Court Opinion

ID: 2644672
Source: CourtListenerOpinion
Date Created: 2013-12-03 17:42:12.111735+00
Date Added: 2024-06-11T12:28:24.709369
License: Public Domain

(Slip Opinion)              OCTOBER TERM, 2013                                       1

                                       Syllabus

         NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
       being done in connection with this case, at the time the opinion is issued.
       The syllabus constitutes no part of the opinion of the Court but has been
       prepared by the Reporter of Decisions for the convenience of the reader.
       See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337.

SUPREME COURT OF THE UNITED STATES

                                       Syllabus

                     UNITED STATES v. WOODS

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
                  THE FIFTH CIRCUIT

   No. 12–562.      Argued October 9, 2013—Decided December 3, 2013
Respondent Gary Woods and his employer, Billy Joe McCombs, partici-
  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
  package to Woods and McCombs was substantially less than the cost
  of the long option alone. Woods and McCombs contributed the
  spreads, along with cash, to two partnerships, which used the cash to
  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
  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.
     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
  shams. As there were no valid partnerships for tax purposes, the IRS
  determined that the partners could not claim a basis for their part-
  nership interests greater than zero and that any resulting tax under-
2                     UNITED STATES v. WOODS

                                Syllabus

    payments would be subject to a 40-percent penalty for gross valua-
    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:
    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.
       (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
 tax liability of the individual partners.         §§6230(a)(1)–(2), (c),
 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
 penalty. Pp. 7–11.
    2. The valuation-misstatement penalty applies in this case.
 Pp. 11–16.
       (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
 partner could legitimately claim a basis in his partnership interest
 greater than zero. Any underpayment resulting from use of a non-
                     Cite as: 571 U. S. ____ (2013)                      3

                                Syllabus

  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.
      (b) Woods’ contrary arguments are unpersuasive. The valuation-
  misstatement penalty encompasses misstatements that rest on legal
  as well as factual errors, so it is applicable to misstatements that rest
  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.
471 Fed. Appx. 320, reversed.

  SCALIA, J., delivered the opinion for a unanimous Court.
                        Cite as: 571 U. S. ____ (2013)                              1

                             Opinion of the Court

     NOTICE: This opinion is subject to formal revision before publication in the
     preliminary print of the United States Reports. Readers are requested to
     notify the Reporter of Decisions, Supreme Court of the United States, Wash­
     ington, D. C. 20543, of any typographical or other formal errors, in order
     that corrections may be made before the preliminary print goes to press.

SUPREME COURT OF THE UNITED STATES
                                   _________________

                                   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
attributable to valuation misstatements, 26 U.S. C.
§6662(b)(3), is applicable to an underpayment resulting
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
developed by the now-defunct law firm Jenkens &
Gilchrist and marketed by the accounting firm Ernst &
2                 UNITED STATES v. WOODS

                      Opinion of the Court

Young under the name “Current Options Bring Reward
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
                 Cite as: 571 U. S. ____ (2013)            3

                     Opinion of the Court

for the partnership that sought to produce capital losses.
The partnerships then terminated the five option spreads
in exchange for a lump-sum payment from Deutsche
Bank.
  As the tax year drew to a close, Woods and McCombs
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
4                UNITED STATES v. WOODS

                     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
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
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
starkly, they were “sham[s]”—so the IRS would disregard
them for tax purposes and disallow the related losses.
Ibid. And because there were no valid partnerships for
tax purposes, the IRS determined that the partners had
                    Cite as: 571 U. S. ____ (2013)                  5

                        Opinion of the Court

“not established adjusted bases in their respective part­
nership interests in an amount greater than zero,” id., at
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-
ships were properly disregarded as shams but that the
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
curiam), reh’g denied (2012).1
   We granted certiorari to resolve a Circuit split over
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
Courts lacked jurisdiction to consider the valuation­
——————
    1 The District Court held that the partnerships did not have to be

“honored as legitimate for tax purposes” because they did not possess
“ ‘economic substance.’ ” App. to Pet. for Cert. 19a. Woods did not
appeal the District Court’s application of the economic-substance
doctrine, so we express no view on it.
6                UNITED STATES v. WOODS

                     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

   We begin with a brief explanation of the statutory
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
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.
   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)).
   Under TEFRA, partnership-related tax matters are
                 Cite as: 571 U. S. ____ (2013)            7

                     Opinion of the Court

addressed in two stages. First, the IRS must initiate
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
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
themselves) partnership items.           §§6230(a)(2)(A)(i),
6231(a)(5).
                              B
   Under the TEFRA framework, a court in a partnership­
level proceeding like this one has jurisdiction to determine
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
misstatement penalty “relates to” the determination that
the partnerships Woods and McCombs created were
shams.
   The Government’s theory of why the penalty was trig­
gered is based on a straightforward relationship between
the economic-substance determination and the penalty. In
8                UNITED STATES v. WOODS

                     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
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
short, that a penalty does not relate to a partnership-item
adjustment if it “requires a partner-level determination,”
regardless of “whether or not the penalty has a connection
to a partnership item.” Brief for Respondent 27.
   Because §6226(f)’s “relates to” language is “essentially
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
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
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
pay his taxes by a large enough amount to trigger the
penalty; or if they did, the partner may nonetheless have
                 Cite as: 571 U. S. ____ (2013)           9

                     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
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
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
determinations.
   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
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
10               UNITED STATES v. WOODS

                     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
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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                           Opinion of the Court

the penalty.2
    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,
     “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
——————
   2 Some 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
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”).
12                   UNITED STATES v. WOODS

