T.C. Memo. 1995-582
UNITED STATES TAX COURT
LEON AND BELLE ATKIND, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20539-89. Filed December 6, 1995.
Neil L. Prupis, for petitioners.
Louise Forbes and William T. Hayes, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Norman H. Wolfe pursuant to the provisions of section
7443A(b)(4) and Rules 180, 181, and 183.1 The Court agrees with
1
All section references are to the Internal Revenue Code, in
effect for the year in issue, unless otherwise indicated. All
Rule references are to the Tax Court Rules of Practice and
(continued...)
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and adopts the opinion of the Special Trial Judge, which is set
forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
WOLFE, Special Trial Judge: This case is 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 this case are substantially
identical to those in the Provizer case.
In a notice of deficiency dated May 31, 1989, respondent
determined a deficiency in petitioners' joint 1981 Federal income
tax in the amount of $109,168.19 (in addition to $29,995
previously assessed as a deficiency) and additions to tax for
that year in the amount of $41,748.95 under section 6659 for
valuation overstatement, in the amount of $6,958 under section
6653(a)(1) for negligence, and under section 6653(a)(2) in an
amount equal to 50 percent of the interest due on the
underpayment attributable to negligence.2 Respondent also
1
(...continued)
Procedure.
2
In the May 31, 1989, notice of deficiency, respondent also
determined a deficiency in and additions to petitioners' Federal
income tax for taxable year 1982. The deficiency and additions
to tax determined for 1982 have been settled by the parties and
are no longer at issue. Petitioners have conceded that the
statute of limitations on the assessment of income tax due from
(continued...)
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determined that interest on deficiencies accruing after December
31, 1984, would be calculated at 120 percent of the statutory
rate under section 6621(c) with respect to part of petitioners'
underpayment of tax for 1981.
Prior to issuance of the May 31, 1989, notice of deficiency,
petitioners agreed to an adjustment of losses relating to a
partnership not at issue herein, Ethynol Cogeneration Associates.
On November 1, 1990, the parties filed a Stipulation settling
adjustments contained in the May 31, 1989, notice of deficiency
regarding petitioners' interest in Gainesville Associates
(Gainesville), a limited partnership.3 On March 7, 1994, the
parties filed a Stipulation of Settled Issues with respect to
items claimed on petitioners' Federal income tax returns
resulting from their participation in the Plastics Recycling
Program. The parties stipulated that petitioners are not
entitled to any deductions, losses, investment credits, business
energy investment credits, or any other tax benefits claimed on
2
(...continued)
petitioners for the taxable years 1981 and 1982 had not expired
on May 31, 1989, the date when respondent mailed the notice of
deficiency.
3
Petitioners conceded disallowance of losses claimed in 1981
in the amount of $91,367 and in 1982 in the amount of $89,710,
and the additional interest under sec. 6621(c) on the
deficiencies arising from the disallowed losses. Respondent
conceded all penalties asserted relating to petitioners'
investment in Gainesville in 1981 and 1982, except for the sec.
6621(c) additional interest.
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their tax returns as a result of their participation in the
Plastics Recycling Program.
The issues for decision are: (1) Whether petitioners are
liable for additions to tax for negligence or intentional
disregard of rules or regulations under section 6653(a)(1) and
(2); (2) whether petitioners are liable for the addition to tax
under section 6659 for an underpayment of tax attributable to
valuation overstatement; and (3) whether petitioners are liable
for increased interest under section 6621(c).
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 resided in Clifton, New Jersey, when
their petition was filed.
During 1981, Leon Atkind (petitioner) was an executive with
NBO Stores Inc. (NBO), a discount store chain founded and owned
by him. His spouse, petitioner Belle Atkind, was also employed
as an executive at NBO during that year. On their 1981 Federal
income tax return, petitioners reported gross income from wages,
interest, dividends, capital gains, and other sources in the
amount of $363,705. Consequently, in the absence of significant
deductions or credits, they were subject to payment of Federal
income taxes in substantial amounts for 1981.
