Triemstra v. Commissioner

T.C. Memo. 1995-581

UNITED STATES TAX COURT

PAUL L. AND DORIS J. TRIEMSTRA, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 14254-89, 17923-89, Filed December 6, 1995.
18126-89.

Paul L. Triemstra, pro se, for petitioners in docket

No. 14254-89.

Sidney L. Cohn, pro se, for petitioners in docket

No. 17923-89.

William G. Christopher, for petitioners in docket

No. 18126-89.

Mary P. Hamilton, Paul Colleran, and William T. Hayes, for

respondent.

1
Cases of the following petitioners are consolidated
herewith: Sidney L. Cohn and Beverly M. Cohn, docket No. 17923-
89; and Jeffrey R. Kravitz and Fran Kravitz, docket No. 18126-89.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: These consolidated cases were assigned to

Special Trial Judge Norman H. Wolfe pursuant to the provisions of

section 7443A(b)(4) and Rules 180, 181, and 183.2 The Court

agrees with and adopts the opinion of the Special Trial Judge,

which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

WOLFE, Special Trial Judge: These cases are part of the

Plastics Recycling group of cases. For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without

published opinion 996 F.2d 1216 (6th Cir. 1993). The facts of

the underlying transaction in these cases are substantially

identical to those in the Provizer case.

In notices of deficiency, respondent determined the

following deficiencies in and additions to petitioners' Federal

income taxes for the taxable year ending December 31, 1981:
Additions to Tax
Docket No. Petitioners Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6659

14254-89 Triemstra $13,929 $696 1 $4,179
17923-89 Cohn 14,728 736 1 4,418
18126-89 Kravitz 10,506 525 1 3,152

1
50 percent of the interest payable with respect to the portion of the
underpayment attributable to negligence.

In the notices of deficiency, respondent also determined that

interest on deficiencies accruing after December 31, 1984, would

2
All section references are to the Internal Revenue Code, in
effect for the year in issue, unless otherwise stated. All Rule
references are to the Tax Court Rules of Practice and Procedure.
 - 3 -

be calculated at 120 percent of the statutory rate under section

6621(c).3

Petitioners have conceded that they are liable for the

deficiencies in tax, the section 6659 additions to tax, and the

section 6621(c) additional interest as determined in respondent's

notices of deficiency.

The sole issue for decision is whether petitioners are

liable for additions to tax for 1981 for negligence or

intentional disregard of rules or regulations under section

6653(a)(1) and (2).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulated facts and attached exhibits are incorporated by

this reference.

Petitioners Jeffrey and Fran Kravitz resided in Birmingham,

Michigan, when their petition was filed. Petitioners Paul and

Doris Triemstra resided in Troy, Michigan, when their petition

3
The notices of deficiency refer to sec. 6621(d). This
section was redesignated as sec. 6621(c) by sec. 1511(c)(1)(A) of
the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744,
and repealed by sec. 7721(b) of the Omnibus Budget Reconciliation
Act of 1989 (OBRA 1989), Pub. L. 101-239, 103 Stat. 2106, 2399,
effective for tax returns due after Dec. 31, 1989, OBRA 89, sec.
7721(d), 103 Stat. 2400. The repeal does not affect the instant
cases. For simplicity, we will refer to this section as sec.
6621(c). The annual rate of interest under sec. 6621(c) for
interest accruing after Dec. 31, 1994, equals 120 percent of the
interest payable under sec. 6601 with respect to any substantial
underpayment attributable to tax-motivated transactions.
 - 4 -

was filed. Petitioners Sidney and Beverly Cohn resided in

Farmington Hills, Michigan, when their petition was filed.

During 1981, petitioners Jeffrey Kravitz (Kravitz), Paul

Triemstra (Triemstra), and Sidney Cohn (Cohn) were all affiliated

with Bromberg, Robinson, Shapero, Cohn & Burgoyne, P.C.

