T.C. Memo. 1996-527
UNITED STATES TAX COURT
LEON M. AND MARY K. JAROFF,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 18885-89, 27392-89. Filed November 27, 1996.
Stuart A. Smith and David H. Schnabel, for petitioners.
Maureen T. O'Brien and David N. Brodsky, for respondent.
1
Docket Nos. 18885-89 and 27392-89 are consolidated for
purposes of trial, briefing, and opinion.
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CONTENTS
Page
MEMORANDUM FINDINGS OF FACT AND OPINION....................... 2
OPINION OF THE SPECIAL TRIAL JUDGE............................ 3
FINDINGS OF FACT.............................................. 6
A. The Plastics Recycling Transactions...................... 6
B. The Partnerships......................................... 9
C. Stuart Becker and Steven Leicht..........................11
D. Petitioners and Their Introduction to the Partnership
Transactions.............................................15
OPINION.......................................................20
A. Section 6653(a)--Negligence..............................22
1. The Private Offering Memoranda......................24
2. The So-Called Oil Crisis............................30
3. Petitioners' Purported Reliance on a Tax
Adviser.............................................33
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.........................................34
b. Becker and Tucker..............................36
4. Miscellaneous.......................................45
5. Conclusion as to Negligence.........................52
B. Section 6659--Valuation Overstatement....................53
1. The Grounds for Petitioners' Underpayments..........54
2. Concession of the Deficiencies......................59
3. Section 6659(e).....................................62
C. Petitioners' 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........................................65
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: These consolidated cases were assigned to
Special Trial Judge Norman H. Wolfe pursuant to the provisions of
section 7443A(b)(4) and Rules 180, 181, and 183. 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
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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 consolidated 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 involving the Sentinel
recyclers in these consolidated cases are substantially identical
to those in the transaction considered in the Provizer case.
In a notice of deficiency dated May 24, 1989, respondent
determined a deficiency in petitioners' 1982 Federal income tax
in the amount of $8,119, and additions to tax for that year in
the amount of $1,985 under section 66592 for valuation
overstatement, in the amount of $406 under section 6653(a)(1) for
negligence, and under section 6653(a)(1)(B)3 in an amount equal
to 50 percent of the interest due on the amount of the
underpayment attributable to negligence, $6,619. Respondent also
determined that interest on deficiencies accruing after December
2
In the alternative to the sec. 6659 addition to tax,
respondent determined an addition to tax under sec. 6661 for
substantial understatement of liability.
3
For taxable year 1982, the addition to tax for negligence in
an amount equal to 50 percent of the interest due on the amount
of the underpayment attributable to negligence was provided for
under sec. 6653(a)(2), not sec. 6653(a)(1)(B).
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31, 1984, would be calculated at 120 percent of the statutory
rate under section 6621(c). The increased interest was
calculated on the amount of $6,619. In her answer, respondent
asserted that the entire deficiency was subject to the increased
rate of interest under section 6621(c). In her trial memorandum,
respondent asserted that the section 6659 addition to tax should
be reduced to $1,550, and that only $6,619 of the deficiency was
subject to section 6621(c) (as originally determined in the
notice of deficiency). We consider the amounts in dispute in
docket No. 18885-89 to be adjusted accordingly.
In a notice of deficiency dated August 18, 1989, respondent
determined a deficiency in petitioners' 1981 Federal income tax
in the amount of $20,837, and additions to tax for that year in
the amount of $1,299 under section 6659 for valuation
overstatement, in the amount of $1,042 under section 6653(a)(1)
for negligence, and under section 6653(a)(2) in an amount equal
to 50 percent of the interest due on the amount of the
underpayment attributable to negligence. Respondent also
determined that interest on deficiencies accruing after December
31, 1984, would be calculated at 120 percent of the statutory
rate under section 6621(c). The increased interest was
calculated on the amount of $4,329. In an amendment to answer,
respondent asserted an increased addition to tax under section
6659 in the amount of $4,952, and also asserted that the entire
deficiency of $20,837 was subject to the increased rate of
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interest under section 6621(c). We consider the amounts in
dispute in docket No. 27392-89 to be adjusted accordingly. For
each of these consolidated cases, the parties filed a Stipulation
of Settled Issues concerning the adjustments relating to
petitioners' participation in the Plastics Recycling Program.
