Legal Case Summary

. And then if a partner, if a penalty were assessed on the partner, the partner would have to pay the penalty before challenging it in through a refund action. But we might want to ask on what ground could the partner want to challenge the penalty at that point. The partner couldn't at that stage want to make the argument that's being made in this court, namely that this is just not the sort of situation to which the substantial valuation misstatement penalty applies because that issue would have already been resolved against the partner in this proceeding by hypothesis if the court agrees with us on the merits. And so the partner would have had an opportunity to get that threshold legal issue resolved without prepaying the penalty first. Now if an individual partner wanted to raise the good faith reasonable cause defense that's provided in 26 U.S.C., 6664.C., the partner would have to pay the penalty first before seeking the refund. But that's pretty clearly consistent with Congress's intent because Congress specified in Teffer itself that after the court in the partnership level proceeding has determined the applicability of the penalty, the partner can still through refund proceedings contend that the penalty was erroneously imposed. And that language tells us two things. It tells us first that Congress didn't see any necessary unfairness in requiring a partner to pay the penalty first before raising certain sorts of challenges. And it also indicates that by applicability, Congress must have meant something different from real the penalty ultimately being imposed. Because of the partnership level determination that the penalty was applicable meant that all the requirements for imposition were satisfied, there'd be no room for the partner to argue down the road that the penalty was erroneously assessed after all. So, could you explain the difference in the two proceedings? First, your position that the proper review is of the final partnership administrative adjustment. How would the penalty be adjudicated in that format? And if your, if the taxpayer is right that the adjudication must be made at the partner level proceeding, what would be the difference in the character of the adjudication? When we say that the applicability of the penalty should be determined in the partnership level proceeding, all we mean is that the court in the partnership level proceeding should resolve the legal issue that is addressed in part two of the respective briefs for the petitioner and the respondent. That is, the court should determine is the substantial valuation, mistatement penalty, the sort of penalty that can apply to a basis over statement that is produced through a sham transaction. We wouldn't ask the court in the partnership level proceeding to go beyond that legal determination and to ask whether individual partners had actually underpaid their tax or whether they had actually mistated basis. It's always theoretically possible in a case like this that the partnership could be determined that the partner could participate in sham transactions, but by the time it was, he had to file his own return, he could get cold feet or he could get legal advice that indicated this just isn't going to work. And so it's possible that the partner could prepare his return in a way that was lawful and the IRS, after the partnership level proceedings were complete, would have to look at the partner return in order to see what that had happened. I think the main practical, I'm sorry. I'm just going to ask if the question were determined of whether the sham transaction counts as an erroneous statement of the basis, if that were determined at the partner level and not in a partnership proceeding, would it be possible to have different outcomes? Yes, absolutely. The respect to different partners. Absolutely

. And I think that's the main practical difference between the way the system would operate under our view of Tefra and the way it would operate under respondents' view. That is, under respondents' view. And you have to relitigate the same issue. Exactly. That under respondents' view, the IRS was not required to say anything at all in the FPA about the potential imposition of basis overstatement penalties down the road. If the FPA adjustments that the shaming determination had been upheld at the partnership level, under respondents' view, the IRS could then assess penalties against individual partners. And if the individual partners raised in objection, the same arguments that are raised in part two of the respondents' merits briefs, that would have to be litigated potentially by different judges in different partner proceedings. Would it be a fair way to look at this to say that what you do with the partnership level is anything that doesn't require looking at an individual's tax return? I think that's a fair way to put it, and another way we would put it is any question that will necessarily have the same answer for all partners should presumptively be resolved at the partnership level. That is, the legal issue that's briefed in part two of the party's respective merits briefs, we may be right, respond it may be right. But the answer is going to be the same for all partners. Either this is the sort of basis overstatement that can trigger the penalty or it isn't. The second practical difference that I wanted to, to allude to at least briefly between our position and the respondents, is that 6226F is the provision that deals with the court's jurisdiction in a partnership level proceeding. 6221 is the provision that tells the IRS what it's supposed to do at the partnership level, and it also tells the IRS determine the applicability of any penalty that's related to an adjustment to a partnership item. Now, one advantage of requiring the IRS to make at least this sort of threshold determination of penalties at the outset is that if the IRS makes an adjustment to a partnership item, and the IRS believes that it is the sort of adjustment that down the road could trigger the imposition of penalties, that's the sort of thing an individual partner would want to know in deciding whether to challenge the adjustment. Is it correct that your position would allow the IRS to evade the normal statute of limitations? I don't see, no. I don't see how, I'm not sure exactly what argument you're referring to, but there are provisions that deal with the way the limitations periods runs depending on when the partnership return is filed and when the partner returns are filed, but I don't see how that would happen. We would still be subject in assessing penalties against any individual partners to whatever limitations period the code provides. And either we would or would not have obtained a legal ruling on the legal issue whether the penalties are the sort that could follow from this partnership item adjustment, but I don't think it would have implications for the statute of limitations. Using the language of the statute that you just quoted, can you explain to us what is the adjustment of the partnership item? That is the statute says determine the applicability of any penalty which relates to the adjustment of a partnership item. So what is, what was the partnership item adjustment? Yes, just a hint. This is on page 6A of the appendix to the government's brief and the adjustment to the partnership item is the shaming determination. The determination that the partnerships were not engaged in for business purposes that they were engaged in purely as tax avoidance measures. And the respondent concedes that this is a partnership item because respondent concedes that the district court had authority to review the shaming determination decide whether that determination was appropriate. And that concession necessarily depends upon the proposition that the determination that the partnerships are shams was an adjustment to a partnership item. And it makes sense for two reasons