(Bromberg, Robinson), a 10 to 14 member law firm in Southfield,

Michigan. Kravitz, Triemstra, and Cohn were also general

partners in Bellvine Associates (Bellvine) during 1981. Bellvine

was a four-man partnership formed to invest in Northeast Resource

Recovery Associates (Northeast), a limited partnership. The

fourth partner in Bellvine was Michael C. Hechtman (Hechtman),

another attorney at Bromberg, Robinson. In 1981, Bellvine

acquired a 2.605250-percent interest in Northeast. The

underlying deficiencies in these cases resulted from respondent's

disallowance of claimed losses and tax credits that were passed

through Northeast and Bellvine to petitioners.

The facts of the underlying transaction in these cases are

substantially identical to those in Provizer v. Commissioner,

supra, and may be summarized as follows. In 1981, Packaging

Industries, Inc. (PI), manufactured and sold seven Sentinel

expanded polyethylene (EPE) recyclers to ECI Corp. for $6,867,000

($981,000 each), of which $530,000 was paid in cash. ECI Corp.,

in turn, resold the recyclers to F & G Corp. for $8,138,667

($1,162,666 each), of which $615,000 was paid in cash. F & G

Corp. then leased the recyclers to Northeast, which licensed the
 - 5 -

recyclers to FMEC Corp., which sublicensed them back to PI. All

of the monthly payments required among the entities in the above

transactions offset each other. These transactions were done

simultaneously. We refer to these transactions collectively as

the Northeast transaction.

In Provizer v. Commissioner, supra, we examined the

Clearwater transaction. In the Clearwater transaction, PI sold

six EPE recyclers to ECI Corp. for $981,000 each. ECI Corp., in

turn, resold the recyclers to F & G Corp. for $1,162,666 each.

F & G leased the recyclers to a limited partnership, Clearwater,

which licensed them to FMEC, which sublicensed them to PI. The

transaction involved herein differs in two respects: (1) Seven

Sentinel EPE recyclers were sold and leased rather than six, and

(2) Northeast, rather than Clearwater, leased the recyclers from

F & G and then licensed them to FMEC. Northeast is thus like

Clearwater, occupying the same link in the transactional chain.

In addition, the Sentinel EPE recyclers considered in these cases

are the same type of machines considered in the Provizer case.

The fair market value of a Sentinel EPE recycler in 1981 was not

in excess of $50,000.

PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap. The sublicense

agreements provided that the end-users would transfer to PI 100

percent of the recycled scrap in exchange for a payment from FMEC

Corp. based on the quality and amount of recycled scrap.
 - 6 -

The following interests were all acquired during 1981.

Bellvine acquired a 2.605250-percent limited partnership interest

in Northeast. Triemstra acquired a 26.668-percent interest in

Bellvine for $6,000. Kravitz acquired a 20-percent interest in

Bellvine for $4,500. Cohn acquired a 26.667-percent interest in

Bellvine for $6,000. As a result of the passthrough from

Northeast and Bellvine, petitioners claimed the following

operating losses and credits:

Investment Business
Petitioner Operating Loss Tax Credit Energy Credit
Triemstra $5,424 $5,654 $5,654
Cohn 5,424 5,654 5,654
Kravitz 4,068 4,241 4,241

Respondent disallowed petitioners' claimed deductions and credits

related to Bellvine's investment in Northeast.

Petitioners are all well-educated, practicing attorneys with

experience in business and investing. Kravitz received a B.A.

degree with a major in political science from Miami University in

Oxford, Ohio, in 1965. In 1968, he received a J.D. degree from

the University of Michigan Law School. Kravitz developed a

specialty in real estate law. At the time of trial, Kravitz was

a partner in a firm having approximately 240 attorneys.

In 1965 Triemstra received a B.A. degree from Calvin College

with a double major in mathematics and economics. From 1965 to

1970, Triemstra worked for the Chrysler Corporation (Chrysler).

