Zenkel v. Commissioner

T.C. Memo. 1996-398

UNITED STATES TAX COURT

BRUCE AND LOIS ZENKEL, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 12091-89, 19760-89, Filed August 27, 1996.
24512-89, 10147-91.

Stuart A. Smith and David H. Schnabel, for petitioners in

docket Nos. 12091-89, 24512-89, and 10147-91.

Stuart A. Smith, David H. Schnabel, and Richard J. Walsh,

for petitioner in docket No. 19760-89.

Mitchell Hausman, Gail A. Campbell, and Frances Ferrito

Regan, for respondent in docket No. 12091-89.

1
Cases of the following petitioners are consolidated for
opinion: Bruce and Lois Zenkel, docket No. 12091-89; Robert G.
Blount, docket No. 19760-89; Morton and Carol David, docket No.
24512-89; and Ira and Helen Selvin, docket No. 10147-91. The
cases were tried and briefed separately.
 - 2 -

Gail A. Campbell and Frances Ferrito Regan, for respondent

in docket No. 19760-89.

Jennifer J. Kohler and Frances Ferrito Regan, for respondent

in docket No. 24512-89.

Wendy Sands and Frances Ferrito Regan, for respondent in

docket No. 10147-91.

CONTENTS
Page
MEMORANDUM FINDINGS OF FACT AND OPINION.......................3
OPINION OF THE SPECIAL TRIAL JUDGE............................3
FINDINGS OF FACT..............................................6
A. The Plastics Recycling Transactions......................6
B. The Partnerships.........................................9
C. Richard Roberts.........................................12
D. Stuart Becker and Steven Leicht.........................13
E. Petitioners and Their Introduction to the Partnership
Transactions............................................17
1. Bruce and Lois Zenkel...............................17
2. Robert G. Blount....................................19
3. Morton and Carol David..............................22
4. Ira and Helen Selvin................................24
OPINION......................................................26
A. Statute of Limitations..................................29
B. Section 6653(a)--Negligence.............................31
1. The So-Called Oil Crisis...........................33
2. Petitioners' Purported Reliance on Ta7
Advisers...........................................37
a. The Circumstances Under Which a Taxpayer May
Avoid Liability Under Section 6653(a)(1) and
(2) Because of Reasonable Reliance on
Competent and Fully Informed Professional
Advice.........................................40
b. Becker.........................................41
c. Steele and Sprague.............................48
3. The Private Offering Memoranda.....................51
4. Miscellaneous......................................55
5. Conclusion as to Negligence........................62
C. Section 6659--Valuation Overstatement...................62
1. The Grounds for Petitioners' Underpayments.........64
2. Concession of the Deficiency.......................69
3. Section 6659(e)....................................73
 - 3 -

D. Petitioners' Motions For Leave To File Motion For
Decision Ordering Relief From the Negligence Penalty
and the Penalty Rate of Interest and To File Supporting
Memorandum of Law.......................................77

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: These 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. They were tried and

briefed separately but consolidated for purposes of opinion. All

section references are to the Internal Revenue Code in effect for

the tax years in issue, unless otherwise indicated. All Rule

references are to the Tax Court Rules of Practice and Procedure.

The Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

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

Plastics Recycling group of cases. For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

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

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

the underlying transactions and the Sentinel EPE recyclers 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:
 Penalty
Additions to Tax
Docket No. Petitioner Year Deficiency Sec. 6621(c) Sec. 6653(a)(1) Sec.
6653(a)(2) Sec. 6659

12091-89 Bruce and Lois Zenkel 1979 $26,330.001 2 --
-- $ 7,899.004
1980 483.001 -- --
-- --
1982 72,349.00 2 $3,617.00
3 21,705.004

19760-89 Robert G. Blount 1981 52,662.49 2 2,633.12
3 15,798.75

24512-89 Morton and Carol David 1982 51,356.00 2 2,569.00
3 15,407.004

10147-91 Ira and Helen Selvin 1981 44,626.00 2 2,231.00
3 13,388.00
1
The deficiencies in docket No. 12091-89 for taxable years 1979 and 1980 result from disallowance of investment tax
credit carrybacks and business energy credit carrybacks from taxable year 1982.
2
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. 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.
3
50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence.
4
In the alternative to the addition to tax under sec. 6659, respondent also determined that petitioners'
underpayments were subject to the addition to tax under sec. 6661.
 - 5 -

The parties in each of these consolidated cases filed a

Stipulation of Settled Issues concerning the adjustments relating

to their participation in the Plastics Recycling Program.

Although there are insubstantial differences in the language

used, such as singular terminology versus plural terminology, the

stipulations are substantively identical. The stipulations 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 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
rate of interest established under I.R.C. §6621(c),
formerly §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, except for the petitioners' potential
liability for additions to the tax for valuation
overstatements under I.R.C. §6659 and for negligence
under the applicable provisions of §6653(a).

Long after the trials in these cases, petitioners in docket

Nos. 10147-91 (Selvin), 24512-89 (David), and 19760-89 (Blount)

each filed a Motion For Leave to File Motion for Decision

Ordering Relief From the Negligence Penalty and the Penalty Rate

of Interest and to File Supporting Memorandum of Law under Rule

50. These motions were filed with attached exhibits on September

22, 1995, October 2, 1995, and November 30, 1995, respectively.
 - 6 -

On those same dates, each petitioner who filed a motion for leave

also lodged with the Court a motion for decision ordering relief

from the additions to tax for negligence and the increased rate

of interest, with attachments, and a memorandum in support of

such motion. Subsequently, respondent filed objections, with

attachments, and memoranda in support thereof. For reasons

discussed in more detail at the end of this opinion, and also in

Farrell v. Commissioner, T.C. Memo. 1996-295, petitioners'

motions shall be denied.

The issues remaining in these consolidated cases are: (1)

Whether the assessment in docket No. 24512-89 (David) is barred

by the statute of limitations; (2) whether petitioners are liable

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

negligence; and (3) whether petitioners are liable for additions

to tax under section 6659 for underpayments of tax attributable

to valuation overstatement.

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.

A. The Plastics Recycling Transactions

These cases concern petitioners' investments in four limited

partnerships that leased Sentinel expanded polyethylene (EPE)

recyclers: Phoenix Recycling Group (Phoenix), Scarborough

Leasing Associates (Scarborough), SAB Resource Reclamation
 - 7 -

Associates (SAB Reclamation), and SAB Resource Recycling

Associates (SAB Recycling). Petitioners Zenkel are limited

partners in SAB Reclamation; petitioner Blount is a limited

partner in Phoenix; petitioners David are limited partners in SAB

Recycling; and petitioners Selvin are limited partners in

Scarborough. For convenience we refer to these partnerships

collectively as the Partnerships.

The transactions involving the Sentinel EPE Recyclers leased

by the Partnerships are substantially identical to those in the

Clearwater Group limited partnership (Clearwater), the

partnership considered in Provizer v. Commissioner, T.C. Memo.

1992-177. 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 back 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
 - 8 -

were recourse but that the recourse portion of the notes was only

due after the nonrecourse portion, 90 percent, was 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

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 leased Sentinel

EPE recyclers from F & G Corp. and licensed those recyclers to

FMEC Corp. The transactions of the Partnerships differ from the

underlying transactions in the Provizer case in the following

respects: (1) The entity that leased the machines from F & G

Corp. and licensed them to FMEC Corp., and (2) the number of

recyclers the Partnerships were organized to lease and license.

Phoenix, Scarborough, and SAB Recycling each was to lease and

license seven Sentinel EPE recyclers. SAB Reclamation was to

lease and license eight recyclers, according to its offering

memorandum, but the SAB Reclamation partnership tax return for

1982 indicates that it leased and licensed only four recyclers.
 - 9 -

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 (EPS) recyclers. We refer to these

collectively as the Plastics Recycling transactions.

B. The Partnerships

Phoenix and Scarborough are New York limited partnerships

that were formed in late 1981. The general partner of Phoenix is

Richard Roberts (Roberts). He and Samuel L. Winer (Winer) are

the general partners of Scarborough. Winer is also the general

partner of Clearwater, the partnership considered in the Provizer

case. See Provizer v. Commissioner, supra.

SAB Reclamation and SAB Recycling are New York limited

partnerships that were organized and promoted in 1982 by Stuart

Becker (Becker), a certified public accountant (C.P.A.) and the

founder and principal owner of Stuart Becker & Co., P.C. (Becker

Co.), an accounting firm that specialized in tax matters. Becker

organized a total of six recycling partnerships (the SAB

Recycling Partnerships). Two of the SAB Recycling Partnerships

closed in late 1981, two closed in early 1982 (SAB Reclamation

and SAB Recycling), and two more closed in late 1982.
 - 10 -

The general partner of each of the SAB Recycling

Partnerships, including SAB Reclamation and SAB Recycling, is SAB

Management Ltd. (SAB Management). SAB Management is wholly owned

by Scanbo Management Ltd. (Scanbo), which is wholly owned by

Becker. Scanbo is an acronym for three of Becker's children:

Scott, Andy, and Bonnie. The officers and directors of SAB

Management and Scanbo are as follows: (1) Becker, president and

director; (2) Noel Tucker (Tucker), vice president, treasurer,

and director; and (3) Steven Leicht (Leicht), vice president,

secretary, and director. During the years in issue, Tucker and

Leicht also worked at Becker Co. Tucker was vice president.

Each owned between 5 and 7 percent of the stock of Becker Co.

SAB Management did not engage in any business before becoming

involved with the SAB Recycling Partnerships.

With respect to each of the Partnerships, a private

placement memorandum was distributed to potential limited

partners. Reports by F & G Corp.'s evaluators, Dr. Stanley M.

Ulanoff (Ulanoff), a marketing consultant, and Dr. Samuel Z.

Burstein (Burstein), a mathematics professor, were appended to

the offering memoranda. Ulanoff owns a 1.27-percent interest in

Plymouth Equipment Associates and a 4.37-percent interest in

Taylor Recycling Associates, partnerships that leased Sentinel

recyclers. Burstein owns a 2.605-percent interest in Empire

Associates and a 5.82-percent interest in Jefferson Recycling

Associates, also partnerships that leased Sentinel recyclers.
 - 11 -

Burstein also was a client and business associate of Elliot I.

Miller (Miller), the corporate counsel to PI.

The offering memoranda for Phoenix, Scarborough, SAB

Reclamation, and SAB Recycling state that the general partner

will receive fees from those partnerships in the respective

amounts of $40,000, $73,000, $110,000 and $97,375. SAB

Management received fees of approximately $500,000 as the general

partner of the SAB Recycling Partnerships. In addition, Becker

Co. prepared the partnership returns and Forms K-1 for all of the

SAB Recycling Partnerships and received fees for those services.

The offering memoranda also allocate a percentage of the

proceeds from each offering--7.5 percent in the case of SAB

Reclamation and SAB Recycling and 10 percent in the case of

Phoenix and Scarborough--to the payment of sales commissions and

offeree representative fees. In addition, the offering memoranda

provide that the respective general partners "may retain as

additional compensation all amounts not paid as sales commissions

or offeree representative fees." However, neither SAB Management

nor Becker retained or received any sales commissions or offeree

representative fees. Instead, after the closing of each SAB

Recycling Partnership, Becker rebated to each investor whose

investment was not subject to a sales commission or offeree

representative fee an amount equal to 7.5 percent of such

investor's original investment.
 - 12 -

The offering memoranda list significant business and tax

risk factors associated with investments in the Partnerships.

