FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RICHARD HONGSERMEIER; FIORELLA 

HONGSERMEIER,

Petitioners, No. 07-72828

v.  Tax Ct. No.

COMMISSIONER OF INTERNAL 29643-86

REVENUE,

Respondent. 

RICHARD B. ROGERS; DONNA G. 

ROGERS,

Petitioners-Appellants, No. 07-73718

v.  Tax Ct. No.

COMMISSIONER OF INTERNAL 17993-95

REVENUE,

Respondent-Appellee. 

JOHN L. HUBER; TERRY E. HUBER, 

Petitioners,

No. 07-73719

v.  Tax Ct. No.

COMMISSIONER OF INTERNAL 20119-84

REVENUE,

Respondent. 

13183
STANLEY C. TITCOMB; SHARON A. 

TITCOMB,

Petitioners-Appellants, No. 07-73818

v.  Tax Ct. No.

COMMISSIONER OF INTERNAL 17992-95

REVENUE,

Respondent-Appellee. 

NORMAN W. ADAIR; BARBARA L.  No. 07-73822

ADAIR,

Tax Ct. Nos. Petitioners-Appellants, 17642-83

v.  38965-84

COMMISSIONER OF INTERNAL 35608-86

REVENUE, 479-89

Respondent-Appellee. 8070-90 

GLORIA K. OWENS; TERRY D. 

OWENS,

Petitioners, No. 07-73823

v.  Tax Ct. No.

COMMISSIONER OF INTERNAL 40159-84

REVENUE,

Respondent. 

13184 HONGSERMEIER v. CIR
HOYT W. YOUNG; BARBARA D. 

No. 07-73825 YOUNG,

Petitioners-Appellants, Tax Ct. Nos.

4201-84

v.  22783-85

COMMISSIONER OF INTERNAL 30010-85

REVENUE,

OPINION Respondent-Appellee. 

Appeal from a Decision of the Tax Court

Argued and Submitted

November 4, 2009—Seattle, Washington

Filed September 1, 2010

Before: Ferdinand F. Fernandez, Andrew J. Kleinfeld and

Richard R. Clifton, Circuit Judges.

Opinion by Judge Clifton

HONGSERMEIER v. CIR 13185
COUNSEL

Michael Louis Minns, Houston, Texas, for petitioners Richard

and Fiorella Hongsermeier.

13188 HONGSERMEIER v. CIR
Joe Alfred Izen, Jr., Bellaire, Texas, for petitioners Norman

W. and Barbara L. Adair, Terry D. and Gloria K. Owens, and

Hoyt W. and Barbara D. Young.

Robert Patrick Sticht, Los Angeles, California, for petitioners

Richard B. and Donna G. Rogers, John L. and Terry E.

Huber, and Stanley C. and Sharon A. Titcomb.

Nathan J. Hochman, Richard Farber, and John A. Dudeck, Jr.

(argued), U.S. Department of Justice, Washington, D.C., for

the respondent.

OPINION

CLIFTON, Circuit Judge:

Petitioners are representatives of a group of taxpayers who

have previously been before our court. The taxpayers participated in a tax shelter that was challenged by the government

and became the subject of litigation before the Tax Court.

Misconduct by government attorneys tainted that litigation.

Specifically, a case was tried before the Tax Court involving

“test case” taxpayers selected by the larger group of taxpayers

and by the government. It was discovered after the Tax Court

announced its decision from the test case that government

attorneys had previously reached a settlement with one taxpayer but withheld that information from the court and from

the other taxpayers so that evidence advantageous to the government could be elicited from the taxpayer during the Tax

Court trial. This Court held in Dixon v. CIR, 316 F.3d 1041,

1047-48 (9th Cir. 2003), that the misconduct constituted fraud

on the court, and we remanded the cases to the Tax Court for

entry of judgment on terms equivalent to those provided to the

taxpayer who was party to the secret settlement. We left it to

that court to determine what the precise terms should be. The

Tax Court rendered its decision, Dixon v. CIR, 91 T.C.M.

HONGSERMEIER v. CIR 13189
(CCH) 1086, 2006 WL 1157520, and it was again appealed

by the taxpayers. That is the appeal now before us. We affirm

the Tax Court’s determination of petitioners’ remaining federal income tax deficiencies and liability for underpayment of

interest.

I. Background

A. Prior Factual and Procedural History1

During the 1970s and 1980s, a group of individual taxpayers participated in an investment program and tax shelter

designed and administered by Honolulu businessman Henry

Kersting (“Kersting”). The investments, which came to bear

Kersting’s name, consisted of a somewhat complicated program in which participants purchased stock with loans from

Kersting-controlled entities financed by two layers of promissory notes.2

 Kersting marketed the product as a legitimate

investment which would enable participants to claim interest

deductions on their individual tax returns. When Kersting participants claimed those deductions,3

 the IRS issued notices of

deficiency, disallowing all interest deductions taken, and reasoning that the underlying transactions were shams, the interest was not “paid or properly accrued,” and the notes did not

constitute a bona fide indebtedness.

1This portion of the background narrative is taken from our prior decision in Dixon, 316 F.3d at 1043-46. 

2The Kersting investment consisted of the following: (i) corporate stock

or stock subscription rights or investment certificates purchased by a loan

from a Kersting company (a “Primary Note”); (ii) prepayment of interest

on the Primary Note financed by a secondary or “leverage” note from

another Kersting entity at a lower interest rate than the Primary Note; (iii)

principal on the Primary Note paid by surrender of the stock or other

underlying asset; and (iv) interest on the Primary Note paid by a distribution from the corporation whose stock was purchased with the Primary

Note. Dixon v. CIR, 62 T.C.M. (CCH) 1440, 1454-62 (1991) (original Tax

Court opinion). 

3Deductions were claimed pursuant to 26 U.S.C. § 163. 