At Chrysler he received training in finance, worked as a budget

analyst, and then worked at the corporate staff level as a credit
 - 7 -

analyst in the treasury department, and then in the budget

department. During his years at Chrysler, Triemstra also

attended Wayne State University Law School at night and completed

his J.D. course requirements in the summer of 1969. After

receiving his J.D., Triemstra briefly worked part-time and

attended MBA courses at the University of Michigan. In 1971

Triemstra began practicing law full-time at the firm of Fisher,

Franklin & Fuller and stopped taking MBA courses. Triemstra left

that firm in 1974 and joined Bromberg, Robinson where he became a

partner in 1979. He became a shareholder after that firm merged

with Shapero & Cohn and converted to a professional corporation.

At the time of trial, Triemstra was practicing law with the 140-

member Butzel Long law firm.

Cohn attended Wayne State University from 1937 to 1939. He

then entered the Detroit College of Law and attended classes at

night while working in a law office during his first 1-1/2 years

of law school. In 1941 Cohn worked long hours at a defense plant

while still attending law school at night. From 1942 to 1943

Cohn worked in the legal division of the Federal Office of Price

Administration. Upon graduating from law school in 1943, Cohn

obtained a commission in the United States Navy and served on

active duty for 2-1/2 years. During the course of his legal

career, Cohn has syndicated numerous real estate transactions,

many of which were mobile home parks and a number of which were

tax shelters. From 1970 to 1981 he syndicated 16 limited
 - 8 -

partnerships. During 1981 Cohn held investment interests in as

many as 32 limited partnerships. Cohn is proud of his success as

a syndicator and investor, and he also is proud of the results

achieved for those who have invested in his syndications.

Two of Kravitz' clients, Claude Hessee (Hessee) and Les

Garrapee (Garrapee), were in the business of acquiring and

managing apartment complexes. Hessee and Garrapee would locate

apartment complexes to purchase, enter into purchase agreements,

and then find general partners to arrange the equity investment

in the projects. In his representation of Hessee and Garrapee,

Kravitz negotiated the purchase agreements for properties and was

responsible for additional matters including review of title, the

survey, financing of the transaction, and handling the closing.

In 1978 Hessee located an equity investor for a $5,000,000

apartment complex project in Indianapolis, Indiana. The investor

was Richard Roberts (Roberts), a businessman from New York City.

Kravitz represented Hessee in negotiating the purchase agreement,

and Kravitz represented the partnership that bought the property.

Roberts' attorneys prepared the offering memorandum for the

partnership. Kravitz reviewed the offering memorandum to assure

that it correctly reflected the real estate transaction. The

entire transaction closed in roughly 4 to 6 months. During that

time, Kravitz dealt with Roberts and his business associate,

Raymond Grant (Grant). Kravitz served in the same capacity in

the acquisition of two more apartment complexes in which either
 - 9 -

Roberts or Grant was the general partner. Kravitz did not invest

in any of these real estate transactions.

Sometime in August 1981, Roberts informed Kravitz of the

Northeast transaction. Roberts was the general partner in a

number of limited partnerships, including Northeast, which leased

Sentinel EPE recyclers. Roberts also was a 9-percent shareholder

in F & G. Roberts explained the Northeast transaction and its

tax benefits to Kravitz. Kravitz knew that Roberts' background

was in banking, and Kravitz had no indication that Roberts had

any knowledge or experience in plastics, plastics recycling, or

machinery. Kravitz read the entire Northeast offering

memorandum. Roberts told Kravitz that he had visited PI, had

seen a recycler in operation, and believed Northeast was a good

investment.

Kravitz introduced Northeast to Cohn, Triemstra, and

Hechtman and told them of his discussions with Roberts. Kravitz

also discussed the Northeast offering memorandum with Garrapee,

who had experience with Roberts and Grant. Garrapee was a

certified public accountant (C.P.A.) and was responsible for the

financial aspects of the apartment complex projects, including

preparation of the financial reports as well as the pro forma

financial information included in the various offering memoranda.