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

substantial likelihood of audit by the Internal Revenue Service

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

probably will be challenged as being in excess of fair market

value; (2) the Partnerships have no prior operating history; (3)

the general partner has no prior experience in marketing

recycling or similar equipment; (4) the limited partners have no

control over the conduct of the Partnerships' business; (5) there

is no established market for the Sentinel EPE recyclers; (6)

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) certain

potential conflicts of interest exist.

C. Richard Roberts

Roberts is a businessman and the general partner in a number

of limited partnerships that leased and licensed Sentinel EPE

recyclers, including Phoenix and Scarborough. He also is a

9-percent shareholder in F & G Corp., the corporation that leased

the recyclers to Phoenix and Scarborough. From 1982 through

1985, Roberts maintained the following office address with

Raymond Grant (Grant), the sole owner and president of ECI Corp.:

Grant/Roberts
Investment Banking
Tax Sheltered Investments
 - 13 -

745 Fifth Avenue, Suite 410
New York, New York 10022

Grant was instrumental in the hiring of Ulanoff as an evaluator

of the Plastics Recycling transactions; the two had met on a

cruise. Roberts and Grant together have been general partners in

other investments.

Prior to the Partnership transactions, Roberts and Grant

were clients of the accounting firm H. W. Freedman & Co.

(Freedman & Co.). Harris W. Freedman (Freedman), the named

partner in Freedman & Co., was the president and chairman of the

board of F & G Corp. He also owned 94 percent of a Sentinel EPE

recycler. Freedman & Co. prepared the partnership returns for

ECI Corp., F & G Corp., Phoenix, and Scarborough. It also

provided tax services to John D. Bambara (Bambara). Bambara is

the 100-percent owner of FMEC Corp., as well as its president,

treasurer, clerk, and director. He, his wife, and daughter also

owned directly or indirectly 100 percent of the stock of PI.

D. Stuart Becker and Steven Leicht

Becker does not have an engineering background, and he is

not an expert in plastics materials or plastics recycling. He

received a B.S. degree in accounting from New York University in

1964 and an M.B.A. in taxation from New York University School of

Business Administration in 1973. He passed the certified public

accountancy test in 1967 and was the winner of the gold medal,

awarded to the person achieving the highest score on the
 - 14 -

examination for that year. Since early 1966, Becker has

practiced as a C.P.A. exclusively in the tax area. From 1964

until 1972 he worked for the accounting firm of Touche, Ross &

Co., and in 1972 he joined the accounting firm of Richard A.

Eisner & Co. as the partner in charge of the tax department. In

1977, Becker founded Becker Co.

Becker had considerable experience involving tax shelter

transactions before he organized the SAB Recycling Partnerships.

He prepared opinions regarding tax shelters' economic and tax

projections, advised individuals and companies with respect to

investments in tax shelters, lectured extensively about tax

shelter investments generally, and lectured and published with

respect to leveraged tax shelters. Becker described a leveraged

tax shelter as "a transaction where [the ratio of] the effective

[tax] writeoff, which includes the value of the tax credit, * * *

[to the amount invested] exceeds one to one." Becker Co.

specialized in tax-advantaged investments. From 1980 to 1982,

approximately 60 percent of the work done by Becker Co. involved

tax sheltered and private investments. Becker has owned minority

interests in general partners of numerous limited partnerships.

Prior to organizing the SAB Recycling Partnerships, Becker owned

5 percent of the general partner of partnerships involved in

approximately 14 transactions concerning river transportation

(such as barges, tow boats, and grain elevators).
 - 15 -

Although investment counseling was related to his firm's

line of business, Becker did not consider himself in the business

of providing investment advice. Becker did not normally hire

other professionals for consultation or advice. In circumstances

where he believed there was a need for outside advice, he would

so advise the client. Between 30 and 40 of Becker's clients

invested in the Plastics Recycling partnerships.

Becker learned of the Plastics Recycling transactions when a

prospective client presented him with an offering memorandum

concerning the transactions in August or September 1981. Becker

reviewed the offering memorandum and spoke to Miller, one of the

key figures in the transactions and an acquaintance of Becker's.

Miller was a shareholder of F & G Corp. and, as noted, the

corporate counsel to PI. He also represented Grant and some of

Grant's clients. Thereafter, Becker recommended the investment

to the prospective client. Although the prospective client did

not invest in the Plastics Recycling transactions, Becker became

interested in the proposal and organized the SAB Recycling

Partnerships in order to make similar investments in Sentinel EPE

recyclers conveniently available to appropriate clients.

In organizing the SAB Recycling Partnerships, Becker was not

allowed to change the format of the transactions or the purchase,

lease, or licensing prices of the Sentinel EPE recyclers. He was

allowed only to conduct a limited investigation of the proposed

investments and choose whether or not to organize similar
 - 16 -

partnerships. Becker relied heavily upon the offering materials

and discussions with persons involved in the matter to evaluate

the Plastics Recycling transactions. He and two other members of

Becker Co., Leicht and Tucker, investigated PI and visited its

plant in Hyannis, Massachusetts, where they saw the Sentinel EPE

recyclers. Tucker did not testify at any of the trials.

During his investigation of the Plastics Recycling

transactions, Becker did not hire any plastics, engineering, or

technical experts, or recommend that his clients do so. Becker

discussed the transactions with Michael Canno (Canno) of the

Equitable Bag Co., a manufacturer of paper and plastic bags.

Canno never saw the recyclers or the pellets and never wrote any

reports assessing the equipment or the pellets. In addition,

Becker retained a law firm, Rabin & Silverman, to assist him in

organizing the SAB Recycling Partnerships. See Spears v.

Commissioner, T.C. Memo. 1996-341, to the effect that in

employing the law firm, Becker particularly sought to protect

himself against liability.

Leicht and Tucker also familiarized themselves with the

Plastics Recycling transactions. Leicht has a B.A. degree in

finance and accounting from Penn State University, a J.D. from

SUNY Buffalo, and an LL.M. in taxation from New York University

School of Law. Leicht ran a mathematical check on the numbers

contained in the offering materials for Becker, but he did not

test the underlying assumptions upon which they were based. He
 - 17 -

also visited PI in Hyannis and met with Miller and other insiders

to the transactions. Leicht never communicated an opinion as to

the value of the recyclers other than what was presented in the

offering memoranda. He has no education or expertise in plastics

materials or plastics recycling.

E. Petitioners and Their Introduction to the Partnership
Transactions

Petitioners in these 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.

1. Bruce and Lois Zenkel

Petitioners Bruce and Lois Zenkel (the Zenkels) resided in

Scarsdale, New York, when their petition was filed. Bruce Zenkel

(Mr. Zenkel) graduated from the University of Michigan and took

some post-graduate courses at the University of Pennsylvania.

Mr. Zenkel did not testify at trial. Lois Zenkel (Mrs. Zenkel)

attended Connecticut College and in 1975 received a degree from

Manhattanville College. During the years in issue, Mrs. Zenkel

was a freelance photographer, and Mr. Zenkel was an investment

banker. On their joint 1982 Federal income tax return, the

Zenkels reported gross income from wages, interest, dividends,
 - 18 -

State and local tax refunds, capital gains, and other sources in

excess of $300,000.

In 1982, Mrs. Zenkel acquired a 9-percent limited

partnership interest in SAB Reclamation for a gross investment of

$50,000, without taking into consideration any sales commission

rebate or advance royalty distribution. Based on Mrs. Zenkel's

interest in SAB Reclamation, on their 1982 Federal income tax

return the Zenkels claimed an operating loss in the amount of

$40,100 and investment tax and business energy credits totaling

$83,712. Their total credits claimed, $85,547, were subject to a

limitation of $62,841. The Zenkels carried back the unused

portion of the credits to 1979 and 1980. Respondent disallowed

the Zenkels' claimed operating loss and credits related to Mrs.

Zenkel's investment in SAB Reclamation.

The Zenkels learned of the Plastics Recycling transactions

and SAB Reclamation from Robert Steele (Steele), an accountant

with Becker Co. At the time, Becker Co. prepared the Zenkels'

Federal and State income tax returns. Mr. Zenkel had earlier met

Steele and Becker on separate occasions during the mid-1970's.

Mr. Zenkel initially met Becker in connection with some

investment offerings with which Mr. Zenkel was involved. After

Mrs. Zenkel also met Steele, the couple hired Becker Co. to

handle their tax and related accounting needs.

Steele provided Mrs. Zenkel with a copy of the SAB

Reclamation offering memorandum. Mrs. Zenkel looked it over and
 - 19 -

discussed the investment with Mr. Zenkel. She did not know

whether Becker or Steele had any experience, education, or

background in plastics recycling. The Zenkels each talked to

Steele about the investment. Mr. Zenkel called Becker directly

and asked him a large number of questions about the Plastics

Recycling transactions. Becker answered his questions and

related the particulars of his investigation to Mr. Zenkel. The

Zenkels had extensive investment experience prior to investing in

SAB Reclamation. Mrs. Zenkel considered Mr. Zenkel, who had

professional experience in the syndication business, to be

sophisticated in financial matters.

2. Robert G. Blount

Petitioner Robert G. Blount (Blount) resided in

Southhampton, New York, when his petition was filed. He received

an undergraduate degree in accounting from Babson College in 1960

and joined the accounting firm of Arthur Andersen & Co.

(Andersen) that same year. Blount became a C.P.A. in 1965 and in

1970 he became a partner at Andersen. In 1973 he left Andersen

and became the chief financial officer of a small company and in

1974 he joined American Home Products (AHP), a major

pharmaceutical manufacturer, as its treasurer and vice president

of finance, subsequently advancing to positions of greater

responsibility with AHP. On his 1981 Federal income tax return,

Blount reported gross income from wages in excess of $332,000.
 - 20 -

Blount acquired a 2.605-percent interest in Phoenix for a

gross investment of $25,000 in 1981, without taking into

consideration any sales commission rebate or advance royalty

distribution. As a result of his investment in Phoenix, on his

1981 Federal income tax return Blount claimed an operating loss

in the amount of $20,520 and investment tax and business energy

credits totaling $42,402. Respondent disallowed Blount's claimed

operating loss and credits related to his investment in Phoenix.

Blount learned of the Plastics Recycling transactions and

Phoenix in 1981 from William Sprague (Sprague), a former

colleague at Andersen who had been introduced to the transactions

by Leicht. Sprague joined Andersen in 1935, became a C.P.A. in

1938 (receiving the silver medal for the second highest grade on

the examination), and had been a partner at Andersen for

approximately 20 years when he retired in 1973. His work at

Andersen was primarily in the area of auditing and administrative

functions within the firm. Sprague knew Leicht because the

latter also worked for Andersen, specifically from 1974 through

1980, and the two occasionally had lunch together. Leicht was

working at Becker Co. in late 1981 when he suggested to Sprague

that he look at some of the potential investments that passed

through Becker Co. Sprague was familiar with Becker Co., and he

knew Becker personally since both had been involved with the New

York State Society of C.P.A.'s.
 - 21 -

Leicht gave Sprague a copy of the Phoenix offering

memorandum, and he reviewed it over a couple of days. Sprague

was a complete stranger to the idea of plastics recycling and was

incapable of evaluating the technical or engineering details

associated with the investment. Thereafter, he discussed the

investment with Leicht, and Leicht described his visits to PI.