In 1981, petitioner acquired a 3.094-percent limited
partnership interest in Hyannis Recycling Associates (Hyannis)
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for his investment of $25,000. As a result of the passthrough
from Hyannis, petitioners deducted on their 1981 Federal income
tax return an operating loss in the amount of $20,326 and claimed
investment tax and business energy credits totaling $39,604. The
underlying deficiency in this case results from respondent's
disallowance of petitioners' claimed operating loss and credits
related to Hyannis for 1981.
The underlying transaction in this case was found by this
Court to be the initial Plastics Recycling transaction in
Provizer v. Commissioner, supra, and may be summarized as
follows. In 1981, Packaging Industries, Inc. (PI), manufactured
and sold six Sentinel expanded polyethylene (EPE) recyclers to
ECI Corp. for $5,400,000 ($900,000 each), of which $340,000 was
to be paid in cash. ECI Corp., in turn, resold the recyclers to
the Hyannis limited partnership for $6,400,000 ($1,066,666 each),
of which $440,000 was paid in cash. Hyannis then leased the
recyclers to FMEC, which subleased them back to PI. All of the
monthly payments for nonrecourse notes, leases, and licenses,
which were required among the entities in the above transactions,
offset each other. These transactions were accomplished
simultaneously.
After the Hyannis offering closed, the safe-harbor leasing
rules were enacted as part of the Economic Recovery Tax Act of
1981 (ERTA), Pub. L. 97-34, 95 Stat. 172. The underlying
transaction was restructured in a manner designed to take
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advantage of the safe-harbor provisions. F & G corporation
became the safe-harbor lessor and was interposed between ECI and
the primary leasing partnership, in this case Hyannis.
Subsequent Plastics Recycling programs were structured in a
similar manner to take advantage of the new statutory safe-harbor
opportunities. See Provizer v. Commissioner, supra. We refer to
the transactions herein collectively as the Hyannis transaction.
In the Provizer case, we considered such a restructured
Plastics Recycling transaction, 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 then leased
the recyclers to Clearwater, which licensed them to FMEC, which
sublicensed them to PI. The transaction involved herein differed
from the Clearwater transaction in the following respects: (1)
F & G purchased the recyclers for $6,400,000, rather than the
$6,975,996 paid in Clearwater, and (2) Hyannis, rather than
Clearwater, leased the recyclers from F & G and then licensed
them to FMEC.4 In all other material respects the transactions
are substantively identical. Hyannis is thus like Clearwater,
occupying the same link in the transactional chain. In addition,
4
There is no explanation in the record as to why the six
recyclers were sold to F & G for $6,400,000 in the Hyannis
transaction but later the same number of identical machines sold
for $6,975,996 in subsequent Plastics Recycling transactions. We
note that the Hyannis partnership initially closed at the lower
price prior to the enactment of the safe-harbor legislation, and
subsequently the arrangement was modified in an attempt to take
advantage of those rules by inserting F & G in the transaction.
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the Sentinel EPE recyclers considered in this case are the same
type of machines considered in Provizer. 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.
Petitioner is a sophisticated and very successful
businessman, entrepreneur, and investor. After graduating from
high school, petitioner attended Patterson Junior College for 1
year, and then the City College of New York for approximately 3
years at night. Petitioner pursued a major in philosophy and
received 2 years' worth of credits for the night classes.
Petitioner started working at age 9, delivering newspapers out of
his father's general store. Petitioner later employed others to
deliver newspapers and also sold food and merchandise from his
father's general store to his newspaper customers. Petitioner
continued his newspaper delivery and merchandising business until
he married at age 18. Then he started a business selling hosiery
by telephone.
Petitioner prospered in the hosiery telemarketing business
and soon began manufacturing hosiery as well. That business was
expanded to include manufacturing knitwear, as well as hosiery.
Eventually, this business involved importing, manufacturing, and
selling on a national basis. In time, petitioner sold that
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business and started a new business known as NBO. NBO was a
discount retail store chain which sold menswear. Petitioner sold
half of NBO to a Canadian business conglomerate in 1984, but he
continued to run the business. In 1988, petitioner sold his
remaining interest in NBO for $25,000,000.
Petitioner was an active investor in the 1980's. Between
1980 and the date of trial, petitioner estimated that he invested
approximately $16,000,000 in somewhere between 65 and 70
different enterprises. Petitioner generally relied on his own
judgment in evaluating proposed investments under $100,000; for
larger investments he sought out professional guidance or
counsel.