. First, because the determination whether these are valid partnerships necessarily underlies any other determination that the IRS would make about the proper tax treatment of items reported on the partnership return. And second, it is the sort of determination that is going to have one answer for every partner. Either the partnership is a sham or it's not, but it can't be the case that a particular partnership is a sham with respect to some partners and not others. But what Judge Centel said in his opinion for the DC Circuit is that based on agreeing with everything you said, that means that the mistatement of basis might be obvious on the individual partner's returns. What's wrong with it might be obvious, but it still is made on those returns and therefore that doesn't fall as a partnership item. Now, we would agree with Judge Centel that outside basis in and of itself is not a partnership item and outside basis in and of itself is not designated as one of the things that the court in a partnership level proceeding can determine. But there and usually it would be inappropriate to determine outside basis at that stage because typically outside basis will vary from partner to partner. But there are some instances in which a court needs to determine outside basis. Why would it vary from partner to partner? I mean, in the more typical case, the outside basis would depend upon the amount that a particular partner had paid for his own partnership interest. And so in that situation, not every partner would necessarily have paid the same thing. But there are fairly rare situations in which in order to make some determination that is specified in 6226F, the court in the IRS along the way have to determine outside basis. And one example we gave on page 32 of our brief, we have a footnote that says it's not implicated here, but outside basis is sometimes a component of a partnership item such as inside basis. And we cite a case that was ultimately decided by this court, but it's a case in which a partnership took advantage of code proceedings that said you can step up your inside basis to match the outside basis of your partner. But in your position in this case, the outside basis in this case is necessarily related inside basis. I think or am I mistating you? I think what we are saying is in order to determine whether the substantial valuation misstatement penalty would be triggered down the road, the IRS and the court would have to make certain, would have to decide what is the proper outside basis in a sham partnership. If a lawyer were asked for, if a lawyer saw an adjustment that said we regard these partnerships as shams and the lawyer were asked, does that mean that I could be subject to the substantial valuation misstatement penalty if I reported deductions on purported losses from that partnership? The only way the lawyer would answer that question is to ask, well, what's true basis in a sham partnership? But if we were to write an opinion which says, an opinion ruling in your favor, that in this case outside basis is necessarily related to inside basis in this transaction, you would say that's wrong? I wouldn't put it that way. I mean, I think in this- What, and why is that? Because I think that's not really the reason we're saying the court needs to- I pointed the court to a different case in which outside basis had to be determined at the partnership level for a different reason, namely because it was in that case, it was a component of inside basis, and since inside basis is a partnership item, you can only determine that partnership item by reference to outside basis. Here we have a somewhat different argument. We're saying the thing that had to be determined at the partnership level was the applicability of the penalties, and the only way you can decide whether the substantial valuation misstatement penalty is applicable is to determine what would be true basis in a sham partnership. If we go over to the merits, if this case came up today, and today we have a penalty that wasn't there originally, and that is for a non-none-economic substance penalty. Would the government today be going under that non-economic substance penalty, or would it be going under the 6, 6, 2, 3 that is a substantial valuation misstatement, or is it the government's option that can pick one or the other? I think it's the government's option, and if you may be helpful to look at page 18A of the appendix to the respondent's brief, because that actually reproduces the current version of the code that contains the 2010 penalty that you're referring to. This government could choose either one, but would it determine its choice? In some instances, the government will pick the one that it thinks is easiest to prove. Some of the penalties are limited to 20%, whereas some can be bumped up to 40%, and we would look for the 40% penalty. But if I could, on page 18A, we're talking about section 6662B, and it says portion of underpayment to which section applies. And then it says, this section shall apply to the portion of any underpayment, which is attributable to one or more of the following

. And then at least six items, subsection three is the substantial valuation misstatement penalty that we're relying on here. Subsection six is a disallowance of claim tax benefits by reason of a transaction lacking economic substance. That's the 2010 penalty. Now, the two points I'd make are first, it's very clear that many, many cases that would fall under subsection six would also fall under subsection one or two. That is, they could involve negligence or disregard of rules or regulations. They could also involve a substantial understatement of income tax, which basically means any understatement of income tax that's 10% or more of the true tax owe. And so if there's no incongruity in saying subsection six should apply to some cases where one or two would also apply, there shouldn't be any greater incongruity in saying it can apply to some cases where subsection three would apply. The other point I would make pertains to the introductory language of that provision. And it says, this section shall apply to the portion of any underpayment, which is attributable to one or more of the following. And I think the primary practical significance of the one or more language is that it functions as an anti-stacking provision. It tells you it doesn't matter whether your underpayment triggers only one of these penalties or all six of them. You're still limited to 20% unless you can get the 40% through some other provision. So we can't take advantage of the fact that more than one penalty applies to a particular transaction by getting 20% on top of 20%. But the very fact that Congress used that language, which is attributable to one or more of the following, indicates that it anticipated situations in which particular underpayments would be attributable to more than one of the other. So it's a very important thing to note that there is a number of those penalties. It didn't see any anomaly in the idea that a penalty that triggers subsection three could trigger subsection one or two. And again, there's no reason to think that there's a greater anomaly with respect to subsection six. The other thing I would say is that in this case, if it arose in connection with a transaction that occurred today, three and six would be cotermas. Either of them would apply. But there will be plenty of cases in which a substantial valuation statement penalty on our view could be triggered by a legal error in computing basis, such as use of the wrong depreciation rate. That would not do it. If I could focus at a somewhat higher level of abstraction, I understand the general underlying thrust of your friend's position to be that overstatement of basis goes to miscalculations. It was actually $20,000. You say it's $40,000. And that's where the penalty comes from

. Well, this case is quite different where you're kind of wiping out the whole transaction. And then you're kind of artificially saying, well, if you wipe out the whole thing, when you come to basis, it should be this and that. And it's not sort of a miss or fraud or misstatement with respect to the basis itself. It follows from a broad sham determination and that sham determination is made at the partnership level, not the partner level. I guess the two things, or at least two things I would say in response to that, are that here the whole point of the avoidance scheme was to create an artificially inflated basis. That is, the high, high basis that's claimed on the individual's returns was not simply a fortuitous result of an avoidance scheme that operated through some other means. The whole point, if you want to claim a loss on a transaction where you didn't incur an actual economic loss, you can do it either by understating the amount that you were paid for the asset or by overstating your basis. And this is one of a number of tax avoidance schemes that operate by overstating basis. So it's true that the transaction was determined to be a sham, but the sham determination was intimately balanced up with the fact that the whole purpose of the scheme was to be a sham. And the whole purpose of the scheme was to create an inflated basis. I understand it, but if you were telling people what happened here, maybe you would. I don't know that your first statement would be they overstated their basis. I think you would say they engaged a completely sham transaction with had, which had some obvious as the DC Circuit put, some obvious consequences, but still the driving determination was that it was a sham transaction. I guess the other couple of points I would make are there's nothing illegal about engaging in a transaction that lacks economic substance. That is, if the partners had engaged in these offsetting currency transactions but then had decided before filing their return that either we no longer believe that this is right conduct or we believe we're going to get caught and they had prepared their returns in a lawful way, nothing wrong, bad would have happened to them. The thing that subjects them to potential penalties is the fact that they claimed a large loss on their tax returns and they did that by claiming a large fall spaces in the partnership. The second thing I would say is when I took math in junior high and high school, the teacher would always tell us to show your work. When you hand it in an assignment, don't just give the answer at the end, indicate the process by which you arrived at that number. In essence, when the code says imposed penalties on underpayments that are attributable to the following things, it says it means we're going to look at your work. When we determine that you have paid to little tax, we're going to look at the calculation process by which you arrived at the amount on your own return and figure out where you went wrong. If they did that here, they would say the mistake these taxpayers made, the reason that they didn't pay as much taxes they owed, was not that they claimed to have sold the assets, was not that they claimed to have sold the assets for less than they actually realized. It was that they claimed a basis that had no founding in reality. The last thing I would say in connection with that is it's no accident that this scheme operated through the creation of sham partnerships. That is, if the taxpayers themselves had bought the offsetting long and short currency options, there would have been no colorable argument that they could have claimed the cost. Mr