Becker stated that he too discussed the investment with Sprague

and disclosed the extent of his investigation; Sprague, however,

could not recall their conversation. Sprague did not otherwise

investigate the Plastics Recycling transactions; he relied

exclusively on the offering materials and Becker Co.

During this time, Sprague saw Blount on business occasions

and also lunched with him about once a month. At one such lunch,

the two were discussing investment opportunities when Blount

mentioned that he was going to receive additional compensation

income. Sprague suggested the Plastics Recycling transactions as

a potential investment and in general terms recounted the

information he had received from Leicht. He explained that as a

service to clients, Becker Co. screens such investments--not to

guarantee them--but to determine generally if the proposed

investments are something their clients should look into.

Sprague suggested that Blount contact Leicht or Becker, but

Blount never spoke to either of them. Blount simply reviewed the

offering memorandum for a few hours and gave it to his tax

preparer, Marilyn Gowin (Gowin). Gowin reviewed all supporting
 - 22 -

documents for any transactions appearing on Blount's tax returns.

Blount considered Phoenix to be a high-risk investment.

3. Morton and Carol David

Petitioners Morton and Carol David (the Davids) resided in

New York, New York, when their petition was filed. Morton David

(David) received a B.A. degree from City College of New York in

1956 and a J.D. from Harvard Law School in 1961. From 1961

through 1963, David was an assistant to the special trial counsel

of the American Stock Exchange. He then practiced corporate law

at the law firm of Cooper, Ostrand, Devarco & Ackerman from 1963

until 1967. David has not practiced law since then. Instead,

David has engaged in the business of workouts and turnarounds of

technology companies, including a small cable television company,

a burglar alarm company, a military contracting company, an

electronics company, and a computer company. On their joint 1982

Federal income tax return, the Davids reported gross income from

wages, interest, dividends, State and local tax refunds, and

capital gains in excess of $750,000.

David acquired a 2.538461-percent interest in SAB Recycling

for a gross investment of $25,000 in 1982, without taking into

consideration any sales commission rebate or advance royalty

distribution. As a result of his interest in SAB Recycling, on

their joint 1982 Federal income tax return the Davids claimed an

operating loss in the amount of $19,871 and investment tax and

business energy credits totaling $41,320. Respondent disallowed
 - 23 -

the Davids' claimed operating loss and credits related to SAB

Recycling.

David learned of the Plastics Recycling transactions and SAB

Recycling from Becker in late 1981 or 1982. He first met Becker

sometime in 1963 when David was general counsel for Perfect Photo

Co. (PPC) and Becker did tax work for PPC on behalf of Touche,

Ross & Co. From 1968 until 1984, Becker provided David with

personal tax advice and performed tax accounting work for

companies that David controlled. David spent 4 to 6 hours

reviewing the offering memorandum for SAB Recycling and

thereafter he discussed the investment with Becker. Becker

described his investigation of the Plastics Recycling transaction

to David in detail.

David has no education or experience in plastics materials

or plastics recycling, and he knew that Becker was not an expert

in the plastics industry. He did not discuss the investment with

anyone who was knowledgeable or expert in the plastics industry.

He never viewed a recycler or independently investigated PI.

David did not investigate whether there was a market for recycled

pellets or independently verify any of the representations in the

offering memorandum. He simply reviewed the SAB Recycling

offering memorandum and discussed the proposed investment with

Becker.
 - 24 -

4. Ira and Helen Selvin

Petitioners Ira and Helen Selvin (the Selvins) resided in

Roslyn Estates, New York, when their petition was filed. Ira

Selvin (Selvin) received a B.S. degree from New York University

School of Commerce. Excluding his active service in the U.S.

Army during World Wars I and II, Selvin has practiced accounting

for his entire career until he retired in approximately 1980. He

was a sole practitioner for 30-35 years and serviced many clients

in the garment industry. Selvin eventually turned his practice

over to the accounting firm of Cooper, Selvin & Strasburg.

Although it maintained an office for him, Selvin never actively

worked for that firm. On their joint 1981 Federal income tax

return, the Selvins reported gross income from interest,

dividends, capital gains, pensions or annuities, and other

sources in excess of $172,000.

In 1981 Selvin acquired an interest in Scarborough as a

nominee on behalf of himself and other members of his accounting

firm (hereinafter "the Selvin group"). The Selvin group invested

$180,000 for an 18.27-percent interest in Scarborough. The

amount of Selvin's share in Scarborough is not entirely clear

from the record in docket No. 10147-91. Selvin stated that he

invested $30,000 in Scarborough, which is the equivalent of a

3.05-percent interest (30,000/180,000 = 16.67 percent; .1667 x

.1827 = 3.05 percent). However, the Selvins claimed $44,626 of
 - 25 -

investment tax and business energy credits using a reported basis

in qualifying property of $223,126. That amount is 15 percent of

the total basis owned by the Selvin group (223,126/1,487,504 =

.15), which is the equivalent of an investment of only $27,000

(180,000 x .15 = $27,000) and a total interest in Scarborough of

2.74 percent (.18277 x .15 = .0274). Relying on the documentary

evidence, we find that the Selvins paid $27,000 for their

partnership interest in Scarborough.

As reported on Selvin's 1981 Form K-1 from Scarborough, the

Selvin group's share of Scarborough's operating loss equaled

$142,821, and its share of Scarborough's basis in the recyclers

was $1,487,504. The Selvins did not claim any portion of the

operating loss on their joint 1981 Federal income tax return but,

as noted, they did claim investment tax and business energy

credits totaling $44,626. Respondent disallowed these claimed

credits.

Selvin learned of the Plastics Recycling transactions and

Scarborough from Becker. He first met Becker on a trip to Israel

in approximately 1968 and the two have been friendly ever since.

Selvin has never referred a client to Becker, although on one

occasion Becker referred a client to Selvin. Becker gave Selvin

a copy of the Scarborough offering memorandum. Selvin spent

several hours reviewing the offering memorandum and discussed it

with Becker. Becker answered Selvin's questions and explained
 - 26 -

the full extent of his investigation, such as his visit to PI,

speaking with Canno, and his research of trade journals to

confirm the price of plastic pellets. Becker never represented

that he was an expert in plastics materials or plastics

recycling. Selvin did not do any independent investigation of

the Sentinel EPE recyclers or plastics recycling in general. He

invested in Scarborough based solely on his review of the

offering materials and his discussions with Becker.

After the 1981 SAB Recycling Partnerships closed, Becker

paid Selvin's accounting firm to send an accountant to PI to

confirm, by serial number, that as of December 31, 1981, the

equipment that was leased to the 1981 SAB Recycling Partnerships

was indeed available for use. Becker arranged for this

verification, independent of PI, because he understood that the

investment tax and business energy credits would not be available

if the qualifying property was not available for use.

OPINION

We have decided more than 30 of the Plastics Recycling group

of cases.2 The majority of these cases, like the consolidated

2
Provizer v. Commissioner, T.C. Memo. 1992-177, affd.
without published opinion 996 F.2d 1216 (6th Cir. 1993),
concerned the substance of the partnership transaction and also
the additions to tax.
The following cases concerned the addition to tax for
negligence, inter alia: Estate of Busch v. Commissioner, T.C.
Memo. 1996-342; Spears v. Commissioner, T.C. Memo. 1996-341;
Stone v. Commissioner, T.C. Memo. 1996-230; Reimann v.
(continued...)
 - 27 -

cases herein, raised issues regarding additions to tax for

negligence and valuation overstatement. We have found the

taxpayers liable for such additions to tax in all but one of the

opinions to date on these issues, although procedural rulings

have involved many more favorable results for taxpayers.3

(...continued)
2

Commissioner, T.C. Memo. 1996-84; Bennett v. Commissioner, T.C.
Memo. 1996-14; Atkind v. Commissioner, T.C. Memo. 1995-582;
Triemstra v. Commissioner, T.C. Memo. 1995-581; Pace v.
Commissioner, T.C. Memo. 1995-580; Dworkin v. Commissioner, T.C.
Memo. 1995-533; Wilson v Commissioner, T.C. Memo. 1995-525;
Avellini v. Commissioner, T.C. Memo. 1995-489; Paulson v.
Commissioner, T.C. Memo. 1995-387; Zidanich v. Commissioner, T.C.
Memo. 1995-382; Ramesh v. Commissioner, T.C. Memo. 1995-346;
Reister v. Commissioner, T.C. Memo. 1995-305; Fralich v.
Commissioner, T.C. Memo. 1995-257; Shapiro v. Commissioner, T.C.
Memo. 1995-224; Pierce v. Commissioner, T.C. Memo. 1995-223; Fine
v. Commissioner, T.C. Memo. 1995-222; Pearlman v. Commissioner,
T.C. Memo. 1995-182; Kott v. Commissioner, T.C. Memo. 1995-181;
Eisenberg v. Commissioner, T.C. Memo. 1995-180.
Greene v. Commissioner, 88 T.C. 376 (1987), concerned the
applicability of the safe-harbor leasing provisions of sec.
168(f)(8). Trost v. Commissioner, 95 T.C. 560 (1990), concerned
a jurisdictional issue.
Farrell v. Commissioner, T.C. Memo. 1996-295; Baratelli v.
Commissioner, T.C. Memo. 1994-484; Estate of Satin v.
Commissioner, T.C. Memo. 1994-435; Fisher v. Commissioner, T.C.
Memo. 1994-434; Foam Recycling Associates v. Commissioner, T.C.
Memo. 1992-645; Madison Recycling Associates v. Commissioner,
T.C. Memo. 1992-605, concerned other issues.
3
In Zidanich v. Commissioner, T.C. Memo. 1995-382, we
held the taxpayers liable for the sec. 6659 addition to tax, but
not liable for the negligence additions to tax under sec.
6653(a). As indicated in our opinion, the Zidanich case, and the
Steinberg case consolidated with it for opinion, involved
exceptional circumstances.
In Estate of Satin v. Commissioner, supra, and Fisher v.
Commissioner, supra, after the decision in Provizer v.
Commissioner, supra, the taxpayers were allowed to elect to
accept a beneficial settlement because of exceptional
(continued...)
 - 28 -

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

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

(...continued)
3

circumstances. In Farrell v. Commissioner, supra, we rejected
taxpayers' claim to a similar belated settlement arrangement
since the circumstances were different and taxpayers previously
had rejected settlement and elected to litigate the case. See
also Baratelli v. Commissioner, supra.
 - 29 -

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 machines 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

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 the respective

stipulations of settled issues filed shortly before trial. The

record plainly supports respondent's determination 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.

A. Statute of Limitations

In their petition, the Davids alleged that the notice of

deficiency in docket No. 24512-89 was not issued within the

statutory limitations period. This issue appears to have been

abandoned. The Stipulation of Settled Issues in docket No.

24512-89 indicates that the only issues remaining for decision in

that case are the potential liability of the Davids for additions
 - 30 -

to tax under sections 6653(a) and 6659. None of the trial

memoranda or briefs in docket No. 24512-89 address this issue.

