United States v. Woods

(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

Cite as: 571 U. S. ____ (2013) 11

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.