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,

Tax Ct. No.

v.  6657-05L

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee. 

6625
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,

Tax Ct. No.

v.  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. 

6626 KELLER v. CIR
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. 

KELLER v. CIR 6627
ESTATE OF CAROL ANDREWS, 

Deceased; ROBERT ANDREWS,

No. 07-72093 Petitioners-Appellants,

Tax Ct. No.

v.  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,

Tax Ct. No.

v.  11319-05

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee. 

6628 KELLER v. CIR
BARRY BLONDHEIM; SHERRY 

BLONDHEIM,

No. 07-72654 Petitioners-Appellants,

Tax Ct. No.

v.  15549-05L

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee. 

DONALD CLAYTON; YVONNE 

CLAYTON,

No. 07-72655 Petitioners-Appellants,

Tax Ct. No.

v.  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. 

KELLER v. CIR 6629
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

6630 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 liabilities for sixteen Taxpayers (as we shall refer to the individual 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 Taxpayers also challenged the imposition of interest under former

26 U.S.C. § 6621(c).1 The Tax Court held that it lacked juris1All of the partnerships involved in these consolidated actions were subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),

6634 KELLER v. CIR
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 Commissioner’s inclusion of § 6621(c) interest in his determination of outstanding liabilities. Taxpayers appeal this decision as well. 

We agree with the Tax Court’s disposition on the offers-incompromise, 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 partnership item to be determined at partnership-level proceedings.

The problem in these cases is that the partnership-level proceedings 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 determine 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 proceedings. We are as well situated as the Tax Court to undertake 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 determined 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). 

2All statutory references are to the Internal Revenue Code as codified

in Title 26 of the United States Code, unless otherwise noted.

KELLER v. CIR 6635
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); Phillips 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 Administrative Adjustment (FPAA), Hoyt, who was the tax matters partner (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 partnership.3

 The Tax Court determined partnership-level adjustments 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

3Proceedings to revoke Hoyt’s status as an Enrolled Agent were initiated 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. 

6636 KELLER v. CIR
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 settlements to individual partners that waived accuracy-related penalties, 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 Determination, Taxpayers petitioned the Tax Court to review

whether the Commissioner abused his discretion in sustaining

the proposed collection action, and whether Taxpayers are liable for the increased rate of interest on tax-motivated transactions under § 6621(c). The Tax Court held that the settlement

officers had not abused their discretion in rejecting Taxpayers’ offers-in-compromise or in upholding the proposed levies. 

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

4These 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 Hubbart, Bobbie E. Johnson, and Martin and Sharon Smith. When appropriate,

we will refer to them collectively as “Ertz Taxpayers,” and to their partnerships collectively as “DGE 85-5.” 

KELLER v. CIR 6637
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 jurisdiction 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 partnerlevel 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 determined 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 factual findings is under the clearly erroneous standard and

5The 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 jurisdiction over § 6621(c) penalties lies only in partner-level proceedings, holding 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. 

6638 KELLER v. CIR
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 Commissioner whether to accept an offer-in-compromise is for an

abuse of discretion. Fargo, 447 F.3d at 709. “Abuse of discretion 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 findings 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 Secretary 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 promulgate 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 confidence 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 compromises to promote effective tax administration (that is, compromises based on economic hardship and on grounds of

KELLER v. CIR 6639
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 taxpayer establishes a ground for compromise, the determination

whether to accept the offer is within the Secretary’s discretion. Id. 

A

Eleven Taxpayers7 in these consolidated cases appeal the

6Section 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 collection 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 justify 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 undermine compliance by taxpayers with the tax laws. 

The regulations as such are not challenged in these cases. 

7Estate 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. 

6640 KELLER v. CIR
Tax Court’s ruling affirming denial of their offers-incompromise 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 outstanding 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 economic 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 determination 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

8Factors 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 disability, 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 liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.” 26 C.F.R. § 301.7122-

1(c)(3)(i). 

KELLER v. CIR 6641
income plus other components of collectibility) (RCP) if “special 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 collectibility 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. Taxpayers attack the Commissioner’s denial of their offers on multiple 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 taxpayers’ evidence of future medical needs was thin, ambiguous, 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 computational 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 col9We agree with the Tax Court’s determination that the Lindleys abandoned their offer based on doubt as to collectibility with special circumstances 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. 

6642 KELLER v. CIR
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 miscalculations 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 retirement 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 Commissioner 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 proceedings, or respond to an offer with a counter-offer. We

believe the Commissioner adequately considered each TaxKELLER v. CIR 6643
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 circumstances 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 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.” Id. § 301.7122-1(b)(3)(ii). “No compromise to promote effective tax administration may be entered into if compromise 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 Commissioner could certainly consider third-party actions along with

10We 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 taxpayer may make a new offer. Taxpayers may be entitled to another collection 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 jurisdiction to consider changes in circumstances. 26 U.S.C. § 6330(d)(2); 26

C.F.R. § 301.6330-1(h). 