Regardless of whether the issue was abandoned, the record in

docket No. 24512-89 shows that the notice of deficiency in that

case was issued within the statutory limitations period. In

general, section 6501(a) requires assessment of tax to be made

within 3 years after a return is filed, whether the return was

filed on or after the date prescribed. Section 6501(b)(1)

provides that if a return is filed before the due date, for

purposes of section 6501, the return shall be considered filed on

the due date. Section 6501(c)(4) provides that if, before the

expiration of the time to assess the tax under section 6501(a),

the parties consent in writing to extend the time for the

assessment of the tax, the tax may be assessed at any time before

the end of the period agreed upon.

The Davids' joint 1982 Federal income tax return was due on

April 15, 1983, and was filed on or before that date. Therefore,

the 3-year period of limitations under section 6501(a) initially

was set to expire on April 15, 1986. However, the Davids and

respondent executed three consecutive Forms 872, Consent to

Extend the Time to Assess Tax. The first of these Forms 872 was

fully executed on March 21, 1986, prior to expiration of the

normal 3-year period of limitations, and the last of these Forms

872 extended the period of limitations to December 31, 1989. The
 - 31 -

notice of deficiency was mailed on July 21, 1989, well before the

expiration of the extended limitations period. The Davids have

presented no evidence that the Forms 872 were not properly

executed. Accordingly, the notice of deficiency in docket No.

24512-89 was issued within the statutory limitations period, as

extended by the parties, and the assessment in docket No. 24512-

89 is not barred by the statute of limitations.

We note that in their respective petitions, the Selvins and

the Zenkels also claimed that the notices of deficiency issued in

their cases were barred by the statute of limitations. However,

the Selvins conceded the issue at a call of the calendar on

March 21, 1994, and the Zenkels conceded the issue in the

stipulation of facts filed in their case. Blount never raised a

statute of limitations issue.

B. Section 6653(a)--Negligence

Respondent determined that petitioners are liable for

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

Petitioners 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).

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. Section 6653(a)(2) imposes an addition to tax equal
 - 32 -

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

of the underpayment attributable to negligence or intentional

disregard of rules or regulations.

Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would employ

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

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

in connection with the transactions were reasonable in light of

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

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

When considering the negligence addition to tax, we evaluate the

particular facts of each case, judging the relative

sophistication of the taxpayers, as well as the manner in which

they approached their investment. McPike v. Commissioner, T.C.

Memo. 1996-46. Compare, e.g., Spears v. Commissioner, T.C. Memo.

1996-341, with Zidanich v. Commissioner, T.C. Memo. 1995-382.

When petitioners invested in the partnerships, they had no

education or experience in plastics materials or plastics

recycling, nor had any of them seen a Sentinel EPE recycler. In

each of these consolidated cases, petitioners maintain that they

were reasonable in claiming deductions and investment credits

with respect to their investments in the Partnerships. In

support of such contentions, petitioners argue, in general terms:

(1) That claiming the deductions and credits with respect to the
 - 33 -

Partnerships was reasonable in light of the so-called oil crisis

during the years in issue; and (2) that they reasonably relied

upon the offering materials and a qualified adviser.

1. The So-Called Oil Crisis

Petitioners argue that they reasonably expected to make an

economic profit from the Partnership transactions because plastic

is an oil derivative and the United States was experiencing a so-

called oil crisis during the years 1981 and 1982.

Petitioners' contention that they reasonably expected an

economic profit from the Partnership transactions is

unconvincing. Petitioners did not give due consideration to the

caveats and warnings contained in the offering memoranda, nor

seriously investigate or educate themselves in the Plastics

Recycling transactions. Moreover, testimony by one of

respondent's experts establishes that the oil pricing changes

during the late 1970's and early 1980's did not justify

petitioners' claiming excessive investment credits and purported

losses based on vastly exaggerated valuations of recycling

machinery.

Petitioners' claim that they reasonably expected an economic

profit from the Partnership transactions is undermined by their

indifference to the warnings in the offering memoranda and their

lack of knowledge regarding the transactions in general,

notwithstanding the so-called oil crisis. Mrs. Zenkel did not
 - 34 -

know how many recyclers SAB Reclamation leased or who

manufactured the recyclers. Blount had no idea who the general

partner of Phoenix was, how a Sentinel EPE recycler worked, the

value placed on the recyclers, how many recyclers Phoenix leased,

or how he was going to make a profit from his investment. David

did not know how many recyclers SAB Recycling purchased or the

price of each machine. Selvin knew nothing about resin prices,

was not aware of any companies that would be suitable end-users,

and did not know whether Scarborough had any assets, or how the

venture was to work.

Petitioners failed to explain how the so-called oil crisis,

or the media coverage of it, provided a reasonable basis for them

to invest in the Partnerships and claim the associated tax

deductions and credits. The offering materials warned that there

could be no assurances that prices for new resin pellets would

remain at their then current level. One of respondent's experts,

Steven Grossman, explained that the price of plastics materials

is not directly proportional to the price of oil. In his report,

he stated 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." Moreover, during

1980 and 1981, in addition to the media coverage of the so-called

oil crisis, there was "extensive continuing press coverage of
 - 35 -

questionable tax shelter plans." Zmuda v. Commissioner, 731 F.2d

1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982).

Petitioners' reliance on 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, 71A AFTR 2d 93-

4294, 91-1 USTC par. 50,252 (E.D. La. 1991), is misplaced. The

facts in Krause v. Commissioner, supra, are distinctly different

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. 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, as explained by respondent's expert Steven Grossman, the

price of plastics materials was not directly proportional to the

price of oil, and there is no persuasive evidence that the so-

called oil crisis had a substantial bearing on petitioners'

decisions to invest. While EOR was, according to our Krause
 - 36 -

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

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, petitioners were not experienced or educated in

plastics recycling or plastics materials. They did not

independently investigate the Sentinel recyclers or hire an

expert in plastics to evaluate the Partnership transactions.

In Rousseau v. United States, supra, 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
 - 37 -

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. As noted above, petitioners did not independently

investigate the Sentinel EPE recyclers or hire an expert in

plastics to evaluate the Partnership transactions. The facts of

petitioners' cases are distinctly different from the Rousseau

case. Accordingly, we do not consider petitioners' arguments

with respect to the Krause and Rousseau cases applicable.

2. Petitioners' Purported Reliance on Tax Advisers

Petitioners also maintain that they reasonably relied upon

the advice of a qualified adviser. The Zenkels discussed the

investment with Steele and Becker; Blount discussed it with

Sprague; and the Davids and the Selvins discussed it with Becker.

The concept of negligence and the argument of reliance on an

expert are highly fact intensive. Petitioners in these cases are

very well educated professionals whose intellect and business

sophistication are reflected in their financial and business

success. Blount is a C.P.A. and business executive with 13 years

of accounting experience with Arthur Andersen, 3 of those as a

partner, and employment with American Home Products, a major

pharmaceutical company, initially as vice president of finance

and treasurer in 1974, and subsequently in positions of greater

responsibility. David was a corporate attorney before engaging
 - 38 -

in workouts and turnarounds of technology companies. Selvin is a

C.P.A. who ran his own accounting firm for 30 to 35 years in New

York City. In respect of these accomplishments and their obvious

financial prowess, petitioners Blount, David, and Selvin do not

pretend to be unsophisticated investors.

Mrs. Zenkel, on the other hand, claims that she is an

unsophisticated investor. Her claim is without merit. In her

SAB Reclamation subscription agreement, Mrs. Zenkel expressly

represented and warranted that she had the experience and

expertise in financial and business affairs necessary to evaluate

the merits and risks of investing in SAB Reclamation. Moreover,

her decision to invest in SAB Reclamation was made with the

assistance of Mr. Zenkel, an investment banker with experience in

the syndication business. Although Mr. Zenkel did not testify at

the trial4, the record shows that he discussed SAB Reclamation

with his wife, Steele, and Becker. Becker testified that Mr.

Zenkel "called me directly regarding the program. He had a large

4
Mr. and Mrs. Zenkel both benefited from the tax
deductions and credits from SAB Reclamation on their joint 1982
Federal Income tax return, and together they petitioned this
Court in docket No. 12091-89. The testimony of Mrs. Zenkel and
Becker shows that Mr. Zenkel was heavily involved in the decision
to invest in SAB Reclamation, and his failure to testify does not
further his wife's claim that she was an unsophisticated
investor. See Bresler v. Commissioner, 65 T.C. 182, 188 (1975);
Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d
409 (5th Cir. 1968); Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th
Cir. 1947).
 - 39 -

number of questions which I answered for him, and apparently

based on that he made his decision to invest." (Emphasis added.)

The Zenkels are not unsophisticated investors. On their 1982

return, they reported dividend income in the amount of $146,644

and net long-term capital gains in the amount of $155,144.

Petitioners assert that they relied upon one or more members

of the accounting firm of Becker Co., and in particular on its

founder and principal owner Stuart Becker, to investigate the tax

law and the underlying business circumstances of a proposed

investment. In the Blount case, petitioner placed reliance on

this firm only indirectly or secondhand, through Sprague.

Becker, who is experienced in tax matters, explains that he made

an investigation within the limits of his resources and abilities

and fully disclosed what he had done. The question here is

whether petitioners actually and reasonably relied on the

accountant with respect to valuation problems requiring expertise

in engineering and plastics technology or whether the accountant

gave the tax advice and facilitated the transaction, but did not

make a full and independent investigation of the relevant

business and technology, and did clearly inform his clients of

the limits of his knowledge and investigation of the transaction.

For reasons set forth below, we believe the latter statement more

accurately describes what happened here.

a. The Circumstances Under Which a Taxpayer
May Avoid Liability Under Section 6653(a)(1)
 - 40 -

and (2) Because of Reasonable Reliance on
Competent and Fully Informed Professional
Advice

A taxpayer may avoid liability for the additions to tax

under section 6653(a)(1) and (2) if he or she reasonably relied

on competent professional advice. United States v. Boyle, 469

U.S. 241, 250-251 (1985); 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. For reliance on professional advice to excuse a

taxpayer from the negligence additions to tax, the taxpayer must

show that such professional had the expertise and knowledge of

the pertinent facts to provide informed advice on the subject

matter. David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir.

1995), affg. T.C. Memo. 1993-621; Goldman v. Commissioner, 39

F.3d 402 (2d Cir. 1994), affg. T.C. Memo. 1993-480; Freytag v.

Commissioner, supra; Sacks v. Commissioner, T.C. Memo. 1994-217,

affd. 82 F.3d 918 (9th Cir. 1996); Kozlowski v. Commissioner,

T.C. Memo. 1993-430, affd. without published opinion 70 F.3d 1279

(9th Cir. 1995); see also Stone v. Commissioner, T.C. Memo. 1996-

230; Reimann v. Commissioner, T.C. Memo. 1996-84.

Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

negligence. Goldman v. Commissioner, supra; Pasternak v.
 - 41 -

Commissioner, 990 F.2d 893 (6th Cir. 1993), affg. Donahue v.

Commissioner, T.C. Memo. 1991-181; LaVerne v. Commissioner, 94

T.C. 637, 652-653 (1990), affd. without published opinion 956

F.2d 274 (9th Cir. 1992), affd. without published opinion sub

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

Marine v. Commissioner, 92 T.C. 958, 992-993 (1989), affd.

without published opinion 921 F.2d 280 (9th Cir. 1991); McCrary

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

91 T.C. 524, 565 (1988). Pleas of reliance have been rejected

when neither the taxpayer nor the advisers purportedly relied

upon by the taxpayer knew anything about the nontax business

aspects of the contemplated venture. David v. Commissioner,

supra; Goldman v. Commissioner, supra; Freytag v. Commissioner,

supra; Beck v. Commissioner, 85 T.C. 557 (1985); Lax v.