. Stewart, what is this case of fight about? I'm sorry. Perhaps I'll just ask it on rebuttal so you can save your time for rebuttal. Thank you, Council. Mr. Gar, thank you, Mr. Chief Justice, and may it please the Court. On both jurisdiction and the merits, the government is asking this Court to adopt an overly expansive interpretation of the code to reach a result that would upset the statutory scheme devised by Congress and lead to further problems down the road. Now, on jurisdiction, I think the most important thing for the Court to recognize is that outside basis, the very thing, as you can tell from my friend's arguments on the merits, that the imposition of this penalty depends on is not a partnership item. In fact, it seems as though you and the government agree on sort of the nature of this problem, right, which is you have a partnership item, which is the sham determination, that leads to an adjustment in outside basis, which, as you just said, is not a partnership item, is instead an affected item, and that leads to a penalty, right? So there's kind of three things, two steps in the process. And you say, well, that's not enough, essentially because the penalty has to directly relate to a partnership item. And they say it is enough because it's okay if it indirectly relates to the partnership item. And I guess the question is, in some sense, you're both adding adjectives to the statute. You add directly, they add indirectly. How do we pick between those? Well, I think the government is asking the Court to add a great deal more than that. And just go to the statutory text. With the provision, it's 62, 26, and its own page, 2A of the red brief. And what that says is that first it gives the Court jurisdiction to determine all partnership items. Everybody agrees that outside basis is not a partnership item. And then it gives jurisdiction to the Court to determine penalties that relate to partnership items. And what the government is asking this Court to do is essentially to read this to say that relates to partnership items or that relates to non-partnership affected items, like outside basis. And the reason why the Court should do that is first, in a scheme that divides the world into partnership items that can be determined at the partnership level and non-partnership items that must go to the partner level, when Congress says partnership item, that's significant. It has defined terms of non-partnership item or affected item. It said partnership item. So we think that it necessarily excluded non-partnership affected items here, and that's the way to read it. And second, if you read the relates to, as broadly as the government says, then it makes no sense

. The partnership item here might as well say affected item, because you're right. At some level of abstraction, you can always say that the penalty relates to the partnership item. That's going to be true for lots of these. But it doesn't just say partnership items. Yes, Court and with Shearstick, a petition is filed. She'll have Shearstick to determine all partnership items, but then it goes on. The proper allocation of such items among the partners and the applicability of any penalty addition to tax or additional amount, which relates to an adjustment to a partnership item. You're right, Justice Scalia. And what can that possibly mean when you're talking about the applicability of any penalty? Well, let me tell you, Justice Scalia, that penalty is going to be applicable at the partner stage. Justice Scalia, I'll answer this way. Partnerships can do many things just like individuals and corporations, and they can engage in things that subject the trigger penalties. A partnership can misreport its income. A partnership can make evaluation in this statement. A partnership can engage in negligence. And the Court can determine those, the applicability of those penalties. Now, it's true that down the road in a mathematical adjustment, the Court is looking to whether or not the partner repeated that error on its return. But what's fundamentally different about this case is the penalty depends not on the partnership, just the partnership item. It depends on this outside basis determination that a Court can't make. I mean, to put it another way. Are there cases in which the partnership is liable for a penalty? No, ultimately, you're on the other side. And it's all passed through and so forth. But suppose a partnership does something that's a sham, that's a fraud, and then and files a partnership information return with that information. But then the partners find out either because of a ruling of the Court that is void or because they have second thoughts that they're not going to do that. So they change their individual, they change their own tax return. Could there be any penalty against the partnership in that instance? You honor that the partners don't actually, the partnership does not pay the penalty, but the partner thinks the partnership against the partners in that instance

. No, I don't believe so. But the partners should be. There should be a criminal liability for filing a false information return. I mean, ultimately, I think that would trickle down to the partners. But, but, you honor, I think there are two different schemes here. One is where the partnership is doing things that actually does trigger the penalty. Take the 2010 non-economic substance injection. And that just fortifies the point that Justice Scalia made that the applicability of the penalty, it's always going to relate to the partners. Yes, and no, Your Honor. Yes, in the sense that ultimately what you're looking in the proper proceeding is to determine whether or not the partner repeated the error that's on the partnership return. But you can say at the partnership level that a penalty is applicable because everything is complete, all the elements can be determined. The partnership is misreported to the sinkham. In this case, you just can't say that because outside basis isn't reported anywhere at all on the partner. So you are. So what? That is, I mean, as I understand it, you agree that on the partnership level, the IRS could say the following in a hypothetical all-now-give-you. The partnership says that this asset has a basis of $10 million. We sold it for eight. Therefore, the partnership has a loss of two. The IRS says the real value was not $10 million basis. It was a $2 million basis. And therefore, in fact, you don't have a loss of two. You have a gain of eight. Moreover. Your understatement was more than 400 percent or whatever the percent is. You know, it was a huge, it was $8 million, you know, overstatement

. And therefore penalties of 400 percent attach. Okay? You agree they can say that. At the partnership level because you're talking about the right correct. Inside, okay. So, yeah, so right what? I understand you're making this bet. But what they've actually done there since it doesn't say anything about inside, outside, is they're saying partners to the extent that you use this on your own return. Remember, there's a 400 percent penalty attached. Okay. You agree they can do that. Now, what they've done here is they've said there is no partnership. So, to the extent that you use this as your as a basis, as you use this on your individual return, remember there's a 400 percent penalty attached because four times zero or whatever it is. You know, you understand the math. So, we haven't got any reference to inside, outside basis here. In both cases, it seems to me they're doing roughly the same thing. And so, we're in the statute. Does it say they can't do it? You're saying, indeed, a penalty attaches to the use of this partnership by you, the partner, to reduce your taxes. And after the extent you don't use it, of course, you don't have to pay anything. But to the extent you use it, you have to pay. Whatever it is, plus the 400 percent. What the Court is doing in both of those situations is fundamentally different. In one case, it's looking at the partnership return, looking at how the partnership reported the basis, and determining that the basis overstatement penalty would apply because of the error committed by the partnership. That is everything that we think the Court can do under the statute for a provision we just referred to. If you determine the applicability of that penalty because it relates to a partnership item, the partnership's statement of its income or basis on the partnership return. Now, what's happening here is the partner, the penalty is applying to the partner's statement of basis. That outside basis doesn't appear anywhere

