Reimann v. Commissioner

T.C. Memo. 1996-84

UNITED STATES TAX COURT

PETER AND URSULA REIMANN, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9915-86, 35003-86, Filed February 27, 1996.
3398-92, 13892-92.

Elliot I. Miller, for petitioners in docket Nos. 9915-86 and

35003-86.

Bernard S. Mark and Richard S. Kestenbaum, for petitioners

in docket Nos. 3398-92 and 13892-92.

1
Cases of the following petitioners are consolidated herewith
for opinion: Edward Brodie and Estate of Alana Brodie, Deceased,
Edward Brodie, Executor, docket No. 35003-86; Marvin and Suzanne
Yarnell, docket No. 3398-92; and Philip and Roberta Yarnell,
docket No. 13892-92. The cases were tried and briefed
separately.
 - 2 -

Maureen T. O'Brien, Paul T. Colleran, and David N. Brodsky,

for respondent in docket No. 9915-86.

Maureen T. O'Brien, Paul T. Colleran, Mae J. Lew, Louise

Forbes, and David N. Brodsky, for respondent in docket No. 35003-

86.

Lawrence L. Davidow and Frances Ferrito Regan, for

respondent in docket Nos. 3398-92 and 13892-92.

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 issues in

these cases involve the leasing of Sentinel expanded polyethylene

2
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
Procedure.
 - 3 -

(EPE) recyclers by partnerships in which petitioners held limited

partnership interests. The facts of the underlying transactions

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 taxable year 1981:
Additions to Tax
Docket No. Petitioner Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6659

9915-86 Peter and Ursula Reimann $43,025.11 --- --- $8,873.10

35003-86 Edward Brodie and Estate
of Alana Brodie 22,711.72 --- --- 7,944.52
1
3398-92 Marvin and Suzanne Yarnell 165,899.00 $7,716 49,770.00
1
13892-92 Philip and Roberta Yarnell 133,225.00 6,051 36,303.00
1
50 percent of the interest payable with respect to the portion of the underpayment attributable to
negligence.

Respondent also determined in each case that interest on

deficiencies accruing after December 31, 1984, would be

calculated at 120 percent of the statutory rate under section

6621(c).3 In docket Nos. 9915-86 and 35003-86, in amendments to

the answers, respondent asserted additions to tax for 1981 under

section 6653(a)(1) in the respective amounts of $2,151 and

3
The notices of deficiency in docket Nos. 9915-86 and 35003-
86 refer to sec. 6621(d). Sec. 6621(c) was repealed by sec.
7721(b) of the Omnibus Budget Reconciliation Act of 1989 (OBRA
89), 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, 1984, equals 120 percent of the interest payable
under sec. 6601 with respect to any substantial underpayment
attributable to tax-motivated transactions.
 - 4 -

$1,202, and under section 6653(a)(2) in amounts equal to 50

percent of the interest due on the respective underpayments

attributable to negligence.

In docket No. 35003-86, respondent also determined

deficiencies for taxable years 1979 and 1980. Those deficiencies

and a portion of the deficiency determined for taxable year 1981

arose from adjustments relating to the Brodies' investment in

Egar Investment Partners, with respect to the Arbitrage Tax

Shelter Management Project. On October 2, 1992, respondent and

the Brodies filed a Stipulation of Settlement of Tax Shelter

Adjustment pertaining to all of the adjustments relating to Egar

Investment Partners. The remaining adjustments in respondent's

notice of deficiency not so settled, and at issue herein, pertain

exclusively to Plymouth Equipment Associates.

Stipulations of Settled Issues concerning petitioners'

respective investments in the Partnerships, and filed in each of

these consolidated cases, provide in part:

1. Petitioners are not entitled to any deductions,
losses, investment credits, business energy investment
credits or any other tax benefits claimed on their tax
returns[4] as a result of their participation in the
Plastics Recycling Program.

2. The underpayments in income tax attributable to
petitioners' participation in the Plastics Recycling
Program are substantial underpayments attributable to
tax motivated transactions, subject to the increased

4
The Stipulation of Settled Issues in docket No. 9915-86
refers to "tax return" in the singular, instead of the plural
"tax returns".
 - 5 -

rate of interest established under I.R.C. §6621(c),
formerly section 6621(d).

3. This stipulation resolves all issues that relate to
the items claimed on petitioners' tax returns resulting
from their participation in the Plastics Recycling
Program, with the exception of petitioners' potential
liability for additions to the tax for valuation
overstatements under I.R.C. §6659 and for negligence
under the applicable provisions of I.R.C. Section
6653(a). [See supra note 3.]

Accordingly, the only issues remaining for resolution in these

consolidated cases are: (1) Whether petitioners are liable for

additions to tax under section 6653(a)(1) and (2) for negligence;

and (2) whether petitioners are liable for additions to tax under

section 6659 for underpayments of tax attributable to valuation

overstatements.

FINDINGS OF FACT

Some of the facts have been stipulated in each case and are

so found. The stipulated facts and attached exhibits are

incorporated in the respective cases by this reference. For

convenience, facts unique to each of the individual cases under

consideration are set forth separately at the end of the findings

of fact.

Petitioners Reimann are limited partners in Scarborough

Leasing Associates (Scarborough) and petitioners Brodie and the

Yarnells are limited partners in Plymouth Equipment Associates

(Plymouth). For convenience we refer to these two partnerships

collectively as the Partnerships.

Petitioners have stipulated that the transactions involving

the Sentinel EPE Recyclers leased by the Partnerships are
 - 6 -

substantially identical to those in the Clearwater Group limited

partnership (Clearwater), the partnership considered in Provizer

v. Commissioner, T.C. Memo. 1992-177. In addition, petitioners

have stipulated substantially the same facts concerning the

underlying transactions as we found in the Provizer case.

In the Provizer case, Packaging Industries, Inc. (PI),

manufactured and sold six Sentinel 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 Corp. then leased the recyclers

to Clearwater, which licensed the recyclers to FMEC Corp., which

sublicensed them to PI. The sales of the recyclers from PI to

ECI Corp. were financed with nonrecourse notes. Approximately 7

percent of the sales price of the recyclers sold by ECI Corp. to

F & G Corp. was paid in cash with the remainder financed through

notes. These notes provided that 10 percent of the notes were

recourse but that the recourse portion of the notes would only be

due after the nonrecourse portion, 90 percent, had been paid in

full.

All of the monthly payments required among the entities in

the above transactions offset each other. These transactions

were done simultaneously. Although the recyclers were sold and

leased for the above amounts under the structure of simultaneous

transactions, the fair market value of a Sentinel EPE recycler in

1981 and 1982 was not in excess of $50,000.

PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap. The sublicense
 - 7 -

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.

Like Clearwater, each of the Partnerships herein was formed

to lease Sentinel EPE recyclers from F & G Corp. and license

those recyclers to FMEC Corp. The transactions of the

Partnerships differ from the underlying transactions in the

Provizer case only as to (1) the number of machines sold, leased,

licensed, and sublicensed, and (2) the entity that leased the

machines from F & G Corp. and licensed them to FMEC Corp. In

1981 Plymouth and Scarborough each leased and licensed seven

Sentinel EPE recyclers. For convenience we refer to the series

of transactions among PI, ECI Corp., F & G Corp., each of the

Partnerships, FMEC Corp., and PI as the Partnership transactions.