Petitioner learned of the Hyannis investment through an
acquaintance, Elliot I. Miller (Miller). At that time, Miller
was a practicing attorney who was experienced in tax matters and
was employed as corporate counsel to PI. Miller was a
shareholder in F & G in 1981. He shared office space with
Raymond Grant (Grant) and Richard Roberts (Roberts) from 1982
through 1984. Grant was the 100-percent owner of the stock of
ECI. Miller represented Grant personally and Grant's clients who
invested in other programs that Grant promoted. Miller
recommended that petitioner speak with Roberts about proposed
investments.
Roberts was a businessman and the general partner in a
number of limited partnerships that leased Sentinel EPE
recyclers, including Hyannis. Roberts was also a 9-percent
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shareholder in F & G. Grant and Roberts have been general
partners together in other investments. The Hyannis offering
memorandum disclosed that Roberts and Grant could each be deemed
promoters of Hyannis and that Miller represented Grant. Roberts
mailed petitioner a copy of the Hyannis offering memorandum.
Petitioner reviewed the offering memorandum and directed his
questions to Roberts. Based on the information provided by these
sources, and his personal judgment, petitioner invested in
Hyannis.
Petitioners do not have any education or work experience in
plastics recycling or plastics materials. Petitioner did not
investigate PI. Petitioners did not see a Sentinel recycler
before investing in Hyannis.
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
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transaction lacked economic substance and a business purpose,
this Court relied heavily upon the overvaluation of the Sentinel
EPE recyclers.
The underlying transaction in this case (the Hyannis
transaction) is in all material respects identical to the
transaction considered in the Provizer case. The Sentinel EPE
recyclers considered in this case are the same type of machines
considered in the Provizer case.
Based on the entire record in this case, including the
extensive stipulations, testimony of respondent's experts, and
petitioner's testimony, we hold that the Hyannis 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 petitioner has
conceded this issue in a Stipulation of Settled Issues filed
shortly before trial. The record plainly supports respondent's
determination regardless of this concession. For a detailed
discussion of the facts and the applicable law in a substantially
identical case, see Provizer v. Commissioner, supra.
Issue 1. Sec. 6653(a) Negligence
Respondent determined that petitioners were liable for the
additions to tax under section 6653(a)(1) and (2). Petitioners
have the burden of proving that respondent's determination of an
addition to tax is erroneous. Rule 142(a); Luman v.
Commissioner, 79 T.C. 846, 860-861 (1982).
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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
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).
Petitioners contend that they were reasonable in claiming
deductions and credits with respect to their investment in
Hyannis and attempt to distinguish the instant case from Provizer
v. Commissioner, supra, by arguing: (1) Petitioner acted
reasonably in relying upon the offering memorandum and the advice
and representations of Miller and Roberts; and (2) petitioner is
not a well-educated, sophisticated investor and was not seeking
to shelter income through Hyannis.
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. There is
nothing in the record indicating that petitioners independently
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investigated the Sentinel EPE recyclers or knew anything about
their value. Petitioner essentially argues that he reasonably
relied on the purported value of the Sentinel EPE recyclers set
out in the offering memorandum and on the statements made by or
on behalf of the promoters.
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.
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
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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
(1985); Flowers v. Commissioner, 80 T.C. 914 (1983); Steerman v.
Commissioner, T.C. Memo. 1993-447.
Petitioner's investigation of the Hyannis transaction did
not extend beyond discussions with Miller and Roberts and a
review of the offering memorandum. Petitioner had met Miller,
and Miller had urged him to consider Roberts' proposals.
Petitioner had taken no action on several deals proposed by
Roberts, but the plastics recycling idea interested him.
Moreover, petitioner testified that because he knew Miller
personally and had a lot of confidence in him, petitioner decided
to look into the plastics recycling proposal. Petitioner did not
explain exactly why he had any confidence in Miller. The record
is devoid of any history of past dealings between petitioner and
Miller on either a personal or professional basis. Nonetheless,
petitioner's purported confidence in Miller is petitioner's only
explanation of his reason for considering the recycling proposal
and for failing to make any investigation of Roberts.
