Partner Can't Escape $1.9M Tax Penalty, Since He Failed To Contest The Penalty During An Earlier Proceeding

According to Law360, a Florida investor can't escape a nearly $1.9 million penalty and interest bill for claiming an improper $10 million partnership loss because he failed to adequately challenge the IRS' approval of the penalty in earlier proceedings, the Eleventh Circuit said in Alan H. Ginsburg v. U.S., case number 19-11836, in the U.S. Court of Appeals for the Eleventh Circuit.

Alan H. Ginsburg Did Not Challenge The IRS's Potentially Untimely Supervisory Approval Of The Penalty In Administrative Proceedings, Forbidding Him From
it's Advancing Those Claims In The Courts,
The Eleventh Circuit Said In An Opinion October 26, 2021.

The appeals court said that although a form from the IRS asserting the $984,000 gross understatement penalty against Ginsburg lacked a signature from an agency supervisor, he didn't exhaust that argument in IRS administrative proceedings as required by Internal Revenue Code Section 7422(a). The Florida federal court that considered his case was consequently correct in tossing his claims, according to the opinion.

"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 [IRS], the district court rightly didn't consider it in Ginsburg's refund lawsuit," the opinion said.

The Eleventh Circuit Also Found That Ginsburg Improperly Raised His Supervisory Approval Challenge
In His Partner-Level Proceedings.

He Should Have Made That Argument When The Partnership, Through Which He Claimed The Roughly $10 Million Loss,
Was Engaged In Partnership-Level Proceedings With The IRS About Its Tax Reporting, The Appeals Court Found.

Ginsburg's dispute with the IRS deals with the supervisory approval requirement under IRC Section 6751(b)(1), which requires an agency supervisor to provide written approval before the initial determination of a tax penalty.

The 40% penalty for his tax understatement at issue, which now includes $876,000 in interest, stems from a $10 million loss Ginsburg claimed on his 2001 tax return through his interest in AHG Investments LLC, according to the opinion. The loss Ginsburg claimed was far more than the total $25,600 loss the company claimed on its partnership tax return, and he used the loss to decrease his tax bill by roughly $2.6 million, according to the opinion.

The lower court said it couldn't consider his supervisory approval arguments because he didn't raise them in proceedings with the IRS, according to the opinion.

In his appeal to the Eleventh Circuit, Ginsburg repeated his arguments that an IRS supervisor failed to timely sign off on the 40% penalty, and that the government was required but failed to demonstrate it met this requirement, according to filings. For its part, the government has contended that it wasn't obligated to show the penalty got the requisite approval and that Ginsburg didn't exhaust his supervisory approval requirement arguments in the administrative proceedings.

The U.S. government has also argued that Ginsburg was required to raise his Section 6751(b)(1) arguments during the partnership-level proceedings. 

The Eleventh Circuit's opinion sided with the government, rejecting Ginsburg's arguments that the courts should have forced the government to prove it met the supervisory approval requirement despite his failure to raise his arguments sooner.

The appeals court also found that Ginsburg should have raised his arguments in the partnership-level proceedings to comport with TEFRA's intent to prevent repetitive proceedings when tax issues aren't adequately addressed before they float down to partners.  

"The Section 6751(b)(1) supervisory approval issue was not personal to Ginsburg, and he could have raised it at the partnership level," the appeals court said. "It is not a partner-level defense."

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