BUSH et al v. USA

Filing 51

PUBLISHED OPINION granting 28 Motion to Dismiss - Rule 12(b)(1); finding as moot 29 Motion for Summary Judgment. The plaintiffs § 6221(c) tax motivated interest refund claims are hereby dismissed for lack of jurisdiction. There being no just reason for delay, the clerk is directed to enter final judgment dismissing these claims under RCFC 54(b). Signed by Judge Nancy B. Firestone. (rh4) Copy to parties.

The United States Court of Federal Claims
No. 10-661T
(Filed: November 14, 2011)
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GORDON W. BUSH, et al.,

Plaintiffs,
v.
THE UNITED STATES,
Defendant.

Tax Equity and Fiscal Responsibility Act of
1982 (“TEFRA”); RCFC 12(b)(1) dismissal
for lack of jurisdiction; 26 U.S.C. § 7422(h);
refund action for a refund “attributable to
partnership items”; 26 U.S.C. § 6621(c);
penalty interest for tax motivated
transactions.

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Thomas E. Redding, Houston, TX, for plaintiff. Sallie W. Gladney, Houston, TX,
of counsel.
Christopher S. Dove, U.S. Department of Justice, Washington, D.C., with whom
was John A. DicCicco, Principal Deputy Assistant Attorney General, for defendant.
OPINION
FIRESTONE, Judge.
The court has pending before it the United States’ motion to dismiss, under Rule
12(b)(1) of the Rules of the United States Court of Federal Claims (“RCFC”), the
plaintiffs’ tax refund claims that challenge the assessment of tax motivated interest under
former § 6621(c) of the Internal Revenue Code (“I.R.C.”). 1 Also pending is the

1

All references to the I.R.C. are in Title 26. Former § 6621(c) was added to the I.R.C. in 1984 to
discourage the growth of abusive tax shelters. See Deficit Reduction Act of 1984, Pub. L. No.
98-369, § 144(a), 98 Stat. 682; Staff of the Joint Committee on Taxation, 98th Cong., General

plaintiffs’ motion for summary judgment on those same claims. The plaintiffs, Gordon
R. and Jennifer L. Cooke, filed the present action seeking a refund of § 6621(c) interest
for tax years 1983 and 1984. 2 The Cookes allege that the Internal Revenue Service
(“IRS”) improperly assessed tax motivated interest against Mr. Cooke under § 6621(c), in
connection with his limited partnership interest in Dillon Oil Technology Partners.
Section 6621(c)(1) imposed an interest rate of 120% of the statutory rate on any
“substantial underpayment attributable to tax motivated transactions.” 3 I.R.C. §
6621(c)(1). The plaintiffs contend that the imposition of § 6621(c)(1) interest was
improper as a matter of law.
In its motion to dismiss, the government argues that pursuant to § 7422(h) this
court may not consider plaintiffs’ claims regarding the merits of the penalty assessment. 4
The government contends that § 7422(h) bars this court from considering in an individual
refund action any challenge “attributable to partnership items.” The government further
Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 485-86 (Joint
Comm. Print 1984). This provision was repealed by the Omnibus Budget Reconciliation Act of
1989, Pub. L. No. 101-239, § 7721(b), 103 Stat. 2399. The repeal was effective for tax returns
due after December 31, 1989.
2

Pursuant to the parties’ joint stipulation, the Cookes have been designated as the representatives
for all of the plaintiffs in this action with respect to all § 6621(c)-based claims. See Order
Granting Joint Mot. to Designate Representative Pls., Jan. 12, 2011, ECF No. 18; Stipulation,
Jan. 13, 2011, ECF No. 19. As such, the court’s decision will be binding on the Cookes and all
remaining plaintiffs.
3

Tax Motivated Transaction (“TMT”) was defined in § 6621(c)(3)(A)(v) to mean “any sham or
fraudulent transaction.” I.R.C. § 6621(c)(3)(A)(v). A “substantial underpayment” was any
underpayment exceeding $1,000 per tax year. I.R.C. § 6621(c)(2).
4

