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deductions and investment tax credits on the basis of these
valuations. This Court and the Courts of Appeals determined,
however, that the properties had not been placed in service;
therefore, the taxpayers’ claimed deductions were disallowed on
that ground and not because of any valuation overstatement.
Thus, in Gainer and Todd, this Court and the Courts of Appeals
disallowed the taxpayers’ tax benefits on grounds separate and
apart from the alleged valuation overstatements. In the instant
cases, however, each of our alternative holdings goes directly to
SMP’s and Corona’s correct adjusted bases in the contributed SMHC
receivables.
In Gilman v. Commissioner, 933 F.2d 143 (2d Cir. 1991),
affg. T.C. Memo. 1990-205, the Court of Appeals for the Second
Circuit applied the valuation overstatement penalty under former
section 6659 to an underpayment of taxes derived from a
transaction that was disregarded for lack of economic substance.
Because the taxpayer was deemed to have a zero basis, the
taxpayer’s claimed basis was infinitely larger than the amount
determined to be the correct basis (as would be any amount of
claimed basis, compared to zero). Acknowledging that applying
the valuation overstatement penalty “somewhat strains the natural
reading of the statutory phrase ‘valuation overstatement’”, the
court nevertheless held, consistent with other judicial
precedents applying the valuation overstatement penalty in the
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