Keller v. Cir

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

MICHAEL W. KELLER, 
Petitioner-Appellant, No. 06-75466
v.
 Tax Ct. No.
7530-04L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


GARY W. MCDONOUGH, 
Petitioner-Appellant, No. 07-70644
v.
 Tax Ct. No.
1201-05L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


WILLIAM H. LINDLEY; JO ANNE 
LINDLEY,
No. 07-71715
Petitioners-Appellants,
v.  Tax Ct. No.
6657-05L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


6625
6626 KELLER v. CIR

DONALD ERTZ, 
Petitioner-Appellant, No. 07-71719
v.
 Tax Ct. No.
20336-04
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


FRANKLIN HUBBART; JANETTA 
HUBBART,
No. 07-72001
Petitioners-Appellants,
v.  Tax Ct. No.
18722-04L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


ROGER CARTER; LORA CARTER, 
Petitioners-Appellants, No. 07-72003
v.
 Tax Ct. No.
20719-04
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.

 KELLER v. CIR 6627

DANIEL O. ABELEIN, 
Petitioner-Appellant, No. 07-72004
v.
 Tax Ct. No.
24804-04L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


BOBBIE E. JOHNSON, 
Petitioner-Appellant, No. 07-72010
v.
 Tax Ct. No.
20775-04L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


GORDON FREEMAN; ILENE FREEMAN, 
Petitioners-Appellants, No. 07-72073
v.
 Tax Ct. No.
24215-04L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.

6628 KELLER v. CIR

ESTATE OF CAROL ANDREWS, 
Deceased; ROBERT ANDREWS,
No. 07-72093
Petitioners-Appellants,
v.  Tax Ct. No.
18174-04
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


ROY BARNES; ANTONETTE BARNES, 
Petitioners-Appellants, No. 07-72114
v.
 Tax Ct. No.
10788-05
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


ROGER D. CATLOW; MARY M. 
CATLOW,
No. 07-72139
Petitioners-Appellants,
v.  Tax Ct. No.
11319-05
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.

 KELLER v. CIR 6629

BARRY BLONDHEIM; SHERRY 
BLONDHEIM,
No. 07-72654
Petitioners-Appellants,
v.  Tax Ct. No.
15549-05L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


DONALD CLAYTON; YVONNE 
CLAYTON,
No. 07-72655
Petitioners-Appellants,
v.  Tax Ct. No.
17704-05L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.


GARY HANSEN; JOHNEAN F. HANSEN, 
Petitioners-Appellants, No. 07-72737
v.
 Tax Ct. No.
11175-05L
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.

6630 KELLER v. CIR

MARTIN SMITH; SHARON SMITH, 
Petitioners-Appellants, No. 07-73038
v.
 Tax Ct. No.
3876-05L
COMMISSIONER OF INTERNAL
REVENUE, OPINION
Respondent-Appellee.

Appeals from the United States Tax Court
Harry A. Haines, United States Tax Court Judge,
and David Laro, United States Tax Court Judge, Presiding

Argued and Submitted February 3, 2009
Submission Vacated February 4, 2009
Submitted May 27, 2009
Seattle, Washington

Filed June 3, 2009

Before: Betty B. Fletcher, Pamela Ann Rymer and
Raymond C. Fisher, Circuit Judges.

Opinion by Judge Rymer
6634 KELLER v. CIR

COUNSEL

Terri A. Merriam, Merriam & Associates, P.C., Seattle,
Washington, for the petitioners-appellants.

Anthony T. Sheehan, Tax Division, Department of Justice,
Washington, D.C., for the respondent-appellee.

OPINION

RYMER, Circuit Judge:

These consolidated appeals concern the outstanding tax lia-
bilities for sixteen Taxpayers (as we shall refer to the individ-
ual partners) who invested in cattle partnerships operated by
Walter J. Hoyt III. Their appeals are taken from the decision
of the Tax Court holding that the Commissioner of Internal
Revenue did not abuse his discretion in rejecting Taxpayers’
offers-in-compromise. In collection due process hearings Tax-
payers also challenged the imposition of interest under former
26 U.S.C. § 6621(c).1 The Tax Court held that it lacked juris-

1
All of the partnerships involved in these consolidated actions were sub-
ject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
 KELLER v. CIR 6635
diction in partner-level proceedings to determine whether the
partnerships’ transactions were tax motivated for purposes of
§ 6621(c).2 The effect was to leave standing the Commission-
er’s inclusion of § 6621(c) interest in his determination of out-
standing liabilities. Taxpayers appeal this decision as well.

We agree with the Tax Court’s disposition on the offers-in-
compromise, and with its view that, under River City Ranches
#1 Ltd. v. Commissioner, 401 F.3d 1136, 1144 (9th Cir.
2005), whether transactions were tax motivated is a partner-
ship item to be determined at partnership-level proceedings.
The problem in these cases is that the partnership-level pro-
ceedings were completed and the judgment had become final
before River City Ranches #1 announced this rule. As the Tax
Court has jurisdiction in partner-level proceedings to deter-
mine issues relating to liability that the taxpayer has had no
opportunity to contest, § 6330(c)(2)(B), we believe the court
could decide whether the partnership transactions were tax
motivated based on the record in the partnership-level pro-
ceedings. We are as well situated as the Tax Court to under-
take this review and, having done so, we conclude that the
record of the partnership-level proceedings shows that the
partnerships’ transactions were in fact tax motivated.

Accordingly, we affirm in part, vacate in part, and permit
the Commissioner to proceed with collection actions as deter-
mined by the Notices of Determination.