Section 7422(h) states: “No action may be brought for a refund attributable to partnership
items (as defined in § 6231(a)(3)) except as provided in § 6228(b) or § 6230(c).” I.R.C. §
7422(h).
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argues that the plaintiffs’ claims based on the imposition of § 6621(c) interest are also
barred under § 6230 of the Code. Under § 6230, any claim challenging the computation
of a partnership-related penalty assessment, i.e., an overpayment “attributable to a
partnership item,” must be filed with the IRS within six months of the notice of a
computational adjustment to the partner. See I.R.C. § 6230(c)(2)(A). The plaintiffs
respond that their claim does not involve the “computation” of penalty interest and
therefore they are not subject to § 6230.
Based on a careful review of the motions and following oral argument, the court
GRANTS the government’s motion to dismiss the plaintiffs’ § 6621(c) claims for lack of
jurisdiction and DENIES the plaintiffs’ motion for summary judgment as moot.
I. Background
A. Statutory Background
The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), Pub. L. No.
97-248, § 402(a), 96 Stat. 324, 648-71 (codified in scattered sections of the I.R.C.), was
enacted to achieve consistent tax treatment for all partners in the same partnership and to
remove the administrative burden of handling partnership matters on the IRS. See H.R.
Rep. No. 97-760 at 599-600 (1982) (Conf. Rep.), reprinted in 1982 U.S.C.C.A.N. 1190.
Under TEFRA, the tax treatment of all “partnership items” is determined at the
partnership, rather than the individual partner, level. Bush v. United States, 655 F.3d
1323, 1325 (Fed. Cir. 2011) (citations omitted). TEFRA defines the term “partnership
item” to mean “any item required to be taken into account for the partnership’s taxable
year under any provision of subtitle A to the extent regulations prescribed by the
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Secretary provide that, for purposes of this subtitle, such item is more appropriately
determined at the partnership level than at the partner level.” I.R.C. § 6231(a)(3).
Regulations promulgated under § 6231 provide that the term “partnership item” includes
“legal and factual determinations 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). 5
When the IRS disagrees with a partnership’s reporting of a partnership item, it
issues a Notice of Final Partnership Administrative Adjustment (“FPAA”) in advance of
making an assessment against the partners with regard to that partnership item. Under
TEFRA, the Tax Management Partner (“TMP”) -- the partner designated to act as liaison
with the IRS and as the representative of the partnership in judicial proceedings -- has the
exclusive right to challenge the proposed adjustments in the Tax Court, United States
District Court, or the Court of Federal Claims. I.R.C. § 6226(a). If a petition challenging
the adjustments in the FPAA is filed, each partner with an interest in the outcome of the
petition is treated as a party. I.R.C. § 6226(c)-(d). If the TMP does not file suit within
the time provided, other partners may file suit within a prescribed time period to
challenge the IRS’s FPAA. I.R.C. § 6226(b)(1). In addition, the court reviewing the
5

Examples of these determinations are:
The partnership’s method of accounting, taxable year, and inventory method;
whether an election was made by the partnership; whether partnership property is
a capital asset, § 1231 property, or inventory; whether an item is currently
deductible or must be capitalized; whether partnership activities have been
engaged in with the intent to make a profit for purposes of § 183; and whether the
partnership qualifies for the research and development credit under § 30.

26 C.F.R. § 301.6231(a)(3)-1(b).
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petition has jurisdiction to determine all partnership items to which the FPAA relates, the
proper allocation of such items among partners, and the applicability of any penalty that
relates to an adjustment to a partnership item. I.R.C. § 6226(f).
Section 7422(h) was enacted as part of TEFRA. Consistent with TEFRA’s
regulatory scheme, § 7422(h), in pertinent part, precludes any individual tax refund
action for a refund “attributable to partnership items.” I.R.C. § 7422(h). As noted above,
under TEFRA’s statutory scheme the tax treatment of any partnership item “shall be
determined at the partnership level.” I.R.C. § 6221.
TEFRA also provides for specific partner-level refund procedures. Under § 6230,
if the IRS erroneously computes an adjustment based on partnership items that is then
allocated to an individual partner, the partner must file a refund claim within six months
after the IRS mails notice of the computational adjustment to the partner. I.R.C. §
6230(c)(2)(A).
B. Factual Background
In 1983 and 1984 Gordon Cooke invested as a limited partner in Dillon Oil
Technology Partners-1982 (“Dillon Oil”), one of a group of partnerships that are
generally referred to as the Elektra partnerships. On April 15, 1987, the IRS issued an
FPAA for Dillon Oil’s 1983 tax year. Between March 30, 1987 and April 15, 1987, the
IRS also issued FPAAs for each of six other Elektra partnerships for tax year 1983. In
response, the TMP for these seven Elektra partnerships, including Dillon Oil, challenged
the adjustments proposed by the IRS in the 1983 FPAAs by filing a single § 6226(a)