In addition to the Partnership transactions, a number of other

limited partnerships entered into transactions similar to the

Partnership transactions, also involving Sentinel EPE recyclers

and Sentinel expanded polystyrene recyclers. We refer to these

collectively as the Plastics Recycling transactions.

With respect to each of the Partnerships, a private

placement memorandum was distributed to potential limited

partners. Appended to the offering memoranda were reports by F &

G's evaluators, Dr. Stanley M. Ulanoff (Ulanoff), a marketing

consultant, and Dr. Samuel Z. Burstein (Burstein), a mathematics

professor. The offering memoranda list significant business and

tax risk factors associated with investments in the Partnerships.
 - 8 -

Specifically, the offering memoranda state: (1) That there is a

substantial likelihood of audit by the Internal Revenue Service

(IRS) and that the purchase price paid by F & G Corp. to ECI

Corp. probably would be challenged as being in excess of fair

market value; (2) that the Partnerships have no prior operating

history; (3) that the general partners have no prior experience

in marketing recycling or similar equipment; (4) that the limited

partners have no control over the conduct of the Partnerships'

business; (5) that there is no established market for the

Sentinel EPE recyclers; (6) that there are no assurances that

market prices for virgin resin will remain at their current costs

per pound or that the recycled pellets will be as marketable as

virgin pellets; and (7) that certain potential conflicts of

interest exist.

Petitioners in the cases under consideration do not have any

education or work experience in plastics recycling or plastic

materials. They did not independently investigate the Sentinel

EPE recyclers or see a Sentinel EPE recycler or any other type of

plastics recycler prior to participating in the recycling

ventures.

Petitioners each learned of their respective Partnership

transaction from members of the accounting firm Bachmann,

Schwartz, and Abramson (Bachmann, Schwartz). Bachmann, Schwartz

was formed in 1972 by Donald Bachmann (Bachmann) (deceased prior

to trial), a certified public accountant (C.P.A.), William

Abramson (Abramson), also a C.P.A., Richard Schwartz and Ivan
 - 9 -

Babbitt. Abramson and Bachmann previously had worked together at

Clarence Rainess & Co., Certified Public Accountants. Joseph

Greene (Greene) was a partner at Bachmann, Schwartz for a time

during the early 1980's. Bachmann, Schwartz specialized in

accounting for the garment industry. The firm performed auditing

services, reviewed investment opportunities, and advised clients

in business and estate planning, as well as mergers and

acquisitions. For time spent researching investment

opportunities, such as Plymouth and Scarborough, Bachmann,

Schwartz generally received a 5-percent commission on sales of

investments. In these cases, Bachmann, Schwartz received a 10-

percent commission for placing the Partnership shares with

petitioners.5

Abramson generally was responsible for advising clients on

tax matters and for reviewing all tax returns before they were

5
The Plymouth and Scarborough offering memoranda both state
that the partnerships will pay sales commissions and fees to
offeree representatives in amounts equal to 10 percent of the
price paid by the investors represented by such persons. The
offering memoranda further state that if such fees are not paid
"they will either be retained by the general partner as
additional compensation if permitted by applicable state law, or
applied in reduction of the subscription price." The K-1's for
petitioners indicate that they paid full price for their
respective investments in the Partnerships. Nothing in the
records in these cases indicates that any portion of the
commission or fee was rebated to the petitioners, and there is no
reason to believe that Bachmann, Schwartz, a firm of experienced
accountants which was active in the marketing of tax shelter
investments, failed to claim any portion of the commission
available to them. Abramson testified that the firm generally
charged clients a 5-percent commission; Greene testified that the
commission could have been 10 percent. The record as a whole
establishes that the commission to Bachmann, Schwartz was 10
percent.
 - 10 -

submitted, while Bachmann advised clients on financial matters.

Bachmann was a graduate of City College of New York. In addition

to his work at Bachmann, Schwartz, he served as chairman of the

board of a public company, Applied DNA, and for a time during the

1980's he chaired two New York State agencies, the Housing

Finance Agency and the Hospital Agency. Abramson earned an

undergraduate degree in accounting, a law degree, and a masters

of law degree in taxation. Greene, also a C.P.A., received a

B.A. degree from New York University and a Masters of Business

Administration degree from Hofstra University in 1960.

Bachmann learned about the Sentinel EPE recyclers and the

Plastics Recycling transactions from an acquaintance, Elliot

Miller (Miller), and Abramson learned about them from Bachmann.

Miller was corporate counsel to PI and a shareholder of F & G in

1981. Greene learned about the Plastics Recycling transactions

from Bachmann and Abramson at a firm meeting. Bachmann and

Abramson read the offering memoranda for the Partnership

transactions. Bachmann reviewed the business aspects and

Abramson reviewed the tax aspects. The two also traveled to

Hyannis and toured PI's plant and offices and spoke to the

principals of PI. Abramson had the understanding from statements

made to him during the tour and from his reading of the offering

circular that the recyclers somehow were unique. He also

discussed tax matters with John Taggart, the head of the tax

department of Windels, Marx, Davies & Ives (WMDI). WMDI prepared

the tax opinion letter appended to the offering memoranda.
 - 11 -

Neither Bachmann or Abramson had any expertise in plastics

materials or plastics recycling. Abramson did not subscribe to

any professional journals in the field of plastics. While at the

PI plant in Hyannis, Abramson did not ask how much it cost to

manufacture a recycler, or whether, or for how much, the

recyclers were insured. Aside from his one visit to PI, Abramson

has never before or since visited a plant which manufactures

plastics recycling machinery. Abramson did not consult with an

independent expert in the field of plastics recycling.

1. Peter and Ursula Reimann, Docket No. 9915-86

Petitioners Peter and Ursula Reimann resided in New York,

New York, at the time their petition was filed. During 1981,

Peter Reimann (Reimann) was an executive salesman at R.B.S.

Fabrics, Ltd. (R.B.S.). His spouse, Ursula, was not employed

outside the home. On their 1981 Federal income tax return, the

Reimanns reported gross income from wages in the amount of

$147,500 and total taxable income of $119,980. Consequently, in

the absence of significant deductions or credits, in addition to

the partnership losses claimed in the computation of total

income, they were subject to payment of Federal income taxes in

substantial amounts.

In 1981, Reimann acquired a 2.538-percent interest in

Scarborough for his investment of $25,000. As a result of the

passthrough from Scarborough, on their 1981 Federal income tax

return, the Reimanns deducted an operating loss in the amount of

$19,833. They claimed $33,428 of a total of $41,312 of
 - 12 -

investment tax and business energy credits available to them from

Scarborough. Respondent disallowed the Reimanns' claimed

operating loss and credits related to their investment in

Scarborough.

Reimann received a textile education at the Zurich Textile

School in Zurich, Switzerland, from which he graduated in 1959.

Thereafter he apprenticed in various textile mills in Europe.

Upon finishing his apprenticeships, Reimann returned to the

United States and began working at his father's company, Bernard

Reimann, a supplier of silk fabrics for the tie or neckwear

trade. Bernard Reimann subsequently merged with another fabric

company and became R.B.S., which supplied fabrics to neckwear

manufacturers. Reimann worked first as a stylist and eventually

as an executive salesman at R.B.S. Reimann had no education,

training, or experience in plastics recycling or plastics

machinery.