                         Opinion of the Court

amount by at least 400 percent, the valuation misstate­
ment is considered not merely substantial, but “gross,”
and the penalty increases to 40 percent. §6662(h).3
  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
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
                               B
     Against this straightforward application of the statute,
——————
  3 Congress has since lowered the thresholds for substantial and gross

misstatements to 150 percent and 200 percent, respectively. See
Pension Protection Act of 2006, §1219(a)(1)–(2), 120 Stat. 1083.
  4 An 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.
                 Cite as: 571 U. S. ____ (2013)           13

                     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 specialized
rules for calculating the adjusted basis of a partner’s
interest in a partnership, see §705 (2006 ed.). The statute
contains no indication that the misapplication of one of
those legal rules cannot trigger the penalty. Were we to
hold otherwise, we would read the word “adjusted” out of
the statute.
  To overcome the plain meaning of “adjusted basis,”
Woods asks us to interpret the parentheses in the statutory
phrase “the value of any property (or the adjusted basis of
any property)” as a signal that “adjusted basis” is merely
explanatory or illustrative and has no meaning inde­
14                UNITED STATES v. WOODS

                      Opinion of the Court

pendent of “value.” The parentheses cannot bear that
much weight, given the compelling textual evidence to the
contrary. For one thing, the terms reappear later in the
same sentence sans parentheses—in the phrase “such
valuation or adjusted basis.” Moreover, the operative
terms are connected by the conjunction “or.” While that
can sometimes introduce an appositive—a word or phrase
that is synonymous with what precedes it (“Vienna or
Wien,” “Batman or the Caped Crusader”)—its ordinary
use is almost always disjunctive, that is, the words it
connects are to “be given separate meanings.” Reiter v.
Sonotone Corp., 442 U.S. 330, 339 (1979). And, of course,
there is no way that “adjusted basis” could be regarded as
synonymous with “value.” Finally, the terms’ second
disjunctive appearance is followed by “as the case may be,”
which eliminates any lingering doubt that the preceding
items are alternatives. See New Oxford American Dic­
tionary 269 (3d ed. 2010). The parentheses thus do not
justify “rob[bing] the term [‘adjusted basis’] of its inde­
pendent and ordinary significance.” Reiter, supra, at
338–339.
   Our holding that the valuation-misstatement penalty
encompasses legal as well as factual misstatements of
adjusted basis does not make superfluous the new penalty
that Congress enacted in 2010 for transactions lacking in
economic substance, see §1409(b)(2), 124 Stat. 1068–1069
(codified at 26 U.S. C. §6662(b)(6) (2006 ed., Supp. V)).
The new penalty covers all sham transactions, including
those that do not cause the taxpayer to misrepresent value
or basis; thus, it can apply in situations where the valuation­
misstatement penalty cannot. And the fact that both
penalties are potentially applicable to sham transactions
resulting in valuation misstatements is not problematic.
Congress recognized that penalties might overlap in a
given case, and it addressed that possibility by providing
that a taxpayer generally cannot receive more than one
                     Cite as: 571 U. S. ____ (2013)                   15

                          Opinion of the Court

accuracy-related penalty for the same underpayment. See
§6662(b) (2006 ed. and Supp. V).5
                              C
  In the alternative, Woods argues that any underpay­
ment of tax in this case would be “attributable,” not to
the misstatements of outside basis, but rather to the deter­
mination that the partnerships were shams—which he
describes as an “independent legal ground.” Brief for
Respondent 46. That is the rationale that the Fifth
and Ninth Circuits have adopted for refusing to apply
the valuation-misstatement penalty in cases like this,
although both courts have voiced doubts about it. See
Bemont, 679 F.3d, at 347–348; id., at 351–355 (Prado, J.,
concurring); Keller v. Commissioner, 556 F.3d 1056, 1060–
1061 (CA9 2009).
  We reject the argument’s premise: The economic­
substance determination and the basis misstatement are
not “independent” of one another. This is not a case where
a valuation misstatement is a mere side effect of a sham
transaction. Rather, the overstatement of outside basis
was the linchpin of the COBRA tax shelter and the mech­
anism by which Woods and McCombs sought to reduce
their taxable income. As Judge Prado observed, in this
type of tax shelter, “the basis misstatement and the trans­
action’s lack of economic substance are inextricably inter­
twined,” so “attributing the tax underpayment only to the
artificiality of the transaction and not to the basis over­

——————
  5 We  do not consider Woods’ arguments based on legislative history.
Whether or not legislative history is ever relevant, it need not be
consulted when, as here, the statutory text is unambiguous. Mohamad
v. Palestinian Authority, 566 U. S. ___, ___ (2012) (slip op., at 8). Nor
do we evaluate the claim that application of the penalty to legal rather
than factual misrepresentations is a recent innovation. An agency’s
failure to assert a power, even if prolonged, cannot alter the plain
meaning of a statute.
16               UNITED STATES v. WOODS

                     Opinion of the Court

valuation is making a false distinction.” Bemont, supra, at
354 (concurring opinion). In short, the partners underpaid
their taxes because they overstated their outside basis,
and they overstated their outside basis because the part­
nerships were shams. We therefore have no difficulty
concluding that any underpayment resulting from the
COBRA tax shelter is attributable to the partners’ misrep­
resentation of outside basis (a valuation misstatement).
   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 deci­
sions 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 legisla­
tive history (a contradiction in terms) is not a legitimate
tool 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, non­
overlapping underpayments, only one of which is attribut­
able to a valuation misstatement.
                 Cite as: 571 U. S. ____ (2013) 
         17

                     Opinion of the Court 

                        *    *    * 

  The District Court had jurisdiction in this partnership­
level proceeding to determine the applicability of the
valuation-misstatement penalty, and the penalty is appli­
cable to tax underpayments resulting from the partners’
participation in the COBRA tax shelter. The judgment of
the Court of Appeals is reversed.
                                           It is so ordered.