The stipulations provide:
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, with the exception of petitioners' potential
liability for additions to the tax for valuation
overstatements under I.R.C. §6659 and for negligence
under the applicable provisions of §6653(a).
4. With respect to the issue of the addition to the
tax under I.R.C. §6659, Petitioners do not intend to
contest the value of the Sentinel Recycler or the
existence of a valuation overstatement on the
Petitioners' returns; however, Petitioners reserve
their right to argue that the underpayment in tax is
not attributable to a valuation overstatement within
the meaning of I.R.C. §6659(a)(1), and that the
Secretary should have waived the addition to tax
pursuant to the provisions of I.R.C. §6659(e).
Long after the trial of these consolidated cases, on
September 18, 1995, petitioners filed a Motion For Leave To File
Motion For Decision Ordering Relief From the Negligence Penalty
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and the Penalty Rate of Interest and To File Supporting
Memorandum of Law under Rule 50. On that same date, petitioners
lodged with the Court a motion for decision seeking relief from
the additions to tax for negligence and the increased rate of
interest, with attachments, and a memorandum in support of the
motion. Subsequently, respondent filed an objection, with
attachments, and a memorandum in support thereof, and petitioners
filed a reply memorandum. For reasons discussed in more detail
at the end of this opinion, and also in Farrell v. Commissioner,
T.C. Memo. 1996-295, petitioners' motion shall be denied. See
also Gollin v. Commissioner, T.C. Memo. 1996-454; Grelsamer v.
Commissioner, T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C.
Memo. 1996-398.
The issues remaining in these consolidated cases are: (1)
Whether petitioners are liable for the additions to tax for
negligence under the provisions of section 6653(a); and (2)
whether petitioners are liable for additions to tax under section
6659 for underpayments of tax attributable to valuation
overstatements.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulated facts and attached exhibits are incorporated
herein by this reference.
A. The Plastics Recycling Transactions
These consolidated cases concern petitioners' investments in
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two limited partnerships that leased Sentinel expanded
polyethylene (EPE) recyclers: SAB Resource Recovery Associates
(SAB Recovery) and SAB Resource Reclamation Associates (SAB
Reclamation). For convenience, we refer to these two
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
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
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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 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
machines sold, leased, licensed, and sublicensed. SAB Recovery
leased and licensed 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.
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
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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
SAB Recovery and SAB Reclamation are New York limited
partnerships. SAB Recovery was formed in late 1981 and SAB
Reclamation was formed in early 1982. Both partnerships were
organized and promoted 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, and two more closed in late 1982.
The general partner of each of the SAB Recycling
Partnerships, including SAB Recovery and SAB Reclamation, 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,
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secretary, and director. During the years in issue, Tucker and
Leicht also worked at Becker Co. Tucker was vice president.
Each owned approximately 5 to 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.
Burstein also was a client and business associate of Elliot I.
Miller (Miller), the corporate counsel to PI.
The offering memoranda for SAB Recovery and SAB Reclamation
state that the general partner will receive fees from those
partnerships in the respective amounts of $97,800 and $110,000.
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 Schedules K-1 for
all of the SAB Recycling Partnerships and received fees for those
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services.
The offering memoranda for the Partnerships also allocate
7.5 percent of the proceeds from each offering 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.
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
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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. 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 for achieving the highest score on the examination for
that year. Since early 1966, Becker has practiced as an
accountant 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
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[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).
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 Robert Grant
(Grant), the president and 100-percent owner of the stock of ECI
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Corp., 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
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.
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,
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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 sought particularly to protect
himself against liability.
After the 1981 SAB Recycling Partnerships closed, Becker had
an accountant sent 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.
Leicht also familiarized himself 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 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.
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D. Petitioners and Their Introduction to the Partnership
Transactions
Leon M. and Mary K. Jaroff resided in New York, New York,
when their petition was filed. Leon M. Jaroff (petitioner)
earned degrees in electrical engineering and mathematics from the
University of Michigan in 1950. He then moved to New York and
worked for an engineering magazine entitled Materials and
Methods. Six months later he joined the staff of Life magazine.
Over approximately the next 8 years, petitioner was employed as a
researcher, then as a reporter in New York, and then as a bureau
correspondent for Life magazine. While working in the Chicago
bureau in 1958, petitioner transferred to Time magazine (Time).
