Bush v. United States

United States Court of Appeals
for the Federal Circuit
__________________________

LYMAN F. BUSH INDIVIDUALLY AND AS
PERSONAL REPRESENTATIVE OF THE ESTATE OF
BEVERLY J. BUSH,
Plaintiffs-Appellants,

v.
UNITED STATES,
Defendant-Appellee.
__________________________

2009-5008
__________________________

Appeal from the United States Court of Federal
Claims in consolidated case nos. 02-CV-1041 and 04-CV-
1598, Judge George W. Miller.
__________________________

TOMMY J. SHELTON,
Plaintiff-Appellant,

v.
UNITED STATES,
Defendant-Appellee.
__________________________

2009-5009
__________________________
BUSH v. US 2

Appeal from the United States Court of Federal
Claims in consolidated case nos. 02-CV-1042 and 04-CV-
1595, Judge George W. Miller.
__________________________

Decided: August 24, 2011
__________________________

THOMAS E. REDDING, Redding & Associates, P.C., of
Houston, Texas, argued for all plaintiffs-appellants. With
him on the brief were SALLIE W. GLADNEY and TERESA J.
WOMACK.

ANDREW M. WEINER, Attorney, Appellate Section, Tax
Division, United States Department of Justice, of Wash-
ington, DC, argued for defendant-appellee. With him on
the brief were JOHN A. DICICCO, Acting Deputy Assistant
Attorney General, and MICHAEL J. HAUNGS, Attorney.
__________________________

Before RADER, Chief Judge, NEWMAN, LOURIE, BRYSON,
GAJARSA, ∗ LINN, DYK, PROST, MOORE, O’MALLEY, and
REYNA, Circuit Judges, on rehearing en banc.
Opinion for the court filed by Circuit Judge PROST, in
which Chief Judge RADER and Circuit Judges LOURIE,
BRYSON, GAJARSA, MOORE, and O’MALLEY, join. Dissent-
ing opinion filed by Circuit Judge DYK, in which Circuit
Judges NEWMAN, LINN, and REYNA join.

PROST, Circuit Judge.

This tax case concerns the procedures to be followed
when the Internal Revenue Service (“IRS” or “govern-
∗
Circuit Judge Gajarsa assumed senior status on
July 31, 2011.
3 BUSH v. US

ment”) conducts a partnership proceeding under the Tax
Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).
I.R.C. §§ 6221–6233. The plaintiffs are individual tax-
payers and limited partners in partnerships that were the
subject of such proceedings. The plaintiffs opted out of
the partnership proceedings via settlement. In doing so,
they stipulated to certain matters concerning their par-
ticipation in the partnerships. Based on those stipula-
tions, the IRS assessed recomputed taxes against the
plaintiffs without first issuing notices of deficiency (which
would have triggered an opportunity for plaintiffs to
challenge the recomputation in the United States Tax
Court before assessment). Plaintiffs paid the assessed
taxes and subsequently filed suit on grounds that the lack
of deficiency notices rendered the assessments invalid.
The United States Court of Federal Claims ruled for the
government, holding that the IRS had no obligation to
issue notices of deficiency in such circumstances. Bush v.
United States, 78 Fed. Cl. 76 (2007); Shelton v. United
States, Nos. 02-1042, 04-1595, 2007 U.S. Claims LEXIS
311 (Aug. 17, 2007). We agree, and therefore affirm.

I

Before turning to the facts, we undertake a brief re-
view of TEFRA and its effect on the IRS’s auditing of
partnerships. When an individual taxpayer prepares his
yearly tax return, he self-computes his tax for income he
has earned, then transmits the appropriate payment.
Matters become more complicated where income gener-
ated by partnerships is involved. The partnership gener-
ates income, but as an entity is not itself taxable.
Instead, the individual partners of a partnership shoulder
the burden of taxation on income that the partnership
generates.
BUSH v. US 4

In order for the IRS to properly audit the individual
returns of the partners, it must have data about the
partnership’s income as a whole. For that reason, part-
nerships are required to file yearly returns, even though
they do not pay tax on income. The IRS can then audit
the partnership return against the returns of the partners
and have a more complete picture of the income gener-
ated, which leads to a more accurate assessment of tax
liability all around.

TEFRA comes into play when the IRS reviews a part-
nership return and disputes some aspect of it. One of the
Act’s purposes was to streamline the tax procedures for
partnerships. Rather than undertake an arduous series
of partner-by-partner audits, as had previously been
required, TEFRA allows for a single, unified audit to
determine the treatment of “partnership items” for all the
partners. See I.R.C. §§ 6221–6233; H.R. Conf. Rep. No.
97-760, at 599–600 (1982); see also Callaway v. Comm’r,
231 F.3d 106, 107–08 (2d Cir. 2000); Keener v. United
States, 76 Fed. Cl. 455, 457–58 (2007), aff’d, 551 F.3d
1358 (Fed. Cir. 2009). These are items whose treatment
affects the entire partnership, and so analyzing them at
the partnership level makes more sense than doing so
partner-by-partner. See I.R.C. § 6231(a)(3) (defining
“partnership item”).

Under TEFRA, the IRS performs its audit of the part-
nership return and then transmits a notice of any re-
quired adjustments to each of the partners, as well as to
the partnership’s Tax Matters Partner. If the partnership
wishes to dispute the outcome of the audit, the Tax Mat-
ters Partner may file a petition in court. See id.
§ 6226(a)(1)–(3). All partners are treated as parties and
have a right to participate in the judicial proceeding, and
5 BUSH v. US

if they wish can settle independently with the IRS. See
id. § 6224(c).

This case involves such settlements, and questions
about the proper procedure for the IRS when it endeavors
to collect taxes it believes are owed pursuant to the set-
tlement.

