Woods and McCombs created a tax-shelter partnership 14 years ago that, after an audit, was found to be a tax sham. The IRS then applied a 40% penalty to the partners as a pass-through from the partnership.
Woods and McCombs fought the application of the penalty in court, winning at the district court level and in appeals. The Supreme Court subsequently decided to take up the issue and heard arguments last Wednesday.
The issue is whether a partnership structure can shield the partners from tax liabilities or penalties generated by the partnership.