Pub. L. No. 97-248, 96 Stat. 324. The version of § 6621(c) that was in
effect for the relevant tax years, 1985 and 1986, increased the statutory
interest rate by 120 percent for a “substantial underpayment attributable to
tax motivated transactions.” § 6621(c) (1988). This version of § 6621(c)
was repealed in 1990. Omnibus Budget Reconciliation Act of 1989, Pub.
L. No. 101-239, § 7721(b), 103 Stat. 2106, 2399 (1989).
2
All statutory references are to the Internal Revenue Code as codified
in Title 26 of the United States Code, unless otherwise noted.
6636 KELLER v. CIR
I

This is another in a growing line of cases arising out of the
tangled tax liabilities of Hoyt partnerships. See, e.g., Keller v.
Comm’r, 556 F.3d 1056 (9th Cir. 2009); Hansen v. Comm’r,
471 F.3d 1021 (9th Cir. 2006); River City Ranches #1, 401
F.3d 1136; Adams v. Johnson, 355 F.3d 1179 (9th Cir. 2004);
Abelein v. United States, 323 F.3d 1210 (9th Cir. 2003); Phil-
lips v. Comm’r, 272 F.3d 1172 (9th Cir. 2001). To make a
long story short, Hoyt organized, promoted, and operated
more than 100 cattle- and sheep-breeding partnerships from
the 1970s through the 1990s. The cattle partnerships relevant
to these appeals were touted as “The 1,000 lb Tax Shelter.”
Taxpayers invested in one or more of them.

The Commissioner sought to disallow tax benefits claimed
by early partnerships, but lost in the Tax Court in 1989. See
Bales v. Comm’r, 58 T.C.M. (CCH) 431 (1989). After Bales,
the Commissioner began to conduct a professional headcount
of the Hoyt livestock.

Upon receipt of Notices of Final Partnership Administra-
tive Adjustment (FPAA), Hoyt, who was the tax matters part-
ner (TMP) for each of the partnerships, filed petitions with the
Tax Court. Hoyt and the Commissioner settled a number of
issues in a May 20, 1993 global settlement agreement that
established a $4,000 value for each cow and a formula for
determining the actual number of cattle owned by each partner-
ship.3 The Tax Court determined partnership-level adjust-
ments in accordance with the 1993 Agreement, and issued
opinions in 1996 resolving disagreements between Hoyt and
the IRS over allocation of the 1980 through 1986 settlement
3
Proceedings to revoke Hoyt’s status as an Enrolled Agent were initi-
ated in 1997. He was then indicted, and convicted on thirty-one counts of
mail fraud (among other things) on February 12, 2001. United States v.
Hoyt, No. CR-98-529 (D. Or. 2001), aff’d, 47 Fed. Appx. 834 (9th Cir.
2002). Taxpayers were identified as victims.
 KELLER v. CIR 6637
items to the individual partners. See Shorthorn Genetic Eng’g
1982-2, Ltd. v. Comm’r, 72 T.C.M. (CCH) 1306 (1996) (SGE
82-2).

Meanwhile, the Commissioner offered a variety of settle-
ments to individual partners that waived accuracy-related pen-
alties, including tax-motivated interest in some instances.
When the IRS sent notices of intent to levy, Taxpayers
requested a collection due process hearing before the Office
of Appeals and submitted their own offers-in-compromise
pursuant to § 6330(c)(2)(A)(iii). The standard offer was for
Taxpayers to pay all Hoyt tax deficiencies for all years and
regular interest accrued through April 15, 1993. The offers
were based on grounds of public policy and equity, and
eleven Taxpayers also claimed doubt as to collectibility with
special circumstances or economic hardship.

The Commissioner’s settlement officers issued a Notice of
Determination in each case rejecting the compromise offer
and upholding collection. In response to the Notices of Deter-
mination, Taxpayers petitioned the Tax Court to review
whether the Commissioner abused his discretion in sustaining
the proposed collection action, and whether Taxpayers are lia-
ble for the increased rate of interest on tax-motivated transac-
tions under § 6621(c). The Tax Court held that the settlement
officers had not abused their discretion in rejecting Taxpay-
ers’ offers-in-compromise or in upholding the proposed lev-
ies.

Those Taxpayers who were subject to § 6621(c) penalties
agreed to be treated as if they were in the same partnership as
Donald C. Ertz, that is the Durham Engineering 1985-5 (DGE
85-5) partnership.4 For the relevant DGE 85-5 tax years, 1985
4
These taxpayers are Daniel O. Abelein, Estate of Carol Andrews and
Robert Andrews, Roy and Antonette Barnes, Barry and Sherry Blondheim,
Roger and Lora Carter, Roger D. and Mary M. Catlow, Donald and
Yvonne Clayton, Gordon and Ilene Freeman, Franklin and Janetta Hub-
bart, Bobbie E. Johnson, and Martin and Sharon Smith. When appropriate,
we will refer to them collectively as “Ertz Taxpayers,” and to their part-
nerships collectively as “DGE 85-5.”
6638 KELLER v. CIR
and 1986, the Commissioner sent FPAAs in 1989 and 1990,
respectively, that noted the applicability of § 6621(c). In the
DGE 85-5 partnership-level proceedings, the Tax Court
applied the 1993 Agreement to adjust DGE 85-5’s reported
depreciation expenses for 1985 from $669,910 to $68,400 and
its qualified investment property from $4,701,120 to
$480,000; DGE 85-5’s depreciation expenses for 1986 were
reduced from $982,534 to $161,040. It also concluded that
interest for tax-motivated transactions pursuant to § 6221(c)
was an affected item that requires factual determinations to be
made at the partner level and that it therefore lacked jurisdic-
tion over the penalties. See DGE 85-5 v. Comm’r, No. 22070-
89, at 14-15 (T.C. Nov. 27, 1996); DGE 85-5 v. Comm’r, No.
28577-90, at 14-16 (T.C. Nov. 27, 1996).5 In these partner-
level proceedings, the Tax Court declined jurisdiction over
the Ertz Taxpayers’ challenge to tax-motivated interest given
that River City Ranches #1 had held that the character of a
partnership’s transactions is a partnership item to be deter-
mined at the partnership level, and no findings had been made
on the § 6621(c) issue at the partnership-level proceeding in
DGE 85-5.