Reimann learned of Scarborough and the Sentinel EPE

recyclers from Bachmann. Bachmann, Schwartz provided accounting

and financial services to R.B.S. Bachmann typically advised

R.B.S. on financial matters, investments, and major business

decisions. Bachmann and Abramson held a meeting at their offices

to explain the Scarborough partnership transaction and the

Sentinel EPE recyclers. They described their visit to PI's plant

in Hyannis. While Bachmann never quantified the potential

economic profit of the venture, he spoke encouragingly about the
 - 13 -

investment. Reimann purportedly relied on Bachmann because his

father's company relied on and trusted Bachmann.

Although Reimann read the Scarborough offering memorandum

and the appended evaluations, he did not focus on or pay heed to

the risks and caveats raised therein. Reimann noticed the

warning that there might be an IRS audit, but claims that he did

not notice the warning that the IRS might challenge the value of

the recyclers. Reimann did not conduct an independent valuation

of the recyclers, nor did he determine if the recyclers had been

placed with end-users prior to his making the investment. He did

nothing more than ask Bachmann some questions about the offering

memorandum. Reimann claims he did not know whether Bachmann,

Schwartz was being compensated in any manner with respect to the

Scarborough partnership investment, nor did he ask if they were

receiving compensation of any sort.

2. Edward Brodie and Estate of Alana Brodie, Docket No. 35003-86

Petitioners Edward Brodie and his wife, Alana, resided in

Englewood Cliffs, New Jersey, at the time their petition was

filed. During 1981, Edward Brodie (Brodie) was a salesman at his

family's business, M & M Luggage Co., Inc. (M & M Luggage).

Alana Brodie was not employed outside the home. On their 1981

Federal income tax return, the Brodies reported total income from

wages, interest, dividends, capital gains, and other sources in

the amount of $123,308. Consequently, in the absence of

significant deductions or credits, they were subject to payment

of Federal income taxes in substantial amounts.
 - 14 -

In 1981, Brodie acquired a 1.361-percent interest in

Plymouth for his investment of $12,500. As a result of the

passthrough from Plymouth, on their 1981 Federal income tax

return, the Brodies deducted an operating loss in the amount of

$10,158 and claimed investment tax and business energy credits

totaling $20,673. Respondent disallowed the Brodies' claimed

operating loss and credits related to their investment in

Plymouth.

Brodie earned a degree in business from New York University

in 1961. After graduation he worked at his family's luggage

manufacturing business, M & M Luggage. Brodie initially was

employed in various activities such as shipping, inventory, and

loading and unloading trucks. Over time, he was promoted to and

worked in the sales, production, and manufacturing departments.

Brodie learned of the Sentinel EPE recycler and Plymouth

from Greene, who was at the time a partner at Bachmann, Schwartz.

Greene provided accounting, business, and financial services to

both M & M Luggage and Brodie individually. Brodie discussed

with Greene the Plymouth investment, including the attendant tax

benefits, the price of the recyclers, and the visit to PI by

Bachmann and Abramson. At trial, Brodie recalled that Greene had

told him that he thought the machines were fairly priced and that

the investment would turn a profit. Brodie knew Greene had no

expertise in plastics and was not an engineer; he relied on him

for tax and investment advice. At trial, Brodie did not recall
 - 15 -

compensating Greene in any manner for his advice regarding

Plymouth.

Greene learned of the Sentinel EPE recyclers and Plymouth

from Bachmann and Abramson at a firm meeting. Greene recalls

that Bachmann was enthusiastic about the investment. At the firm

meeting, Bachmann described the recycler and his and Abramson's

visit to PI's plant in Hyannis. Greene did not discuss valuation

with Bachmann. While Greene knew that Bachmann did not have any

experience in plastics engineering or plastics technology, he

nonetheless relied on whatever investigation Bachmann had made

with respect to the Sentinel EPE recyclers and the Plastics

Recycling transactions. Greene received his partnership share of

the 10-percent commission Bachmann, Schwartz received for

arranging the Brodies' investment in Plymouth.

Greene did not read the entire Plymouth offering memorandum

and only glanced through the section entitled "Potential

Conflicts of Interest." He could not recall at trial that

Burstein, one of F & G's evaluators of the Sentinel EPE recycler,

was a business associate and client of Miller, who was corporate

counsel to PI and a shareholder of F & G in 1981. Greene did not

check the figures or underlying assumptions in the offering

memorandum, or prepare any sort of analysis for Brodie. Even

though Bachmann, Schwartz had clients in the plastics business,

Greene did not consult them about plastics recycling.

Brodie read the Plymouth offering memorandum, including the

reports by F & G's evaluators. He understood that the tax
 - 16 -

benefits exceeded the amount he invested, and that they were

generated by the purported value of the Sentinel EPE recyclers.

He read the warnings in the offering memorandum that the IRS

would likely audit Plymouth and challenge the value of the

machines. Brodie did nothing to verify the purported value of

the Sentinel EPE recycler and undertook no research into Plymouth

or plastics recycling aside from reviewing the offering

memorandum and speaking with Greene. Although Brodie spoke to

Greene about the investment every few months, he never knew for

sure whether the recyclers were ever delivered to end-users. In

fact, the recyclers were eventually placed with end-users which

did not have sufficient amounts of recyclable plastic scrap

material ever to pay off the notes on the recyclers. Brodie

never made an economic profit in any year from Plymouth. After

he received the tax credits in 1981, however, Brodie was not

concerned that he received no dividends or return of capital with

respect to the Plymouth investment.

3. Marvin and Suzanne Yarnell, Docket No. 3398-92, and Philip
and Roberta Yarnell, Docket No. 13892-92

Petitioners Marvin and Suzanne Yarnell resided in Old

Westbury, New York, when their petition was filed. Petitioners

Philip and Roberta Yarnell resided in Manhasset, New York, when

their petition was filed.

During 1981, Marvin Yarnell was a 75-percent owner and

primary operating executive of Yarnell Fabrics Corporation

(Yarnell Fabrics) and Yarnell Fabrics International, Ltd. (YFIL).
 - 17 -

His wife, Suzanne Yarnell, was not employed outside the home. On

their 1981 Federal income tax return, Marvin and Suzanne Yarnell

reported gross income from wages of $350,000 and total income in

the amount of $374,178. Consequently, in the absence of

significant deductions or credits, they were subject to payment

of Federal income taxes in substantial amounts.

Philip Yarnell was a salesman and 25-percent owner of

Yarnell Fabrics and YFIL during 1981. His spouse, Roberta, was

employed as a travel consultant during that year. On their 1981

Federal income tax return, Philip and Roberta Yarnell reported

gross income from wages of $300,000 and total taxable income in

the amount of $296,787. Consequently, in the absence of

additional deductions or credits, they were subject to payment of

Federal income taxes in substantial amounts.

For an investment of $75,000, Marvin Yarnell acquired a

7.62-percent interest in Plymouth in 1981. As a result of the

passthrough from Plymouth, on their 1981 Federal income tax

return, Marvin and Suzanne Yarnell deducted an operating loss in

the amount of $60,952 and claimed investment tax and business

energy credits totaling $124,034. Respondent disallowed Marvin

and Suzanne Yarnell's claimed operating loss and credits related

to their investment in Plymouth.