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TEFRA partnership-level case in the Tax Court at Vulcan Oil Tech. Partners v.
Commissioner, No. 21530–87.
On April 11, 1988, the IRS issued a combined FPAA for Dillon Oil’s 1984 and
1985 tax years. Between March 28, 1988 and June 30, 1988, the IRS issued FPAAs for
each of six other Elektra partnerships for tax years 1984 and 1985. In response, the TMP
for these seven Elektra partnerships, including Dillon Oil, challenged the adjustments
proposed by the IRS in the 1984 and 1985 FPAAs by filing a single § 6226(a) TEFRA
partnership-level case in the Tax Court at Vulcan Oil Technology Partners v.
Commissioner, No. 16768-88.
Thereafter, the Vulcan Oil case was stayed pending the Tax Court decision in
Krause v. Comm’r, Nos. 16425-86, 33231-86. Krause was designated as the test case
“for over 2,000 related cases and for a number of related TEFRA [Elektra] partnerships.”
Krause v. Comm’r, 99 T.C. 132, 133 (1992), including the Dillon Oil partnership. The
Krause Court concluded that the partnerships’ debt obligations and fee licenses were not
legitimate obligations, held that the transactions did not constitute legitimate, for-profit
business obligations, and expressly imposed enhanced interest under § 6621(c). Id. at
168-69, 175-76, 180. In making this finding, the Krause court held that enhanced interest
under § 6621(c) was proper under § 183 of the Code. 6 Id. Krause was later affirmed by

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The plaintiffs argue that the Krause court misapplied § 183 as a basis for imposing § 6621(c)
interest, based on the holdings in Copeland v. Comm’r, 290 F.3d 326 (5th Cir. 2002) and Weiner
v. United States, 389 F.3d 152 (5th Cir. 2004). As set forth in their complaint, the plaintiffs
assert that the Copeland court determined that the § 183 analysis in Krause “was wrong as a
matter of law.” Compl. at 32. The plaintiffs further allege that under Weiner a § 6621(c) penalty
is appropriate only where every basis asserted in the FPAA for disallowing deductions is on
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the Tenth Circuit in Hildebrand v. Comm’r., 28 F.3d 1024 (10th Cir. 1994), cert. denied,
513 U.S. 1078 (1995).
Following the decision in Krause, the Vulcan Oil court considered objections
made by the TMPs for certain Elektra partnerships, including Dillon Oil, regarding the
IRS’s practices when negotiating with partnerships that had not settled with the IRS
before Krause was decided. Vulcan Oil Tech. Partners v. Comm’r, 110 T.C. 153 (1998).
In rejecting the partnerships’ objections, the Vulcan Oil court reiterated that any
partnership that had not settled with the IRS would be bound by the opinion in Krause,
explaining:
In [Acierno v. Comm’r, T.C.M. 1997-441] we found that the Denver-based
partnerships that are involved in the instant cases were similar to the
Manhattan and Wichita partnerships that were involved in the lead test
cases in the Elektra Hemisphere tax shelter project of Krause . . . and
accordingly that the limited partners of the Denver-based partnerships who
had not settled their cases with respondent were to be bound by the opinion
in Krause. The settlements that most of the movants herein entered into,
during 1994 and later years, are consistent with our decisions in Krause and
the above-cited related cases (namely, no deductions are to be allowed to
the taxpayers relating to their investments in the Elektra Hemisphere tax
shelters, and the taxpayers are not to be held liable for additions to tax or
penalties other than increased interest under section 6621(c) or its
predecessor section 6621(d)).
Vulcan Oil, 110 T.C. at 154-55
After this ruling, the TMPs in the Vulcan Oil case took no further action, and on
November 28, 2001, and December 20, 2001, the IRS filed Motions to Dismiss for Lack

