In the
United States Court of Appeals
For the Seventh Circuit
No. 12‐1212
ACUTE CARE SPECIALISTS II, et al.,
Plaintiffs‐Appellants,
v.
UNITED STATES OF AMERICA,
Defendant‐Appellee.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:11‐cv‐00465 — Matthew F. Kennelly, Judge.
ARGUED SEPTEMBER 7, 2012 — DECIDED AUGUST 22, 2013
Before CUDAHY, ROVNER, and TINDER, Circuit Judges.
TINDER, Circuit Judge. Almost thirty years ago, the
appellant‐taxpayers entered into partnerships which the IRS
later determined engaged in little more than tax avoidance.
The path by which this matter reached our court was convo‐
luted, but our decision is straightforward. We affirm the
district court’s holdings that it lacked subject‐matter jurisdic‐
tion over the taxpayers’ claims that the IRS’s assessments
2 No. 12‐1212
against them were untimely and improperly included penalty
interest and that taxpayers Joann and Joseph Shanahan’s
refund claim was barred by the statute of limitations. Further‐
more, the district court was not obligated to conduct a full res
judicata analysis before dismissing the taxpayers’ claims.
I.
During the 1970s and 1980s, American Agri‐Corp organized
a number of limited partnerships, for which the company
served as general partner. American Agri‐Corp solicited high‐
income individuals to serve as limited partners, investing in
the partnerships. These supposed agricultural ventures took
the term “cash crop” literally; the purported purpose of these
partnerships was to invest in agricultural activities—but,
according to the IRS, the real purpose was to shelter the limited
partners’ income from taxation.
Plaintiff‐appellants Acute Care Specialists II (an entity
composed of physicians in the greater Chicago area), Gregory
Jackson, Alan Kaplan, Anthony Raccuglia, and Joseph
Shanahan were each limited partners in at least one of several
partnerships that were audited by the IRS during the mid‐
1980s. (The other plaintiffs in this case, the wives of these
individuals, were not limited partners, but are included in this
case because they filed joint tax returns with their husbands.
We adopt the term “the taxpayers” to refer to all of the
plaintiff‐appellants in this appeal, unless otherwise noted.)
Several years later, the IRS concluded that the partnerships
were, essentially, tax‐avoidance schemes. In 1990 and 1991, the
IRS issued Final Partnership Administrative Adjusts for the
relevant partnerships. These Adjusts stated that the partner‐
No. 12‐1212 3
ships’ activities constituted “a series of sham transactions” and
“lack[ed] economic substance,” and disallowed several listed
farming expenses and other deductions for the 1984 or 1985 tax
years.
But as it turned out, the issuance of these Adjusts was just
one step in the IRS’s long journey to collect the taxes (along
with interest and penalty interest) that it determined these
partners owed. Soon after the issuance of these Adjusts,
various partners filed petitions in the Tax Court to challenge
the IRS’s determinations. Specifically, they sought readjust‐
ments of the assessed partnership items pursuant to 26 U.S.C.
§6226.
The Tax Court consolidated a suit filed by one of the
partnerships involved in this appeal with six other Tax Court
cases, and consolidated the suits filed by other partnerships
involved in this appeal with seventy‐six other cases. Fred
Behrens, an American Agri‐Corp officer and general partner
for all of the partnerships, intervened as the tax‐matters
partner for all of the partnerships involved in this case, as well
as for many others. These suits all raised a similar set of issues,
and all of the partnerships involved in this case agreed to be
bound by the Tax Court’s determination of these issues in one
particular case, known as the Test Case Group.
During the trial, some of the partnerships in the Test Case
Group raised as an affirmative defense the argument that the
limitations period under 26 U.S.C. §6229(a) had expired before
the IRS issued its Final Partnership Administrative Adjusts.
For one of these Final Partnership Administrative Adjusts,
the Tax Court held that the IRS action was not time‐barred
4 No. 12‐1212
“because the partnership return … was not a valid return and,
accordingly, did not trigger the statute of limitations.” Agri‐Cal
Venture Assoc. v. Comm’r, 80 T.C.M. (CCH) 295 (2000). For the
other Final Partnership Administrative Adjusts, the Tax Court
held that these IRS determinations were not time‐barred
“because the partnerships had extended the time for the IRS to
issue” the Adjusts. Id.
