United States: Supreme Court Decision Alert - December 3, 2013

Last Updated: December 4 2013
Article by Richard B. Katskee

Yesterday (December 3, 2013) the Supreme Court issued two decisions, described below, of interest to the business community.

  • Taxation—Penalties for Overstating Basis—District Court Jurisdiction
  • Forum-Selection Clauses—Proper Venue—Transfer Between Districts

Taxation—Penalties for Overstating Basis—District Court Jurisdiction

United States v. Woods, No. 12-562 (previously discussed in the March 25, 2013, Docket Report)

Section 6662(e) of the Internal Revenue Code imposes a penalty for an underpayment of income tax that is "attributable to" an overstatement of the value or basis of property. Today, the Supreme Court, in a unanimous opinion by Justice Scalia, held that the overstatement penalty is applicable to an underpayment resulting from a basis-inflating transaction subsequently disregarded for lack of economic substance. The Court also decided that district courts have jurisdiction to consider the applicability of tax penalties in partnership-level proceedings.

Woods arose from an IRS determination that two partnerships involving the same two individuals had engaged in a sham transaction—the COBRA tax shelter promoted during the 1990s—for the sole purpose of generating tax losses. The district court upheld the IRS determination disregarding the partnerships as shams. But the court overturned the assessment of a valuation-misstatement penalty, based on Fifth Circuit precedent excepting the total disallowance of a deduction from the penalty for valuation overstatements. Woods v. United States, 794 F. Supp. 2d 714, 717 (W.D. Tex. 2011). The IRS appealed, and the Fifth Circuit affirmed in a per curiam opinion, holding that the issue was "well settled" in the circuit.

The Supreme Court reversed. As an initial matter, the Supreme Court held that the district court had jurisdiction to determine the applicability of the tax penalty even though the proceeding was at the partnership level rather than the partner level. (Partnerships file tax returns but do not pay taxes or penalties.) The Court held that Section 6224(f) of the Internal Revenue Code gives courts in partnership-level proceedings "jurisdiction to determine the applicability of any penalty that could result from an adjustment to a partnership item, even if imposing the penalty would also require determining affected or non-partnership items such as outside basis." The Court emphasized, however, that "such a partnership-level applicability determination is provisional: the court may decide only whether adjustments properly made at the partnership level have the potential to trigger the penalty." Individual partners remain free to dispute the imposition of any penalty on them specifically in subsequent partner-level proceedings.

Turning to the merits of the case, the Court determined that, where an asset's true value or adjusted basis is zero, any claim of a positive basis is automatically a gross-valuation misstatement, so that the penalty under Section 6662(e) applies. Woods had argued that the penalty applies only to factual misrepresentations about an asset's worth—not to misrepresentations that rest on legal errors (such as what properly constituted the asset's basis). The Court rejected this argument, noting that Section 6662(e) also applies to an overstatement of "adjusted basis," which clearly incorporates legal considerations. The Court also rejected Woods' argument that any underpayment of tax in this case would be "attributable" not to a basis misstatement, but rather to the determination that the partnerships were shams—a supposedly "independent legal ground." Contrary to this view (which reflected the approach of the Fifth and Ninth Circuits), the Court held that the "economic-substance determination and the basis misstatement are not 'independent' of one another." Rather, the Court observed, the basis overstatement at issue was the "linchpin of the tax shelter," and the mechanism by which Woods sought to reduce his taxable income. Therefore, the valuation-misstatement penalty applied.

The Court's decision is important to all taxpayers engaging in basis-increasing transactions that may be challenged by the IRS as lacking economic substance. Additionally, the Court's jurisdictional decision is relevant to any partnerships or individual partners that may contest the applicability of tax penalties based on the partnership's treatment of tax items.

Forum-Selection Clauses—Proper Venue—Transfer Between Districts

Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, No. 12-929 (previously discussed in the April 1, 2013, Docket Report)

What procedure should a defendant use to enforce a forum-selection clause when the defendant is sued in a court that is not the contractually selected forum?

