Greenberg v. Comm'r of Internal Revenue, 20-13001

CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)
Writing for the CourtLAGOA, Circuit Judge
Docket Number20-13001,20678-09,1335-06,20676-09,20677-09
PartiesDAVID B. GREENBERG, Petitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee, DAVID B. GREENBERG, Petitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee, DAVID B. GREENBERG, Petitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee, DAVID B. GREENBERG, Petitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee, DAVID B. GREENBERG, Petitioner - Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee.
Decision Date20 August 2021

DAVID B. GREENBERG, Petitioner - Appellant,


DAVID B. GREENBERG, Petitioner - Appellant,


DAVID B. GREENBERG, Petitioner - Appellant,


DAVID B. GREENBERG, Petitioner - Appellant,


DAVID B. GREENBERG, Petitioner - Appellant,


Nos. 20-13001, 1335-06, 20676-09, 20677-09, 20678-09

United States Court of Appeals, Eleventh Circuit

August 20, 2021

Petition for Review of a Decision of the U.S. Tax Court Agency No. 001143-05

Before NEWSOM, BRANCH, and LAGOA, Circuit Judges.

LAGOA, Circuit Judge

This appeal primarily concerns the interpretation of provisions of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub. L. No. 97-248, 96 Stat. 324, in effect during the tax years at issue.[1] David Greenberg appeals the Tax Court's memorandum opinion upholding adjustments contained in five notices of deficiencies ("NODs") issued by the Internal Revenue Service against him for the tax years 1999, 2000, and 2001, as well as the Tax Court's adoption of the Commissioner of Internal Revenue's computations under Tax Court Rule 155 and its denial of several of Greenberg's posttrial motions. After careful review and with the benefit of oral argument, we affirm the Tax Court's decision.


This case concerns the appeal of five cases filed by Greenberg that were consolidated by the Tax Court in Tax Court Docket Nos. 1143-05, 1335-06, 20676 09, 20677-09, and 20678-09.[2] At issue in this case is a type of tax shelter known as "Son-of-BOSS."[3] As this Court has noted:

There are a number of different types of Son-of-BOSS transactions, but what they all have in common is the transfer of assets encumbered by significant liabilities to a partnership, with the goal of increasing basis in that partnership. The liabilities are usually obligations to buy securities, and typically are not completely fixed at the time of transfer. This may let the partnership treat the liabilities as uncertain, which may let the partnership ignore them in computing basis. If so, the result is that the partners will have a basis in the partnership so great as to provide for large-but not out-of-pocket-losses on their individual tax returns. Enormous losses are attractive to a select group of taxpayers- those with enormous gains

Highpoint Tower Tech. Inc. v. Comm'r, 931 F.3d 1050, 1052-53 (11th Cir. 2019) (quoting Kligfield Holdings v. Comm'r, 128 T.C. 192, 194 (2007)).

Specifically, the type of Son-of-BOSS transactions involved in the instant case is the Short Option Strategy ("SOS") transaction. The Tax Court below aptly explained SOS transactions as follows:

The SOS transaction required clients to (1) buy from a bank a foreign-currency option that involved both a long and a short position; (2) transfer the long position to a partnership which also assumed the client's obligation under the short position; and then (3) withdraw from the partnership and receive a liquidating distribution of foreign currency which the client would sell at a loss.

Greenberg v. Comm'r, T.C. Memo. 2018-74, at *8 (footnote omitted).

Before delving into this case's factual and procedural background, we first explain the statutory framework governing the taxation of partnerships during the relevant time period, given the complexity of the tax transactions before us.

A. Statutory Overview

"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 (2013); accord I.R.C. § 701. A partnership must report its tax items for the taxable year on an information return (generally, a Form 1065) and must issue to each partner such information showing that partner's distributive share of the partnership's tax items (generally, a Schedule K-1). See I.R.C. § 6031. In turn, the individual partners must report their distributive shares of the partnership's tax items on their own respective income tax returns. See id. §§ 702, 704, 6222(a); Woods, 571 U.S. at 38.

