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underpayment, including an addition for overvaluation, which we
upheld. See Merino v. Commissioner, T.C. Memo. 1997-385. The
Court of Appeals for the Third Circuit sustained our
determination and held that section 6659 is properly imposed
where a claimed tax benefit is disallowed because it is an
integral part of a transaction lacking economic substance.
Merino v. Commissioner, 196 F.3d at 159. The Court of Appeals
for the Third Circuit distinguished the Court of Appeals for the
Fifth Circuit’s holding in Heasley that section 6659 was
inapplicable where there were no grounds for the disallowance of
the taxpayers’ claimed benefits other than overvaluation,
“because the Court’s decision appears to have been driven by
understandable sympathy for the Heasleys rather than by a
technical analysis of the statute.” Merino v. Commissioner, 196
F.3d at 158-159.
In arriving at its decision, the Court of Appeals for the
Third Circuit relied on Gilman v. Commissioner, 933 F.2d 143,
152 (2d Cir. 1991), affg. T.C. Memo. 1989-684, in which the
Court of Appeals for the Second Circuit stated:
Where a transaction is not respected for lack of
economic substance, the resulting underpayment is
attributable to the implicit overvaluation. A
transaction that lacks economic substance generally
reflects an arrangement in which the basis of the
property was misvalued in the context of the
transaction. While this interpretation of
underpayment “attributable to a valuation
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