Following the conclusion of the Test Case Group trial,
Behrens, acting as tax‐matters partner, reached a contingent
agreement with the IRS regarding all of the disputed partner‐
ship items. The contingent agreement stated that “all partners
would be bound by the [Tax Court’s] determination of the
partnership items” and “expressly consent to the assessment
of interest on the deficiencies in income tax, if any, which are
attributable to the adjustments to the partnership items.” This
agreement was contingent on the consent of all partners. The
partners’ consent would be implied by the absence of an
objection to the Tax Court’s entry of decisions.
Next, the IRS filed motions for entry of decisions in all of
the cases involving partnerships that are relevant to this
appeal. These motions stated that, as per the contingent
agreements, the IRS would determine the amount of interest to
be assessed on any income tax deficiencies “by way of compu‐
tational adjustment.”
In July 2001, the Tax Court entered decisions for all partner‐
ships that are relevant to this appeal. The court determined
that the partnerships had engaged in “transactions which
lacked economic substance,” and which “result[ed] in a
substantial distortion of income and expense” in each partner’s
No. 12‐1212 5
tax returns. Accordingly, the court concluded that the IRS was
authorized to adjust the partners’ income taxes owed. The IRS
did so, assessing tax, interest, and penalty interest under 26
U.S.C. §6621(c).
In January 2011, the taxpayers filed suit, alleging that these
assessments were improper. The IRS filed a motion to dismiss.
The IRS made three arguments in its motion. First, the IRS
argued that the district court did not have jurisdiction to hear
the taxpayers’ claim that the statute of limitations had expired
by the time that the IRS issued its Final Partnership Adminis‐
trative Adjusts. According to the IRS, the taxpayers’ statute‐of‐
limitations argument involved a partnership‐level determina‐
tion, and 26 U.S.C. §7422(h) deprives courts of jurisdiction over
such determinations. Second, the IRS asserted that the assess‐
ment of penalty interest involved a partnership‐level determi‐
nation over which, once again, courts lack jurisdiction. Third,
the IRS argued that taxpayers Joseph and Joann Shanahan’s
claims concerning one of the partnerships in which they were
partners in tax year 1986 was time‐barred by the six‐month
statute of limitations established by 26 U.S.C. §6230(c). The
district court agreed, granting the IRS’s motion to dismiss, and
the taxpayers appealed.
II.
We review a district court’s dismissal for lack of subject‐
matter jurisdiction de novo. Apex Digital Inc. v. Sears, Roebuck
& Co., 572 F.3d 440, 443 (7th Cir. 2009). In this review, we
accept as true the taxpayers’ factual allegations, drawing all
reasonable inferences in their favor. Iddir v. I.N.S., 301 F.3d 492,
496 (7th Cir. 2002). In determining whether subject‐matter
6 No. 12‐1212
jurisdiction exists, we consider any evidence that has been
submitted regarding jurisdiction, in addition to the allegations
in the appellant’s complaint. Id.
A.
The taxpayers first claim that the district court erred in
construing §7422(h) to bar jurisdiction over their claim that the
IRS and the tax‐matters partner did not agreed to extend the
length of the limitations period, i.e., the period during which
the IRS must file an assessment against a taxpayers or forfeit
the ability to do so. (For simplicity, we adopt the term “the
limitations issue” to refer to this matter.)
The IRS argues that the taxpayers’ limitations claim is
attributable to partnership items. Since courts are jurisdiction‐
ally barred from hearing taxpayer actions brought for a refund
attributable to partnership items,1 the IRS asserts that the
district court correctly held that it lacked subject‐matter
jurisdiction over the taxpayers’ refund claim. See 26 U.S.C.
§7422(h) (“No action may be brought for a refund attributable
to partnership items … .”). The taxpayers disagree, asserting
1
This jurisdictional bar on claims attributable to partnership items has its
roots in the federal government’s treatment of partnerships for tax
purposes. Partnerships do not pay federal income taxes, but still must file
informational returns. Individual partners then report their shares of
income from the partnership on their personal income tax returns. To avoid
the inefficiency of requiring the IRS to audit each partner’s tax return when
the IRS suspects a problem at the partnership level, Congress created a
unified partnership‐level procedure for auditing and litigating “partnership
items.” See Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, 26
U.S.C. §§6221–6234. As part of this statutory scheme, §7422 bars courts from
hearing taxpayer claims attributable to partnership items.
No. 12‐1212 7
that the limitations issue involves an “affected item,” not a
partnership item, and that therefore 26 U.S.C. §7422(h) pres‐
ents no jurisdictional bar. Thus, the critical jurisdictional issue
in this portion of the taxpayers’ appeal is whether the limita‐
tions issue is best characterized as a matter attributable to a
partnership item or an affected item.