Several years later, he was promoted to Detroit bureau chief. In
1964 petitioner was transferred to New York to write for the
business section of Time. Subsequently, petitioner was employed
as a science writer for Time, the science editor for that
magazine, and then as a senior editor. In 1980 Time, Inc.
started a science magazine, Discover, and petitioner was chosen
to be its first managing editor. Petitioner was the managing
editor of the science magazine Discover for 4-1/2 years,
including the taxable years in issue. Mary K. Jaroff was a sales
executive with Institutional Investor Systems during the taxable
years in issue.
Petitioner acquired a second-tier, 0.895928-percent interest
in SAB Recovery--through the partnership Resource Partners--for
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$10,000 in 1981.4 As a result of his second-tier interest in SAB
Recovery, on their 1981 return petitioners claimed an operating
loss in the amount of $7,940 and investment tax and business
energy credits totaling $16,508. Petitioners also claimed a $458
loss from SAB Recovery on their 1982 return. In 1982, petitioner
acquired a second-tier, approximately 1.8-percent5 interest in
SAB Reclamation--through the partnership V & L Equities--for
$10,000.6 As a result of his second-tier interest in SAB
4
The record does not directly disclose petitioner's percentage
interest in SAB Recovery. Petitioner testified that he invested
$10,000, through Resource Partners, in SAB Recovery. Attached to
the 1981 Partnership return of SAB Recovery is a Schedule K-1,
Partner's Share of Income, Credits, Deductions, etc, of an
individual who invested $10,000 in SAB Recovery. For $10,000,
that limited partner acquired a 0.895928-percent interest in SAB
Recovery. The amount of SAB Recovery's operating loss allocated
to that partner was $7,940, and the amount of basis allocated to
that partner was $82,537, which results in a combined investment
and business energy credit in the amount of $16,508. ($82,537 x
10% = $8,254. $8,254 x 2 = $16,508). Those figures are
consistent with the loss and credits claimed by petitioners on
their 1981 income tax return.
5
The record does not directly disclose petitioner's
percentage interest in SAB Reclamation. However, on its 1982
partnership return, SAB Reclamation reported a loss in the amount
of ($445,560), and a basis in the recyclers in the amount of
$4,650,668. Petitioner was allocated a loss in the amount of
($8,021), and a basis in the recyclers in the amount of $83,712.
(($8,021)/($445,560) = 0.018002. 0.018 x $4,650,668 =
$83,712.02).
6
The record does not directly disclose the amount that
petitioner invested in V & L Equities for his second-tier
interest in SAB Reclamation. However, the Schedule K-1 for V & L
Equities for 1982, attached to the SAB Reclamation partnership
return, shows that V & L Equities acquired a 9-percent interest
in SAB Reclamation for $50,000. Petitioner had a 1.8-percent
second-tier interest in SAB Reclamation. (0.018/0.09 = 0.2. 0.2
x $50,000 = $10,000).
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Reclamation, on their 1982 return petitioners claimed an
operating loss in the amount of $8,0217 and investment tax and
business energy credits in the amount of $16,742. Respondent
disallowed the operating losses and credits related to SAB
Recovery and claimed by petitioners on their 1981 return. With
respect to petitioners' 1982 return, respondent disallowed $432
of the claimed $458 loss related to SAB Recovery; $2,475 of the
claimed $8,021 loss related to SAB Reclamation; and $5,166 of the
claimed $16,742 investment tax and business energy credits
related to SAB Reclamation.
7
The total operating loss claimed by petitioners on their
1982 return, from both SAB Reclamation and SAB Recovery, was
$8,479. ($8,021 + $458 = $8,479).
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Petitioner learned of the Plastics Recycling transactions
from Noel Tucker of Becker Co. in 1981. Petitioner had been
referred to Becker Co. in 1980 by Richard Snyder (Snyder), who at
the time was the chief executive officer of Simon & Schuster,
Inc. Petitioner and Snyder frequented the same fitness center
and often talked while exercising. While "bemoaning * * * [his]
financial status" on one such occasion, petitioner told Snyder
that he "would love to increase" his income and that his "taxes
[were] all screwed up". Snyder was a client of Becker Co. and he
recommended the firm to petitioner. Petitioner contacted Becker,
who "almost immediately turned * * * [him] over to Noel Tucker."