Taxpayers timely appealed.

II

We review Tax Court decisions “in the same manner and
to the same extent as decisions of the district courts in civil
actions tried without a jury.” § 7482(a)(1); Fargo v. Comm’r,
447 F.3d 706, 709 (9th Cir. 2006). Therefore, review of fac-
tual findings is under the clearly erroneous standard and
5
The Tax Court had adhered to the same view in River City Ranches #1,
85 T.C.M. (CCH) 1365 (2003), which, unlike DGE 85-5, was appealed.
In River City Ranches #1, we rejected the Tax Court’s view that jurisdic-
tion over § 6621(c) penalties lies only in partner-level proceedings, hold-
ing instead that the court has jurisdiction at the partnership level to make
findings concerning the imposition of penalty interest under § 6621(c).
401 F.3d at 1138, 1143-44.
 KELLER v. CIR 6639
review of questions of law is de novo. Fargo, 447 F.3d at 709;
Millenbach v. Comm’r, 318 F.3d 924, 930 (9th Cir. 2003).
Like the Tax Court, our review of the decision by the Com-
missioner whether to accept an offer-in-compromise is for an
abuse of discretion. Fargo, 447 F.3d at 709. “Abuse of discre-
tion occurs when a decision is based on an erroneous view of
the law or a clearly erroneous assessment of the facts.” Id.
(internal quotation marks omitted). We review factual find-
ings underlying the imposition of a penalty under § 6621(c)
for clear error, and the legal conclusions de novo. See Keller,
556 F.3d at 1058-59; Wolf v. Comm’r, 4 F.3d 709, 715 (9th
Cir. 1993); Gainer v. Comm’r, 893 F.2d 225, 226 (9th Cir.
1990).

III

[1] Congress authorized the Secretary of the Treasury to
“compromise any civil or criminal case arising under the
internal revenue laws.” § 7122(a). The statute directs the Sec-
retary to ensure that taxpayers entering into a compromise
“have an adequate means to provide for basic living
expenses.” § 7122(d)(2). Congress delegated authority to pro-
mulgate more detailed guidelines to the Secretary.
§ 7122(d)(1).

[2] The Secretary’s regulations allow compromises for
doubt as to liability (which is not at issue here); for doubt as
to collectibility; and to promote effective tax administration
for economic hardship when collection of the normal amount
would leave a taxpayer unable to afford basic living expenses,
or where compelling public policy or equity reasons are
shown and, due to exceptional circumstances, collection of
the full amount of tax liability would undermine public confi-
dence in the fairness of tax administration whether or not a
similarly situated taxpayer may have paid his liability in full.
26 C.F.R. § 301.7122-1(b). The regulations constrain compro-
mises to promote effective tax administration (that is, com-
promises based on economic hardship and on grounds of
6640 KELLER v. CIR
public policy or equity) to those that would not undermine
compliance with the tax laws. Id., § 301.7122-1(b)(3)(iii).6
“The determination whether to accept or reject an offer to
compromise will be based upon consideration of all the facts
and circumstances . . . . ” Id. § 301.7122-1(c)(1). Once a tax-
payer establishes a ground for compromise, the determination
whether to accept the offer is within the Secretary’s discre-
tion. Id.

A

Eleven Taxpayers7 in these consolidated cases appeal the
6
Section 301.7122-1(b)(3), which governs the ground for compromise
based on effective tax administration, provides:
(i) A compromise may be entered into to promote effective tax
administration when the Secretary determines that, although col-
lection in full could be achieved, collection of the full liability
would cause the taxpayer economic hardship within the meaning
of Sec. 301.6343-1.
(ii) If there are no grounds for compromise under paragraphs
(b)(1), (2), or (3)(i) of this section, the IRS may compromise to
promote effective tax administration where compelling public
policy or equity considerations identified by the taxpayer provide
a sufficient basis for compromising the liability. Compromise
will be justified only where, due to exceptional circumstances,
collection of the full liability would undermine public confidence
that the tax laws are being administered in a fair and equitable
manner. A taxpayer proposing compromise under this paragraph
(b)(3)(ii) will be expected to demonstrate circumstances that jus-
tify compromise even though a similarly situated taxpayer may
have paid his liability in full.
(iii) No compromise to promote effective tax administration
may be entered into if compromise of the liability would under-
mine compliance by taxpayers with the tax laws.
The regulations as such are not challenged in these cases.
7
Estate of Carol Andrews and Robert Andrews, Roy and Antonette
Barnes, Roger and Lora Carter, Roger D. and Mary M. Catlow, Donald
and Yvonne Clayton, Donald Ertz, Franklin and Janetta Hubbart, Bobbie
E. Johnson, William H. and Jo Anne Lindley, Gary W. McDonough, and
Martin and Sharon Smith.
 KELLER v. CIR 6641
Tax Court’s ruling affirming denial of their offers-in-
compromise based on doubt as to collectibility with special
circumstances or economic hardship.

[3] A doubt as to collectibility exists where the taxpayer’s
assets and income are less than the full amount of the out-
standing tax liability. 26 C.F.R. § 301.7122-1(b)(2), (c)(2). A
compromise based on economic hardship may be entered into
when, even though the full liability could be collected, it
would cause the taxpayer to be unable to pay his reasonable
living expenses. See id. §§ 301.6343-1, 301.7122-1(b)(3)(i);
Fargo, 447 F.3d at 709-710 (noting the statute’s focus on
basic expenses with an offer-in-compromise alleging eco-
nomic hardship).8 Both types of offer trigger the same inquiry
into how much of the tax liability can be paid while allowing
the taxpayer to retain enough to pay for reasonable living
expenses. 26 C.F.R. §§ 301.6343-1(b)(4) (economic hardship
means “unable to pay his or her reasonable basic living
expenses”); 301.7122-1(b)(2), (3); 301.7122-1(c)(2)(i) (“[a]
determination of doubt as to collectibility will include a deter-
mination of ability to pay . . . [while] permit[ting] taxpayers
to retain sufficient funds to pay basic living expenses”).