Garrapee told Kravitz that he and his partners were going to

invest in Northeast. Kravitz did not know whether Garrapee had

any background in plastics or plastics recycling.
 - 10 -

Kravitz also discussed the Northeast transaction and the

Sentinel EPE recycler with Grant. Grant was the president and

100-percent owner of the stock of ECI. Kravitz knew that Grant

was an attorney who had worked in the securities industry, but he

had no reason to believe that Grant had any knowledge or

experience with respect to plastics, plastics recycling, or

machinery. Grant told Kravitz that he had spoken with people at

PI and that these people at PI had told him that the Sentinel EPE

recyclers were priced as if being sold to an independent third

party. Kravitz did not know how the Sentinel EPE recycler worked

or why it was presented as unique. He did not investigate the

Sentinel EPE recycler. Kravitz understood from the offering

memorandum that the Sentinel EPE recycler was not patented, and

he did not conduct a patent search. He never saw a Sentinel EPE

recycler or asked if he could see one. Kravitz never

investigated or visited any end-user company.

Triemstra learned of the Northeast transaction from Kravitz.

Triemstra read the Northeast offering memorandum over the course

of several evenings. Triemstra previously had seen other

offering memoranda. During 1981 Triemstra also invested in a gas

exploration venture and directed the investment of $5,000 of his

retirement plan into a mobile home park. Triemstra discussed the

Northeast transaction with Kravitz, Cohn, and Hechtman. Kravitz

informed Triemstra of his discussions with Roberts and Grant.
 - 11 -

Triemstra had no education or experience in the recycling or

plastics fields.

Triemstra did not investigate PI. He was unaware of the

prevailing price of polyethylene pellets at the time, and he did

not investigate the price of virgin pellets. Triemstra never saw

a Sentinel EPE recycler or asked if he could see one. He never

visited an end-user. Triemstra was unaware of any competing

plastics recyclers and did not investigate the matter.

Cohn learned about the Northeast transaction from Kravitz.

Cohn was provided a copy of the Northeast offering memorandum and

remembers having read the draft legal opinion and the reports of

the evaluators included in the appendices thereto. Cohn

concluded there were no comparable machines solely on the basis

of his reading of the Northeast offering memorandum. Before

investing in Northeast, Cohn contacted Alvin Shapiro (Shapiro), a

C.P.A. who had prepared Cohn's tax returns for many years.

Shapiro told Cohn that he was familiar with the type of

transaction set out in the Northeast offering memorandum and that

Cohn should be careful about the valuation of the Sentinel EPE

recyclers. Shapiro considered valuation to be "the big problem"

with that type of investment.

Cohn had no background in plastics or plastics recycling.

He knew none of the principals at PI and never investigated PI.

Cohn never investigated the price of virgin pellets as compared

with recycled pellets. He never read any periodicals about the
 - 12 -

plastics business. Cohn never saw a Sentinel EPE recycler and

never asked to see one. He never visited an end-user. Despite

his many years in the syndication business and his great success

in that business, with respect to the Northeast transaction, Cohn

"did not spend hours and hours pouring over" the offering

memorandum, but simply relied on Kravitz.

OPINION

In Provizer v. Commissioner, T.C. Memo. 1992-177, a test

case involving the Clearwater transaction and another tier

partnership, this Court (1) found that each Sentinel EPE recycler

had a fair market value not in excess of $50,000, (2) held that

the Clearwater transaction was a sham because it lacked economic

substance and a business purpose, (3) upheld the section 6659

addition to tax for valuation overstatement since the

underpayment of taxes was directly related to the overstatement

of the value of the Sentinel EPE recyclers, and (4) held that

losses and credits claimed with respect to Clearwater were

attributable to tax-motivated transactions within the meaning of

section 6621(c). In reaching the conclusion that the Clearwater

transaction lacked economic substance and a business purpose,

this Court relied heavily upon the overvaluation of the Sentinel

EPE recyclers.