Also during 1981, Philip Yarnell acquired a 6.35-percent

interest in Plymouth for an investment of $62,500. As a result

of the passthrough from Plymouth, on their 1981 Federal income

tax return, Philip and Roberta Yarnell deducted an operating loss
 - 18 -

in the amount of $50,794 and claimed investment tax and business

energy credits totaling $103,362. Respondent disallowed Philip

and Roberta Yarnell's claimed operating loss and credits related

to their investment in Plymouth.

Marvin Yarnell received a B.S. degree from New York

University School of Commerce in 1949. After college, he worked

for 3 years as a sales trainee for a textile company. Then he

became a salesman for Cameo Fabrics and worked for that company

for approximately 11 years. Philip Yarnell graduated from North

Carolina State College with a degree in textile management and

manufacturing. After college he worked for 4 years for a textile

converter company, then started and ran his own business for

approximately 12 years. In 1963, Philip and Marvin Yarnell

formed Yarnell Fabrics, a textile converter corporation.

Both Marvin and Philip Yarnell learned of the Sentinel EPE

recyclers and Plymouth from Bachmann and Abramson.6 Bachmann,

Schwartz had been the accounting firm for Yarnell Fabrics since

the late 1970's. Marvin and Philip Yarnell primarily dealt with

Bachmann, who also advised them on personal financial matters.

Bachmann and Abramson described their trip to PI's plant in

Hyannis and gave the Yarnells copies of the Plymouth offering

memorandum. According to Marvin Yarnell, Bachmann pointed out

6
At the trial, Abramson could not recall a specific meeting
with the Yarnells for purposes of discussing the Plastics
Recycling deal. Marvin Yarnell remembered a meeting at
Bachmann's office whereas Philip Yarnell recalled that the
proposal was introduced when Bachmann and Abramson came to
Yarnell Fabrics.
 - 19 -

that one of the components of polyethylene was oil and that

recycling was good for the environment. Philip Yarnell claims he

understood that there was no competition for the Sentinel EPE

recycler. In fact, information published prior to the Plastics

Recycling transactions indicated that several similar machines

already were on the market. These included 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, T.C. Memo. 1992-177.

Philip Yarnell purportedly did not know whether Bachmann had

any expertise in engineering or plastics. Marvin Yarnell, on the

other hand, knew that Bachmann did not have any such expertise.

Neither Marvin nor Philip Yarnell asked Bachmann to consult

anyone with expertise in the field of plastics or plastics

recycling. Both were aware that the amount of the tax benefits

flowing from Plymouth exceeded their respective investments in

the partnership. Marvin and Philip Yarnell did not independently

investigate Plymouth or any of the representations made in the

offering memorandum. The Yarnells did not have any education or

work experience in plastics recycling or plastics materials.

OPINION

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

case for the Plastics Recycling group of cases, this Court (1)

found that each Sentinel EPE recycler had a fair market value not
 - 20 -

in excess of $50,000; (2) held that the transaction, which is

almost identical to the Partnership transactions in these

consolidated cases, 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 transaction

lacked economic substance and a business purpose, this Court

relied heavily upon the overvaluation of the Sentinel EPE

recyclers.

Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that the investments in

the Sentinel EPE recyclers in these cases are similar to the

investment described in Provizer v. Commissioner, supra. The

underlying transactions in these consolidated cases, and the

Sentinel EPE recyclers considered in these cases, are the same

type of transaction and same type of machine considered in

Provizer v. Commissioner, supra.

Based on the entire records in these cases, including the

extensive stipulations, testimony of respondent's experts, and

petitioners' testimony, we hold that each of the Partnership

transactions herein was a sham and lacked economic substance. In

reaching this conclusion, we rely heavily upon the overvaluation
 - 21 -

of the Sentinel EPE recyclers. Respondent is sustained on the

question of the underlying deficiencies. We note that

petitioners have explicitly conceded this issue in their

respective stipulations of settled issues filed shortly before

trial. The record plainly supports respondent's determinations

in these cases regardless of such concessions. For a detailed

discussion of the facts and the applicable law in a substantially

identical case, see Provizer v. Commissioner, supra.

Issue 1. Section 6653(a) Negligence

In notices of deficiency, respondent determined that

petitioners Marvin and Suzanne Yarnell and Philip and Roberta

Yarnell were liable for additions to tax for negligence under

section 6653(a)(1) and (2). The Yarnells have the burden of

proving that respondent's determinations of these additions to

tax are erroneous. Rule 142(a); Luman v. Commissioner, 79 T.C.

846, 860-861 (1982).

In amendments to answer, respondent asserted that

petitioners Reimann and Brodie were liable for additions to tax

for negligence under section 6653(a)(1) and (2). Because

respondent raised these additions to tax for the first time in

amendments to answer, respondent has the burden of proof on these

issues. Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170, 196

(1994).

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
 - 22 -

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 in these consolidated cases contend that they

were reasonable in claiming deductions and credits with respect

to the Partnerships. To support their contentions, they allege,

in general terms, that they relied upon the advice of qualified

advisers, and that they expected an economic profit in light of

the so-called oil crisis in the United States during 1981. In

each of the cases before us, petitioners' investigation of the

Partnership transactions and the Sentinel EPE recyclers was

limited to conversations with Bachmann and Greene, respectively,

and in varying degrees, a review of the offering memoranda.7

7
It is unclear from the records to what extent Abramson
influenced any of petitioners' decisions to invest in the
Partnerships. While Abramson participated in the purported
investigation of the Partnerships, petitioners' testimony
indicates that their reliance was placed predominantly on
Bachmann and Greene. Abramson's generally vague and indefinite
testimony in these cases supports the conclusion that he was not
(continued...)
 - 23 -

Petitioners essentially argue that their reliance on Bachmann,

Schwartz and the offering materials insulates them from the

negligence additions to tax.

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.

7
(...continued)
a primary adviser with respect to petitioners' investment in the
Partnerships, although he was the primary tax specialist at
Bachmann, Schwartz.
 - 24 -

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 had substantial knowledge 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.

Based upon our review of the entire records in these cases,

we hold that Brodie's purported reliance on Greene, and Reimann's

and the Yarnells' purported reliance on Bachmann, was not

reasonable, not in good faith, nor based upon full disclosure.

Neither Bachmann or Greene, nor petitioners, nor anyone

affiliated with Bachmann, Schwartz, had any education or work

experience in plastics materials or plastics recycling. None of

petitioners and no one at Bachmann, Schwartz consulted any

independent experts or conducted anything approaching a

meaningful investigation.8 While Bachmann and Abramson did visit

8
According to Abramson, Bachmann had a cousin who was an
engineer and taught at City College of New York. Abramson
testified that he thought Bachmann asked his cousin for the
cousin's opinion of the feasibility of the Sentinel EPE recycling
machinery and process. However, Abramson did not elaborate on
the cousin's response; he testified only that he was certain
Bachmann and he discussed the results of Bachmann's
investigation. We consider Abramson's testimony on this matter
of no probative value. We are not convinced that Bachmann spoke
(continued...)
 - 25 -

PI's Hyannis plant, neither of them was qualified to analyze or

assess the machines on display. In each of these cases,

petitioners' argument is that they put complete faith in Bachmann

or Greene. Given the technical nature of these investment

ventures, it was unreasonable for them to do so.