Petitioner indicated some interest when Roberts called about
the plastics recycling deal, and a copy of the Hyannis offering
memorandum was sent to petitioner. Petitioner testified that he
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did not read the entire opinion letter included in the offering
memorandum. At trial petitioner could not recall the name of the
equipment involved, the value of the equipment, or that the
offering memorandum disclosed Miller's relationship with PI.
Petitioner was invited to see the Sentinel EPE recycler but
declined because he "wasn't disposed to do that." Petitioner
testified that he had some conversations with Roberts after
reviewing the offering memorandum, but he could not recall the
particulars of those conversations. Petitioner could only
surmise that because he proceeded with the investment, he must
have received "answers that apparently satisfied" him.
We find petitioner's purported reliance on Miller and
Roberts was not reasonable, not in good faith, nor based upon
full disclosure. The record does not show that either Miller or
Roberts possessed any special qualifications or professional
skills in the recycling or plastics industries. Miller was
corporate counsel to PI and Roberts was general partner and a
promoter of Hyannis. See Vojticek v. Commissioner, T.C. Memo.
1995-444, to the effect that advice from such persons "is better
classified as sales promotion". Moreover, petitioner's testimony
indicates that he relied more on his personal judgment or
instincts in making the investment than any conversations he may
have had with Miller and Roberts. A self-described risk taker
and marketing person, petitioner testified that when he first
heard of the plastics recycling transaction, "it struck a chord
for whatever reason" and sounded like a viable idea. Petitioner
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testified that he typically relied on his own judgment for
investments under $100,000; his investment in Hyannis was in the
amount of $25,000. When asked who he relied upon in making the
Hyannis investment, petitioner replied, "My own judgment."
Petitioner attempts to distinguish himself from the
taxpayers in Provizer v. Commissioner, T.C. Memo. 1992-177, by
arguing that he was not an educated, sophisticated investor and
attorney seeking to shelter income. However, while petitioner
did not receive a college degree, he did receive some higher
education and he was anything but unsophisticated in business and
investing. Petitioner's entrepreneurial spirit, energy, and
business acumen led to the creation and prosperity of various
apparel businesses. Petitioner's business ventures culminated in
the founding of NBO, a business which became so successful
petitioner was able to sell half of it for $25,000,000 in 1988.
In addition, from 1980 to the time of trial, petitioner invested
approximately $16,000,000 in upwards of 70 ventures. In light of
petitioner's remarkable and impressive business success and
extensive investing activity, the fact that he never received a
college degree does not persuade us that he was an
unsophisticated businessman or investor.
Similarly, we are not persuaded that petitioner lacked
interest in the tax benefits generated by Hyannis. According to
the Hyannis offering memorandum, the projected benefits for each
$50,000 investor were investment tax credits in 1981 of $79,200
plus deductions in 1981 of $42,491. In the first year of the
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investment alone, petitioners claimed an operating loss in the
amount of $20,326 and investment tax and business energy credits
related to Hyannis totaling $39,604, while petitioners'
investment in Hyannis was $25,000. The direct reductions in
petitioners' Federal income tax, from just the tax credits,
equaled 158 percent of their cash investment. Given petitioners'
combined gross income of $363,705 for 1981, we find petitioner's
alleged lack of interest in the tax benefits generated by Hyannis
unconvincing.
Also, we are unpersuaded by petitioners' efforts to
trivialize this case. The argument is that because of
petitioner's heavy business responsibilities, his great wealth,
and his substantial income, he could not be expected to spend
much time on a mere $25,000 investment. In petitioner's words
"because of the comparatively minimal amount, it did not get the
diligence or the discretion that probably should have been given
to it". In our view, despite petitioner's numerous and
significant responsibilities, he is required to exercise due care
with respect to his Federal income taxes. Obviously, there is no
rule permitting wealthy people to be negligent with respect to
claims of tax benefits but imposing penalties on those with less
income who claim the same benefits. Moreover, the record here
demonstrates that the tax benefits of the Hyannis deal were not
trivial to petitioner. While petitioner paid $25,000 for his
share of Hyannis, on his 1981 tax return he indicated ownership
of investment property of $198,016 related to Hyannis, and that
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amount is significant, even on petitioners' tax return.