[4] Under IRS guidelines, the Commissioner may accept a
doubt as to collectibility offer that is less than the taxpayer’s
“reasonable collection potential” (net equity plus future
8
Factors that support, but are not conclusive of, a determination to
accept an economic hardship offer include: “(A) Taxpayer is incapable of
earning a living because of a long term illness, medical condition, or dis-
ability, and it is reasonably foreseeable that taxpayer’s financial resources
will be exhausted providing for care and support during the course of the
condition; (B) Although taxpayer has certain monthly income, that income
is exhausted each month in providing for the care of dependents with no
other means of support; and (C) Although taxpayer has certain assets, the
taxpayer is unable to borrow against the equity in those assets and liquida-
tion of those assets to pay outstanding tax liabilities would render the tax-
payer unable to meet basic living expenses.” 26 C.F.R. § 301.7122-
1(c)(3)(i).
6642 KELLER v. CIR
income plus other components of collectibility) (RCP) if “spe-
cial circumstances” are present. Rev. Proc. 2003-71,
§ 4.02(2); Internal Revenue Manual § 5.8.1.1.3 (2005)
(I.R.M.). The factors the IRS considers for a doubt as to col-
lectibility with special circumstances offer are the same as for
an economic hardship offer. I.R.M. § 5.8.4.3.

For each of the Taxpayers, the Commissioner rejected the
offer because it was substantially lower than what the RCP
calculation showed the Taxpayer could afford to pay. Taxpay-
ers attack the Commissioner’s denial of their offers on multi-
ple grounds, but we see no basis to conclude the
Commissioner abused his discretion in any of these cases.

[5] A number of Taxpayers argue the Commissioner should
have factored into the RCP calculation higher future medical
expenses (Andrews, Barnes, Carters, Catlows, Hubbarts, Ertz,
Johnson, Lindleys,9 McDonough, and Smiths). We cannot say
the Commissioner clearly erred in considering medical needs
by relying on present medical expenses instead of estimating
future increases. See Fargo, 447 F.3d at 710 (noting that tax-
payers’ evidence of future medical needs was thin, ambigu-
ous, and speculative); 26 C.F.R. § 301.7122-1(c)(3)
(including as a factor in support of hardship that the taxpayer
is incapable of earning a living because of a medical condition
and it is “reasonably foreseeable” that financial resources will
be exhausted providing for care and support).

[6] Some Taxpayers fault the Commissioner for computa-
tional mistakes, such as omitting transaction costs or not
including a corresponding adjustment to housing expenses
when treating the Taxpayer’s equity in his home as fully col-
9
We agree with the Tax Court’s determination that the Lindleys aban-
doned their offer based on doubt as to collectibility with special circum-
stances or economic hardship; on appeal the Lindleys contend the
Commissioner erred even if their offer is treated under the standard for a
normal doubt as to collectibility offer.
 KELLER v. CIR 6643
lectible (Barnes, Carters, Catlows, Claytons, Ertz, Hubbarts,
Johnson, Lindleys, and McDonough). The Commissioner,
however, caught and corrected those mistakes to a significant
extent in the Tax Court. Moreover, those relying on miscalcu-
lations fail to demonstrate that, allowing for the errors, their
offers do not remain below their ability to pay. Cf. City of
Sausalito v. O’Neill, 386 F.3d 1186, 1220 (9th Cir. 2004)
(noting the requirement in the Administrative Procedure Act
that “ ‘due account shall be taken of the rule of prejudicial
error’ ” by courts reviewing agency action) (quoting 5 U.S.C.
§ 706). For the same reason, to the extent Ertz is correct that
the Commissioner’s treatment of his home equity and retire-
ment account as fully collectible is inconsistent with 26
C.F.R. § 301.7122-1(c)(3)(i)(example 2), he has not shown
this error affected the Commissioner’s determination that he
could afford to pay more than his offer.

A few Taxpayers attempt to undermine the Commissioner’s
determination based on evidence that was not part of the
record before him (Andrews, Carters, Hubbarts, and Johnson).
However, our review is confined to the record at the time the
Commissioner’s decision was rendered. See Robinette v.
Comm’r, 439 F.3d 455, 459 (8th Cir. 2006) (observing that
appellate review is based on “the administrative record
already in existence, not some new record made initially in
the reviewing court”) (quoting Camp v. Pitts, 411 U.S. 138,
142 (1973)); Northcoast Envtl. Ctr. v. Glickman, 136 F.3d
660, 665 (9th Cir. 1998).

[7] Beyond this, Taxpayers question whether the Commis-
sioner fully considered their special circumstances, allowed
sufficient time to submit information in support of their
offers, and provided an opportunity to respond before making
a final determination. The Commissioner is not required to
perform an investigation, engage in formal fact-finding pro-
ceedings, or respond to an offer with a counter-offer. We
believe the Commissioner adequately considered each Tax-
6644 KELLER v. CIR
payer’s offer given the record before him and within the
framework established by the statute, regulations, and Manual.10

B

Those Taxpayers who sought compromise based on special
circumstances or economic hardship but failed on those
grounds, join the rest who claim that exceptional circum-
stances exist based on considerations of public policy and
equity for accepting their offers-in-compromise. They point to
two in particular: that they were victims of Hoyt’s fraud, and
that the Commissioner caused undue delays in resolving their
individual tax liabilities.