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

opinion 72 F.3d 123 (3d Cir. 1995); Sacks v. Commissioner, supra;

Steerman v. Commissioner, T.C. Memo. 1993-447; Rogers v.

Commissioner, T.C. Memo. 1990-619; see also the Plastics

Recycling cases cited, supra note 2.

b. Becker

Becker had no education, special qualifications, or

professional skills in plastics engineering, plastics recycling,

or plastics materials. In evaluating the Plastics Recycling

transactions and organizing the SAB Recycling Partnerships,
 - 42 -

Becker supposedly relied upon: (1) The offering materials; (2) a

tour of the PI facility in Hyannis; (3) discussions with insiders

to the transactions; (4) Canno; and (5) his investigation of the

reputation and background of PI and persons involved in the

transactions.

Despite his lack of knowledge regarding the product, the

target market, and the technical aspects at the heart of the

Plastics Recycling transactions, Becker did not hire an expert in

plastics materials or plastics recycling, or recommend that his

clients do so. The only independent person having any connection

with the plastics industry with whom Becker spoke was Canno. A

client of Becker Co., Canno was a part owner and the production

manager of Equitable Bag Co., a manufacturer of paper and plastic

bags. Becker spoke to Canno about the recyclers and PI, but did

not hire or pay him for any advice. Canno did not visit PI's

plant in Hyannis, see or test a Sentinel EPE recycler, or see or

test any of the output from a Sentinel EPE recycler or the

recycled resin pellets after they were further processed by PI.

According to Becker, Canno endorsed the Partnership transactions

after reviewing the offering materials. Asked at trial if Canno

had done any type of comparables analysis, Becker replied, "I

don't know what Mr. Canno did."

Becker visited the PI plant in Hyannis, toured the facility,

viewed a Sentinel EPE recycler in operation, and saw products
 - 43 -

that were produced from recycled plastic. He claims that during

his visit he was told that the recycler was unique and that it

was the only machine of its type. In fact, the Sentinel EPE

recycler was not unique; instead, several machines capable of

densifying low density materials already were on the market.

Other plastics recycling machines available during 1981 ranged in

price from $20,000 to $200,000, including the Foremost

Densilator, Nelmor/Weiss Densification System (Regenolux), Buss-

Condux Plastcompactor, and Cumberland Granulator. See Provizer

v. Commissioner, T.C. Memo. 1992-177.

Becker was also told that PI had put an enormous amount of

research and development--10 to 12 years' worth--into the

creation and production of the Sentinel EPE recycler. When he

asked to see the cost records for some kind of independent

verification, however, his request was denied. Becker was

informed that such information was proprietary and secret, and

that he would just have to take PI's representations as true.

Although PI claimed that all of its information was a trade

secret, and that it never obtained patents on any of its

machines, PI had in fact obtained numerous patents prior to the

recycling transactions and had also applied for a trademark for

the Sentinel recyclers. Becker decided to accept PI's

representations after speaking with Miller (the corporate counsel

to PI), Canno (who had never been to PI's plant or seen a
 - 44 -

Sentinel EPE recycler), and a surrogate judge from Rhode Island

who did business in the Boston-Cape Cod area (and who had no

expertise in engineering or plastics materials). Becker

testified that he was allowed to see PI's internal accounting

controls regarding the allocation of royalty payments and PI's

recordkeeping system in general. In Provizer v. Commissioner,

supra, this Court found that "PI had no cost accounting system or

records."

Becker confirmed at trial that he relied on the offering

materials and discussions with PI personnel to establish the

value and purported uniqueness of the recyclers. Becker

testified that he relied upon the reports of Ulanoff and Burstein

contained in the offering materials, despite the fact that: (1)

Ulanoff's report did not contain any hard data to support his

opinion; (2) Ulanoff was not an economics or plastics expert; (3)

Becker did not know whether Burstein was an engineer; and (4)

Burstein was a client of Miller's and was not an independent

expert. In addition, Ulanoff and Burstein each owned an interest

in more than one partnership that owned Sentinel recyclers as

part of the Plastics Recycling program.

Becker explained at trial that in the course of his practice

when evaluating prospective investments for clients, he focuses

on the economics of the transaction and investigates whether

there is a need or market for the product or service. With
 - 45 -

respect to the Partnership transactions, the records indicate

that Becker overlooked several red flags regarding the economic

viability and market for the Sentinel EPE recyclers. The

offering memoranda for the Partnership transactions warned that

there was no established market for the Sentinel EPE recyclers.

Becker never saw any marketing plans for selling the pellets or

leasing the recyclers. He accepted representations by PI

personnel that they would be marketing the recyclers to clients

and that there was a sufficient base of end-users for the

machines, yet he never saw PI's client list. At the time of the

closing of the Partnerships, Becker did not know who the end-

users were or whether there were any end-users actually committed

to the transaction.

Becker purportedly checked the price of the pellets by

reading trade journals of the plastics industry. However, he did

not use those same journals to investigate the recyclers'

purported value or to see whether there were any advertisements

for comparable machines. The record in these cases does not

indicate that any of petitioners or their advisers other than

Becker asked to see those journals for their own examination. In

concluding that the Partnerships would be economically

profitable, Becker made two assumptions that he concedes were

unsupported by any hard data: (1) That there was a market for

the pellets; and (2) that market demand for them would increase.
 - 46 -

Becker also had a financial interest in SAB Reclamation and

SAB Recovery. He received fees in excess of $500,000 with

respect to the SAB Recycling Partnerships, more than $200,000 of

which was derived from SAB Reclamation and SAB Recycling. Becker

also received fees from individual investors for investment

advice. In addition, Becker Co. received fees from the SAB

Recycling Partnerships for preparing their partnership returns.

As Becker himself testified, petitioners could not have read the

offering materials and been ignorant of the financial benefits

accruing to him.

We find that petitioners' purported reliance on Becker was

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

disclosure. Becker's expertise was in taxation, not plastics

materials or plastics recycling, and his investigation and

analysis of the Plastics Recycling transactions reflected this

circumstance. Selvin and David knew Becker was not expert in

plastics materials or plastics recycling, and the Zenkels and

Blount had no reason to believe otherwise. Becker testified that

he was very careful not to mislead any of his clients regarding

the particulars of his investigation. As he put it: "I don't

recall saying to a client I did due diligence * * * [Rather,] I

told [my clients] precisely what I had done to investigate or

analyze the transaction. I didn't just say I did due diligence,
 - 47 -

and leave it open for them to define what I might or might not

have done."

The purported value of the Sentinel EPE recycler generated

the deductions and credits in these cases, and that circumstance

was reflected in the offering memoranda. Certainly Becker

recognized the nature of the tax benefits and, given their

education and business experience, petitioners should have

recognized it as well. Yet neither petitioners nor Becker

verified the purported value of the Sentinel EPE recycler.

Becker confirmed at trial that he relied on PI for the value of

the Sentinel EPE recyclers. Investors as sophisticated as

petitioners either learned or should have learned the source and

shortcomings of Becker's valuation information when he reported

to them and "precisely" disclosed "what [he] had done to

investigate or analyze the transaction." Accordingly, we hold

that petitioners did not reasonably or in good faith rely on

Becker as an expert or a qualified professional working in the

area of his expertise to establish the fair market value of the

Sentinel EPE recycler and the economic viability of the

Partnership transactions. Becker never assumed such

responsibility, and he fully described the particulars of his

investigation, taking care not to mischaracterize it as "due

diligence."
 - 48 -

In the end, Becker and petitioners relied on PI personnel

for the value of the Sentinel EPE recyclers and the economic

viability of the Partnership transactions. See Vojticek v.

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

such persons "is better classified as sales promotion." Becker

did not have any education, special qualifications, or

professional skills in plastics materials or plastics recycling.

A taxpayer may rely upon his adviser's expertise (in these cases,

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

to rely upon a tax adviser regarding matters outside of his field

of expertise or with respect to facts that he does not verify.

See David v. Commissioner, 43 F.3d at 789-790; Goldman v.

Commissioner, 39 F.3d at 408; 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; Sacks v.

Commissioner, T.C. Memo. 1994-217; Rogers v. Commissioner, T.C.

Memo. 1990-619; see also Estate of Busch v. Commissioner, T.C.

Memo. 1996-342, Spears v. Commissioner, T.C. Memo. 1996-341, with

respect to Becker's advice in Plastics Recycling cases.

c. Steele and Sprague

Petitioners Zenkel and Blount purport to have relied on

advisers other than or in addition to Becker. The only person

with whom Blount discussed the Plastics Recycling transactions

was Sprague, who in turn had spoken with Becker and Leicht.
 - 49 -

Blount also gave a copy of the offering memorandum to his tax

return preparer, Gowin. Mr. Zenkel spoke to Becker; both he and

Mrs. Zenkel spoke to Steele.

Blount learned about the Plastics Recycling transactions

from Sprague. Sprague suggested the Plastics Recycling

transactions to Blount as an investment option after Blount

mentioned that he was going to receive additional compensation

income. Sprague recalled introducing the investment to Blount in

the following manner: "[I]f you're looking for investments, you

might contact Stephen Leicht or Stuart Becker, because I * * *

understand that they, as a service to clients, do screen numerous

such investments, not to guarantee them but to just generally

determine if they believe they would be suitable for referring *

* * to their clients to take a look at." (Emphasis added.)

Sprague then went on to describe the Plastics Recycling

information he had received from Leicht and Becker "in a general

way."

Blount never spoke to Becker or Leicht. He simply reviewed

the offering memorandum, spoke with Sprague, and furnished the

offering memorandum to his tax return preparer. Sprague is not

an expert in plastics materials or plastics recycling and could

not evaluate the technical or engineering details of the Phoenix

transaction. He testified that in 1981 he "was a complete

stranger to this notion of reprocessing plastics and recycling."
 - 50 -

Sprague's investigation of Phoenix consisted of reading the

offering memorandum and talking to Leicht and Becker. Blount has

not shown that his tax return preparer, Gowin, possessed the

requisite expertise in recycling or the plastics industry to have

enabled her properly to evaluate the merits of the Phoenix

transaction. In light of the foregoing, Blount will not be

relieved of the negligence additions to tax based upon his

purported reliance on Sprague and Gowin.

Mr. and Mrs. Zenkel each discussed the investment with

Steele. Neither Steele nor Mr. Zenkel testified in docket No.

12091-89. Mrs. Zenkel could not recall the content of her

conversations with Steele; she remembered only that he told her

that the investment had tax benefits and that he responded

positively when she asked him if SAB Reclamation was a worthwhile

investment. Mrs. Zenkel testified that she did not know that

Becker Co. was involved in tax-oriented investments, whether

Steele had any background in plastics materials or plastics

recycling, whether Becker or Steele investigated PI, whether they

investigated and/or compared the recycler with any similar

products, whether they investigated end-users, or whether either

of them checked with independent plastics experts as to the value

of the recycler. Mrs. Zenkel testified that if she had known any

of the particulars of Becker's and Steele's investigation, she

has since forgotten them. The record in docket No. 12091-89 does
 - 51 -

not establish that the Zenkels' purported reliance on Steele was

reasonable, in good faith, or based upon full disclosure.