Reimann did little more than speak with the accountants at

Bachmann, Schwartz before investing in Scarborough. He received

a copy of the offering memorandum and attended an introductory

meeting at the offices of Bachmann, Schwartz. Reimann recalled

that at the meeting, Bachmann explained the Scarborough

transaction and described his and Abramson's visit to PI.

Reimann described his impressions as follows:

I remember I was quite in awe of this huge office, huge
conference room * * * [The facilities] * * * were
extremely impressive, to say the least. I had never
been in that kind of situation before. There's this
huge conference table and a lot of people -- I presume
most of them were partners and they were all basically
giving me this wonderful advice.

The "wonderful advice" to which Reimann refers, of course, was

the suggestion that he invest in the unsuccessful Plastics

Recycling deal. Reimann testified that he read the offering

memorandum, but did not focus on the warnings or caveats

contained therein. At trial he could not recall the warning that

the IRS might challenge the value of the recycler. Reimann spent

only enough time reading the offering memorandum "to get the gist

8
(...continued)
to a cousin about the recycler or that the cousin was qualified
to evaluate it. Moreover, the record does not disclose the
cousin's opinion of the recycler.
 - 26 -

of it". He explained that as to review of the offering

memorandum, he "really left it to Bachmann."

Reimann testified that his primary consideration for

investing in Scarborough was profit, and that Bachmann never told

him that the tax credits would exceed the amount of his

investment. He could not or would not recall or state at trial

the amount of the credits he and his former wife claimed on their

1981 return or whether they paid any taxes that year, although

this information was on the face of the return he had come from

California to testify about. On their tax return for 1981, the

Reimanns claimed a tax refund in the amount of $21,570. Reimann

claims he never asked anyone at Bachmann, Schwartz whether the

firm was receiving a commission on the Plastics Recycling

investment. He testified that he never made a determination that

any of the recyclers would be placed with end-users prior to the

time he made his investment but that he knew only that they were

"planned to be placed." According to Reimann, "These things I

left to Bachmann, Schwartz and Abramson."

Marvin and Philip Yarnell likewise claim that they relied on

the now-deceased Bachmann in deciding to invest in Plymouth.

Philip Yarnell says he did not know whether Bachmann had any

expertise in engineering or plastics. Marvin Yarnell knew

Bachmann was not a specialist in plastics recycling, but he

asserted confidence that Bachmann would have investigated the

matter before recommending investment. Philip Yarnell testified

that his primary reason for making the investment "was the fact
 - 27 -

that there would be a good return on the capital." Both Marvin

and Philip Yarnell were aware that the tax benefits flowing from

Plymouth exceeded the amount of their respective investments.

Philip Yarnell testified that he read the Plymouth offering

memorandum and that, with the exception of the technical aspects,

he understood the substance of what was set forth therein.

However, in describing how Plymouth was supposed to generate an

economic profit, he testified that he was informed that Plymouth

would manufacture the recyclers, place them with end-users, and

oversee their operation (all facets of the Plymouth transaction

which were supposed to be performed by PI, not Plymouth).

Marvin Yarnell testified that he and Philip "briefly" read

the offering memorandum and that, "quite frankly speaking, it was

very lengthy. It was very detailed and such." He could not

recall having read the reports of the evaluators and explained

that he and his brother were very busy at the time working on

their new company. In lieu of a thorough reading of the offering

memorandum, or an independent investigation, the Yarnells met

with Bachmann to get his opinion as to whether Plymouth was worth

investing in. Marvin Yarnell testified that he and Philip

invested in Plymouth based upon "what had been told to" them. He

also testified that "if the details were mentioned to * * *

[them], they really were not paid that much attention to because

* * * [they] had * * * [their] own business to take care of."

Bachmann never represented that he had contacted an

independent expert, and neither Marvin or Philip Yarnell ever
 - 28 -

asked him to seek an expert opinion. Marvin Yarnell did not

investigate Plymouth and never asked Bachmann any questions about

the underlying transaction. Philip Yarnell did not investigate

any of the representations set forth in the offering memorandum.

The Yarnells' position is that they simply acted blindly on

Bachmann's advice. As Marvin Yarnell put it, Bachmann "was such

an overwhelming personality, we almost felt it would be an

affront if in any way at all we would not go along with his

suggestions." He reiterated: "We really had blind faith in Don

Bachmann." Philip Yarnell testified that he "relied almost

entirely and solely on * * * [Bachmann's] expertise. * * *

whatever he said, I, basically, took as gospel."

The Yarnells placed into the records of their cases several

documents, ostensibly submitted as evidence that they monitored

their investments in Plymouth. These were unaudited financial

statements of Plymouth for 1984 and 1985, a 1983 report

describing PI's accounting procedures and controls, and a 1983

update from PI noting that "market prices for polyethelene resin

have remained relatively low * * * [and] the Sentinel recyclers

* * * have not been profitable." Neither Marvin or Philip

Yarnell testified that they examined these documents. Given

their admitted inattention to the details of the investment, we

decline to infer from these documents that the Yarnells actively

monitored their investments in Plymouth.

Brodie claims reliance on Greene, who in turn relied on

Bachmann, with respect to Brodie's decision to acquire an
 - 29 -

interest in Plymouth. Greene knew that Bachmann had no education

or work experience in plastics or plastics recycling. Greene's

review of the offering memorandum was fairly perfunctory. When

asked at trial if he had read it, Greene replied, "I did read it,

[but] I can't say that I read it cover-to-cover." Greene

testified that although he did not discuss valuation with

Bachmann, he did read and rely upon the reports by Ulanoff and

Burstein. However, Greene only glanced at the section relating

potential conflicts of interest, and he could not recall at trial

that Burstein was a business associate and legal client of

Miller's.

Greene did not check any of the underlying assumptions or

figures set out in the offering memorandum. He did not prepare

any kind of report or analysis for Brodie. He sought no

independent verifications of the representations in the offering

memorandum, even though Bachmann, Schwartz had clients who were

in the plastics business. He relied exclusively on Bachmann.

Greene reluctantly admitted that he received a commission as a

result of Brodie's investment and that the amount of the

commission paid could have been 10 percent.

Greene purportedly explained to Brodie the environmental and

economic benefits of the Plastics Recycling transaction as well

as the tax benefits. Brodie understood that the tax benefits

exceeded the amount of his investment, and that they were

generated by the purported value of the recyclers. However, he

did nothing to verify the purported value of the Sentinel EPE
 - 30 -

recycler. Brodie undertook no research or investigation beyond

speaking with Greene and "reviewing" the offering memorandum.

Although Greene believed his commission was disclosed to Brodie

by notice or letter, Brodie could not recall compensating Greene

for, as he put it, the "service of submitting a prospectus for me

to read and telling me that it was a good investment for me."

Greene considered the Plastics Recycling deal a tax shelter with

tax benefits for investors approximately four times the

investment. He obtained his information from Bachmann, and there

is no reason to think he did not pass on this same information to

his client, Brodie.