The underlying transaction in these cases (the Northeast

transaction) is in all material respects identical to the

transaction considered in the Provizer case. The Sentinel EPE
 - 13 -

recyclers considered in these cases are the same type of machines

considered in the Provizer case.

Based on the entire record in these cases, including the

extensive stipulations, testimony of respondent's experts, and

cross-examination of them, and petitioners' testimony, we hold

that the Northeast transaction was a sham and lacked economic

substance. In reaching this conclusion, we rely heavily upon the

overvaluation of the Sentinel EPE recyclers. Respondent is

sustained on the question of the underlying deficiency. We note

that petitioners explicitly conceded this issue at trial, in

their briefs, and in a stipulation of settled issues. The record

plainly supports respondent's determination regardless of such

concession. For a detailed discussion of the facts and the

applicable law in a substantially identical case, see Provizer v.

Commissioner, supra.

In the notices of deficiency respondent determined that

petitioners were liable for the negligence additions to tax under

section 6653(a)(1) and (2) for 1981. Petitioners have the burden

of proving that respondent's determination is erroneous. Rule

142(a); Luman v. Commissioner, 79 T.C. 846, 860-861 (1982).

Section 6653(a)(1) imposes an addition to tax equal to 5

percent of the underpayment if any part of an underpayment of tax

is due to negligence or intentional disregard of rules or

regulations. In cases involving negligence, an additional amount

is added to the tax under section 6653(a)(2); such amount is
 - 14 -

equal to 50 percent of the interest payable with respect to the

portion of the underpayment attributable to negligence.

Negligence is defined as the failure to exercise the due care

that a reasonable and ordinarily prudent person would employ

under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). The question is whether a particular taxpayer's actions

in connection with the transactions were reasonable in light of

his experience and the nature of the investment or business. See

Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740 (1973).

When petitioners claimed the disallowed deductions and tax

credits, they had no knowledge of the plastics or recycling

industries and no engineering or technical background.

Petitioners did not independently investigate the Sentinel EPE

recyclers. Petitioners contend that they were reasonable in

claiming deductions and credits with respect to Bellvine's

investment in Northeast and attempt to distinguish their cases

from Provizer v. Commissioner, supra, by arguing that the

circumstances of their investment were unique. Petitioners

contend that it was reasonable for them to rely on Roberts

because: (1) Kravitz had prior dealings with Roberts in real

estate matters, and (2) Roberts had waived his usual commission

for petitioners.

Under some circumstances a taxpayer may avoid liability for

the additions to tax under section 6653(a)(1) and (2) if

reasonable reliance on a competent professional adviser is shown.
 - 15 -

Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d

1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991). Reliance on

professional advice, standing alone, is not an absolute defense

to negligence, but rather a factor to be considered. Id. In

order for reliance on professional advice to excuse a taxpayer

from the negligence additions to tax, the reliance must be

reasonable, in good faith, and based upon full disclosure. Id.;

see Weis v. Commissioner, 94 T.C. 473, 487 (1990); Ewing v.

Commissioner, 91 T.C. 396, 423-424 (1988), affd. without

published opinion 940 F.2d 1534 (9th Cir. 1991); Pritchett v.

Commissioner, 63 T.C. 149, 174-175 (1974).

Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

negligence. LaVerne v. Commissioner, 94 T.C. 637, 652-653

(1990), affd. without published opinion 956 F.2d 274 (9th Cir.

1992), affd. without published opinion sub nom. Cowles v.

Commissioner, 949 F.2d 401 (10th Cir. 1991); Marine v.

Commissioner, 92 T.C. 958, 992-993 (1989), affd. without

published opinion 921 F.2d 280 (9th Cir. 1991); McCrary v.