. So, then the question is this. The question is to the words partnership item in the section, scope of judicial review, refer only to those items that the partnership, in fact, is concerned with or do they consider the partnership itself? Right. And the three, the three-circuit courts that have addressed that have agreed with us. And as Justice Justice, we're interpreting the word partnership items in that statute and you're saying the partnership itself is not a partnership item. No, not at all. What? No. What we're saying is outside basis is not a partnership item. We're not on a bit outside, but that's just a question of how they use it on the return. There are many ways in which a person could use a partnership item on the return. If this is a partnership item, I mean, a person might, for example, have no tax. In my case. I think that the confusion maybe is between the statement at issue here. The statement at issue in this case is the basis that the partners reported on their individual returns as a result of these transactions. If you go to the partnership return and go to page 169 of the joint appendix, and it may be difficult to find out because of these foldouts, but you'll find with the partnership on the reported. And it reported all of the transactions at issue and it reported accurately in the lawsuit. Excuse me, and I'm genuinely confused. I have read this several times. Right. And the reason that I'm confused is this. That I, well, I understand your difference between the outside basis and the inside basis. Now what I'm trying to do is to figure out via the statute, I think, like what Justice Scalia was trying to do, I think. Where does that matter? Well, it matters in the scope of jurisdiction, Your Honor, and again, I mean, that's not true. No, I understand that, too. I'm just trying to get the precise words of the statute that it would make a difference because in common sense, it doesn't seem to me to make much difference, but it may be in this statutory language it does, so I want to know what words. The words that matter is partnership item. This is a statutory scheme that talks about non-partnership items and partnerships. Okay, now you just told me I said that I thought and you said no, it didn't. Those weren't the right words. But if you say those are the right words, then explain to me why a partnership item cannot include a partnership itself. The partnership item, Your Honor, can include the partnership. We're not disputing that part of the sham determination. My point is that the imposition of the penalty depends on an additional determination, which is a non-partnership item. And in that sense, Mr. Gart, it strikes me as wrong to say that the words in dispute are partnership item. Actually, everybody agrees what partnership item means, what it includes, and what it doesn't include. It doesn't include outside basis. The government is perfectly happy to concede that. It seems as though the words in dispute are what is related to them in, and is related to, have to be related to, in this very direct way that excludes the center-media step of adjusting outside basis. Right. And the reason why, and I think that gets back to partnership item, because if you read relates to in the broad sense that the government is asking you to read it, then in essence you are adding, you're taking away the limitation of partnership item and you're adding words that says, or affected item. Because what they're saying is, look, any time you have a partnership item that is in any way related to the imposition of the penalty down the road, then you can do it. But another way of saying that, in the way the Congress would have said, if it meant it, was, courts you can determine the applicability of any penalty that relates to a partnership item or an affected item. But it is an addition to partnership item. You see, you say, oh, you can't do that because it would add to, you can't do partnership items. But the statute does not say just partnership item. It says, partnership items, the proper allocation of such items, and the applicability of any penalty addition attached to an additional amount. Right. It's an addition to partnership items. And it seems to me not enough to say, well, if you interpret that third part to go beyond partnership items, you're destroying the statute. I don't think so

. This is a statutory scheme that talks about non-partnership items and partnerships. Okay, now you just told me I said that I thought and you said no, it didn't. Those weren't the right words. But if you say those are the right words, then explain to me why a partnership item cannot include a partnership itself. The partnership item, Your Honor, can include the partnership. We're not disputing that part of the sham determination. My point is that the imposition of the penalty depends on an additional determination, which is a non-partnership item. And in that sense, Mr. Gart, it strikes me as wrong to say that the words in dispute are partnership item. Actually, everybody agrees what partnership item means, what it includes, and what it doesn't include. It doesn't include outside basis. The government is perfectly happy to concede that. It seems as though the words in dispute are what is related to them in, and is related to, have to be related to, in this very direct way that excludes the center-media step of adjusting outside basis. Right. And the reason why, and I think that gets back to partnership item, because if you read relates to in the broad sense that the government is asking you to read it, then in essence you are adding, you're taking away the limitation of partnership item and you're adding words that says, or affected item. Because what they're saying is, look, any time you have a partnership item that is in any way related to the imposition of the penalty down the road, then you can do it. But another way of saying that, in the way the Congress would have said, if it meant it, was, courts you can determine the applicability of any penalty that relates to a partnership item or an affected item. But it is an addition to partnership item. You see, you say, oh, you can't do that because it would add to, you can't do partnership items. But the statute does not say just partnership item. It says, partnership items, the proper allocation of such items, and the applicability of any penalty addition attached to an additional amount. Right. It's an addition to partnership items. And it seems to me not enough to say, well, if you interpret that third part to go beyond partnership items, you're destroying the statute. I don't think so. Our point is the one that the D.C. Circuit and the other circuits have adopted, which is that to make this determination, you have to go beyond a partnership item. You have to determine a non-partnership item in this grant of jurisdiction to do that. When would you not have to do that if you're applying the third item, the applicability of any penalty addition to tax or additional amount, which relates to an adjustment to a partnership item? Again, that will always require you to go down to the partner. No. No. So when the penalty is complete based on what the partnership is done, you can determine the applicability of the penalty. You can say, all of the elements are met because of what the partnership did. And then later, you're only looking to whether or not the partners repeated that error. Here, that's not what's happening. Yes, you've all asked, suppose the government had asserted this penalty under subs 6 for the transaction, the lasting economic substance. Would you be made, would you say it doesn't mean differences the same? Or would you say that under 6, your argument is not applicable to that and the determination could be made at the partnership level? It would, Your Honor. The non-economic substance penalty that Congress passed to cover the situation here solves all the problems. As to jurisdiction, courts could determine it at the partnership level because looking to whether or not the partnership is a sham is a partnership item. And so courts have jurisdiction to do that. And of course, that solves the merits question too because Congress actually addressed the situation here in the merits. Instead, we have the government trying to fit a square peg into a round hole. I mean, on jurisdiction before I go to the merits, I just want to talk about the practical consequences of this ruling. It's very significant from the standpoint of the taxpayers. What the government wants to do is funnel all of these penalty determinations into a computational adjustment, as opposed to the deficiency proceeding, which is the default rule under the statute, Section 6232. And from the taxpayer's perspective, that has huge consequences. It means that taxpayers have to pay the refund upfront as just sort of my or it recognized. That means that even in disputed penalties, they've got to pay all that upfront. And then that limits their ability to challenge it