II

We turn, then, to the facts. The two appeals before us
present the same issues and nearly identical stories. The
first, case number 2009-5008, concerns taxpayer Lyman
Bush and his late wife Beverly Bush. In the early 1980s,
Mr. Bush was a limited partner in two partnerships,
respectively named Lone Wolf McQuade and Cinema ’84.
As part of their obligations under the Tax Code, the
partnerships filed tax returns. As individual taxpayers,
the Bushes filed joint tax returns of their own.

The IRS, on reviewing the Lone Wolf McQuade and
Cinema ’84 returns, found deficiencies. Pursuant to
TEFRA, in 1991 the IRS notified the partners of Lone
Wolf McQuade that it was issuing Final Partnership
Administrative Adjustments (“FPAAs”) that would disal-
low certain deductions on the partnership’s 1983–86 tax
returns. See I.R.C. § 6223(a) (requiring notice to the Tax
Matters Partner and to each individual partner). The IRS
also notified the partners of Cinema ’84 of disallowed
deductions in that partnership’s returns for tax years
1985–89.

Both partnerships challenged the FPAAs with peti-
tions in the Tax Court. 1 See I.R.C. § 6226(a) (concerning

1 In fact, both partnerships had the same Tax
Matters Partner, Richard Greenberg. The Lone Wolf
BUSH v. US 6

judicial review of FPAAs). While proceedings were pend-
ing, on August 7, 1999, the Bushes settled with the IRS.
See I.R.C. § 6224(c) (concerning settlement). The settle-
ment papers—two Form 906 Closing Agreements on Final
Determination Covering Specific Matters—expressly
stated that they did not make any adjustments to part-
nership items. The agreements addressed the right to
claim partnership losses on individual tax returns. The
agreements provided that the settling partners were only
entitled to claim partnership losses to the extent of their
“at risk” amount. They also contained stipulations as to
how to calculate the exact dollar amount for each settling
partner that was “at risk” for the relevant tax years. For
example, the Bushes’ “capital contribution” was set at
$50,000 per partnership, and the agreement stated that
the at risk amount could increase with any additional
capital contribution to the partnership after 1986. See
Bush, 78 Fed. Cl. at 78; Bush Panel J.A. 191. Following
these Closing Agreements, the Tax Court dismissed the
Bushes from the partnership proceedings concerning
Cinema ’84 and Lone Wolf McQuade.

On July 12, 2000, the IRS issued Notices of Adjust-
ment for the Bushes’ 1985, 1986, and 1987 joint tax
returns. The Notices disallowed a significant portion of
the losses the Bushes had claimed connected to the two
partnerships. Two weeks later, the IRS assessed the
Bushes for the following amounts:

McQuade and Cinema ’84 partnerships are known collo-
quially as “Greenberg Brothers partnerships” in recogni-
tion of the role of the Greenberg Brothers Partnership in
their marketing. See Bush, 78 Fed. Cl. at 77. There are a
substantial number of other Greenberg Brothers partner-
ships, and approximately thirty have brought tax refund
suits similar to the two in this appeal. Id.
7 BUSH v. US

Tax Year Assessment
1985 Tax: $16,708.00
Interest: $42,660.44
1986 Tax: $10,817.00
Interest: $46,004.97
1987 Tax: $9,635.00
Interest: $26,729.62
Id. at 79. The government argues, and the Bushes do not
dispute, that these amounts were calculated based on
provisions in the Closing Agreements, specifically the
stipulated amount of the Bushes’ at-risk capital in those
years. Crucial to this appeal, the IRS did not issue the
Bushes any notices of deficiency as to their joint tax
returns prior to making these assessments.

The Bushes paid the assessed tax and interest the
next month, August 2000. Two years later, they initiated
refund proceedings with the IRS seeking to recover that
payment on grounds that the IRS failed to provide them
deficiency notices. The IRS denied their claims, and the
Bushes filed suit in the Court of Federal Claims on Octo-
ber 25, 2004. Id.

The facts pertaining to case number 2009-5009 are
largely identical. Like Mr. Bush, taxpayer Tommy Shel-
ton was a limited partner in Cinema ’84 (Lone Wolf
McQuade does not figure in Mr. Shelton’s appeal). Like
the Bushes, Mr. Shelton filed individual income tax
returns claiming deductions stemming from that partner-
ship and so was affected by the TEFRA proceeding con-
cerning Cinema ’84. Like the Bushes, Mr. Shelton settled
with the IRS. His Closing Agreement differed only in the
tax years at issue and the amount of Mr. Shelton’s capital
contribution, which was stipulated to be $150,000. Shel-
ton, 2007 U.S. Claims LEXIS 311, at *3.
BUSH v. US 8

Mr. Shelton’s post-settlement experience also mir-
rored that of the Bushes. On July 20, 2000, the IRS
issued Notices of Adjustment disallowing deductions on a
number of Mr. Shelton’s tax returns in the 1980s and
1990s. It subsequently assessed him as follows:
Tax Year Assessment
1981 Tax: $9,782.00
Interest: $61,329.37
1985 Tax: $9,444.00
Interest: $35,147.78
1986 Tax: $8,134.00
Interest: $26,500.86
1987 Tax: $1,346.00
Interest: $3,193.01
1989 Tax: $811.00
Interest: $1,115.49
1992 Tax: $958.00
Interest: $802.02
1995 Tax: $1,891.00
Interest: $785.46
Id. at 89,584–85. As in the case of the Bushes, the IRS
issued no Notices of Deficiency to Mr. Shelton. Mr. Shel-
ton paid the assessed tax and interest on August 28, 2000.
Like the Bushes, he initiated refund proceedings chal-
lenging the absence of a deficiency notice, but was denied
as to these assessments. 2 On August 23, 2002, Mr. Shel-
ton sued in the Court of Federal Claims.