13190 HONGSERMEIER v. CIR
In a Tax Court action brought by Kersting on their behalf,

program participants sought a redetermination of the deficiencies. Recognizing that the sheer number of affected taxpayers

(approximately 1,800) made it impractical to try each case

individually, the parties agreed to employ a “test case”

approach to determine liability. To facilitate this process, the

bulk of affected taxpayers signed stipulations (“piggyback

agreements”) agreeing to be bound by the decision of a test

case trial involving representative taxpayers. The agreed-upon

process provided that two representatives would be chosen by

the taxpayers’ attorneys and five by IRS attorneys. Approximately 1,300 taxpayers, some 500 already having settled,

signed on to the piggyback agreements.

The test cases proceeded to a consolidated one-month trial

before the Tax Court sitting in Honolulu. The Tax Court ultimately concluded that the taxpayers were liable for all

assessed deficiencies and would be required to pay additional

negligence and tax-motivated transaction penalties. Crucial to

this determination was the testimony of John R. Thompson

(“Thompson”), the only taxpayer who testified that he

believed the instruments creating the claimed interest would

not be enforced.

As it turns out, that which the Tax Court and other participants believed to be a legitimate, representative proceeding,

binding on the test case petitioners and all those waiting in the

wings, was anything but. Some time prior to the test case trial,

Kenneth W. McWade (“McWade”), the IRS attorney trying

the case, and William A. Sims (“Sims”), the IRS attorney

with supervisory authority over it, had entered into secret settlement agreements with Thompson and another test case petitioner, John R. Cravens (“Cravens”). Cravens was one of the

taxpayer-selected test case representatives, chosen by taxpayer counsel because his payment of capital gains taxes upon

exiting the Kersting investment program made him a particularly good representative.

HONGSERMEIER v. CIR 13191
A condition of their settlements required Thompson and

Cravens to remain test case petitioners. McWade also convinced Cravens, who mistakenly believed his liability was

finalized by the settlement, to proceed pro se. With respect to

Thompson,4 McWade agreed to have Thompson’s tax deficiencies reduced in proportion to his attorney’s fees, which

exceeded $60,000. At no point did McWade or Sims reveal to

the Tax Court or to any other taxpayer representative that two

of the test case petitioners’ cases had been settled, much less

reveal the conditions imposed on them.

The deception continued with a cover-up, which was carefully designed to prevent the Tax Court and other taxpayers

from learning of the secret settlement agreements. At Kersting’s deposition, which McWade attended, Kersting’s lawyer

objected to the presence of Thompson’s attorney because of

rumors that Thompson was attempting to settle. Knowing that

Thompson had, in fact, already settled, McWade remained

silent. McWade then misled the Tax Court by failing to disclose the settlement when he moved to set aside the Thompson piggy-back agreement, a pre-trial motion necessary to

ensure Thompson’s status as a test case petitioner. Deceptive

silence matured into overt misconduct when, during the

course of the test case trial, it became apparent that Thompson

was going to testify about his settlement. McWade quickly

shifted his questions to unrelated matters.5

4Thompson had an ongoing dispute with Kersting over the validity of

the investment certificates. Specifically, Kersting had threatened to initiate

collection proceedings against Thompson. Therefore, Thompson had an

interest in seeing that the certificates of investment were declared invalid

and unenforceable. DeCastro, Thompson’s attorney, used the test case proceeding to elicit testimony from Thompson regarding the sham nature of

the notes in order to bolster Thompson’s position in any subsequent litigation with Kersting. 

5

In the Tax Court proceedings on remand, Judge Beghe pointed to the

following exchange as evidence of deception: 

Mr. Thompson: The procedure went through a tax firm in Los

Angeles known as Loeb & Loeb, and I wound up with the

13192 HONGSERMEIER v. CIR
McWade and Sims also secured an agreement with taxpayer Dennis Alexander6

 (“Alexander”) whereby the IRS

would reduce Alexander’s tax deficiencies in exchange for

testimony and trial preparation assistance. In accordance with

this agreement, the IRS paid for Alexander’s expenses in

Hawaii for the length of the trial. McWade then filed a memorandum regarding the basis for the settlement of Alexander’s

tax liabilities which the Tax Court later found to be false.

During the test case trial, McWade also sat silently through

testimony by Alexander that he knew to be false.7

DeCastro Law Corporation by way of their direction, and made

several discoveries that were startling to me. And of course, I settled. To be quite honest, I had to get out of this. I was not going

to spend my life— 

Mr. McWade: Well, let me— 

Mr. Thompson:—doing all this. 

Mr. McWade: Let me stop you here for a moment. 

Mr. Thompson: Okay, I’m sorry. I beg your pardon. 

Mr. McWade: Mr. Thompson, can you tell me: have we been

successful in getting the lien removed from your house? 

Thompson’s use of the word “settled” did not disclose the secret settlement between Thompson and the IRS because, in the original proceeding,

Judge Goffe mistakenly interpreted the remark as referring to resolution

of the Thompsons’ tax liability for another year which was not at issue.

Dixon v. CIR, 77 T.C.M. (CCH) 1630, n.55. McWade did nothing to disabuse the court of its interpretation. 

6Alexander was then embroiled in a legal battle with Kersting involving

more than $4 million. Alexander’s animus towards Kersting was made

clear in a letter to the IRS (“When the Nazi knows that 1400 of his clients

are going to be clobbered and that he will have the Criminal Investigative

Division of the IRS coming down on him, I think he will be inclined to

pay me my money.”). 

7When one of the attorneys for the taxpayers asked Alexander if

McWade had discussed a reduction of Alexander’s tax deficiency in

exchange for his testimony, Alexander responded, “Specifically, no.”

McWade failed to correct this patently false statement. 

HONGSERMEIER v. CIR 13193
The Tax Court’s test case determination left the remaining

taxpayers—those who had signed on to the piggyback

agreements—subject to judgment on the same adverse terms.