Before making this assessment, some background informa‐
tion concerning the limitations period for IRS assessments is
helpful. The IRS generally must make an assessment against a
taxpayer within a three‐year period following the taxpayer’s
filing. 26 U.S.C. §6501. Ordinarily, this general three‐year
window also applies to taxes that are attributable to a partner‐
ship item or affected item. See 26 U.S.C. §6229(a) (stating that
the IRS must make the assessment against a partnership within
a three‐year window following either the filing of the partner‐
ship’s tax return or the last day of filing for a taxable year). The
IRS and the taxpayer may agree to an extension of the limita‐
tions period, however. 26 U.S.C. §6229(b). Specifically, the
limitations period for IRS assessments against partnerships
may be extended by written agreement between the IRS and
the tax‐matters partner or any other partner authorized to
enter into such an agreement, provided that this written
agreement occurs before the expiration of the statute of
limitations. Id.
In the instant case, the taxpayers and the IRS contest
whether there was a valid written agreement between the IRS
and the partnerships extending the deadline for specific IRS
assessments that, in the absence of such an agreement, would
be barred by the statute of limitations. The taxpayers argue
that the agreement between the tax‐matters partner and the
8 No. 12‐1212
IRS is not valid, and that, therefore, the IRS’s assessments
against them is untimely under the three‐year window
established in §6229(a).
The IRS counters that the very act of determining whether
a validly designated partner agreed in writing on behalf of the
partnership to extend the limitations period requires making
a determination of what the partnership did. In other words,
the IRS’s position is that determining whether a partnership
and the IRS agree to extend the limitations period requires
analysis of a partnership item. Since courts are prohibited from
considering cases brought for a refund attributable to partner‐
ship items, the IRS contends that courts lack subject‐matter
jurisdiction over the taxpayers’ claim. See 26 U.S.C. §7422(h).
In response, the taxpayers assert that the determination of
whether a validly designated partner agreed to extend the
limitations period requires a partner‐level assessment. Since
the limitations period established in §6501 starts to run when
an individual partner files his or her tax return, the taxpayers
contend that the determination of whether the partnership’s
tax‐matters partner and the IRS entered into an agreement to
extend the limitations period involves a partner‐level determi‐
nation. Because §7422(h)’s jurisdictional bar applies only to
partnership items, the taxpayers argue that §7422(h) cannot bar
their claim that the IRS’s assessment against it did not occur
during the statutorily required three‐year period for such
assessments.
Stated plainly, all of this is just a long way of saying that
this portion of the taxpayers’ appeal turns on whether the
limitations issue is attributable to a partnership item or an
No. 12‐1212 9
affected item—and, hence, whether the subject‐matter jurisdic‐
tional bar in §7422(h) applies. Given the centrality of this
“partnership‐item‐or‐affected‐item” determination, we provide
definitions of these two categories of items before proceeding
to analyze this issue.
Concerning partnership items, the relevant statutory
provision, §7422(h), refers to 26 U.S.C. §6231(a)(3) as defining
partnership items for the purposes of §7422(h) (with two
exceptions, neither of which the parties claim apply here). In
turn, §6231(a)(3) defines partnership items as “any item
required to be taken into account for the partnership’s taxable
year … [that] is more appropriately determined at the partner‐
ship level than at the partner level.” 26 U.S.C. §6231(a)(3). This
definition seems circular to us. Treasury regulations, however,
shed a bit more light. According to these regulations, partner‐
ship items include, inter alia, “the legal and factual determina‐
tions that underlie the determination of the amount, timing,
and characterization of items of income, credit, gain, loss,
deduction, etc.” 26 C.F.R. §301.6231(a)(3)–1(b). Because this
regulation is a reasonable construction of the ambiguous
§6231(a)(3), it is entitled to Chevron deference. See Prati v.
United States, 603 F.3d 1301, 1306 (Fed. Cir. 2010); Keener v.
United States, 551 F.3d 1358, 1362 (Fed. Cir. 2009); see also
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837 (1984).
Section 6231(a) also provides a definition of affected item:
“The term ‘affected item’ means any item to the extent such
item is affected by a partnership item.” 26 U.S.C. §6231(a)(5).
Affected items can be thought of as hybrids of partnership
items and partner items, containing partnership‐item and
10 No. 12‐1212
partner‐item components. See Duffie v. United States, 600 F.3d
362, 366 (5th Cir. 2010). For example, a limited partner’s
“amount of risk” (a term of art in the Internal Revenue Code)
may involve both a partnership‐item determination of the size
of the partnership’s debt and a partner‐item determination of
the amount of the partnership debt that this limited partner
assumes; hence, this determination is an affected item. See id.;
McGann v. United States, 76 Fed. Cl. 745, 750 (2007).
