WASHINGTON (CN) - The Supreme Court said Monday that it will decide whether a federal judge properly assumed jurisdiction in a dispute over partnership adjustments.
At the heart of the matter are two partnerships created in a tax-avoidance scheme for the assets of Texas philanthropist Billy Joe "Red" McCombs, a former owner of the San Antonio Spurs and the Minnesota Vikings.
Gary Woods had spent the past 30 years as the "right-hand man" to McCombs and acted as president of McCombs Enterprises, the umbrella surrounding McCombs' various interests.
Acting on his own behalf and on behalf of McCombs, Woods decided in November 1999 to participate in a tax shelter known as Cobra. He implemented the Cobra plans by forming three sets of business entities, including the two partnerships, Tesoro Drive Partners and SA Tesoro Investment Partners.
Those partnerships bought shares in Sun Microsystems, and Tesoro Drive Partners sold its Sun Micro shares in December, resulting in a short-term capital gain of $5,000. Before the year was out, both partnerships were effectively liquidated. Woods and McCombs then claimed that the sale of the Tesoro Drive Investors assets resulted in an ordinary tax loss of $13.3 million. They said that unloading the other partnership's Sun shares resulted in a $32.2 million short-term capital loss for tax purposes.
Woods filed separate complaints against the United States in the Western District of Texas in 2005 to order the readjustment of certain items in the 1999 partnership returns.
After a consolidated bench trial in 2010, U.S. District Harry Hudspeth granted the United States judgment as a matter of law.
"These were collateral transactions, which not only did not produce the tax benefit at issue in this case, but did the opposite - they resulted in taxable income to the partnerships," Hudspeth wrote. "The 'transaction that is relevant in this case is the plaintiff's use of two partnerships with a six-week life span to conduct that trading for the sole purpose of generating a paper loss."
Hudspeth added that the asset transfers here were "totally lacking in economic substance" and were "for the sole purpose of creating a tax benefit."
"Therefore, both the ordinary loss and the capital loss claimed by the respective partnerships should be disregarded for tax purposes," the ruling states. "The defendant is entitled to judgment in its favor with respect to the plaintiffs' petition for review of those particular adjustments to the partnership returns."
The September 2010 order states that Hudspeth founded the jurisdiction on Section 6226(a)(2) of U.S. Code.
In March 2011, Hudspeth reversed the imposition of penalties for misstatement of valuation imposed by the Internal Revenue Service commissioner. He entered judgment for the United States and affirmed the commissioner's rulings "with respect to the applicability of other penalties, additions to tax, and all other adjustments to the partnership returns."
The 5th Circuit affirmed with a one-page unsigned order in June 2012.
On Monday, however, the Supreme Court agreed to decide whether Section 6226 gave Hudspeth jurisdiction to consider the substantial valuation misstatement penalty.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.