This is when the McWade-Sims house of cards began to collapse. Thompson and Cravens, who had sat silent while the

Tax Court entered judgment against them, pressured McWade

and Sims to live up to the terms of their secret settlement

agreements. It was now clear that the IRS would have to

move to set aside the Thompson and Cravens judgments;

McWade and Sims were forced to reveal the secret settlements necessitating the Tax Court’s entry of “revised” judgments in favor of Thompson and Cravens.

After being asked to approve the set aside motions, senior

IRS officials determined that McWade and Sims had engaged

in active misconduct and informed the Tax Court of the secret

settlements,8 asking for an evidentiary hearing to determine

the extent of the damage. The Tax Court refused to hold an

evidentiary hearing and proceeded to enforce the terms of the

Thompson and Cravens settlements. The taxpayers appealed

the refusal to this Court, which remanded with instructions to

hold an evidentiary hearing. Dufresne v. CIR, 26 F.3d 105

(9th Cir. 1994).

On remand, the Tax Court conducted the mandated evidentiary hearing. Incredibly, McWade’s pattern of deception continued with his persistent denial that the Thompson settlement

was a vehicle for paying Thompson’s attorneys’ fees and his

testimony that the Thompson settlement was attributable to a

separate transaction. After making extensive findings concerning the government’s misconduct, the Tax Court surprisingly concluded that what had occurred was harmless error.

While the bulk of the decision from the original test case pro8As the Tax Court proceeding on remand revealed, this disclosure was

anything but complete, excluding, for example, the arrangement to “pay”

(through a reduction in disallowed deductions) $60,000 to Thompson for

his attorney fees. 

13194 HONGSERMEIER v. CIR
ceeding was reinstated, the Tax Court did relieve the taxpayers of that portion of the original judgment which imposed

increased interest penalties for negligence and “tax motivated

transactions” and imposed costs and attorneys’ fees on the

IRS. From the Tax Court’s refusal to vacate the adverse judgments against them, the taxpayers filed an appeal to this

Court, which resulted in our Dixon decision.

B. Our Decision in Dixon

In Dixon we held that the IRS counsel committed intentional fraud on the Tax Court and the taxpayers:

There can be no question here but that the actions of

McWade and Sims amounted to a fraud on both the

taxpayers and the Tax Court. The Tax Court

believed it was hearing a legitimate adversarial dispute when, in fact, the proceeding was a charade

fraught with concealed motives, hidden payments,

and false testimony. What did occur was clearly

designed to defile the court itself, and there is no

question that it was carried out by an officer of the

court.

Dixon, 316 F.3d at 1046-47. We further concluded that the

taxpayers were not required to demonstrate prejudice in order

to obtain relief. The Tax Court’s determination that the misconduct had been harmless to other taxpayers was set aside as

an abuse of discretion.

We then set forth our conclusion as to the appropriate remedy. Because the adherence of the Tax Court on remand to

our instructions is a major issue in the current appeal, we will

quote in full the “Remedy” portion of our decision in Dixon,

omitting citations and one of the two footnotes. The second

footnote, note 11, is critical to our decision in the current

appeal. It appears at the end of the quoted passage, and we

include it at the end:

HONGSERMEIER v. CIR 13195
We have the inherent power to vacate the judgment of the Tax Court, fashion an appropriate remedy and sanction a party or its lawyers for willful

abuse of the judicial process, particularly when the

party or its lawyers have intentionally practiced a

fraud upon the court. This power, however, is to be

“exercised with restraint and discretion.”

Here, it plainly would be unjust to remand for a

new, third trial. The IRS had an opportunity to present its case fairly and properly. Instead its lawyers

intentionally defrauded the Tax Court. The Tax

Court had two opportunities to equitably resolve this

situation and failed. Enormous amounts of time and

judicial resources have been wasted. In addition, the

IRS has done little to punish the misconduct and

even less to dissuade future abuse. The taxpayers

should not be forced to endure another trial and the

IRS should be sanctioned for this extreme misconduct.

Conversely, we will not enter judgment eradicating all tax liability of these taxpayers. Such an

extreme sanction, while within the court’s power, is

not warranted under these facts. Instead, we remand

to the trial court with directions to enter judgment in

favor of Appellants and all other taxpayers properly

before this Court on terms equivalent to those provided in the settlement agreement with Thompson

and the IRS. n.11

n.11. We leave to the Tax Court’s discretion the fashioning of such judgments

which, to the extent possible and practicable, should put these taxpayers in the same

position as provided for in the Thompson

settlement.

13196 HONGSERMEIER v. CIR
Id. at 1047.

C. The Tax Court’s Decision on Remand

The task our decision in Dixon assigned to the Tax Court

was not a purely mechanical one. All the affected taxpayers

participated in the Kersting tax shelters, but their tax returns

differed in other respects and some of those differences raised

separate issues. The Thompson tax returns were among those

that raised other issues, and the Thompson settlement

resolved more than Kersting tax shelter claims.

In order to put other taxpayers “in the same position as provided for in the Thompson settlement,” id. at 1047 n.11, the

Tax Court was required to translate the overall Thompson settlement into the different contexts presented by the tax returns

of other taxpayers. It also had to decide how to treat the portion of the Thompson settlement that reduced Thompson’s tax

liability by the amount of his attorney’s fees he paid for participating in the charade of a trial, since that did not represent

an actual net savings by Thompson. With the discretionary

nature of the Tax Court’s decision in mind, the Commissioner

argued to the Tax Court that the affected taxpayers should

receive a 20 percent reduction in their tax deficiencies, while

the taxpayers argued for a 100 percent or near 100 percent

reduction in their deficiencies.

The Tax Court was also required to deal with the reality

that both the tax laws and interest rates have changed over the

years. The Tax Court noted in its order that “[t]he Thompson

settlement was embodied in a sequence of payments and

refunds that occurred more than 15 to 20 years ago, when personal interest was fully or partially deductible for income tax

purposes, in a different interest rate environment, and in temporal relationships that are not now reproducible with respect

to any of the other petitioner participants in the Kersting project.” Dixon, 91 T.C.M. (CCH) 1086, 2006 WL 1157520, at

*26.

