The Tax Court has overturned its own precedent in ruling that a taxpayer may not avoid the 40% gross valuation penalty for overvaluing a tax shelter. Taxpayers have been able to avoid the penalty short of trial merely by conceding on grounds unrelated to valuation or basis. But now, in AHG Investments, the court shifted gears and followed the majority rule in the appellate courts and sided with the IRS, which had waged a decades-long battle on this issue.
What it means: This ruling may trigger more trials focusing on valuation issues, since the value of the underlying assets is typically the fundamental issue in abusive tax shelter cases. It also means investors need to be more careful when presented with a business deal that promises tax benefits based on assets with a questionable valuation.