Ginsburg v. United States

• Decision Date: 26 October 2021
• Docket Number: No. 19-11836,19-11836
• Citation: 17 F.4th 78
• Parties: Alan H. GINSBURG, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

17 F.4th 78

Alan H. GINSBURG, Plaintiff-Appellant,

v.UNITED STATES of America, Defendant-Appellee.

No. 19-11836

United States Court of Appeals, Eleventh Circuit.

Filed: October 26, 2021

Susan E. Seabrook, James N. Mastracchio, Winston & Strawn, LLP, Washington, DC, Melissa Lorraine Fox, Rebecca M. Stork, Eversheds Sutherland (US) LLP, Atlanta, GA, Rebecca E. Rhoden, Lowndes Drosdick Doster Kantor & Reed, PA, Orlando, FL, Meghana D. Shah, Eversheds Sutherland (US) LLP, New York, NY, Daniel Graham Strickland, Eversheds Sutherland (US) LLP, Washington, DC, for Plaintiff-Appellant

Ivan Clay Dale, Michael J. Haungs, U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, U.S. Attorney Service - Middle District of Florida, U.S. Attorney's Office, Tampa, FL, for Defendant-Appellee

Before Branch, Luck, and Ed Carnes, Circuit Judges.

Luck, Circuit Judge:

The tax code prohibits the Internal Revenue Service from assessing a tax penalty "unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination." 26 U.S.C. § 6751(b)(1). The question in this case is when must a partner in a limited liability company or a partnership raise the section 6751(b)(1) supervisory approval issue: Before or after he files his refund lawsuit? During the partnership-level proceedings or the partner-level proceedings? We hold that, in partnership tax cases controlled by the Tax Equity and Fiscal Responsibility Act of 1982, the supervisory approval issue must be exhausted with the Service before the partner files his refund lawsuit and it must be raised during the partnership-level proceedings. Because Alan H. Ginsburg did not exhaust the section 6751(b)(1) supervisory approval issue before he filed his refund lawsuit, and because he didn't raise the issue during the partnership-level proceedings, we affirm the summary judgment for the government.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Tax Equity and Fiscal Responsibility Act of 1982

Because this is a partnership tax case, we start with a few words about how partnership taxation works. "A partnership does not pay federal income taxes; instead, its taxable income and losses pass through to the partners." United States v. Woods , 571 U.S. 31, 38, 134 S.Ct. 557, 187 L.Ed.2d 472 (2013) (citing 26 U.S.C. § 701 ). "A partnership must report its tax items for the taxable year on an information return ... and must issue to each partner such information showing that partner's distributive share of the partnership's tax items ...." Greenberg v. Comm'r , 10 F.4th 1136, 1145 (11th Cir. 2021). "In turn, the individual partners must report their distributive shares of the partnership's tax items on their own respective income tax returns." Id.

Before 1982, "tax matters pertaining to all the members of a partnership were dealt with just like tax matters pertaining only to a single taxpayer: through deficiency proceedings at the individual-taxpayer level." Woods , 571 U.S. at 38, 134 S.Ct. 557. The inability to correct a partnership return in a single, unified proceeding "led to duplicative proceedings and the potential for inconsistent treatment of partners in the same partnership." Id. ; see also Greenberg , 10 F.4th at 1145 ("Before the enactment of TEFRA, the [Service] was unable to correct errors on a partnership's return in a single, unified proceeding; instead, tax matters pertaining to the individual partners were conducted through deficiency proceedings at the individual-taxpayer level."). To fix this perceived problem, Congress enacted the Tax Treatment of Partnership Items Act of 1982 as Title IV of the Tax Equity and Fiscal Responsibility Act of 1982. 96 Stat. 648 (codified as amended at 26 U.S.C. §§ 6221 – 6232 (2006 ed. and Supp. V)).¹ See Woods , 571 U.S. at 38, 134 S.Ct. 557.

Under the Act, partnership-related tax matters are resolved in two stages: first the partnership level; and then the partner level. Id. at 39, 134 S.Ct. 557. During the partnership-level proceedings, the Service may adjust the "partnership items," or items relevant to the partnership as a whole, by issuing a notice of final partnership administrative adjustment. Id. at 36, 39, 134 S.Ct. 557. See 26 U.S.C. §§ 6221, 6231(a)(3). During the partnership-level proceedings, the Service also assesses and collects "any tax attributable" to the partnership and determines the "applicability of any penalty." Id. § 6221(a). The partnership can challenge the adjustment notice by filing a petition for readjustment with the United States Tax Court, the Court of Federal Claims, or a federal district court. Id. § 6234(a). A reviewing court has jurisdiction to "determine all partnership-related items for the partnership taxable year to which the notice ... relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount for which the partnership may be liable." Id. § 6234(c). All partners are bound "by any final decision in a proceeding brought ... with respect to the partnership." Id. § 6223(b).