As already noted, the cases brought by Mr. Bush and
Mr. Shelton were among numerous others brought by
other partners in other partnerships in essentially the

2Mr. Shelton did obtain refunds for certain as-
sessments not discussed herein. Shelton, 2007 U.S.
Claims LEXIS 311, at *8–*9.
9 BUSH v. US

same circumstances. See supra note 1. The Court of
Federal Claims selected these two cases for “briefing and
representative resolution.” Bush, 78 Fed. Cl. at 77.
There were essentially no disputed facts, and the plain-
tiffs and the government cross-moved for summary judg-
ment. The plaintiffs argued that the post-settlement
assessments made by the IRS were invalid because they
had not been preceded by a notice of deficiency, citing the
Tax Code’s general deficiency notice provision. See I.R.C.
§ 6212(a). The government disagreed, arguing that no
notice of deficiency was required because the new assess-
ments were mere “computational adjustments” exempt
from the notice requirement. See I.R.C. § 6230(a)(1).

In both cases, the Court of Federal Claims sided with
the government. It held that the post-settlement adjust-
ments were “computational adjustments” as that term is
defined in the Tax Code and that none of the Tax Code
provisions requiring notice even for computational ad-
justments applied. Bush, 78 Fed. Cl. at 83 et seq.; Shel-
ton, 2007 U.S. Claims LEXIS 311, at *12–*13. Plaintiffs
timely appealed.

A divided panel of this court affirmed, but on different
grounds. Bush v. United States, 599 F.3d 1352 (Fed. Cir.
2010), vacated, 400 F. App’x 556 (Fed. Cir. 2010). The
panel majority agreed with the taxpayers that the IRS’s
post-settlement assessments were not “computational
adjustments.” Id. at 1361. Nonetheless, the majority
would have affirmed, reasoning that the IRS’s failure to
issue notices of deficiency was harmless under the federal
harmless error statute, 28 U.S.C. § 2111. Id. at 1363–66.
Specifically, the majority concluded that the issuance of a
notice would have conferred to the taxpayers a right to
seek an injunction against the IRS’s collection, and a
refund of any collected amount. Because the taxpayers in
BUSH v. US 10

this case paid voluntarily—i.e., there was no formal
collection proceeding—and because no refund was ulti-
mately owed them, the panel majority held the failure to
send a deficiency notice harmless.

That opinion was accompanied by a concurrence
which agreed with the panel majority’s final result but
disagreed with its statutory interpretation and its appli-
cation of the harmless error exception. Id. at 1366–76
(Prost, J., concurring in the result). The concurrence
pointed out that harmless error doctrine “was not advo-
cated by either party in this court or below.” Id. at 1373.
It also cited opinions from other courts holding that
failure to send a deficiency notice cannot be harmless
error. Id. at 1376 (citing Phila. & Reading Corp. v. Beck,
676 F.2d 1159, 1163–54 (7th Cir. 1982); Hoyle v. Comm’r,
131 T.C. 197, 205 (2008)). Rather than join the majority’s
expedition into harmless error analysis, the concurrence
would have affirmed the Court of Federal Claims’ inter-
pretation that the assessments in this case were “compu-
tational adjustments.”

We subsequently granted the plaintiffs’ petitions to
rehear the case en banc, vacated the panel opinion, and
requested additional briefing from the parties. Bush, 400
F. App’x 556. We specifically asked the parties to address
four questions:

a) Under I.R.C. § 6213, were taxpayers in this
case entitled to a pre-assessment deficiency no-
tice? Were the assessments the results of a “com-
putational adjustment” under § 6230 as the term
“computational adjustment” is defined in § 6231
(a)(6)?
11 BUSH v. US

b) If the IRS were required to issue a deficiency
notice, does § 6213 require that a refund be made
to the taxpayers for amounts not collected “by levy
or through a proceeding in court”?

c) Are taxpayers entitled to a refund under any
other section of the Internal Revenue Code? For
example, what effect, if any, does an assessment
without notice under § 6213 have on stopping the
running of the statute of limitations?

d) Does the harmless error statute, 28 U.S.C.
§ 2111, apply to the government’s failure to issue
a deficiency notice under I.R.C. § 6213? If so,
should it apply to the taxpayers in this case?

Id. at 556–57.

III

Our first task is to construe the relevant Tax Code
sections to discover whether the IRS was required to issue
notices of deficiency before assessing additional tax pay-
ments from the Bushes and from Mr. Shelton.

The Tax Code’s general rule requiring pre-assessment
notices of deficiency is set forth in I.R.C. § 6212: “If the
Secretary determines that there is a deficiency in respect
of any tax imposed by [various parts of the Tax Code], he
is authorized to send notice of such deficiency to the
taxpayer by certified mail or registered mail.” Such
notice is generally a prerequisite to any attempt by the
IRS to assess or collect on the deficiency. Comm’r v.
Shapiro, 424 U.S. 614, 618 (1976).

As already mentioned, auditing partnerships raises
novel considerations not present when auditing individu-
BUSH v. US 12

als. TEFRA added provisions to increase efficiency when
the IRS audits partnership returns that may affect a
large number of individual taxpayers. Prominent among
these provisions for our purposes is § 6230, which creates
special dispensation from certain administrative require-
ments for some partnership proceedings.

Section 6230(a) broadly exempts a class of “computa-
tional adjustments” from the notice and other administra-
tive provisions otherwise required for a deficiency
proceeding:

(a) Coordination with deficiency proceedings.—

(1) In general.—Except as provided in para-
graph (2) or (3), subchapter B of this chapter
shall not apply to the assessment or collection
of any computational adjustment.