Moreover, petitioner reported total tax of $97,751 for 1981, but
reached that figure by claiming $39,604 in investment tax and
business energy credits related to Hyannis and an operating loss
of $20,326. Consequently, we consider the trivialization
argument inappropriate and inaccurate. Petitioners' tax benefits
claimed with respect to Hyannis were not negligible--even for
them.
Petitioners have not distinguished their situation from that
of the taxpayers in Provizer v. Commissioner, supra, where the
negligence additions to tax were upheld. We hold, upon
consideration of the entire record, that petitioners are liable
for the negligence additions to tax under the provisions of
section 6653(a)(1) and (2). Respondent is sustained on this
issue.
Issue 2. Sec. 6659 Valuation Overstatement
Respondent determined that petitioners are liable for the
section 6659 addition to tax for valuation overstatement on the
portion of their 1981 underpayment attributable to the tax
benefits claimed with respect to Hyannis. A graduated addition
to tax is imposed when an individual has an underpayment of tax
that equals or exceeds $1,000 and "is attributable to" a
valuation overstatement. Sec. 6659(a), (d). A valuation
overstatement exists if the fair market value (or adjusted basis)
of property claimed on a return equals or exceeds 150 percent of
the amount determined to be the correct amount. Sec. 6659(c).
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If the claimed valuation exceeds 250 percent of the correct
value, the addition is equal to 30 percent of the underpayment.
Sec. 6659(b).
Petitioners claimed an operating loss and investment tax
credits based on purported values of $1,066,666 for each Sentinel
EPE recycler. Petitioners stipulated that the fair market value
of each recycler was not in excess of $50,000. Therefore, if
disallowance of petitioners' claimed tax benefits is attributable
to the valuation overstatement, petitioners are liable for the
section 6659 addition to tax at the rate of 30 percent of the
underpayment of tax attributable to the tax benefits claimed with
respect to Hyannis.
Section 6659 does not apply to underpayments of tax that are
not "attributable to" valuation overstatements. See McCrary v.
Commissioner, 92 T.C. 827 (1989); Todd v. Commissioner, 89 T.C.
912 (1987), affd. 862 F.2d 540 (5th Cir. 1988). To the extent
taxpayers claim tax benefits that are disallowed on grounds
separate and independent from alleged valuation overstatements,
the resulting underpayments of tax are not regarded as
attributable to valuation overstatements. Krause v.
Commissioner, 99 T.C. 132, 178 (1992) (citing Todd v.
Commissioner, supra), affd. sub nom. Hildebrand v. Commissioner,
28 F.3d 1024 (10th Cir. 1994). However, when valuation is an
integral factor in disallowing deductions and credits, section
6659 is applicable. See Illes v. Commissioner, 982 F.2d 163, 167
(6th Cir. 1992) (section 6659 addition to tax applies if a
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finding of lack of economic substance is "due in part" to a
valuation overstatement), affg. T.C. Memo. 1991-449; Gilman v.
Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), affg. T.C. Memo.
1989-684; Masters v. Commissioner, T.C. Memo. 1994-197; Harness
v. Commissioner, T.C. Memo. 1991-321.
In the Stipulation of Settled Issues, petitioners conceded
that they "are not entitled to any deductions, losses, investment
credits, business energy investment credits or any other tax
benefits claimed on their tax returns as a result of their
participation in the Plastics Recycling Program". In Todd v.
Commissioner, supra, and McCrary v. Commissioner, supra, we
denied application of section 6659, even though the subject
property was overvalued, because the related deductions and
credits had been conceded or denied in their entirety on other
grounds. In Todd, we found that an underpayment was not
attributable to a valuation overstatement because property was
not placed in service during the years in issue. In McCrary, we
found the taxpayers were not liable for the section 6659 addition
to tax when, prior to the trial of the case, the taxpayers
conceded that they were not entitled to the investment tax credit
because the agreement in question was a license and not a lease.
In both cases, the underpayment was attributable to something
other than a valuation overstatement.
This Court has held that concession of the investment tax
credit in and of itself does not relieve taxpayers of liability
for the section 6659 addition to tax. Dybsand v. Commissioner,
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T.C. Memo. 1994-56; Chiechi v. Commissioner, T.C. Memo. 1993-630.