[8] A compromise to promote effective tax administration
based on public policy or equity considerations “will be justi-
fied only where, due to exceptional circumstances, collection
of the full liability would undermine public confidence that
the tax laws are being administered in a fair and equitable
manner.” Id. § 301.7122-1(b)(3)(ii). “No compromise to pro-
mote effective tax administration may be entered into if com-
promise of the liability would undermine compliance by
taxpayers with the tax laws.” Id. § 301.7122-1(b)(3)(iii).

[9] Taxpayers argue that they were victimized by the Hoyt
operation, but no authority requires the Commissioner to
accept an offer-in-compromise simply because the taxpayer
was a victim of fraud or third-party misdeeds. The Commis-
sioner could certainly consider third-party actions along with
10
We note that this is not necessarily the end of the road. Whether
equity is obtainable from an asset is investigated prior to an actual levy,
and court approval is required before a principal residence can be seized.
26 U.S.C. § 6334(a)(13)(B), (e); 26 C.F.R. § 301.6334-1(d). Also, a tax-
payer may make a new offer. Taxpayers may be entitled to another collec-
tion due process hearing if the IRS seeks to collect by levy. 26 U.S.C.
§§ 6320(b)(2), 6330(b)(2). Finally, the Office of Appeals retains jurisdic-
tion to consider changes in circumstances. 26 U.S.C. § 6330(d)(2); 26
C.F.R. § 301.6330-1(h).
 KELLER v. CIR 6645
Taxpayers’ own conduct and motivation for investing in the
Hoyt partnerships. However, we have never held that being
victimized by a tax shelter scheme is alone sufficient to
require compromise. Indeed, we have upheld negligence pen-
alties applied by the Commissioner to Hoyt partners, see Han-
sen, 471 F.3d at 1029, and it would be anomalous to require
a reduction in liability based on public policy or equity
grounds in these cases. Given all the facts and circumstances
of Taxpayers’ involvement in the Hoyt partnerships, we can-
not say that the Commissioner abused his discretion in reject-
ing their offers. It was reasonable for him to decide that
collection of less than the full liability would undermine pub-
lic confidence in administration of the tax laws, whereas
accepting the offers could “undermine compliance by taxpay-
ers.” See 26 C.F.R. §§ 301.7122-1(b)(3)(ii), (iii).

[10] While it did take nearly twenty years to shut down
Hoyt’s operations and determine individual tax liabilities, the
delay is not all that surprising given the complexity of these
tax-shelter partnerships. The lengthy time required for the
Commissioner — and the courts — to unravel how the Hoyt
partnerships really worked is part of the risk assumed by those
who chose to invest in them. Taxpayers fault the IRS, rather
than the nature of the TEFRA proceedings, for the delay,
maintaining that the IRS failed to seek injunctive relief
against Hoyt when it knew enough to do so (no later than
1988); waited until 1997 before seeking to revoke Hoyt’s sta-
tus as an Enrolled Agent when it could have done so earlier;
and dealt with Hoyt (as TMP) instead of a settlement commit-
tee prior to the 1993 Agreement that, among other things,
waived the statute of limitations. But focusing on a few steps
that the IRS in hindsight might have taken sooner oversimpli-
fies the saga that got side-tracked with the Commissioner’s
early loss in Bales.

[11] Taxpayers also submit that resolution of their tax lia-
bility took longer than the “average” amount of time it takes
to conclude a tax shelter case. They suggest that delay should
6646 KELLER v. CIR
somehow be measured by the “average” time, which, they
say, is in the range of ten years. However, there is no footing
in the statutes or regulations for an arbitrary cut-off, or for
requiring the Commissioner to abate penalties and interest
once an “average” amount of time for “average” shelters has
passed. Indeed, Taxpayers’ cases are not that different from
Fargo, where the individual partners invested in partnerships
more than twenty years prior to resolution of their tax liability
in our court.11 We rejected taxpayers’ similar argument there,
that delays outside their control should not be held against
them. Fargo, 447 F.3d at 713-14. Although the IRS may
resolve longstanding cases by foregoing penalties and interest
that have accumulated as a result of delay in determining the
taxpayer’s liability,12 no authority says that it must. Congress
advisedly left settlement decisions to the Commissioner’s dis-
cretion. We conclude that the Commissioner had discretion to
find that full payment of the outstanding tax liabilities in these
cases would encourage future investors to take care before
investing in similar tax shelters, whereas less than full pay-
ment would discourage potential investors from researching
and monitoring similar investments.
11
Bales was tried in 1986 and the opinion, adverse to the Commissioner,
was issued in October 1989. The headcount begun by the Commissioner
in response to Bales had progressed sufficiently by May 1993 for the IRS
and Hoyt to enter into a global settlement for tax years 1980 through 1986,
and for the IRS to issue FPAAs for later tax years. Partnership-level cases
were filed in 1994. The Tax Court issued opinions in 1996 resolving dis-
agreements between Hoyt and the IRS over allocation of the 1980 through
1986 settlement items to the individual partners. See, e.g., SGE 82-2. In
1996 and 1997 the court held trials in two test cases for tax years 1987 and
later, for which it issued opinions in 1999 and 2000. See Durham Farms,
#1 v. Comm’r, 79 T.C.M. (CCH) 2009 (2000), aff’d, 59 Fed. Appx. 952
(9th Cir. 2003); River City Ranches #4 v. Comm’r, 77 T.C.M. (CCH) 2245
(1999), aff’d, 23 Fed. Appx. 744 (9th Cir. 2001). The ruling in River City
Ranches #4 was the first on the merits since Bales in 1989.
12
See H.R. Rep. No. 105-599, at 289 (1998) (Conf. Rep.) (noting that
the IRS may utilize the new authority to make compromises “to resolve
longstanding cases by forgoing penalties and interest which have accumu-
lated as a result of delay in determining the taxpayer’s liability”).
 KELLER v. CIR 6647
Taxpayers further take issue with the Commissioner’s reli-
ance on the Internal Revenue Manual, § 5.8.11 (2005), which
gives an example of when an offer-in-compromise may be
rejected that is quite close factually to their case but which,
they contend, was legal error because the Manual lacks the
force of law under Fargo.13 In Fargo, taxpayers relied on the
Manual in support of their position, and we held that the Inter-
nal Revenue Manual “does not have the force of law and does
not confer rights on taxpayers.” 447 F.3d at 713. By this we
did not mean to suggest that it is legal error for the Commis-
sioner to be guided by his own guidelines. Nor are we per-
suaded by Taxpayers’ argument that referencing the Manual’s
most analogous example deprived them of full consideration
of the facts and circumstances surrounding their investment.
As settlement officers are required by the regulations to do,
26 C.F.R. § 301.7122-1(c)(1), the officers here did look at the
facts and circumstances of each case but nevertheless found
their decision in Taxpayers’ cases was guided by the Manu-
al’s example. They did not err in doing so.