(2) Deficiency proceedings to apply in certain
cases.--

(A) Subchapter B shall apply to any defi-
ciency attributable to--

(i) affected items which require partner
level determinations (other than penal-
ties, additions to tax, and additional
amounts that relate to adjustments to
partnership items), or

(ii) items which have become nonpart-
nership items (other than by reason of
section 6231(b)(1)(C)) and are described
in section 6231(e)(1)(B).
13 BUSH v. US

I.R.C. § 6230(a)(1)–(2)(A). 3 Paragraphs (1) and (2), set
forth above, are relevant to this appeal, and they define
the two prongs of our statutory analysis. First, we hold
that the IRS’s adjustments in this case are “computa-
tional adjustments” covered by paragraph (1). Second, we
hold that the deficiencies alleged by the IRS against Mr.
Bush and Mr. Shelton are not “attributable to affected
items which require partner level determinations” as per
paragraph (2).

A

The Tax Code defines “computational adjustment” as:

[T]he change in tax liability of a partner which
properly reflects the treatment under this sub-
chapter of a partnership item. All adjustments
required to apply the results of a proceeding with
respect to a partnership under this subchapter to
an indirect partner shall be treated as computa-
tional adjustments.

I.R.C. § 6231(a)(6). As already discussed, a “partnership
item” is an item of a partnership return whose treatment
is better handled at the partnership level than partner-
by-partner. See id. § 6231(a)(3); see also 26 C.F.R.
§ 301.6231(a)(3)-1 (further defining “partnership item”).

Plaintiffs urge that the IRS’s assessment against
them is not a “computational adjustment” because, in
their view, a “computational adjustment” occurs only
where the IRS changes some aspect of its treatment of a
partnership item, and as a result the computed tax liabil-

3 The references to “subchapter B” in para-
graphs (1) and (2) mean Chapter 63, Subchapter B of the
Tax Code, which contains the notice statute.
BUSH v. US 14

ity has changed. They point out a provision in the Closing
Agreements expressly stating, “No adjustment to the
partnership items shall be made . . . .” Shelton Panel J.A.
150.

The government acknowledges that, by virtue of set-
tlement, certain partnership items may become nonpart-
nership items. It emphasizes, however, that the term
“computational adjustment” is defined in the Code not as
requiring “changes” to partnership items, but merely
treatment of such items. The government argues that any
determination of partnership items in a TEFRA proceed-
ing, including determining that the items were properly
reported, constitutes “treatment” of that partnership
item. Further, it argues that when a partner’s tax liabil-
ity “properly reflects” this treatment, then it is properly
assessed as a computational adjustment.

The government also maintains that accepting the
taxpayers’ proposed statutory construction would frus-
trate the purpose of TEFRA. Specifically, the government
contends that regardless of whether treatment of a part-
nership item changes during a TEFRA proceeding, an
individual partner should not get a second opportunity to
challenge that treatment following the TEFRA proceeding
unless there are partner-level factual determinations
involved.

Questions of statutory construction turn on “the lan-
guage itself, the specific context in which the language is
used, and the broader context of the statute as a whole.”
Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). In
this case, all of these support our conclusion that a “com-
putational adjustment,” as defined in § 6231(a)(6), does
not require that the treatment of a partnership item
change during the TEFRA proceeding.
15 BUSH v. US

The purpose of TEFRA is to provide a single, unified
forum for determination of partnership items. Every
partner is given notice of this proceeding and every part-
ner has an opportunity to participate. I.R.C. § 6226(c). If
a notice of deficiency were to be required in the circum-
stances urged by the taxpayers—when a TEFRA proceed-
ing results in a change in tax liability with no changes to
partnership items—then individual partners would be
able to have a second pre-assessment bite at the apple,
challenging the TEFRA determinations of partnership
items in the Tax Court. Instead, this scenario should
result in a directly assessed computational adjustment.

This is true regardless of whether the TEFRA pro-
ceeding makes changes to the treatment of partnership
items from the partnership returns. Indeed, if the IRS, in
a TEFRA proceeding, accepts the partnership return as
fully correct, it may still make assessments as computa-
tional adjustments for any changes in tax liability that
arise from the partnership proceeding. The plain lan-
guage of the statute demands this result. The word
“change” in the statute modifies “the tax liability of a
partner.” The word “treatment” modifies the phrase “of a
partnership item.” This structure is incompatible with
plaintiffs’ contention that a change to “treatment” of a
partnership item is a prerequisite to any computational
adjustment. What must change is the partner’s tax
liability, not necessarily the treatment of any partnership
item. To hold differently would be grammatically inde-
fensible. Further, the word “treatment” is not a synonym
for “change.” The word “treatment” is broad, but under-
standably so, given that the tax code performs an enor-
mous set of functions—from categorizing items as
“income” or “loss,” to determining whether an item war-
rants a tax credit, deduction, or additional tax. It is thus
not surprising that Congress has used “treatment” often,
BUSH v. US 16

but not because it really meant “change.” See, e.g., id.
§§ 1361–1379 (subchapter S, “Tax Treatment of S Corpo-
rations and Their Shareholders”), § 4462, §§ 6211–6234
(subchapter C, “Tax Treatment of Partnership Items”).
There is no evidence that Congress intended the phrase
“treatment under this subsection of a partnership item” to
mean less than its naturally broad and inclusive meaning.
Cf. Reiter v. Sonotone Corp., 442 U.S. 330, 338–39 (1979).
To interpret “treatment” to mean “change [in treatment]”
would fail to give proper weight to the words chosen by
Congress. See Sosa v. Alvarez-Machain, 542 U.S. 692,
711 n.9 (2004) (“[W]hen the legislature uses certain
language in one part of the statute and different language
in another, the court assumes different meanings were
intended.”) (internal quotation marks omitted). Had
Congress intended to limit “computational adjustments”
to tax liability changes arising from changes in treatment
of a partnership item, it could have used the word
“change” or “change in treatment” rather than the word
“treatment” alone.

