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2. Substantial Understatement of Income Tax
Section 6662(a)(2) imposes a 20-percent accuracy-related
penalty on any portion of an underpayment of tax required to be
shown on a return which is attributable to any substantial
understatement of income tax. Sec. 6662(b)(1) and (2).
There is a “substantial understatement of income tax” for
any taxable year if the amount of the understatement of the
taxable year exceeds the greater of 10 percent of the tax
required to be shown on the return for the taxable year, or
$5,000. Sec. 6662(d)(1). For this purpose, the term
“understatement” generally means the excess of the amount of the
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impression. The only issue that we decide against petitioner,
which might be construed as an issue of first impression, is
whether a contribution of worthless debts to a partnership
constitutes a “contribution of property” for purposes of sec. 721
and the partnership basis rules. This issue arises in our
holding sustaining respondent’s alternative argument regarding
basis; this issue is not directly implicated in our primary
holding that the transaction in question lacked economic
substance or in our alternative holding involving the application
of the step transaction doctrine. Moreover, this Court
previously decided that a contribution of worthless stock to a
corporation was not a “contribution” for purposes of the
analogous corporate carryover basis rules. See Seaboard
Commercial Corp. v. Commissioner, 28 T.C. 1034, 1054 (1957). The
Court of Appeals for the Eleventh Circuit in United States v.
Stafford, 727 F.2d 1043, 1052 n.14 (11th Cir. 1984), has also
considered whether a contribution of valueless property
represents a contribution of property for purposes of sec. 721 of
the partnership rules, concluding that it did not. Moreover, we
do not find the language of sec. 721 or the partnership basis
rules unclear. On the contrary, we find it to be quite obvious
from those Code sections that a contribution of worthless debt is
not a contribution of property. Consequently, petitioner cannot
avoid the negligence penalty on this basis.
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