. Our point is the one that the D.C. Circuit and the other circuits have adopted, which is that to make this determination, you have to go beyond a partnership item. You have to determine a non-partnership item in this grant of jurisdiction to do that. When would you not have to do that if you're applying the third item, the applicability of any penalty addition to tax or additional amount, which relates to an adjustment to a partnership item? Again, that will always require you to go down to the partner. No. No. So when the penalty is complete based on what the partnership is done, you can determine the applicability of the penalty. You can say, all of the elements are met because of what the partnership did. And then later, you're only looking to whether or not the partners repeated that error. Here, that's not what's happening. Yes, you've all asked, suppose the government had asserted this penalty under subs 6 for the transaction, the lasting economic substance. Would you be made, would you say it doesn't mean differences the same? Or would you say that under 6, your argument is not applicable to that and the determination could be made at the partnership level? It would, Your Honor. The non-economic substance penalty that Congress passed to cover the situation here solves all the problems. As to jurisdiction, courts could determine it at the partnership level because looking to whether or not the partnership is a sham is a partnership item. And so courts have jurisdiction to do that. And of course, that solves the merits question too because Congress actually addressed the situation here in the merits. Instead, we have the government trying to fit a square peg into a round hole. I mean, on jurisdiction before I go to the merits, I just want to talk about the practical consequences of this ruling. It's very significant from the standpoint of the taxpayers. What the government wants to do is funnel all of these penalty determinations into a computational adjustment, as opposed to the deficiency proceeding, which is the default rule under the statute, Section 6232. And from the taxpayer's perspective, that has huge consequences. It means that taxpayers have to pay the refund upfront as just sort of my or it recognized. That means that even in disputed penalties, they've got to pay all that upfront. And then that limits their ability to challenge it. It means they can't go to the tax court to challenge it. They have to do it in a more expedited faction. The default rule is deficiency proceedings. That is where Congress intended these penalty issues of the type that we have here that pertained to nonpartnership. Let me ask you something. There's no reason to go into a sham transaction except to mistake the outside basis in the individual partnership level. So it's low hanging fruit according to the D.C. court. But why shouldn't you be able to pick it? I mean, sort of obvious, just as it's obvious that if a partnership item has a miscalculation that the partner is going to include it in their tax return later, that's why we permit the penalty to be imposed upfront and to pay the tax upfront because you're making an assumption that it's been included erroneously on the part. And I leveled. What you would be doing is assuming that a fact necessary to the penalty that outside basis was reported as zero for purposes of finding jurisdiction. And we don't think the court could do that. The government acknowledges that it's at least possible that the taxpayer in the fit of conscience or having fully more fully understood the transactions would not inflate its basis. It would report a zero basis. And yet nobody would know that in the partnership level proceeding because the partner's outside basis isn't even before the court, before the IRS or the court in that proceeding. I would again, can I just try once more. Suppose that a person owes a gift tax and the ready gave to his children or whatever was, in part, an interest in a partnership. Now I go back to my example, because I want to get the, my example is that everybody agrees that the 810 million versus 8 million there's a penalty attached. Well, he doesn't take that into account when he gives the gift. Now if he did give the gift, he would, Sad, he'd have to pay a tax on the gift on his gift tax return. Okay? They assess that, they would assess that, wouldn't they? Right. I mean, ultimately, if- Okay, so no matter what kind of return you use, no matter what the tax situation, if the partnership, real, real value makes a difference, you have to put it in, of two. In the individual- Yeah. In individual gift tax return, maybe it's a state tax return, maybe it's an income tax return

. It means they can't go to the tax court to challenge it. They have to do it in a more expedited faction. The default rule is deficiency proceedings. That is where Congress intended these penalty issues of the type that we have here that pertained to nonpartnership. Let me ask you something. There's no reason to go into a sham transaction except to mistake the outside basis in the individual partnership level. So it's low hanging fruit according to the D.C. court. But why shouldn't you be able to pick it? I mean, sort of obvious, just as it's obvious that if a partnership item has a miscalculation that the partner is going to include it in their tax return later, that's why we permit the penalty to be imposed upfront and to pay the tax upfront because you're making an assumption that it's been included erroneously on the part. And I leveled. What you would be doing is assuming that a fact necessary to the penalty that outside basis was reported as zero for purposes of finding jurisdiction. And we don't think the court could do that. The government acknowledges that it's at least possible that the taxpayer in the fit of conscience or having fully more fully understood the transactions would not inflate its basis. It would report a zero basis. And yet nobody would know that in the partnership level proceeding because the partner's outside basis isn't even before the court, before the IRS or the court in that proceeding. I would again, can I just try once more. Suppose that a person owes a gift tax and the ready gave to his children or whatever was, in part, an interest in a partnership. Now I go back to my example, because I want to get the, my example is that everybody agrees that the 810 million versus 8 million there's a penalty attached. Well, he doesn't take that into account when he gives the gift. Now if he did give the gift, he would, Sad, he'd have to pay a tax on the gift on his gift tax return. Okay? They assess that, they would assess that, wouldn't they? Right. I mean, ultimately, if- Okay, so no matter what kind of return you use, no matter what the tax situation, if the partnership, real, real value makes a difference, you have to put it in, of two. In the individual- Yeah. In individual gift tax return, maybe it's a state tax return, maybe it's an income tax return. You do, but the property- So it affects the taxpayer differently. And I'm just saying, why does it matter? That the way this affects the taxpayer is through what you call his outside basis. Why does that matter? You're on every partner's outside basis is going to vary in the typical situation. Yes, yes, but of course, any, in my example, too, it will vary. Of course, it will vary. Some people will use, have no tax to pay, no extra tax, because their income tax if they paid was zero. In fact, the government owed the Marie Fund, so it didn't matter. It varies in many ways, so since it varies in many ways and varies by many returns. It might vary depending upon whether it affected your outside basis or something else. And the fact that it can vary your honor is one of the reasons why Congress, one of these determinations made at the partner level. And another thing on the jurisdictional question, I don't think the court could resolve this question looking only to the sham partnership situation here. Sometimes transactions are shamed, sometimes partnerships are shamed, and the jurisdictional question or answer to the question should apply across the board. And yet, if you have a situation where you have only a transaction shamed, then even the government would have to acknowledge that basis could be affected in many different ways in that situation. And again, getting back, couldn't the government have pursued this instead of saying, you know, it's a sham partnership, just said, just, couldn't the government simply have said that the partnership overstated its basis? It couldn't because, and it didn't because, again, if you go back to page 186, 169 of the joint appendix, everything about these transactions is accurately reported on that form, which is in the partnership return. The partnership actually reported a gain on these transactions. The error comes in at the partner level and is only on the partner return in the situation. And that's why you can't determine outside basis at the partnership level. And that's why you can't determine the applicability of this penalty at the partnership level. I have a second question, which I asked your friend as well. Is he correct that if we rule for you, each partner may have a different result, because different courts will find this to be a sham or not to be a sham. No, no, your owner, in this sense, if this court resolves the merits question, then that's why it applies or not in this context, is going to apply to all partners. So that issue is not going to vary by partner. What can happen by partner is different partners may have different outside basis. Even in this situation, my friend acknowledged you could have a partner that nevertheless reports zero as his basis in this situation and not the inflated basis. No, well, why wouldn't one court say, I don't think it's a sham partnership