Instead, what is significant is the ground upon which the
investment tax credit is disallowed or conceded. Chiechi v.
Commissioner, supra. Even in situations in which there are
arguably two grounds to support a deficiency and one supports a
section 6659 addition to tax and the other does not, the taxpayer
may still be liable for the addition to tax. Gainer v.
Commissioner, 893 F.2d 225, 228 (9th Cir. 1990), affg. T.C. Memo.
1988-416; Irom v. Commissioner, 866 F.2d 545, 547 (2d Cir. 1989),
vacating in part and remanding T.C. Memo. 1988-211; Harness v.
Commissioner, supra.
In petitioner's case, there was no argument made and no
evidence presented showing that disallowance and concession of
the claimed tax benefits, including the investment tax credits,
related to anything other than a valuation overstatement. To the
contrary, petitioners stipulated substantially the same facts
concerning the underlying transactions as we found in Provizer v.
Commissioner, supra. In the Provizer case, we held that the
taxpayers were liable for the section 6659 addition to tax
because the underpayment of taxes was directly related to the
overvaluation of the Sentinel EPE recyclers. The overvaluation
of the recyclers, exceeding 2325 percent, was an integral part of
our findings in Provizer that the transaction was a sham and
lacked economic substance. Similarly, the record in this case
plainly shows that the overvaluation of the recyclers was
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integral to and was the core of our holding that the underlying
transaction herein was a sham and lacked economic substance.
Consistent with our findings in Provizer, petitioners
stipulated that the Hyannis partnership had no net equity value,
that Hyannis' sole activity lacked any potential for profit, and
that the Hyannis transaction therefore lacked economic substance.
When a transaction lacks economic substance, section 6659 will
apply because the correct basis is zero and any basis claimed in
excess of that is a valuation overstatement. Gilman v.
Commissioner, supra; Rybak v. Commissioner, 91 T.C. 524, 566-567
(1988); Zirker v. Commissioner, 87 T.C. 970, 978-979 (1986);
Donahue v. Commissioner, T.C. Memo. 1991-181, affd. without
published opinion 959 F.2d 234 (6th Cir. 1992), affd. sub nom.
Pasternak v. Commissioner, 990 F.2d 893 (6th Cir. 1993).
We held in Provizer v. Commissioner, T.C. Memo. 1992-177,
that each Sentinel EPE recycler had a fair market value not in
excess of $50,000. Our finding in the Provizer case that the
Sentinel EPE recyclers had been overvalued was integral to and
inseparable from our finding of a lack of economic substance.
Petitioners conceded that the Hyannis transaction was similar to
the Clearwater transaction described in Provizer v. Commissioner,
supra, and that the Hyannis transaction lacked economic
substance. Given those concessions, and the fact that the record
here plainly shows that the overvaluation of the recyclers was
the primary reason for the disallowance of the claimed tax
benefits, and the fact that no argument was made and no evidence
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was presented to the Court to prove that disallowance and
concession of the claimed tax benefits related to anything other
than a valuation overstatement, we conclude that the deficiency
caused by the disallowance of the claimed tax benefits was
attributable to the overvaluation of the Sentinel EPE recyclers.
Finally, we consider petitioners' express argument as to
waiver of the addition to tax. On brief, petitioners contested
imposition of the section 6659 addition to tax on the grounds
that respondent erroneously failed to waive the penalty. Section
6659(e) authorizes respondent to waive all or part of the
addition to tax for valuation overstatements if taxpayers
establish that there was a reasonable basis for the adjusted
bases or valuations claimed on the returns and that such claims
were made in good faith. Respondent's refusal to waive a section
6659 addition to tax is reviewable by this Court for abuse of
discretion. Krause v. Commissioner, 99 T.C. at 179.
Petitioner arrived at the claimed valuation by virtue of his
purported reliance on Miller and Roberts, in addition to the
representations and evaluations contained in the offering
memorandum. He contends that such reliance was reasonable and,
therefore, respondent should have waived the section 6659
addition to tax.
We have found that petitioner's purported reliance on
Miller, Roberts, and the offering memorandum was not reasonable.