Commissioner, 92 T.C. 827, 850 (1989); Rybak v. Commissioner, 91

T.C. 524, 565 (1988). We have rejected pleas of reliance when

neither the taxpayer nor the advisers purportedly relied upon by

the taxpayer knew anything about the nontax business aspects of

the contemplated venture. Beck v. Commissioner, 85 T.C. 557
 - 16 -

(1985); Flowers v. Commissioner, 80 T.C. 914 (1983); Steerman v.

Commissioner, T.C. Memo. 1993-447.

In his capacity as attorney, Kravitz dealt with Roberts or

Grant in three real estate ventures during the period 1978 to

1981. Roberts was the general partner in the first venture in

1978. With respect to the latter two ventures, Kravitz could not

recall at trial whether Roberts or Grant was the general partner;

he knew only that it was one or the other. Kravitz testified

that each of the real estate ventures closed without incident; he

found the offering materials for each venture to be appropriate

and correct with respect to the real estate aspects of the

transaction.

Cohn testified that the significant feature to him in any

offering was the performance and reputation of the general

partner. Triemstra testified that among the factors that induced

him to invest in Northeast was his reliance on Kravitz'

"investigation" and prior dealings with Roberts, and the

Government's supposed encouragement of this type of investment.

There is no indication in the record that Cohn or Triemstra ever

had any contact with Roberts or Grant. They knew only what

Kravitz told them, and relied upon his impressions of Roberts and

Grant.

Kravitz had no indication that either Roberts or Grant had

any background in plastics or plastics recycling. Kravitz knew

that Roberts' background was in banking and that Grant was a
 - 17 -

securities lawyer. Kravitz also knew that Roberts and Grant were

both insiders in the Northeast transaction. Roberts was a 9-

percent shareholder in F & G in addition to being the general

partner in Northeast. Grant was the 100-percent owner of ECI.

The Northeast offering memorandum stated that both Roberts and

Grant were promoters. While Roberts waived his commission for

petitioners, he still received a general partners' fee and

percentage interest. This fee and the percentage interest were

unambiguously disclosed in the Northeast offering memorandum.

Similarly, Grant's position as sole shareholder of the "seller"

(ECI) and the profitable nature of that position were disclosed

in the offering memorandum.

We find that petitioners' reliance on Roberts and Grant, two

promoters of Northeast, was not reasonable, not in good faith,

nor based upon full disclosure. See Vojticek v. Commissioner,

T.C. Memo. 1995-444, to the effect that advice from such persons

"is better classified as sales promotion." The record does not

show that either Grant or Roberts possessed any special

qualifications or professional skills in the recycling or

plastics industries. While Kravitz did, in his capacity as an

attorney, deal with Roberts or Grant in three real estate

ventures, the record does not convince us that these prior

dealings, strictly limited to the real estate area in which

Kravitz was experienced, provided any reasonable basis for his

apparent blind faith in Roberts and Grant in plunging into a tax-
 - 18 -

oriented venture in plastics recycling equipment. Triemstra and

Cohn had no first-hand contact or discussion with Roberts or

Grant; they relied exclusively on Kravitz' judgment.

Moreover, the Northeast transaction was not a type of

investment encouraged by the Federal Government. According to

the Northeast offering memorandum, the projected benefits for

each $50,000 investor were investment tax credits in 1981 of

$84,813, plus deductions in 1981 of $40,174. In the first year

of the investment alone, petitioners Triemstra and Cohn each

claimed an operating loss in the amount of $5,424 and investment

tax and business energy credits related to Northeast totaling

$11,308, while their cash payment for the investment in Northeast

was only $6,000 each; Kravitz claimed an operating loss of $4,068

and investment credits totaling $8,482 on a cash outlay of

$4,500. The direct reductions in petitioners' Federal income

tax, from just the tax credits, equaled 188 percent of their cash

payments for the investments. Therefore, like the taxpayers in

Provizer v. Commissioner, T.C. Memo. 1992-177, "except for a few

weeks at the beginning, petitioners never had any money in the

[Northeast] deal." While the Government may have been

encouraging energy conservation, it was not providing tax

benefits for supposed investments that actually were shams and

lacked economic substance. See Greene v. Commissioner, 88 T.C.