. You do, but the property- So it affects the taxpayer differently. And I'm just saying, why does it matter? That the way this affects the taxpayer is through what you call his outside basis. Why does that matter? You're on every partner's outside basis is going to vary in the typical situation. Yes, yes, but of course, any, in my example, too, it will vary. Of course, it will vary. Some people will use, have no tax to pay, no extra tax, because their income tax if they paid was zero. In fact, the government owed the Marie Fund, so it didn't matter. It varies in many ways, so since it varies in many ways and varies by many returns. It might vary depending upon whether it affected your outside basis or something else. And the fact that it can vary your honor is one of the reasons why Congress, one of these determinations made at the partner level. And another thing on the jurisdictional question, I don't think the court could resolve this question looking only to the sham partnership situation here. Sometimes transactions are shamed, sometimes partnerships are shamed, and the jurisdictional question or answer to the question should apply across the board. And yet, if you have a situation where you have only a transaction shamed, then even the government would have to acknowledge that basis could be affected in many different ways in that situation. And again, getting back, couldn't the government have pursued this instead of saying, you know, it's a sham partnership, just said, just, couldn't the government simply have said that the partnership overstated its basis? It couldn't because, and it didn't because, again, if you go back to page 186, 169 of the joint appendix, everything about these transactions is accurately reported on that form, which is in the partnership return. The partnership actually reported a gain on these transactions. The error comes in at the partner level and is only on the partner return in the situation. And that's why you can't determine outside basis at the partnership level. And that's why you can't determine the applicability of this penalty at the partnership level. I have a second question, which I asked your friend as well. Is he correct that if we rule for you, each partner may have a different result, because different courts will find this to be a sham or not to be a sham. No, no, your owner, in this sense, if this court resolves the merits question, then that's why it applies or not in this context, is going to apply to all partners. So that issue is not going to vary by partner. What can happen by partner is different partners may have different outside basis. Even in this situation, my friend acknowledged you could have a partner that nevertheless reports zero as his basis in this situation and not the inflated basis. No, well, why wouldn't one court say, I don't think it's a sham partnership. Well, that determination, your owner, is being made at the partnership level and we agree that it can be made at that level and that determination applies to all the partners. There's no inconsistency about that. The only question here is whether the partnership level court can determine the applicability of the basis misstatement penalty as the government calls it. And it doesn't have jurisdiction to do that because it depends on that outside basis. But I think you're saying that. You say that that's not true because individual partners may respond differently to the partnership determination with respect to the basis. Some of them are going to put in something else, but somebody may put in zero for a number of the reasons that the IRS's counsel suggested. Yes. And now, I suspect that those will be only in rare circumstances. And I guess that's why the DC Circuit said, even though the result here may be obvious, it nonetheless depends on the outside basis determination. Exactly. What I understand your friend to be saying is it's not just that it's obvious, but it's ineluctable and therefore it doesn't depend on the outside partnership determinations. So does your case hinge on the perhaps unusual situations where you have one of these partners having a fit of conscience and decides to put down the real number or has some other adjustment to it? I think largely, yes, but if I can explain that first, I mean, that presents the low hanging fruit situation, the DC Circuit, resolved. And we think they were right to say, even if you think it's low hanging, you're fruit been to pick it. Second, here are the whole partnership is shammed. But there are certainly cases where individual transactions are shammed. And if individual transactions are shammed, then the outside basis could vary widely based on the individual circumstances of the partners. And so there in that situation, it's not at all obvious or necessarily true that the basis is going to be overstated. You have to look. And again, that's why it's a completely separate determination made for your level. Concrete example, because I'm not quite sure about what you're talking about. Well, you could have a partnership, your honor, that engages in many transactions. And the IRS would determine that one of the many transactions that it entered into was a sham. That particular transaction was only designed for tax purposes. But other transactions that engage in work legitimate

. Well, that determination, your owner, is being made at the partnership level and we agree that it can be made at that level and that determination applies to all the partners. There's no inconsistency about that. The only question here is whether the partnership level court can determine the applicability of the basis misstatement penalty as the government calls it. And it doesn't have jurisdiction to do that because it depends on that outside basis. But I think you're saying that. You say that that's not true because individual partners may respond differently to the partnership determination with respect to the basis. Some of them are going to put in something else, but somebody may put in zero for a number of the reasons that the IRS's counsel suggested. Yes. And now, I suspect that those will be only in rare circumstances. And I guess that's why the DC Circuit said, even though the result here may be obvious, it nonetheless depends on the outside basis determination. Exactly. What I understand your friend to be saying is it's not just that it's obvious, but it's ineluctable and therefore it doesn't depend on the outside partnership determinations. So does your case hinge on the perhaps unusual situations where you have one of these partners having a fit of conscience and decides to put down the real number or has some other adjustment to it? I think largely, yes, but if I can explain that first, I mean, that presents the low hanging fruit situation, the DC Circuit, resolved. And we think they were right to say, even if you think it's low hanging, you're fruit been to pick it. Second, here are the whole partnership is shammed. But there are certainly cases where individual transactions are shammed. And if individual transactions are shammed, then the outside basis could vary widely based on the individual circumstances of the partners. And so there in that situation, it's not at all obvious or necessarily true that the basis is going to be overstated. You have to look. And again, that's why it's a completely separate determination made for your level. Concrete example, because I'm not quite sure about what you're talking about. Well, you could have a partnership, your honor, that engages in many transactions. And the IRS would determine that one of the many transactions that it entered into was a sham. That particular transaction was only designed for tax purposes. But other transactions that engage in work legitimate. Now, in this case, the IRS is saying that the whole, everything the partnership did is a sham. But in my case, some transactions are okay, some are different. In that case, the individual partners outside basis, they may have, they may have tried to take advantage of the sham transaction, but yet all the other transactions affect their basis as well in the partnership. I'm a little confused on this example. Presumably, it's only if they carried forward which we're assuming they would have done carried forward the outside basis. The penalty would have been determined just on that one transaction. No, because your honor, again, the penalty is based on what the individual partner claims as his basis. And that partner is going to be looking to everything that goes into his partnership interest, the costs or investment in the partnership pertaining not only to the one transaction that we've hypothesized that it's been shamed, but many other transactions as well. So you can't conclude either that there's been any statement or that any misstatement triggers the valuation misstatement penalty here. If I could talk a little bit about the merits. On the merits, our fundamental question is that evaluation misstatement penalty, the Congress divides in 1981, was not intended at all to apply to the fundamentally different situation here, where the government is claiming not that you mistated the correct amount of the value or that you didn't have an accurate amount of the value or the number that you put for basis or value, but that the thing that's the subject of the valuation of the basis doesn't exist at all. I mean, we know if you look at the pre-enactment history, the post-enactment history, we know that this is not what Congress had in mind. If you look at the pre-enactment history, it's all about resolving a problem of a backlog of cases where taxpayers were misvaluing property and the actual property. Well, that was wrote in typical case, Mr. Gar, there's no question that that's the central case that Congress had in mind, but it doesn't have to be the only case. And they wrote words that seem to be applicable to this case, as well as to the kind of case that you're talking about. Your Honor, they have basis and we have context, punctuation, pre-enactment history, post-enactment history, and structure. I'm sorry, you're saying they have text and you have a bunch of other. Well, not at all, Your Honor, because not at all, Your Honor, because this is a valuation of the statement penalty. The reference to or adjusted basis comes in a parenthetical subordinate way. And let me give you a hypothetical. One of my associates came up with a good example, I think. If you had a contract for a wedding that provided for flowers or plants and parentheses, you would understand that to mean flowers or plants like lilies or ferns that would accompany flowers in the wedding, you wouldn't read that to include an oak tree in the middle of the reception area. Well, the government's basis overstatement penalty is the oak tree in the middle of the reception area here. The most common situation in which basis misstatements are made, the government acknowledges throughout its brief, is where you misstate the price or cost of a good