Our reasoning in Olson v. United States supports this
conclusion. 172 F.3d 1311 (Fed. Cir. 1999). Olson holds
that assessments are “computational adjustments” when
they require “no individualized factual determinations” as
to the correctness of the original partnership items or
“any other factual matters such as the state of mind of the
taxpayer upon filing.” Id. at 1318. Under Olson, when
critical questions of fact have been resolved, then “appli-
cation of that stipulated fact to the tax returns in ques-
tion requires only computational action.” Id. This applies
with equal force to settlements as to fully contested
TEFRA determinations. And, in fact, other courts have
adopted our approach when the only remaining issue
after a TEFRA proceeding is to apply a mathematical
formula. See, e.g., Desmet v. Comm’r, 581 F.3d 297, 303-
17 BUSH v. US

04 (6th Cir. 2009); Callaway v. Comm’r, 231 F.3d 106,
110 & n.4 (2d Cir. 2000) (holding that “where no further
factual determinations are necessary at the partner level,
an assessment attributable to an ‘affected item’ may also
be made by computational adjustment” because determin-
ing the tax liability “is a mathematical calculation and
requires no further factual finding”). Olson supports our
conclusion because, under its rule, a post-settlement
adjustment is “computational” because after the settle-
ment, there is nothing left to do but perform a calculation
to determine tax liability. That is precisely the case here.

Plaintiffs’ remaining arguments are not persuasive.
They point to § 6230(a)(2)(A)(i) and contend that our
interpretation would render a wide variety of assess-
ments—even those based on individual partner-level
factual determinations—“computational adjustments.”
As shown above in our discussion of Olson, and in the
additional analysis below, we agree with taxpayers that
any tax liability that arises based on individual partner-
level factual determinations requires a notice of defi-
ciency. That is not the situation in this case.

Similarly, plaintiffs argue that our holding would
render the second sentence of I.R.C. § 6231(a)(6) (the
definition of “computational adjustment”) superfluous.
This sentence reads “[a]ll adjustments required to apply
the results of a proceeding with respect to a partnership
under this subchapter to an indirect partner shall be
treated as computational adjustments.” Because they
mistakenly believe that the government’s proposed inter-
pretation would make every assessment a computational
adjustment, plaintiffs argue that such an interpretation
must be rejected in order to avoid making the above-cited
sentence superfluous. We dispute plaintiff’s premise. To
hold, as they suggest, that assessments based on detailed
BUSH v. US 18

partner-level determinations are nevertheless “computa-
tional” would be incompatible with the statute, and we do
not so hold. We thus find the second sentence of
§ 6231(a)(6) entirely compatible with our holding that a
“computational adjustment” can arise from a change to
tax liability properly reflecting treatment of a partnership
item, even where that treatment does not change during
the TEFRA proceeding.

Further, the taxpayers argue that our holding con-
flicts with the applicable regulation on computational
adjustments which reads:

A change in the tax liability to properly reflect the
treatment of a partnership item under subchapter
C of chapter 63 of the Code is made through a
computational adjustment. A computational ad-
justment may include a change in tax liability
that reflects a change in an affected item where
that change is necessary to properly reflect the
treatment of a partnership item . . . . However,
changes in a partner’s tax liability with respect to
affected items that require partner-level determi-
nations (such as a partner’s at-risk amount that
depends upon the source from which the partner
obtained the funds that the partner contributed to
the partnership) are not included in a computa-
tional adjustment.

Temp. Treas. Reg. § 301.6231(a)(6)-1T, 52 Fed. Reg. 6,779,
6,790–91 (Mar. 5, 1987). 4 The taxpayers argue that this

4 There is a more current version of this regula-
tion. See 26 C.F.R. § 301.6231(A)(6)-1. It does not vary
from this version in any substantive way that would
affect our analysis.
19 BUSH v. US

regulation shows that a computational adjustment must
involve some change in treatment of a partnership item.
We disagree. Nothing about this regulation requires that
a computational adjustment involve a change in treat-
ment of a partnership item. While it shows that a compu-
tational adjustment may (and often does) result from a
change in treatment of a partnership item, nothing in the
regulation demands that this be the only scenario.

The taxpayers then argue that, contrary to the gov-
ernment’s assertion, I.R.C. § 6222(c) actually supports
their definition of computational adjustment. This sec-
tion states that certain assessment restrictions “shall not
apply to any part of a deficiency attributable to any
computational adjustment required to make the treat-
ment of items by such partner consistent with the treat-
ment of the items on the partnership return.” Taxpayers
argue that this statutory section defines an exception to
the general rule that a computational adjustment re-
quires a change in treatment to a partnership item. We
are not persuaded that this section has such an effect.
This section merely makes clear that the assessment of
computational adjustments goes in both directions, apply-
ing both to changes in tax liability that result from the
TEFRA proceeding itself and to changes in tax liability
that arise from making a partner’s tax return consistent
with the TEFRA proceeding and the partnership return.

Finally, the taxpayers argue that theirs are not com-
putational adjustments because the definition of “compu-
tational adjustment” is located in a separate statutory
chapter than the definition of amounts at risk. Compare
I.R.C. § 465 (“Deductions limited to amounts at risk.”)
(Chapter 1, Subchapter E) with I.R.C. § 6231(a) (setting
forth definitions, including for “computational adjust-
ment,” “for purposes of this subchapter”) (Chapter 63,
BUSH v. US 20

Subchapter C). We disagree with the plaintiffs. The at-
risk amount, in the context of a partnership, is an affected
item, meaning it has a partnership component. As long
as the limitation on the at-risk amount relates to treat-
ment of a partnership item, as in this case, it can be
assessed as a computational adjustment.

In this case, the IRS believed that the taxpayers were
not entitled to claim certain losses. Had the TEFRA
proceeding gone through to completion and the IRS
prevailed, the claimed losses would have been invalid and
the IRS would have undisputedly assessed the taxes via a
computational adjustment. Instead, plaintiffs chose to
settle. They agreed to formulas to determine their at-risk
amount, which necessarily affected the amount of loss
they could claim on their personal returns. The only
reason there were not “changes” to partnership items is
because of the way the parties structured their settle-
ments. That does not mean, however, the settlements
failed to give rise to a “change in tax liability of a partner
which properly reflects the treatment . . . of a partnership
item.” These settlements took disputes as to partnership
items and resolved them by translating those partnership
items into specific numbers or computations. As a result,
the IRS’s post-settlement assessments reflect nothing
more than simple computational adjustments stemming
from those agreements.