3. The Private Offering Memoranda

In addition to purportedly relying on Becker, Steele, and/or

Sprague, petitioners maintain that they reasonably relied upon

the offering memoranda and the tax opinion letter appended

thereto. However, petitioners' testimony and actions indicate

that they did not thoroughly review or study all of the

information set out in the offering memoranda and that they

ultimately did not place a great deal of reliance, if any, on the

representations therein.

The offering memoranda included numerous caveats and

warnings with respect to the Partnerships, including: (1) The

substantial likelihood of audit by the IRS and a likely challenge

of the purported value of the recyclers; (2) the general

partners' lack of experience in marketing recycling or similar

equipment; (3) the lack of an established market for the

recyclers; and (4) uncertainties regarding the market prices for

virgin resin and the possibility that recycled pellets would not

be as marketable as virgin pellets. In addition, the offering

memoranda noted a number of conflicts of interest, including

Miller's interest in F & G Corp. and his representation of

Burstein, PI, and Grant, who was the sole shareholder of ECI

Corp. A careful consideration of the materials in the respective
 - 52 -

offering memoranda in these cases, especially the discussions 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; Sacks v. Commissioner, T.C.

Memo. 1994-217.

In each case, the projected tax benefits in the respective

offering memoranda exceeded petitioners' respective investments.

According to the offering memoranda, for each $50,000 investor,

the projected first-year tax benefits were investment tax credits

in excess of $82,500 plus deductions in excess of $39,000.

Specifically, the projected investment tax credits and deductions

for the Partnerships in the first year of the investment for each

$50,000 investor were as follows: $82,639 and $39,323 for

Scarborough in 1981; $84,813 and $40,671 for Phoenix in 1981;

$82,639 and $40,037 for SAB Recycling in 1982; and $83,712 and

$40,234 for SAB Reclamation in 1982.

For Mrs. Zenkel's gross $50,000 investment, the Zenkel's

claimed an operating loss in the amount of $40,100 and investment

tax and business energy credits in the amount of $83,712. As a

result of his gross $25,000 investment, Blount claimed a $20,520

operating loss and $42,402 in investment tax and business energy

credits. For their gross $25,000 investment, the Davids claimed
 - 53 -

an operating loss in the amount of $19,871 and investment tax and

business energy credits totaling $41,320. For their $27,000

investment, the Selvins claimed investment tax and business

energy credits in the amount of $44,626.

The direct reductions in petitioners' Federal income tax,

from the investment tax credits alone, ranged from 149 percent to

170 percent of their cash investments, without consideration of

any rebated commissions or advance royalty payments. Therefore,

after adjustments of withholding, estimated tax, or final

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

Memo. 1992-177, "except for a few weeks at the beginning,

petitioners never had any money in the * * * [Partnership

transactions]." In view of the disproportionately large tax

benefits claimed on petitioners' 1981 and 1982 Federal income tax

returns, relative to the dollar amounts invested, further

investigation of the Partnership transactions clearly was

required. A reasonably prudent person would have asked a

qualified independent tax adviser if this windfall were not too

good to be true. McCrary v. Commissioner, 92 T.C. at 850. A

reasonably prudent person would not conclude without substantial

investigation that the Government was providing tax benefits so

disproportionate to the taxpayers' investment of their own

capital.
 - 54 -

Petitioners' reliance upon the Court of Appeals for the

Ninth Circuit's partial reversal of our decision in Osterhout v.

Commissioner, T.C. Memo. 1993-251, affd. in part and revd. in

part without published opinion sub nom. Balboa Energy Fund 1981

v. Commissioner, 85 F.3d 634 (9th Cir. 1996), is misplaced. In

Osterhout, we found that certain oil and gas partnerships were

not engaged in a trade or business and sustained respondent's

imposition of the negligence additions to tax with respect to one

of the partners therein.5 The Court of Appeals for the Ninth

Circuit reversed our imposition of the negligence additions to

tax. Petitioners point out that the taxpayer in that case relied

in part upon a tax opinion contained in the offering materials.

However, the offering memoranda for the Partnerships herein

warned prospective investors that the accompanying tax opinion

letters were not in final form, and were prepared for the general

partner, and that prospective investors should consult their own

professional advisers with respect to the tax benefits and tax

risks associated with the respective Partnerships. The tax

opinion letters accompanying the SAB Reclamation and SAB

5
Osterhout v. Commissioner, T.C. Memo. 1993-251, affd.
in part and revd. in part without published opinion sub nom.
Balboa Energy Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir.
1996), involved a group of consolidated cases. The parties
therein agreed to be bound by the Court's opinion regarding the
application of the additions to tax under sec. 6653(a), inter
alia. Accordingly, although the Court's analysis focused on one
taxpayer, the additions to tax were sustained with respect to all
of the taxpayers.
 - 55 -

Recycling offering memoranda were addressed solely to the general

partner and began with the following disclaimer:

This opinion is provided to you for your individual
guidance. We expect that prospective investors will
rely upon their own professional advisors with respect
to all tax issues arising in connection with an
investment in the Partnership and the operations
thereof. We recognize that you intend to include this
letter with your offering materials and we have
consented to that with the understanding that the
purpose in distributing it is to assist your offerees'
and their tax advisors in making their own analysis and
not to permit any prospective investor to rely upon our
advice in this matter. [Emphasis added.]

A similar disclaimer appears in the tax opinion letter

accompanying the Scarborough offering memorandum. (The copy of

the Phoenix offering memorandum submitted into the record of

docket No. 19760-89 is missing page 1 of the tax opinion letter,

the page that contains the opening disclaimer). Accordingly, the

tax opinion letters expressly indicate that prospective investors

such as petitioners were not to rely upon the tax opinion

letters. See Collins v. Commissioner, 857 F.2d at 1386. The

limited, technical opinion of tax counsel expressed in these

letters was not designed as advice upon which taxpayers might

rely and the opinion of counsel itself so states.

4. Miscellaneous

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
 - 56 -

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

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, research, and investigation, and were

subsequently rejected and discredited by their author. In one

preliminary report, Carmagnola states that he has "a serious

concern of actual profit" from 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
 - 57 -

information available concerning research and development costs

of the machines and that he estimated those costs in his

valuations of the machines.

Respondent rejected the Carmagnola 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' counsel did

not call Carmagnola to testify in these cases, but preferred

instead to rely solely upon his preliminary, ill-founded

valuation estimates. Carmagnola has not been called to testify

in any of the Plastics Recycling cases before us. The Carmagnola

reports were a part of the record considered by this Court and

reviewed by the Court of Appeals for the Sixth Circuit 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 rely on Reile v. Commissioner, T.C. Memo. 1992-

488, Davis v. Commissioner, T.C. Memo. 1989-607, and Mollen v.
 - 58 -

United States, 72 AFTR 2d 93-6443, 93-2 USTC par. 50,585 (D.

Ariz. 1993). This Court declined to sustain the negligence

additions to tax in the Reile and Davis cases for reasons

inapposite to the facts herein. In the Davis case, the taxpayers

reasonably relied upon a "trusted and long-term adviser" who was

independent of the investment venture, and the offering materials

reviewed by the taxpayers did not reflect that the principals in

the venture lacked experience in the pertinent line of business.

In the Reile case, the taxpayers, a married couple, had only one

year of college between them and characterized themselves as

financial "dummies." In contrast to those cases, petitioners

herein are well educated, sophisticated, and successful

professional and business people. Their reliance on Becker,

Steele, and/or Sprague with respect to the essential valuation

issue and the economic viability and bona fides of the

Partnership transactions was misplaced and inconsistent with

Becker's disclosure of the limitations of his investigation.

Although Blount did not talk to Becker, Sprague related to Blount

the particulars of Becker's investigation. In addition, the

offering memoranda disclosed that the Partnerships had no prior

operating history and that the general partner had no prior

experience in marketing recycling or similar equipment.

Accordingly, petitioners' reliance on the Reile and Davis cases

is misplaced.
 - 59 -

In Mollen, the taxpayer 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 that invested in the production,

marketing, and distribution of medical educational video tapes.

The District Court found that 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, the District Court noted that the propriety

of the taxpayer's disallowed deduction therein was "reasonably

debatable." Id.

Neither petitioners nor Becker had any formal education,

expertise, or experience in plastics materials or plastics

recycling. None of them had any personal insight or industry

know-how in plastics recycling that would reasonably lead them to

believe that the Plastics Recycling transactions would be

economically profitable. Becker and petitioners relied upon

representations by insiders to the Plastics Recycling

transactions, and neither he nor petitioners hired any

independent experts in the field of plastic materials or plastics
 - 60 -

recycling. Becker purportedly discussed the transactions with

Canno, who apparently was familiar with the plastics industry,

but Canno was not hired by Becker to investigate PI and the

Sentinel EPE recycler, never saw a Sentinel EPE recycler, and

never prepared any kind of formal, written analysis of the

venture. Accordingly, we consider petitioners' arguments with

respect to the Mollen case inapplicable under the circumstances

of these cases.

Petitioners also rely on two recent decisions by the Court

of Appeals for the Fifth Circuit that reversed this Court's

imposition of the negligence additions to tax in non-plastics

recycling cases: Durrett v. Commissioner, 71 F.3d 515 (5th Cir.

1996), affg. in part and revg. in part T.C. Memo. 1994-179; and

Chamberlain v. Commissioner, 66 F.3d 729 (5th Cir. 1995), affg.

in part and revg. in part T.C. Memo. 1994-228. The taxpayers in

the Durrett and Chamberlain cases were among thousands who

invested in the First Western tax shelter program involving

alleged straddle transactions of forward contracts. In the

Durrett and Chamberlain cases, the Court of Appeals for the Fifth

Circuit concluded that the taxpayers reasonably relied upon

professional advice concerning tax matters. In other First

Western cases, however, the Courts of Appeals have affirmed

decisions of the Tax Court imposing negligence additions to tax.

See Chakales v. Commissioner, T.C. Memo. 1994-408 (reliance on
 - 61 -

long-term adviser who was a tax attorney and accountant, and who

in turn relied on a promoter of the venture, held unreasonable),

affd. 79 F.3d 726 (8th Cir. 1996); Kozlowski v. Commissioner,

T.C. Memo. 1993-430 (reliance on adviser held unreasonable absent

a showing that the adviser understood the transaction and was

qualified to give an opinion whether it was bona fide), affd.

without published opinion 70 F.3d 1279 (9th Cir. 1995); Freytag

v. Commissioner, 89 T.C. 849 (1987) (reliance on tax advice given

by attorneys and C.P.A.'s held unreasonable absent a showing that

the taxpayers consulted any experts regarding the bona fides of

the transactions), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501

U.S. 868 (1991). Here we have found that none of the advisers

consulted by petitioners possessed sufficient knowledge of the

plastics recycling business to render a competent opinion. This

factor has been deemed relevant by the Court of Appeals for the

Second Circuit, the Court to which appeal in these cases lie.

See David v. Commissioner, 43 F.3d at 789-790 (taxpayers'

reliance on expert advice not reasonable where expert lacks

knowledge of business in which taxpayers invested); Goldman v.