With these definitions in mind, we turn to evaluating the
taxpayers’ assertion that the limitations issue is an affected
item, which would make §7422(h)’s prohibition on suits for
refunds attributable to partnership items irrelevant. Unfortu‐
nately for the taxpayers, we previously have held that such
determinations are decided on the partnership level. In Kaplan
v. United States, we were confronted with the argument that an
agreement between a purported tax‐matters partner and the
IRS extending the IRS’s period for adjusting the partnership’s
taxes was invalid, because the partner that had entered into
this agreement allegedly had lacked the authority to do so. 133
F.3d 469, 473 (7th Cir. 1998). We stated that the validity of the
agreement extending the limitations period was a partnership‐
level determination, despite the fact that an assessment of the
agreement’s validity arguably might require a court to examine
the extent of the authority that the partnership delegated to a
particular partner. Id. We reasoned that since “the underlying
substantive claim concerns the propriety of the adjustments to
the partnership’s … tax return,” if the appellants “were to
succeed in their claim, it would affect the tax liability of all of
[the partnership’s] partners.” Id. Thus, the appellants’ chal‐
No. 12‐1212 11
lenge to the validity of the agreement was a partnership‐level
determination, over which the courts lacked jurisdiction. Id.
The facts of the instant case are only slightly different from
Kaplan. The taxpayers in Kaplan challenged the validity of a
written agreement between the partnership and the IRS,
whereas the taxpayers here challenge the existence of such an
agreement. But this is a distinction without difference for
purposes of this case, since both claims can be characterized as
challenging the existence of a valid agreement.
Anticipating the importance of Kaplan to the instant matter,
the taxpayers call our attention to Rhone‐Poulenc Surfactants &
Specialties, L.P. v. Comm’r, 114 T.C. 533, 542 (2000), a Tax Court
case decided after Kaplan and favorably cited by two of our
sister circuits. See AD Global Fund v. United States, 481 F.3d 1351
(Fed. Cir. 2007); Curr‐Spec Partners, L.P. v. Comm’r, 579 F.3d
391, 396–99 (5th Cir. 2009). Rhone‐Poulenc provides the Tax
Court’s interpretation of the interaction between §6501, which
provides the maximum‐limitations period within which any
tax may be assessed, and §6229(a), which provides the
minimum‐limitations period within which any tax attributable
to partnership items or affected items may be assessed. Rhone‐
Poulenc, 114 T.C. at 542. The Tax Court—and our sister courts
that have adopted its approach—consider §6229(a) not to
create a separate ceiling for a limitations period for assess‐
ments of partnership‐ and affected‐items, but rather to create
a floor. See, e.g., AD Global Fund, 481 F.3d at 1354. Since
§6229(a) “contains no mandatory words establishing a time
within which assessments must be made,” this provision on its
own does not establish a separate limitations period. Id.
12 No. 12‐1212
Without passing judgment on the wisdom of those courts’
interpretation of §6229(a), we note that the taxpayers take this
interpretation a step beyond what those courts stated; we reject
the taxpayer’s proposed extension of Rhone‐Poulenc’s reason‐
ing. The taxpayers argue that, because §6229(a) is “merely a
possible extension” of §6501(a), we ought to consider §6229(a)
as an affirmative defense that the IRS may raise in response to
the taxpayers’ prima facie argument that the IRS’s action is time‐
barred by §6501(a). Essentially, they argue that whereas
§6501(a) is jurisdictional, §6229(a) is not.
This is an unusual argument, because the conclusion that
§6501(a) is jurisdictional but §6229(a) must be raised by the
government as an affirmative defense does not seem to follow
logically from the taxpayers’ premise, grounded in the Federal
Circuit, Fifth Circuit, and Tax Court’s caselaw, that §6229(a) is
“merely a possible extension” of §6501(a). The taxpayers do not
cite any caselaw to support their logical leap. Instead, they
claim that their argument is “of first impression here.” But that
is not quite accurate. Other courts have rejected claims that
§6229(a) must be raised by the government. See, e.g., Prati, 603
F.3d at 1307 (“[Appellants argue that the] §6229 time extension
is not invoked … unless it is separately asserted by the govern‐
ment. We disagree.”). More generally, various courts outside
of our circuit have rejected the argument “that a refund suit
based on limitations under §6501 is different from a refund suit
based on limitations under §6229.” Rowland v. United States,
Civil No. 7:07–cv–18–O, 2011 WL 2516170 at *10 (N.D. Tex.