The taxpayers effectively admit that this is the situa-
tion in the present case by acknowledging that, rather
than requiring complex factual determinations, the Clos-
ing Agreements in question “establish . . . the formula for
computing each of [the taxpayer’s] at risk amounts after
1986.” Bush Panel Appellant’s Br. 43; see also, Shelton
Panel Appellant’s Br. 45. This admission makes it clear
that under our construction, the assessments were the
21 BUSH v. US

result of computational adjustments. After the settle-
ment, there was nothing to do other than plug numbers
into a formula to determine any change in tax liability.
Thus, the assessments were computational adjustments
under I.R.C. § 6231.

B

Our holding that the assessments in this case meet
the definition of “computational adjustment” under I.R.C.
§ 6231(a)(6) does not end our analysis. Notices of defi-
ciency would still be due for any deficiencies (including
any that would otherwise be a computational adjustment)
attributable to “affected items which require partner level
determinations” under § 6230(a)(2)(A)(i).

An “affected item” is “any item to the extent such item
is affected by a partnership item.” I.R.C. § 6231(a)(5). An
affected item includes two parts, a partnership component
and a nonpartnership component, with the former affect-
ing the latter. See Keener, 76 Fed. Cl. at 460.

Taxpayers argue that the at-risk amounts determined
by the settlements in this case involved partner-level
factual determinations that triggered the notice require-
ment. For example, they argue that the “settlements
acknowledged that the partnership debt was valid and
agreed that their amounts at-risk would be reduced by
any portion of that debt they had individually assumed—
clearly a partner-level determination.” En Banc Appel-
lants’ Br. 6, n.9.

The government responds that the determination of
tax liability in these cases involved no partner-level
factual determinations. While it concedes that a partner’s
at-risk amount nominally has nonpartnership elements,
BUSH v. US 22

the government argues that these cases actually turned
on partnership-level considerations. The government
states:

Generally, a taxpayer is at risk for amounts con-
tributed to a partnership, and borrowed by the
partnership where there is recourse against the
taxpayer for the repayment of the borrowed
amounts and the taxpayer is not otherwise
shielded from personal liability. Whether a part-
nership note is recourse or nonrecourse is a part-
nership item. Here, the IRS determined in the
FPAAs that, contrary to the partnership returns,
the partnership notes were nonrecourse. This
proposed change to a partnership item indisputa-
bly would have resulted in computational adjust-
ments reducing taxpayers’ at-risk amounts. The
closing agreements reached the same result.

En Banc Appellee’s Br. 33 (citations omitted). The gov-
ernment argues that the settlements resolved only part-
nership items and thus could be directly assessed as a
computational adjustment without the need for a defi-
ciency notice.

We agree with the analysis of the Court of Federal
Claims that, while the at-risk amount may be an affected
item with a nonpartnership component, in these cases
there were no partner-level determinations. The Court of
Federal Claims noted that “a settlement is usually ap-
plied to a partner by means of a computational adjust-
ment and not under the ordinary deficiency and refund
procedures.” Bush, 76 Fed. Cl. at 81 (quoting Bob Hamric
Chevrolet v. United States, 849 F. Supp. 500, 510 (W.D.
Tex. 1994)). The settlements between the taxpayers and
the IRS only required computation to determine the
23 BUSH v. US

taxpayers’ at-risk amount and thus their tax liability.
Specifically, in paragraph 3 of the Closing Agreement, the
taxpayers agreed that the at-risk amount would be “their
capital contribution to the partnership.” Shelton Panel
J.A. 150. The next paragraph identifies that capital
contribution as $150,000. Id. The remaining paragraphs
define the ways in which this at-risk amount may change.
For example, paragraph 7 states “[t]o the extent the
taxpayers make additional cash contributions to the
capital of the partnership after 1989, the taxpayers’
amount at risk will be increased in accordance with I.R.C.
§ 465.” Id.

Simply because these at-risk amounts may be specific
to the individual partner does not mean that they are
partner-level determinations within the meaning of
§ 6230(a)(2)(A)(i). As in Olson, all that remained after the
settlements was to apply the values from the taxpayers’
returns to the stipulated computations in the settlement
agreement and directly assess the tax. There was no need
to collect any additional information from the taxpayers
or make any factual determinations.

As the Court of Federal Claims noted, a notice of defi-
ciency is due under I.R.C. § 6230(a)(2)(A)(i) only when
“uncertainty as to factual matters must be resolved before
arriving at a figure for those affected items.” Bush, 78
Fed. Cl. at 83 (citing Olson, 173 F.3d at 1317). There are
several types of such factual determinations that have
been outlined in earlier cases. For example, in some
instances the IRS may issue a penalty for negligently
under-reporting a partner’s share of a partnership’s tax
liability. Bob Hamric Chevrolet, 849 F. Supp. at 511.
This requires a factual inquiry into the taxpayer’s negli-
gence and cannot be assessed without a notice of defi-
ciency. Id. Another example is when the taxpayer and a
BUSH v. US 24

third party have an agreement for the assumption of
certain tax liabilities. Id. This would require the IRS to
make a factual determination regarding these assumed
liabilities and would entitle the taxpayer to a notice of
deficiency. It is clear that none of these factual determi-
nations had to take place in this case in order to deter-
mine tax liability from the settlement terms. The IRS
simply had to plug the numbers from the taxpayers’ tax
returns into the computations set out in the Closing
Agreements and directly assess any change in tax liabil-
ity. As noted above, the taxpayers conceded as much in
their opening briefs when they admitted that the Closing
Agreements simply “establish . . . the formula for comput-
ing each of [the taxpayer’s] at risk amounts after 1986.”
Bush Panel Appellant’s Br. 43; see also, Shelton Panel
Appellant’s Br. 45.

