t c memo united_states tax_court jerry and patricia a dixon et al petitioners v commissioner of internal revenue respondent docket nos filed date 1cases of the following petitioners have been treated as cases related to the above-captioned case for purposes of the additional evidentiary hearing required to give effect to the mandates of the court_of_appeals for the ninth circuit in 316_f3d_1041 9th cir as amended date dixon v revg and remanding tcmemo_1999_101 dixon iii robert h and barbara a gridley docket nos norman w and barbara l adair docket nos ronald l and mattie l alverson docket no russell l fleer sr and sally a fleer docket nos and hoyt w and barbara d young docket nos robert l and carolyn s dufresne docket nos john l and terry e huber docket no arden l and barbara g blaylock docket no terry d and gloria k owens docket no richard and fiorella hongsermeier docket no willis f mccomas ii and marie d mccomas docket no wesley armand and sherry lynn cacia baughman docket no joe a and joanne rinaldi docket no norman a and irene cerasoli docket no stanley c and sharon a titcomb docket no richard b and donna g rogers docket no the related cases have been consolidated for briefing and opinion in 316_f3d_1041 9th cir revg and remanding tcmemo_1999_101 the court_of_appeals held that the misconduct of r’s trial attorney and his supervisor in the trial of the test cases for the kersting tax_shelter project in agreeing with counsel for t one of the test case ps to a secret settlement of t’s deficiencies not disclosed to irs management to this court or to counsel for other test case ps was a fraud on the court the court_of_appeals ordered this court to sanction r by entering judgment in favor of the remaining test case ps and other ps in the kersting tax_shelter group before the court on terms equivalent to those provided in the final settlement agreement with t and the irs leaving to this 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 in the t settlement r argues that the substance of the t settlement was a 20-percent reduction of t’s deficiencies plus the payment of t’s attorney’s fees ps argue that the t settlement was in form and substance a 17-percent reduction of t’s deficiencies plus other_benefits that bring the t settlement to a 92-percent reduction in the deficiencies the parties agree that the t settlement also included cancellation of all additions and penalties including nonshelter-related additions and penalties and the use of a burnout to reduce the accrual of interest on the remaining deficiencies ps argue that interest on the deficiencies should not be charged beyond date which in their view marks the inception of the fraud on the court r has conceded that no interest will be charged on the deficiencies for the period of the appeals to the ninth circuit commencing in held the final settlement of t’s deficiencies amounts to a 17-percent reduction of those deficiencies held further two minor additional benefits included in the t settlement bring the reduction percentage up to dollar_figure percent held further the t settlement encompasses and requires the vacating of the portion or portions of the deficiencies determined against any ps that may be attributable to the bauspar shelter that was also promoted by kersting and to any other issues not arising from shelters promoted by kersting held further interest on the reduced deficiencies shall not be charged beyond the date in fixed by r’s concession and shall not be stopped as of any earlier date henry g binder and john a irvine for petitioners in docket nos and joe alfred izen jr for petitioners in docket nos and robert alan jones for petitioners in docket nos and declan j o’donnell for petitioners in docket nos and michael louis minns and enid m williams for petitioners in docket no robert patrick sticht and boris orlov for petitioners in docket no robert patrick sticht for petitioners in docket nos and henry e o’neill and peter r hochman for respondent contents page findings_of_fact i the kersting tax_shelters a b background respondent’s kersting project respondent’s project settlement offer in general bauspar c ii the thompsons’ participation in the kersting tax_shelters the thompsons’ tax_return sec_1 prepetition years--1977 and years before the court years following those before the court examination of the thompsons’ returns a b iii the test case litigation and the thompson settlements selection of the test cases a b c d e f g h i j a b c d e deterioration of the thompson-kersting relationship the thompsons engage decastro who settles their cases irs activity regarding the thompsons’ returns the reporting and resolution of the thompsons’ deficiency_interest payments for and the thompson settlement revised as trial approaches trial and entry of decisions discovery and disclosure of the thompson settlements implementation and effects of the final thompson settlement respondent’s disciplinary action against sims and mcwade iv ninth circuit remand and subsequent proceedings ninth circuit orders in the dufresne case evidentiary hearing and opinions after the remand in dufresne the ninth circuit’s opinion and mandates in these cases proceedings following remand further disciplinary proceeding sec_64 opinion preliminary comments i procedural issues following remand a b c d procedural posture law of the case parties before the court burden_of_proof ii defining and applying the thompson settlement overview areas of agreement a b c starting point the thompsons’ settlement respondent’s position petitioners’ position analysis of proposed deficiencies for other_benefits relating to the thompsons’ tax_year d elimination of the thompsons’ late filing non-kersting addition for respondent’s failure to address the bauspar issue in the thompsons’ statutory notice for benefits to the thompsons relating to years other than in general the thompsons’ escape from kersting liability with respect to the thompsons’ kersting deficiency and the disappearing statutory notice the thompsons’ bauspar deductions the thompsons’ deduction of prepaid_interest on their and returns the thompsons’ attorney’s fee deduction for the thompsons’ failure to report tax_benefit income for payment of witness fees to mr thompson release of lien on the thompsons’ property and other intangible benefits the percentage reduction summarized additional relief elimination of non-kersting additions allowance of bauspar deduction sec_2 elimination of non-kersting deficiencies attorney’s fee sec_4 e f g iii interest on deficiencies and overpayments memorandum findings_of_fact and opinion2 beghe judge with this opinion the court hopes to provide a template for resolution of the more than remaining case sec_2this opinion is issued pursuant to the mandates of the court_of_appeals for the ninth circuit in dixon v revg and remanding dixon iii dixon iii had supplemented our memorandum findings_of_fact and opinion in dixon v commissioner tcmemo_1991_614 dixon ii vacated and remanded per curiam sub nom 26_f3d_105 9th cir for the record dixon i is reported as 90_tc_237 holding that petitioners had failed to establish standing to contest a search of kersting’s office thereby sustaining the validity of the deficiency notices generated by the information discovered in that search dixon iv reported as dixon v commissioner tcmemo_2000_116 provided for awards of attorney’s fees under sec_6673 to petitioners in dixon iii unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure 3in addition to the more than big_number open cases petitioners in of the more than other dockets in the kersting project in which stipulated decisions were entered both before and after discovery and disclosure of the misconduct held by the court_of_appeals in dixon v to have constituted fraud on the court have filed motions for leave to file motions to vacate their decisions the court has returned unfiled numerous other such motions because of procedural defects petitioners filing or attempting to file such motions have thereby sought to become entitled to the benefits of the thompson settlement as mandated by the court_of_appeals in dixon v motions for reconsideration have been filed in the three dockets addressed in lewis v commissioner tcmemo_2005_205 in which we denied petitioners’ motions for leave to file motions to vacate stipulated decisions in kersting-related cases of petitioner participants in the second generation4 of tax_shelter programs the kersting project promoted by henry f k kersting kersting during the trial on the merits of the test cases used to try to resolve the vast majority of the pending cases in the kersting project respondent’s trial counsel kenneth w mcwade mcwade with the knowledge and connivance of 4in 78_tc_822 affd without published opinion 732_f2d_164 9th cir this court sustained respondent’s disallowance of all deductions for interest losses and credits claimed by participants in kersting’s first-generation programs 5for additional information about the kersting project see infra parts i a and i b before his death on date kersting and the tax_shelter programs he promoted were frequently before the courts in addition to those cases cited supra note sec_2 and see also eg 891_f2d_1407 9th cir holding that an irs summons was enforceable against some kersting program participants richards v commissioner tcmemo_1997_149 supplemental opinion tcmemo_1997_299 upholding kersting project deficiency_notice affd without published opinion 165_f3d_917 9th cir gridley v commissioner tcmemo_1997_210 denying petitioners’ motions for summary_judgment to obtain benefit of thompson settlement 206_f3d_817 9th cir promoter penalties upheld kersting v commissioner tcmemo_1999_197 sustaining deficiencies against kersting personally united_states v kersting aftr bankr d haw denying kersting bankruptcy discharge 6in counsel for the parties in the kersting-related cases agreed to a test case procedure under which a few typical cases are selected as test cases while the petitioners whose cases are not selected as test cases are encouraged to execute a piggyback_agreement ie a stipulation to be bound by the outcome of the test cases the majority of petitioners in the kersting-related cases executed piggyback agreements see the discussion in gridley v commissioner supra note his supervisor honolulu district_counsel william a sims sims entered into secret settlements with luis decastro decastro counsel for test case petitioners john r and maydee thompson the thompsons the financial terms of the final settlement were much more advantageous to the thompsons than the settlements generally made available to other petitioner participants in the kersting project the final settlement with the thompsons was intended to provide refunds of tax and interest_paid by the thompsons under a prior settlement plus interest thereon that were to be used--and the bulk of the refunds was used--to pay decastro’s fees for providing the appearance of his independent representation of the thompsons at the trial of the test cases after this court upheld respondent’s determinations and entered decisions in favor of respondent in all the test cases see dixon v commissioner tcmemo_1991_614 dixon ii respondent’s senior management discovered the settlements moved this court to vacate the decisions including the decisions in the thompsons’ cases that had not already been appealed to the 7one nontest case petitioner denis alexander in exchange for his acting as a witness and serving as an undeclared consultant to mcwade during the original trial of the test cases as described in dixon iii at findings_of_fact v b and vi f received a settlement even more favorable than that afforded the thompsons although the court_of_appeals in dixon v noted alexander’s settlement the court_of_appeals did not rely on or refer to that settlement in formulating the sanction to be imposed by its mandates court_of_appeals for the ninth circuit and requested an evidentiary hearing after vacating the decisions the court denied the motion for evidentiary hearing entered decisions for the thompsons in accordance with their final settlement and reentered or allowed to stand its decisions in the other test cases the court thereafter denied motions by test case and nontest case petitioners to intervene in the thompsons’ cases shortly before the new decisions in those cases became final in 26_f3d_105 9th cir hereafter dufresne the court_of_appeals for the ninth circuit vacated the decisions against the other test case petitioners on the ground that the misconduct of sims and mcwade required further inquiry the court_of_appeals directed this court to hold an evidentiary hearing to determine whether the extent of misconduct rises to the level of a structural defect voiding the judgment as fundamentally unfair or whether despite the government’s misconduct the judgment can be upheld as harmless error id pincite this court conducted the evidentiary hearing directed by the court_of_appeals and held that the misconduct of the government attorneys did not create a structural defect but rather resulted in harmless error see dixon v commissioner tcmemo_1999_ dixon iii we imposed sanctions against respondent in the form of relief from the accrual of interest on additions to tax for negligence as well as relief from additional interest under sec_6621 c hereafter sec_6621 the other test case petitioners again appealed the court_of_appeals for the ninth circuit reversed and remanded our decisions in those test cases in 316_f3d_1041 9th cir as amended on date dixon v the court_of_appeals held that the misconduct of respondent’s counsel constituted a fraud on the court and directed this court to enter decisions 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 id pincite in this opinion we determine the terms of the thompson settlement and their application to the kersting project participants before the court findings_of_fact the parties have filed a stipulation of facts for evidentiary hearing on date a first supplemental stipulation of facts for evidentiary hearing on date a second supplemental stipulation of facts for evidentiary hearing on date a third supplemental stipulation of sec_6621 was redesignated sec_6621 by the tax_reform_act_of_1986 tra publaw_99_514 sec c a - c 100_stat_2744 and repealed by sec b of the omnibus budget reconciliation act of publaw_101_239 103_stat_2399 facts for evidentiary hearing on date a fourth supplemental stipulation of facts filed on date and a stipulation of settled issues filed on date the facts stipulated therein are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference the parties have further stipulated that for purposes of the present opinion the court may incorporate its findings_of_fact as stated in earlier proceedings unless such facts are inconsistent with the opinion of the court_of_appeals in dixon v or are inconsistent with facts stipulated or proven in proceedings held after the issuance of dixon v i the kersting tax_shelters a background all the cases before the court concern proposed deficiencies additions to tax and interest that related to petitioners’ participation in tax_shelter programs promoted by kersting all the programs involved both primary loans and notes and leverage loans and notes with corporations organized by kersting that have been held to be his alter egos see kersting v commissioner tcmemo_1999_197 these notes sometimes bore dates that were long before the date on which the documents were actually executed and even before the date on which the participant informed kersting he was ready to participate in a particular program kersting advised participants in his programs that the programs created legitimate investments that would entitle participants to interest deductions that they should claim on their individual tax returns b respondent’s kersting project in general kersting’s promotion of his tax_shelter programs had attracted the attention of the internal_revenue_service irs which instituted a tax_shelter project known as the kersting project in furtherance of that project respondent sent deficiency notices to more than big_number taxpayers who had participated in the kersting programs the irs established the kersting project in its honolulu appeals_office in any given tax_shelter project a project appeals officer typically works with a project attorney from the district counsel’s office in the kersting project mcwade from 9tax shelter projects were initiated to deal with the large volume of cases generated by tax_shelter examinations during the late 1970s and the early 1980s among the responses of the irs and the tax_court were the development of procedures including tax_shelter projects that were intended to streamline the litigation process economize on the use of administrative and judicial resources and reduce the costs incurred by taxpayers in resolving disputes over tax_shelter adjustments the irs office_of_chief_counsel created the tax_shelter branch in the national_office to oversee tax_shelter litigation across the country and to organize individual tax_shelter projects the projects generally focused upon a specific type of tax_shelter such as those promoted by kersting that constituted the kersting project the honolulu district counsel’s office served as the project attorney once a tax_shelter project is assigned to a particular district counsel’s office that district_counsel has the authority to settle any individual case in the project the district_counsel generally is expected to adhere to the official project settlement offer nevertheless the district_counsel has the authority in special circumstances to settle individual tax_shelter project cases on a basis different from the project settlement offer bauspar one kersting program that was not part of respondent’s kersting project was known as bauspar kersting had promoted the bauspar program as a combination savings and low interest mortgage plan while the precise manner in which the bauspar program operated for each participant remains uncertain the total amount of home mortgage interest deducted by bauspar participants appears to have been overstated respondent’s officials believed that there were relatively few participants in the bauspar program that there was no easy way to identify participants in the bauspar program from a review of their income_tax returns and that an investigation of bauspar deduction claimants would not be cost effective accordingly respondent ultimately decided not to systematically pursue bauspar participants through the kersting project respondent’s identification of bauspar participants appears instead to have been a hit or miss proposition although respondent has disallowed some bauspar deductions claimed by a few kersting project petitioners those disallowances have been sporadic because the bauspar program was not included in respondent’s kersting project we refer to interest deductions claimed under the bauspar program as bauspar deductions rather than kersting deductions c respondent’s project settlement offer between and respondent had in effect an official settlement offer for the kersting project in general the offer permitted participants in the kersting programs to resolve their cases by agreeing to pay income_tax deficiencies that averaged percent less than those determined in their deficiency notices the offer also released participants from negligence additions and increased interest by date respondent’s counsel had agreed to modify the 7-percent reduction settlement offer to incorporate a new feature called the burnout that would apply in cases involving more than one taxable_year under this procedure the interest on a taxpayer’s total unpaid deficiencies for the first and second years of tax_liability would not begin to accrue until the return_due_date for the second year the burnout thus postponed for a year the accrual of interest on the first year’s deficiency thereby reducing the total interest that accrued on the deficiencies this was accomplished by zeroing out the taxpayer’s agreed deficiency for the first year and adding it to the agreed deficiency for the second year ii the thompsons’ participation in the kersting tax_shelters a the thompsons’ tax_return sec_1 prepetition years--1977 and although the thompsons participated in one of kersting’s programs during they did not claim any kersting-related interest deductions on their income_tax return for that year because their accountant refused to claim those deductions on the return the record suggests the thompsons first claimed kersting deductions on their tax_return which was prepared by an accountant recommended by kersting years before the court the thompsons filed their tax_return pursuant to an extension on date the thompsons reported kersting deductions of dollar_figure on that return the thompsons received an extension of time to file their tax_return until date on that return received by the irs on date the thompsons reported kersting deductions of dollar_figure the thompsons late filed their tax_return on date reporting kersting deductions of dollar_figure as investment_interest expense the kersting deductions claimed on that return were the principal factor in reducing the thompsons’ adjusted_gross_income of dollar_figure to taxable_income of dollar_figure--a reduction of dollar_figure the thompsons also reported dollar_figure of home mortgage interest_expense that was probably attributable to the bauspar program in which the thompsons began participating in date years following those before the court the thompsons filed their tax_return on may dollar_figure on that return the thompsons reported kersting and probably bauspar deductions sufficient to reduce their adjusted_gross_income of dollar_figure to taxable_income of dollar_figure--a reduction of 10by date mr thompson had retired as a pilot with continental airlines dollar_figure neither petitioners nor respondent have been able to locate a copy of the thompsons’ tax_return the 3-year period of limitations under sec_6501 expired with no action by respondent concerning the thompsons’ tax_return the irs received the thompsons’ income_tax return on date the thompsons reported no tax_liability on that return they also reported kersting interest_expense deductions of dollar_figure as well as bauspar deductions respondent received the thompsons’ income_tax return in date on that return the thompsons claimed kersting interest_expense deductions from two kersting programs mahaio mahalo in the amount of dollar_figure and federated finance in the amount of dollar_figure the mortgage interest_deduction included in the return also included interest_paid pursuant to the bauspar program the thompsons paid dollar_figure as tax_shown_on_the_return to be owing on their income_tax return the thompsons reported itemized_deductions of dollar_figure and reported adjusted_gross_income of dollar_figure resulting in zero taxable_income although the thompsons did not claim any kersting deductions on the return they overstated their mortgage interest_expense as a result of their participation in the bauspar program b examination of the thompsons’ returns the thompsons experienced audit problems with their tax_return that were due in part to their failure to attach to the return a form_w-2 wage and tax statement showing the amount of income_tax that continental airlines had withheld from mr thompson’s wages in early to mid-1986 the thompsons’ personal counsel samuel m huestis huestis negotiated a settlement of their income_tax_liability for the record does not disclose the terms of that settlement on date the los angeles district_director issued a statutory_notice_of_deficiency with respect to the thompsons’ taxable_year disallowing kersting deductions of dollar_figure and determining a deficiency in tax of dollar_figure the notice_of_deficiency also determined a negligence addition of dollar_figure under sec_6653 on date the thompsons filed a pro_se petition in this court seeking a redetermination of the deficiency and addition on date the honolulu district_director issued a statutory_notice_of_deficiency with respect to the thompsons’ taxable_year disallowing kersting deductions of dollar_figure and determining a deficiency in tax of dollar_figure on date the thompsons filed a pro_se petition in this court seeking a redetermination of the asserted deficiency on date kersting sent a letter to kersting program participants stating that he had retained attorney brian seery seery to represent them in the tax_court at no charge to individual petitioners the letter requested that each kersting program participant provide written authorization for seery’s representationdollar_figure seery’s compensation_for legal services rendered to kersting program participants was always paid_by one of kersting’s alter ego corporations on date seery entered appearances for the thompsons in their tax_court cases for their and taxable years he also entered his appearance for hundreds of other taxpayers on date the los angeles district_director issued a statutory_notice_of_deficiency with respect to the thompsons’ taxable_year disallowing claimed kersting deductions of dollar_figure and determining a deficiency in tax of dollar_figure the notice_of_deficiency also determined negligence additions against the thompsons under sec_6653 and a late filing addition under sec_6651 and increased interest under sec_6621 respondent did not disallow the dollar_figure claimed 11in a letter to program participants dated date kersting recommended that program participants not attempt to resolve their cases on their own and instead rely on counsel he had hired as home mortgage interest that was probably attributable to the bauspar program on date the thompsons filed a pro_se petition in this court seeking a redetermination of the asserted deficiency additions and increased interest for dollar_figure the thompsons thus had three of their taxable years before the court in three docketed cases respondent’s determinations of the thompsons’ federal_income_tax deficiencies and additions for their taxable years were as follows additions to tax sec sec sec sec year deficiency a a a a dollar_figure --- dollar_figure --- --- big_number --- --- --- big_number dollar_figure --- dollar_figure of the interest due --- on the deficiency total big_number big_number big_number --- respondent also determined that the thompsons were liable for increased interest for pursuant to sec_6621 on date the chief_judge of this court assigned all the kersting project cases to judge william a goffe judge goffe for trial or other_disposition subsequent kersting project cases were automatically assigned to judge goffe 12the thompsons apparently filed their petition for their taxable_year pro_se even after seery had entered his appearance in the earlier cases iii the test case litigation and the thompson settlements a selection of the test cases mcwade and seery planned to use the test case procedure to dispose_of the cases of the kersting program petitioners who wished to contest the deficiencies determined against them by respondent most of these petitioners entered into stipulations of settlement for tax_shelter adjustments also called piggyback agreements respondent and petitioners who entered into piggyback agreements thereby agreed to be bound by the results in the selected test cases on date mcwade and seery provided the names of the test case petitioners they had selected to judge goffe seery and mcwade had agreed to the selection of test cases in dockets of seven married couples who had filed joint returns and one individual who had not filed jointly among the couples selected to be test case petitioners were the thompsons john r and e maria cravens the cravenses and richard and fiorella hongsermeier the hongsermeiers seery particularly sought to include the cravenses as test case petitioners because they treated their payments to kersting as basis reductions that resulted in capital_gain upon the termination of their interests in the programs the cravenses later decided to proceed without counsel and to settle their casesdollar_figure seery also selected the hongsermeiers as test case petitioners because he mistakenly believed that they had used their own funds rather than nontaxable distributions from kersting corporations to repay loans to other kersting corporations the hongsermeiers’ taxable years were before the court respondent had failed to audit their and taxable years there is no clear indication whether it was seery or mcwade who originally proposed the participation of the thompsons as noted the thompsons’ taxable years were before the court respondent had failed to audit their taxable_year b deterioration of the thompson-kersting relationship around the time seery and mcwade selected the test cases the relationship between the thompsons and kersting deteriorated earlier in the thompsons’ personal counsel huestis had asked kersting for an accounting of the thompsons’ participation in the kersting programs huestis’s request led to a dispute between the thompsons and kersting on date the thompsons retained john chanin a honolulu attorney to help them in their dispute with kersting in a letter dated august 13see infra note kersting informed the thompsons he had turned their file over to his own attorney for collection and further stated the day after you have allowed your attorneys to file suit i will declare all notes which you have executed to our companies in default and begin collection proceedings the aggregate sum is well in excess of dollar_figure as you know we will not provide legal assistance free of cost to you any longer in us tax_court proceedings you will have to retain your own attorney to make an appearance for you on february in us tax_court by letter dated date kersting notified seery that he expected to be in litigation with the thompsons and directed seery not to render any services at our expense to the thompsons on date huestis wrote to seery notifying him that the thompsons were seeking substitute counsel and requesting their files on date seery sent the thompson files to huestis and informed him that the thompsons were test case petitioners seery indicated that he was withdrawing as the thompsons’ counsel on date huestis again wrote to seery to express dissatisfaction with the sufficiency of the thompsons’ files and to warn seery that his earlier representation of the thompsons while he was also apparently representing kersting could be viewed as a conflict of interest and lead to an action for professional negligence on date seery filed motions to withdraw as counsel in the thompsons’ cases which the court granted in ruling on a subsequent motion judge goffe observed that there could be a conflict of interest if seery represented both petitioners and kersting seery subsequently filed motions to withdraw as counsel in the kersting project cases both test cases and nontest cases citing concerns about a possible conflict of interest the court granted seery’s motions in date c the thompsons engage decastro who settles their cases on or about date the thompsons retained attorney luis decastro decastro who was also a certified_public_accountant to settle their kersting tax issues mr thompson retained decastro to resolve all the thompsons’ kersting tax years not only the years docketed in the tax_court the thompsons provided decastro with tax records for all those years the retainer agreement between the thompsons and decastro provided for a dollar_figure fee which covered only efforts to negotiate a settlement it did not cover preparation for and conduct of a trial none of the other petitioners in the kersting project whether test case petitioners or piggybackers incurred any attorney’s fees in connection with the preparation and trial of the test cases kersting paid all such fees meanwhile in the wake of seery’s withdrawal kersting engaged attorneys robert j chicoine chicoine and darrell d hallett hallett to represent the test case petitioners other than the thompsons and the cravenses at the tax court’s trial session in maui hawaii which had been scheduled to commence date chicoine and hallett agreed to do so with the understanding that they would not represent kersting in late chicoine and hallett apparently indicated to mcwade and sims that they intended to challenge the admissibility of evidence that had been seized in the date search of kersting’s office that became the subject of this court’s opinion in 90_tc_237 dixon i see supra note about the same time mcwade and sims began to offer 20-percent reduction settlements that were based on the same general approach as their modified 7-percent reduction settlement offer that included the burnout feature in date decastro traveled to hawaii on behalf of the thompsons and a number of other clients who had participated in the kersting shelters there decastro accompanied by gary poltash poltash the thompsons’ new accountant who was not associated with kersting began settlement discussions with mcwade their initial agreement called for a reduction in the thompsons’ deficiencies of approximately percent the settlement also provided for the elimination of all additions to tax and for the elimination of the increased interest rate under sec_6621 for the burnout would also apply so as to combine the agreed deficiencies for the years and in the year during this trip decastro and mcwade also discussed the bauspar program in which the thompsons were involved on date mcwade signed and sent decastro stipulated decision documents in the thompsons’ cases the transmittal letter stated that as previously indicated the decision documents in john r and maydee thompson will not be filed with the court until the decision becomes final in the test cases in the interim the thompsons can make an advance_payment as discussed at our conference and stop the accrual of any additional liability for interest on date decastro signed and returned to mcwade the executed decision documents agreeing to the reduced deficiencies neither mcwade nor sims communicated the terms or existence of the thompsons’ settlement to their superiors the result of the pending settlement upon the thompsons’ tax_liabilities would have been as follows income year adjustment determined deficiency proposed settlement percentage reduction dollar_figure big_number total big_number all years total dollar_figure big_number big_number big_number big_number --- dollar_figure big_number big_number big_number decastro poltash and mcwade had also agreed that the thompsons would be able to deduct the interest payable on the deficiencies agreed to under the settlement by prepaying such interest by december dollar_figure as of date the accrued interest on the thompsons’ newly settled deficiencies was dollar_figure for and dollar_figure for 1981--a total of dollar_figure which the parties rounded to dollar_figure accordingly the decision documents returned to mcwade by decastro stated by separate cover you will also be receiving a check in the amount of dollar_figure representing interest on the tax deficiencies reflected in the decision documents with a letter dated date mr thompson sent mcwade two checks check no for dollar_figure and check no for dollar_figure for a total of dollar_figure mr thompson’s letter stated i am at the present time doing the necessary procedures to take care of the balance at mcwade’s direction irs personnel in honolulu prepared payment posting vouchers form allocating the thompsons’ prepayment of dollar_figure between the years before the court 14the internal_revenue_code was amended in to add a new sec_163 that repealed the deduction for personal_interest see tra sec_511 100_stat_2246 under the new sec_163 was the last taxable_year in which taxpayers could deduct percent of such personal_interest tra sec_511 100_stat_2249 for only percent of personal_interest was deductible and the deduction for personal_interest was phased out entirely by the end of sec_163 indicating designated interest for in the amount of dollar_figure and designated interest in the amount of dollar_figure for the entire amount of check no dollar_figure and dollar_figure from check no was applied to the remainder of check no dollar_figure was applied to the thompsons’ dollar_figure check check no was subsequently dishonored this was reflected as a debit for the thompsons’ accounts for and in date the thompsons made a replacement payment of dollar_figure representing the amount of the dishonored_check plus a 1-percent bad_check_penalty the replacement payment was restored as a credit as of date the thompsons were the only test case petitioners for whom the irs processed a prepayment of interest without receiving a concurrent advance_payment on deficiency to which the interest was attributable in date chicoine and hallett filed motions in this court seeking to suppress the evidence that had been seized in the raids on kersting’s office and to shift to respondent the burden_of_proof and burden of going forward with evidence the chicoine and hallett motions in effect turned the date maui trial session into a hearing on the motions and resulted in a continuation of the trial of the test cases on date mcwade sent decastro a revised decision document for the thompsons’ taxable_year making a minor change that reduced the deficiency for that year from dollar_figure to dollar_figure mcwade later explained it must have been i miscomputed something with this modification of the settlement the thompsons’ aggregate deficiencies for were reduced by dollar_figure percent of the deficiencies originally determined by respondent ie from dollar_figure to dollar_figure on date decastro sent a dollar_figure cashier’s check in partial payment of the total amount due to the internal_revenue_service center in fresno on behalf of the thompsons respondent received the payment of dollar_figure on date and credited it to the thompsons’ account as an advance_payment less offset of a credit of dollar_figure that was applied to their tax_year accordingly by date the thompsons’ payments to the irs with respect to the taxable years totaled dollar_figure dollar_figure as an advance_payment of tax and dollar_figure as interest d irs activity regarding the thompsons’ returns in the meantime an employee of respondent at the fresno service_center in california with initials a a k prepared a statutory_notice_of_deficiency subsequently dated date disallowing dollar_figure of kersting deductions claimed on the thompsons’ income_tax return because the thompsons had little taxable_income that year the first whole year of mr thompson’s retirement the deficiency resulting from this disallowance was only dollar_figure there is some indication that the notice_of_deficiency was mailed and that it caused an inquiry an internal document of the irs form reflects a handwritten entry dated date no reason to change determination - refiling case nevertheless no petition for the thompsons’ taxable_year was filed in this court and the deficiency was never assessed or collected on date revenue_agent carolyn speers speers based in san jose california audited the thompsons’ income_tax return and noted dollar_figure of kersting deductions claimed on the return on that date she wrote the thompsons a letter proposing to dispose_of the kersting issue identified on the return consistent with respondent’s general 7-percent reduction settlement proposal in her letter speers also requested additional information regarding the thompsons’ participation in the kersting tax_shelter programs including a request for a copy of the thompsons’ income_tax return speers did not receive a response from the thompsons to her date letter nor to a followup letter dated date on date mr thompson called speers to report that he had forwarded her request to decastro on date decastro sent speers an executed copy of the 7-percent reduction settlement agreement for along with a power_of_attorney executed by the thompsons for the taxable years and and a form 872-a special consent to extend the time to assess tax because decastro did not include the requested additional information or a copy of the thompsons’ return speers declined to proceed on the basis of the percent reduction settlement instead by letter to decastro dated date speers proposed to dispose_of the thompsons’ year by disallowing the claimed kersting interest_expense deductions in their entirety she again requested a copy of the thompsons’ return to verify that interest from kersting was not deducted in this year beginning date and continuing through date speers documented in her case history worksheet telephone or written contact in the course of her examination of the thompsons’ income_tax return with the thompsons decastro philip hoskins of decastro’s firm and an accountant named rick speers’s case history worksheet reflects no contacts with mcwade sims or any other of respondent’s counsel by letter dated date decastro agreed to a complete disallowance of the dollar_figure of kersting deductions claimed by the thompsons for and the resulting deficiency of dollar_figure the thompsons paid the deficiency and interest by virtue of this disposition of the matter respondent issued no notice_of_deficiency to the thompsons for on date decastro sent speers a copy of the thompsons’ income_tax return as noted above the thompsons’ income_tax return did not reflect any kersting deductions although it did include bauspar deductions in a letter dated date speers notified the thompsons that she was able to verify that interest from the kersting project was not deducted on that return respondent issued no notice_of_deficiency to the thompsons for e the reporting and resolution of the thompsons’ deficiency_interest payments for and the thompsons claimed their dollar_figure interest payments to the irs as an itemized interest_deduction on schedule a - itemized_deductions of their income_tax return however because their adjusted_gross_income for that year was relatively low the thompsons were able to use only dollar_figure of the dollar_figure deduction the thompsons did not claim any kersting or bauspar deductions on their return poltash prepared the thompsons’ income_tax return on that return the thompsons deducted dollar_figure as interest_paid to the irs that figure represent sec_65 percent of dollar_figure see supra note apparently the thompsons were attempting to carry over the unused portion of the interest_deduction of dollar_figure from their taxable yeardollar_figure the thompsons did not claim any kersting or bauspar deductions on their return poltash did not discuss the preparation of the thompsons’ or returns with mcwade or sims revenue_agent speers examined the thompsons’ income_tax return she asked about the dollar_figure interest_deduction in letters to the thompsons dated february and date in a telephone conversation with speers on date mr thompson explained the dollar_figure interest_expense_deduction to her satisfaction speers closed the examination of the thompsons’ return without making any adjustments to the return her examination workpapers reflect her notation that tp paid large interest to irs on schedule a--verified per transcripts in date a revenue agent16 screened the thompsons’ income_tax return for kersting deductions the return bears a stamp stating income_tax survey after assignment meaning that the agent saw nothing obvious for examination and returned the 15although poltash claimed to lack any recollection of his attempt to claim the interest_deduction he conceded the dollar_figure amount might have represented an attempt to claim for the portion of the dollar_figure claimed on the return that produced no tax_benefit to the thompsons we note a slight discrepancy between the amount of the deduction actually used on the thompsons’ return dollar_figure and the figure underlying the dollar_figure carryover for dollar_figure - dollar_figure dollar_figure 16the signature of the examining agent is difficult to decipher it appears to be art or pat taylor return to files without examining it or transmitting it for examination f the thompson settlement revised as trial approaches although chicoine and hallett ultimately recommended that their test case clients accept respondent’s 20-percent settlement offer kersting disagreed and replaced chicoine and hallett with attorney joe alfred izen jr izen in date counsel on both sides began to prepare for trial which was scheduled for date in honolulu hawaii in an order dated date the court granted mcwade’s motion to depose kersting in date while in honolulu for the kersting deposition decastro met mcwade to discuss the thompson cases decastro told mcwade he wanted to withdraw the thompsons from the test case trial decastro’s reason for withdrawing the thompsons was to avoid their having to pay the fees and expenses of the trial and to enable them to take the settlement they had already agreed to mcwade wanted to keep mr thompson as a party to the trial because he was a test case petitioner who was represented by an attorney decastro who had not been hired and paid_by kersting from respondent’s standpoint there was also a benefit to having as a party witness a participant in the kersting program who was feuding with kersting and could be expected to testify against him recalling the withdrawal of seery sims was concerned by the potential conflict of interest from kersting’s paying the fees of the attorney representing the test case petitioners accordingly he wanted to keep decastro in the trial of the test cases as an independent attorney paid_by the taxpayer to provide an apparent safeguard against the trial appearing to be slanted toward protecting the promoter’s as opposed to petitioners’ interest mcwade and decastro also apparently discussed the status of an outstanding federal_tax_lien on the thompsons’ house unrelated to their participation in kersting shelters which the irs had yet to remove more than a year after the thompsons had satisfied the underlying liabilitydollar_figure on date respondent issued a certificate of release with respect to the federal_tax_lien on the thompsons’ house shortly before trial of the test cases in this court in date mcwade and decastro reached an oral agreement the new agreement calling for reduced amounts of agreed deficiencies for of zero dollar_figure and dollar_figure respectively the purpose of the reductions was to compensate the thompsons for the cost of having an attorney represent them at the trial of the 17under sec_6325 the irs was required to release the lien not later than date days after the liability had been satisfied test cases decastro estimated that his legal fees for representing the thompsons at the trial of the test cases would be approximately dollar_figure it was estimated that the newly agreed reductions would generate approximately dollar_figure of refunds to the thompsons from the dollar_figure they had paid earlier toward satisfaction of the deficiencies and interest under the earlier settlement the new agreement also preserved the thompsons’ chances to prevail on the merits of the litigation mcwade and decastro agreed that if the results of the trial were more favorable to the thompsons than the new agreement the thompsons would be entitled to the results of the trial when the new agreement was reached respondent’s official settlement policy still provided for a 7-percent reduction in determined deficiencies elimination of the negligence_penalty and other minor concessions although as the time for trial approached some nontest case petitioners’ attorneys continued to negotiate 20-percent reduction settlements the new agreement 18as petitioners point out decastro was somewhat inconsistent in his recollection of his proposed billing on date he initially denied that the new agreement was designed as a mechanism for respondent to pay his fees but he admitted to the contrary days later on date decastro recalled estimating that it would cost a minimum of dollar_figure to try the thompsons’ case after being shown documents indicating he had billed the thompsons for more than dollar_figure decastro said he had told mcwade that his fees would be roughly dollar_figure as respondent points out decastro’s bills to the thompsons as of date totaled dollar_figure however reduced the thompsons’ deficiencies for the years at issue from the originally determined dollar_figure to dollar_figure--a reduction of dollar_figure percent the new agreement substantially deviated from respondent’s official settlement policy and from the 20-percent reduction settlements obtained by decastro and chicoine and hallett and other attorneys on behalf of other clients none of sims’s or mcwade’s superiors approved the new agreement to the contrary sims’s and mcwade’s superiors did not discover the new agreement until after this court had tried the test cases issued its opinion and entered its initial decisions therein g trial and entry of decisions the trial of the test cases was conducted before judge goffe from january through date at honolulu hawaii neither sims mcwade nor decastro informed judge goffe the national_office the regional_office or izen of the thompson settlement or the cravens settlement before or during the date trial of the test cases or thereafter the government paid the travel food and lodging_expenses of mr cravens and mr thompson while they were in hawaii mr thompson’s reimbursed expenses amounted to dollar_figure we stated in dixon iii n inasmuch as respondent subpoenaed all the test case petitioners it is assumed they were all reimbursed for their expenses although there is no evidence in the record that any other test case petitioner other than mr cravens and mr thompson was reimbursed by the government for the expenses of attending the test case trial neither is there any record evidence that any or all of the other test case petitioners who requested reimbursement of their trial attendance expenses had their requests denied or indeed that requests for reimbursement were made by any such petitioners around the time of the trial decastro asked mcwade to arrange for the thompsons to receive a refund of dollar_figure of their advance_payments in a memorandum dated date mcwade requested respondent’s administrative officials to process a dollar_figure refund to the thompsons on date the government issued a refund check of dollar_figure to the thompsons the thompsons endorsed the check to decastro law corp without depositing it in their own checking account the thompsons did not claim a deduction on their return for the dollar_figure they paid decastro on date decastro wrote a letter to mcwade confirming the revision of the thompson settlement that had been agreed to before the trial of the test cases decastro’s letter states in pertinent part as follows re jack and maydee thompson dear ken please confirm following is our agreement with respect to settlement of above taxpayer’s cases for open years we have agreed that the total taxes due for all the open years are dollar_figure for and dollar_figure for further in the event a final_decision in this case is more favorable they are to receive the benefit of such decision please sign below so i can have for my files mcwade signed the letter and returned it to decastro on date decastro wrote mcwade requesting him to arrange for the thompsons to receive the balance of their refund mcwade replied that the balance would not be released until the tax_court had issued its opinion and decastro so informed the thompsons decastro told the thompsons that because the irs would be paying interest he believed it was fair to add interest to the thompsons’ bill on or about date mcwade received an undated letter from mr thompson which stated in pertinent part as follows dear mcwade there are some questions in mind that i feel you can help me answer i received a check from irs in the amount of thirty thousand dollars-- dollar_figure i endorsed this over to decastro law corp this did not retire the billed amount i am completely amazed at the billings we are receiving i am now in receipt of additional billings that exceed realistic amounts in fact the total comes to sixty six thousand two hundred forty three and dollars dollar_figure at some point i know a reconciliation will come luis decastro says don’t be concerned i am very concerned i am the one being billed most emphatically i did not expect to be a channel through which irs funneled funds to any law firm certainly not in this magnitude i have the feeling at this point that i am correct in this--the bill is to sic much i want to know the exact legal position i occupy we have been frustrated long enough we wish to close this chapter decastro wrote to huestis on date stating in pertinent part thank you for your letter regarding the matter of the thompsons’ fees as i have told jack we are looking for payment of his fees to the irs not him i am enclosing a copy of my letter to him in this regard for your information decastro sent a similar letter to the thompsons on the same date on date the court issued its opinion in dixon v commissioner tcmemo_1991_614 dixon ii sustaining almost all of respondent’s determinations that the kersting programs at issue lacked merit for tax purposes on date the court entered decisions against petitioners in the test cases in accordance with its opinion on date the test case petitioners--other than test case petitioner ralph j rina rina and the thompsons and the cravenses--appealed the decisions in their cases to the court_of_appeals for the ninth circuit h discovery and disclosure of the thompson settlements on date sims and mcwade by memorandum requested the san francisco appeals_office to process the thompsons’ account administratively in accordance with the thompson settlement not the tax court’s decisions on date danny cantalupo regional_director_of_appeals for the western region informed peter d bakutes bakutes deputy regional_counsel for tax litigation for the western region in san francisco of sims’s and mcwade’s request to process the thompson settlement bakutes informed benjamin sanchez sanchez the western regional_counsel in san francisco who informed officials in the national_office of the office_of_chief_counsel in washington d c the circumstances surrounding the thompson settlement became a matter of widespread concern within the irs on date sims at the direction of sanchez informed decastro by letter that the thompson settlement would not be honored and that assessments would be made in accordance with the decisions entered on date pursuant to dixon ii the letter advised that assessment of the taxes owing plus statutory additions and interest would be approximately dollar_figure the letter further noted of course your clients’ advance_payments will be credited toward the assessments decastro had several telephone conversations with respondent’s officials in which he maintained that the thompson settlement as memorialized in the date letter agreement was an enforceable contract and that he was prepared to appeal any decision to the contrary bakutes prepared a motion that was filed in this court on date seeking leave to vacate the decisions entered in the thompson cases as well as the cravens and the rina cases respondent requested the court to conduct an evidentiary hearing to determine whether the agreements with the cravenses and the thompsons had affected the trial of the test cases or the ensuing decisions of the court on date judge goffe granted respondent’s motions to vacate filed in the thompson and the cravens cases that same day bakutes called decastro to tell him that the decisions in the thompson cases had been vacated during this call decastro told bakutes that in mcwade had reduced the thompsons’ deficiencies to keep the thompsons in the case although he had earlier told bakutes that attorney’s fees were not awarded in the settlement decastro admitted in this conversation that the deficiencies were reduced to pay the thompsons’ legal fees for his representation of them in the test case trial on or about date sanchez decided that sims and mcwade should no longer have any authority over the kersting cases and that the cases should be assigned to other attorneys who had been involved in the kersting project bakutes accordingly reassigned the test case dockets to thomas a dombrowski dombrowski and the nontest cases to henry e o’neill o’neill on date judge goffe denied respondent’s request for an evidentiary hearing and ordered the parties to file agreed decisions with the court or otherwise move within days of the date hereof in a separate order filed on the same date the court denied respondent’s motion to vacate the decision filed in rina’s case stating the court has reviewed the testimony of cravens the testimony of thompson the stipulated facts and stipulated exhibits relating to the cravenses and the thompsons and the exhibits offered through thompson as a witness the court finds that these reviewed items had no material effect on the opinion which the court filed on date as that opinion relates to petitioner rina if the reviewed items were stricken from the record the court would file an opinion in all material respects like the opinion it filed on date with the exception of certain portions relating specifically and expressly to the cravenses or the thompsons and the court’s findings analyses and conclusions relating to petitioner rina would remain the same during the summer of respondent’s acting chief_counsel david jordan jordan directed two senior attorneys in the tax litigation division in the national_office thomas j kane kane and steven m miller miller to investigate the thompson settlement on behalf of the national_office kane and miller conducted in-house depositions and interviewed various individuals who had participated in the test case trial and the thompson settlement bakutes assigned dombrowski to help kane and miller in their investigation dombrowski’s immediate problem was how to respond to this court’s order of date that the parties file agreed decisions with the court or otherwise move within days dombrowski learned that mcwade and sims had denied that the purpose of the new agreement to reduce the thompsons’ deficiencies was to pay decastro’s fees instead they claimed the lowered deficiencies had something to do with the thompsons’ 19rina appealed from this denial unlike the thompsons rina had no settlement agreement with sims and mcwade on date rina agreed to the entry of a stipulated decision in the amounts originally determined in his statutory_notice_of_deficiency investment in bauspardollar_figure to see whether bauspar figured in the thompson settlement dombrowski sought the thompsons’ post-1981 tax returns by date he had received the thompsons’ returns and a memo that the thompsons’ tax_return and administrative file had been destroyed dombrowski analyzed the returns to see if they shed light on the bauspar question raised by mcwade’s and sims’s contentions although the tax_return was not available dombrowski believed it likely that kersting deductions had been claimed on that return because of the disparity between adjusted_gross_income and taxable_income and because kersting deductions were claimed on the thompsons’ and returns dombrowski’s analysis of subsequent year returns noted the mortgage interest deductions claimed on the thompsons’ returns and further noted bauspar he also noted that entries that may have reflected the bauspar deductions had not been audited dombrowski’s reason for putting a question mark after bauspar was that he could not tell from the entries on the returns whether they actually related to bauspar 20in a memorandum dated date kane had written sims claimed that mcwade had initiated the recommendation to allow bauspar losses so that both thompson and decastro would remain in the case thus sims told mcwade to work with the bauspar numbers in order to give thompson relief and keep him as a test case fn ref omitted additionally in mcwade testified that he reduced the thompsons’ deficiencies on his own to make up for the thompsons’ dollar_figure loss in the bauspar program we found this testimony not credible dombrowski also noted that the thompsons appeared to have defaulted on a statutory notice issued to the thompsons for disallowing claimed kersting deductions of dollar_figure but that the irs had failed to assess the resulting deficiency of dollar_figure dombrowski also noted the date entry in the thompsons’ file for that stated no reason to change determination - refiling case dombrowski believed this entry indicated that someone contacted the fresno service_center after receiving and questioning the notice_of_deficiency for because the year period of limitations with respect to the returns he was examining had expired several years earlier dombrowski did not attempt to determine why the assessment for had not been made he instead focused on preparing a timely response to the court’s date order in the thompsons’ cases on date marlene gross gross an official in the national_office of chief_counsel called bakutes and informed him that despite the disclosure of sims’s and mcwade’s misconduct the department of justice doj would not seek to remand the test cases that had been appealed the doj’s decision was based on the tax court’s refusal to vacate the decision in the rina case that refusal indicated to the doj officials that the tax_court probably would not vacate its decisions in the other test cases if asked to do so gross also reported to bakutes that the doj and specifically the tax_division appellate section chief gary allen wished to offer the same settlement to the test case petitioners on appeal that the thompsons had received a percent reduction in deficiencies an approximation of the reduction of the thompsons’ originally determined deficiencies from dollar_figure to the dollar_figure figure finally agreed upon bakutes was opposed to settling the appealed cases on that basis there is no evidence that the doj made any such settlement offer to the test case petitioners on appeal on date decastro filed a motion for entry of decision in the thompsons’ cases on the terms of his settlement agreement with mcwade ie deficiencies of zero dollar_figure and dollar_figure for respectively on date respondent filed objections to decastro’s motion for entry of decision together with respondent’s own motion for entry of decision respondent’s motion sought a decision that reflected the original 8-percent reduction settlement agreed to by mcwade and decastro in december dollar_figure 21respondent’s motion stated that the date agreement between decastro sims and mcwade to reduce the thompsons’ deficiencies by percent exceeded the terms of the standard 7-percent reduction settlement offer nevertheless respondent conceded respondent’s counsel possessed the authority to make such an offer and such offer was accepted by petitioners herein as well as others respondent also noted the approximately percent reduction settlement offers previously made to other participants respondent’s motion further continued respondent’s 11-page motion for entry of decision with a 15-page supporting memorandum disclosed to the court the facts that had been discovered in respondent’s investigation respondent informed the court that before the test case trial sims and mcwade had agreed to settle the thompson cases by reducing the thompsons’ deficiencies in amounts sufficient to compensate the thompsons for their projected attorney’s fees as respondent explained to the court sims and mcwade had agreed with decastro that all settlement refunds in excess of the amounts provided by the date agreement would go ultimately to the benefit of mr decastro for payment of his legal fees and costs mr decastro would be paid solely from amounts refunded by the service to thompson this new agreement in sum and substance if not explicitly was designed and constituted an agreement by messrs sims and mcwade to pay mr decastro’s legal fees and expensesdollar_figure continued indicates that chicoine and hallet’s motion to suppress evidence was pending when mcwade offered the 20-percent reduction settlement to decastro in date although mcwade may have known of chicoine and hallet’s intent to file such a motion the motion in the form of a motion for leave to amend petition was not filed until date after chicoine and hallett had entered their appearances any error in this regard however is immaterial in view of our disposition of this matter 22on brief petitioners question the assertions in respondent’s motion that all settlement refunds in excess of the amounts provided in the date agreement would go to decastro this assertion however appears to have reflected respondent’s understanding at the time once again in view of our disposition of this matter any error in this respect is irrelevant respondent asserted that the new agreement was unauthorized and had no legal basis if respondent’s motion had been granted the thompsons’ deficiencies would have been zero for taxable_year dollar_figure for and dollar_figure for on date this court granted decastro’s motions for entry of decision in the thompson cases thus holding respondent to the pretrial concessions made by sims and mcwade in the new agreement year deficiency additions to tax --- --- dollar_figure --- big_number --- the tax court’s decision for also relieved the thompsons of the non-kersting late filing addition of dollar_figure under sec_6651 that addition was the only non-kersting issue in the thompsons’ docketed cases respondent did not appeal the decisions entered by the court with respect to the cases of the thompsons and the cravensesdollar_figure 23the cravenses who were not represented by counsel after seery’s withdrawal had agreed with mcwade to deficiencies of dollar_figure for their taxable years and a reduction of only about percent from the originally determined deficiencies of dollar_figure this settlement was less favorable to them percentagewise than the generally available modified 7-percent reduction settlement offer and did not include the burnout feature on date this court entered a decision reflecting the cravens settlement amounts but the decision included the stipulation that certain advance_payments made by the cravenses had not yet been taken into account late in continued the office of chief counsel's rationale for not appealing the tax court's entry of the decisions giving effect to the thompson settlement was set forth in a memorandum dated date and signed by kane the chief_counsel and deputy chief_counsel have concluded that under the circumstances we have completely fulfilled all applicable ethical and legal obligations with respect to this issue and this litigation they have also concluded that given the fact that the conduct on the part of our attorneys is significantly less than exemplary there is nothing to be gained by further prolonging this aspect of the kersting litigation on date judge goffe terminated his recall status as a senior judge and retired from the bench the chief_judge of the tax_court reassigned the kersting project cases to judge renato beghe after this court entered its decisions in the thompson cases izen who had represented the test case petitioners other than the thompsons and cravenses at the trial and who was representing them on their appeals and robert patrick sticht sticht who represents a number of nontest case petitioners filed separate motions with the court to intervene in the thompson and cravens cases on date the court continued date officials in respondent’s western region proposed closing the cravenses’ cases in such a way as to cause the taxpayers’ and accounts to zero out with no further amounts due denied their motions to intervene and izen and sticht filed notices of appeal i implementation and effects of the final thompson settlement this court’s date decisions enforcing the final thompson settlement had a number of financial consequences the court’s decisions not only reduced the thompsons’ deficiencies it also reduced the interest that had accrued on those deficiencies in date and in date the thompsons had paid dollar_figure of interest on their originally settled deficiencies of dollar_figure for and dollar_figure for because the court’s decisions giving effect to the new settlement agreement resulted in deficiencies of only dollar_figure for each of and the interest that had accrued on those deficiencies before the thompsons made their interest payments was much less than dollar_figure instead as of date the interest accruals on the dollar_figure deficiencies for and for amounted to only dollar_figure and dollar_figure respectively as a result the thompsons’ aggregate payments of dollar_figure in date-date were more than sufficient to cover their total deficiencies and interest as eventually reduced by the final thompson settlement in date respondent made new assessments against the thompsons for and that were based upon the decisions entered by the tax_court on date the total assessments for and amounted to dollar_figure tax and interest for of dollar_figure and dollar_figure respectively plus tax and interest for of dollar_figure and dollar_figure respectively respondent applied the dollar_figure credit balance resulting from the thompsons’ payments of dollar_figure in interest to satisfy their dollar_figure liability for and leaving a small credit balance the thompsons’ having remitted dollar_figure in date in respect of their previously settled deficiencies respondent credited dollar_figure of that amount to their account as an advance_payment of tax because the thompsons had no deficiency for under both the earlier settlements and the tax court’s decision giving effect to the new settlement the dollar_figure refund issued in date left a credit balance of dollar_figure accordingly in date respondent issued a refund check for dollar_figure to the thompsons as they had done with their earlier refund the thompsons endorsed this refund check to decastro as payment of additional legal fees without depositing the check in their own checking account decastro thereafter complained to dombrowski that the thompsons were entitled to receive even more from respondent decastro argued that the thompsons were entitled to receive interest on the dollar_figure advance_payment albeit as successively reduced to dollar_figure and then dollar_figure dombrowski requested audit assistance which he received from george guzzardo guzzardo an appeals auditor in respondent’s san diego office in determining whether the thompsons were entitled to the requested interest guzzardo determined that the thompsons’ dollar_figure remittance on date was an advance_payment rather than a cash bond the distinction is important an advance_payment resulting in an overpayment entitles the taxpayer to interest on the overpayment conversely a cash bond does not earn interest having concluded that the previously refunded dollar_figure was an advance_payment guzzardo determined that the thompsons were entitled to additional interest of dollar_figure as of date dombrowski did his own computations and then asked jean samuels samuels an experienced appeals auditor to check his and guzzardo’s figures samuels advised that in the main she agreed with both guzzardo’s and dombrowski’s calculations relatively small differences in their results were attributable to their use of different dates for the accrual of interestdollar_figure on date dombrowski sent bakutes a memorandum requesting approval to refund the interest on the thompsons’ 24samuels saw that the refund included some previously deducted interest thus producing tax_benefit income but stated in her memorandum to dombrowski most taxpayers would probably either not know or not remember to include this tax_benefit income in income since they won’t get a form_1099 for it overpayments with a copy to the national_office bakutes approved the refund in an e-mail message to dombrowski in date respondent issued a refund check to the thompsons in the amount of dollar_figure finally in date respondent issued a refund check of dollar_figure to the thompsons for the check represented an overpayment credit of dollar_figure the amount by which their dollar_figure interest payment exceeded their deficiencies and interest for and after minor adjustments plus accrued interest of dollar_figure on the overpayment credit the thompsons deposited these last two refund checks in their checking account the following table summarizes the payments by the thompsons to respondent as well as the subsequent payments as refunds and interest on refunds by respondent to the thompsons paid_by thompsons dollar_figure date and date payments of interest on deficiencies under original settlement big_number date advance_payment of deficiencies for net of dollar_figure credited to tax_year big_number total amount_paid for years in issue received by thompsons dollar_figure refunded date pursuant to request of mcwade endorsed to decastro dollar_figure refunded date pursuant to request of decastro and endorsed to decastro dollar_figure third refund check dated date for dollar_figure representing interest on overpayment resulting from advance_payment of deficiencies dollar_figure dollar_figure refund with interest of overpayment resulting from application of dollar_figure interest payment against deficiencies and interest total amount refunded by irs for years in issue in sum the thompsons were refunded dollar_figure of the dollar_figure they had paid in deficiencies and interest for of the dollar_figure refunded dollar_figure was paid to decastro as legal fees of this amount dollar_figure was paid to decastro by the thompsons’ endorsement to him of the first two refund checks they received in and the thompsons apparently paid decastro an additional dollar_figure after receiving the third refund check later in on their tax_return the thompsons reported both the dollar_figure interest_income received from the irs in october and the smaller interest payment of dollar_figure received in december their return did not reflect the tax_benefit arising from the fact that while they deducted dollar_figure of deficiency_interest on their and returns dollar_figure for and dollar_figure for the interest on the reduced deficiencies that were ultimately assessed in amounted to only dollar_figure dollar_figure for and dollar_figure for pursuant to written advice from decastro the thompsons deducted the fees paid to him in totaling dollar_figure dollar_figure dollar_figure in computing their taxable_income the description accompanying the deduction claim on the thompsons’ return was legal fees for includable inc j respondent’s disciplinary action against sims and mcwade on date sanchez sent notices of proposed disciplinary action to sims and mcwade the notices asserted that sims and mcwade had violated department of the treasury minimum standards of conduct section a an employee shall avoid any_action which might result in or create the appearance of giving preferential treatment to any person department of the treasury minimum standards of conduct section a an employee shall avoid any_action that might adversely affect the confidence of the public in the integrity of the government and irs rule_of conduct 25the reference to includable inc has not been satisfactorily explained even by poltash whose office prepared the return petitioners urge that the reference is to an entity that never existed the court doubts the reference is to an entity at all but the court’s question to poltash whether the reference was a shorthand reference to includable income as a justification for deductibility under sec_212 met with a protestation of ignorance an employee will not intentionally make false or misleading verbal or written statements in matters of official interest the notices proposed to suspend both sims and mcwade for calendar days without pay mcwade retired from the irs effective date on date acting chief_counsel jordan approved sanchez’s proposed disciplinary action sims was suspended from duty without pay for days and was transferred to the san francisco regional counsel’s office where he was assigned nonsupervisory duties as a special litigation assistant in the general litigation area iv ninth circuit remand and subsequent proceedings a ninth circuit orders in the dufresne case on date the court_of_appeals for the ninth circuit filed a per curiam opinion vacating and remanding this court’s decisions in the remaining test cases on the ground that the misconduct of sims and mcwade required further inquiry dufresne v commissioner f 3d pincite citing 499_us_279 the court_of_appeals observed we cannot determine from this record whether the extent of misconduct rises to the level of a structural defect voiding the judgment as fundamentally unfair or whether despite the government’s misconduct the judgment can be upheld as harmless error accordingly the court_of_appeals remanded the remaining test cases to this court with directions to conduct an evidentiary hearing to determine the full extent of the admitted wrong done by the government trial lawyers id it further directed this court to consider on the merits all motions of intervention filed by parties affected by this case id finally the court indicated that all subsequent appeals will be scheduled before this panel id notwithstanding its general endorsement of allowing parties in related cases to intervene the court_of_appeals for the ninth circuit dismissed attorneys izen’s and sticht’s appeals from this court’s denial of their motions to intervene in the thompson and cravens cases in an unpublished opinion filed the same day as the dufresne opinion the panel of the court_of_appeals that had decided dufresne explained the tax court’s august and decisions entering settlement in the cravens and thompson cases respectively are final sec_7481 fed r app p the tax_court lacks jurisdiction to vacate those decisions 868_f2d_1081 9th cir because there is no case remaining in which the taxpayers can intervene this appeal is moot adair v commissioner 26_f3d_129 9th cir on date the district_court for the district of hawaii entered an order in favor of the united_states that approved the assessment of penalties of dollar_figure and dollar_figure under sec_6700 and sec_6701 against kersting for the promotion of abusive tax_shelters kersting timely appealed in date the tax_court received the mandate of the court_of_appeals in dufresne and the test cases were assigned to judge beghe for further proceedings under the mandate b evidentiary hearing and opinions after the remand in dufresne in response to respondent’s motion for the evidentiary hearing required by the mandate this court following receipt of the record from the court_of_appeals set the test cases for a pretrial hearing to be held date in furtherance of the court of appeals’ directive regarding intervention the court ordered that notice of the hearing be served on all attorneys who had entered appearances on behalf of nontest case petitioners in the kersting project ultimately the court ordered that cases of nontest case petitioners each represented by either izen sticht or attorney robert alan jones jones be consolidated with the remaining test cases for purposes of the evidentiary hearing as a result three groups of petitioners participated in all subsequent phases of the evidentiary hearing test case and nontest case petitioners represented by izen nontest case petitioners represented by sticht and nontest case petitioners represented by jonesdollar_figure 26the group of cases that were consolidated for purposes of the evidentiary hearing initially included the case of william d and karen s booth docket no in which declan j o'donnell o'donnell had entered his appearance however at the start of the evidentiary hearing the court granted continued as directed by the court_of_appeals in dufresne judge beghe conducted the evidentiary hearing at special trial sessions of the court in los angeles california from may and june and date on date on the basis of the record developed at the evidentiary hearing the court issued its supplemental opinion in dixon v commissioner tcmemo_1999_101 dixon iii the court held that the misconduct of the government attorneys in the trial of the test cases did not in the words of the court_of_appeals for the ninth circuit in dufresne constitute a structural defect in the trial but rather resulted in harmless error however the court imposed sanctions against respondent holding that kersting program participants who had not had final decisions entered in their cases would be relieved of liability for the interest component of the addition_to_tax for negligence under sec_6653 and and the incremental interest attributable to the increased rate prescribed in sec_6621 continued o’donnell's motion to sever the booth case from the cases consolidated for the evidentiary hearing o’donnell argued that in light of the theory underlying a motion for summary_judgment that he had filed on behalf of the booths they had no need to participate in the evidentiary hearing in gridley v commissioner tcmemo_1997_210 the court denied o’donnell’s motions for entry of decision consistent with the final thompson settlement on date the court_of_appeals for the ninth circuit affirmed the order of the hawaii district_court that had imposed almost dollar_figure million in penalties against kersting for the promotion of abusive tax_shelters the opinion of the court_of_appeals states the district_court did not err in finding that kersting knew or had reason to know that his statements concerning the allowability of interest were false or fraudulent see sec_6700 the record indicates that kersting knew that his tax_shelters were sham transactions in which participants could write off approximately twelve dollars for every dollar of actual out-of pocket expenses kersting himself indicated in a comfort letter to one of the nervous nellies investing in his scheme that these deductions were not legitimate - kersting warned the individual to be sure this letter does not get into the wrong hands if irs would become aware of the offsetting character of your note you would likely lose your interest_deduction kersting also knew that these fraudulent interest deductions originating in a prior version of his tax_shelter had been previously disallowed by this court see 78_tc_822 denying interest deductions to taxpayers participating in kersting’s tax_shelters because the transactions conducted by kersting’s corporations were shams lacking economic_substance affd 732_f2d_164 9th cir after pike kersting made merely cosmetic changes to his tax_shelter scheme 206_f3d_817 9th cir on date this court issued a supplemental opinion dixon v commissioner tcmemo_2000_116 dixon iv awarding petitioners some of the attorney’s fees they sought for services performed in the evidentiary hearing mandated by the court_of_appeals in dufresne and denying their motions for additional sanctions in so doing the court denied petitioners’ requests for the award of attorney’s fees under sec_7430 on the ground that dixon iii had held that none of them was a prevailing_party as defined in sec_7430 instead the court awarded fees under sec_6673 which authorizes the tax_court to require the united_states to pay excess costs expenses and attorney’s fees whenever the commissioner’s attorneys have multiplied the proceedings in any case unreasonably and vexatiously on the same date the court entered decisions in the test cases and the test case petitioners appealed the court also certified for interlocutory appeal the cases of nontest case petitioners represented by izen jones and sticht who had also participated in the evidentiary hearing and nontest case petitioners represented by o’donnell whose cases were the subject of the court’s opinion in gridley v commissioner tcmemo_1997_210 these nontest case petitioners also appealed c the ninth circuit’s opinion and mandates in these cases on date following extensive motion practice on jurisdiction and other issues the court_of_appeals set a briefing schedule and confirmed that the cases on appeal would be scheduled before the panel that issued the dufresne opinion following receipt of opening and reply briefs from test case petitioners now represented by three sets of attorneys the dufresne panel filed an order indicating that upon reconsideration it would not retain jurisdiction and directing the clerk to schedule the appeal in the normal course of events on date the panel that ultimately issued the opinion in dixon v heard oral argument in the test cases on date the court_of_appeals issued its opinion in the test cases in 316_f3d_1041 9th cir amended on date dixon v vacating and remanding the court’s decisions in the test cases and directing the further proceedings that have resulted in this opinion citing 322_us_238 overruled on other grounds 429_us_17 the court_of_appeals stated 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 dixon v commissioner f 3d pincite the court 27on date the dufresne panel had filed an order directing that the appeals of nontest case petitioners represented by izen sticht jones and o’donnell shall be held in abeyance pending resolution of the appeal in no ie the test cases 28the three sets of attorneys are izen michael l minns and john a irvine and henry g binder of appeals held that fraud on the court occurs regardless of whether the opposing party is prejudiced iddollar_figure the court_of_appeals further stated 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 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 id pincite citations omitted the court_of_appeals instead reversed the decisions of this court in the test cases and directed this court 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 id it left 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 id n 29the court_of_appeals acknowledged the contrary holding of the court_of_appeals for the seventh circuit in 113_f3d_670 7th cir affg tcmemo_1995_209 in drobny the seventh circuit held that proof of fraud on the court requires a showing that the alleged misconduct actually affected the outcome of the case to the taxpayer’s detriment id pincite on date respondent’s then chief_counsel referring to dixon v publicly announced we will assure that no interest is charged on deficiencies for the period of the appeals to the ninth circuit on date deborah butler respondent’s associate chief_counsel for procedure and administration issued a chief_counsel notice cc-2003-008 reminding all chief_counsel attorneys in light of the opinion of the court_of_appeals in dixon v to adhere to the highest ethical standards when performing their duties including when representing the irs before the tax_court on date the court_of_appeals issued orders remanding to the tax_court for further proceedings consistent with the opinion in dixon v the nontest cases that had been appealed pursuant to their certification for interlocutory appeal on date the court_of_appeals issued its mandates with respect to the test cases in accordance with dixon v d proceedings following remand on date respondent filed a motion for a status conference regarding disposition on remand of the test cases and a group of related nontest cases on date this court 30the original decisions in dixon ii were entered date the notices of appeal were filed date the 90-day appeal period would have expired date ordered the parties to file status reports regarding subsequent disposition of the cases the responses displayed various disagreements between respondent and petitioners concerning not only the scope of the remedy but the manner of its implementation for example the status report of petitioners’ counsel henry binder states respondent does not come to this court’s fashioning of the equitable remedy ordered by the ninth circuit with clean hands and therefore has no standing to argue the terms or scope of that remedy the court conducted status conferences in houston texas in date and in los angeles california in date to address petitioners’ attempts to settle the cases the conferences resulted in no settlement the parties then engaged in protracted motions practice regarding assertions of privilege by respondent as to some matters sought in discovery and regarding the award of attorney’s fees claimed by counsel for petitioners on date petitioners filed motions for an evidentiary hearing thereafter at the behest of the parties the court directed further discovery and conducted further hearings the first hearing took place at las vegas nevada in 31having considered certain issues raised in the status reports this court issued an order dated date indicating it was not inclined to consider attempts to disqualify counsel in any of the cases at issue we additionally stated this court is not inclined to seek appointment of counsel from the united_states department of justice to represent respondent in these cases date the second hearing at los angeles california in date and the final hearing at washington d c in date by the end of date the parties had filed their briefs regarding the scope and application of the thompson settlement e further disciplinary proceedings on date the day immediately following the issuance of the dixon iii opinion judge beghe referred the misconduct of sims mcwade and decastro to the committee on admissions ethics and discipline of the tax_court for disciplinary actiondollar_figure in accordance with the court’s practice in such matters the referrals were not mentioned in the dixon iii opinion or otherwise publicized when that opinion was issued on date the court through the committee on admissions ethics and discipline issued orders to sims mcwade and decastro to show cause why they should not be suspended or disbarred from practice before the court or otherwise further disciplined on date decastro resigned from practice before the court 32on date at what then seemed to be the close of the evidentiary hearing izen had filed a motion requesting this court to refer the thompson and cravens settlements and mcwade’s settlement with denis alexander to the doj public integrity section for criminal prosecution izen identified approximately alleged crimes associated with these settlements by order dated date the court denied izen's motion following complaints filed by petitioners’ counsel minns in response to inquiries by the dixon v panel at oral argument the arkansas state bar suspended sims’s license to practice for year in date and the oregon state bar suspended mcwade’s license to practice for years in date this court acting on the orders to show cause and the recommendations of the committee on admissions ethics and discipline suspended mcwade and sims from practice for years commencing february dollar_figure the director of the irs office_of_professional_responsibility suspended mcwade and sims indefinitely from practice_before_the_irs effective date under rule c a practitioner who has been suspended for more than days or disbarred from practice before this court may not resume practice until reinstated by order of the court under rule c if the disciplinary proceeding giving rise to a suspension or disbarment was predicated upon the complaint of a judge of this court a hearing on the petition for reinstatement is to be held before a panel of three other judges appointed by the chief_judge at the hearing on the petition the practitioner shall have the burden of demonstrating by clear_and_convincing evidence that the practitioner 33the first announcement by the court with respect to the referrals was the court’s issuance on date of a press release that disciplinary action had been taken against mcwade and sims decastro’s resignation was not publicized by the court until issuance of the opinion herein has the moral qualifications competency and learning in the law required for admission to practice before this court and that the practitioner’s resumption of such practice will not be detrimental to the integrity and standing of the bar or to the administration of justice or subversive of the public interest id preliminary comments opinion the court_of_appeals has directed that the remaining test case petitioners and all other taxpayers properly before this court receive judgments in their favor on terms equivalent to those provided in the settlement agreement with thompson and the irs dixon v commissioner f 3d pincite the court_of_appeals has left to this 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 in the thompson settlement id n throughout the proceedings required to implement the mandates of the court_of_appeals petitioners impelled by outrage and indignation at the fraud on the court committed by respondent’s attorneys seem to view the mandates as an invitation to award damages against respondent without in any way minimizing the seriousness of the misconduct of respondent’s attorneys we decline any such invitationdollar_figure the mandates do not call for the recovery_of damages by the taxpayers they call for 34in any event we lack jurisdiction to award damages chocallo v commissioner tcmemo_2004_152 sanctions against respondent to be determined in accordance with the ascertainable_standard provided by the dixon v opinion we now broach how in light of the different circumstances of the thompsons and the various groups of affected taxpayers we can follow and apply the directive of the mandates interpreting the term same position used in footnote of dixon v to mean same financial position it might seem at first blush that the test case and nontest petitioners cannot be put in the financial position the thompsons found themselves in as a result of the thompson settlement the thompson settlement was embodied in a sequence of payments and refunds that occurred more than to 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 also the bulk of those refunds was used to pay legal fees the other test case petitioners were not required to pay for representation in the test case trial it should be borne in mind that the thompson settlement occurred in two distinct phases in date into early mcwade and decastro arranged to provide the thompsons a reduction of approximately percent in the originally determined deficiencies this version of the settlement took account of respondent’s increased litigation risk resulting from chicoine and hallett’s efforts to suppress the evidence discovered in the irs raid on kersting’s office other kersting petitioner clients of decastro and chicoine and hallett obtained 20-percent reduction settlements from mcwade prior to the court’s opinion in dixon i and some other nontest case petitioners thereafter obtained such settlements the thompsons’ payments to the irs in late and in were made to satisfy their obligations under the approximately 20-percent reduction settlement arranged by mcwade and decastro decastro thereafter played on the fears of sims and mcwade that he would walk away from the test case trial to extort the additional reduction agreed to in late and early that would generate the refunds that were to be used to pay his fees for providing legal representation to the thompsons at the trial the new thompson settlement had no rationale quantifiably related to the hazards_of_litigation or the merits of the case it was based on the opportunistic estimates of mcwade and decastro of what was needed to bring about a particular financial result that has little or no congruence with the situation in which the petitioners before the court now find themselves the fact that the thompsons had already made the payments required by the earlier 20-percent reduction settlement provided the fund that was ripening for the taking under the new settlement as it turned out the overall reduction of approximately percent in the thompson deficiencies provided by the new settlement was more than enough to produce the approximately dollar_figure of refunds mcwade and decastro thought would be needed to pay decastro’s original estimate of what his fees would be as it further turned out the additional interest on the thompsons’ payments under the original settlement was sufficient to provide decastro with an additional fee that he and perhaps mr thompson probably felt was justified by his success in keeping the new settlement in effect as well as leave a surplus to be retained by the thompsonsdollar_figure test case and nontest case petitioners in the main fall into two groups both of which are now in different situations from the situation of the thompsons years ago it is the court’s impression that a substantial majority of nontest case petitioners are in the unhappy situation of having followed kersting’s advice to stand pat they neither settled their cases nor made any remittances in respect of the deficiencies determined against them with the passage of years and the operation against them of the force of compound interest they claim that they have been facing financial ruin with all it sec_35the lack of legal rationale and the opportunistic character of the new settlement are emphasized by the fact that it was entered into after the litigation risk that supported the original 20-percent reduction settlement had evaporated with the publication of this court’s opinion in dixon i attendant anxieties this is because they did not have the foresight or the discipline to invest the chimerical tax savings they had appropriated by using the kersting shelters to support their original return positionsdollar_figure on the other hand there are a minority of petitioners who without conceding their liabilities have stopped the running of interest against themselves by prepaying the kersting deficiencies the irs had determined against themdollar_figure with the passage of time and the operation in their favor of the force of compound interest this minority of petitioners are entitled under the dixon v opinion and mandates to substantial refunds and properly so a further comment the financial burden of petitioners who did not prepay has been substantially ameliorated--but not completely eliminated--by respondent’s concession that no interest will be charged on deficiencies for the period of the 36the bulk of petitioners in the kersting project appear to have been commercial airline pilots there is no evidence in the record of their financial sophistication or lack thereof either individually or as a group 37the court understands that this group includes the remaining test case petitioners with the exception of the dixons who received a discharge_in_bankruptcy by collecting the deficiencies from the test case petitioners because of their failure_to_file appeal bonds cf estate of kanter v commissioner tcmemo_2006_46 respondent has put those petitioners in the advantageous position of being entitled to collect substantial refunds on which interest has been accruing and compounding over the years without attracting current annual tax_liabilities of course the interest component of those refunds will be includable in gross_income of the recipients when finally paid appeals to the ninth circuit that concession prompted by respondent’s recognition of responsibility for the delay in resolving the kersting project cases caused by the need to investigate the misconduct of respondent’s attorneys seems appropriate but also generous even if there had been no misconduct by respondent’s attorneys the appeals filed by test case petitioners before the misconduct was discovered would have taken some substantial time beyond date to resolve the amelioration is substantial because it has stopped the further accrual and compounding of interest on the deficiencies for more than years the amelioration is not complete because many petitioners have deficiencies going back to the late 1970s and early 1980s the bottom line is that in the absence of the misconduct petitioners who did not prepay would have been required to pay substantially more than they will be required to pay under the mandates moreover they will be entitled to pay these reduced amounts many years later than would have been necessary if there had been no misconduct as a result of respondent’s concession they have had the use of the money due for their reduced deficiencies for more than additional years stated differently they have enjoyed for more than years the equivalent of an interest-free_loan of the reduced deficiencies and interest they will now have to pay in sum this court has determined the terms of the thompson settlement our decisions in these cases will apply those terms to test case and nontest case petitioners alike subject_to the review of the court_of_appeals our opinion and decisions will provide the template for the disposition of the more than big_number pending cases in the kersting project the thoughts underlying the foregoing comments have informed our effort not only to determine and apply the terms of the thompson settlement but also our effort to put petitioners to the extent possible and practicable in positions similar to that provided by the thompson settlement although it may be impossible to put petitioners in the same position financial or otherwise the thompsons were in to years ago we observe that the code provisions for interest on deficiencies and overpayments in which are embedded the time_value_of_money principles that underlie all financial planning provide the only available appropriate means of approximating the desired equivalencedollar_figure sec_6601 sec_6611 39see generally eg brealey myers principles of corporate finance 7th ed 40gokhale smetters measuring social security’s financial outlook within an aging society daedalus n winter comment that discounting to present_value an operation integral to giving effect to the time_value_of_money makes it possible to place dollars accruing at different points in time continued for two reasons those petitioners who prepaid will receive refunds many times greater than the thompsons received most of those petitioners probably made payments equal to their originally determined deficiencies not just percent thereof like the thompsons and their refunds will be exponentially increased by interest accruals because they have had to wait much longer than the thompsons did to receive their refunds on the other hand those petitioners who unlike the thompsons did not prepay will have deficiencies that will be reduced in the same proportion as the thompsons’ deficiencies were finally reduced under the settlement although they will still have to pay those reduced deficiencies with interest accruing until mid-1992 their interest obligation will have been substantially reduced by respondent’s concession we conclude these comments by again observing that these petitioners will still be substantially better off financially than they would have been in the absence of respondent’s misconduct and so should it be in accord with the sanction the court_of_appeals has fixed as the appropriate judicial response to the misconduct of respondent’s attorneys continued on an equal valuation scale i procedural issues following remand a procedural posture these cases are before the court pursuant to the dufresne and dixon v opinions and mandates of the court_of_appeals for the ninth circuit they therefore present issues in a procedural posture diametrically different from the standpoint from which we usually redetermine income_tax deficiencies or overpayments arising from notices of deficiency or refund claims here the traditional roles of petitioner and respondent are reversed in this phase of the proceedings it is respondent not petitioner whose activities are being questioned it is respondent not petitioners who is charged with having the necessary records and the personnel who have recollections regarding the matters at issuedollar_figure because of the unique posture of this case it is respondent not petitioner who often argues that a deduction has been properly claimed and allowed and thus should not be included as one of the taxpayer benefits of the thompson settlement while petitioners argue the contrary 41it should be noted that following the remand in dixon v neither side called decastro mcwade or sims as a witness we understand that decastro is seriously ill so he was not available we have no such information about mcwade or sims perhaps their previous failures to persuade this court of their credibility discouraged both sides from calling them b law of the case the court_of_appeals for the ninth circuit recently explained the law_of_the_case_doctrine as follows the law_of_the_case_doctrine requires a district_court to follow the appellate court’s resolution of an issue of law in all subsequent proceedings in the same case 243_f3d_1181 9th cir the doctrine applies to both the appellate court’s explicit decisions as well as those issues decided by necessary implication 51_f3d_178 9th cir quoting 880_f2d_149 9th cir 394_f3d_1254 9th cir in relying upon its inherent authority to sanction the irs by extending the benefit of the thompson settlement to all interested parties the court_of_appeals by necessary implication concluded that the doctrine_of inherent authority trumps the doctrine_of sovereign immunity the latter generally prohibiting the imposition of monetary sanctions against the united_states absent the express consent of congress dollar_figure we therefore are not concerned with that issue 42the principle that a court has inherent power to impose sanctions is well established it has long been understood that ‘ c ertain implied powers must necessarily result to our courts of justice from the nature of their institution ’ powers ‘which cannot be dispensed with in a court because they are necessary to the exercise of all others ’ 501_us_32 quoting united_states v hudson u s cranch c parties before the court the opinion of the court_of_appeals directs this court to enter judgment in favor of appellants and all other taxpayers properly before this court dixon v commissioner f 3d pincite in a technical sense the dixon v opinion and the implementing mandates might be deemed to extend only to those parties who filed notices of appeal see 859_f2d_115 9th cir we believe however that the court_of_appeals did not intend a technical restricted application of its opinion and mandates nor apparently do the parties following the hearings in these cases the parties filed a stipulation of settled issues among other things that stipulation recites the kersting deficiencies of any petitioner who has filed a piggyback_agreement with the tax_court shall be determined in accord with the ninth circuit’s mandates as implemented by the tax_court on remand in this proceeding the kersting deficiencies of any petitioner in a case docketed before the tax_court who has not filed a piggyback_agreement will absent a showing of cause be determined in accord with the ninth circuit’s mandates as implemented by the tax_court on remand in this proceeding we read these stipulations to apply to all open cases of petitioner participants in the kersting tax_shelter programs in other words the parties have agreed--and properly so--that the sanction applies to benefit not only to test case petitioners but also to nontest case petitioners in all remaining docketed cases in the kersting project whether or not they signed piggyback agreements d burden_of_proof in our dixon iii opinion we noted several factors that impelled us to impose the burden_of_proof on respondent with respect to whether the misconduct of respondent’s attorneys resulted in a fundamental defect or in harmless error those same factors apply to the present proceedings concerning the scope and application of the thompson settlement as in dixon iii respondent has had direct and immediate access to the critical witnesses and most of the relevant documents since date when the misconduct of respondent’s attorneys first came to light further respondent conducted an internal investigation of that misconduct without the participation of outside parties soon after discovering the misconduct petitioners on the other hand have had to rely on discovery and circumstantial evidence plus whatever evidence respondent has revealed voluntarily petitioners have been far less favorably situated than respondent to produce the factual record needed to decide these cases on remand furthermore and finally as we have previously observed these cases are not in the normal deficiency posture and it is the misconduct of respondent’s attorneys that is under review accordingly we again conclude that the interests of justice are better served by placing the ultimate burden_of_proof and persuasion on respondent and we so holddollar_figure see 512_f2d_882 9th cir affg tcmemo_1972_133 we recognize that imposing the burden_of_proof on respondent may put respondent in the difficult position of having to prove a negative ie that a given outcome or transaction involving the thompsons was not a result of the thompson settlement in other circumstances when a taxpayer has the burden of proving the negative of a proposition such as proving the nonreceipt of income the court_of_appeals for the ninth circuit requires the commissioner to produce at least some substantive evidence linking the taxpayer to the income-producing activity see 596_f2d_358 9th cir respondent must offer some foundational support of the receipt of such income revg 67_tc_672 accordingly in the matter at hand it is appropriate to require petitioners to 43petitioners have filed a motion as supplemented by a later motion asking the court to assign the burden_of_proof to respondent on specified issues in so doing petitioners aver that they do not seek a general allocation of the burden_of_proof to respondent respondent has objected to these motions quoting 83_tc_309 n for the proposition that the court has never in any context invoked such a sanction our action in dixon iii in shifting the general burden_of_proof and persuasion to respondent in that phase of these proceedings belies respondent’s objections we have concluded that no useful purpose would be served by addressing petitioners’ motions on an issue-by-issue basis suffice to say we have assigned the burden_of_proof and persuasion to respondent on each issue of fact that bears on the scope and terms of the thompson settlement produce at least some substantive evidence indicating that asserted benefits to the thompsons are the result of the thompson settlement at least when respondent is in the position of having to prove the contrary in this regard it is appropriate for petitioners to rely upon circumstantial evidence although here as in other contexts ‘mere suspicion or speculation does not rise to the level of sufficient evidence’ see 17_f3d_1192 9th cir quoting 922_f2d_508 9th cir finally we believe the factual issues regarding the operative terms and scope of the thompson settlement now that the existence and overall significance of the misconduct have been determined do not present policy considerations that require a heightened standard of proof such as the requirement of clear_and_convincing proof of fraud imposed by our rule b in deficiency cases that we applied in dixon iii against respondent in an earlier phase of these proceedings accordingly we hold that the quantum or level of respondent’s burden is a preponderance_of_the_evidence the traditional quantum or level of proof required under rule a and the case law thereunderdollar_figure this is the same standard to which we and 44petitioners have not sought to allocate the burden_of_proof to respondent on the ultimate question of whether the thomson settlement is characterized as a 20-percent reduction in deficiencies plus the payment of the thompsons’ legal fees or continued other courts have for many years held taxpayers on questions of general tax_liability and we believe that this is the appropriate standard to apply to respondent in this phase of the proceedings see rule a 290_us_111 am pipe steel corp v commissioner 243_f2d_125 9th cir affg 25_tc_351 ii defining and applying the thompson settlement a overview in al-safin v circuit city stores inc f 3d pincite the court_of_appeals reminded us that its opinion may be consulted to ascertain what was intended by the mandates in dixon v the court_of_appeals described the basis of the secret settlement agreements with the thompsons and the cravenses as follows a condition of their settlements required thompson and cravens to remain test case petitioners with respect to thompson mcwade agreed to have thompson’s tax deficiencies reduced in proportion to his attorney’s fees which exceeded dollar_figure dixon v commissioner f 3d pincite fn ref continued as a 62-percent reduction see part c infra we observe that the significant evidentiary facts on this issue are not in dispute so that the burden_of_proof does not enter into what we see as a problem of legal characterization therefore the question does not arise whether we should employ some heightened standard of proof such as strong_proof or clear_and_convincing proof that might otherwise arise when a party to a transaction seeks to disregard the form employed our resolution of this issue does not depend on the allocation or standard of the burden_of_proof omitted the court_of_appeals further described the thompson settlement as a vehicle for paying thompson’s attorney’s fees notwithstanding mcwade’s testimony that the settlement was attributable to a separate transaction id at dollar_figure the opinion of the court_of_appeals displays its understanding that the thompson settlement was a covert transaction a secret settlement agreement that was a vehicle to provide the thompsons with advantages--including payment of attorney’s fees through a drastic reduction of deficiencies and elimination of kersting and non-kersting additions--over and above those offered to other taxpayers thus while our sanction should put the other affected taxpayers in the position of having received the benefits the thompsons received those benefits should be fairly traceable to the sanctionable conduct of respondent’s counsel mcwade and sims as we informed the parties in an order dated date 45the reference to a separate transaction is to the thompsons’ participation in the bauspar program in his brief to the court_of_appeals izen explained that mcwade and sims had misled this court by denying that the thompsons sic settlement was a vehicle for paying decastro’s legal fees for representing the thompsons at the trial of the test cases and by testifying that the thompsons sic settlement was attributable to the thompsons’ participation in the bauspar program additionally as we observed in dixon iii mr mcwade testified that the thompsons’ settlement was revised in the summer of in order to dispose_of the bauspar issue mr mcwade denied that the thompsons’ settlement was revised to provide a means for the thompsons to pay mr decastro’s attorney’s fees the mere fact that the thompsons received a tax_benefit is insufficient to enable the court to conclude that the benefit was part of the settlement with respect to each item it is also necessary to show or find it appropriate to assume that respondent’s counsel played an enabling or facilitating role in procuring or assuring the benefit to the thompsons b areas of agreement the parties’ stipulation of settled issues in addition to delineating the beneficiaries of the court of appeals’ mandates see supra part i c establishes some common ground regarding the relief to which those beneficiaries are entitled the burnout element of the thompson settlement is as follows a b for taxpayers with 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 for taxpayers with 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 no petitioner will incur any penalties stemming from such petitioners’s sic kersting deficiencies we incorporate the foregoing stipulations in the relief we announce todaydollar_figure as for the deficiencies themselves petitioners and respondent have agreed that the originally determined kersting deficiencies should be reduced in proportion to the monetary benefit the thompsons received as a result of the new agreement between mcwade and decastro as petitioners explain to determine a percentage reduction of aggregate deficiencies requires a numerator and denominator the numerator being the amount the thompsons actually paid under the settlement and the denominator being the amount they would have paid absent the settlement we agree with the initial caveat that inasmuch as the parties address both interest and kersting-related penalties elsewhere we disregard those items in determining what the thompsons paid the numerator and would have paid the denominator 46we do not adopt all aspects of the parties’ stipulation of settled issues see infra note 47actually the resulting percentage would represent the proportion of proposed deficiencies that affected taxpayers would be required to pay to obtain the percentage reduction it will be necessary to subtract the percentage so found from percent c starting point the thompsons’ settlement of proposed deficiencies for respondent’s position respondent’s characterization of the thompsons’ settlement of their deficiencies as set forth in a status report dated date has remained constant throughout the proceedings on remand from dixon v respondent maintains from a substantive standpoint that the thompsons’ settlement of their deficiencies amounted to a reduction of the deficiencies plus payment of the thompsons’ attorney’s fees incurred with respect to the actual trial of the test cases resulting in the opinion in dixon v commissioner tcmemo_1991_614 dixon ii in other words respondent maintains that the settlement fraction numerator-- the amount the thompsons actually paid under the settlement --is dollar_figure the amount of tax the thompsons remitted to the irs in date in respondent’s view the settlement should not reflect the additional dollar_figure reduction in tax plus the accompanying interest reductions that generated the refunds of dollar_figure in date and dollar_figure in date49 that were signed over to decastro nor the interest refunds on the resulting overpayment sec_48more accurately dollar_figure percent from dollar_figure to dollar_figure 49respondent applied the remaining dollar_figure to the thompsons’ tax_year that funded an additional fee payment to decastro later in and still left over something that was retained by the thompsons respondent argues that because none of the other petitioners test case or nontest case incurred attorney’s fees for the test case trial all such fees were paid_by kersting those petitioners would receive an economic windfall if we were to use the actual 62-percent reduction in the thompsons’ deficiencies as the starting point for our remedy respondent reasons that the 62-percent characterization would provide a benefit to petitioners the reduction in their proposed deficiencies by an additional percent that the thompsons did not enjoy due to their implicit obligation to turn over the bulk of the resulting refunds to decastro as payment for legal services that conferred no discernible benefit to them respondent further argues that the relatively small portion of the refunds of tax and interest ultimately retained by the thompsons dollar_figure out of dollar_figure is rendered even more insignificant by the fact that the thompsons reported almost twice that amount dollar_figure as gross interest_income received from the irs in on which they paid taxdollar_figure in sum respondent argues the sweetener embodied in the final settlement respondent overlooks the fact that the refunds of dollar_figure of taxable interest_income reported by the thompsons for were substantially exceeded by the dollar_figure deduction for legal fees claimed by and allowed to them for that year that was achieved by increasing the deficiency reduction percentage from percent to percent in effect should be disregarded because the refunds generated thereby purchased nothing of value and provided at most a de_minimis increase in the thompsons’ net worthdollar_figure petitioners’ position in sharp contrast petitioners view the thompsons’ settlement of their deficiencies strictly in terms of the percentage reduction in the total amount of tax the thompsons were required to pay thus petitioners maintain that the starting point for determining the percentage reduction in deficiencies to which they are entitled is dollar_figure percent representing the final total reduction of the thompsons’ proposed deficiencies for the years at issue from dollar_figure to dollar_figure in addition to their argument that the form of the thompsons’ settlement of their deficiencies percent reduction provides the starting point for determining the appropriate sanction in these cases petitioners dispute respondent’s assertion that the payment of decastro’s fees wa sec_51a more nuanced adoption and application of respondent’s argument might arrive at some percentage between percent and percent by increasing the percent to reflect the amount of the refunds actually retained by the thompsons or the amount they expected or were expected to retain after their endorsement over to decastro of the first two refunds neither side has advanced such an argument one of the substantive elements of that settlement petitioners urge that the evidence does not support a finding that the thompsons’ use of the refunds generated by the final reduction in deficiencies was restricted in any way they point to some inconsistencies in the estimate of total fees that decastro had given to mcwade as well as decastro’s initial reluctance to acknowledge that respondent had arranged to pay his fees accordingly petitioners argue that the substance of the thompsons’ settlement of their deficiencies did not depart from the form in which respondent provided it--that is a reduction of dollar_figure percent in the deficiencies originally determined for those years analysis as a threshold matter we do not believe that the inconsistencies perceived by petitioners outweigh the direct and circumstantial evidence that in substance the thompsons’ settlement of their deficiencies was in the words of the court_of_appeals a vehicle for paying thompson’s attorneys’ fees the preponderance_of_the_evidence shows that when they made their final deal mcwade and decastro intended that the refunds generated by the final reduction of the thompsons’ deficiencies would go to decastro in payment of his fees the fact that the thompsons endorsed the first two refunds--two checks totaling dollar_figure--directly to decastro’s law firm confirms that intention in a telephone call with bakutes on date decastro himself conceded that the refunds were intended as a means of paying his fees although we recognize that the payment of decastro’s fees was an essential element of the thompsons’ settlement of their deficiencies it does not follow that respondent’s characterization of that settlement 20-percent reduction in deficiencies plus payment of attorney’s fees must prevail from a practical standpoint respondent overlooks the fact that the refunds generated by the reduction in deficiencies exceeded the legal fees they were intended to defray more importantly inasmuch as the court_of_appeals has taken us to task for twice failing to equitably resolve a situation in which respondent’s attorneys committed fraud on the court we believe respondent should be held to the form of the new settlement that is we do not think it appropriate to define the thompsons’ settlement of their deficiencies only by reference to its asserted substance which would require respondent to reduce the proposed deficiencies of the affected taxpayers by only percent this would be the practical effect because although respondent would also be required to reimburse the affected taxpayers for attorney’s fees none of the affected taxpayers paid any such fees dollar_figure we instead think it appropriate to hold respondent to the form of the transaction adopted by his misbehaving attorneys ie the reduction of the thompsons’ deficiencies by dollar_figure percent without regard to the fact that the thompsons used the bulk of the refunds generated thereby to pay decastro’s fees we recognize that in the usual case it is taxpayers who are held to the form of the transaction they have adopted once a party has chosen to organize his affairs in a certain fashion he must accept the tax consequences of his choice whether contemplated or not and may not enjoy the benefit of some other route he might have chosen to follow but did not 417_us_134 on the other hand respondent generally may disregard the taxpayer’s form and if that form is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute 308_us_473 we also recognize that in these cases the traditional roles of petitioner and respondent have been reversed requiring respondent to assume the procedural posture of a taxpayer does not necessarily prohibit respondent from asserting substance over form we have in mind the following 52the attorney’s fees incurred by petitioners for which respondent may be liable relate to further proceedings required by the misconduct of respondent’s attorneys and are in no way analogous to the thompsons’ fees to decastro for his representation in the original trial in dixon ii comment of judge wisdom the taxpayer too has a right to assert the priority of substance--at least in a case where his tax reporting and actions show an honest and consistent respect for the substance of a transaction weinert v commissioner 294_f2d_750 5th cir affg 31_tc_918 dollar_figure our difficulty with respondent’s assertion of the priority of substance arises from the failure of respondent’s actions to show an honest and consistent respect for the substance of the transaction here respondent through his former attorneys did not show respect for the substance of the transaction mcwade and sims tried to hide the settlement from their supervisors from the other parties and from the court as we have seen and the court_of_appeals has noted dixon v commissioner 316_f3d_1044 n when thompson was about to reveal his settlement in open court mcwade immediately steered him to another subject nor did respondent’s attorneys manifest a consistent respect for the substance of the transaction in substance the thompsons’ settlement of their deficiencies was a vehicle for payment of their attorney’s fees but respondent again through his former attorneys who perpetrated the fraud characterized it as a refund of taxes to the thompsons that was solely attributable to bauspar see smith substance over form a taxpayer’s right to assert the priority of substance tax law we therefore reject respondent’s assertion of substance over form we shall instead apply to respondent the nondisavowal principle of commissioner v natl alfalfa dehydrating milling co supra pincite that a party who has chosen to organize his affairs in a certain fashion must accept the tax consequences of his choice whether contemplated or not and may not enjoy the benefit of some other route he might have chosen to follow but did not we believe the settlement of the thompsons’ deficiencies must be applied by giving effect to their receipt of the entire amount of the refunds rather than by disregarding such receipt as a mere formality in the process of what was in substance respondent’s manipulation of the tax administrative process to use the thompsons as a conduit to pay decastro’s fees we are not content to rest our conclusion solely by invoking the nondisavowal principle to hold respondent to the form of the transaction to do so might give rise to the implication that we have disregarded the substance of the transaction if we did no more than disregard the substance of the thompson settlement by upholding its form respondent might well impeach our conclusion by arguing that we thereby would have disregarded the mandate of the court_of_appeals for the ninth circuit to put all petitioners in the same position as provided in the thompson settlement we therefore push the analysis further by observing that our conclusion accords with principles of federal income_taxation developed by the supreme court in analogous situations specifically our treatment of the thompson settlement is analogous to the treatment of taxpayers who are held to have received gross_income even though that income was paid directly to a third party petitioners cite 279_us_716 in which the supreme court held that an employer’s payment of its employees’ income taxes should be recognized as a taxable_payment of additional compensation to the employeedollar_figure our conclusion is supported by the recent decision of the supreme court in 543_us_426 there mr banks settled an employment discrimination suit for dollar_figure and pursuant to a contingent_fee arrangement paid his attorneys dollar_figure of that amount the supreme court held that the dollar_figure fee amount was includable in the gross_income of mr banks notwithstanding his preexisting obligation to pay 54we note that the thompsons did not report as gross_income the first refund of dollar_figure presumably because it was a refund of tax they had previously paid moreover they did not claim that amount as a deduction under sec_212 when they endorsed the check for that amount to decastro as a partial payment on account of his legal fees although their failure to claim the deduction operated as a tax detriment to the thompsons there is no evidence that their forbearance was in any way related to the deal with mcwade approximately one-third of his total recovery to his lawyersdollar_figure we read the supreme court’s opinion in banks as confirming and applying the general principle that the portion of a settlement that is dedicated to the payment of the plaintiff’s attorney’s contingent_fee is still regarded as received by the plaintiff even though he is not expected or entitled to retain it our conclusion is guided also by the fact that the court_of_appeals has specifically directed us to provide the equivalent of the thompson settlement as a sanction against respondent we do not believe that the court_of_appeals contemplated the application of this aspect of the thompson settlement in the way that respondent urges that is as a 20-percent reduction in proposed deficiencies together with the hollow requirement that respondent reimburse the many other affected petitioners for attorney’s fees that in fact they never incurred if we did so 55we note that in 114_tc_399 affd 259_f3d_881 7th cir a majority of this court upheld respondent’s contention that the taxpayers were chargeable with the receipt of gross_income on the portion of a settlement that was used to pay their attorney under a contingent_fee arrangement in kenseth the taxable_year was the taxable_year for which in the matter at hand respondent contends that we should disregard as a formality the thompsons’ receipt of the second refund they used to pay their attorney we observe that our hewing to the form of the transaction as generating refunds of tax and interest to the thompsons obviates any argument by petitioners that the thompsons received a tax_benefit in not being required to report as gross_income the receipt of the refund of tax that enabled them to make their first installment_payment of decastro’s attorney’s fees we would not be applying the equivalent of the thompsons’ settlement instead we would be applying essentially the same 20-percent reduction settlement that mcwade extended to other taxpayers including other clients of chicoine and hallett and decastro the monetary benefit of which respondent would have been content to allow the thompsons to retain we believe the modest deficiency reduction percentage urged by respondent would not provide an appropriate sanction for misconduct that the court_of_appeals has held to be a fraud on this court to adopt respondent’s view would be to ignore the financial terms and effects of the final settlement that was sweetened for the illicit purpose of creating the fund from which decastro’s trial fees could be paid we conclude that the court_of_appeals intended that the thompsons’ secret agreement with respect to to the extent it reflected the reduction of deficiencies to dollar_figure for those years is to be applied as a reduction of dollar_figure percent in the kersting deficiencies of the affected taxpayers rather than the 20-percent reduction urged by respondent or some intermediate percentage based upon the actual or expected amounts of the refunds to be retained by the thompsons after payment of decastro’s fees see supra note in terms of the settlement fraction discussed above we begin with a numerator of dollar_figure the total tax_deficiency the thompsons paid and a denominator of dollar_figure the tax deficiencies the thompsons would have paid absent the settlement d other_benefits relating to the thompsons’ tax_year elimination of the thompsons’ late filing non-kersting addition for petitioners maintain that the denominator of the settlement fraction should be increased by dollar_figure representing the late filing addition in the thompsons’ statutory notice for that they would have had to pay absent the settlement of their tax years we disagree respondent’s proposed application of non-kersting penalties and additions was specific to individual taxpayers unlike the kersting-related deficiencies and additions for which all affected taxpayers are liable for that reason we believe it is appropriate to limit the benefit of this aspect of the thompson settlement relief from liability for non-kersting additions to those affected taxpayers who like the thompsons were subject_to non-kersting additions we therefore deal with this aspect of the thompson settlement separately from our determination of the percentage reduction in kersting deficiencies that will apply to all affected taxpayers see infra part ii g respondent’s failure to address the bauspar issue in the thompsons’ statutory notice for as discussed above the thompsons began participating in the bauspar program in respondent’s notice_of_deficiency with respect to the thompsons’ tax_year did not disallow the dollar_figure claimed by the thompsons on their return as home mortgage interest interest that was probably attributable to the bauspar program by date when the thompsons filed their petition in this court for respondent was generally precluded from revising the statutory notice to include the bauspar issue see sec_6212 because that cutoff date predates the thompsons’ retention of decastro by more than a year respondent’s failure to include the bauspar issue in the statutory notice for could not have been part of the secret settlement agreement between decastro and mcwadedollar_figure e benefits to the thompsons relating to years other than in general respondent maintains that the only years covered by the thompson settlement were the thompsons’ taxable years before the court in this proceeding petitioners on the other 56respondent presumably could have raised the bauspar issue later by seeking leave to amend his answer in the thompsons’ tax_court case see sec_6214 rule a rule a shifting the burden_of_proof to the commissioner with respect to the increased deficiency for reasons discussed infra in part ii e we need not concern ourselves with that possibility hand maintain that the thompson settlement covered a number of years between and thereby increasing the percentage reduction in kersting deficiencies to which they are entitled to dollar_figure percentdollar_figure they base this percentage on their calculation that absent the settlement the amount of taxes the thompsons would have paid respondent for the taxable years and was dollar_figure while the amount they actually paid was dollar_figure dollar_figure reduced by dollar_figure that respondent maintains mr thompson improperly received as reimbursement for his travel to hawaii to testify in the dixon ii trial we examine various suspect benefits belowdollar_figure 57in a separate brief petitioners’ counsel sticht argues for a cashflow approach to the calculation of the reduction percentage which would bring the initial reduction percentage to percent of petitioners’ aggregate deficiencies additions and interest without closely following the mechanics of sticht’s calculation we reject the cashflow approach out of hand it completely disregards the time_value_of_money principles that underlie our preliminary comments see text accompanying note sec_38 sec_39 and sec_40 supra we also note that in the course of the evidentiary hearing required by the dixon v mandates petitioners’ counsel o’donnell and jones filed motions for summary_judgment of 100-percent discount as a sanction we denied the motions and the motions for reconsideration of our denials because of numerous outstanding issues of material fact with the completion of the evidentiary hearing and issuance of our opinion herein we now regard petitioners’ motions to characterize the thompson settlement as a 100-percent reduction in the kersting-related deficiencies as having been denied on the merits 58we note that petitioners do not question the settlement of the thompsons’ tax_year which was apparently the first year for which the thompsons claimed kersting deductions in any continued the thompsons’ escape from kersting liability with respect to as discussed earlier the thompsons claimed kersting and probably bauspar deductions on their return sufficient to reduce their adjusted_gross_income of dollar_figure to dollar_figure respondent took no action with respect to that return and the generally applicable 3-year period of limitations for the thompsons’ tax_year expired in date given the fact that the thompsons did not retain decastro until date respondent’s failure to act on the thompsons’ return before the expiration of the 3-year period of limitations could not have been part of the secret settlement agreement between decastro and mcwade petitioners nevertheless maintain that the thompsons’ escape from kersting liability with respect to is attributable to the decastro mcwade agreement in support of that argument they point to decastro’s date letter to mcwade which states we have agreed that the total taxes due for all the open years are dollar_figure for and dollar_figure for emphasis added petitioners then argue that the thompsons’ tax_year was still fair game at that time because mr thompson’s fraud rendered the statute_of_limitations inapplicable pursuant to continued event that settlement was consummated in early to mid-1986 before decastro came on the scene sec_6501 they argue that mr thompson was liable for fraud because he had claimed kersting deductions even though he believed he wouldn’t have to pay the notes petitioners’ arguments are farfetched allegations of fraud are serious business the grounds for asserting civil_fraud were succinctly explained in 394_f2d_366 5th cir quoting 264_f2d_930 5th cir affg t c memo fraud implies bad faith intentional wrongdoing and a sinister motive it is never imputed or presumed and the court should not sustain findings of fraud upon circumstances which at most create only suspicion negligence whether slight or great is not equivalent to the fraud with intent to evade tax named in the statute the fraud meant is actual intentional wrongdoing and the intent required is the specific purpose to evade a tax believed to be owing mere negligence does not establish either we amplified these requirements in fields v commissioner t c memo to succeed in the instant case respondent must show that he had a reasonable basis for believing that he could prove his allegation of petitioner’s fraud by clear_and_convincing evidence see eg 88_tc_1329 more particularly he must show that he had a reasonable basis for believing that he could prove by clear_and_convincing evidence that petitioner willfully intended to evade a tax she believed to be owing in fields where we found that respondent lacked a reasonable basis for asserting fraud we awarded attorney’s fees to the petitioner under sec_7430 see also benson v commissioner tcmemo_2004_272 when decastro wrote to mcwade confirming their deal respondent had not asserted fraud for any of the thompsons’ taxable years that were before the court in all three of which the thompsons had claimed substantial kersting-related deductions respondent in fact has not asserted fraud charges against any of the test case or nontest case petitioners with respect to kersting deficiencies nor for that matter did respondent even assert fraud charges against kersting himself when respondent issued a deficiency_notice to kersting for his failure to report more than dollar_figure million of fee income he received over a 7-year period from the kersting project petitioners through his alter ego corporations see kersting v commissioner tcmemo_1999_197 nor do we believe the facts of the thompsons’ case would support an assertion--much less a finding--of fraud against mr thompson petitioners point to mr thompson’s trial testimony in which he admitted that he had taken kersting deductions while believing the debt to which the deductions related would not have to be repaid we believe this testimony is true and consistent with our findings in dixon ii and dixon iii regarding the kersting shelters we further believe this testimony falls far short of demonstrating by clear_and_convincing evidence that by claiming the kersting deductions mr thompson specifically intended to evade a tax known to be owing our skepticism is based upon our perception that charging mr thompson with fraud in these circumstances would attribute to mr thompson substantially more knowledge of tax law than he ever had when his tax_return was filed mr thompson was a retired airline pilot who like more than big_number of his colleagues duped by kersting unwisely bought into a spurious tax_shelter petitioners apparently would have us accept the proposition that mr thompson was familiar with the laws governing the deduction of interest payments where there is some question whether the taxpayer involved is personally at risk this court had substantial opportunity to evaluate the credibility of mr thompson who testified for days during the evidentiary hearing mandated by dufresne we found no basis for suspecting him of fraud to the contrary if he had engaged in fraud we doubt he would have admitted that he didn’t think he was personally at risk on the kersting notes instead we concluded that his testimony at the test case trial was truthful more to the point we believe mr thompson’s true beliefs are those shown by his letter to mcwade dated date in this letter mr thompson expressed his anger and confusion at the part he had been made to play by the machinations of decastro and mcwade i received a check from irs in the amount of thirty thousand dollars-- dollar_figure i endorsed this over to decastro law corp this did not retire the billed amount i am completely amazed at the billings we are receiving i am now in receipt of additional billings that exceed realistic amounts in fact the total comes to sixty six thousand two hundred forty three and dollars dollar_figure at some point i know a reconciliation will come luis decastro says don’t be concerned i am very concerned i am the one being billed most emphatically i did not expect to be a channel through which irs funneled funds to any law firm certainly not in this magnitude i have the feeling at this point that i am correct in this--the bill is to sic much i want to know the exact legal position i occupy we have been frustrated long enough we wish to close this chapter mr thompson’s reaction as displayed by this letter is not that of a willing participant in a fraudulent conspiracy instead it’s the outrage of a mark who finally realizes he’s been a tool in somebody else’s game the two cases cited by petitioners reinforce our conclusion in popkin v commissioner tcmemo_1988_459 affd without published opinion 899_f2d_21 11th cir and fried v commissioner tcmemo_1989_430 affd 954_f2d_730 11th cir the commissioner determined fraud penalties against tax_shelter promoters who themselves had invested in four types of tax_shelters involving books movies lithographs and coal mining this court rejected the commissioner’s fraud determinations in the book movie and lithograph_shelters the court did however sustain the fraud penalties against the promoters for their participation in the coal-mining shelters these conclusions were based upon their complicity in backdating documents and failing to deliver promissory notes here in contrast there is no evidence of mr thompson’s engaging in any backdating failure to make delivery or any other dishonesty upon which in large part we relied in finding fraud in popkin and fried in sum there is not now nor was there ever before any basis to assert fraud against mr thompson for accordingly the period of limitations for that year expired in date that being the case the thompsons’ tax_year was not an open_year to which decastro’s date letter to mcwade could have applied we find and hold that the thompsons’ taxable_year was not affected by and was not part of the thompson settlementdollar_figure in all likelihood the thompsons’ tax_year simply slipped through the cracks as a result of the haphazard operation of the audit_lottery the record in these cases reveals numerous other instances in which respondent failed to catch all the taxable years of all the kersting deductions claimed by participants in kersting’s shelters for example test case petitioners richard and fiorella hongsermeier escaped audit for their and taxable years and respondent acknowledges that the irs missed the through taxable years of other kersting petitioners the thompsons’ kersting deficiency and the disappearing statutory notice concerning the year matters are substantially different unlike the thompsons’ tax_return did not slip through the cracks instead respondent’s fresno service_center had prepared a statutory_notice_of_deficiency dated date disallowing kersting deductions and asserting a deficiency of dollar_figure the statutory notice appears to have been issued notations in respondent’s administrative records indicate that respondent received an inquiry regarding that notice in date nonetheless no petition on behalf of the thompsons was filed in this court regarding the deficiencies proposed for nor moreover did respondent assess or collect the deficiency determined in the statutory notice instead for reasons not explained respondent’s determination for was ignored and the year was allowed to lapse early in when the thompson statutory_notice_of_deficiency for was being prepared mcwade and decastro were actively involved in resolving the thompsons’ tax matters pursuant to their original settlement in date mcwade provided a sweetener of the original settlement that slightly reduced the determined deficiencies for the years before the court to bring the reduction up to dollar_figure percent additionally during the prior december and january he had helped process the thompsons’ interest payments for if there were an explanation for the apparent abandonment of assessment and collection procedures well under way for the thompsons’ taxable_year we would expect respondent to be able to provide one but he has not therefore under the burden_of_proof approach we have adopted we hold that the thompsons’ escape from a dollar_figure deficiency for was part of the thompson settlement and that this amount should be included in the denominator for determining the percentage reduction in kersting deficiencies to be afforded all affected taxpayers before the courtdollar_figure the thompsons’ bauspar deductions the thompsons like some other kersting project participants apparently deducted substantial amounts as home mortgage interest on their returns on the basis of payments under the bauspar program that may not have met the requirements for deductible home mortgage interest while respondent concedes that the thompsons probably derived a benefit from overstated bauspar interest deductions for those years the precise amount of that benefit is not readily ascertainable 60the last year for which the thompsons claimed kersting deductions was as discussed earlier revenue_agent speers ultimately disallowed the thompsons’ kersting deductions for that year dollar_figure in full and the thompsons paid the resulting deficiency of dollar_figure because the payees of claimed mortgage interest are not identified on the returns although the thompsons were audited by the irs for each of the years no deficiencies were ever determined against them with respect to the bauspar program even though as respondent’s counsel o’neill reported there are some other docketed cases where we have disallowed mortgage interest we believe that escaping bauspar deficiencies was an implied term of the thompson settlement while sims and mcwade knew that the thompsons had participated in the bauspar program the settlement that they engineered assured that no bauspar deficiencies were determined assessed or collected from the thompsons thus in the absence of circumstances indicating that the thompsons’ escape from bauspar-related deficiencies was not engineered by sims or mcwade we conclude that bauspar relief was part of the thompson settlementdollar_figure because the amounts of the thompsons’ bauspar deductions are incapable of determination with any precision and because respondent disallowed bauspar deductions only sporadically for a small number of taxpayers we deal with this aspect of the thompson settlement separately from our determination of the 61in so holding we do not retract our conclusion in dixon iii that mcwade and sims lied in testifying that the final thompson settlement had the purpose and effect of giving the thompsons refunds by way of carrybacks of amounts they had lost by reason of their participation in bauspar percentage reduction in kersting deficiencies that will apply to all affected taxpayers see infra part ii g the thompsons’ deduction of prepaid_interest on their and returns the thompsons paid dollar_figure of deficiency_interest on december dollar_figure because the thompsons’ adjusted_gross_income for was relatively low they ultimately were able to use only dollar_figure of deficiency_interest as a deduction on their return petitioners maintain that respondent should have disallowed that deduction in its entirety because the thompsons did not pay the corresponding amount of the proposed deficiencies in petitioners’ argument requires us to examine the state of the tax law as of date at that time interest on federal_income_tax deficiencies was treated as personal_interest which was fully deductible by the taxpayer making the payment see 119_tc_44 during however the internal_revenue_code was amended prospectively to add a new sec_163 which repealed the deduction for personal_interest see tra publaw_99_514 the thompsons purported to pay dollar_figure of deficiency_interest on that date and reported that amount as deficiency_interest expense on schedule a itemized_deductions of their return the larger of the two checks issued for that purpose in the amount of dollar_figure was dishonored and the thompsons did not send a replacement check until date b 100_stat_2246 under the provision was the last taxable_year in which taxpayers could deduct percent of such personal_interest tra sec_511 100_stat_2246 for the next year only percent of personal_interest was deductible and the deduction for personal_interest was phased out entirely by the end of sec_163 in a news_release issued date the irs advised since under the tax_reform_act_of_1986 interest on most tax deficiencies of individual taxpayers will not be fully deductible after taxpayers may wish to pay actual or contested deficiencies now to obtain the full interest_deduction on tax returns the news_release accordingly included as an attachment announcement ann 1986_45_irb_20 which provided guidance to taxpayers wishing to obtain the full deductibility of deficiency_interest in under paragraph general considerations ann states in general a taxpayer may not pay interest on a contested deficiency without simultaneously paying or agreeing to pay the underlying tax_deficiency with respect to which the interest is being paid the detailed instructions of ann describe two situations that arguably apply here respondent argues that the thompsons’ situation was governed by section c b taxpayers desiring to settle their tax_court cases under this provision a taxpayer whose case is pending before this court and who wishes to settle the case on some other basis than a full concession is directed to contact respondent’s attorney or appeals officer to whom the case is assigned then if a settlement is agreed to the attorney or appeals officer will prepare the appropriate decision document id in this case when they prepaid their interest the thompsons through decastro had actually reached a settlement of their liabilities for with mcwade mcwade prepared the appropriate decision documents and he and decastro both signed those documents which reflected the settlement and contained an express waiver of the restrictions against assessment and collection of the liabilities accordingly as of date the thompsons had agreed to pay approximately percent of the deficiencies originally determined against them and their attorney had in fact executed decision documents to that effect under section c b of ann the thompsons’ agreement appears to have qualified their payment of deficiency_interest for full deductibility petitioners argue that another provision of ann applies section c c addresses taxpayers desiring to make a payment in while continuing to contest the asserted deficiency in tax_court that provision directs that in order to obtain an interest_deduction for payment made in while continuing to litigate before the tax_court the taxpayer must simultaneously pay the amount of the contested tax_deficiency to which the interest being paid is attributable petitioners note that the agreement between decastro and mcwade permitted the thompsons to receive the better of their settlement agreement or the result of the tax_court proceedings accordingly petitioners argue the thompsons were in effect continuing to contest the determined deficiencies in this court within the scope of ann sec c c petitioners therefore maintain that because the thompsons prepaid only the interest and none of the contested tax deficiencies the thompsons were not entitled under ann section c c to deduct the interest in 92_tc_749 a reviewed opinion with no dissents this court held that a payment designated as accrued interest made after a notice_of_deficiency has been issued is deductible in the year paid even though the underlying tax has not been paid see also preble v commissioner tcmemo_1989_208 we based our holding on two provisions of the internal_revenue_code sec_163 which permits a deduction of interest without requiring that the underlying obligation be paid and sec_461 which permits a deduction of interest in the year in which it is paid even though the taxpayer’s liability for the underlying debt is contested we concluded that the revenue_procedure upon which section c c of ann is based had imposed an unwarranted restriction by requiring payment of the obligation perkins v commissioner supra pincite petitioners argue that we rejected respondent’s restrictions on the deductibility of interest on contested deficiencies well after the thompsons had deducted such interest at that time they argue section c c of ann operated to deny the claimed deduction petitioners’ argument in sum is that respondent should have disallowed the thompsons’ interest_deduction under an incorrect legal theory petitioners essentially ask that we include in the denominator of the settlement fraction a tax_benefit to which the thompsons were already entitled under a correct application of the law we decline to do so regardless of whether mcwade played any part in respondent’s allowance of the deduction the thompsons reported deficiency_interest expense of dollar_figure on schedule a of their return and deducted percent of that amount dollar_figure see supra note the claimed deduction appears to derive from poltash’s misguided attempt to carry over the unused portion of the dollar_figure of deficiency_interest expense reported on schedule a of the thompsons’ return see supra note such a deduction was improper the internal_revenue_code did not and does not permit the carryover of an individual cash-basis taxpayer’s unused personal_interest deduction from one year to the next the thompsons did however make a valid payment of interest early in when they issued a valid check for dollar_figure to replace the dishonored_check they had mailed the previous year the extra dollar_figure was a bad_check charge as cash-basis taxpayers and under the law applicable for they would have been permitted to deduct percent of that amount or dollar_figure as personal_interest this valid deduction would have been dollar_figure less than the dollar_figure actually claimed and used as an interest_deduction on their return if the dollar_figure excess_amount deducted were added back to their taxable_income for the thompsons’ tax_liability would have been increased by dollar_figure accordingly we conclude that for their taxable_year the thompsons received a modest tax_benefit during the time mcwade and decastro were colluding to reduce the thompsons’ tax_liabilities there is no evidence that mcwade directly intervened to cause this excess deduction but there is evidence that he took an active role in seeing that the prepaid_interest was posted in time to permit full deduction in we conclude that the excess deduction of personal_interest in is improper and not one that would have been extended to other affected taxpayers thus while it is unclear that mcwade undertook any_action to secure the improper deduction it is also unclear that he did not and he had the access and ability to do so in accordance with the burden_of_proof we have imposed upon respondent and in the absence of circumstances showing that the thompsons’ excess_interest_deduction for was not engineered with the collusion of respondent’s counsel we find that this benefit was part of the thompson settlement we shall add the dollar_figure tax_benefit to the denominator of the fraction that will determine the percentage reduction in kersting deficiencies to be afforded all affected taxpayers the thompsons’ attorney’s fee deduction for on their tax_return the thompsons deducted the additional dollar_figure of legal fees paid in that year to decastro petitioners maintain that the deduction of legal fees paid to decastro was improper and that the amounts so deducted should be included in the thompson settlement we disagree sec_212 allows the deduction of legal fees paid_or_incurred in connection with the determination collection_or_refund_of_any_tax regulations further provide that expenses paid_or_incurred by a taxpayer for tax counsel or expenses paid_or_incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining the extent of tax_liability or in contesting his tax_liability are deductible sec_1_212-1 income_tax regs decastro obviously represented the thompsons in proceedings involved in determining the extent of tax_liability or in contesting tax_liability the thompsons hired him to resolve their tax problems he did so not only by negotiating the settlements with mcwade but also by appearing on behalf of the thompsons at the trial of the test cases in additionally after respondent had discovered and disclosed the misconduct of respondent’s counsel decastro successfully enforced the terms of the new settlement over respondent’s objections in the tax_court the thompsons’ payments to decastro clearly satisfy the definition of deductible legal fees petitioners complain that in view of decastro’s fraudulent deal with mcwade decastro’s legal fees fail to meet the statutory requirement that they be ordinary and necessary expenses of the thompsons petitioners’ complaint ignores the supreme court’s holding in 383_us_687 that legal fees otherwise qualifying as ordinary and necessary expenses are deductible without regard to public policy objections although decastro appears to have participated in the fraud on the court his fees remain deductible for tax purposes the basic proposition is that the federal_income_tax is a tax on net_income not a sanction against wrongdoing id pincite moreover with respect to deductions the basic rule with only a few limited and well-defined exceptions is the same id we conclude that the thompsons’ payments of decastro’s legal fees generated allowable deductions that were not a part of the improper tax benefits provided by the thompson settlement the thompsons’ failure to report tax_benefit income for while we agree with respondent that the thompsons were entitled to deduct the attorney’s fees paid to decastro in we agree with petitioners that the thompsons’ return is incorrect in a different respect it does not reflect the thompsons’ realization of income under the tax_benefit_rule recall that the thompsons deducted dollar_figure of deficiency_interest expense for dollar_figure for and dollar_figure for as a result of their interest prepayments for the deficiency years this court’s order and decision of date which held respondent to the terms of the thompson settlement resulted in the thompsons’ ultimately paying only dollar_figure in interest for those years this situation should have resulted in application of the tax_benefit_rule the tax_benefit_rule is a judicially created principle that serves to remedy certain disparities inherent in the use of an annual accounting system for the reporting of 63the statutory exceptions none of which applies here are contained in sec_162 f and g see sec_1_212-1 income_tax regs federal income taxes 460_us_370 the tax_benefit_rule rectifies the inequity that results when a deduction is taken during one taxable_year and later events show that the deduction would not have been allowable if all relevant facts had been known at the time of the deduction id pincite in operation the tax_benefit_rule requires the taxpayer to recognize the amount so deducted as income in the year of the later inconsistent event the amount the taxpayer must include in income however is limited to the amount of the deduction that provided a tax_benefit for the prior year e g 90_tc_1090 affd 901_f2d_810 9th cir in the case at hand the excess of the dollar_figure deducted over the dollar_figure actually paid as interest is dollar_figure the inconsistent event occurred in date when respondent assessed only dollar_figure of interest with respect to the thompsons’ and tax years on the basis of the decisions entered by the tax_court in date respondent in effect refunded the excess dollar_figure to the thompsons by applying it as a credit toward their dollar_figure deficiencies for each of and the thompsons thus had a tax_benefit of dollar_figure in that they failed to report on their return for that year although the thompsons’ failure to include income under the tax_benefit_rule was erroneous it did not result from the intervention of respondent’s attorneys to the contrary by the time the thompsons filed their income_tax return many attorneys in respondent’s office_of_chief_counsel at the local regional and national levels were seeking to control the damage caused by mcwade’s preferential treatment of the thompsons for the years the misconduct was also before the court_of_appeals in the dufresne appeal mcwade had retired from the irs and sims had been disciplined by respondent’s regional_counsel responsibility for the kersting project cases had been transferred to dombrowski and o’neill the sources of the misconduct in the handling of the thompsons’ tax matters had been effectively removed dombrowski who was assigned mcwade’s duties with respect to the test cases did not engage in or perpetuate any misconduct he instead found himself faced with decastro’s apparently valid request for a refund of interest accruing on the payments the thompsons had paid for their taxable years dombrowski approved that refund only after obtaining the approval of his superior in the regional_office and only after having some of respondent’s experienced employees doublecheck his figures during his testimony dombrowski did not recall whether he had told decastro about the income_tax ramifications of the refund under the tax_benefit_rule but it was not his duty to do so dombrowski’s approval of a refund of interest and deficiencies was a result of his assignment to take over mcwade’s duties for the thompsons’ taxable years that were before the court and that had been affected by the misconduct of mcwade and sims there is no basis for finding that dombrowski had an affirmative obligation to demand or intervene in any audit of the thompsons’ return as subsequently filed in to the contrary any errors of omission or commission in failing to report the thompsons’ tax_benefit income were the responsibility of poltash their tax accountant and decastro their tax attorney we therefore conclude that respondent’s failure to ensure that the thompsons reported tax_benefit income on their return and respondent’s subsequent failure to adjust the return accordingly was not part of the thompson settlement payment of witness fees to mr thompson petitioners urge that the thompson settlement includes respondent’s payment of witness fees and mileage to mr thompson who testified in date at the trial before judge goffe in response to a subpoena issued by respondent we have noted that respondent subpoenaed all the test case petitioners and also paid mr cravens’s witness fees we have also noted that there is no record evidence regarding any requests for reimbursement of witness fees on behalf of any other test case petitionerdollar_figure such requests would have been required in order to obtain reimbursement inasmuch as rule b in effect provides that the commissioner unlike a private party is not required to tender fees and mileage in order to issue a valid subpoena on the basis of this record we do not believe respondent’s payment of thompson’s witness fees and expenses was a benefit that was unavailable to the other petitioners who testified at the trial of the test cases accordingly we conclude that such payment was not part of the thompson settlement having so concluded there is no need to reach petitioners’ argument that the payment of thompson’s fees was a benefit that should be given effect by subtracting it from the numerator of the settlement fraction rather than adding it to the denominator release of lien on the thompsons’ property and other intangible benefits on date respondent had filed a notice_of_federal_tax_lien for the unpaid balance due of dollar_figure for the thompsons’ taxable_year which did not involve the 64rule a states any witness summoned to a hearing or trial or whose deposition is taken shall receive the same fees and mileage as witnesses in the united_states district courts rule b refers to sec_7457 which provides in turn in the case of witnesses for the secretary such payments of fees mileage and expenses shall be made by the secretary out of any moneys appropriated for the collection of internal revenue taxes disallowance of any kersting deductions as detailed in respondent’s records the thompsons made a number of payments on the liability which was finally satisfied in date under sec_6325 the irs was required to issue a certificate_of_release_of_lien within days in this case by date this was not done in a timely fashion the lien was released however following a meeting between decastro and mcwade in hawaii late in at the time of kersting’s deposition again although this relief may have been brought about by mcwade’s efforts it was not a tax advantage that would not have been available to other similarly situated taxpayers the thompsons were entitled to have the lien released by operation of sec_6325 we believe that an inquiry by any other taxpayer’s representative would have produced the same relief we conclude that the release of the lien was not a part of the thompson settlement petitioners argue that the thompsons received other intangible benefits including not only assistance with getting the tax_lien released from their house but also use of the test-case trial as a platform for defending against henry kersting and avoiding the collection litigation disillusion and anxiety that have been experienced by the other taxpayers they concede that in terms of imposing sanctions it does not seem possible to confer those benefits on other taxpayers they urge however that such benefits be deemed ballast in weighing the sanctions to be imposed we believe that in responding as we have to the mandates of the court_of_appeals we have accounted for the problems faced by the other affected taxpayers we are painfully aware as the court_of_appeals for the ninth circuit has observed that enormous amounts of time and judicial resources have been wasted and further that the taxpayers should not be forced to endure another trial dixon v commissioner f 3d pincite we further recognize the urgent need to equitably resolve this situation to the best of our abilities id despite our rejection of any notion of ballast as an impermissible invitation to fix damages against respondent we are confident that our implementation of the mandates in conjunction with respondent’s concession cutting short the accrual of interest on deficiencies see infra part iii will provide substantial relief to all affected taxpayers f the percentage reduction summarized to summarize our holdings above we shall direct that the kersting-related deficiencie sec_65 for each of the affected taxpayers are to be reduced by a factor of dollar_figure percent that is affected taxpayers will have to pay dollar_figure percent of the 65we do not include in that term deficiencies relating to bauspar see infra part ii g amounts of tax they would have had to pay we have calculated the reduction percentage as follows the numerator is dollar_figure representing the total deficiencies paid_by the thompsons for the taxable years before the court that is their taxable years the denominator is initially dollar_figure representing the total deficiencies that respondent asserted against the thompsons for their taxable years to this sum we add dollar_figure representing the deficiency the thompsons escaped paying for the year by virtue of respondent’s unexplained failure to follow up on the statutory_notice_of_deficiency for that year we also add dollar_figure to the denominator which represents the thompsons’ tax savings attributable to respondent’s allowance of a personal_interest deduction that was overstated by dollar_figure dollar_figure - dollar_figure the total denominator is thus dollar_figure dollar_figure dollar_figure g additional relief elimination of non-kersting additions although the parties’ stipulation of settled issues can be read as limiting penalty relief to kersting-related additions see supra part ii b respondent does not dispute that implementation of the court of appeals’ mandates includes the elimination of all penalties and additions including non- kersting-related items such as late filing additions we agree and so hold it seems especially incongruous to impose an addition for a few months’ delay in filing a return at this time when years have passed since that delay occurred all 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 allowance of bauspar deductions we concluded earlier that bauspar relief was part of the thompson settlement see supra part ii e moreover respondent’s analysis of the bauspar program indicates that at least some of the alleged mortgage payments made to bauspar by its borrowers would qualify for mortgage interest deductions as respondent’s counsel henry o’neill o’neill observed real dollars are involved accordingly we shall direct that any disallowed deductions relating to bauspar are to be treated as valid deductions with respect to those taxpayers who may have claimed them that’s the way bauspar played out for the thompsons and so should it be for the other taxpayers before the court against whom bauspar-related deficiencies have been determined elimination of non-kersting deficiencies respondent indicates that perhaps of the affected taxpayers have non-kersting-related items in the deficiencies determined against them we see no reason to treat those non- kersting deficiencies differently from non-kersting additions as with those additions the resolution of non-kersting issues has been delayed much too long rule a as in effect during the years at issue would impose upon those petitioners the burden of proving those deficiencies to be erroneous we think it would be inherently unfair to impose upon them the risks that memories have faded and records have been lost or destroyed during the long delay in resolution of the kersting issues a delay primarily caused by the misconduct of respondent’s attorneys moreover we suspect that the non-kersting issues are relatively minor when compared to the kersting-related deductions that are at issue in all these cases we therefore direct that all non-kersting-related deficiencies determined in the notices of deficiency for all affected taxpayers with taxable years still before this court be eliminated attorney’s fees we further recall that respondent made the somewhat empty concession that the other affected kersting petitioners should be reimbursed for any attorney’s fees they incurred during the trial of the test cases before judge goffe the concession is illusory because as respondent acknowledges such fees were incurred and paid_by kersting himself not by the affected petitioners respondent’s facile concession gives us occasion to observe that the court will address the matter of attorney’s fees for petitioners’ prosecution of these cases on appeal as well as petitioners’ attorney’s fees for the conduct of the postmandate evidentiary hearing in separate opinions and orders iii interest on deficiencies and overpayments respondent has conceded that the accrual of interest on taxpayer deficiencies ultimately determined by this court should be tolled as of date in accordance with the then chief counsel’s public announcement on date petitioners however maintain that the accrual of interest on any deficiencies that remain after application of the thompson settlement should be halted as of date--the date by which petitioners maintain the fraudulent mcwade-decastro agreement was first entered into the protracted nature of these proceedings has exaggerated the impact of interest upon amounts that are owed by or owed to the affected taxpayers informed by this realization at a status conference held in these cases on date the court asked respondent to compare the fiscal consequences of characterizing the thompson settlement as i a 20-percent reduction in the deficiencies determined by respondent ii a 62-percent reduction or iii an 80-percent reduction with interest accruals terminated as of a date and b december dollar_figure respondent produced figures that would approximate the overall fiscal consequences in the scenarios described above respondent further calculated that if interest on the aggregate deficiencies were allowed to accrue unabated it would amount to almost times the amount of the deficiencies deficiencies interest through total dollar_figure big_number big_number respondent calculates that in the case of a hypothetical petitioner who owes dollar_figure as a result of kersting deductions claimed for the taxable_year the accrued interest payable at the end of calendar_year would have been dollar_figure for taxpayers who prepaid the deficiencies determined against them the results would be similarly substantial but in their favor for example we have considered the effect of a percent reduction in deficiencies on a hypothetical petitioner who had prepaid a deficiency for of dollar_figure our 66on date sticht counsel for some of the nontest case petitioners filed a motion to strike respondent’s interest estimates the court held that motion in abeyance without examining the estimates until date when it entered an order denying sticht’s motion we are aware of no authority indicating that the court may not be aware of the financial consequences of the sanction it is being asked to order at the conclusion of the case before it in the final analysis however in determining the sanctions to be imposed under the mandates the court has not been influenced by respondent’s projections calculations indicate that in addition to a dollar_figure refund of tax respondent would owe that taxpayer dollar_figure of interest as of the close of calendar_year it is basic that accrued interest will vary depending upon the amount owed the time the amount has been owing and the rates at which the interest accrues the parties differ not only over the amount owed that is the amount of the deficiencies but also the time the deficiencies should be deemed to have been outstanding there does appear to be a consensus with which the court agrees that the applicable rates of interest are those prescribed pursuant to sec_6621 and set forth most recently in revrul_2005_62 2005_38_irb_557 which adopts the tables provided in revproc_95_17 c b inasmuch as this court is a court of limited jurisdiction we may exercise jurisdiction only to the extent expressly authorized by statute sec_7442 88_tc_1175 85_tc_527 while this court has jurisdiction to determine deficiencies in tax pursuant to sec_6214 it is well settled that such jurisdiction generally does not extend to statutory interest imposed under sec_6601 see 13_f3d_54 2d cir 107_tc_249 64_tc_589 see also 90_tc_816 asciutto v commissioner tcmemo_1992_564 affd 26_f3d_108 9th cir sec_6601 expressly provides that interest prescribed by sec_6601 is treated as tax except for purposes of subchapter_b of chapter relating to deficiency procedures because this exception excludes interest from the definition of tax for purposes of sec_6211 defining the term deficiency it follows that such interest is not treated as part of the underlying deficiency see 95_tc_209 in contrast as we recognized in 115_tc_293 affd 32_fedappx_278 9th cir sec_6601 does not curtail our jurisdiction over interest on overpayments of taxes instead the court does have jurisdiction to redetermine statutory interest where a taxpayer has properly invoked the court’s overpayment jurisdiction pursuant to sec_6512 the cases before the court however involve both interest owed by petitioners on deficiencies over which we arguably lack jurisdiction and interest owed by respondent on overpayments over which we clearly have jurisdiction this possible divergence in our jurisdictional authority has the potential at least for interfering with our execution of the mandates of the court_of_appeals which we believe require relief not only to taxpayers to whom respondent owes interest but also to taxpayers who owe interest to respondentdollar_figure we are given further pause by the holding of the supreme court in 484_us_3 in mccoy the court_of_appeals for the sixth circuit issued an unpublished order following its affirmance--809 f 3d 6th cir affg t c memo 1985-509--of the tax court’s denial of special use estate_tax_valuation in its order the court_of_appeals had granted the taxpayer’s request for relief from interest and penalties which now exceed the assessed tax and ordered the tax_court to forgive the interest and penalties in order to achieve a fair and just result id pincite in a per curiam opinion justice marshall dissenting the supreme court held that the court_of_appeals had exceeded its jurisdiction in ordering the tax_court to forgive interest on the determined deficiency in estate_tax and to forgive the statutorily imposed late payment penalty in so doing the supreme court observed 67the court is concerned about the parties’ stipulation filed on date wherein they apparently seek to remove from this court’s consideration the issue of whether any remittance by an affected taxpayer is an interest bearing advance_payment or a non-interest bearing cash bond this court is not bound by such stipulation we believe the mandates of the court_of_appeals require that interest be paid to all affected taxpayers who made remittances with respect to kersting deficiencies as was the case with the thompsons inasmuch as we have jurisdiction over interest on overpayments we shall direct respondent to compute and pay such interest to all affected taxpayers who made remittances with respect to the deficiencies that had been determined against them plainly the court_of_appeals lacks jurisdiction to decide an issue that was not the subject of the tax_court proceeding or to grant relief that is beyond the powers of the tax_court itself id pincite we conclude our discussion of mccoy by noting as does respondent that the supreme court in overruling the forgiveness of a generally applicable statutory interest accrual on deficiencies under sec_6601 by the court_of_appeals for the sixth circuit had no occasion to address a court’s inherent authority to impose sanctions in a case of government misconduct moreover in 264_f3d_904 9th cir the court_of_appeals for the ninth circuit adopted an expansive view of the tax court’s equitable or inherent powers the court stated the tax_court exercises its judicial power in much the same way as the federal district courts exercise theirs 501_us_868 111_sct_2631 115_led_764 this includes the authority to apply the full range of equitable principles generally granted to courts that possess judicial powers even if the tax_court does not have far-reaching general equitable powers it can apply equitable principles and exercise equitable powers within its own jurisdictional competence 231_f3d_541 9th cir see also kelley v commissioner f 3d pincite 9th cir tax_court has equitable power to reform agreements between taxpayer and irs buchine v commissioner of internal_revenue_service 20_f3d_173 5th cir holding that the tax_court had the authority to apply the equitable principle of reformation to a case over which it had jurisdiction id pincite it would appear that in issuing its opinion and mandates in dixon v the court_of_appeals for the ninth circuit consistent with its opinion in commissioner v branson supra adopted the view that the tax_court had and has equitable power to resolve the situation then before it and now before us more to the point we regard respondent’s concession not to collect interest on deficiencies that would otherwise accrue beyond date as an appropriately targeted response to the consequences of his former attorneys’ fraud on the court which caused substantial delay in the resolution of the kersting project casesdollar_figure we have respondent’s assurance that he will give effect to the concession we are satisfied he will do so moreover in accepting and endorsing respondent’s concession we need not and do not reach petitioners’ argument that the tax_court has the power and obligation to abate or cancel interest on deficiencies as of an earlier datedollar_figure 68on date test case petitioners dixon dufresne young and hongsermeier had already appealed their test cases before the misconduct of respondent’s attorneys was discovered and disclosed it is reasonable to assume that the conduct of their appeals would have caused a delay of at least or years before the kersting project test cases would have been finally decided even if there had been no such misconduct in these circumstances we would not be inclined even if our power to do so were clear to cancel or abate interest as of an earlier date than respondent has conceded 69in any event we reject petitioners’ citation and discussion of 856_f2d_1214 9th cir wallace j dissenting revd u s continued in the unlikely event respondent fails to give effect to the concession or if there is a dispute about how the concession is to be applied there will be time enough to consider whether and how to address the matter in a collection action or other appropriate proceeding to give effect to the foregoing decisions will be entered under rule continued and riggs v palmer n e n y app ct app as authorizing or even suggesting the proposition that accrual of interest on kersting-related deficiencies as they have been reduced by our application of the mandates should cease as of date the date petitioners argue the fraud commenced petitioners also argue that interest should not continue to accrue beyond date because the result of the final settlement arrived at in was to convert the interest payments made by the thompsons as of date into payments of tax that satisfied their agreed tax_liabilities and stopped any further accrual of interest against them it suffices to point out that the thompsons made the necessary payments around the end of those petitioners who remain in a deficiency underpayment posture under the mandates made no such payments and interest on their reduced deficiencies therefore continued to accrue until the effective date of respondent’s concession