HONGSERMEIER v. CIR 13197
The Tax Court’s effort was further complicated by the fact

that there was no comprehensive written agreement documenting the terms of the Thompson settlement. There was a

written agreement at one point, but it was subsequently modified, culminating in an oral agreement between the IRS attorneys and the attorney for Thompson. That meant, among

other things, that it was not clear which resolutions were

reached concerning various non-Kersting issues over several

tax years, including years not otherwise connected with the

Kersting tax shelter, related to the Kersting shelter settlement

and which, if any, were independent of the settlement.

The Tax Court ultimately determined that the “Kerstingrelated deficiencies” for each affected taxpayer should be

reduced by 63.37 percent, thereby requiring taxpayers to pay

36.63 percent of the income tax they allegedly otherwise

would have owed. Id. at 47. The Tax Court calculated this

percentage by constructing a fraction with a numerator representing the tax actually paid by Thompson and a denominator

reflecting Thompson’s alleged tax liability absent the settlement. Specifically, the Tax Court used a numerator of

$30,000, representing the portion of the total deficiencies that

was actually paid by Thompson over the 1979-1981 period.9

The denominator was calculated by starting with $79,294, the

sum of the deficiencies initially asserted against Thompson by

the Commissioner for the tax years in question, 1979-1981.

To that amount was added two additional benefits received by

Thompson: (a) an adjustment of $980 representing a deficiency in Thompson’s 1983 tax that the IRS did not assess

and Thompson did not pay, and (b) an adjustment of $1,624

representing a tax savings by Thompson attributable to the

Commissioner’s allowance of a 1987 personal interest deduction that was overstated by $5,814. Summing those figures

produced a total denominator of $81,898. Dividing $30,000

by $81,898 produced a fraction equivalent to 36.63 percent,

9The Tax Court declined to include within the numerator the amounts

paid by Thompson for attorney’s fees. 

13198 HONGSERMEIER v. CIR
representing the proportion of tax the Tax Court found had

been paid by Thompson. Id. That meant that the settlement

reduced what he was required to pay in taxes in connection

with the Kersting shelter by 63.37 percent.

The Tax Court also addressed a separate tax program, the

Bauspar program, through which Thompson and certain other

Kersting project participants “apparently deducted substantial

amounts as home mortgage interest on their 1983-85 returns,

on the basis of payments under the Bauspar program that may

not have met the requirements for deductible home mortgage

interest.” Id. at 40. Finding that the benefit Thompson derived

from overstated Bauspar interest deductions was not readily

ascertainable because the payees of claimed mortgage interest

are not identified in the returns and that the Commissioner

disallowed Bauspar deductions only sporadically for a small

number of taxpayers, the Tax Court determined that it was not

appropriate to deal with the Bauspar program as part of its

calculation of the percentage deduction that would apply to all

taxpayers. Id. Rather the court directed that “any disallowed

deductions relating to Bauspar are to be treated as valid

deductions with respect to those taxpayers who may have

claimed them” because “[t]hat’s the way Bauspar played out

for the Thompsons . . . .” Id. at 47. 

The Tax Court also accorded other benefits to the taxpayers

under the Dixon mandate. Noting that many Kersting participants had remaining penalties and additions and “[i]t seems

especially incongruous to impose an addition for a few

months’ delay in filing a return at this time, when 25 years

have passed since that delay occurred,” the Tax Court concluded that “[a]ll affected taxpayers are to be relieved of all

penalties and additions to tax that were determined in their

statutory notices of deficiency, not just Kersting-related items

such as negligence additions.” Id. The Tax Court also found

that approximately 100 Kersting taxpayers had non-Kerstingrelated deficiencies, and, again noting the long delay in

resolving this matter, the court directed that “all nonHONGSERMEIER v. CIR 13199
Kersting-related deficiencies determined in the notices of

deficiency for all affected taxpayers with taxable years still

before this Court be eliminated.” Id.

The Tax Court also noted areas of agreement where all parties “establish[ed] some common ground regarding the relief

to which those beneficiaries are entitled.” Id. at 32. The court

accepted the parties’ stipulation that the Thompson settlement

involved a “burnout” element that effected a reduction in the

underpayment of interest that would otherwise arise under

I.R.C. § 6601.10 Id.

The government did not appeal the Tax Court’s judgment.

Taxpayers filed this timely appeal. We have jurisdiction pursuant to 26 U.S.C. § 7482.

Petitioners Richard and Fiorella Hongsermeier, Terry and

Gloria Owens, and Hoyt and Barbara Young served as test

case petitioners in the original litigation before the Tax Court,

while petitioners Norman and Barbara Adair, Richard and

Donna Rogers, John and Terry Huber, and Stanley and

Sharon Titcomb initially entered into “piggy-back” agreements to be bound by the Tax Court’s determination in the

test cases. The Adairs, Owens, and Youngs consolidated their

cases on appeal to this Court, as did the Rogers, Hubers, and

Titcombs. We consolidated all cases for the purposes of oral

10The Tax Court opinion explained the “burnout” element as follows: 

(a) for taxpayers with 2-3 taxable years before the court, the first

year’s deficiencies are shifted forward and combined with the

deficiencies in the second year then reduced in accord with the

Ninth Circuit’s mandate; and 

(b) for taxpayers with 4 or more taxable years before the court,

the first year’s deficiencies are shifted forward to the second year

and the second year’s deficiencies are shifted forward and combined with the deficiencies in the third year, after which all deficiencies are reduced in accord with the Ninth Circuit’s mandate.

Dixon, 91 T.C.M. (CCH) 1086, 2006 WL 1157520, at *32. 

13200 HONGSERMEIER v. CIR
argument, and now resolve the appeals in all of the cases in

this opinion.