In conclusion, we affirm the judgments of the Court of
Federal Claims. The changes in tax liability that arose
from the Closing Agreements in this case were computa-
tional adjustments under I.R.C. § 6231(a)(6). Further, to
the extent that the at-risk amounts were affected items,
they did not require any partner-level factual determina-
tions. Thus, the IRS was correct to directly assess these
taxes without a notice of deficiency.

IV

Because we conclude that the assessments in this case
amounted to computational adjustments, no deficiency
notices were necessary. The three remaining questions
this court put to the parties as part of en banc rehearing
each presumed that a deficiency notice was required.
Because our holding here definitively contradicts that
presumption, we need not analyze those questions. We
25 BUSH v. US

therefore affirm the judgment of the Court of Federal
Claims.

AFFIRMED
 United States Court of Appeals
for the Federal Circuit
__________________________

LYMAN F. BUSH INDIVIDUALLY AND AS
PERSONAL REPRESENTATIVE OF THE ESTATE OF
BEVERLY J. BUSH,
Plaintiffs-Appellants,
v.
UNITED STATES,
Defendant-Appellee.
__________________________

2009-5008
__________________________

Appeal from the United States Court of Federal
Claims in consolidated case nos. 02-CV-1041 and 04-CV-
1598, Judge George W. Miller.
__________________________

TOMMY J. SHELTON
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
__________________________

2009-5009
__________________________
BUSH v. US 2

Appeal from the United States Court of Federal
Claims in consolidated case nos. 02-CV-1042 and 04-CV-
1595, Judge George W. Miller.
__________________________

DYK, Circuit Judge, dissenting, with whom Circuit Judges
NEWMAN, LINN, and REYNA join.
The majority holds that a deficiency notice under
I.R.C. § 6230 was not required because the assessment
here involved a “computational adjustment,” as defined by
I.R.C. § 6231(a)(6), and no individual partner level deter-
minations were necessary. In my view, the majority has
effectively rewritten the statute to virtually eliminate the
requirement that the government establish the existence
of a computational adjustment. I respectfully dissent.
In most cases, the IRS is barred from assessing and
collecting taxes unless it has sent the taxpayer a notice of
deficiency. Id. § 6213(a). The notice allows the taxpayer
to contest the amount due before collection proceedings
are initiated and to elect to litigate the merits of the
alleged deficiency assessment in the Tax Court. However,
the Code dispenses with the deficiency notice requirement
when the assessment is merely conforming the taxpayer’s
individual calculation of tax liability to a partnership’s
treatment of partnership items (i.e., a “computational
adjustment”). Id. § 6230(a)(1). The Code, however, also
creates an exception to this exception where the treat-
ment of a partnership item changes the taxpayer’s tax
liability, but the tax computation still requires a determi-
nation of a partner level issue, that is, a non-partnership
item. 1 The Code provides that a deficiency notice is

1 Section 6230(a) provides, in relevant part:
(a) Coordination with deficiency proceedings.—
(1) In general.—Except as provided in para-
graph (2) or (3), subchapter B of this chapter
3 BUSH v. US

required if the assessment is “attributable to . . . affected
items which require partner level determinations (other
than penalties, additions to tax, and additional amounts
that relate to adjustments to partnership items).” Id.
§ 6230(a)(2)(A)(i). 2 Thus, for there to be an exemption
from the deficiency notice requirements, § 6230(a) im-
poses not only a requirement that there be a computa-
tional adjustment, but also a requirement that there not
be an “affected item[ ] . . . which require[s] partner level
determinations.” Id.
Focusing on the “computational adjustment” issue,
the Code here defines that term as “the change in the tax
liability of a partner which properly reflects the treatment
under this subchapter of a partnership item.” Id.
§ 6231(a)(6). The IRS may directly assess any “computa-
tional adjustment required to make the treatment of the
items by such partner consistent with the treatment of the

[requiring a deficiency notice] shall not apply to
the assessment or collection of any computa-
tional adjustment.
2) Deficiency proceedings to apply in certain
cases.--
(A) Subchapter B shall apply to any deficiency
attributable to--
(i) affected items which require partner level
determinations (other than penalties, addi-
tions to tax, and additional amounts that
relate to adjustments to partnership items),
or
(ii) items which have become nonpartner-
ship items (other than by reason of section
6231(b)(1)(C)) and are described in section
6231(e)(1)(B).
I.R.C. § 6230(a) (emphases added).
2 An “affected item” is defined as “any item to the
extent such item is affected by a partnership item.” Id.
§ 6231(a)(5).
BUSH v. US 4

items on the partnership return.” Id. § 6222(c) (emphasis
added). The need to conform the individual return to the
treatment of a partnership item may arise in either of two
ways—either because the individual taxpayer return does
not accurately reflect partnership items in the partner-
ship return, or because a TEFRA proceeding results in a
different treatment of a partnership item than in the
original return. As the Second Circuit noted in Callaway
v. Comm’r, 231 F.3d 106, 109–10 (2d Cir. 2000):
Such peremptory adjustments of a partner’s
return [(i.e., assessments made without a defi-
ciency notice)] are justified because the partner
will already have benefitted from notice of and the
right to participate in any proceeding under the
TEFRA provisions to determine the partnership
items at the partnership level. The IRS may ad-
just partnership items only at the partnership
level and only after following the TEFRA proce-
dures. . . . After the FPAA adjustments [following
the TEFRA procedures] become final . . . , the IRS
may assess partners with the tax which properly
accounts for their distributive share of the ad-
justed partnership items, without notice, as a
computational adjustment.
There is no claim here that the individual taxpayers’
computations failed to reflect the treatment of a partner-
ship item in the partnership return. Nor did the TEFRA
proceeding result in any change in the treatment of a
partnership item. The settlement agreement of the
TEFRA proceeding stated specifically: “No adjustment to
the partnership items shall be made . . . for purposes of
this settlement.” The fact that there might have been a
computational adjustment as a result of the TEFRA
proceeding if the partnership losses had been disallowed
hardly suggests that a computational adjustment was
5 BUSH v. US

