to be paid can't be determined until the partnership level — until the partner level determination. Yet you're claiming that you're entitled to an amount of money beforehand, before that decision is made. There's a tension in my mind about
that. Let me explain as best I can the sequence of events that we think would unfold if this Court affirmed our view of the — both held that the courts below had jurisdiction and agreed with our view of the way the penalty is supposed to operate. If the Court agreed with the position that we take in Part 2 of our merits brief, namely that a deduction that is claimed in connection with a transaction that is later determined to be a sham can trigger — if you agree with us on that legal issue, then the IRS would examine the returns of the individual partners and it would verify that they did in fact claim deductions in connection with this transaction because they would have this Court's agreement with the proposition that that's the sort of thing that can trigger the penalty.
They would then determine what the amount of the underpayment was, and they would presumably assess a 40 percent penalty on that. There would be a subsidiary question because the FPA, the Final Partnership Administrative Adjustment, said that the partnerships were shams, but it also said that the individual transactions, the purchases and sales of the options and the currency and the stock they would be treated as though they had been engaged in in by the individual partners and so at the partner level there might be further determinations about what what a relatively small amount of tax the individual partners would owe on that and then if a partner if a penalty were assessed on the partner
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Chapters
8 chapters
1
What is the central jurisdictional question in United States v. Woods?
0:01–9:31
2
How does the government argue the penalty applies to sham partnership transactions?
9:31–18:46
3
Why does the petitioner claim the partnership‑level court can determine penalty applicability?
18:46–27:05
4
What are the practical consequences of imposing the penalty before a deficiency notice?
27:05–33:03
5
How do the parties interpret the phrase “relates to” in the statutory language?
33:03–39:21
6
What role does outside basis play in deciding whether the penalty applies?
39:21–46:26
7
How might differing court rulings affect individual partners under this case?
46:26–53:56
8
What is the Court’s ultimate decision on the merits and jurisdiction of the penalty?
53:56–1:00:50