TMT grounds. Id. Here, they assert, the Krause court determined that some of the disallowances
were made on non-TMT grounds and thus TMT penalty interest under 6621(c) is not allowed.
Id. As discussed below, because the court finds it lacks jurisdiction the court does not address
these arguments.
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of Prosecution the Vulcan Oil Tax Court cases. Each motion requested specified
adjustments to partnership items of each partnership on the basis that:
the Petitioners’ [TMP] has failed to perform the duties and responsibilities
required of a [TMP] under the Tax Court’s Rules . . . and such failure has
precluded the further prosecution and ultimate resolution of this case,
whether by trial or settlement.
...
Due to concessions by Respondent, which are based on applying I.R.C. §
183 in accordance with this Court’s opinion in Krause v. Commissioner, 99
T.C. 132 (1992), aff’d sub nom., Hildebrand v. Commissioner, 28 F.3d
1024 (10th Cir. 1994), cert denied, 513 U.S. 1078 and 1079 (1995), and
aff’d sub nom., Hill v. Commissioner, 204 F.3d 1214 (9th Cir. 2000),
certain of the adjustments set forth in the schedules above are less than
those determined in the [FPAAs] upon which this case is based.
Pls.’ Exs. J, K. Thereafter, on December 21, 2001, and March 22, 2002, the Tax Court
issued Orders to Show Cause in the Vulcan Oil cases, requiring that the partners show
cause, on or before May 24, 2002, as to why the cases should not be dismissed for failure
to prosecute. Pls.’ Exs. L, M. The show cause orders also noted that there were
adjustments to the FPAA partnership items “as stated in [the IRS’s] motion[s]” based on
the decision in Krause. Id. The Tax Court directed the Clerk to serve the show cause
orders on the partners at the addresses given, including Mr. and Mrs. Cooke, and to attach
the exhibits attached to the IRS’s motions that detailed the adjustments. Id. On June 13,
2002, the Tax Court entered an Order and Order of Dismissal and Decision in each
Vulcan Oil case stating: “ORDERED that respondent’s Motion to Dismiss for Lack of
Prosecution filed [November 28, 2001 and December 20, 2001, as applicable], is
granted.” Pls.’ Exs. N, O. The dismissal orders included partnership-level adjustments
based on § 183 in accordance with the opinion in Krause, as referenced in the
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government’s motion to dismiss. Id. The dismissal orders also “made absolute” the
court’s show cause order. Id.
On or about February 22, 2003, and February 26, 2003, the IRS sent to the Cookes
a Letter 2083 with attached Form CG-4549A for each of the tax years 1983 and 1984,
respectively, each of which stated, inter alia, as follows:
ALL OR PART OF THE UNDERPAYMENT OF TAX YOU WERE
REQUIRED TO SHOW ON YOUR RETURN IS A SUBSTANTIAL
UNDERSTATEMENT ATTRIBUTABLE TO A TAX MOTIVATED
TRANSACTION, AS DEFINED BY SECTION 6621(C)(3) OF THE
INTERNAL REVENUE CODE.
Pls.’ Exs. P, Q. Thereafter, on March 24, 2003 the IRS assessed tax ($19,746.00) and
interest ($130,641.26) against the Cookes for tax year 1983, and on May 12, 2003, June
16, 2003, and August 16, 2004, made additional interest assessments of $723.04,
$872.22, and $8,246.42, respectively. A portion of the subject interest was assessed at
the enhanced § 6621 rate.
On March 24, 2003 the IRS assessed tax ($15,368.00) and interest ($88,689.25)
against the Cookes for tax year 1984, and on May 12, 2003, June 16, 2003, and August
23, 2004, made additional interest assessments of $607.37, $603.83, and $5,599.03,
respectively. Again, a portion of the interest was assessed at the § 6621 enhanced rate.
On April 12, 2006, the plaintiffs filed claims for a refund of $45,798.41 and
$31,132.45, for tax years 1983 and 1984, respectively. In their refund claims they
asserted they were due a refund for the “portion[s] of interest assessed due to the penalty
rate under § 6621(c).”