involved when the parties decided not to make a change
to any partnership item. Thus, the “change in liability” of
the taxpayer partners did not result from the “treatment .
. . of a partnership item” but from a change in the treat-
ment of an individual partner level item in the settlement
agreement (i.e., the agreement to cap the at-risk amount
of the individual partners). Because no partnership item
is involved, there can be no computational adjustment.
The majority makes little effort to come to grips with
the statutory language defining a “computational adjust-
ment.” Rather, the majority reasons that, “when critical
questions of fact have been resolved, the ‘application of
that stipulated fact to the tax returns in question requires
only computational action.’” Maj. Op. at 16 (quoting
Olson v. United States, 172 F.3d 1311, 1318 (Fed. Cir.
1999)). But the stipulated facts (or those established in
the TEFRA proceeding) must relate to a partnership item,
not to an individual partner item. Here, the settlement
agreement by its own explicit terms changed only the
partner level at-risk amount. The settlement agreement
explicitly stipulated that “[n]o adjustment to the partner-
ship items shall be made . . . for purposes of this settle-
ment.” Because the settlement agreement then adjusted
the at-risk amount, it clearly did not view the at-risk
amount as a “partnership item[ ].”
The taxpayers correctly point out that the majority’s
approach effectively dispenses with the requirement of a
deficiency notice when the change in tax liability is not
the result of a change in treatment of a partnership item
but results from a change in an individual partner item.
The majority’s answer is that § 6230(a) still requires
notice if an “affected item . . . require[s] partner level
determinations” (i.e., if there is an unresolved factual
issue concerning individual partner liability). There is
none here, says the majority, because the taxpayers
BUSH v. US 6

stipulated to the at-risk amount, and the tax liability may
be calculated by applying this stipulation to the tax
payers’ individual returns. But that is not all the statute
says. To be exempt from the deficiency notice require-
ments, § 6230(a) imposes the additional requirement that
there be a computational adjustment. See I.R.C.
§ 6230(a)(1).
The majority remarkably finds support in two deci-
sions by the Second and Sixth Circuits in Callaway, 231
F.3d at 110 n.4, and Desmet v. Comm’r, 581 F.3d 297,
303–04 (6th Cir. 2009), suggesting that these circuit
decisions have similarly held that post-settlement ad-
justments were “computational” when there was “nothing
left to do but perform a calculation to determine tax
liability.” Maj. Op. at 17, 16–17. The majority appears to
think that these cases suggest that if an item is not an
“affected item” requiring a partner level determination,
then it necessarily follows that it is a “computational
adjustment.” But neither of these cases suggests that the
mere fact that there is not an affected item requiring a
partner level determination could dispense with the
additional requirement that there be a computational
adjustment. Both of these cases acknowledge that there
must be a computational adjustment in addition to the
separate requirement imposed by § 6230(a)(2)(A)(i) that
there be no “affected item[ ] . . . which require[s] partner
level determinations.”
The majority appears to be concerned that applying
the statute as written will allow taxpayers to relitigate
issues resolved by settlement agreements. The basis for
this concern is difficult to fathom. A settlement agree-
ment is binding; the requirement of a deficiency notice
does nothing to undo such an agreement. It merely
requires that the taxpayer receive notice of how the
application of the settlement agreement will affect the
7 BUSH v. US

taxpayer’s tax liability. A right to a deficiency notice has
nothing to do with whether there is merit to the tax-
payer’s underlying claims.
Because I conclude that a “computational adjustment”
was not involved, I need not reach the additional question
of whether there was an “affected item” involved requir-
ing a partner level determination. If I am correct that a
deficiency notice was required, the question then becomes
whether the taxpayers are entitled to a refund because a
deficiency notice was not provided. For the reasons stated
in the original panel opinion, and as the government
agrees, § 6213(a) only provides for an automatic refund in
circumstances where the tax is “collected” during a period
in which “collecti[on] by levy or through a proceeding in
court” is prohibited. In this case, the IRS never initiated
collection proceedings against the taxpayers. Indeed, the
taxpayers voluntarily paid the assessments and then sued
for a refund. The taxpayers do not contend that the
amounts paid were not owed if the limitations period had
not run when payment was made. If the statute of limita-
tions had not run when the payments were made, the fact
that the IRS failed to issue the notice required before the
IRS could have assessed or collected the tax does not
require a refund. See Lewis v. Reynolds, 284 U.S. 281,
283 (1932) (“An overpayment must appear before refund
is authorized.”); cf. Jones v. Liberty Glass Co., 332 U.S.
524, 531 (1947) (“[T]he payment of more than is rightfully
due is what characterizes an overpayment.”). Our sister
circuits have applied Lewis for the principle that the
timely payment of taxes properly due is not an overpay-
ment, regardless of whether a timely assessment has been
made. See, e.g., Williams-Russell & Johnson Inc. v.
United States, 371 F.3d 1350, 1353 (11th Cir. 2004)
(applying the principles in Lewis and finding “no convinc-
ing legal reason why [the taxpayer] should be allowed to
BUSH v. US 8

recover what it owed and has already properly paid
simply because the IRS was lax in it[s] responsibilities”
and noting that “it would be nonsensical to allow a tax-
payer to recover those taxes now”). However, the gov-
ernment agrees that the running of the statute of
limitations before payment may compel a refund. I would
remand this case to the Claims Court to address this
issue.