Commissioner, 39 F.3d at 408 (same). Accordingly, we will not

relieve petitioners of the negligence additions to tax on the

basis of petitioners' reliance on the Court of Appeals' decisions

in the Durrett and Chamberlain cases.
 - 62 -

5. Conclusion as to Negligence

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 did not reasonably rely upon the

offering memoranda, or on Becker, Steele, and/or Sprague, and

they did not in good faith investigate the underlying viability,

financial structure, and economics of the Partnership

transactions herein. We are unconvinced by the claims of these

highly sophisticated, able, and successful business people that

they reasonably failed to inquire about their investments and

simply relied on the offering circulars and on Steele, Sprague,

and ultimately Becker, despite warnings in the offering circulars

and explanations by Becker about the limitations of his

investigation. In each case, these taxpayers knew or should have

known better. 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 the

taxable years at issue. Respondent is sustained on this issue.

C. Section 6659--Valuation Overstatement

Respondent determined that petitioners are each liable for

the section 6659 addition to tax on the portion of their

respective underpayments attributable to valuation overstatement.
 - 63 -

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. at 860-

861.

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). 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 tax benefits, including an investment

tax credit and a business energy credit, based on purported

values of $1,162,666 for each Sentinel EPE recycler. Petitioners

concede that the fair market value of a Sentinel EPE recycler in

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

disallowance of petitioners' claimed tax benefits is attributable

to such valuation overstatements, 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 the Partnerships.
 - 64 -

Petitioners argue that section 6659 does not apply in their

cases for the following reasons: (1) Disallowance of the claimed

tax benefits was attributable to other than a valuation

overstatement; (2) petitioners' concessions of the claimed tax

benefits precludes imposition of the section 6659 additions to

tax; and (3) respondent erroneously failed to waive the section

6659 addition to tax. We reject each of these arguments in these

cases for reasons set forth below.

1. The Grounds for Petitioners' Underpayments

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), affg. T.C. Memo. 1991-449; Gilman v.
 - 65 -

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.

Petitioners argue that the disallowance of the claimed tax

benefits was not "attributable to" a valuation overstatement.

According to petitioners, the tax benefits were disallowed

because the Partnership transactions lacked economic substance,

not because of any valuation overstatements. It follows,

petitioners reason, that because the "attributable to" language

of section 6659 requires a direct causative relationship between

a valuation overstatement and an underpayment in tax, section

6659 cannot apply to their deficiencies. Petitioners cite in

support of this argument, Todd v. Commissioner, supra; Heasley v.

Commissioner, 902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo.

1988-408; Gainer v. Commissioner, 893 F.2d 225 (9th Cir. 1990),

affg. T.C. Memo. 1988-416; McCrary v. Commissioner, supra.

Petitioners' argument rests on the mistaken premise that our

holding herein that the Partnership transactions lacked economic

substance was separate and independent from the overvaluation of

the Sentinel EPE recyclers. To the contrary, in holding that the
 - 66 -

Partnership transactions lacked economic substance, we relied

heavily upon the overvaluation of the recyclers. Overvaluation

of the recyclers was an integral factor in regard to: (1) The

disallowed tax credits and other benefits in these cases; (2) the

underpayments of tax; and (3) our finding that the Partnership

transactions lacked economic substance.

Petitioners argue that in Provizer v. Commissioner, T.C.

Memo. 1992-177, we found that the Clearwater transaction lacked

economic substance for reasons independent of the valuation

reported in that case. According to petitioners, the purported

value of the recyclers in the Clearwater transaction was

predicated upon a projected stream of royalty income, and this

Court merely rejected the taxpayers' valuation method.

Petitioners misread and distort our Provizer opinion. In the

Provizer case, overvaluation of the Sentinel EPE recyclers,

irrespective of the technique employed by the taxpayers in their

efforts to justify the overvaluation, was the dominant factor

that led us to hold that the Clearwater transaction lacked

economic substance. Likewise, overvaluation of the Sentinel EPE

recyclers in these cases is the ground for our holding herein

that the Partnership transactions lacked economic substance.

Moreover, a virtually identical argument was recently

rejected in Gilman v. Commissioner, supra, by the Court of
 - 67 -

Appeals for the Second Circuit, the Court to which appeal in

these cases lie. See Golsen v. Commissioner, 54 T.C. 742, 756-

758 (1970), affd. 445 F.2d 985 (10th Cir. 1971). In the Gilman

case, the taxpayers engaged in a computer equipment sale and

leaseback transaction that this Court held was a sham transaction

lacking economic substance. The taxpayers therein, citing Todd

v. Commissioner, supra, and Heasley v. Commissioner, supra,

argued that their underpayment of taxes derived from

nonrecognition of the transaction for lack of economic substance,

independent of any overvaluation. The Court of Appeals for the

Second Circuit sustained imposition of the section 6659 addition

to tax because overvaluation of the computer equipment

contributed directly to this Court's earlier conclusion that the

transaction lacked economic substance and was a sham. Gilman v.

Commissioner, supra at 151. In addition, the Court of Appeals

for the Second Circuit agreed with this Court and with the Court

of Appeals for the Eighth Circuit that "'when an underpayment

stems from disallowed * * * investment credits due to lack of

economic substance, the deficiency is * * * subject to the

penalty under section 6659.'" Gilman v. Commissioner, supra at

151 (quoting Massengill v. Commissioner, 876 F.2d 616, 619-620

(8th Cir. 1989), affg. T.C. Memo. 1988-427); see also Rybak v.

Commissioner, 91 T.C. 524, 566-567 (1988); Zirker v.
 - 68 -

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).

Petitioners' reliance on Gainer v. Commissioner, supra, Todd

v. Commissioner, 862 F.2d 540 (5th Cir. 1988), and McCrary v.

Commissioner, supra, is misplaced. In those cases, in contrast

to the consolidated cases herein, it was found that a valuation

overstatement did not contribute to an underpayment of taxes. In

the Todd and Gainer cases, the underpayments were due exclusively

to the fact that the property in each case had not been placed in

service. In the McCrary case, the underpayments were deemed to

result from a concession that the agreement at issue was a

license and not a lease. Although property was overvalued in

each of those cases, the overvaluations were not the ground on

which the taxpayers' liability was sustained. In contrast, "a

different situation exists where a valuation overstatement * * *

is an integral part of or is inseparable from the ground found

for disallowance of an item." McCrary v. Commissioner, 92 T.C.

at 859. Each of these consolidated cases presents just such a

"different situation": overvaluation of the recyclers was

integral to and inseparable from petitioners' claimed tax
 - 69 -

benefits and our holding that the Partnership transactions lacked

economic substance.6

2. Concession of the Deficiency

Petitioners argue that their concessions of the deficiencies

preclude imposition of the section 6659 additions to tax.

Petitioners contend that their concessions render any inquiry

into the grounds for such deficiencies moot. Absent such

inquiry, petitioners argue that it cannot be known if their

underpayments were attributable to a valuation overstatement or

other discrepancy. Without a finding that a valuation

overstatement contributed to an underpayment, according to

petitioners, section 6659 cannot apply. In support of this line

of reasoning, petitioners rely heavily upon Heasley v.

Commissioner, 902 F.2d 380 (5th Cir. 1990), and McCrary v.

Commissioner, supra.

6
To the extent that Heasley v. Commissioner, 902 F.2d
380 (5th Cir. 1990), revg. T.C. Memo. 1988-408, merely represents
an application of Todd v. Commissioner, 89 T.C. 912 (1987), affd.
862 F.2d 540 (5th Cir. 1988), we consider it distinguishable. To
the extent that the reversal in the Heasley case is based on a
concept that where an underpayment derives from the disallowance
of a transaction for lack of economic substance, the underpayment
cannot be attributable to an overvaluation, this Court and the
Court of Appeals for the Second Circuit have disagreed. See
Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991): "The
lack of economic substance was due in part to the overvaluation,
and thus the underpayment was attributable to the valuation
overstatement."
 - 70 -

Petitioners' open-ended concessions do not obviate our

finding that the Partnership transactions lacked economic

substance due to overvaluation of the recyclers. This is not a

situation where we have "to decide difficult valuation questions

for no reason other than the application of penalties." See

McCrary v. Commissioner, supra at 854 n. 14. The value of the

Sentinel EPE recycler was established in Provizer v.

Commissioner, T.C. Memo. 1992-177, and stipulated by the parties.

As a consequence of the inflated value assigned to the recyclers

by the Partnerships, petitioners claimed deductions and credits

that resulted in underpayments of tax, and we held that the

Partnership transactions lacked economic substance. Regardless

of petitioners' concessions, in these cases the underpayments of

tax were attributable to the valuation overstatements.

Moreover, concession of the investment tax credit in and of

itself does not relieve taxpayers of liability for the section

6659 addition to tax. See Dybsand v. Commissioner, T.C. Memo.

1994-56; Chiechi v. Commissioner, T.C. Memo. 1993-630. Instead,

the ground upon which the investment tax credit is disallowed or

conceded is significant. 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.
 - 71 -

Commissioner, 893 F.2d at 228; Irom v. Commissioner, 866 F.2d

545, 547 (2d Cir. 1989), vacating in part T.C. Memo. 1988-211;

Harness v. Commissioner, T.C. Memo. 1991-321.

In the present cases, no argument was made and no evidence

was presented to the Court to prove that disallowance and

concession of the investment tax credits related to anything

other than a valuation overstatement. To the contrary,

petitioners each stipulated substantially the same facts

concerning the Partnership 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 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.

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

misplaced. In that case, the taxpayers conceded disentitlement

to their claimed tax benefits, and the section 6659 additions to

tax were held inapplicable. However, the concessions of the
 - 72 -

claimed tax benefits, in and of themselves, did not preclude

imposition of the section 6659 additions to tax. In McCrary v.

Commissioner, supra, the section 6659 addition to tax was

disallowed because the agreement at issue was conceded to be a

license and not a lease. In contrast, the records in

petitioners' cases plainly show that petitioners' underpayments

were attributable to overvaluation of the Sentinel EPE recyclers.

We hold that petitioners' reliance on McCrary v. Commissioner,

supra, is inappropriate.7

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

from our holding of a lack of economic substance. Petitioners

stipulated that the Partnership transactions were similar to the

Clearwater transaction described in the Provizer case, and that

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

was not in excess of $50,000. Given those concessions, and the

7
Petitioners' citation of Heasley v. Commissioner,
supra, in support of the concession argument is also
inappropriate. That case was not decided by the Court of Appeals
for the Fifth Circuit on the basis of a concession. Moreover,
see supra note 6, to the effect that the Court of Appeals for the
Second Circuit and this Court have not followed the Heasley
opinion with respect to the application of sec. 6659.
 - 73 -

fact that the records here plainly show that the overvaluation of

the recyclers was the underlying reason for disallowance of the

claimed tax benefits, we conclude that the deficiencies were

attributable to overvaluation of the Sentinel EPE recyclers.

3. Section 6659(e)

Petitioners argue that respondent erroneously failed to

waive the section 6659 additions to tax. 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. Abuse of discretion has been

found in situations where respondent's refusal to exercise her

discretion is arbitrary, capricious, or unreasonable. See

Mailman v. Commissioner, 91 T.C. 1079 (1988); Estate of Gardner

v. Commissioner, 82 T.C. 989 (1984); Haught v. Commissioner, T.C.

Memo. 1993-58. We note initially that petitioners did not

request respondent to waive the section 6659 additions to tax

until many months after the trials of the these cases. We are

reluctant to find that respondent abused her discretion in cases

in which she was not timely requested to exercise it and where
 - 74 -

there is no direct evidence of any abuse of administrative

discretion. Haught v. Commissioner, supra; cf. Wynn v.