It was petitioners' reliance upon the purported value of the

Sentinel EPE recycler that generated the deductions and credits

in these cases. Yet the purported value of the Sentinel EPE

recyclers is the very thing that petitioners, and the accountants

Bachmann, Schwartz, did not verify. A taxpayer may rely upon his

adviser's expertise (in these cases accounting, financial

planning, and tax advice), but it is not reasonable or prudent

for petitioners to rely upon an adviser regarding matters outside

of his field of expertise or with respect to facts which he does

not verify. See Skeen v. Commissioner, 864 F.2d 93 (9th Cir.

1989), affg. Patin v. Commissioner, 88 T.C. 1086 (1987); Lax v.

Commissioner, T.C. Memo. 1994-329, affd. without published

opinion 72 F.3d 123 (3d Cir. 1995).

Moreover, a careful consideration of the materials in the

respective offering memoranda, especially the discussions in the
 - 31 -

prospectuses of high writeoffs and risk of audit, should have

alerted a prudent and reasonable investor to the questionable

nature of the promised deductions and credits. See Collins v.

Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988), affg. Dister

v. Commissioner, T.C. Memo. 1987-217. The preface to each

memorandum contained the following: NO OFFEREE SHOULD CONSIDER

THE CONTENTS OF THIS MEMORANDUM *** AS *** EXPERT ADVICE. EACH

OFFEREE SHOULD CONSULT HIS OWN PROFESSIONAL ADVISERS AS TO LEGAL,

TAX, ACCOUNTING AND OTHER MATTERS RELATING TO ANY PURCHASE BY HIM

OF UNITS. Each of the memoranda also clearly stated that the

respective Partnership transactions involved significant tax

risks and that in all likelihood the IRS would challenge the

transactions. In a "business risks" section, each warned that

there was no history for the subject partnership and no

established market for the recyclers or the pellets. It is clear

from the records that none of petitioners carefully considered

the offering memoranda.

On their face, the Partnership transactions should have

raised serious questions in the minds of ordinarily prudent

investors. According to the offering memoranda, the projected

benefits for taxable year 1981 were, for each $50,000 investor:

(1) Investment tax credits of $82,639 plus deductions of $39,323

(for investors in Scarborough) or $40,376 (for investors in

Plymouth), all in the initial year of investment. In the first

year of the investments alone, petitioners claimed the following
 - 32 -

operating losses and investment tax and business energy credits

related to the Partnerships:

Petitioners Investment Operating Loss IT + EC Credits
Reimann $25,000 $19,833 $33,428
Brodie 12,500 10,158 20,673
M. Yarnell 75,000 60,952 124,034
P. Yarnell 62,500 50,794 103,362

Therefore, like the taxpayers in Provizer v. Commissioner, T.C.

Memo. 1992-177, except for a few weeks at the beginning, none of

petitioners ever had any money in the Partnerships. A reasonably

prudent person would not conclude without substantial

investigation that the Government was providing significant tax

benefits to taxpayers who made no investment of their own

capital. McCrary v. Commissioner, 92 T.C. 827, 850 (1989).

The parties in these consolidated cases stipulated that the

fair market value of a Sentinel EPE recycler in 1981 and 1982 was

not in excess of $50,000. Notwithstanding this concession,

petitioners contend that they were reasonable in claiming credits

on their Federal income tax returns based upon each recycler

having a value of $1,162,666. In support of this position,

petitioners submitted into evidence preliminary reports prepared

for respondent by Ernest D. Carmagnola (Carmagnola), the

president of Professional Plastic Associates. Carmagnola had

been retained by the IRS in 1984 to evaluate the Sentinel EPE and

EPS recyclers in light of what he described as "the fantastic

values placed on the [recyclers] by the owners." Based on

limited information available to him at that time, Carmagnola

preliminarily estimated that the value of the Sentinel EPE
 - 33 -

recycler was $250,000. However, after additional information

became available to him, Carmagnola concluded in a signed

affidavit, dated March 16, 1993, that the machines actually had a

fair market value of not more than $50,000 each in the fall of

1981 and 1982.

We accord no weight to the Carmagnola reports submitted by

petitioners. The projected valuations therein were based on

inadequate information,9 research, and investigation, and were

subsequently rejected and discredited by their author.

Respondent likewise rejected the reports and considered them

unsatisfactory for any purpose, and there is no indication in the

records that respondent used them as a basis for any

determinations in the notices of deficiency. Even so,

petitioners' counsel obtained copies of these reports and urge

that they support the reasonableness of the values reported on

petitioners' returns. Not surprisingly, petitioners did not call

Carmagnola to testify in these cases,10 but preferred instead to

rely solely upon his preliminary, ill-founded valuation

estimates. The Carmagnola reports were a part of the record

considered by this Court and reviewed by the Sixth Circuit Court

9
In one preliminary report, Carmagnola states that he has "a
serious concern of actual profit-level" of a Sentinel EPE
recycler and that to determine whether the machines actually
could be profitable, he required additional information from PI.
Carmagnola also indicates that in preparing the report, he did
not have information available concerning research and
development costs of the machines and that he estimated those
costs in his valuations of the machines.
10
Carmagnola has not been called to testify in any of the
Plastics Recycling cases before us.
 - 34 -

of Appeals in the Provizer case, where we held the taxpayers

negligent. Consistent therewith, we find in these cases, as we

have found previously, that the reports prepared by Carmagnola

are unreliable and of no consequence. Petitioners are not

relieved of the negligence additions to tax based on the

preliminary reports prepared by Carmagnola.

Petitioners' reliance on Mollen v. United States, 72 AFTR2d

93-6443, 93-2 USTC par. 50,585 (D. Ariz. 1993) is misplaced. The

taxpayer in Mollen was a medical doctor who specialized in

diabetes and who, on behalf of the Arizona Medical Association,

led a continuing medical education ("CME") accreditation program

for local hospitals. The underlying tax matter involved the

taxpayer's investment in Diabetics CME Group, Ltd., a limited

partnership which invested in the production, marketing, and

distribution of medical educational video tapes. The taxpayer's

personal expertise and insight in the underlying investment gave

him reason to believe it would be economically profitable.

Although the taxpayer was not experienced in business or tax

matters, he did consult with an accountant and a tax lawyer

regarding those matters. Moreover, as the District Court noted,

the propriety of the taxpayer's disallowed deduction therein was

"reasonably debatable."

The records in these cases, on the other hand, show that

neither petitioners nor their advisers, Bachmann and Greene, had

any formal education, expertise, or experience in plastics or

plastics recycling. None of them had any personal insight or
 - 35 -

industry know-how in plastics recycling which would reasonably

lead them to believe that the Partnership transactions would be

economically profitable. The extent of the Bachmann, Schwartz

investigation was a tour of PI's plant in Hyannis and a

discussion with the principals of PI. No independent experts in

the field of plastics or plastics recycling were consulted by

petitioners or Bachmann, Schwartz. The facts of these cases are

distinctly different from those in the Mollen case. We consider

petitioners' arguments with respect to the Mollen case

inapplicable.

Petitioners' arguments are not supported by Anderson v.

Commissioner, 62 F.3d 1266 (10th Cir. 1995), affg. T.C. Memo.