376 (1987).
 - 19 -

While the three petitioners paid cash of $16,500, their

total investment credit and business energy credits were $31,098,

and they claimed total operating losses of $14,916 in 1981 alone.

On their 1981 tax returns, Triemstra and Cohn each claimed a

qualified investment with an unadjusted basis of $56,542, and

Kravitz claimed such an investment of $42,407. The three

partners in Bellvine claimed a total qualified investment with a

basis of $155,491. With respect to the significance of the full

investment, see Anderson v. Commissioner, 62 F.3d 1266 (10th Cir.

1995), affg. T.C. Memo. 1993-607.

Petitioners further contend that their failure to look

beyond the Northeast offering memorandum was reasonable.

Petitioners argue: (1) It was reasonable for them not to look

beyond the offering memorandum but to accept its representations

at face value because Federal and State securities laws

discourage false or misleading statements, and (2) petitioners'

familiarity with offering memoranda reasonably led them to

believe that the cautionary language contained in the Northeast

offering memorandum was for the exclusive benefit of the promoter

and could therefore be disregarded.

Kravitz read the entire Northeast offering memorandum. The

memorandum, and particularly the projections of anticipated

business profits, supposedly convinced Kravitz that the Northeast

transaction was a real business proposal. Kravitz did not check

the figures in the offering memorandum or verify the charts with
 - 20 -

the financial projections in any way. Kravitz accepted the

evaluators' reports without question; he did not inquire as to

whether the evaluators were investors or had any conflict of

interest. The tax risk factors detailed in the offering

memorandum did not raise any "red flags" for Kravitz because, he

testified, he believed such caveats were insurance for the

promoters against securities litigation. While Kravitz knew the

tax credits depended on the value of the Sentinel EPE recyclers,

he testified that the fact that much of the purchase price was

represented by F & G's nonrecourse notes did not concern him.

Triemstra testified that the representations in the

Northeast offering memorandum indicated to him that it was

unnecessary to look beyond the offering memorandum. Triemstra

understood that valuation of the Sentinel EPE recyclers was

important for purposes of the investment and energy tax credits,

and he also recognized that the transaction was structured "to

fall within the strata of the tax benefits." Triemstra accepted

the representations in the offering memorandum regarding the

Sentinel EPE recyclers and the reports of the evaluators.

Triemstra ignored the cautionary language in the Northeast

offering memorandum because, he testified, he had seen other

offering memoranda and they all contained such warnings and risk

alerts.

As for Cohn, at trial he could not remember how thoroughly

he read the Northeast offering memorandum, but he did recall
 - 21 -

reading the draft legal opinion and the evaluators' reports

included in the appendices. Cohn understood that the tax credits

were dependent upon the value of the Sentinel EPE recyclers.

Cohn contacted his tax preparer for the previous 25 years, Alvin

Shapiro, a C.P.A. Shapiro told Cohn that he was familiar with

this type of investment and cautioned Cohn to be careful of the

valuation. Shapiro told Cohn that he thought that valuation was

the predominant problem with this type of investment.

Nonetheless, Cohn accepted the representations in the offering

memorandum regarding the Sentinel EPE recyclers and their

purported value. Cohn consulted a tax professional; without even

seeing the offering memorandum, the tax professional told Cohn

that the problem in this type of transaction is the valuation of

the equipment. So Cohn was explicitly warned by his own tax

adviser that the possibility of abuse in this deal most likely

would be in the valuation, but Cohn chose to ignore his own

adviser and simply accepted the valuation set by the promoters.

Cohn also points out that he had syndicated many deals and had

great financial and professional success prior to the plastics

recycling investment. This impressive record only emphasizes

that he had the skills and resources to evaluate the deal under

consideration if he had exercised due care and had considered the

warning of his own long-time tax adviser. Cf. Chamberlain v.

