Kent J. and Ruth W. Dawson - Page 18

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          factor in disallowing deductions and credits, section 6659 is               
          applicable.  See Illes v. Commissioner, 982 F.2d 163, 167 (6th              
          Cir. 1992) (section 6659 addition to tax applies if a finding of            
          lack of economic substance is "due in part" to a valuation                  
          overstatement), affg. T.C. Memo. 1991-449.                                  
               Petitioners concede they are not entitled to any losses or             
          credits arising from their investment in MSA.  The record in this           
          case and the test case of Charlton v. Commissioner, supra,                  
          clearly shows that the overvaluation of the tapes was integral to           
          and was the core of our holding that the underlying transaction             
          herein was a sham and lacked economic substance.  When a                    
          transaction lacks economic substance, section 6659 will apply               
          because the correct basis is zero and any basis claimed in excess           
          of that is a valuation overstatement.  Gilman v. Commissioner,              
          933 F.2d 143, 151 (2d Cir. 1991), affg. T.C. Memo. 1989-684;                
          Rybak v. Commissioner, 91 T.C. 524, 566-567 (1988).  Accordingly,           
          we conclude that the deficiency caused by the disallowance of the           
          claimed loss and credits was attributable to the overvaluation of           
          the tapes.                                                                  
               Petitioners contend that respondent abused her discretion in           
          failing to waive the section 6659 additions to tax pursuant to              
          section 6659(e).  Section 6659(e) authorizes respondent to waive            
          all or part of the addition to tax for valuation overstatements             
          if taxpayers establish that there was a reasonable basis for the            






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