June 22, 2011) (collecting cases). We add our voice to this
growing choir.
No. 12‐1212 13
Having rejected the taxpayers’ invitation to interpret §6229
and §6501 in the manner they propose, Kaplan’s logic remains
sound. Because the determination of whether a valid written
agreement exists will affect the entire partnership’s bottom‐
line—i.e., because it is a “legal and factual determination[] that
underlie[s] the determination” of various balance‐sheet items
for tax purposes, 26 C.F.R. §301.6231(a)(3)–1(b)—this determi‐
nation meets the statutory and regulatory definitions of a
partnership item. See 26 U.S.C. §6231(a)(3); 26 C.F.R.
§301.6231(a)(3)–1(b). In making this determination, we note
that our practice is consistent with that of several of our sister
circuits, which have determined that statute‐of‐limitations
challenges cannot be raised in partner‐level proceedings under
the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982,
26 U.S.C. §§6221–6234. See, e.g., Keener, 551 F.3d at 1364 (“To
remain consistent with [TEFRA’s] structure, the limitations
claim … should not be litigated in a partner‐level proceeding
because it affects the partnership as a whole.”); Weiner v. United
States, 389 F.3d 152, 156 (5th Cir. 2004); Davenport Recycling
Assocs. v. Comm’r, 220 F.3d 1255, 1260 (11th Cir. 2000); Chimblo
v. Comm’r, 177 F.3d 119, 125 (2d Cir. 1999); Williams v. United
States, 165 F.3d 30 (6th Cir. 1998) (unpublished table decision).
Because the taxpayers’ claims in this part of its appeal are
attributable to a partnership item, courts lack subject‐matter
jurisdiction to hear them under §7422(h). Accordingly, we
affirm the district court’s dismissal for want of jurisdiction.
B.
Second, the taxpayers challenge the district court’s determi‐
nation that §7422(h) provides a jurisdictional bar to their claim
14 No. 12‐1212
that the IRS improperly assessed penalty interest. The taxpay‐
ers note that penalty interest is an affected item under
§6231(a)(5)—a statement with which the IRS agrees. The
taxpayers argue that, since penalty interest is not a partnership
item, §7422(h)’s prohibition on actions brought for refunds
attributable to partnership items does not apply. Thus, they
conclude that the district court erred in holding that it lacked
subject‐matter jurisdiction over their claim that the IRS’s
assessment of penalty interest against them was improper. In
response, the IRS argues that, although the taxpayers’ penalty‐
interest claim concerns an affected item, this claim is at least in
part attributable to partnership items, and hence, §7422(h)
applies. See 26 U.S.C. §7422(h) (barring courts from hearing
suits brought for refunds that are “attributable to partnership
items” (emphasis added)).
We agree with the IRS’s position. To determine whether an
assessment of penalty interest is appropriate, a court first
would have to determine whether tax‐motivated transactions
occurred, i.e., whether the partnerships engaged in transac‐
tions that lacked economic substance. In the particular case
before us, a court also would have to answer the slightly
different question of whether the partnerships’ agreements
with the IRS established that tax‐motivated transactions
occurred. The taxpayers do not suggest how the answers to
these questions could differ among partners in a given partner‐
ship; it is difficult to imagine how they could. Thus, these
determinations are more appropriately made at the partner‐
ship level, not at the partner level.
Treasury regulations are consistent with this basic logic,
classifying the determination of whether a transaction lacks
No. 12‐1212 15
economic substance as a partnership item. See 26 C.F.R.
§301.6231(a)(3)–1(b) (listing “whether partnership activities
have been engaged in with the intent to make a profit” as one
of the “legal and factual determinations” that qualify as
partnership items). As previously discussed, this regulation is
entitled to Chevron deference.
Accordingly, we consider these predicate determinations
concerning the occurrence or nonoccurrence of tax‐motivated
transactions to be partnership items. See 26 U.S.C. §6231(a)(3).
Because these partnership‐level assessments are a necessary
predicate of a court’s later determination of whether penalty
interest is warranted (an affected item), we consider this later
determination to be partially attributable to partnership items.
Thus, we hold that §7422(h) deprives courts of subject‐matter
jurisdiction over the taxpayers’ penalty‐interest claims.