Commissioner, 66 F.3d 729 (5th Cir. 1995), affg. in part and

revg. in part T.C. Memo. 1994-228.
 - 22 -

We hold that petitioners' failure to look beyond the

Northeast offering memorandum and the representations by two

insiders of Northeast was unreasonable and not in keeping with

the standard of the ordinarily prudent person. See LaVerne v.

Commissioner, 94 T.C. 637 (1990); Marine v. Commissioner, 92 T.C.

958 (1989). We find no merit in petitioners' argument about

their supposed faith in the representations in the offering

memorandum allegedly based on the concept that Federal and State

securities laws discourage false and misleading statements.

Petitioners' educational backgrounds and professional experience

belie such feigned naivety. Likewise, since petitioners were

experienced attorneys familiar with offering memoranda, we are

unconvinced by their contention that they reasonably disregarded

the cautionary language and risk alerts because they believed

such admonitions were inserted for the benefit of the promoter.

On its face, the cautionary language is directed to the investor.

Petitioners have presented no reason for us to doubt that the

cautionary language means what it says.

Petitioners' reliance on Heasley v. Commissioner, 902 F.2d

380 (5th Cir. 1990), revg. T.C. Memo. 1988-408, and Ewing v.

Commissioner, 91 T.C. 396 (1988), affd. without published opinion

940 F.2d 1534 (9th Cir. 1991), is misplaced. The facts in the

Heasley case are distinctly different from the facts of these

cases. In the Heasley case, the taxpayers were not educated

beyond high school and had limited investment experience, while
 - 23 -

petitioners herein were highly educated, sophisticated, and

successful practicing attorneys with previous investment

experience individually or in practice. Kravitz counseled

clients on a number of real estate syndications and had reviewed

numerous offering memoranda. Cohn testified at trial that he had

syndicated almost 100 deals. Triemstra was an experienced

attorney and made investments in a gas exploration venture and a

mobile home park in 1981.

The taxpayers in the Heasley case actively monitored their

investment and, as the Fifth Circuit Court of Appeals stated,

intended to profit from the investment. We cannot reach similar

conclusions in the present cases. The record shows that of the

three petitioners, only Kravitz received updates reporting the

progress of the Sentinel EPE recyclers and financial statements

prepared by nonindependent accountants. Yet even though an

August 1982 update indicated to Kravitz that the recyclers were

not performing up to expectations, he decided to invest in more

recyclers that same year. The evidence in these cases is that

petitioners anticipated benefits primarily from tax savings.

Petitioners have failed to provide evidence of any serious

efforts to monitor the investment or reliable evidence of any

profit objective independent of tax savings. We consider

petitioners' arguments with respect to the Heasley case

inapplicable.
 - 24 -

In the Ewing case, the taxpayers' reliance on a legal

opinion letter included in an offering memorandum was considered

reasonable because several of the taxpayers had known and

successfully dealt with the author of the opinion for over 10

years. With respect to these cases, however, nothing in the

record indicates that any of petitioners knew the authors of the

draft opinion letter included in the Northeast offering

memorandum. Instead, only one of petitioners had from one to

three business dealings in real estate matters with the general

partner of the venture over a 3-year period preceding the

investment. Accordingly, we consider petitioners' arguments with

respect to the Ewing case inapplicable.

We conclude that petitioners Triemstra, Cohn, and Kravitz

were negligent in claiming the deductions and credits with

respect to Bellvine's investment in Northeast on their respective

1981 Federal income tax returns. We hold, upon consideration of

the entire record in docket Nos. 14254-89, 17923-89, and 18126-

89, that petitioners Triemstra, Cohn, and Kravitz are liable for

the respective negligence additions to tax under the provisions

of section 6653(a)(1) and (2) for 1981.

Decisions will be entered

for respondent.