Tucker serviced petitioner's account for approximately 1 year,
and then it was turned over to a new member of the firm, Harry
Shuffrin.
Tucker suggested the Plastics Recycling transactions to
petitioner in 1981 and provided him with a copy of the SAB
Recovery offering memorandum. Petitioner claims that he and his
wife Mary devoted several evenings to the offering memorandum and
"read it very carefully". The "possibility of being audited" and
"a statement about there being some risk" concerned petitioner,
and he raised these concerns with Tucker. According to
petitioner, Tucker indicated that such warnings or caveats are
routine and that the venture was sound. Petitioner recalled
believing that Tucker had not visited PI but that Becker had
visited PI several times, "often with experts in tow," and that
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the Sentinel EPE recycler "was supposed to be better than * * *
the state-of-the-art machines at that time." Petitioner could
not recall speaking to Becker about SAB Recovery. After his
initial introduction to Becker, and except for an occasional
phone conversation with Leicht when Tucker was out of the office,
during his first year as a client, petitioner recalled dealing
only with Tucker.
Petitioner confirmed at trial that if he needs information,
he knows how to get it. He is familiar with a library and how to
get information from various publications. Petitioner knew how
to locate plastics trade journals, but he did not consult any
such magazines before investing in the Partnerships. Petitioner
explained that "one of the ways * * * [he] [gets] information
best is to go to experts, generally in the [fields] of science
and technology and medicine." He did not, however, consult
anyone outside of Becker Co. about the Partnerships. Petitioner
was never led to believe that Becker was an engineer or had any
expertise in plastics. He knew that Tucker was an accountant but
assumed that Tucker was "relying upon the advice [of] experts
that Stuart Becker had engaged." Petitioner did not ask Tucker
who those experts were.
Petitioners never made a profit in any year from their
participation in SAB Recovery and SAB Reclamation. Petitioner
did not see a Sentinel EPE recycler prior to investing in the
Partnerships. He has no education or work experience in plastics
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recycling or plastics materials.
OPINION
We have decided a large number of the Plastics Recycling
group of cases.8 The majority of these cases, like the
consolidated cases herein, raised issues regarding additions to
tax for negligence and valuation overstatement. We have found
8
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: Gollin v. Commissioner, T.C. Memo. 1996-
454; Grelsamer v. Commissioner, T.C. Memo. 1996-399; Zenkel v.
Commissioner, T.C. Memo. 1996-398; 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. 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.
- 22 -
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.9
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
9
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
circumstances. In Farrell v. Commissioner, supra, we rejected
the taxpayers' claim to a similar belated settlement arrangement
since the circumstances were different and the taxpayers
previously had rejected settlement and elected to litigate the
case. See also Gollin v. Commissioner, supra; Grelsamer v.
Commissioner, supra; Zenkel v. Commissioner, supra; Baratelli v.
Commissioner, supra.
- 23 -
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 consolidated cases are
similar to the investment described in Provizer v. Commissioner,
supra. The underlying transactions in these consolidated cases,
and the Sentinel EPE recyclers considered in these consolidated
cases, are the same type of transaction and same type of machines
considered in Provizer v. Commissioner, supra.
Based on the entire record in these consolidated cases,
including the extensive stipulations, testimony of respondent's
experts, and petitioner's 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
stipulations of settled issues filed shortly before trial. The
record plainly supports respondent's determinations regardless of
such concession. For a detailed discussion of the facts and the
applicable law in a substantially identical case, see Provizer v.
Commissioner, supra.
- 24 -
A. Section 6653(a)--Negligence
In two notices of deficiency, respondent determined that
petitioners were liable for the additions to tax for negligence
under section 6653(a)(1) and (2) for 1981 and 1982.10
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
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
10
In the notice of deficiency for taxable year 1982,
respondent referred to sec. 6653(a)(2) as sec. 6653(a)(1)(B).
- 25 -
sophistication of the taxpayers, as well as the manner in which
they approached their investment. McPike v. Commissioner, T.C.
Memo. 1996-46. Compare Spears v. Commissioner, T.C. Memo. 1996-
341 with Zidanich v. Commissioner, T.C. Memo. 1995-382.
