Tuesday, December 3, 2013

Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (12/3/13)

In United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Court rejected procedural arguments and applied the special 40% accuracy related penalty for valuation and basis overstatements.  §§6662(a), (b)(3), (e)(1)(A), (h).  The unanimous opinion is written  by Justice Scalia, the plain language justice, who not surprisingly concludes:  "The penalty’s plain language makes it applicable here."

I am sure others and even I will have a lot to say about the opinion and its ramifications later. For now, this caught my eye as Justice Scalia jabs at the use of the Blue Book:
Woods contends, however, that a document known as the “Blue Book” compels a different result. See General Explanation of the Economic Recovery Tax Act of 1981 (Pub. L. 97–34), 97 Cong., 1st Sess., 333, and n. 2 (Jt.Comm. Print 1980). Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” Flood v. United States, 33 F. 3d 1174, 1178 (CA9 1994). We have held that such “[p]ost-enactment legislative history (a contradiction in terms) is not a legitimatetool of statutory interpretation.” Bruesewitz v. Wyeth LLC, 562 U. S. ___, ___ (2011) (slip op., at 17–18); accord, Federal Nat. Mortgage Assn. v. United States, 379 F. 3d 1303, 1309 (CA Fed. 2004) (dismissing Blue Book as “a post-enactment explanation”). While we have relied on similar documents in the past, see FPC v. Memphis Light, Gas & Water Div., 411 U. S. 458, 471–472 (1973), our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive. But the passage at issue here does not persuade. It concerns a situation quite different from the one we confront: two separate, non­overlapping underpayments, only one of which is attributable to a valuation misstatement. 
Addendum 12/4/13 10:32am:

I have posted the foregoing, along with more discussion on the Blue Book on my Federal Tax Procedure Blog:   Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Procedure Blog 12/3/13), here.

Also, I have extended and updated those comments on the following:  More on the Supreme Court's Opinion in Woods on TEFRA and the 40% Basis Overstatement Penalty (Federal Tax Procedure Blog 12/4/13), here.

Addendum 12/10/13 8:45 am:

For a good crisp discussion of the holdings, see Alan Horowitz, Supreme Court Rules for Government on Both Issues in Woods (Tax Appellate Blog 12/3/13), here.


  1. Q. Is checking no on Schedule B and not filing an FBAR enough to establish wilfulness? A. No.

    Your observation is correct that many, probably most, of the successful opt outs answered the question no and failed to file FBARs (as well as failed to report the income).
    Something more is needed for the willful FBAR penalty and the consequences of a fraudulent return.

    Jack Townsend

  2. Thanks for your response; Yes, I am considered opt out.

  3. Very informative post. Thank you so much for sharing the same.

  4. Jack, I don't understand your response above. You say "I agree with you" then say "I would say just the opposite." All other things being equal which do you consider the better case for opt out, higher balance or lower? And why?

    In my view higher balance may mean that most or all of the person's assets are in a foreign account, which would make optout riskier. On the other hand, legal fees would be a smaller proportion of the account for the higher balance. But then again, the IRS may be more willing to allocate its own resources to a situation with a higher balance.

  5. i was trying to say that, all other things being equal, the larger the account the higher the risk on audit. (Inside OVDP, the 27.5% penalty is one size fits all.) That is to say that, all other things being equal, the smaller account is more likely to obtain more favorable audit results (whether on opt out or otherwise). The bigger accounts usually involve more U.S. tax noncompliance which is a factor.

    It is of course true that for smaller accounts, the transaction costs (attorneys, accountants, etc.) will often be a higher percentage of the overall amount involved. But that is just the way math works, because the smaller accounts often involve as much work as the larger accounts.

    Jack Townsend

  6. Since the penalty structure in an opt-out is uncertain. I am wondering what factors would you analyze to determine whether an opt-out would be beneficial to your client. How would you weight the good and bad factors?

    What would make you as an attorney recommend to your client that he or she should opt out?

    Any thoughts would be helpful.


  7. I would like to be helpful, but don't think I can in a responsible way. The analysis of whether to opt out is heavily fact intensive. So to try to list factors outside the context of specific facts would, I think, not be helpful, could lead readers to misunderstand their specific situation, and could lead readers to make decisions that are not in their best interests.

    Sorry I could not do that.

    Jack Townsend


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.