Finally, Taxpayers contend that the Commissioner erred by
failing to follow the factors that informed the court’s decision
in Fargo affirming the Commissioner’s denial of an offer-in-
compromise. The factors we identified there as “cutting
against” taxpayers were:

1) Taxpayers invested in tax shelters, and purely tax-
motivated transactions are frowned upon by the
Code; 2) no evidence was presented to suggest that
13
In the example, a taxpayer invests in a nationally-marketed partner-
ship, claims investment tax credits from the partnership, the partnership is
then audited, the taxpayer rejects the Commissioner’s initial settlement
offer, litigation by the partnership upholds the Commissioner’s determina-
tion, and the taxpayer submits an offer-in-compromise supported by the
argument that the tax managing partner is at fault and the statutory rules
are unfair. The example suggests that compromise on the grounds of
equity “would undermine the purpose of both the penalty and interest pro-
visions at issue and the consistent settlement principles of TEFRA.”
6648 KELLER v. CIR
Taxpayers were the subject of fraud or deception; 3)
the delay that took place was due to well-established
TEFRA procedures and the inability of [the TMPs]
to negotiate quickly; and 4) the primary incentives
created by requiring full payment are to encourage
taxpayers to research future investments more care-
fully and to keep in better contact with financial
agents (such as TMPs).

Fargo, 447 F.3d at 714 (footnotes omitted). These factors
were neither intended as a mantra to be applied to each offer-
in-compromise based on grounds of public policy or equity,
nor as a minimum requirement for the proper exercise of the
Commissioner’s discretion. Rather, we mentioned these facts
as indicating why, “at the very least,” the Commissioner did
not abuse his discretion in not accepting the offer-in-
compromise in that case. Id. Accordingly, the Commissioner
had no legal obligation explicitly to consider each of these
factors before rejecting Taxpayers’ offers-in-compromise.
Even so, as in Fargo, there are a number of factors here that
also cut against, not in favor of, Taxpayers. Taxpayers
invested in a “1,000 lb Tax Shelter” which is “frowned upon.”
While individual partners may have thought or hoped they
were investing in a business that would make money, the pro-
gram was marketed for its tax benefits. Even considering
Hoyt’s fraud, investors in Hoyt’s partnerships have been
unable to avoid negligence penalties.14 The time it took to
resolve these cases was, as in Fargo, explicable. Also, “the
primary incentives created by requiring full payment are to
encourage taxpayers to research future investments more
carefully and to keep in better contact with financial agents
(such as TMPs).” Fargo, 447 F.3d at 714. Finally, reducing
the risks of participating in tax shelters would encourage more
taxpayers to run those risks.
14
See Hansen, 471 F.3d at 1029-33; Mortensen v. Comm’r, 440 F.3d
375, 387-93 (6th Cir. 2006); Van Scoten v. Comm’r, 439 F.3d 1243, 1252-
60 (10th Cir. 2006).”
 KELLER v. CIR 6649
[12] In sum, we conclude that the Commissioner was not
obliged by compelling considerations of public policy or
equity to accept Taxpayers’ offers-in-compromise.

IV

We now turn to whether the Commissioner may apply the
interest penalty of § 6621(c) to the tax liability of the twelve
Ertz Taxpayers.

[13] TEFRA established a statutory scheme for separately
determining the partnership’s tax liability and then the result-
ing liability of individual partners. Under TEFRA, a partner-
ship files an informational return describing the share of
income and expenses attributable to its partners; the individ-
ual partners then report their pro rata share of the partner-
ship’s tax liability on their individual tax returns. §§ 701, 702,
6221, 6222; see Kaplan v. United States, 133 F.3d 469, 471
(7th Cir. 1998). To assure uniformity, TEFRA “intends that
adjustments to a partnership tax return be completed in one
consistent proceeding before individual partners are assessed
for partnership items.” AD Global Fund, LLC ex rel. North
Hills Holding, Inc. v. United States, 481 F.3d 1351, 1355
(Fed. Cir. 2007). Thus, “[a] partnership’s tax items, which
determine the partners’ taxes, are litigated in partnership pro-
ceedings — not in the individual partners’ cases.” River City
Ranches #1, 401 F.3d at 1144. TEFRA gives a court with
jurisdiction over the partnership-level proceedings jurisdiction
“to determine all partnership items of the partnership.”
§ 6226(f).