II. Discussion

We review the Tax Court’s conclusions of law de novo, its

factual findings for clear error, and its discretionary rulings

for abuse of discretion. Kelley v. CIR, 45 F.3d 348, 350 (9th

Cir. 1995). The Tax Court’s evidentiary rulings are reviewed

for abuse of discretion and will not be reversed absent a

showing of prejudice. Sparkman v. CIR, 509 F.3d 1149, 1156

(9th Cir. 2007).

A. The Tax Court’s Remedy

We conclude that the Tax Court’s findings are well supported in its comprehensive review of the record and do not

leave “the definite and firm conviction that a mistake has been

committed.” Sparkman, 509 F.3d at 1155 (quotation marks

omitted). The Tax Court’s determination of the percentage

deduction in the taxpayers’ deficiencies, plus other benefits,

accords with this Court’s mandate in Dixon and is not an

abuse of discretion. See Jim Turin & Sons v. CIR, 219 F.3d

1103, 1105 (9th Cir. 2000)(“[W]e independently review for

abuse of discretion, and our task is to determine whether [the

exercise of discretion] is clearly unlawful or plainly arbitrary.” (footnote omitted)).

Taxpayers argue that the Tax Court’s remedy fails to comply with the Dixon mandate and challenge, in various ways,

the Tax Court’s calculation of the 63.37 percent figure.

B. Elimination of Taxpayers’ Deficiencies

The Hongsermeiers first argue that the taxpayers’ refunds

should be accepted as filed to allow a 100 percent reduction

in their tax deficiencies based on this Court’s finding in Dixon

of fraud on the court, continued fraud on the court on the part

HONGSERMEIER v. CIR 13201
of the Commissioner following Dixon, and a lack of complete

information concerning the Thompson settlement. 

[1] This Court has the power to vacate or amend a judgment of the Tax Court and to fashion an appropriate remedy

upon a finding of fraud on the court. See In re Levander, 180

F.3d 1114, 1119 (9th Cir. 1999). In Dixon, we did indeed find

that “the taxpayers . . . clearly and convincingly demonstrated

fraud on the court and are entitled to relief.” 316 F.3d at 1047.

We specifically chose, however, to “not enter judgment eradicating all tax liability of these taxpayers.” Id. The option of

a 100 percent reduction in taxpayers’ deficiencies was already

rejected by this Court, which noted that “[s]uch an extreme

sanction, while within the court’s power, is not warranted

under these facts.” Id. We instead remanded the case to the

trial court, leaving to the Tax Court’s discretion the fashioning of a settlement for the affected taxpayers equivalent to

that offered to Thompson. The Tax Court followed our mandate by not eliminating all tax liability for the taxpayers, and

properly so. A trial court is prohibited from giving relief

beyond the scope of an appellate mandate. See Caldwell v.

Puget Sound Elec. Apprenticeship & Training Trust, 824 F.2d

765, 767 (9th Cir. 1987).

[2] The Hongsermeiers’ argument that further fraud on the

court following Dixon, or, in the alternative, unconscionable

bad faith, should prompt this Court to vacate the Tax Court’s

judgment and eliminate 100 percent of taxpayers’ deficiencies

is also flawed. The Hongsermeiers contend that the Commissioner’s representation on remand that Thompson received

only a 20 percent reduction in his tax deficiencies was not

only false, but also contradicted two previous statements: the

first, by Sims in a 2003 state bar disciplinary proceeding stating that the Thompson settlement was a 50 percent reduction

in tax deficiencies, and the second, by the former Chief of the

Appellate Section of the Department of Justice’s Tax Division, reporting in 1992 that Thompson received a 65 percent

reduction in deficiencies. 

13202 HONGSERMEIER v. CIR
[3] While, as previously noted, we may vacate the Tax

Court’s judgment upon a finding of fraud on the court, there

is no evidence in the record that, following Dixon, the Commissioner acted in a manner at all amounting to “an unconscionable plan or scheme which is designed to improperly

influence the court in its decision.” England v. Doyle, 281

F.2d 304, 309 (9th Cir. 1960) (defining fraud on the court).

The Commissioner simply argued on remand that the Thompson settlement amounted to a 20 percent reduction in what

Thompson had to pay because the Commissioner explicitly

disregarded reductions Thompson used to pay his attorney’s

fees as not representing a net savings to Thompson. Attorney’s fees of other taxpayers were paid for by Kersting, the

promoter of the tax shelter. While the Tax Court rejected that

argument, the Commissioner’s position did not constitute

fraud on the court or bad faith, nor was it related to the fraud

initially perpetrated by Sims and McWade.

C. Calculation of the Tax Court’s Remedy

[4] Taxpayers also argue that the Tax Court’s calculation

of the 63.37 percent figure did not take into account the full

benefits offered to Thompson. Specifically, the Hongsermeiers argue that the Court should order a 90.1 percent reduction of their deficiencies, and the Adairs, Owens, and Youngs

argue that the Court should order a 98 percent reduction of

their deficiencies.

The Hongsermeiers base their calculation of the terms of

the Thompson settlement on a letter from Sims to Thompson’s attorney, dated May 29, 1992, estimating that the taxes

Thompson owed, plus statutory additions and interest, would

be “approximately $302,396.12.” The Hongsermeiers used

the numerator of $30,000, representing the total deficiencies

paid by Thompson over the 1979-1981 period, and divided

that number by a denominator of $302,396.12 to produce the

90.1 percent figure. 

HONGSERMEIER v. CIR 13203
[5] It is undisputed that the total tax deficiencies asserted

against Thompson for the years 1979-1981 was $79,294, and

that Thompson’s final settlement reduced those deficiencies

to $30,000. The alternative denominator offered by the Hongsermeiers in this appeal is based on their vague contention

that various additions, interest, and penalties should be

included in the denominator of the Thompson settlement fraction. As discussed above, the Tax Court did add two figures

to the denominator based on additional benefits received by

Thompson: (a) $980 to represent the unpaid deficiency in

Thompson’s 1983 tax, and (b) $1,624 to represent Thompson’s tax savings due to the Commissioner’s allowance of an

overstated personal interest deduction for 1987. The Tax

Court therefore determined that the appropriate denominator

was $81,898.