The Supreme Court today held in Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, No. 12-929, that if the case is filed in a federal district court that is authorized by statute (but not the forum that the parties selected), the defendant should invoke 28 U.S.C. § 1404(a), which permits the court to transfer the case it to another proper venue "[f]or the convenience of the parties and witnesses, in the interest of justice." The defendant may invoke 28 U.S.C. § 1406(a), which authorizes a district court to dismiss or transfer a case, only if the action is filed in a venue not authorized by statute.

Importantly, the Court held both that the party resisting the forum-selection clause has the burden of establishing that public interests disfavoring transfer outweigh the parties' contractual choice of forum, and that the parties' choice should control except in the most unusual cases.

Atlantic Marine is significant for the business community because it provides greater certainty regarding the enforceability of forum-selection clauses, giving businesses that employ such clauses in their contracts greater predictability about where they will face future litigation. The Court reinforced the strong policy favoring the enforcement of such clauses, and clarified the mechanism for their enforcement.

In this case, Atlantic Marine Construction had entered into a contract with J-Crew Management that called for all disputes to be resolved in the state or federal court in Norfolk, Virginia. After J-Crew sued Atlantic Marine in federal court in Texas, Atlantic Marine invoked the forum-selection clause and sought to dismiss or transfer under § 1406(a), or else to transfer under § 1404(a). The district court declined to transfer, concluding that § 1406(a) did not apply because venue in Texas was proper despite the forum-selection clause, and that the balance of public and private interests weighed against a discretionary transfer under § 1404(a). The Fifth Circuit denied Atlantic Marine's petition for a writ of mandamus, concluding that Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), implicitly held that a forum-selection clause is a nondispositive factor favoring transfer under § 1404(a), and is irrelevant under § 1406(a). Over a dissent that noted the presumptive enforceability of forum-selection clauses, the panel majority concluded that the district court did not clearly abuse its discretion in weighing public and private interests under § 1404(a).

In a unanimous opinion by Justice Alito, the Supreme Court reversed and remanded. The Court first reasoned that a forum-selection clause does not render venue in an unselected forum "wrong" or "improper," because the venue statute (28 U.S.C. § 1391) does not address forum-selection clauses. Slip op. 4-8. Accordingly, when a case is filed in a district in which venue is proper under § 1391, a party may not enforce the clause using mechanisms for dismissal or transfer that are predicated on the wrongfulness or impropriety of venue, such as 28 U.S.C. § 1406(a) for clauses selecting federal forums, or Fed. R. Civ. P. 12(b)(3) for clauses selecting state forums. Rather, a clause selecting a federal forum may be enforced using § 1404(a), and a clause selecting a state forum may be enforced under the forum non conveniens doctrine.

The Court then described the appropriate standard for transfer. In ordinary cases not involving forum-selection clauses, courts must balance "the convenience of the parties and various public-interest considerations" to determine whether transfer would promote "the interest of justice." 28 U.S.C. § 1404(a). But that analysis shifts in three important ways, the Court explained, in cases involving forum-selection clauses. First, in balancing interests the court may not consider "the plaintiff's choice of forum," because the plaintiff had already agreed by contract that another forum is more appropriate. Slip op. 13. Second, because forum-selection clauses "waive" the parties' "right to challenge the preselected forum as inconvenient," the courts must "consider arguments about public-interest factors only." Id. The parties' contractual choice of forum will outweigh public-interest factors "in all but the most exceptional cases." Id. at 12 (quoting Stewart, 487 U.S. at 33 (Kennedy, J., concurring)). Finally, in order to avoid privileging a party that "flouts its contractual obligation and files suit in a different forum," the transferee court will apply the choice-of-law rules of the contractually selected forum, as if the case had been filed there in the first instance. Id. at 14-15. (The same revised analysis would apply in determining whether dismissal on forum non conveniens grounds is appropriate in a case in which a state or foreign forum is selected by the contract.) The Court remanded to allow the lower courts to consider in the first instance whether any other public-interest factors preclude enforcement of the clause in this case.

Please visit us at www.appellate.net

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions