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Acute Care Specialists II v. United States

United States Court of Appeals, Seventh Circuit

August 22, 2013

Acute Care Specialists II, et al., Plaintiffs-Appellants,
United States of America, Defendant-Appellee.

Argued September 7, 2012

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:11-cv-00465 — Matthew F. Kennelly, Judge.

Before Cudahy, Rovner, and Tinder, Circuit Judges.

Tinder, Circuit Judge.

Almost thirty years ago, the appellant-taxpayers entered into partnerships which the IRS later determined engaged in little more than tax avoidance. The path by which this matter reached our court was convoluted, but our decision is straightforward. We affirm the district court's holdings that it lacked subject-matter jurisdiction over the taxpayers' claims that the IRS's assessments 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.


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- 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 Ta x Court to challenge the IRS's determinations. Specifically, they sought readjustments 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 Ta x Court cases, and consolidated the suits filed by other partnerships involved in this appeal with seventy-six other cases. Fred Behrens, an American Agri-Corp officer and general partner for all of the partnerships, intervened as the tax-matters partner for all of the partnerships involved in this case, as well as for many others. These suits all raised a similar set of issues, and all of the partnerships involved in this case agreed to be bound by the Tax Court's determination of these issues in one particular case, known as the Test Case Group.

During the trial, some of the partnerships in the Test Case Group raised as an affirmative defense the argument that the limitations period under 26 U.S.C. §6229(a) had expired before the IRS issued its Final Partnership Administrative Adjusts.

For one of these Final Partnership Administrative Adjusts, the Tax Court held that the IRS action was not time-barred "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 Ta x 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 West 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 Ta x 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 computational adjustment."

In July 2001, the Ta x Court entered decisions for all partner- ships that are relevant to this appeal. The court determined that the partnerships had engaged in "transactions which lacked economic substance, " and which "result[ed] in a substantial distortion of income and expense" in each partner's 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 Administrative Adjusts. According to the IRS, the taxpayers' statute-of- limitations argument involved a partnership-level determination, and 26 U.S.C. ยง7422(h) deprives courts of jurisdiction over such determinations. Second, the IRS asserted that the assessment of penalty interest involved a partnership-level determination 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 ...

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