We are mindful of the fact that this holding places us in
tension with the Second Circuit, which held in Field v. United
States that §7422(h)’s jurisdictional bar on claims attributable
to partnership items does not apply to claims for refunds of
penalty interest. 328 F.3d 58, 59 (2d Cir. 2003). The recent trend
among our sister circuits, however, has been to treat these
claims as at least partially attributable to partnership items,
and thus within the purview of §7422(h). See, e.g., Prati, 603
F.3d at 1309 (whether a transaction “lack[ed] economic
substance … is directed to the nature of the partnership
transaction and therefore is barred by §7422(h)”); Duffie, 600
F.3d at 383 (“Because the nature of a partnership’s activi‐
ties—whether they are sham transactions—is the partnership‐
item component of an affected item, the Duffies’ refund claim
is based on the determination of a partnership item.”); Keener,
16 No. 12‐1212
551 F.3d at 1366 (“[T]he nature of a partnership’s transac‐
tion—and, specifically, whether a partnership transaction is a
‘sham’—is a partnership item.”); RJT Invs. X v. Comm’r, 491
F.3d 732, 738 (8th Cir. 2007) (“[T]he Tax Court correctly treated
as a partnership item its determination that [the creation of a
legal entity] is a ‘sham.’”). For the reasons listed above, we side
with this latter group of our sister circuits.
The taxpayers claim that this holding runs counter to
courts’ “historical[] recogni[tion] that §7422(h) cannot bar
jurisdiction merely because the assessed underpayment was
attributable to partnership items,” and that “[f]or §7422(h) to
bar jurisdiction, it is a refund, not an underpayment, that must
be attributable to partnership items.” In making this claim,
however, the taxpayers ignore Prati. 603 F.3d at 1308. More‐
over, the cases that that they cite in support of this claim do not
limit §7422(h)’s domain to refunds attributable to partnership
items. See Field, 328 F.3d 58, 59–60; Prochorenko v. United States,
243 F.3d 1359, 1362–63 (Fed. Cir. 2001); Alexander v. United
States, 44 F.3d 328, 331 (5th Cir. 1995).
Finally, in urging us to reject what they perceives as an
“overbroad” interpretation of 7422(h), the taxpayers point to
American Boat Co. v. United States, 583 F.3d 471 (7th Cir. 2009).2
2
Although the taxpayers believe that American Boat’s approach “applies
equally to both … [the] limitations and penalty‐interest claims,” for brevity
we include this discussion only in addressing the penalty‐interest issue. We
note that the same rationale as we present here also applies to the their
argument that American Boat supports their position concerning the
limitations issue.
No. 12‐1212 17
The taxpayers characterize American Boat as standing for the
proposition that “courts in partnership‐level suits have
jurisdiction to determine only the partnership‐item compo‐
nents; the penalty itself and its nonpartnership‐item compo‐
nents are resolved in later partner‐level proceedings.” But this
reading of American Boat contorts our holding concerning a
specific defense at issue in that case into a grand statement
concerning our application of §7422(h) to penalty‐interest
claims more generally. In American Boat, we considered
whether raising the reasonable cause exception for underpay‐
ments, see 26 U.S.C. §6664(c), as a defense is properly consid‐
ered a partnership‐ or a partner‐level item, or both. 583 F.3d at
478. We determined that the reasonable‐cause defense could be
raised either by a partner in a partner‐level proceeding or by a
partnership in a partnership‐level proceeding. Id. at 480.
The taxpayers urge us to follow a similar approach in the
instant case. But they do not address any potential similarities
between the classification of the limitations and penalty‐
interest claims in the instant case and classification of the
reasonable‐cause defense in American Boat. Instead, their
argument boils down to an assertion that, since we held in
American Boat that the reasonable‐cause defense was not
exclusively a partnership item, id. at 478–80, we therefore
ought to conclude in the instant case that the limitations and
penalty‐interest issues are not partnership items. Without
more, we do not think that this conclusion naturally flows from
the premise.
18 No. 12‐1212
C.
The taxpayers also mount a separate challenge to the IRS’s
assessment of taxpayers Joseph and Joann Shanahan’s tax
liability for the 1986 tax year. This challenge has its origins in
the following set of facts. On July 19, 2001, the Tax Court made
a decision concerning the 1986 tax liability for a partnership in
which the Shanahans were partners. In brief, the Tax Court
found that the Shanahans had underpaid their tax liabilities
from this partnership in 1986. On August 7, 2002, the IRS
mailed the Shanahans a document, labeled IRS Form 4549A,
which noted the size of the couple’s income tax deficiency and
the balance due. This document did not, however, specifically
indicate that it was a notice of computational adjustment or
state the length of time that the Shanahans had in which to
challenge the adjustment. On September 2, 2002, the IRS made
assessments against the couple based on this Tax Court
decision. On August 26, 2004—slightly less than two years
after the IRS made these assessments—the Shanahans filed a
refund claim.