1993-607, where the taxpayers were found liable for negligence

additions to tax. In Anderson, the taxpayers claimed tax

benefits based upon their acquisition of property listed at

$124,500, for which they actually paid $6,225 in a cash

downpayment (5 percent of the purchase price) plus a 5-year

financing arrangement. Had the acquisition been nothing more

than a $6,225 passive investment, noted the Court of Appeals, it

would have been reasonable for the taxpayers to rely on the

advice of a good friend who had thoroughly investigated the

investment.11 However, because the transaction was structured

11
The adviser had his accountant and attorney review and check
out the structure of the investment; he spoke with the investment
principal; he looked into the principal's background and checked
out his references, banks, other business connections, and the
Better Business Bureau; and he spoke with competitors to make
(continued...)
 - 36 -

and represented as a purchase in the amount of $124,500, the

Court of Appeals held that something more was required.

In the cases before us, petitioners claimed tax benefits

based on the assumption that they owned and leased, through the

Partnerships, an interest in $8,138,662 worth of recycling

machines. Based on investments ranging from $12,500 to $75,000,

petitioners each claimed a qualified investment in new investment

credit property with bases ranging from $103,361 to $620,167.

These inflated bases generated claims to first-year tax credits

ranging from $20,673 to $124,034, and claims to deductible losses

ranging from $10,158 to $60,952. Clearly these were substantial

transactions requiring careful investigation under the Anderson

case. Of petitioners' respective advisers, Bachmann did nothing

more than tour PI's plant in Hyannis, speaking only with

insiders, and Greene did nothing, relying exclusively on

Bachmann. Unlike the adviser in Anderson, no one at Bachmann,

Schwartz thoroughly investigated or educated himself in the

industry of the proposed investment. In view of the substantial

basis claimed for the interest of each petitioner in the

machinery (a substantial amount, and in each case, more than

eight times greater than the cash invested), from which the

investment credits stemmed, plainly something more was required.

Accordingly, we consider petitioners' reliance on the Anderson

case inappropriate.

11
(...continued)
sure the venture was viable.
 - 37 -

Petitioners also argue, in general terms, that they were

reasonable in claiming the deductions and credits related to the

Partnerships because of rising oil prices in the United States in

1981. In support of this argument, petitioners placed into the

record several articles from Modern Plastics and an energy

projections report from the U.S. Department of Energy (DOE), all

published in the years 1980 and 1981. Petitioners also cite

Krause v. Commissioner, 99 T.C. 132 (1992), affd. sub nom.

Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994), and

Rousseau v. United States, 91-1 USTC par. 50,252 (E.D. La. 1991).

The articles from Modern Plastics and the report by the DOE

speculated on the price of oil, among other matters. The preface

to the DOE report cautioned about "the tremendous uncertainties

underlying energy projections" and warned "that [their]

projections do not constitute any sort of blueprint for the

future." Reflective of such uncertainties, an April 1980 article

in Modern Plastics contemplated resin price hikes, while a May

1981 article predicted a leveling off of prices, market

disruptions, and an industrywide shakeout. Petitioners do not

purport to have read, or in any way relied upon, the DOE report

or the Modern Plastics articles, and have not otherwise explained

the connection between these speculative materials and their

investments in the Partnerships. Petitioners' vague, general

claims concerning the so-called oil crisis are without merit.

Petitioners' reliance on Krause v. Commissioner, supra, is

misplaced. The facts in the Krause case are distinctly different
 - 38 -

from the facts of these cases. In the Krause case, the taxpayers

invested in limited partnerships whose investment objectives

concerned enhanced oil recovery (EOR) technology. The Krause

opinion states that during the late 1970's and early 1980's, the

Federal Government adopted specific programs to aid research and

development of EOR technology. Id. at 135-136. In holding that

the taxpayers in the Krause case were not liable for the

negligence additions to tax, this Court noted that one of the

Government's expert witnesses acknowledged that "investors may

have been significantly and reasonably influenced by the energy

price hysteria that existed in the late 1970's and early 1980's

to invest in EOR technology." Id. at 177. In the present cases,

however, one of respondent's experts, Steven Grossman, explained

that the price of plastics materials is not directly proportional

to the price of oil, that less than 10 percent of crude oil is

utilized for making plastics materials, and that studies have

shown that "a 300% increase in crude oil prices results in only a

30 to 40% increase in the cost of plastics products." While EOR

was, according to our Krause opinion, in the forefront of

national policy and the media during the late 1970's and 1980's,

there is no showing in these records that the so-called energy

crisis would provide a reasonable basis for petitioners investing

in recycling of polyethylene, particularly in the machinery here

in question.

Moreover, the taxpayers in the Krause opinion were

experienced in or investigated the oil industry and EOR
 - 39 -

technology specifically. One of the taxpayers in the Krause case

undertook significant investigation of the proposed investment

including researching EOR technology. The other taxpayer was a

geological and mining engineer whose work included research of

oil recovery methods and who hired an independent geologic

engineer to review the offering materials. Id. at 166. In the

present cases, none of petitioners has any education or work

experience with respect to plastics or plastics recycling.

Petitioners did not independently investigate the Sentinel EPE

recyclers, nor did they hire an expert in plastics to evaluate

the Partnership transactions. Petitioners' arguments with

respect to the Krause case are inapplicable here.

Petitioners' reliance on Rousseau v. United States, supra,

is similarly misplaced. In Rousseau, the property underlying the

investment, ethanol producing equipment, was widely considered at

that time to be a viable fuel alternative to oil and its

potential for profit was apparent. In addition, the taxpayer

therein conducted an independent investigation of the investment

and researched the market for the sale of ethanol in the United

States. In contrast, as we noted in distinguishing the Krause

case, there is no showing in these records that the so-called oil

crisis would provide a reasonable basis for petitioners'

investing in the polyethylene recyclers here in question. See

supra pp. 38-39. Petitioners did not independently investigate

the Sentinel EPE recyclers or hire an expert in plastics to

evaluate the Partnership transactions. The facts of petitioners'
 - 40 -

cases are distinctly different from the Rousseau case.

Accordingly, we do not find petitioners' arguments with respect

to the Rousseau case applicable.

Under the circumstances of these cases, petitioners failed

to exercise due care in claiming large deductions and tax credits

with respect to the Partnerships on their respective Federal

income tax returns. Petitioners claim that they relied blindly

upon their accountants, one of whom, Bachmann, they uniformly

describe as a "financial genius". Bachmann is deceased, so we

are unable to inquire whether he would claim full credit for what

Reimann describes as "this wonderful advice" to invest in the

Partnerships. Abramson, the primary tax partner at Bachmann,

Schwartz, plainly made only a cursory investigation of the

transaction and was not a central figure in these investments.

Greene, a Bachmann, Schwartz partner who presented the deal to

Brodie, described it as a 4 to 1 tax shelter on which the firm

received a 10-percent commission. Petitioners described

themselves as innocents who simply followed the advice of their

accountants, whose instructions they would not even presume to

question. But the record indicates that petitioners were

educated, experienced, successful, and prosperous businessmen

capable of making their own decisions. Certainly the accountants

who testified indicated that interests in the Plastics Recycling

partnership were offered only to clients with income available

for high risk tax shelter deals which the firm made available and

on which it received a commission. Petitioners invested what
 - 41 -

Marvin Yarnell described as funds in excess of "case" money, that

is, he explained, excess amounts they did not need for present or

anticipated business purposes or living expenses. The records in

these cases show that the accountants offered their clients an

admittedly high risk transaction, involving an industry and

machinery about which neither the accountants nor petitioners had

any expertise or significant understanding. These petitioners,

knowing the substantial tax benefits and little more about the

transaction, and knowing that their advisers had no expertise in

the area of the investment, took the risk. However, they did not

in good faith directly or indirectly investigate the underlying

viability, financial structure, and economics of the Partnership

transactions. We hold, upon consideration of the entire records,

that petitioners are liable for the negligence additions to tax

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

Respondent is sustained on this issue.

