Court Opinion

ID: 855260
Source: CourtListenerOpinion
Date Created: 2013-03-14 19:26:23.912385+00
Date Added: 2024-06-11T08:52:13.955174
License: Public Domain

140 T.C. No. 7

                     UNITED STATES TAX COURT

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 adjustment
   (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 penalties. P conceded the
   adjustments to income on grounds other than valuation or basis in an
   attempt to avoid the gross valuation 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.
                                        -2-

      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 Internal Revenue Code
in effect for the years in issue.
                                          -3-

                                      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’ principal 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(a) for

the portions of the underpayments of tax resulting from adjustments of partnership

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

      2
        Respondent also determined 20% accuracy-related penalties applied to the
portion of each underpayment resulting from adjustments of partnership items
attributable to negligence or disregard of the rules or regulations, a substantial
understatement of income tax, or a substantial valuation misstatement.
                                         -4-

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.

                                     Discussion

I. Summary Judgment

      Rule 121(a) provides that either party may move for summary 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.
                                         -5-

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 attributable 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 concedes the deduction or credit on that ground, any underpayment

resulting from the concession is not attributable to a gross valuation misstatement.3

Bergmann v. Commissioner, 137 T.C. 136, 145 (2011) (citing McCrary v.

Commissioner, 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

      3
        In addition, we have extended that holding to situations where the taxpayer
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).
                                        -6-

penalty merely by conceding 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 taxpayers 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 inapplicable as a result of

their concession. In disagreeing with the Commissioner’s argument that a taxpayer

cannot selectively 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

extensively 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; however, the taxpayers

in Todd I did not make a concession on a ground other than valuation or basis as in
                                         -7-

McCrary.4 Rather, in Todd I we had already disallowed claimed deductions 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

calculating 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:

             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 committee staff explained § 6659’s operation as follows:

      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 taxpayer to concede
on a ground other than valuation or basis, posing a rhetorical 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?”
                                         -8-

             “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
      overstatements. 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 contained 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 Committee 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
      attributable 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.
                                          -9-

      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. Accordingly, the underpayment due to the valuation
      overstatement is the difference 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 [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 valuation 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

irrelevant 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

      5
        The Court of Appeals further stated that Congress saw the gross valuation
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).
                                        - 10 -

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 argument persuasive and

adopting the rule in the case. McCrary v. Commissioner, 92 T.C. at 853-854

(“Following this language, 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. However, many other Courts

of Appeals have rejected Todd II as an incorrect interpretation of the Blue Book

formula.

      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 certiorari 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 denied the Government’s petition.
                                          - 11 -

      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 concluded 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 circuits 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
      attributing 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 overstatement 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 conceded the

Commissioner’s adjustments on grounds other than basis or valuation. The Court of
                                        - 12 -

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 formula and example relied on in Todd II, the Court of

Appeals in Alpha I stated that

             The Blue Book, in sum, offers the unremarkable proposition
      that, when the IRS disallows two different deductions, but only one
      disallowance is based on a valuation misstatement, the valuation
      misstatement penalty should apply only to the deduction taken on the
      valuation 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 analysis

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
                                         - 13 -

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 argument before the Tax Court, and we therefore decline

to consider 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 International. See supra p. 11.

      Even the Courts of Appeals for the Fifth and Ninth Circuits 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.

      7
       The Tax Court case did not address Todd I or Todd II and distinguished
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).
                                          - 14 -

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 circuits’ “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 penalties, 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 application 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 principle 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

overstatement.” Id. at 351-352, 354 (Prado, J., concurring). Judge Prado opined
                                        - 15 -

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 “creating * * * [a]

perverse incentive structure” whereby taxpayers 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 valuation if found out. Id.

at 355.

      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 6626 (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

      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. Commissioner, 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.
                                        - 16 -

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 “Notwithstanding 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 Investment’s 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. Commissioner, 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).

      9
        For purposes of sec. 7482(b)(1), a partnership’s principal place of business
shall be determined as of the time the petition under sec. 6226 was filed with the
Tax Court.
                                        - 17 -

      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.

      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 proponent of overruling precedent has borne the heavy
      burden of persuading 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. * * *

      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.
                                        - 18 -

      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. “Therefore,

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 overstatement. 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.

      Today we depart from our precedent following the minority rule and side with

the majority rule. By doing so we recognize that an underpayment of tax may be
                                          - 19 -

attributable to a valuation misstatement even when the Commissioner’s

determination 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 infraction, such as an improper charitable deduction,

that is unrelated 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.

      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 formula represents how Congress intended the
penalty to be applied). However we rule today that the formula yields a different
result than the result reached in those cases.
                                        - 20 -

      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 F.3d at 1136-1137; Alpha I, L.P., 682 F.3d at 1030 (“An

interpretation of the statute that allows imposition of a valuation misstatement

penalty even when other grounds are asserted furthers the congressional policy of

deterring abusive 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.”)

      12
        We acknowledge that our ruling today might lead to more trials on questions
of valuation.
                                           - 21 -

      In addition, we find the other factors mentioned in McCrary in support of its

ruling (regarding equitable considerations and moderation of penalties) to be

similarly unconvincing. Over the years certain taxpayers have purposefully used the

holdings in Todd I and McCrary to avoid gross valuation 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 penalty”. 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 unrelated 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
                                       - 22 -

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.

      To reflect the foregoing,

                                                      An appropriate order will be

                                                issued denying petitioner’s motion for

                                                partial summary 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.