[6] The $302,396.12 figure asserted by the Hongsermeiers

does not represent the reduction in Thompson’s actual liability in comparison to the amount they were able to pay in settlement because it does not take into account advance

payments that Thompson made in 1986 and 1987 of $121,770

in both tax and interest owed. Thompson did not “save”

amounts he actually paid. The Tax Court did not relieve the

taxpayers of interest liability because, as discussed below,

Thompson paid his interest in full. See infra Part II, E.

The Hongsermeiers also separately assert that the Tax

Court should have increased the denominator of the Thompson settlement fraction by $4,934.32 to include the late filing

addition in Thompson’s statutory notice of deficiency for

1981, which Thompson would have been required to pay had

he not settled his tax liabilities. Rather than give a credit or

add this figure to the denominator of the Thompson settlement fraction, the Tax Court instead chose to eliminate all

penalties related to non-Kersting additions for all affected taxpayers. Noting that taxpayers’ “proposed application of nonKersting penalties and additions was specific to individual

taxpayers, unlike the Kersting-related deficiencies and addi13204 HONGSERMEIER v. CIR
tions for which all affected taxpayers are liable,” the Tax

Court found that it was appropriate to limit the benefit of

relief from non-Kersting additions to those affected taxpayers

who, like Thompson, were subject to non-Kersting additions.

Dixon, 91 T.C.M. (CCH) 1086, 2006 WL 1157520, at *36.

Certain taxpayers, including the Hongsermeiers, did not

have any additional non-Kersting-related penalties asserted

against them. The Tax Court’s decision to eliminate all nonKersting penalties was well within the Tax Court’s mandated

discretion, however, for the Tax Court was not required to

fashion individual remedies for taxpayers based on their lack

of non-Kersting-related additions. The Tax Court noted in its

decision that “memories have faded and records have been

lost or destroyed during the long delay in resolution of the

Kersting issues,” making it difficult to assess the status of

each taxpayers’ non-Kersting related issues and thus “inherently unfair” to “impose upon those petitioners the burden of

proving those deficiencies to be erroneous.” Id. at 47. Furthermore, the court stated that “the non-Kersting issues are relatively minor when compared to the Kersting-related

deductions that are at issue in all these cases.” Id. The court

therefore concluded that the appropriate remedy was to eliminate all non-Kersting related penalties, additions, and deficiencies for all affected taxpayers. That determination was not

an abuse of discretion.

The Adairs, Owens, and Youngs argue that the Tax Court

did not take into account tax benefits Thompson received in

tax years 1982 and 1983 in its determination of the denominator in the Thompson settlement fraction, which, by their calculations, allowed Thompson to pay less than two percent of

his taxes. This argument is premised on the incorrect assumption that the Commissioner’s treatment of Thompson’s 1982

tax return was part of the Thompson settlement agreement, as

well as on an incorrect calculation of Thompson’s savings for

tax year 1983.

HONGSERMEIER v. CIR 13205
The argument is based on an August 3, 1989 letter sent

from Thompson’s attorney, DeCastro, to McWade, which

states: “We have agreed that the total taxes due for all the

open years are $15,000 for 1980 and $15,000 for 1981.” The

Tax Court determined, however, that the statutory period of

limitations for 1982 had expired in 1986, and therefore

Thompson’s 1982 taxable year was not an “open year” to

which the letter could have applied. Thompson filed his 1982

tax return on May 6, 1983, and on this tax return he claimed

Kersting-related tax deductions which reduced his adjusted

gross income of $99,362 to $4,336 for tax purposes. No

action was taken concerning this tax return, and the statute of

limitations under I.R.C. § 6501 expired in May 1986. The settlement which this court held to be a fraud on the court was

negotiated on behalf of Thompson by DeCastro, and Thompson did not retain DeCastro as his attorney until November

1986. Therefore, the Tax Court reasonably determined that

the Commissioner’s failure to act on the 1982 tax return could

not have been part of the Thompson settlement agreement

between DeCastro and McWade.

The Adairs, Owens, and Youngs also assert that Thompson’s 1982 tax year should be considered an “open year”

because fraud on the part of Thompson rendered the statute of

limitations inapplicable pursuant to I.R.C. § 6501(c)(1).

“Fraud implies bad faith, intentional wrongdoing and a sinister motive.” Powell v. Granquist, 252 F.2d 56, 60 (9th Cir.

1958) (quotation marks omitted). The Tax Court did not find,

based on its evaluation of the credibility of Thompson during

the evidentiary hearing mandated by DuFresne, that Thompson specifically intended to evade a tax known to be owing.

There is no evidence that the Tax Court clearly erred in finding that Thompson’s 1982 tax year was not an open year to

which DeCastro’s 1989 letter could have applied. Consequently, the Tax Court’s determination that any benefits

Thompson received from that year should not be included in

the Thompson settlement fraction was not an abuse of the Tax

Court’s discretion.

13206 HONGSERMEIER v. CIR
The Adairs, Owens, and Youngs also argue that the Tax

Court erred in failing to include in its Thompson settlement

calculation savings in the amount of $19,717.99 as a benefit

for tax year 1983. The Tax Court agreed with the taxpayers

that the treatment of tax year 1983 should be included within

the benefits obtained by Thompson as part of the settlement.11

It found, however, that Thompson received a benefit from the

settlement of only $980 for tax year 1983. The argument that

Thompson received tax savings of $19,717.99 instead of $980

for tax year 1983 erroneously assumes that Thompson had

sufficient income for that year to make complete use of his

Kersting deductions. He did not. The tax deficiency which he

avoided based on the disallowance of $67,620 of Kersting

deductions totaled only $980. That is all he actually saved. It

was not an abuse of discretion for the Tax Court to use that

amount in calculating the benefit obtained by Thompson from

the settlement.