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The Cookes filed the present action on October 1, 2010, more than six months
after they filed their original claims for refund. In their complaint they assert that they
are not liable for § 6621(c) penalty interest. The government filed its motion to dismiss
the plaintiffs’ § 6621(c) claims for lack of jurisdiction on June 17, 2011. The plaintiffs
filed their motion for summary judgment on those same claims on June 18, 2011.
Briefing is complete and argument was heard on October 28, 2011.
II. Standard of Review
Whether the court possesses jurisdiction to decide the merits of a case is a
threshold matter. See PODS, Inc. v. Porta Stor, Inc., 484 F.3d 1359, 1365 (Fed. Cir.
2007) (citing Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94-95 (1998)).
Because jurisdiction is a threshold matter, a case can proceed no further if a court lacks
jurisdiction to hear it. See Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006) (“[W]hen
a federal court concludes that it lacks subject-matter jurisdiction, the court must dismiss
the complaint in its entirety.” (citation omitted)). The plaintiff bears the burden of
establishing subject matter jurisdiction and must do so by a preponderance of the
evidence. M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323, 1327 (Fed. Cir.
2010) (citing Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 748 (Fed. Cir.
1988)).
When a party has moved to dismiss for lack of subject matter jurisdiction pursuant
to RCFC 12(b)(1), the alleged facts in the complaint are viewed as true. Pixton v. B & B
Plastics, Inc., 291 F.3d 1324, 1326 (Fed. Cir. 2002) (citing Scheuer v. Rhodes, 416 U.S.
232, 236 (1974)). Additionally, in considering a motion to dismiss for lack of subject
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matter jurisdiction, a court may look beyond the pleadings and “inquire into jurisdictional
facts” to determine whether jurisdiction exists. Rocovich v. United States, 933 F.2d 991,
993 (Fed. Cir. 1991).
III. Section 7422(h) Bars Jurisdiction
It is well-settled that § 7422(h) deprives this court of jurisdiction to hear individual
partner refund claims where the refund is “attributable to partnership items.” Keener v.
United States, 76 Fed. Cl. 455, 462 (2007), aff’d, 551 F.3d 1358 (Fed. Cir. 2009), cert.
denied 130 S. Ct. 153 (2009) (internal quotations omitted); Schell v. United States, 84
Fed. Cl. 159, 167 (2008), aff’d, 589 F.3d 1378 (Fed. Cir. 2009), cert. denied, 131 S. Ct.
346 (2010); Prati v. United States, 81 Fed. Cl. 422 (2008), aff’d, 603 F.3d 1301, 1308
(Fed. Cir. 2010), cert. denied, 131 S. Ct. 940 (2010); LeBlanc v. United States, 410 F.
App’x 323, 325 (Fed. Cir. 2011), cert. denied, 131 S. Ct. 3003 (2011). In addition, the
Federal Circuit has expressly held that a challenge to a tax motivated penalty assessment
is “inherently a dispute over the proper characterization of the partnerships’ transactions”
and therefore must be challenged at the partnership level. Prati, 603 F.3d at 1308;
Keener, 551 F.3d at 1365 (a dispute over the “characterization of a partnership’s
transaction is a partnership item.”). Specifically, the Keener court stated:
[B]ecause Taxpayers are requesting a refund based on the nature of the
partnerships’ transactions and because the nature of a partnership’s
transactions is a partnership item, Taxpayers’ claims are “attributable to”
partnership items. Accordingly, the Court of Federal Claims correctly
determined that it lacks jurisdiction over Taxpayers’ claim “for a refund
attributable to partnership items.” I.R.C. § 7422(h).

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Keener, 551 F.3d at 1366 (citation omitted). 7
The plaintiffs attempt to distinguish the jurisdictional status of this case from
Keener and Prati on the grounds that no court has ever held that any of the Dillon Oil
partnership transactions are tax motivated, and therefore that no court has determined that
the IRS properly imposed a tax motivated penalty on the plaintiffs. They argue that
Keener and Prati, in contrast, rely on tax court decisions which had affirmed the IRS’s
TMT determinations in those cases. According to the plaintiffs, the partners in Keener
and Prati were actually barred from litigating their individual tax refund claims based on
principles of “res judicata.” More specifically, although res judicata is not mentioned by
the Federal Circuit as the basis for its decisions in those cases, the plaintiffs argue that
“res judicata is TEFRA’s lynchpin between partnership-level and partner-level cases.”
Pls.’ Resp. at 14, ECF No. 37. Thus, they argue that § 7422(h) bars actions only when a
partner seeks a “new” partnership item determination where one was previously made in
the partnership-level case. Otherwise, they contend, “if res judicata does not bind a
partner to a TMT determination in the partnership-level decision, then § 7422(h) cannot
bar refund jurisdiction for that partner to assert that no TMT determination was ever
made.” Id. at 15. Plaintiffs therefore argue that in Vulcan Oil, the Tax Court never made
7

