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Date: 11-21-2021
Case Style:
Alan H. Ginsburg v. United States of America
Case Number: 19-11836
Judge: Robert J. Luck
Court: United States Court of Appeals
For the Eleventh Circuit
On appeal from The United States District Court
for the Middle District of Florida
Plaintiff's Attorney: United States Attorney’s Office
Defendant's Attorney:
Description:
Atlanta, GA - Partnership Tax lawyer represented defendant with a partnership tax case.
Because this is a partnership tax case, we start with a few x
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,
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19-11836 Opinion of the Court 3
38 (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 individualtaxpayer level.” Woods, 571 U.S. at 38. 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
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19-11836 Opinion of the Court 4
at 26 U.S.C. §§ 6221–6232 (2006 ed. and Supp. V)).1 See Woods,
571 U.S. at 38.
Under the Act, partnership-related tax matters are resolved
in two stages: first the partnership level; and then the partner level.
Id. at 39. 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. 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 partnershiprelated 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
1 The Act’s procedures for partnership taxation were prospectively repealed
by the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101(a), 129 Stat.
584, 625, effective for taxable years beginning on or after January 1, 2018.
Here, the relevant tax years were 2001 and 2002, so the Act’s procedures guide
our analysis. While our decision today will have “little impact” on the taxable
years on or after January 1, 2018, it nevertheless will be “relevant . . . with
respect to taxable years beginning before January 1, 2018.” Highpoint Tower
Tech. Inc. v. Comm’r, 931 F.3d 1050, 1052 n.2 (11th Cir. 2019).
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19-11836 Opinion of the Court 5
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. 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 (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. “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.
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
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19-11836 Opinion of the Court 6
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.
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19-11836 Opinion of the Court 7
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 partnerlevel 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
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19-11836 Opinion of the Court 8
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 accounting advice, a
tax opinion, legal advice, tax return services, and financial advice
from reputable firms and professionals.2
The Service denied Ginsburg’s refund claim. But the Service
told Ginsburg that if he disagreed with its decision, he could “file
suit to recover tax, penalties, or other amounts, with the United
States District Court that has jurisdiction or with the United States
Court of Federal Claims.”
Ginsburg filed a partner-level refund lawsuit against the
United States in the Middle District of Florida. He alleged that he
was not liable for the $983,586 penalty, and the $876,198 interest
on the penalty, “because he acted reasonably and in good faith with
respect to the underlying tax issues.”
The parties moved for summary judgment. The
government argued that Ginsburg could not and did not
reasonably rely on the advice of his accountants, tax experts,
lawyers, and financial advisors to avoid the penalty. Ginsburg
contended that he was entitled to summary judgment because the
government did not get “written approval of the penalty by an
2 Ginsburg also explained that he overpaid interest because, under the tax
code, interest should have been suspended between November 18, 2002 and
October 3, 2004. But the overpaid-interest issue isn’t relevant to this appeal.
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19-11836 Opinion of the Court 9
immediate supervisor,” as required by 26 U.S.C. section 6751(b)(1).
Without approval, Ginsburg asserted, “the penalty is void.” The
government had the burden to show that the Service complied
with section 6751(b)(1), Ginsburg argued, and there was no dispute
that it didn’t meet that burden here.
The district court granted the government’s summary
judgment motion and denied Ginsburg’s motion. The district
court concluded that Ginsburg could not have reasonably relied on
the advice of his tax, legal, and financial advisors. And the district
court determined that it couldn’t consider Ginsburg’s section
6751(b) supervisory approval argument because he didn’t exhaust
it in his claim for refund with the Service.
Ginsburg appeals the summary judgment for the
government.
STANDARD OF REVIEW
We review the district court’s summary judgment de novo,
viewing the facts and drawing all reasonable inferences in the light
most favorable to the non-moving party. NextEra Energy, Inc. v.
United States, 893 F.3d 1353, 1357 (11th Cir. 2018). Summary
judgment is appropriate if there is no genuine dispute of material
fact and the moving party is entitled to judgment as a matter of
law. Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986). We also
review the district court’s interpretation of the federal tax code
de novo. Batchelor-Robjohns v. United States, 788 F.3d 1280, 1284
(11th Cir. 2015).
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19-11836 Opinion of the Court 10
DISCUSSION
Ginsburg raises the same argument here as he did in his
summary judgment motion. He argues that under 26 U.S.C.
section 7491(c), the government has “the burden of production in
any court proceeding with respect to the liability of any individual
for any penalty.” 26 U.S.C. § 7491(c). The government’s burden
of production, Ginsburg continues, includes the requirement in
section 6751(b)(1) that “[n]o penalty . . . be assessed unless the
initial determination of [the] assessment is personally approved (in
writing) by the immediate supervisor of the individual making
[the] determination.” Id. § 6751(b)(1). The supervisory approval
requirement is an “element” of the government’s case and “part of
its burden of production.” The government, Ginsburg contends,
never established that it could satisfy this burden.