[7] The Adairs, Owens, and Youngs argue that the IRS

failed to preserve critical documents, including Thompson’s

1982 tax return and the administrative files for tax years 1982

and 1983, which would prove that the “IRS granted Thompson audit forbearance for other open tax years not before the

Tax Court, allowed all of Thompson’s Kersting deductions,

and settled the validity of the Kersting deductions, in favor of

Thompson, for all open tax years as part of the Thompson settlement.” Particularly at a time when tax filings were made on

paper rather than electronically, the IRS could not and did not

keep all records for all years. There is no evidence that the

IRS destroyed documents to cover up its attorneys’ miscon11As with tax year 1982, the Commissioner allowed the statute of limitations to expire without collecting the identified deficiency for tax year

1983. Unlike tax year 1982, however, the Tax Court determined that the

benefit obtained by Thompson should be taken into account as part of the

settlement and included as part of the denominator of its calculation

because McWade and the attorney for Thompson were actively involved

in discussions at the time the Thompson statutory notice of deficiency for

1983 was being prepared. 

HONGSERMEIER v. CIR 13207
duct or to hinder the calculation of the benefits obtained by

Thompson. Nor have we been given any reason to believe that

the destroyed records would prove any of the taxpayers’

assertions. The Tax Court did not abuse its discretion in relying on the materials available to determine the Thompson settlement fraction.

D. Discovery Requests

[8] The taxpayers also requested that the Tax Court order

the production of additional documents by the Commissioner,

arguing that these documents were necessary to determine

whether there was continuing fraudulent conduct on the part

of the Commissioner. The Hongsermeiers filed with the Tax

Court a motion for reconsideration of the Tax Court’s opinion

on remand, asserting that the Commissioner engaged in a continuing cover-up of the fraud and requesting that the Tax

Court reopen the record and impose additional sanctions on

the Commissioner. In a supplemental opinion responding to

the motion for reconsideration, the Tax Court held that the

law of the case and our mandate in Dixon “preclude[d] [the

Tax Court] in the cases at hand from conducting any further

inquiry into respondent’s misconduct and from imposing any

additional sanction . . . .” Dixon v. CIR, 92 T.C.M. (CCH)

245, 2006 WL 2577847, at *1. Under the law of the case doctrine, “one panel of an appellate court will not as a general

rule reconsider questions which another panel has decided on

a prior appeal in the same case.” Kimball v. Callahan, 590

F.2d 768, 771 (9th Cir. 1979). In Dixon, despite taxpayers’

claims of continuing fraud on the part of the Commissioner

and our awareness of the “persistence and concealment” of

the original misconduct, we did not order another evidentiary

hearing, as we had in DuFresne, but rather ordered the Tax

Court to fashion a remedy for the taxpayers equivalent to the

Thompson settlement. Dixon, 316 F.3d at 1043, 1047. Recognizing that “[e]normous amounts of time and judicial

resources have been wasted” and “taxpayers should not be

forced to endure another trial,” we held in Dixon that the

13208 HONGSERMEIER v. CIR
proper solution was a financial remedy and not a further

inquiry into the alleged misconduct. Id. at 1047.

[9] Moreover, following Dixon, the Tax Court granted

almost all of the taxpayers’ discovery requests, amounting to

over 200 documents and items described in the IRS’s privilege log, “for the limited purpose of ascertaining respondent’s

understanding of the origins and nature of the Thompson settlement.” Dixon, 92 T.C.M. (CCH) 245, 2006 WL 2577847,

at *5. There was only one exception. Documents listed under

Item 123 of the IRS privilege log were reviewed by the Tax

Court in camera, and the court found they were not directly

relevant to its determination of the scope of the Thompson

settlement. The Tax Court thus sustained the Commissioner’s

invocation of the deliberative process privilege for these documents filed under Item 123, which include printed e-mail

and facsimile transmissions, memorandums, proposed pleadings and other correspondence created and maintained by the

Commissioner’s counsel, Henry E. O’Neill, beginning in mid1992 following the discovery and disclosure of the Thompson

settlement and during the course of litigation.

[10] Petitioners Rogers, Huber, and Titcomb appeal this

denial of disclosure, arguing that the documents filed under

Item 123 may contain further information regarding misconduct on the part of the Commissioner. This discovery request

exceeds the mandate in Dixon, however, for the Court in

Dixon ordered a financial settlement for the taxpayers equivalent to that offered to Thompson and not further exploration

into IRS misconduct or additional sanctions. Based on the Tax

Court’s mandated role to create a financial settlement for the

taxpayers, the denial of the discovery request for materials

listed under Item 123 was not an abuse of discretion.

[11] Furthermore, the deliberative process privilege permits the government to withhold documents that “reflect[ ]

advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and

HONGSERMEIER v. CIR 13209
polices are formulated.” NLRB v. Sears, Roebuck & Co., 421

U.S. 132, 150 (1975) (quotation marks omitted). Documents

must be both “predecisional” and “deliberative” to qualify for

this privilege; a document is predecisional if it was “ ‘prepared in order to assist an agency decisionmaker in arriving

at his decision,’ ” and deliberative if its release would “ ‘expose an agency’s decisionmaking process in such a way as to

discourage candid discussion within the agency and thereby

undermine the agency’s ability to perform its functions.’ ”

Carter v. U.S. Dep’t of Commerce, 307 F.3d 1084, 1089 (9th

Cir. 2002) (quoting Assembly of Cal. v. U.S. Dep’t of Commerce, 968 F.2d 916, 920 (9th Cir. 1992). The documents

listed under Item 123 are both predecisional and deliberative,

for the privilege log describes them as materials created during decision-making processes by the Office of Chief Counsel

of the IRS over the course of the Kersting project litigation.

The Tax Court therefore did not abuse its discretion in determining that the documents were protected by the deliberative

process privilege based on the need to protect uninhibited dialogue and deliberations by government agencies. See Lahr v.

