### In the



# United States Court of Appeals

For the Seventh Circuit

No. 12

‐ 1212

A CUTE C ARE S PECIALISTS II, et al.,

Plaintiffs

‐ Appellants

,

v.

U NITED S TATES OF A MERICA

, 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.

A RGUED S EPTEMBER 7, 2012

— D ECIDED A UGUST 22, 2013

Before C UDAHY

, R OVNER

, and T INDER

, Circuit Judges.

T INDER

, 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 assessments2 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

‐ barred4 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’sNo. 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

‐ matter6 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 the8 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 anNo. 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 and10 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 claim14 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 lacksNo. 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 hearNo. 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 A FFIRM

the district’s court dismissal of the taxpayers’ complaint.