The taxpayers’ complaint alleged that the IRS had improp‐
erly assessed income tax against the Shanahans for the 1986 tax
year, “because the IRS applied the entire adjustment to
[Joseph] Shanahan’s distributive share of [a specific partner‐
ship’s] loss determined by the Tax Court as if he had not
limited his claimed deduction under the ‘at‐risk’ rules.” In
response, the IRS argued that the Shanahans’ refund claim was
time‐barred.
The district court agreed with the IRS, and dismissed the
Shanahans’ claim for want of jurisdiction. The court deter‐
No. 12‐1212 19
mined that the six‐month statute of limitations for claims that
the IRS “erroneously computed any computational adjust‐
ment” applied to the Shanahans’ claim. See 26 U.S.C.
§6230(c)(1)(A)(ii) (“a partner may file a claim for refund on the
grounds that the Secretary erroneously computed any compu‐
tational adjustment necessary” for certain actions); 26
U.S.C.§6230(c)(2)(A) (stating that any claim under, inter alia,
subparagraph (1)(A) “shall be filed within 6 months after the
day on which the Secretary mails notice of computational
adjustment to the partner”). With this six‐month period having
expired, the court held that it lacked jurisdiction to entertain
the Shanahans’ claim. See United States v. Dalm, 494 U.S. 596,
608 (1990) (stating that, under principles of sovereign immu‐
nity, the terms of the United States’ consent to be sued “define
[the] court’s jurisdiction,” and that “[a] statute of limitations …
is one of those terms” (internal quotation omitted)).
On appeal, the taxpayers argue that the general statute of
limitations for refund claims, 26 U.S.C. §6511(a), ought to
apply. This provision establishes a two‐ or three‐year limita‐
tions period for most claims for credit or refunds of overpay‐
ment,3 unless an exception applies. The six‐month period for
claims arising out of alleged IRS “erroneous comput[ations]
[of] any computational adjustment” in certain circumstances,
§6230(c), is one such exception. The taxpayers challenge the
application of §6230(c)’s six‐month statute of limitations on
two fronts.
3
The parties agree that, if our court were to find that 26 U.S.C. §6511(a)
supplies the relevant statute of limitations, then two years would be the
applicable length.
20 No. 12‐1212
First, the taxpayers argue that their complaint does not
allege an erroneous computation of a computational adjust‐
ment, and that therefore the six‐month statute of limitations in
§6230(c)—which covers complaints alleging, inter alia, that the
IRS “erroneously computed any computational adjustment” in
certain circumstances—does not apply. Consequently, they
continue, their claim is not time‐barred. In making this
assertion, the taxpayers claim that the phrase “erroneous[]
comput[ations] [of] any computational adjustment,” §6230(c),
refers exclusively to “math errors.” They characterize their
complaint as “not based on mathematical mistakes but on
substantive issues,” chief among them that the IRS erroneously
“include[d] in its tax computation an adjustment for a deduc‐
tion it acknowledge[d] the Shanahans did not claim.”
The taxpayers’ argument that the phrase “erroneously
computed any computational adjustment” only refers to
“mathematical mistake,” which are distinguishable from
“substantive issues,” does not find support in statutory or case
law. A “computational adjustment” is defined as “the change
in the tax liability of a partner which properly reflects the
treatment … of a partnership item.” 26 U.S.C. §6231(a)(6).
Although the Code does not provide a precise definition of
what constitutes an erroneous computation in this context, the
fact that the provision immediately preceding §6230(c) is
entitled “Mathematical and clerical errors appearing on
partnership returns,” §6230(b), indicates that §6230(c) refers to
a class of errors that is distinct from “[m]athematical and
clerical errors.” Accordingly, we reject the taxpayers’ assertion
that “‘erroneously computed’ can only rationally mean ‘made
a math error.’” The Code’s separate provisions for “math[] …
No. 12‐1212 21
errors” and “erroneous[] comput[ations],” §6230(b) & (c), leads
us to the opposite conclusion. See Duffie, 600 F.3d at 385–86
(holding that the six‐month limitations period applies to
taxpayers’ claim that the IRS erroneously computed the exact
same adjustment as in the instant case). We hold that the six‐
month statute of limitations applies.