Petitioner maintains that he and his wife were reasonable in
claiming deductions and credits with respect to the Partnerships.
He claims that he (1) carefully read the SAB Recovery offering
memorandum; (2) intended and reasonably expected to make an
economic profit from the Partnerships in light of the so-called
oil crisis in the United States in 1981 and 1982; and (3)
reasonably relied upon Tucker as a qualified adviser on this
matter.
1. The Private Offering Memoranda
Petitioner testified that he relied in part upon the SAB
Recovery offering memorandum. He claimed that he and his wife
spent several consecutive evenings carefully reading it.
Petitioner did not indicate how much time, if any, he spent
reviewing the SAB Reclamation offering memorandum.
Each of the offering memoranda highlighted a number of tax
risk factors and 12 business risk factors, including the
following: (1) The Partnerships had no operating history; (2)
management of the Partnerships' business was dependent upon the
general partner, who had no experience in marketing recycling
equipment and who was required to devote only such time to the
Partnerships as such general partner deemed necessary; (3) the
- 26 -
limited partners had no right to take part in, or interfere in
any manner with, the management or conduct of the business of the
Partnerships; (4) there was no established market for the
Sentinel recyclers; and (5) although competitors were purportedly
not marketing comparable equipment, and the Sentinel recyclers
purportedly involved "carefully guarded trade secrets," PI did
"not intend to apply for a patent for protection against
appropriation and use by others."
In these consolidated cases, the projected tax benefits in
the SAB Recovery and SAB Reclamation offering memoranda exceeded
petitioner's investments. According to the offering memoranda,
for each $50,000 investor, the projected first-year tax benefits
were investment tax credits in the amounts of $82,639 and
$83,712, respectively, plus deductions in the amounts of $40,003
and $40,234, respectively. As a result of petitioner's second-
tier, $10,000 investment in SAB Recovery, on their 1981 return
petitioners claimed an operating loss in the amount of $7,940 and
investment tax and business energy credits totaling $16,508; and
on their 1982 return they claimed an operating loss in the amount
of $458. For petitioner's $10,000, second-tier investment in SAB
Reclamation in 1982, petitioners claimed an operating loss in the
amount of $8,021 and investment tax and business energy credits
in the amount of $16,742.
Petitioner estimated that at the time he invested in the
Partnerships, he was working 70 hours a week at Discover
- 27 -
magazine, and "just the thought of pursuing any other kind of
activity was just out of the question for * * * [him]."
Petitioner testified that he invested in the Partnerships to
obtain an additional source of income to help offset current and
future tuition bills of his children, as well as alimony payments
to his former wife. According to petitioner, the long-term
projected royalty payments, and not the tax benefits, primarily
induced him to invest in the Partnerships. Petitioners claimed
three children as dependents on their 1981 and 1982 returns.
They deducted alimony paid--in the amount of $3,600--only on
their 1981 return. Petitioners reported income from wages,
interest, and dividends in the amount of $154,209 in 1981, and in
the amount of $182,556 in 1982. Petitioner testified that, after
purportedly reading the SAB Recovery offering memorandum over
several nights, his primary concern was the risk of being
audited.
Petitioner testified that the tax benefits flowing from the
Partnerships were explained to him, and that he understood they
would exceed his cash invested. He was not so well informed or
concerned about the business aspects of the Partnerships,
however. Petitioner testified that he thought that the Sentinel
EPE recycler had an advantage over its competitors because "it
was supposed to be better * * * than the state-of-the-art
machines at that time," but the offering memoranda warned that PI
was not patenting the machine to protect against appropriation
- 28 -
and use by others. The financial structure of the Partnerships
was not clear to petitioner from the offering memoranda, and at
trial he could not recall that the offering memoranda warned that
there was no established market for the recyclers. This point
was discussed in a section of the offering memorandum entitled,
"No Established Market for the Sentinel Recyclers". The offering
memoranda explained that "There is presently no established
market for leasing or licensing the use of the Sentinel Recyclers
or comparable recycling equipment", and that "there can be no
assurance that the Sentinel Recyclers will be placed * * * to any
significant extent". Notwithstanding petitioner's purported
economic profit motive for investing in the Partnerships, the
record in these consolidated cases indicates that petitioners did
not carefully read the offering memoranda, did not give due
consideration to all of the information set out therein, and
ultimately did not place a great deal of reliance, if any, on the
representations therein.
