Fifth Circuit: Penalties upheld in “sham partnerships” case

Fifth Circuit: Penalties upheld in sham partnerships

The U.S. Court of Appeals for the Fifth Circuit affirmed penalty determinations made by a federal district court with regard to “sham partnerships,” including the imposition of the gross-valuation misstatement penalty under section 6662.

Related content

The case is: Chemtech Royalty Associates, L.P. v. United States, No. 15-30577 (5th Cir. May 17, 2016). Read the Fifth Circuit’s decision [PDF 162 KB]

Overview

In a prior appeal, the Fifth Circuit affirmed the federal district court’s decision to disregard the partnership form of two partnerships held to be “sham partnerships” for tax purposes, but vacated and remanded the case back to the district court as to the penalty issues in order to consider the application of the section 6662 penalties—in particular the substantial-valuation and gross-valuation penalties in light of the intervening decision in United States v. Woods, 134 S. Ct. 557, 564 (2013).

On remand, the federal district court re-instated the vacated penalty award and further held that a tax penalty for gross-valuation misstatement applied. The district court held that the gross-valuation misstatement penalty applied with respect to one of the partnerships, and that the substantial-understatement and negligence penalties applied to both partnerships for different tax years. As a result and because section 6662 penalties do not “stack,” the 20% penalty applied for tax years 1997 to mid-1998 and a 40% penalty applied for tax years mid-1998 to 2006.

In affirming the district court’s decision, the Fifth Circuit:

  • Refused to require the district court to consider whether the taxpayer had a reasonable basis and substantial authority specifically regarding the “sham partnership” issue
  • Rejected the government’s claim that the substantial authority defense to section 6662 penalties attributable to tax shelters—i.e., that a taxpayer reasonably believed that the tax treatment of the items involved was more likely than not the proper treatment of that item—was unavailable to the taxpayer
  • Found the taxpayer lacked substantial authority for its position, providing a clear explanation of the applicable standard and the reasons behind its conclusion

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform