                 FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

MICHAEL W. KELLER,                   
             Petitioner-Appellant,         No. 06-75441
               v.
                                            Tax Ct.
                                             9662-01
COMMISSIONER OF INTERNAL
REVENUE,                                    OPINION
             Respondent-Appellee.
                                     
              Appeal from a Decision of the
                United States Tax Court
               Harry A. Haines Presiding

                  Argued and Submitted
          February 3, 2009—Seattle, Washington

                 Filed February 26, 2009

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

                 Opinion by Judge Rymer




                           2323
                            KELLER v. CIR                          2325




                             COUNSEL

Terri A. Merriam, Merriam & Associates, P.C., Seattle,
Washington, for the petitioner-appellant.

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


                              OPINION

RYMER, Circuit Judge:

   Michael W. Keller appeals the tax court’s order upholding
the Commissioner of Internal Revenue’s imposition of
accuracy-related penalties for his tax underpayment for years
1994 and 1995. Keller now concedes that a 20 percent penalty
for negligence is appropriate under 26 U.S.C. § 6662(b)(1)1
but contests the enhancement to a 40 percent penalty for gross
valuation misstatements under § 6662(h). Because we agree
with Keller that, under the law of this circuit, his tax under-



  1
   Except where otherwise noted, all statutory references in this opinion
are to the Internal Revenue Code.
2326                      KELLER v. CIR
payment is not “attributable to” a valuation overstatement, we
affirm in part, reverse in part, and remand to the tax court for
calculation of the 20 percent negligence penalty.

                                 I

   Keller is one of hundreds of individuals who obtained ille-
gitimate tax benefits through the sheep and cattle investment
shams directed by Walter J. Hoyt, III. This court is, by now,
quite familiar with Hoyt inspired cases. See, e.g., River City
Ranches #1 Ltd. v. Comm’r, 401 F.3d 1136 (9th Cir. 2005);
Durham Farms, #1 v. Comm’r, 59 Fed. Appx. 952 (9th Cir.
2003) (unpublished); River City Ranches #4 v. Comm’r, 23
Fed. Appx. 744 (9th Cir. 2001) (unpublished). Unlike many
of his fellow investors, Keller was not a Hoyt partner —
rather, his participation was limited to contributing money as
a solo investor.

   Keller is employed by the United States government’s Mili-
tary Sealift Command and has been since 1982. In the three
years preceding his investment with Hoyt, Keller’s income
ranged from $70,094 to $107,841. Although Keller first
learned of the Hoyt investment scheme as far back as 1985,
his interest was piqued in December 1994 by colleagues while
on a tour of duty at sea. The captain, and many other ship-
mates, were partners involved in the business of owning regis-
tered cattle.

   Keller’s colleagues informed him the investment scheme,
which afforded significant tax savings, was found to be legiti-
mate by the tax court in the Bales2 case and gave him promo-
tional materials to review. He found the promotional materials
persuasive — Hoyt was described as one of the top cattlemen
in the industry who had been in business for forty years. In
Keller’s opinion, if the investment scheme were not legiti-
  2
   Bales v. Comm’r, T.C. Memo. 1989-568 (upholding the legitimacy of
the Hoyt investment scheme for tax years mostly in the late 1970s).
                         KELLER v. CIR                      2327
mate, it would already have been shut down by the Securities
and Exchange Commission. Although Keller recognized he
would receive significant tax savings through depreciation
deductions at the beginning of the investment, he also claims
to have expected a long-term profit.

   In February 1995, Keller requested additional information
from Hoyt and was contacted by Dave Barnes, a Hoyt repre-
sentative. Barnes provided promotional materials and asked
Keller to fill out a credit application and attach tax returns
from the previous years. Eventually the two met at a Hoyt
ranch in Elk Grove, California. The meeting lasted several
hours and covered the investment opportunity generally and
also included a description by Barnes of the outcome in Bales.
Keller was additionally given independent media publications
and cattle count reports.

  Keller ultimately decided to invest in late February or early
March 1995. He signed a 15-year promissory note to repay
$956,980 in exchange for 146 heifers — half of which were
only in the embryonic stage at purchase. Other sales docu-
ments included a bill of sale, a certificate of warranty, a sales
order, and a security agreement. At no time in the purchasing
process did Keller ever consult a tax expert or attorney
regarding his investment.

   Keller made no initial payments, other than a $50 applica-
tion fee, to Hoyt to finance his investment. Instead, he agreed
to allocate 75 percent of the tax savings he enjoyed from the
investment back to Hoyt. He did, however, eventually begin
making payments on the promissory note of a little over
$1,000 each month. Upon finalization of the investment,
Hoyt’s accounting department immediately began preparing
Keller’s tax returns for 1994 and 1995.

   As it turns out, Keller may not have acquired any cattle in
the first instance. During Hoyt and his co-conspirators’ crimi-
nal trial, the government described the cow shortage as “se-
2328                    KELLER v. CIR
vere and pervasive.” The shortage was growing, and yet
nonexistent “phantom” cows continued to be sold to new
investors. Additionally, the same cows — as identified by
name and ear tag number — were often sold to more than one
investor. Regardless, and although the purported cattle pur-
chase did not occur until 1995, Keller’s 1994 return contained
a Schedule F — the schedule on which profits or losses asso-
ciated with farming are reported — as did the 1995 return.
The 1994 return reported a net loss of $302,818 and the 1995
return a loss of $107,951. Depreciation schedules showed the
cost basis of the cattle to be $880,423 in 1994 and $625,100
in 1995.

   Because Keller’s losses for 1994 were so large and elimi-
nated the totality of his 1994 income taxes with some loss
leftover, he was able to carry back losses to eliminate any
taxes that had been owed for 1991, 1992, and 1993. Keller
was issued a refund of $11,773 for 1994 and a total of
$40,740 for the carry back years. Hoyt collected $10,500 for
1994 and $30,500 for the carry back years for his services.
Including the allocation of tax savings and the payments made
on the promissory note, Keller ultimately paid Hoyt a total of
$67,225.

   Prior to the filing of the 1995 return, the Commissioner
sent Keller notice that deductions stemming from the Hoyt tax
shelter were unlikely to be allowable. Any return claiming a
refund was to be reduced by the amount generated from the
Hoyt investment scheme. It also warned of the accuracy-
related penalties under § 6662 that would be applied in appro-
priate cases. The 1995 return was nonetheless filed, including
Hoyt-related deductions, and requested a refund of $8,788. A
refund was never issued.

   On February 24, 1997, the Commissioner sent Keller a let-
ter informing him that his 1994 and 1995 returns were under
examination. A Notice of Deficiency, dated May 3, 2001, was
later sent indicating a deficiency of $11,106 for 1994 and
                         KELLER v. CIR                       2329
$17,410 for 1995. The Commissioner also assessed accuracy
penalties under § 6662(h) of $4,442.40 for 1994 and
$6,931.60 for 1995 — that is, an additional amount equal to
40 percent of the underpayment. The deficiency was based on
the Commissioner’s conclusion that the cattle were not actu-
ally being used in a trade or business or to generate income.
The 40 percent penalty was applied due to alleged gross valu-
ation misstatements in the claimed value of the cattle.

   Keller petitioned the tax court for a redetermination of the
deficiency. However, prior to trial, Keller and the Commis-
sioner stipulated that Keller should not have been entitled to
any Hoyt-related deductions. The issue at trial was thus
reduced to the imposition of accuracy-related penalties. The
tax court determined that if Keller had in fact not acquired
any cattle, his basis in the cattle would be zero for the relevant
tax years, far below the claimed bases, and thus supported the
40 percent penalty for gross valuation misstatements. The
court also found the 20 percent penalty for negligence appli-
cable and rejected Keller’s other defenses. Accordingly, it
upheld the deficiency and penalty amounts in full. This appeal
followed.

                                II

   The factual findings underpinning whether an underpay-
ment is attributable to a valuation overstatement are reviewed
for clear error. Wolf v. Comm’r, 4 F.3d 709, 715 (9th Cir.
1993). Application of the facts to the requirements of § 6662
is a question of law reviewed de novo. See Gainer v. Comm’r,
893 F.2d 225, 226 (9th Cir. 1990) (reviewing now-repealed
§ 6659, a statute also imposing penalties for underpayment
attributable to valuation overstatements).

                               III

  In his briefing before this court, the Commissioner con-
cedes that application of the gross valuation misstatement
2330                         KELLER v. CIR
penalty to the 1994 tax year was inappropriate because Kel-
ler’s purported purchase of cattle did not occur until 1995.
Keller, on the other hand, concedes that a negligence penalty
under § 6662(b)(1) is appropriate for both tax years 1994 and
1995. The question that remains for us is whether, for tax year
1995, the 40 percent penalty for gross valuation misstate-
ments under § 6662(h) should be imposed instead — in other
words, whether Keller owes around $7,000 plus interest (as
the tax court held) or around $3,500 plus interest (as Keller
claims).

  [1] Section 6662 of the Internal Revenue Code imposes a
variety of accuracy-related penalties for tax underpayment. As
a general rule, when § 6662 is applicable, the taxpayer is
penalized “an amount equal to 20 percent of the portion of the
underpayment.” § 6662(a). Examples of when the 20 percent
penalty applies include taxpayer negligence, § 6662(b)(1),
and substantial valuation misstatements, § 6662(b)(3).3 The
20 percent penalty is enhanced to 40 percent, however, in the
case of gross valuation misstatements. § 6662(h)(1). Keller
makes no argument that if § 6662(h) applies to him, he did
not make a gross valuation misstatement — that is, he does
not contest that the claimed value of the cattle was more than
200 percent greater than their actual value.

   [2] Instead, he challenges whether § 6662(h) is applicable
in the first instance. The statute applies to situations where the
tax underpayment “is attributable to one or more gross valua-
tion misstatements.” § 6662(h)(1). Keller argues his tax
underpayment is not “attributable to” the valuation overstate-
ment because he was entitled to no deduction at all, rather
  3
    The penalties may not be stacked. That is, if a taxpayer is negligent and
files a return with a substantial valuation misstatement, the penalty is just
20 percent (rather than combining the two to reach 40 percent). Treas.
Reg. § 1.6662-2(c). The same is true if the taxpayer is negligent and files
a return with a gross valuation misstatement — the penalty is just the
greater of the two, 40 percent, not the two combined.
                           KELLER v. CIR                         2331
than simply a reduced deduction. Thus, the underpayment is
“attributable to” taking an illegitimate deduction, not over-
valuing an asset.

   We previously have had occasion to consider the meaning
of the words “attributable to” in a similar context. Gainer v.
Commissioner interpreted “attributable to” in § 6659, now
repealed, which also imposed a penalty on taxpayers who
underpaid their taxes by overvaluing an asset.4 In Gainer, the
taxpayer purchased a 10 percent interest in a refrigerated ship-
ping container for $26,000 (thus, the shipping container’s
total value was $260,000) by paying $4,500 up front and exe-
cuting a non-recourse promissory note for the balance. 893
F.2d at 226. The actual fair market value of the container was
somewhere between $52,000 and $60,000, leaving the taxpay-
er’s interest truly valued between $5,200 and $6,000. Id.
Nonetheless, in the 1981 tax year, a depreciation deduction
was taken based on the $26,000 purchase price. Id. Prior to
trial before the tax court, the parties agreed the deduction was
improper in the first instance because the container was not
placed in service during the 1981 tax year. Id. The Commis-
sioner nonetheless sought to impose a penalty for overvaluing
the container. Id. The tax court refused, reasoning that the tax-
payer was not entitled to any deduction regardless of the
stated value and thus any underpayment was attributable to
taking an unwarranted deduction, not overvaluing the contain-
ers. Id.

   On appeal, this court rejected the Commissioner’s argu-
ment that “attributable to” actually means “capable of being
attributed,” as there was no support for such a reading, and in
any event, it would just move the inquiry to the meaning of
“capable,” which could be equally ambiguous. Id. at 227. In
trying to divine a proper reading of the statute, the court con-
  4
   Section 6659 applied to any underpayment “which is attributable to a
valuation overstatement.” Economic Recovery Tax Act of 1981, Pub. L.
No. 97-34, Title VII, § 722(a)(1), 95 Stat. 172 (Aug. 13, 1981).
2332                     KELLER v. CIR
sulted the plain language, dictionary definitions, and legisla-
tive history, all without success. Id. It ultimately found
instructive the General Explanation of the Economic Recov-
ery Tax Act of 1981, prepared by the staff of the Joint Com-
mittee on Taxation. The General Explanation provides a
formula for determining when an underpayment is attributable
to an overvaluation:

    The portion of a tax underpayment that is attribut-
    able to a valuation overstatement will be determined
    after taking into account any other proper adjust-
    ments to tax liability. Thus, the underpayment result-
    ing from a valuation overstatement will be
    determined by comparing the taxpayer’s (1) actual
    tax liability (i.e., the tax liability that results from a
    proper valuation and which takes into account any
    other proper adjustments) with (2) actual tax liability
    as reduced by taking into account the valuation over-
    statement. The difference between these two
    amounts will be the underpayment that is attributable
    to the valuation overstatement.

Gainer, 893 F.2d at 227 (citation omitted) (emphasis in origi-
nal).

   Following the formula, the court held that the taxpayer’s
underpayment could not be said to be “attributable to” the
overvaluation of the shipping container. Because the parties
stipulated that no deduction was appropriate in the first
instance, the tax underpayment did not vary depending on
how much the container was overvalued. The tax liability,
“after adjusting for failure to place the container in service,
was no different from [the taxpayer’s] liability after adjusting
for any overvaluation.” Id. at 228. More broadly, we held
“when there is some other ground for disallowing the entire
portion of a deduction that otherwise might be disallowed for
overvaluation,” an overvaluation penalty may not be imposed.
Id.
                             KELLER v. CIR                             2333
   Our decision in Gainer rested in large part on the Fifth Cir-
cuit’s decision in Todd v. Commissioner, 862 F.2d 540 (5th
Cir. 1988). Todd dealt with precisely the same issue — the
same overvalued shipping containers that were likewise not
placed in service in the applicable tax years. Id. at 540-41.
Todd also used the General Explanation to determine when
an underpayment is “attributable to” an overvaluation, id. at
542-43, and determined that when a depreciation deduction is
not allowed in the first instance, overvaluation of the underly-
ing asset cannot be said to be the cause of the underpayment,
id. at 543. The General Explanation instructs that overvalua-
tion be determined after “any other proper adjustment to tax
liability” — for example, an adjustment to reflect a wholly
improper deduction. Id. at 544 (emphasis and quotation marks
omitted).

   [3] While Gainer is arguably distinguishable on its facts —
overvaluing a shipping container but failing to put it into ser-
vice is different from overvaluing cattle you never actually
acquire — its rationale is directly on point. When a deprecia-
tion deduction is disallowed in total, any overvaluation is sub-
sumed in that disallowance, and an associated tax
underpayment is “attributable to” the invalid deduction, not
the overvaluation of the asset. Moreover, Gainer embraces the
formula announced by the General Explanation that requires
first determining whether any deductions are improper and,
only after that, determining whether there is a lingering asset
overvaluation. In other words, Gainer’s holding is such that
when a deduction is disallowed in total, an associated penalty
for overvaluing an asset is precluded.5

   [4] Viewing Gainer in this light, we conclude the tax court
  5
   The Fifth Circuit has interpreted its holding in Todd in the same way.
See Heasley v. Comm’r, 902 F.2d 380, 383 (5th Cir. 1990) (“Whenever
the I.R.S. totally disallows a deduction or credit, the I.R.S. may not penal-
ize the taxpayer for a valuation overstatement included in that deduction
or credit.”).
2334                         KELLER v. CIR
erred in upholding the gross valuation misstatement penalty
under § 6662(h) against Keller. Prior to trial, Keller and the
Commissioner stipulated that all of the Hoyt-related deduc-
tions he took were unlawful. Once the totality of the deduc-
tion was disallowed, the fact that the cattle purportedly
acquired by Keller had a claimed basis far in excess of their
true value became irrelevant. Keller’s tax deficiency was “at-
tributable to” taking a depreciation deduction to which he was
not entitled (at all) rather than “attributable to” overvaluation.6

   We recognize that many other circuits have concluded that
when overvaluation is intertwined with a tax avoidance
scheme that lacks economic substance, an overvaluation pen-
alty can apply. See Merino v. Comm’r, 196 F.3d 147, 155 (3d
Cir. 1999); Zfass v. Comm’r, 118 F.3d 184, 190-91 (4th Cir.
1997); Illes v. Comm’r, 982 F.2d 163, 166-67 (6th Cir. 1992);
Gilman v. Comm’r, 933 F.2d 143, 149-52 (2d Cir. 1991);
Massengill v. Comm’r, 876 F.2d 616, 619-20 (8th Cir. 1989).
This sensible method of resolving overvaluation cases cuts off
at the pass what might seem to be an anomalous result —
allowing a party to avoid tax penalties by engaging in behav-
ior one might suppose would implicate more tax penalties, not
fewer. Nonetheless, in this circuit we are constrained by
Gainer.

   This said, Keller’s concession of invalid deductions had
significant consequences. He was no longer able to argue in
the tax court the merits of his deficiencies in tax payment —
in other words, he agreed that he owed $11,106 for 1994 and
$17,410 for 1995 in back taxes, plus interest.7 Moreover, Kel-
  6
     Because Gainer controls, we express no opinion on the parties’ dis-
agreement over the role of the Commissioner’s presumption of correct-
ness. See Foster v. Comm’r, 756 F.2d 1430, 1439 (9th Cir. 1985).
   7
     It is for this reason that we find no merit in the Commissioner’s argu-
ment that Keller’s concession of invalid deductions was “opportunistic”
and should therefore be rejected. While the concession ultimately allows
him to avoid an overvaluation penalty, it also confirmed, without any
opportunity in court to argue otherwise, that he owed over $28,000 plus
interest in back taxes. In any event, the Commissioner agreed to the stipu-
lation at the time and must live with the consequences of that agreement
now.
                             KELLER v. CIR                           2335
ler now concedes8 a 20 percent negligence penalty is appro-
priate for both tax years — a total that approaches an
additional $5,700, plus interest. In future cases too, the Com-
missioner will be able to look to the negligence penalty or
other penalties where applicable.

                                   IV

   [5] We hold that Gainer and the formula it embraces from
the General Explanation require the validity of deductions be
determined first, and that an overvaluation penalty may only
be imposed on any lingering inflated value. Accordingly, the
imposition of the gross valuation misstatement penalty for the
19949 and 1995 tax years is reversed. Imposition of the 20
percent negligence penalty for both tax years is affirmed. We
remand to the tax court to calculate the appropriate penalty,
using the 20 percent multiplier, plus interest.

 AFFIRMED IN PART, REVERSED IN PART, and
REMANDED.




  8
     Because counsel for Keller conceded at oral argument, without qualifi-
cation, that the negligence penalty applies, we have no need to address
Keller’s argument that he is immunized from accuracy-related penalties by
the reasonable cause exception in § 6664(c)(1). Even on the merits,
§ 6664-based arguments have been rejected by this court, and others, in
Hoyt-related cases, and we see no reason why this case would be any dif-
ferent. See Hansen v. Comm’r, 471 F.3d 1021, 1030-33 (9th Cir. 2006);
Mortensen v. Comm’r, 440 F.3d 375, 387-93 (6th Cir. 2006); Van Scoten
v. Comm’r, 439 F.3d 1243, 1256-60 (10th Cir. 2006).
   9
     As noted supra, the Commissioner has conceded the penalty should not
have been applied in 1994.