The direct reductions in petitioners' Federal income taxes,
from the investment tax credits alone, ranged from 165 percent to
167 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
- 29 -
transactions]." In view of the disproportionately large tax
benefits claimed on petitioners' Federal income tax returns,
relative to the dollar amounts invested, further investigation of
the Partnership transactions clearly was required. A careful
consideration of the materials in the 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, affd. 82 F.3d 918 (9th Cir.
1996). 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.
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 the
Commissioner's imposition of the negligence additions to tax with
- 30 -
respect to one of the partners therein.11 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.
11
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.
- 31 -
In the consolidated cases before us, however, petitioner's
testimony indicates that he and his wife did not carefully read
the offering memoranda and therefore did not place a great deal
of reliance, if any, upon the tax opinion letter attached
thereto. Moreover, 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 Partnerships. The tax opinion
letters accompanying the SAB Recovery and SAB Reclamation
offering memoranda were addressed solely to the general partner
and began with the following opening 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.]
Accordingly, the tax opinion letters expressly indicate that
prospective investors such as petitioners were not to rely upon
the tax opinion letter. See Collins v. Commissioner, supra. The
limited, technical opinion of tax counsel expressed in these
letters was not designed as advice upon which taxpayers might
- 32 -
rely, and the opinion of counsel itself so states.
2. The So-Called Oil Crisis
Petitioner contends that he 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. Based upon our
review of the record, we find petitioner's contention
unconvincing, regardless of the so-called oil crisis. 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.
By 1981 petitioner had approximately 30 years' experience
as, variously, a reporter, bureau correspondent, and editor for
the magazines Life, Time, and Discover. He confirmed at trial
that if he needs information, he knows how to get it. In
addition to utilizing libraries and varying publications,
petitioner noted that "one of the ways that * * * [he] [gets]
information best is to go to experts, * * * generally in the
[fields] of science and technology and medicine." Despite his
research and reporting experience, and the resources available to
him at Time, Inc., petitioner did not educate himself in, or
personally investigate, the plastics recycling transactions; nor
- 33 -
did he consult anyone outside of Becker Co. In addition,
petitioner and his wife did not carefully read the SAB Recovery
offering memorandum or seriously attempt to resolve the numerous
caveats and warnings therein. We are not convinced that
petitioner gave sufficient consideration to the business aspects
of the Partnerships to demonstrate that he really intended and
reasonably expected to make an economic profit from the
transactions, regardless of the so-called oil crisis.
Moreover, petitioners did not explain how the so-called oil
crisis 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." Furthermore, during 1980 and 1981, in
addition to the media coverage of the so-called oil crisis, there
was "extensive continuing press coverage of 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
- 34 -
(1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024
(10th Cir. 1994), 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. Id. at 135-136. In holding that
the taxpayers in the Krause case were not liable for the
negligence additions to tax, this Court noted that one of the
Government's expert witnesses acknowledged that "investors may
have been significantly and reasonably influenced by the energy
price hysteria that existed in the late 1970s and early 1980s 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 petitioner's
decision to invest. While EOR was, according to our Krause
opinion, in the forefront of national policy and the media during
the late 1970's and 1980's, there is no showing in these records
that the so-called energy crisis would provide a reasonable basis
for petitioner's investing in recycling of polyethylene,
particularly in the machinery here in question.
- 35 -
In addition, the taxpayers in the Krause case were
experienced in or investigated the oil industry and EOR
technology specifically. One of the taxpayers in Krause v.
Commissioner, supra, 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. Petitioner did
not independently investigate the Sentinel recyclers or hire an
expert in plastics to evaluate the Partnership transactions. We
consider petitioners' arguments with respect to the Krause case
inapplicable.
3. Petitioners' Purported Reliance on a Tax Adviser
Petitioner maintains that he reasonably relied upon the
advice of a qualified adviser, Tucker, and that he relied on
various representations allegedly made by Tucker about what
Becker had done.