The government responds that, for two reasons, it was not
required to show that the penalty was approved by an immediate
supervisor. First, the government contends, Ginsburg didn’t
exhaust his argument that the Service didn’t comply with the
supervisory approval requirement. Ginsburg had to exhaust the
supervisory approval issue with the Service first before he could
raise it as part of his refund lawsuit. Second, the government
argues, Ginsburg had to raise all partnership-level defenses during
the partnership-level proceedings. The section 6751(b)(1)
supervisory approval issue is a partnership-level defense that
cannot be raised during the partner-level proceedings.
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19-11836 Opinion of the Court 11
Failure to exhaust
We agree with the government that Ginsburg did not
exhaust with the Service his supervisory approval argument. “No
suit or proceeding shall be maintained in any court for the recovery
. . . of any penalty claimed to have been collected without authority
. . . until a claim for refund or credit has been duly filed with the
[Service], according to the provisions of law in that regard, and the
regulations of the [Service] established in pursuance thereof.” Id. §
7422(a).
The Service’s regulations explain what must be in a duly
filed claim for refund. “The claim must set forth in detail each
ground upon which a credit or refund is claimed and facts sufficient
to apprise the [Service] of the exact basis thereof.” 26 C.F.R. §
301.6402-2(b)(1). And if the claim for refund “does not comply
with” the duly filed requirement, it “will not be considered for any
purpose as a claim for refund or credit.” Id.
That means “[a] taxpayer may not sue the United States for
a tax refund until [he] first files a refund claim with the
government.” Charter Co. v. United States, 971 F.2d 1576, 1579
(11th Cir. 1992) (citing 26 U.S.C. § 7422(a) (1988)). He must “detail
each ground upon which a refund is claimed,” and any later
“litigation of the government’s denial of a refund claim is limited
to the grounds fairly contained within the refund claim.” Id. (citing
26 C.F.R. § 301.6402-2(b)(1)). “Federal courts have no jurisdiction
to entertain taxpayer allegations that impermissibly vary or
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19-11836 Opinion of the Court 12
augment the grounds originally specified by the taxpayer in the
administrative refund claim.” Id.
There’s no dispute that Ginsburg’s administrative refund
claim didn’t include his supervisory approval argument. But
Ginsburg argues that the “[n]otwithstanding” clause in section
7491(c) means that the statute “trump[s] and override[s] any
conflicting provision” in the tax code, including the exhaustion
requirement in section 7422(a). Section 7491(c) reads, in full, that
“[n]otwithstanding any other provision of this title, the [Service]
shall have the burden of production in any court proceeding with
respect to the liability of any individual for any penalty, addition to
tax, or additional amount imposed by this title.” 26 U.S.C. §
7491(c). This means, Ginsburg says, that the burden of production
imposed by section 7491(c) applies notwithstanding any other
provision of the tax code. The district court erred, he asserts, in
not requiring the Service to produce evidence that an immediate
supervisor approved the penalty in writing.
Ginsburg reads too much into the “notwithstanding” clause.
It doesn’t trump any other provision of the tax code. “[T]he use
of . . . a ‘notwithstanding’ clause clearly signals the drafter’s
intention that the provisions of the ‘notwithstanding’ section
override conflicting provisions of any other section.” Cisneros v.
Alpine Ridge Grp., 508 U.S. 10, 18 (1993). Conflicting provisions;
not any provision of the tax code.
We see no conflict between the burden-of-production
requirement in section 7491(c) and the exhaustion requirement in
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section 7422(a). Section 7491(c) sets the Service’s burden of
production “in any court proceeding.” 26 U.S.C. § 7491(c). But
section 7422(a) requires that a tax refund claim be filed with the
Service before a taxpayer can bring a refund “suit or proceeding.”
Id. § 7422(a). It does not deal with court proceedings or the
elements the government must prove in those court proceedings;
instead, it concerns “administrative exhaustion.” United States v.
Williams, 514 U.S. 527, 533 (1995). Section 7422(a) makes “the
proper filing of an administrative refund claim a condition
precedent to bringing a lawsuit for a refund.” Wachovia Bank,
N.A. v. United States, 455 F.3d 1261, 1265 (11th Cir. 2006) (citing
Little People’s Sch., Inc. v. United States, 842 F.2d 570, 571 (1st Cir.
1988)).