[14] Section 6621(c) interest is an “affected item,” that is,
a partner-level item that is affected by partnership items.
§ 6231(a)(5). “The nature of [a] partnership[’s] transactions”
for purposes of § 6621(c) is a “partnership item.” River City
Ranches #1, 401 F.3d at 1144; see § 6231(a)(3). Once the
1993 Agreement was reached, the Tax Court determined allo-
cation issues at the partnership level. The difficulty here is
6650 KELLER v. CIR
that (consistent with its own then-governing precedent) the
court held that § 6221(c) interest was an affected item requir-
ing factual determinations at the partner level, therefore it
was not within the court’s jurisdiction in the partnership-level
proceedings. This decision was not appealed, but Ertz Tax-
payers did challenge § 6621(c) interest in the collection due
process, or partner-level, proceedings. Meanwhile, the Tax
Court’s similar ruling at the partnership-level proceedings in
River City Ranches #1 was appealed. We reversed and
remanded, holding that the Tax Court — at the level of part-
nership proceedings — had jurisdiction to rule on the charac-
ter of the partnerships’ transactions for purposes of § 6621(c)
interest. River City Ranches #1, 401 F.3d at 1143-44. In the
wake of River City Ranches #1, the parties asked the Tax
Court in these cases to use the findings, or lack thereof, in the
DGE 85-5 partnership-level proceedings to determine whether
their partnership transactions were tax motivated. The court
declined to do so, believing that its prior decisions could not
fairly be interpreted as making those findings or determina-
tions. Given this, and deferring to our decision in River City
Ranches #1 that the character of a partnership’s transactions
is a partnership item to be determined at the partnership level,
the Tax Court concluded that it lacked jurisdiction to deter-
mine DGE 85-5’s partnership items, including whether its
transactions were tax motivated. Accordingly, it did not
decide whether Ertz Taxpayers had substantial underpayments
of tax resulting from tax-motivated transactions. The net
result is that Ertz Taxpayers owe § 6621(c) interest without a
court having specifically ruled on any aspect of that interest.

[15] We must decide whether, in these circumstances, the
Tax Court had jurisdiction in the partner-level proceedings to
determine from findings that were made and from the record
adduced in the partnership-level proceedings, whether the
partnership transactions were tax motivated or not. We con-
clude that the Tax Court in these partner-level proceedings
had jurisdiction to review the decision and evidence in the
partnership-level proceedings for this limited purpose.
 KELLER v. CIR 6651
[16] The Tax Court clearly has jurisdiction in a collection
due process proceeding to consider issues relating to a taxpay-
er’s liability which the taxpayer has had no opportunity to dis-
pute. See § 6330(c)(2)(B). This is true here of issues relating
to Ertz Taxpayers’ liability for § 6621(c) interest. Unless the
Tax Court has jurisdiction to review the partnership-level
record, Taxpayers will have no forum for disputing the impo-
sition of § 6621 penalties. While River City Ranches #1 rec-
ognized that jurisdiction lies in the partnership-level
proceeding to decide whether partnership transactions are tax
motivated, we did not purport to revoke the Tax Court’s resid-
ual jurisdiction in a partner-level proceeding to entertain
issues over which the taxpayer otherwise would have no
review. As the Commissioner included § 6621(c) interest in
his Notices of Determination, we hold that the Tax Court had
jurisdiction to consider Ertz Taxpayers’ challenge to the
amount of their liability, including liability for additional
interest penalties, that the Commissioner determined. In exer-
cising this jurisdiction the Tax Court should not be making an
independent judgment at the partner level about whether part-
nership transactions were tax motivated, but rather should be
reviewing the partnership-level proceedings to determine
whether the findings and the record there show the character
of the partnerships’ transactions.

We agree with the Tax Court that no explicit findings were
made on partnership-level issues relevant to § 6621(c) interest
in DGE 85-5. However, we disagree that the court needed to
stop at this point. Rather, it could consider what was implic-
itly found as well. Cf. Botany Worsted Mills v. United States,
278 U.S. 282, 290 (1929) (noting “[subsidiary] findings will
not support a judgment unless . . . the ultimate fact follows
from them as a necessary inference and may be held to result
as a conclusion of law”). A necessary implication of what was
found in DGE 85-5 is that the outstanding tax liabilities for
1985 and 1986 were attributable to either an overvaluation or
a sham transaction. Either way, the transactions were tax
motivated.
6652 KELLER v. CIR
The applicable (former) version of § 6621(c) stated:

(1) In general. In the case of interest payable under
section 6601 with respect to any substantial under-
payment attributable to tax motivated transactions,
the rate of interest established under this section
shall be 120 percent of the underpayment rate estab-
lished under this section.

(2) Substantial underpayment attributable to tax
motivated transactions. For purposes of this subsec-
tion, the term “substantial underpayment attributable
to tax motivated transactions” means any underpay-
ment of taxes imposed by subtitle A for any taxable
year which is attributable to 1 or more tax motivated
transactions if the amount of the underpayment for
such year so attributable exceeds $1,000.

(3) Tax motivated transactions.

(A) In general. For purposes of this subsec-
tion, the term “tax motivated transaction”
means —

(i) any valuation overstatement (within
the meaning of section 6659(c)),

...

(v) any sham or fraudulent transaction.

A “valuation overstatement” is defined as “150 percent or
more of the amount determined to be the correct amount of
such valuation or adjusted basis.” §§ 6621(c), 6659(c). A
“sham or fraudulent transaction” is one that has no “practical
economic effects other than the creation of income tax loss-
es.” Sochin v. Comm’r, 843 F.2d 351, 354 (9th Cir. 1988),
abrogated on other grounds as recognized by Keane v.
 KELLER v. CIR 6653
Comm’r, 865 F.2d 1088, 1092 n. 8 (9th Cir. 1989). The test
for a “sham or fraudulent transaction” is whether “the tax-
payer has shown 1) a non-tax business purpose (a subjective
analysis), and 2) that the transaction had ‘economic sub-
stance’ beyond the generation of tax benefits (an objective
analysis).” Id.; see also Sacks v. Comm’r, 69 F.3d 982, 988
(9th Cir. 1995).