The plaintiffs rely on language in Keener which leaves open the question whether all individual
refund actions involving a partnership item are barred by § 7422(h). Specifically, the Federal
Circuit declined to reach the question whether § 7422(h) would bar actions involving partneronly issues arising from the partnership. Keener, 551 F.3d at 1366, 1366 n.7 (“Taxpayers only
challenge a partnership-level component of this affected item (namely, the nature of the
partnerships’ transactions), without advancing any argument regarding partner-level components
(e.g., a partner’s underpayment must exceed $1,000 in order to be ‘substantial’). We, therefore,
do not decide whether § 7422(h) precludes jurisdiction over every claim for a refund of penalty
interest imposed pursuant to § 6621(c).”). However, this case does not involve a partner-only
claim.
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a TMT determination. Rather, the plaintiffs argue, the cases were dismissed for lack of
prosecution and have no res judicata effect. In such circumstances, plaintiffs argue, TMT
penalty interest was imposed without any legal justification. In other words, the Vulcan
Oil court, by adopting the adjustments proposed by the government in its motion to
dismiss, did not make the requisite TMT finding necessary to support the TMT penalty
interest at issue in this case. The plaintiffs therefore conclude that without the res
judicata effect of such a finding, § 7422(h) presents no jurisdictional bar.
The government argues that plaintiffs’ effort to distinguish this case from Keener
and Prati on the above-cited grounds must be rejected. The government contends that
nothing in Keener or Prati suggests that principles of res judicata were dispositive in
those cases. Rather, the government argues, those cases stand for the proposition that §
7422(h) bars the court’s review because the plaintiffs are asking this court to examine the
propriety of imposing TMT interest on partnership-level items. The government argues
that the IRS imposed TMT penalty interest under § 6621(c) after the decision in Krause
was extended to the Dillon Oil partnership through the dismissal orders in Vulcan Oil. In
order to set aside that TMT penalty interest, the government argues, this court would
have to examine the partnership-level items identified in the Vulcan Oil dismissal orders.
The government asserts that in Prati, the Federal Circuit expressly held that this court
does not have jurisdiction to make that examination. See Prati, 603 F.3d at 1308
(“Because the . . . challenge to the penalty interest assessments is inherently a dispute
over the proper characterization of the partnerships’ transactions, that issue is barred by §
7422(h) from being litigated in the refund action before the Court of Federal Claims.”).
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The government concludes by arguing that the § 7422(h) bar is not based on principles of
res judicata and cases seeking to “re-litigate” a previously-litigated TMT determination.
Rather, the government argues § 7422(h) bars this court from examining partnershiplevel items in the first instance.
The court agrees with the government. There is no doubt that certain of the
procedural facts of this case are different from the facts in Prati and Keener. For
instance, the IRS’s TMT determination at issue in Keener was affirmed after partnershiplevel Tax Court review. 8 In Prati, the tax partners chose to settle their partnership items
with the IRS prior to a final Tax Court decision. Prati, 603 F.3d at 1303. In contrast, the
Vulcan Oil court, relying upon Krause, adopted the re-calculations presented by the
government in its dismissal orders, but did not specifically state that it was making a
TMT decision regarding the transactions in the Dillon Oil partnership. 9 Thus, the present

8

In Keener, the Tax Court ultimately issued stipulated decisions in the partnership-level
proceedings finding that the adjustments to partnership income and expense “were attributable to
transactions ‘which lacked economic substance,’ as described in former I.R.C. §
6621(c)(3)(A)(v), ‘so as to result in a substantial distortion of [partnership income and/or
expense],’ as described in I.R.C. § 6621(c)(3)(A)(iv).” Keener, 551 F.3d at 1360 n.2.
9