The section 7422(a) exhaustion requirement “permit[s] the
[Service] to correct claimed errors in the first instance and, if
disagreement persists, to limit the litigation to the issues which
have been reexamined by the [Service] and which [it] is prepared
to defend.” Carmack v. Scofield, 201 F.2d 360, 362 (5th Cir. 1953).
Section 7491(c), on the other hand, applies to the limited litigation
issues that have been exhausted and are now in court, and puts the
burden of production on the Service as to the exhausted issues.
Ginsburg also argues that he couldn’t have raised the
supervisory approval argument in his refund claim with the Service
“because he did not learn of the basis for that argument until
discovery in the district court proceedings.” But the Service sent
Ginsburg notice of the penalty on June 20, 2016, months before his
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19-11836 Opinion of the Court 14
claim for refund on December 15, 2016. The part of the notice
assessing the penalty was signed only by the Service examiner and
made no mention of an “immediate supervisor.” 26 U.S.C. §
6751(b)(1). When Ginsburg filed his claim for refund with the
Service, he could have—but didn’t—raise that there was no
signature on the penalty notice from an immediate supervisor even
though section 6751(b)(1) prohibited the Service from assessing a
penalty “unless the initial determination of such assessment [was]
personally approved (in writing) by the immediate supervisor of
the individual making such determination.” Id. Because the
district court was limited to the grounds Ginsburg raised in his
claim for refund, and because the supervisory approval argument
wasn’t exhausted before the Service, the district court rightly didn’t
consider it in Ginsburg’s refund lawsuit.
Failure to raise during the partnership-level proceedings
We also agree with the government that the section
6751(b)(1) supervisory approval issue was a partnership-level
defense that had to be raised during the partnership-level
proceedings. The supervisory approval argument isn’t a partnerlevel defense that Ginsburg can raise in his refund lawsuit.
As we explained earlier, under the Tax Equity and Fiscal
Responsibility Act, there are “two stages” for “partnership-related
tax matters”: partnership-level proceedings and partner-level
proceedings. Woods, 571 U.S. at 39. The applicability of any
penalties is determined at the first, partnership-level stage. See 26
U.S.C. § 6221(a) (“[T]he applicability of any penalty . . . shall be
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19-11836 Opinion of the Court 15
determined, at the partnership level . . . .”). Under the Act, the
Supreme Court explained in Woods, “a court in a partnership-level
proceeding . . . has jurisdiction to determine not just partnership
items, but also ‘the applicability of any penalty . . . which relates to
an adjustment to a partnership item.’” 571 U.S. at 39 (quoting 26
U.S.C. § 6226(f)). The Act “gives courts . . . jurisdiction to
determine the applicability of any penalty that could result from an
adjustment to a partnership item.” Id. at 41; see also id. (The Act
“provides that the applicability of some penalties must be
determined at the partnership level.”). The regulations underscore
that the “[a]ssessment of any penalty . . . shall be made based on
partnership-level determinations,” which “include all the legal and
factual determinations that underlie the determination of any
penalty . . . other than partner-level defenses.” 26 C.F.R.
§ 301.6221-1(c).
Importantly, “a partnership-level determination ‘concerning
the applicability of any penalty . . . which relates to an adjustment
to a partnership item’ is ‘conclusive’ in a subsequent refund
action.” Woods, 571 U.S. at 41 (quoting 26 U.S.C. § 6230(c)(4)).
While the penalty determination is conclusive, the partner can still
assert in his refund lawsuit “any partner level defenses that may
apply.” Id.
“Partner-level defenses are limited to those that are personal
to the partner or are dependent upon the partner’s separate return
and cannot be determined at the partnership level.” 26 C.F.R.
§ 301.6221-1(d). For example: (1) “a partner may not have carried
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19-11836 Opinion of the Court 16
over [the partnership return’s] errors to his own return;” (2) “if he
did, the errors may not have caused him to underpay his taxes by a
large enough amount to trigger the penalty;” and (3) if he did
underpay his taxes by a large enough amount to trigger the penalty,
“the partner may nonetheless have acted in good faith with
reasonable cause.” Woods, 571 U.S. at 40. Ginsburg raised this
third example—good-faith reliance on the advice of professionals—
in his claim for refund.
Here, during the partnership-level proceedings, the Service
determined that the forty percent penalty applied to AHG
Investments because it made gross valuation misstatements. In
response, Ginsburg did not raise the section 6751(b)(1) supervisory
approval issue. Instead, he argued to the tax court that the forty
percent penalty “[did] not apply as a matter of law because [he]
conceded the correctness of adjustments proposed [by the Service]
on grounds unrelated to valuation or basis.” AHG Invs., 140 T.C.
at 74. The tax court rejected this argument because Ginsburg’s
“concessions . . . do not prevent application of the gross valuation
misstatement penalty to the underpayments of tax as a matter of
law.” Id. at 85. The tax court determined that the forty percent
gross valuation misstatement penalty applied to AHG Investments,
“subject to any partner-level defenses.”
