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1. The Grounds for Petitioners' Underpayments
Section 6659 does not apply to underpayments of tax that are
not "attributable to" valuation overstatements. See McCrary v.
Commissioner, supra; Todd v. Commissioner, 89 T.C. 912 (1987),
affd. 862 F.2d 540 (5th Cir. 1988). To the extent taxpayers
claim tax benefits that are disallowed on grounds separate and
independent from alleged valuation overstatements, the resulting
underpayments of tax are not regarded as attributable to
valuation overstatements. Krause v. Commissioner, 99 T.C. 132,
178 (1992) (citing Todd v. Commissioner, supra), affd. sub nom.
Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994).
However, when valuation is an integral factor in disallowing
deductions and credits, section 6659 is applicable. See Illes v.
Commissioner, 982 F.2d 163, 167 (6th Cir. 1992), affg. T.C. Memo.
1991-449; Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir.
1991) (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. 1989-684; Masters v.
Commissioner, T.C. Memo. 1994-197, affd. without published
opinion 70 F.3d 1262 (4th Cir. 1995); Harness v. Commissioner,
T.C. Memo. 1991-321.
Farrell argues that the disallowance of the claimed tax
benefits was not "attributable to" a valuation overstatement.
According to Farrell, the tax benefits were disallowed because
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