Miller was corporate counsel to PI, and Roberts was a promoter of
Hyannis. See Vojticek v. Commissioner, T.C. Memo. 1995-144,
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rejecting advice from such persons. Neither Miller or Roberts
knew anything about plastics or plastics recycling. The
evaluators whose reports were appended to the offering memorandum
each owned interests in partnerships which leased Sentinel EPE
recyclers. The offering memorandum contained numerous caveats,
including the following: NO OFFEREE SHOULD CONSIDER THE CONTENTS
OF THIS MEMORANDUM *** AS *** EXPERT ADVICE. EACH OFFEREE SHOULD
CONSULT HIS OWN PROFESSIONAL ADVISERS. Petitioner did not see a
Sentinel EPE recycler prior to investing in Hyannis, and he
presented no evidence that he independently investigated the
recyclers.
Petitioner also contends that he did not know and could not
know of any comparable product by which to compare prices because
one did not exist. In fact, there were at least four other
plastics recycling machines available during 1981, ranging in
price from $20,000 to $200,000: Foremost Densilator,
Nelmor/Weiss Densification System (Regenolux), Buss-Condux
Plastcompactor, and Cumberland Granulators. See Provizer v.
Commissioner, supra. Moreover, petitioners stipulated that
information published prior to the plastics recycling
transactions indicated that several similar machines were already
on the market.
Petitioners did not have a reasonable basis for the adjusted
bases or valuations claimed on their 1981 return with respect to
their investment in Hyannis. Accordingly, respondent properly
found that petitioner's purported reliance on Miller, Roberts,
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and the appraisal in the promotional materials was unreasonable.
The record does not establish an abuse of discretion on the part
of respondent but supports respondent's position. We hold that
respondent's refusal to waive the section 6659 addition to tax is
not an abuse of discretion. Petitioners are liable for the
section 6659 addition to tax at the rate of 30 percent of the
underpayment of tax attributable to the disallowed credits for
1981. Respondent is sustained on this issue.
Issue 3. Sec. 6621(c) Tax Motivated Transactions
Respondent determined that interest on deficiencies accruing
after December 31, 1984, would be calculated under section
6621(c). The annual rate of interest under section 6621(c)
equals 120 percent of the interest payable under section 6601
with respect to any substantial underpayment attributable to tax-
motivated transactions. An underpayment is substantial if it
exceeds $1,000. Sec. 6621(c)(2).
The term "tax motivated transaction" includes "any sham or
fraudulent transaction." Sec. 6621(c)(3)(A)(v). In this case,
petitioners stipulated that the Hyannis transaction lacked
economic substance. Transactions devoid of economic substance
are sham transactions for purposes of section 6621(c)(3)(A)(v).
Friendship Dairies, Inc. v. Commissioner, 90 T.C. 1054, 1068
(1988); Cherin v. Commissioner, 89 T.C. 986, 1000 (1987).
Therefore, by definition the Hyannis transaction is tax motivated
under section 6621(c)(3)(A)(v). Moreover, the term "tax
motivated transaction" includes any section 6659(c) valuation
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overstatement. Sec. 6621(c)(3)(A)(i). In 1981, petitioners
claimed a value for the recyclers in excess of 150 percent of the
true value of the recyclers. Therefore, petitioners had a
valuation overstatement as defined in section 6659(c).
For section 6621(c) interest to apply, the underpayment of
taxes must be "attributable to" a tax-motivated transaction.
Where a valuation overstatement or other category of tax-
motivated transaction is an integral part of, or inseparable
from, the ground for disallowance of an item, section 6621(c)
increased interest applies. See McCrary v. Commissioner, 92 T.C.
at 859. Petitioners stipulated that the Hyannis transaction
lacked economic substance and conceded respondent's disallowance
of their claimed deductions and credits related to Hyannis. By
virtue of its lack of economic substance and the overvaluation of
the Sentinel EPE recyclers, the Hyannis transaction is by
definition a sham transaction. Moreover, we have already found
that the valuation overstatement of the recyclers was an integral
part of the ground for disallowance of the items related to
Hyannis. Accordingly, respondent's determination as to the
applicable interest rate for deficiencies attributable to tax-
motivated transactions is sustained, and the increased rate of
interest applies for the taxable year in issue.
To reflect concessions and our conclusions,
Decision will be entered
under Rule 155.