The concept of negligence and the argument of reliance on an
expert are highly fact intensive. Petitioner is well educated;
he earned degrees in electrical engineering and mathematics from
the University of Michigan. For approximately 30 years, he
worked variously as a reporter, bureau correspondent, editor,
senior editor, and managing editor for Life magazine, Time
- 36 -
magazine, and Discover magazine. This experienced business and
science journalist claims that he relied upon an accountant to
investigate the tax law and the underlying business circumstances
of a proposed investment, the success of which depended upon a
purportedly technologically unique machine. Becker, who is
experienced in tax matters, explains that he made an
investigation within the limits of his resources and abilities
and that he and Tucker fully disclosed what he had done. For
reasons set forth below, we believe that petitioner did not
reasonably rely upon Tucker, and ultimately Becker, with respect
to valuation problems requiring expertise in engineering and
plastics technology.
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
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. Freytag v. Commissioner, supra. For reliance on
professional advice to excuse a taxpayer from the negligence
additions to tax, the taxpayer must show that the professional
- 37 -
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.
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,
- 38 -
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 8.
In the instant consolidated cases, petitioner maintains that
he reasonably relied upon Tucker as a qualified adviser on this
matter. Although petitioner testified that he did not discuss
the Plastics Recycling transactions with Becker, and he does not
argue that he relied on Becker, the substance of petitioner's
testimony is that he relied upon Tucker's representations about
what Becker had done to investigate the Plastics Recycling
transactions. Tucker did not testify at trial; Becker did.
b. Becker and Tucker
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,
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.
- 39 -
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.
Canno was a client of Becker Co. and 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 the PI 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
that were produced from recycled plastic. Becker claims that he
was told by PI personnel 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 were already on the market.
Other plastics recycling machines available during 1981 and 1982
- 40 -
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
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
- 41 -
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
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
- 42 -
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. 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.
Becker had a financial interest in SAB Recovery, SAB
Reclamation, and the SAB Recycling Partnerships, generally. He
received fees in excess of $500,000 with respect to the SAB
Recycling Partnerships, and more than $200,000 of those fees was
derived from SAB Recovery and SAB Reclamation. Becker also
received fees for investment advice from some individual
investors. In addition, Becker Co. received fees from the SAB
Recycling Partnerships for preparing their partnership returns.
As Becker himself testified, potential investors could not have
read the offering materials and remained ignorant of the
financial benefits accruing to him.
- 43 -
Petitioner's recollection of Becker's investigation, as
purportedly told to him by Tucker, is inconsistent with Becker's
testimony. According to petitioner, he understood from Tucker
that Tucker had not visited the PI plant in Hyannis, but that
"Becker had gone many times" and "had taken experts in plastics
and manufacturing along with him." In contrast, Becker testified
that he visited PI just "one or two" times and that Tucker
visited PI once or twice. Becker was "quite certain" that Tucker
accompanied him on one of his visits to PI, although he did not
indicate when that visit occurred. As for taking along experts
in plastics and manufacturing, Becker testified that he did not
hire any independent experts other than counsel to represent him
as general partner, and that he relied on PI for the value and
uniqueness of the Sentinel recycler.
Becker and petitioner also have differing recollections
regarding whether the two of them discussed the Plastics
Recycling transactions. According to petitioner, after he first
contacted Becker, Becker took him on as a client and "almost
immediately turned * * * [him] over to Noel Tucker." Petitioner
testified that thereafter, except for an occasional phone
conversation with Leicht, his dealings "were entirely with Noel
Tucker" until his account was turned over to Shuffrin. In
contrast, Becker testified that he spoke to petitioner "more than
once", although to the best of his recollection only once prior
to the closing of SAB Recovery. Becker testified that "Mr.
- 44 -
Jaroff called me after discussing the transaction with Mr.
Tucker, and asked me * * * to confirm the information that Noel
[Tucker] had given him". As Becker recalled, he and petitioner
discussed the Plastics Recycling transactions for approximately
15 to 30 minutes in Tucker's office. Asked if his testimony
would be different if petitioner were to testify that he had met
Becker only once, and that he had spoken only to Tucker and
Shuffrin about the Partnerships, Becker replied: "No. * * * [My
testimony] wouldn't be different." Asked if he had a definite
recollection of talking to petitioner, Becker replied: "I recall
talking to him in Tucker's office."