As noted above, during the taxable years at issue in this case, partnership audits and litigation were governed by provisions of TEFRA, which were formerly found in I.R.C. §§ 6221 through 6234.[4] Before the enactment of TEFRA, the IRS 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. See Highpoint, 931 F.3d at 1053. To address those difficulties, Congress enacted TEFRA, which created a "two-step process for addressing partnership-related tax matters." Id. As the Supreme Court explained in Woods:

First, the IRS must initiate proceedings at the partnership level to adjust "partnership items," those relevant to the partnership as a whole. §§ 6221, 6231(a)(3). It must issue [a Final Partnership Administrative Adjustment ("FPAA")] notifying the partners of any adjustments to partnership items, § 6223(a)(2), and the partners may seek judicial review of those adjustments, § 6226(a)-(b). Once the adjustments to partnership items have become final, the IRS may undertake further proceedings at the partner level to make any resulting "computational adjustments" in the tax liability of the individual partners. § 6231(a)(6). Most computational adjustments may be directly assessed against the partners, bypassing deficiency proceedings and permitting the partners to challenge the assessments only in post-payment refund actions. § 6230(a)(1), (c). Deficiency proceedings are still required, however, for certain computational adjustments that are attributable to "affected items," that is, items that are affected by (but are not themselves) partnership items. §§ 6230(a)(2)(A)(i), 6231(a)(5).

571 U.S. at 39.

Additionally, all partnerships-i.e., any partnership required to file a return under § 6031(a)-were subject to the TEFRA partnership procedures, unless the partnership qualified as a "small partnership." I.R.C. § 6231(a)(1). A small partnership was "any partnership having 10 or fewer partners each of whom [was] an individual . . ., a C corporation, or an estate of a deceased partner." Id. § 6231(a)(1)(B)(i). But a small partnership could elect out of the small partnership exception and choose to have TEFRA apply to it for the taxable year and all subsequent taxable years. Id. § 6231(a)(1)(B)(ii). As discussed below, Greenberg and the Commissioner dispute whether this election could have been taken by a partnership that did not qualify as a small partnership for the partnership taxable year in order to have TEFRA apply should the partnership qualify as a small partnership in the future.

Furthermore, each partnership designated a "tax matters partner" ("TMP") to act on its behalf in dealings with the IRS. See I.R.C. § 6231(a)(7). And, if the IRS did issue an FPAA following a partnership audit, the TMP was permitted to challenge those adjustments to the partnership items in the Tax Court. Id. §§ 6223(a), (d), 6226. TEFRA also contained exceptions under which an affected partner's taxes would be determined as if he or she had personally engaged in the partnership's transactions. For example, when a partner was under criminal investigation for violation of the internal revenue laws relating to income tax, the IRS was permitted to send that partner a conversion notice informing the partner that his or her partnership items for the partnership taxable shall be treated as nonpartnership items. See id. §§ 6231(b)(1)(D), (c); Treas. Reg. § 301.6231(c)-5T. With this statutory framework in mind, we turn to the factual and procedural background of the case.

B. Factual Background[5]

Greenberg is a certified public accountant who earned a degree in business and finance and a master's in accounting and who previously worked as a tax accountant at accounting firms such as Arthur Andersen, KPMG, and Deloitte. Greenberg met Goddard, an attorney, while working at Arthur Andersen.

1. The Purported Transactions

In January 1997, Greenberg and Goddard formed GG Capital, a California partnership that did not have a written partnership agreement. Goddard's law partner, Raymond Lee, later became a partner at GG Capital. A Panamanian investment company known as Solatium Investments Inc. ("Solatium") was also briefly a partner of GG Capital, but Solatium left the partnership by 1998. Greenberg claims that GG Capital ran an active investment business in digital-option spreads for both itself and its clients, i.e., a purpose completely unrelated to generating tax losses, although the Tax Court did not find many facts in support of his claim. Greenberg and Goddard also both assigned large amounts of their income from their "day jobs" to GG Capital, with Greenberg's assigned income coming from KPMG and Deloitte. GG Capital reported, as ordinary income from Greenberg, $617, 000, $898, 000, and $851, 000 for the tax years of 1999, 2000, and 2001, respectively. The Commissioner asserted to the Tax Court that this assignment of income was designed to offset ordinary income with the artificial losses GG Capital planned to generate.

During 1997 and 1998, GG Capital was purportedly involved with several transactions that resulted in inflating bases in various entities. According to Greenberg, GG Capital, in October 1997, acquired a 20% interest in a company known as DBI Acquisitions II ("DBI") and was credited with a $4 million capital account; Milestone Acquisitions, an entity controlled by a client of Goddard's law firm, controlled the other 80% of DBI. Next,...

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