Commissioner, T.C. Memo. 1995-609; Klieger v. Commissioner, T.C.

Memo. 1992-734.

However, we do not decide this issue solely on petitioners'

failure timely to request waivers but, instead, we have

considered the issue on its merits.

Petitioners urge that they relied on the respective offering

materials and Becker, Steele, and/or Sprague in deciding on the

valuation claimed on their tax returns. Petitioners contend that

such reliance was reasonable, and, therefore, respondent should

have waived the section 6659 additions to tax. However, as we

explained above in finding petitioners liable for the negligence

additions to tax, petitioners' purported reliance on the offering

materials and their advisers was not reasonable.

The offering materials for the Partnerships contained

numerous warnings and caveats, including the likelihood that the

value placed on the recyclers would be challenged by the IRS as

being in excess of fair market value. Further, petitioners'

testimony raises doubts as to the extent to which they reviewed

the offering memoranda or sought to resolve the numerous issues

raised in the memoranda.
 - 75 -

Sprague and Becker readily admitted that they possessed no

special qualifications or professional skills in the recycling or

plastics industries. Steele did not testify, and there is no

showing in the records that he possessed any education or

experience in plastics materials or plastics recycling. Neither

Becker, Steele, nor Sprague ever hired or consulted any plastics

engineering or technical experts with respect to the Plastics

Recycling transactions. Becker spoke with his client Canno, who

apparently had some knowledge of the plastics industry, but the

substance of Canno's purported comments is doubtful and he had

only minimal information about the transaction. At trial Becker

confirmed that in the end he relied exclusively on PI, its

personnel, and the offering materials as to the value and

purported uniqueness of the machines. Sprague relied on Becker,

and Steele assisted Becker.

In support of their contention that they acted reasonably,

petitioners cite Mauerman v. Commissioner, 22 F.3d 1001 (10th

Cir. 1994), revg. T.C. Memo. 1993-23. However, the facts in the

Mauerman case are distinctly different from the facts of these

cases. In Mauerman, Court of Appeals for the Tenth Circuit held

that the Commissioner had abused her discretion by 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
 - 76 -

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,

petitioners relied upon advice that 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 claimed on their tax returns

with respect to their investments in the Partnerships. In these

cases, respondent properly could find that petitioners'

respective reliance on the offering materials, Becker, Steele,

and/or Sprague 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 respective section

6659 additions to tax at the rate of 30 percent of the
 - 77 -

underpayments of tax attributable to the disallowed tax benefits.

Respondent is sustained on this issue.

D. Petitioners' Motions For Leave To File Motion For Decision
Ordering Relief From the Negligence Penalty and the Penalty Rate
of Interest and To File Supporting Memorandum of Law

Long after the trials of these cases, petitioners in docket

Nos. 19760-89, 24512-89, and 10147-91 each filed a Motion For

Leave To File Motion for Decision Ordering Relief From the

Negligence Penalty and the Penalty Rate of Interest and To File

Supporting Memorandum of Law under Rule 50. In addition, they

lodged with the Court motions for decision ordering relief from

the additions to tax for negligence and from the increased rate

of interest, with attachments, and memoranda in support of such

motions. Respondent filed objections, with attachments, and

memoranda in support thereof and petitioners thereafter filed

reply memoranda. Petitioners argue that they should be afforded

the same settlement that was reached between other taxpayers and

the IRS in Miller v. Commissioner, docket Nos. 10382-86 and

10383-86. See Farrell v. Commissioner, T.C. Memo. 1996-295,

denying a similar motion based in part on analogous

circumstances.

Counsel for petitioners seek to raise a new issue long after

the trials in these cases. Resolution of such issue might well

require new trials. Such further trials "would be contrary to
 - 78 -

the established policy of this Court to try all issues raised in

a case in one proceeding and to avoid piecemeal and protracted

litigation." Markwardt v. Commissioner, 64 T.C. 989, 998 (1975);

see also Robin Haft Trust v. Commissioner, 62 T.C. 145, 147

(1974). Consequently, under the circumstances here, at this late

date in the litigation proceedings, long after the trials and

briefing and after the issuance of numerous opinions on issues

and facts closely analogous to those in these cases, petitioners'

motions for leave are not well founded. Farrell v. Commissioner,

supra.

Even if petitioners' motions for leave were granted, the

arguments set forth in each of petitioners' motions for decision

and attached memoranda, lodged with this Court, are without merit

and such motions would be denied. Therefore, and for reasons set

forth in more detail below, petitioners' motions for leave shall

be denied.

Some of our discussion of background circumstances

underlying petitioners' motions is drawn from documents submitted

by the parties and findings of this Court in two earlier

decisions. Such matters are not disputed by the parties. See

Estate of Satin v. Commissioner, T.C. Memo. 1994-435; Fisher v.

Commissioner, T.C. Memo. 1994-434. The Estate of Satin and

Fisher cases involved Stipulation of Settlement agreements
 - 79 -

(piggyback agreements) made available to taxpayers in the

Plastics Recycling project, whereby taxpayers could agree to be

bound by the results of three test cases: the Provizer case and

the two Miller cases. We held in the Estate of Satin and Fisher

cases that the terms of the piggyback agreement bound the parties

to the results in all three lead cases, not just the Provizer

case. Petitioners assert that the piggyback agreement was

extended to them, but they do not claim to have accepted the

offer, so they effectively rejected it. We discuss the

background matters, apparently not disputed by the parties, for

the sake of completeness. As we have noted, granting

petitioners' motion for leave would require further proceedings.

On or about February 1988, a settlement offer (the Plastics

Recycling project settlement offer or the offer) was made

available by respondent in all docketed Plastics Recycling cases,

and subsequently in all nondocketed cases. Baratelli v.

Commissioner, T.C. Memo. 1994-484.8 Pursuant to the offer,

taxpayers had 30 days to accept the following terms:

8
Although the records do not include a settlement offer
to petitioners, petitioners have attached to their motions for
decision a copy of a settlement offer to another taxpayer with
respect to a plastics recycling case, and respondent has not
disputed the accuracy of the statement of the plastics recycling
settlement offer.
 - 80 -

(1) Allowance of a deduction for 50 percent of the amount of the

cash investment in the venture in the year(s) of investment to

the extent of loss claimed; (2) Government concession of the

substantial understatement of tax penalties under section 6661

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

(2); (3) taxpayer concession of the section 6659 addition to tax

for valuation overstatement and the increased rate of interest

under section 6621; and (4) execution of a closing agreement

(Form 906) stating the settlement and resolving the entire matter

for all years. Petitioners assert that the Plastics Recycling

project settlement offer was extended to them, but they do not

claim to have accepted the offer timely, so they effectively

rejected it.

In December 1988, the Miller cases were disposed of by

settlement agreement between the taxpayers and respondent.9 This

Court entered decisions based upon those settlements on December

22, 1988. The settlement provided that the taxpayers in the

Miller cases were liable for the addition to tax under section

6659 for valuation overstatement, but not for the additions to

tax under sections 6661 and 6653(a). The increased interest

9
Although it is not otherwise a part of the record in
these cases, respondent attached copies of the Miller closing
agreement and disclosure waiver to her objections to petitioners'
motion for leave, and petitioners do not dispute the accuracy of
the document.
 - 81 -

under section 6621(c), premised solely upon Miller's interest in

the recyclers for the taxable years at issue, was not applicable

because Miller made payments prior to December 31, 1984, so no

interest accrued after that time. Respondent did not notify

petitioners or any other taxpayers of the disposition of the

Miller cases. Estate of Satin v. Commissioner, T.C. Memo. 1994-

435; Fisher v. Commissioner, T.C. Memo. 1994-434.

Petitioners argue that they are similarly situated to the

taxpayer in the Miller cases, and that in accordance with the

principle of "equality" they are therefore entitled to the same

settlement agreement executed by respondent and Miller in those

cases. In effect, petitioners seek to resurrect the piggyback

agreement offer and the settlement offer that they previously

failed to accept.

Petitioners contend that under the principle of "equality,"

the Commissioner has a duty of consistency toward similarly

situated taxpayers and cannot tax one and not tax another without

some rational basis for the difference. United States v. Kaiser,

363 U.S. 299, 308 (1960) (Frankfurther, J., concurring opinion);

see Baker v. United States, 748 F.2d 1465 (11th Cir. 1984), affg.

575 F.Supp. 508 (N.D. Ga. 1983); Farmers' & Merchants' Bank v.

United States, 476 F.2d 406 (4th Cir. 1973). According to

petitioners, the principle of equality precludes the Commissioner
 - 82 -

from making arbitrary distinctions between like cases. See Baker

v. Commissioner, 787 F.2d 637, 643 (D.C. Cir. 1986), vacating 83

T.C. 822 (1984).

The different tax treatment accorded petitioners and Miller

was not arbitrary or irrational. While petitioners and Miller

both invested in the Plastics Recycling project, their actions

with respect to such investments provide a rational basis for

treating them differently. Specifically, Miller foreclosed any

potential liability for increased interest in his cases by making

payment of the tax prior to December 31, 1984; no interest

accrued after that date. In contrast, petitioners made no such

payment, and they conceded that the increased rate of interest

under section 6621(c) applies in their cases. Liability for the

increased rate of interest is the principal difference between

the settlement in the Miller cases, which petitioners declined

when they failed to accept the piggyback agreement offer, and the

settlement offer that petitioners also failed to accept.

Petitioners argue that section 6621(c) must have been an

issue in the Miller cases since each of the decisions in Miller

recites "That there is no increased interest due from the

petitioner[s] for the taxable years [at issue] under the

provisions of IRC section 6621(c)." According to petitioners,

"Surely, if the Millers were not otherwise subject to the penalty
 - 83 -

interest provisions because of the particular timing of their tax

payments, there would have been no need for the Court to include

such a recital in its decisions." This argument by petitioners

is entirely conjectural and is not supported by the documentation

on which counsel relies. In fact, the recital that no increased

interest under section 6621(c) was due in the Miller cases was an

express term of the settlement documents in those cases and

apparently included in the decisions for completeness and

accuracy. There is nothing on the record in the present cases,

or in the Court's opinions in Estate of Satin v. Commissioner,

supra, or Fisher v. Commissioner, supra, or in any of the

material submitted to us in these cases that would indicate that

the Millers were "otherwise subject to the penalty interest

provisions". Petitioners' argument is based on a false premise.

We find that petitioners and Miller were treated equally to

the extent they were similarly situated, and differently to the

extent they were not. Miller foreclosed the applicability of the

section 6621(c) increased rate of interest in his cases, while

petitioners concede it applies in their cases. Petitioners

failed to accept a piggyback settlement offer that would have

entitled them to the settlement reached in the Miller cases, and

also did not enter into a settlement offer made to them prior to

trial of a test case. In contrast, Miller negotiated and
 - 84 -

accepted an offer that was essentially the same as the Plastics

Recycling project settlement offer that petitioners failed to

accept prior to trial. Petitioners' motions are not supported by

the principle of equality on which they rely. Cf. Baratelli v.

Commissioner, T.C. Memo. 1994-484.

To reflect the foregoing,

Appropriate orders will be

issued denying petitioners'

motions, and decisions will be

entered under Rule 155.