Once the partnership-level proceedings become final, a partner-level proceeding begins. Woods , 571 U.S. at 39, 134 S.Ct. 557. At this partner-level proceeding, the results of the partnership-level proceeding are "conclusive" on the individual partners (with the exception of some partner-specific defenses). Id. at 41, 134 S.Ct. 557 (quoting 26 U.S.C. § 6230(c)(4) ). While the question of whether a penalty should be applied is determined at the partnership-level proceeding, the question of whether a penalty will be imposed against a specific partner is determined at a partner-level proceeding. Id. at 40–41, 134 S.Ct. 557. "Each partner remains free to raise [at the partner-level proceeding] any reasons why the penalty may not be imposed on him specifically." Id. at 42, 134 S.Ct. 557.

Ginsburg's partnership-level proceedings

Turning to this case, on October 29, 2001, Ginsburg, Alpha Consultants LLC, Samuel Mahoney, and Helios Trading LLC formed AHG Investments LLC. On its 2001 partnership tax return, AHG Investments reported a $25,618 total loss. But on Ginsburg's 2001 tax return, he reported a $10,069,505 loss from AHG Investments. Ginsburg used the reported $10,069,505 loss from AHG Investments to offset his $22,826,616 in income and decrease his tax liability by $3,583,873.

On September 11, 2008, the Service sent Ginsburg notice that it was proposing adjustments to the partnership items on AHG Investments's 2001 and 2002 tax returns. The Service alleged that AHG Investments and its partners had not established that AHG Investments was a "partnership as a matter of fact." Instead, it "was formed ... solely for purposes of tax avoidance." AHG Investments "was a sham" and "lacked economic substance," the Service wrote, and its "principal purpose ... was to reduce substantially the present value of its partners’ aggregate federal tax liability." Thus, the Service said, it would disregard the partnership, the "purported partners of AHG Investments" would not be treated as partners, and "any purported losses" would not be "allowable as deductions." For Ginsburg, the Service "disallowed" the $10,069,505 loss from AHG Investments on his 2001 tax return. And the Service said it would impose a forty percent penalty for "gross valuation misstatement." Any of the partners could contest the Service's adjustments in the tax court, the court of federal claims, or the district court "in the district of the partnership's principal place of business."

At the partnership-level proceeding, Ginsburg petitioned the tax court to contest the part of the Service's adjustment notice imposing a forty percent penalty for grossly misstating AHG Investments's value. AHG Invs., LLC v. Comm'r , 140 T.C. 73, 73–74 (2013). Ginsburg agreed that he was not entitled to deduct AHG Investments's losses because he was not at risk and the partnership's transactions did not have substantial economic effect. Id. But Ginsburg contested the forty percent gross valuation misstatement penalty. Id.

Based on Ginsburg's concessions, the tax court found that AHG Investments "was a sham, lacked economic substance[,] and was formed ... for purposes of tax avoidance." The tax court concluded that AHG Investments must be "disregarded for federal income tax purposes," and adjusted AHG Investments's 2001 tax return, consistent with the Service's notice, to show no losses. The tax court also rejected Ginsburg's petition, id. at 85, and concluded that the forty percent penalty "applies to any underpayment of tax attributable to any gross valuation misstatement ..., subject to any partner-level defenses."

Ginsburg's partner-level proceedings

Based on the tax court's decision, the Service sent Ginsburg a notice of computational adjustment "which reflect[ed] the amount [he] owe[d] based upon adjustments to a partnership[ ] in which [he was] directly or indirectly invested." The computational adjustment disallowed the $10,069,505 loss from Ginsburg's 2001 tax return, which resulted in a $2,458,964 tax deficiency. The Service also calculated the forty percent penalty as $983,586. The notice told Ginsburg that if he wanted to dispute the computational adjustment made to his return, or if he wanted to "assert partner-level defenses to any penalty imposed in [the] notice," he had to pay the adjusted tax in full and "then file a claim for refund" with the Service. If the Service disallowed his refund claim, Ginsburg could "file a refund suit as provided by law."

Ginsburg paid the $2,458,964 tax deficiency, the $983,586 penalty, and $3,208,674 in interest on the tax deficiency and penalty and filed a claim for refund with the Service. Ginsburg asked the Service to refund his $983,586 penalty and $876,198 of interest paid on the penalty. Ginsburg explained that he was entitled to a refund because he reasonably relied in good faith on...