In this connection, the court finds the plaintiffs’ reliance on McGann v. United States, 81 Fed.
Cl. 642 (2008) misplaced. McGann was decided prior to and without the guidance of the Federal
Circuit’s decisions in Keener, Schell, Prati, and LeBlanc, and the court apparently was not
presented with the same question and arguments on whether the plaintiffs’ claims were barred by
§ 7422(h). The court recognizes that in McGann, the court held that the Vulcan Oil court did not
make a specific TMT penalty determination when it issued its dismissal order and went on to
consider the plaintiffs’ objections to the imposition of the penalty. McGann, 81 Fed. Cl. at 65455. In light of this, the court disagrees with the McGann court’s reading of the Vulcan Oil
record. Instead, this court finds based on the 1998 Vulcan Oil decision regarding settlements,
see Vulcan Oil, 110 T.C. at 154-55 (stating that non-settling partnerships would be bound by
Krause), the subsequent motions to dismiss in Vulcan Oil that referenced Krause and included a
detailed re-calculation of each partnership’s FPAAs based on Krause, the Vulcan Oil show cause
orders that referenced the IRS’s motion to dismiss and attached copies of the proposed
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case involves a partnership-level determination one step removed from the
determinations made in Prati and Keener. However, this difference does not alter the
outcome. Prati and Keener were not based on principles of res judicata. Rather, those
cases turned on the Federal Circuit’s reading of § 7422(h) and its conclusion that this
court cannot, in an individual refund action, examine “partnership-level items.” In this
case, it is also the examination of the partnership-level items in an individual refund
action that is barred by § 7422(h) and outside of the CFC’s jurisdiction.
It is clear that the plaintiffs in this case are asking the court to examine
partnership-level items. The plaintiffs are asking this court to rule that the Vulcan Oil
court’s dismissal order was not sufficient to impose TMT penalties. The plaintiffs argue
that there was never a finding supporting TMT penalty interest. In addition, the plaintiffs
argue that none of the partnership transactions undertaken by the Dillon Oil partnership
support imposition of TMT penalty interest under § 183. The court finds that to make
either ruling the court would have to examine the Dillon Oil partnership-level
transactions.
First, to determine whether the Vulcan Oil court erred by failing to make a TMT
penalty interest determination and find that its decision cannot serve as the basis for
imposing a TMT penalty would require the court to examine the modified partnership
calculations the Vulcan Oil court sent to the plaintiffs in the show cause order and later

modifications to the FPAAs, and the final dismissal orders issued in Vulcan Oil that modified the
FPAAs based on Krause, it is clear that the Vulcan Oil court understood that the Dillon Oil
partnership would be bound by the Krause decision, including the imposition of TMT penalties
under § 183.
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adopted in its final dismissal order. The Vulcan Oil court had previously held that
Krause would apply to non-settling partners like the plaintiffs. The Dillon Oil
partnership TMP had an opportunity to challenge those calculations at the partnership
level by objecting to the show cause order, but elected not to object. At its core, the
plaintiffs’ objection is to the IRS’s and Vulcan Oil court’s application of Krause to the
Dillon Oil partnership, a partnership-level issue.
Second, the court would need to review partnership-level items to determine
whether § 183 may serve as a valid basis for the imposition of TMT penalty interest in
this case. The plaintiffs’ arguments regarding the Krause decision and the Krause court’s
misapplication of § 183 plainly would require this court to examine the Dillon Oil
partnership transactions to determine if the transactions identified in the modified
calculations are not covered by § 183. As discussed above, Federal Circuit precedent
precludes this court from examining both of these issues in an individual refund case.
See Keener, 551 F.3d at 1367; Prati 603 F.3d at 1308; Schell, 589 F.3d at 1384; LeBlanc,
410 F. App’x at 325. Therefore, the plaintiffs’ claims for the refund of § 6621(c) tax
motivated interest must be dismissed for lack of jurisdiction.
IV. Conclusion
For all of the reasons discussed above, the government’s motion to dismiss based
on the application of § 7422(h) is GRANTED. The plaintiffs’ motion for summary
judgment is DENIED as moot. See 10 Charles Alan Wright & Arthur Miller, Federal
Practice and Procedure, Civil § 2713 (3d ed. 2010). The plaintiffs’ § 6221(c) tax
motivated interest refund claims are hereby dismissed for lack of jurisdiction. There
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being no just reason for delay, the clerk is directed to enter final judgment dismissing
these claims under RCFC 54(b).
IT IS SO ORDERED.

s/Nancy B. Firestone
NANCY B. FIRESTONE
Judge

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