Hyman S. and Gaile S. Zfass - Page 11

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          overstatement is found if the claimed fair market value or adjusted         
          basis of property is at least 150 percent of the correct amount.            
          Sec. 6659(c).                                                               
               Petitioner claims that the disallowance of the claimed                 
          partnership deductions and investment tax credits is unrelated to           
          any valuation overstatement, thus making the section 6659 addition          
          to tax inappropriate in this case.                                          
               If an underpayment of tax is not "attributable to" a valuation         
          overstatement, the section 6659 addition does not apply.  See               
          McCrary v. Commissioner, 92 T.C. 827 (1989).  Section 6659 does             
          apply, however, when the claimed valuation was an integral factor           
          in disallowing deductions and credits.  See Illes v. Commissioner,          
          982 F.2d 163, 167 (6th Cir. 1992), affg. T.C. Memo. 1991-449.  When         
          a transaction lacks economic substance, the correct basis is zero;          
          any amount claimed 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).               
               In Charlton v. Commissioner, supra, valuation overstatement            
          was central to the holding that the transactions were a sham.  It           
          is  obvious  from  the  record  in  this  case  that  valuation             
          overstatement was a primary reason for the disallowance of the              
          claimed tax benefits.  Accordingly, we hold that petitioner is              









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