This determination was “conclusive.” See Woods, 571 U.S.
at 41. And the section 6751(b)(1) supervisory approval argument
was not a partner-level defense.
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The supervisory approval argument was not a partner-level
defense because it was not personal to Ginsburg. It would have
applied to all of AHG Investments’s partners. The forty percent
penalty was determined at the partnership level. See AHG Invs.,
140 T.C. at 73–74. If a supervisor didn’t approve the initial
determination of the penalty as section 6751(b)(1) requires, then
the Service couldn’t have applied the penalty at all—to any of the
partners, not just Ginsburg—because the defect in supervisory
approval would taint the whole penalty, not just one partner’s
share. In contrast, Ginsburg’s good-faith reliance on professional
advice was a partner-level defense because it focused on his own
individual motives. The supervisory approval argument has no
personal component. Either a supervisor approved the penalty or
she didn’t, and if she didn’t, the penalty is defective as a whole and
doesn’t apply to any of the partners.
The supervisory approval defense was also not a partnerlevel defense because it could have been determined at the
partnership level. As we explained earlier, “a court in a
partnership-level proceeding . . . has jurisdiction to determine not
just partnership items, but also ‘the applicability of any penalty . . .
which relates to an adjustment to a partnership item.’” Woods, 571
U.S. at 39 (quoting 26 U.S.C. § 6226(f)). The applicability of any
penalty depends on whether it is “personally approved (in writing)
by the immediate supervisor of the individual making [the initial
penalty] determination.” 26 U.S.C. § 6751(b)(1). Ginsburg could
have raised the supervisory approval issue at the partnership level
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19-11836 Opinion of the Court 18
since the approval was required as part of the penalty
determination. See id.
We’re not the first court to say so. In Mellow Partners v.
Commissioner, 890 F.3d 1070 (D.C. Cir. 2018), the D.C. Circuit
explained that, although the partnership “did not raise its [section]
6751(b)(1) challenge at any point during the [t]ax [c]ourt
proceedings,” “[n]othing precluded [it] from doing so.” Id. at 1081.
“Section 6751,” the D.C. Circuit continued, “has been in existence
since 1998,” id., and the partnership “was free to raise the same,
straightforward statutory interpretation argument . . . that the
language of [section] 6751(b)(1) requires [the Service] to obtain
written approval by a certain point in the process in order to
impose penalties,” id. at 1082. In Nix v. United States, 339 F. Supp.
3d 580 (E.D. Tex. 2018), the district court concluded that “[t]he
proper place to raise compliance with [section] 6751 was at the
partnership-level proceeding.” Id. at 588. And, in Rogers v.
Commissioner, Nos. 30586-09, 1052-12, 15682-13, 30482-13, 20910-
14, 2019 WL 2304993 (T.C. May 30, 2019), aff’d, 9 F.4th 576 (7th
Cir. 2021), the tax court reasoned:
The Commissioner’s noncompliance with section
6751(b) is a partnership-level defense. Parties in a
partnership-level case may raise noncompliance with
section 6751(b) as a defense. However, a partner may
not raise section 6751(b) noncompliance as a defense
at the partner level for penalties previously
determined at the partnership level. Under section
6230, partner-level defenses are “those that are
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19-11836 Opinion of the Court 19
personal to the partner or are dependent upon the
partner’s separate return and cannot be determined at
the partnership level.” The tax treatment of
partnership items and the applicability of any penalty,
addition to tax, or additional amount that relates to
an adjustment to a partnership item is determined at
the partnership level.
Id. at *8 (citations omitted).3
The section 6751(b)(1) supervisory approval issue was not
personal to Ginsburg, and he could have raised it at the partnership
level. It is not a partner-level defense. Allowing Ginsburg to
“[d]efer[] consideration of [the supervisory approval issue] until
partner-level proceedings would replicate the precise evil that [the
Act] sets out to remedy: duplicative proceedings, potentially
leading to inconsistent results, on a question that applies equally to
all of the partners.” Woods, 571 U.S. at 42
Outcome: Ginsburg did not properly raise his argument that the
government didn’t meet its burden to show under section
6751(b)(1) that a supervisor personally approved (in writing) the
forty percent gross valuation misstatement penalty. He had to
raise the issue in the partnership-level proceedings before the tax
court. And he had to exhaust it with the Service in his claim for
refund. Because he did neither, the district court rightly refused to
consider the argument and correctly granted summary judgment
for the government on Ginsburg’s refund lawsuit.
AFFIRMED.
Plaintiff's Experts:
Defendant's Experts:
Comments: