Supreme Court will uphold tax penalty against Red McCombs and Gary Woods

[TexasTowelie]

WASHINGTON —

The Supreme Court says two Texans' partnership doesn't keep the IRS from penalizing them for what the agency called a sham tax shelter.

The Supreme Court unanimously upheld the agency's 40 percent penalty against Gary Woods and Billy Joe "Red" McCombs, who held ownership positions with the San Antonio Spurs and the Minnesota Vikings.

The two men were involved in a tax shelter that was disallowed by the IRS. The agency then billed Woods and McCombs for the past taxes and added a 40 percent penalty, which they challenged in court.

The 5th U.S. Circuit Court of Appeals threw out the penalty. But Justice Antonin Scalia said for the unanimous court that the lower court's decision was reversed, the penalty was legal and could be applied in this case.

http://www.statesman.com/news/ap/texas/court-will-uphold-tax-penalty/nb9bW/

From Reuters:

The U.S. Supreme Court on Tuesday unanimously ruled that Texas billionaire Billy Joe "Red" McCombs must pay steep penalties to the Internal Revenue Service related to more than $45 million he tried to shield from taxes.

The decision could lead to the payment of hundreds of millions of dollars in penalties and interest that the government has alleged other taxpayers owe in disputes similar to the McCombs case.

McCombs, former owner of the Minnesota Vikings football team, and his business partner Gary Woods in 1999 set up a partnership to run a tax shelter known as a "current options bring reward alternatives," or COBRA. It was designed to create financial losses to offset windfall gains McCombs was expecting.

The tax shelter itself had already been ruled a sham by lower courts. But McCombs and Woods argued that a 40 percent IRS penalty should not apply.

http://www.reuters.com/article/2013/12/03/usa-tax-mccombs-idUSL2N0JI0ZP20131203

[Gothmog]

1. According to my tax partner, this ruling was expected

This seems strange but according to my tax partner, the 5th Cir. is very taxpayer friendly in these types of lawsuits and the 5th Cir. ruling was way outside what the other courts were ruling. By taxpayer friendly, I mean that the 5th Cir. favored rich taxpayers who can afford to take the case to District Court and appeal to the 5th Cir. instead of litigating these issues in Tax Court.

Section 704 of the IRC is a very strange animal and there is a great deal of subjectivity involved in determining whether a transaction has "economic substance." The 5th Cir. was always siding with the very wealthy taxpayers.

Here is a link to the actual opinion. http://www.supremecourt.gov/opinions/13pdf/12-562_k5fl.pdf I intend to read this case later in that I work on partnership issues in my practice.