. Now, in this case, the IRS is saying that the whole, everything the partnership did is a sham. But in my case, some transactions are okay, some are different. In that case, the individual partners outside basis, they may have, they may have tried to take advantage of the sham transaction, but yet all the other transactions affect their basis as well in the partnership. I'm a little confused on this example. Presumably, it's only if they carried forward which we're assuming they would have done carried forward the outside basis. The penalty would have been determined just on that one transaction. No, because your honor, again, the penalty is based on what the individual partner claims as his basis. And that partner is going to be looking to everything that goes into his partnership interest, the costs or investment in the partnership pertaining not only to the one transaction that we've hypothesized that it's been shamed, but many other transactions as well. So you can't conclude either that there's been any statement or that any misstatement triggers the valuation misstatement penalty here. If I could talk a little bit about the merits. On the merits, our fundamental question is that evaluation misstatement penalty, the Congress divides in 1981, was not intended at all to apply to the fundamentally different situation here, where the government is claiming not that you mistated the correct amount of the value or that you didn't have an accurate amount of the value or the number that you put for basis or value, but that the thing that's the subject of the valuation of the basis doesn't exist at all. I mean, we know if you look at the pre-enactment history, the post-enactment history, we know that this is not what Congress had in mind. If you look at the pre-enactment history, it's all about resolving a problem of a backlog of cases where taxpayers were misvaluing property and the actual property. Well, that was wrote in typical case, Mr. Gar, there's no question that that's the central case that Congress had in mind, but it doesn't have to be the only case. And they wrote words that seem to be applicable to this case, as well as to the kind of case that you're talking about. Your Honor, they have basis and we have context, punctuation, pre-enactment history, post-enactment history, and structure. I'm sorry, you're saying they have text and you have a bunch of other. Well, not at all, Your Honor, because not at all, Your Honor, because this is a valuation of the statement penalty. The reference to or adjusted basis comes in a parenthetical subordinate way. And let me give you a hypothetical. One of my associates came up with a good example, I think. If you had a contract for a wedding that provided for flowers or plants and parentheses, you would understand that to mean flowers or plants like lilies or ferns that would accompany flowers in the wedding, you wouldn't read that to include an oak tree in the middle of the reception area. Well, the government's basis overstatement penalty is the oak tree in the middle of the reception area here. The most common situation in which basis misstatements are made, the government acknowledges throughout its brief, is where you misstate the price or cost of a good. And yet, they're moving, which is why the reference to a adjusted basis makes sense in the statutory scheme here. It covers that situation. But they're saying, you don't need to, it goes far beyond that, not only to the prosaic situation as they call it, but to a situation where you're not complaining about whether the thing, what the correct number is or what the correct amount is, you're saying the thing doesn't exist at all. I mean, if I donate a painting that I say is worth a million dollars to a church, and I put that on my return, but in fact, it turns out that I didn't donate the painting, I may have committed a fraud, I may have lied about contributing to painting, but I haven't made a valuation statement, nor have I misstate in my basis. And I think our position is here that if you look at everything, as I mentioned, the words of the statute, the context in which a basis is appears, a structure, there's a graduated scheme that makes no sense with a zero basis situation, which is essentially a nullity. If you look at the fact that Congress addressed this in 2010, not by many in the valuation of the statement penalty, but by enacting a penalty designed to apply to the situation, the non-economic trans-exand situation. So just to be clear, if this, if six had been on the books, then you would have no quarrel with the government's position, they could do this at the partnership level. Yes. Absolutely. That's the way Congress designed it, and the last, I didn't get the question if what was over there. If the non-economic substance transaction penalty that was enacting in 2010 was on the books, what would happen is a quarka determine the applicability of that penalty, which is based on what the partnership did, at the partnership proceeding, and we would agree that penalty applies. All the problems are solved by what Congress did to address this particular situation. The government is trying to put that square peg in a round hole. And if you add everything up, I think what's interesting about the government's reply brief is it doesn't contest that if there's any ambiguity here, the statute has to be read in favor of the taxpayer. And that's because of the canon that this Court has recognized that tax penalties are strictly construed in favor of the taxpayer. Here at a bare minimum, there is ambiguity as to whether the Congress that passed the valuation of the statement penalty ever intended to apply to this fundamentally different situation where no one disagrees about the numbers reporting on the return. Again, if you go to the partnership return, transactions are accurately reported. If you go to the outside basis, it's true that they reported a loss, but that's because they were following the IRS's rules about how you treat contingent liabilities. So that number is actually accurate under the IRS's rules. That's why the IRS has to come up with a sham to get rid of the property altogether and say that we're going to pretend that it doesn't exist at all. But again, that's not a valuation statement. When the tent penalty talks about correct amounts, about accuracy, about value, it's trying to get at the number of the thing that is worth. It is not concerned with a situation in which the IRS is claiming that the property doesn't exist at all. That is a different problem. Congress addressed it in a direct way in the non-economic substance penalty