Nat’l Transp. Safety Bd., 569 F.3d 964, 979 (9th Cir. 2009)

(The deliberative process privilege “shields certain intraagency communications from disclosure to allow agencies

freely to explore possibilities, engage in internal debates, or

play devil’s advocate without fear of public scrutiny.” (internal citation and quotation marks omitted)).

E. The Tax Court’s Imposition of Liability for Interest on

the Remaining Deficiencies

[12] Under I.R.C. § 6601, interest runs from the date a tax

is due to be paid until the date the tax is paid. The Tax Court’s

determination that taxpayers’ tax deficiencies should be

reduced by a factor of 63.37 percent thus eliminated their liability for interest with respect to the portion of the tax liability

that was eliminated. The Tax Court found, however, that taxpayers remained liable for underpayment of interest on the tax

13210 HONGSERMEIER v. CIR
deficiencies for which they were liable after the application of

the Thompson settlement terms.

[13] The Commissioner voluntarily agreed to suspend the

running of interest on all Kersting taxpayers’ deficiencies

beginning in June 1992 and remaining suspended until 90

days after the Tax Court entered its judgment on remand.12

Taxpayers argue, however, that interest should have stopped

accruing on their tax deficiencies on December 31, 1986, the

date Thompson stopped accruing interest on his tax deficiencies, in order to adhere to the Dixon mandate. The question

on appeal is thus whether taxpayers remain liable for interest

accrued from December 31, 1986 to June 1992, as well as for

interest that has accrued to the present starting on September

13, 2007, the date that was 90 days after the Tax Court’s decisions were entered in most of the consolidated group of cases

that were before the Tax Court on remand, including all petitioners here.

Pursuant to I.R.C. § 6601(a), “[i]f any amount of tax

imposed by this title . . . is not paid on or before the last date

prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for

the period from such last date to the date paid.” Although in

some circumstances a court may have discretion in determining whether prejudgment interest should be owed, in this context the statute indicates that interest “shall” be paid. See

Grauvogel v. CIR, 768 F.2d 1087, 1090 (9th Cir. 1985) (“The

statute itself provides the means for a taxpayer to stop the

interest provision from operating.”).

12The Commissioner’s agreement to suspend interest as of June 1992

does not affect the Tax Court’s determination of taxpayers’ interest due

prior to June 1992. This concession was a voluntary, self-imposed sanction, which the Tax Court noted was “an appropriately targeted response

to the consequences of [the Commissioner’s] former attorneys’ fraud on

the court, which caused substantial delay in the resolution of the Kersting

project cases.” 

HONGSERMEIER v. CIR 13211
[14] The Tax Court found that Thompson paid full interest

on his tax deficiencies, as imposed by I.R.C. § 6601(a). While

Thompson did stop accruing interest in 1986, this occurred

because Thompson paid his interest liability in 1986, not

because he received an adjustment to his interest due. It is true

that Thompson did not pay the actual deficiencies themselves

until six months after he paid his interest liability, but the Tax

Court ruled under Perkins v. CIR, 92 T.C. 749, 760 (1989),

that Thompson’s payment of accrued interest was deductible

in the year paid even though the underlying tax had not been

paid. See I.R.C. § 163(a) (permitting deduction of interest

without requiring that the underlying obligation be paid);

I.R.C. § 461(f) (permitting deduction of interest in the year in

which it is paid, even though taxpayer’s liability for the

underlying debt is contested).

Taxpayers also point to a special feature of the Thompson

settlement which allowed a replacement check Thompson

paid in February 1987 to be credited as a payment on December 31, 1986. The Tax Court noted this in its opinion on

remand, building into the reduced tax deficiency figure for

taxpayers the tax benefit received by Thompson as a result of

crediting the payment in 1986. The court did not address

whether Thompson should have accrued an additional six

weeks’ worth of interest. Nonetheless, Thompson ultimately

received refunds for overpayments made in 1986 and 1987, so

it would be illogical to conclude that he had amounts still

owing after December 31, 1986.

[15] It is true that taxpayers were not offered the benefit of

the Thompson settlement terms in 1986. Taxpayers therefore

did not have the option to pay their tax deficiencies in 1986

based on the terms offered to Thompson and thus stop interest

from accruing on their deficiencies. Nonetheless, this Court’s

mandate in Dixon calling for a settlement that puts taxpayers

in the “same position” as Thompson does not require taxpayers’ interest be extinguished past 1986, because the Thompson settlement did not involve a cancellation or reduction in

13212 HONGSERMEIER v. CIR
the interest owed by Thompson on his tax deficiencies.

Indeed, some taxpayers involved in the Kersting tax shelter

and related litigation did make prepayments on their deficiencies to stop interest accruing on their accounts just as Thompson did.

[16] The taxpayers who did not make prepayments continued to receive the economic benefits of their funds, while

Thompson lost the use of his funds by paying all tax deficiencies and interest in 1986 and 1987. As the Tax Court noted,

taxpayers therefore were granted “the equivalent of an

interest-free loan of the reduced deficiencies and interest they

will now have to pay.” Dixon, 91 T.C.M. (CCH) 1086, 2006

WL 1157520, at *28. “Section 6601(a) is not a penalty for

late payment but merely compensation for delayed payment

in the nature of interest on a loan.” Grauvogel, 768 F.2d at

1090; see also United States v. Childs, 266 U.S. 304, 309-10

(1924) (interest on income tax is “clearly intended to compensate the delay in payment of the tax—the detriment of its nonpayment, to be continued during the time of its nonpayment—

compensation, not punishment.”). Cancelling taxpayers’ interest payments beyond 1986 would accord taxpayers a benefit

well beyond that received by Thompson.

III. Conclusion

[17] The Tax Court did not abuse its discretion in fashioning a remedy for petitioners. The adjustments set out in the

Tax Court decision fairly and reasonably complied with our

direction to “put these taxpayers in the same position as provided for in the Thompson settlement,” “to the extent possible

and practicable.” Dixon, 316 F.3d at 1047 n.11.

AFFIRMED.

HONGSERMEIER v. CIR 13213