Issue 2. Section 6659 Valuation Overstatement

Respondent determined that petitioners were each liable for

the section 6659 addition to tax on the portion of their

respective underpayments attributable to valuation overstatement.

Petitioners have the burden of proving that respondent's

determinations of these section 6659 additions to tax are

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

861 (1982).

A graduated addition to tax is imposed when an individual

has an underpayment of tax that equals or exceeds $1,000 and "is
 - 42 -

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). 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 each claimed an investment tax credit and a

business energy credit based on purported values of $1,162,666

for each Sentinel EPE recycler. Each of petitioners concedes

that the fair market value of each recycler was not in excess of

$50,000. Therefore, if disallowance of petitioners' claimed

credits is attributable to the valuation overstatements,

petitioners are liable for the section 6659 addition to tax at

the rate of 30 percent of the respective underpayments of tax

attributable to the credits claimed with respect to the

Partnerships.

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.
 - 43 -

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), affg. T.C. Memo. 1991-449; Gilman v.

Commissioner, 933 F.2d 143, 151 (2d Cir. 1991) (section 6659

addition to tax applies if a finding of lack of economic

substance is "due in part" to a valuation overstatement), affg.

T.C. Memo. 1989-684; Masters v. Commissioner, T.C. Memo. 1994-

197, affd. without published opinion 70 F.3d 1262 (4th Cir.

1995); Harness v. Commissioner, T.C. Memo. 1991-321.

In the respective stipulations of settled issues,

petitioners concede 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
 - 44 -

investment tax credit because the agreement in question was a

license and not a lease. In both cases the underpayment was

deemed 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,

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.

No argument was made and no evidence was presented to the

Court in the present cases to prove that disallowance and

concession of 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, T.C. Memo. 1992-177. In the Provizer case, we held

that the taxpayers were liable for the section 6659 addition to
 - 45 -

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 records in these cases

plainly show that the overvaluation of the recyclers is integral

to and is the core of our holding that the underlying

transactions here were shams and lacked economic substance.

Consistent with our findings in Provizer, petitioners

respectively stipulated that the Scarborough and Plymouth

transactions had no net equity value, that the sole activity of

the Scarborough and Plymouth partnerships lacked any potential

for profit, and that the Scarborough and Plymouth partnership

transactions 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, supra, 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
 - 46 -

from our finding of a lack of economic substance. Petitioners

conceded that the Scarborough and Plymouth transactions were

similar to the Clearwater transaction described in Provizer v.

Commissioner, supra, and that the Scarborough and Plymouth

transactions lacked economic substance. Given those concessions,

and the fact that the records here plainly show that the

overvaluation of the recyclers was the reason for the

disallowance of the tax benefits, and the fact that no argument

was made and no evidence was presented to the Court to prove that

disallowance and concession of the tax benefits related to

anything other than a valuation overstatement, we conclude that

the deficiencies caused by the disallowance of the claimed tax

benefits were attributable to the overvaluation of the Sentinel

EPE recyclers.

Finally, we consider petitioners' express arguments as to

waiver of the addition to tax under section 6659. On brief,

petitioners each contested imposition of the section 6659

addition to tax on the grounds that respondent erroneously failed

to waive the addition to tax. Section 6659(e) authorizes

respondent to waive all or part of the addition to tax for

valuation overstatement 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.
 - 47 -

Petitioners urge that they relied on Bachmann and Greene,

respectively, and in varying degrees the offering memoranda, in

deciding on the valuation claimed on their tax returns.

Petitioners each contend that such reliance was reasonable, and,

therefore, respondent should have waived the section 6659

addition to tax. Petitioners cite Krause v. Commissioner, supra;

Mauerman v. Commissioner, 22 F.3d 1001 (10th Cir. 1994), revg.

T.C. Memo. 1993-23; Rousseau v. United States, 91-1 USTC par.

50,252 (E.D. La. 1991); in support of their argument.

We have found that petitioners' purported reliance on

Bachmann and Greene, and the offering memoranda, was not

reasonable. Neither Bachmann nor Greene, nor petitioners nor

anyone affiliated with Bachmann, Schwartz, was educated or

experienced in plastics or plastics recycling. The evaluators

whose reports were appended to each of the offering memoranda

each owned interests in partnerships which leased Sentinel EPE

recyclers. The offering memoranda 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. Petitioners did not see a

Sentinel EPE recycler prior to investing in Scarborough or

Plymouth, nor did they independently investigate the recyclers.

Petitioners' reliance on Krause v. Commissioner, supra,

Mauerman v. Commissioner, supra, and Rousseau v. United States,

supra, in support of their contentions that they acted

reasonably, is misplaced. In the Krause and Rousseau cases, the
 - 48 -

section 6659 addition to tax was disallowed in light of the

respective holdings that the taxpayers in each case had a

reasonable basis for the valuations claimed on the tax returns or

had reasonable cause for the understatements on the returns and

were not subject to negligence additions to tax. In contrast, we

have held that petitioners herein did not act reasonably in

claiming deductions and investment tax credits related to the

Partnerships, that the errors on petitioners' tax returns were

caused by the excessive valuations of the underlying machinery in

the Partnership transactions, that petitioners lacked reasonable

cause for such overvaluation, and that each petitioner is

therefore liable for the negligence additions to tax under

section 6653(a). See supra pp. 20-40. Accordingly, petitioners'

reliance on the Krause and Rousseau cases is misplaced.

In Mauerman, the Tenth Circuit Court of Appeals held that

the Commissioner had abused her discretion for not waiving a

section 6661 addition to tax. Like section 6659, a section 6661

addition to tax may be waived by the Commissioner if the taxpayer

demonstrates that there was reasonable cause for his underpayment

and that he acted in good faith. Sec. 6661(c). The taxpayer in

Mauerman relied upon independent attorneys and accountants for

advice as to whether payments were properly deductible or

capitalized. The advice relied upon by the taxpayer in Mauerman

was within the scope of the advisers' expertise, the

interpretation of the tax laws as applied to undisputed facts.

In these cases, particularly with respect to valuation,
 - 49 -

petitioners relied upon advice which was outside the scope of

expertise and experience of their advisers. Consequently, we

consider petitioners' reliance on the Mauerman case inapplicable.

We hold that petitioners did not have a reasonable basis for

the adjusted bases or valuations reflected on their tax returns

with respect to their investments in Scarborough and Plymouth.

In these cases respondent properly could find that petitioners'

respective reliance on Bachmann and Greene, and in varying

degrees the offering materials, was unreasonable. The records in

these cases do not establish an abuse of discretion on the part

of respondent but support 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 tax benefits.

Respondent is sustained on this issue.

Decisions will be entered

under Rule 155.