6644 KELLER v. CIR
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 penalties applied by the Commissioner to Hoyt partners, see Hansen, 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 cannot say that the Commissioner abused his discretion in rejecting their offers. It was reasonable for him to decide that

collection of less than the full liability would undermine public confidence in administration of the tax laws, whereas

accepting the offers could “undermine compliance by taxpayers.” 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 status as an Enrolled Agent when it could have done so earlier;

and dealt with Hoyt (as TMP) instead of a settlement committee 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 oversimplifies the saga that got side-tracked with the Commissioner’s

early loss in Bales. 

[11] Taxpayers also submit that resolution of their tax liability took longer than the “average” amount of time it takes

to conclude a tax shelter case. They suggest that delay should

KELLER v. CIR 6645
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 discretion. 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 payment would discourage potential investors from researching

and monitoring similar investments. 

11Bales 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 disagreements 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. 

12See 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 accumulated as a result of delay in determining the taxpayer’s liability”). 

6646 KELLER v. CIR
Taxpayers further take issue with the Commissioner’s reliance 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 Internal 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 Commissioner to be guided by his own guidelines. Nor are we persuaded 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 Manual’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-incompromise. The factors we identified there as “cutting

against” taxpayers were:

1) Taxpayers invested in tax shelters, and purely taxmotivated transactions are frowned upon by the

Code; 2) no evidence was presented to suggest that

13In the example, a taxpayer invests in a nationally-marketed partnership, 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 determination, 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 provisions at issue and the consistent settlement principles of TEFRA.” 

KELLER v. CIR 6647
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 carefully 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 offerin-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-incompromise 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 program 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. 

14See 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).” 

6648 KELLER v. CIR
[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 resulting liability of individual partners. Under TEFRA, a partnership files an informational return describing the share of

income and expenses attributable to its partners; the individual partners then report their pro rata share of the partnership’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 proceedings — 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 allocation issues at the partnership level. The difficulty here is

KELLER v. CIR 6649
that (consistent with its own then-governing precedent) the

court held that § 6221(c) interest was an affected item requiring 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 Taxpayers 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 partnership proceedings — had jurisdiction to rule on the character 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 determinations. 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 determine 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 conclude 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. 

6650 KELLER v. CIR
[16] The Tax Court clearly has jurisdiction in a collection

due process proceeding to consider issues relating to a taxpayer’s liability which the taxpayer has had no opportunity to dispute. 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 imposition of § 6621 penalties. While River City Ranches #1 recognized 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 residual 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 exercising this jurisdiction the Tax Court should not be making an

independent judgment at the partner level about whether partnership 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 implicitly 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. 

KELLER v. CIR 6651
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 underpayment attributable to tax motivated transactions,

the rate of interest established under this section

shall be 120 percent of the underpayment rate established under this section. 

(2) Substantial underpayment attributable to tax

motivated transactions. For purposes of this subsection, the term “substantial underpayment attributable

to tax motivated transactions” means any underpayment 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 subsection, 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 losses.” Sochin v. Comm’r, 843 F.2d 351, 354 (9th Cir. 1988),

abrogated on other grounds as recognized by Keane v.

6652 KELLER v. CIR
Comm’r, 865 F.2d 1088, 1092 n. 8 (9th Cir. 1989). The test

for a “sham or fraudulent transaction” is whether “the taxpayer has shown 1) a non-tax business purpose (a subjective

analysis), and 2) that the transaction had ‘economic substance’ 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 adjustment 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 valuation 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 valuation agreed upon in the 1993 Agreement. Essentially, the

argument is that the partnership-level record does not conclusively reveal whether DGE 85-5 overvalued the actual number 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

15The 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. 

KELLER v. CIR 6653
85-5’s tax returns included at least 664 nonexistent cattle,

then the disallowed portion of DGE 85-5’s claimed tax benefits was based on cattle it never acquired. It follows that those

benefits are the result of transactions that fit within the definition 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 underpayment 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 burden of proving it to be wrong,” Welch v. Helvering, 290 U.S.

111, 115 (1933), we uphold his imposition of § 6621(c) interest. 

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 disallowed 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 valuation 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

6654 KELLER v. CIR
penalty imposed pursuant to § 6659. Section 6621 incorporates 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 interpreting 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 provision 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 Commissioner’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 Inspector 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 measure up under IRS guidelines and Treasury Regulations. Contrary to the Tax Court’s view, it did have jurisdiction in the

partner-level proceedings in these cases to review the record

KELLER v. CIR 6655
of partnership-level proceedings to determine whether the

partnerships’ transactions were tax motivated. Having conducted this review ourselves, we are satisfied that the

partnership-level record admits of only one reasonable conclusion — that the partnerships’ transactions were either overvalued or sham, thus tax motivated. We therefore vacate the

portion of the Tax Court’s order and decision in the Ertz Taxpayers’ cases that dismisses the claim regarding § 6621(c) for

lack of jurisdiction. We affirm the order in each of these sixteen cases to the extent it permits the Commissioner to proceed with the collection action as determined in the Notice of

Determination Concerning Collection Action(s). 

AFFIRMED IN PART; VACATED IN PART. 

6656 KELLER v. CIR