In the partnership-level proceedings, the Tax Court
adjusted the qualified investment property of DGE 85-5 from
$4,701,120 to $480,000. Ertz Taxpayers argue that this adjust-
ment cannot fit within the definition of overvaluation (150
percent or more of the actual value) without knowing how
many cattle were included in each valuation.15 The 1993
Agreement established a $4,000 per head value for the cattle;
thus the adjustment to $480,000 reflects $4,000 multiplied by
120 cows. Ertz Taxpayers suggest that DGE 85-5’s initial val-
uation of $4,701,120 could represent 784 cattle, which would
equal $5,996 per head, and then the overvaluation would be
less than 150 percent compared to the $4,000 per head valua-
tion agreed upon in the 1993 Agreement. Essentially, the
argument is that the partnership-level record does not conclu-
sively reveal whether DGE 85-5 overvalued the actual num-
ber of cattle, included nonexistent cattle, or both.

However, no matter how one cuts it, the difference between
the claimed value and the adjusted value is attributable to
either an overvaluation or sham transaction. Based on the
actual number of cows, 120, DGE 85-5’s claimed valuation of
$4,701,120 represents a per head valuation of $39,176,
roughly ten times the actual value of $4,000. On the other
hand, to the extent that Ertz Taxpayers did not overvalue their
cattle in excess of 150 percent on the assumption that DGE
15
The Commissioner relies on a schedule that was not referenced or
incorporated in any stipulation in the partnership-level proceedings. We
cannot say that the Tax Court necessarily relied on the numbers contained
in the Commissioner’s schedule, therefore we do not consider it.
6654 KELLER v. CIR
85-5’s tax returns included at least 664 nonexistent cattle,
then the disallowed portion of DGE 85-5’s claimed tax bene-
fits was based on cattle it never acquired. It follows that those
benefits are the result of transactions that fit within the defini-
tion of a factual sham. Viewed either as an overvaluation or
as a sham transaction, the effect is the same: underpayment by
DGE 85-5 is necessarily “attributable to” a tax-motivated
transaction as defined by § 6621(c).

[17] Ertz Taxpayers offer no explanation for the underpay-
ment that escapes imposition of § 6621(c) interest. None
appears in the record of the partnership-level proceedings.
Accordingly, as a Commissioner’s ruling “has the support of
a presumption of correctness, and the petitioner has the bur-
den of proving it to be wrong,” Welch v. Helvering, 290 U.S.
111, 115 (1933), we uphold his imposition of § 6621(c) inter-
est.

Ertz Taxpayers maintain that an overvaluation penalty
should nonetheless not apply when a deduction is disallowed
in its entirety. See Keller, 556 F.3d at 1059-62; Gainer, 893
F.2d at 226. While we have held that where a deduction is dis-
allowed in its entirety, any underpayment is not “attributable
to” an overvaluation after taking into consideration the effect
of disallowing the deduction, see Keller, 556 F.3d at 1060;
Gainer, 893 F.2d at 226-29, the deduction claimed by DGE
85-5 was not disallowed in its entirety. Therefore, Gainer and
Keller do not apply.

[18] Finally, Ertz Taxpayers submit that a partner-level
determination is needed with respect to whether each partner
made the valuation overstatement in good faith. Then-existing
§ 6659 authorized the Secretary to waive “all or any part of
the addition to the tax provided by this section on a showing
by the taxpayer that there was a reasonable basis for the valu-
ation or adjusted basis claimed on the return and that such
claim was made in good faith.” § 6659(e) (1988). By its
terms, § 6659(e) only applies to a valuation overstatement
 KELLER v. CIR 6655
penalty imposed pursuant to § 6659. Section 6621 incorpo-
rates the definition of § 6659(c) that a valuation overstatement
exists “if the value of any property . . . claimed on any return
is 150 percent or more of the amount determined to be the
correct amount.” Section 6621, however, does not incorporate
the discretionary waiver for good faith underpayments in
§ 6659(e). Ertz Taxpayers point to no authority for interpret-
ing the applicable version of § 6621 to include a good faith
exception. To read the statute this way would require us to
hold that a statutory provision that explicitly cross-references
one part of another provision also implicitly incorporates
another part of that other provision. We decline to do this.
See, e.g., Botosan v. Paul McNally Realty, 216 F.3d 827, 832
(9th Cir. 2000) (“The incorporation of one statutory provision
to the exclusion of another must be presumed intentional
under the statutory canon of expressio unius.”). It is “unlikely
that Congress would absentmindedly forget to adopt a provi-
sion that appears a mere two paragraphs below the subsection
it adopted.” Id. (internal quotation marks omitted).

V

Taxpayers raise a number of issues regarding evidentiary
decisions by the Tax Court, including to grant the Commis-
sioner’s motion in limine excluding extra-record evidence, to
limit trial time and restrict testimony, and to decline to
enforce a subpoena for documents from the Treasury Inspec-
tor General for Tax Administration. We have considered the
record on each of these points, and see no abuse of discretion
in the Tax Court’s rulings.

VI

[19] We conclude that the Commissioner did not abuse his
discretion in rejecting offers-in-compromise that did not mea-
sure up under IRS guidelines and Treasury Regulations. Con-
trary to the Tax Court’s view, it did have jurisdiction in the
partner-level proceedings in these cases to review the record
6656 KELLER v. CIR
of partnership-level proceedings to determine whether the
partnerships’ transactions were tax motivated. Having con-
ducted this review ourselves, we are satisfied that the
partnership-level record admits of only one reasonable con-
clusion — that the partnerships’ transactions were either over-
valued or sham, thus tax motivated. We therefore vacate the
portion of the Tax Court’s order and decision in the Ertz Tax-
payers’ cases that dismisses the claim regarding § 6621(c) for
lack of jurisdiction. We affirm the order in each of these six-
teen cases to the extent it permits the Commissioner to pro-
ceed with the collection action as determined in the Notice of
Determination Concerning Collection Action(s).

AFFIRMED IN PART; VACATED IN PART.