. And yet, they're moving, which is why the reference to a adjusted basis makes sense in the statutory scheme here. It covers that situation. But they're saying, you don't need to, it goes far beyond that, not only to the prosaic situation as they call it, but to a situation where you're not complaining about whether the thing, what the correct number is or what the correct amount is, you're saying the thing doesn't exist at all. I mean, if I donate a painting that I say is worth a million dollars to a church, and I put that on my return, but in fact, it turns out that I didn't donate the painting, I may have committed a fraud, I may have lied about contributing to painting, but I haven't made a valuation statement, nor have I misstate in my basis. And I think our position is here that if you look at everything, as I mentioned, the words of the statute, the context in which a basis is appears, a structure, there's a graduated scheme that makes no sense with a zero basis situation, which is essentially a nullity. If you look at the fact that Congress addressed this in 2010, not by many in the valuation of the statement penalty, but by enacting a penalty designed to apply to the situation, the non-economic trans-exand situation. So just to be clear, if this, if six had been on the books, then you would have no quarrel with the government's position, they could do this at the partnership level. Yes. Absolutely. That's the way Congress designed it, and the last, I didn't get the question if what was over there. If the non-economic substance transaction penalty that was enacting in 2010 was on the books, what would happen is a quarka determine the applicability of that penalty, which is based on what the partnership did, at the partnership proceeding, and we would agree that penalty applies. All the problems are solved by what Congress did to address this particular situation. The government is trying to put that square peg in a round hole. And if you add everything up, I think what's interesting about the government's reply brief is it doesn't contest that if there's any ambiguity here, the statute has to be read in favor of the taxpayer. And that's because of the canon that this Court has recognized that tax penalties are strictly construed in favor of the taxpayer. Here at a bare minimum, there is ambiguity as to whether the Congress that passed the valuation of the statement penalty ever intended to apply to this fundamentally different situation where no one disagrees about the numbers reporting on the return. Again, if you go to the partnership return, transactions are accurately reported. If you go to the outside basis, it's true that they reported a loss, but that's because they were following the IRS's rules about how you treat contingent liabilities. So that number is actually accurate under the IRS's rules. That's why the IRS has to come up with a sham to get rid of the property altogether and say that we're going to pretend that it doesn't exist at all. But again, that's not a valuation statement. When the tent penalty talks about correct amounts, about accuracy, about value, it's trying to get at the number of the thing that is worth. It is not concerned with a situation in which the IRS is claiming that the property doesn't exist at all. That is a different problem. Congress addressed it in a direct way in the non-economic substance penalty. So this court doesn't have to worry about this problem being unaddressed, but what it should do is correctly interpret the penalty that Congress enacted, which was on the books when these events occurred, which is the valuation of the statement penalty. It is not the all-encompassing basis over statement penalty. I think if you're going to read one of the Amicus briefs, read the Shaq al-Amicus brief, it talks about all the additional situations in which IRS or Congress never applied this penalty to, which would be swept in by the government's position here today. Thank you, Council. Mr. Stewart, you have five minutes left. Mr. Chief Justice, Justice Kagan, I agree with your point that on the jurisdictional issue the crucial contested language is related to, and the issue is whether the basis over statement penalty here relates to the shaming for it. How does it not, partnership item is defined to include legal and factual determinations that underlie the determination among other things that income credit gain loss. Okay. Whether there's a partnership at all does underlie the determination of whether the partnership return, which had all kinds of numbers on it, shows anything. That's correct. All right, so therefore it's a partnership item. Does this penalty relate to a partnership item? I don't want to say that you're right for the wrong reason, so you better be sure I'm right. That is, does it relate to a partnership item? I just told you what a partnership item was. It certainly seems to, because the zero is what it relates to. Yeah, I mean, the end of case. Well, better die. It can't be that simple. We have three courts. Let me pose perhaps a less friendly question. God. What do you do with your friend's hypothetical? On the tackles, Sharon, you say, I gave a painting to a charity worth a million dollars. And in fact, he did not. And he says, what you're doing is you're going to go in and say, that wasn't worth a million dollars

. So this court doesn't have to worry about this problem being unaddressed, but what it should do is correctly interpret the penalty that Congress enacted, which was on the books when these events occurred, which is the valuation of the statement penalty. It is not the all-encompassing basis over statement penalty. I think if you're going to read one of the Amicus briefs, read the Shaq al-Amicus brief, it talks about all the additional situations in which IRS or Congress never applied this penalty to, which would be swept in by the government's position here today. Thank you, Council. Mr. Stewart, you have five minutes left. Mr. Chief Justice, Justice Kagan, I agree with your point that on the jurisdictional issue the crucial contested language is related to, and the issue is whether the basis over statement penalty here relates to the shaming for it. How does it not, partnership item is defined to include legal and factual determinations that underlie the determination among other things that income credit gain loss. Okay. Whether there's a partnership at all does underlie the determination of whether the partnership return, which had all kinds of numbers on it, shows anything. That's correct. All right, so therefore it's a partnership item. Does this penalty relate to a partnership item? I don't want to say that you're right for the wrong reason, so you better be sure I'm right. That is, does it relate to a partnership item? I just told you what a partnership item was. It certainly seems to, because the zero is what it relates to. Yeah, I mean, the end of case. Well, better die. It can't be that simple. We have three courts. Let me pose perhaps a less friendly question. God. What do you do with your friend's hypothetical? On the tackles, Sharon, you say, I gave a painting to a charity worth a million dollars. And in fact, he did not. And he says, what you're doing is you're going to go in and say, that wasn't worth a million dollars. It was worth nothing. When, in fact, what you should be saying is, you didn't give the painting at all. I think this is a different situation because the IRS did not determine that the underlying transactions, the purchases and sale of currency options and so forth, didn't occur. It determined that the partnerships were shams. And I think that this is an important point. Well, but if you determine that the partnerships were shams, that's like saying there were no partnerships. There were no partnerships. And if you say, I didn't really give the painting, that means there wasn't any painting. It seems to me that pretty closely parallel. But what the FPA also said was, because there were no partnerships, the transactions should be treated as though they had were engaged in by the individual partner, maybe in a frame with a blank canvas. And I think, as I was starting to say at the close of my opening argument, it's no accident that partnerships were used to effectuate the scheme because if the individuals had bought and sold the offsetting for currency options, they would have had no colorable rationale for contending that they were entitled to a deduction for the cost of the long option, but they were not required to treat as income the amount they received from the short option. It would have been absolutely clear that the transaction taken as a whole was a wash. The only way that they could try to create the appearance of a paper loss was by manipulating the rules that govern the computation of basis in partnerships. And so the shaming determination in effect was a determination that for tax purposes, you can't try to take advantage of the Helmer rule that says that for computing basis in a partnership, we will ignore the contingent liability created by the short option. The other thing I would say on the merits is to why we care about this case is that respondents' argument doesn't just go to on subsection three, doesn't just go to basis over statements that are produced through sham transactions. It goes to all basis over statements that are produced through legal errors. Do you agree that the new legislation completely resolves this problem? It completely resolves the specific problem posed by this almost completely resolves the specific problem. Subsection six undoubtedly would cover this case. Now subsection six, the trigger for having a 40% penalty rather than a 20% penalty is slightly different. Under subsection six, you are, if you disclose the relevant information on your tax return, then even if it's later determined that the transaction leak-black economic substance, you would be subject only to the 20% penalty. Under subsection three, you can get the 40% if the overstatement is 400% or more regardless of disclosure, but it almost completely covers it. But other. Kagan, would you go back just one moment to the practical point that your brother made? Is this issue only about whether you collect the tax beforehand or after? Because he says that they are bound in a partner level proceeding to the finding that the outside basis was, that if it was claimed in the partnership level, it was zero. Well, with respect to jurisdiction, the question simply goes to the allocation of responsibilities between the partnership level court and the partner level court. Now, when he says we're trying to avoid deficiency proceedings, I think it ignores the fact that under our reading, the important legal objections that respondent has made to the penalty, namely the arguments that are set forth in part two of their brief, can resolve, under our theory, can be resolved at the partnership level without prepayment of penalties

. Thank you, counsel. The case is submitted