Second, the taxpayers claim that the Form 4549A that the
Shanahans received from the IRS did not provide adequate
notice of the computational adjustments and that, therefore,
the six‐month period never began. To be considered adequate,
a notice of deficiency must (i) “advise the taxpayer that the IRS
determined that a deficiency exists for a particular year,” and
(ii) “specify the amount of the deficiency or provide the
information necessary” to do so. Murray v. Comm’r, 24 F.3d 901,
903 (7th Cir. 1994). The Form 4545A mailed to the Shanahans
lists the existence and amount of the couple’s tax deficiency in
two places: Line 14 (“Deficiency‐Increase in Tax”) and the sub‐
line in Line 18 (“Total Penalties”) that includes the phrase
“Underpayment attributable [to] Tax Motivated Transactions.”
The form therefore meets our standard for notice.
Accordingly, we conclude that because the Shanahans
failed to file within this period, the district court correctly held
that it was barred from considering their complaint.
D.
Finally, the taxpayers claim that the district court erred in
dismissing their complaint for want of jurisdiction under
§7422(h) without first conducting “a full res judicata analysis.
They call our attention to Duffie, in which the Fifth Circuit
dismissed a similar tax refund suit. 600 F.3d 362. In that case,
22 No. 12‐1212
the district court had determined that a prior agreed decision
in the Tax Court was res judicata, id. at 373, and that the
Duffies’ failure to file a timely refund claim deprived the court
of subject‐matter jurisdiction, id. at 384. The Fifth Circuit
adopted the lower court’s opinion, verbatim, as its own
opinion. Id. at 364. Significantly, the district court in Duffie first
conducted a lengthy analysis of the IRS’s assertion that the
Duffies’ claim was barred by res judicata, id. at 372–82, and then
analyzed the IRS’s claims that the courts lacked subject‐matter
jurisdiction based on §7422 and on the Duffies’ failure to file
their claim before the statute of limitations had run, id. at
382–87. The court agreed with the IRS on both issues.
The taxpayers in the instant case argue that, since the Duffie
court’s res judicata analysis preceded its jurisdictional analysis,
a full exposition on the former subject is necessary before
courts can evaluate the latter. But there is no language in Duffie
to suggest that one analysis is in any way dependent on the
other. Instead, the court’s res judicata analysis and its jurisdic‐
tional analysis provide separate and independent bases for the
court’s grant of the IRS’s motion for summary judgment.
Even if the taxpayers’ characterization of Duffie were
correct—and, we stress, it is not—this alleged authority from
our sister court would not be persuasive in our court. Lack of
subject‐matter jurisdiction is an immovable impediment; if
courts do not have jurisdiction to hear a case, then the outcome
is a foregone conclusion, rendering superfluous any other
analysis that could conceivably occur prior to the jurisdictional
analysis. Therefore, the notion that, in circumstances such as
these, courts must or should conduct full res judicata analyses
before examining whether they possess the authority to hear
No. 12‐1212 23
claims flies in the face of judicial economy considerations, not
to mention common sense.4 Given these concerns, it is little
wonder that the Federal Circuit, when faced with strikingly
similar cases as the matter before us today, affirmed lower‐
court dismissals for lack of subject‐matter jurisdiction under
§7422(h), without conducting “full” res judicata analyses. See
Prati, 603 F.3d at 1305; Keener, 551 F.3d at 1362–63). Accord‐
ingly, we reject the taxpayers’ claim that the district court erred
in not undertaking a more detailed res judicata analysis.
III.
The district court did not have subject‐matter jurisdiction
over the taxpayers’ claims. Their claims that the IRS’s assess‐
ments against them were untimely and improperly included
penalty interest are barred, since these determinations are
attributable to partnership items over which courts lack
subject‐matter jurisdiction. In addition, the fact that the
Shanahans’ refund claim based on alleged IRS computational
errors was brought well after the period established by the
relevant statute of limitations had run bars considerations of
4
This statement does not imply, however, that courts cannot make any
inquiry into the identities of parties before them, and the status of these
parties’ claims, before dismissing for want of jurisdictions. Under 26 U.S.C.
§6226, federal courts have jurisdiction to consider appeals filed by partners
concerning partnership items that were adjudicated in IRS administrative
decisions. Because §6226 provides the only mechanism by which taxpayers
with certain claims can have their day in court, it seems sensible that some
inquiry into whether the taxpayers were considered parties in earlier §6226
actions would be needed before the court can determine whether §7422(h)
bars jurisdiction. This statement, however, is a far cry from the position
voiced by the taxpayers in the instant case.
24 No. 12‐1212
that claim. Finally, the district court was correct in determining
whether it had jurisdiction before conducting a res judicata
analysis; after the court had determined that it lacked jurisdic‐
tion, such analysis was unnecessary. Accordingly, we AFFIRM
the district’s court dismissal of the taxpayers’ complaint.