With respect to what he told petitioner, Becker's testimony
is inconsistent. On direct examination, Becker testified that he
confirmed to petitioner that he and his associates at Becker Co.
had visited PI, observed the recyclers, and done everything they
thought appropriate. Becker testified that "I just confirmed
that we believed that we had done an appropriate level of due
diligence." On cross-examination, Becker modified his earlier
testimony and said:
I [told Jaroff] that I had done a high degree of
investigation, review, and analysis, as opposed to
saying I did due diligence * * *. I had told him about
some of the things that I had done, some of [the] other
things that Mr. Tucker had done, and we also had
discussed the investment with Jaroff. I had indicated
to him that, based upon my knowledge of his financial
circumstance, he could afford the risk. That was
basically the substance of my discussions with Mr.
Jaroff.
- 45 -
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, and leave it open for them
to define what I might or might not have done."
The record shows that petitioner did not carefully read the
offering memoranda; did not independently research the Plastics
Recycling transactions; and did not consult any experts in
plastics materials or plastics recycling. Petitioner claims that
he relied on Tucker, and particularly relied on Tucker's
purported representations about what Becker had done to
investigate the Plastics Recycling transactions. As petitioner
recalls them, however, Tucker's purported representations
contradict Becker's testimony regarding what he had done. We
find petitioner's recollection of Tucker's representations to be
unreliable, and his failure to call Tucker to testify gives rise
to the inference that such testimony would not have been
favorable to petitioners. Mecom v. Commissioner, 101 T.C. 374,
386 (1993), affd. without published opinion 40 F.3d 385 (5th Cir.
1994); 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); Sacks v. Commissioner, T.C. Memo. 1994-217. We are
- 46 -
not required to accept petitioner's self-serving testimony as
true, particularly when inconsistent and contradicted by other
evidence. Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir.
1964), affg. 41 T.C. 593 (1964); Niedringhaus v. Commissioner, 99
T.C. 202, 212 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77
(1986); Snyder v. Commissioner, T.C. Memo. 1995-285; Sacks v.
Commissioner, supra.
Petitioner does not allege that Tucker misled or deceived
him. As a member of Becker Co., Tucker was privy to the
particulars of Becker's investigation. Certainly he knew that
Becker did not take any experts with him to PI, especially
considering Becker's testimony that Tucker was with him on one
such occasion. To the extent that Tucker related the particulars
of Becker's investigation to petitioner, we have no reason to
doubt that his representations were accurate and forthright. In
addition, Becker's testimony convinces us that petitioner
discussed the Plastics Recycling transactions with Becker and
that Becker supplemented the representations made by Tucker, so
that petitioner knew "precisely what * * * [Becker] had done to
investigate or analyze the transaction." Accordingly, we find
that petitioner was fully apprised of the particulars of Becker
Co.'s investigation, consistent with the facts as we have found
them.
We hold that petitioner's purported reliance on Tucker, and
indirectly on Becker, was not reasonable, not in good faith, nor
- 47 -
based upon full disclosure. 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.
Petitioner testified that the tax benefits were explained to him
and that he recognized that the Sentinel recycler was "very
expensive." Certainly Tucker and Becker recognized the nature of
the tax benefits and, given petitioner's education and
professional experience, he should have recognized it as well.
Yet neither petitioner, nor Tucker, nor Becker verified the
purported value of the Sentinel EPE recycler. Petitioner
ultimately relied on Becker, and Becker confirmed at trial that
he relied on PI for the value of the Sentinel EPE recyclers.
In the end, Tucker, Becker, and petitioner 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."
Tucker and 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
- 48 -
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, supra; Rogers v.
Commissioner, T.C. Memo. 1990-619; see also Gollin v.
Commissioner, T.C. Memo. 1996-454; Grelsamer v. Commissioner,
T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C. Memo. 1996-398;
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.
4. Miscellaneous
Petitioners stipulated that the fair market value of a
Sentinel EPE recycler in 1981 was not in excess of $50,000.
Notwithstanding this concession, petitioners contend that they
were reasonable in claiming credits on their Federal income tax
returns based upon each recycler having a value of $1,162,666.
In support of this position, petitioners submitted into evidence
preliminary reports prepared for respondent by Ernest D.
Carmagnola (Carmagnola), the president of Professional Plastic
Associates. Carmagnola had been retained by the IRS in 1984 to
evaluate the Sentinel EPE and EPS recyclers in light of what he
described as "the fantastic values placed on the * * *
[recyclers] by the owners." Based on limited information
available to him at that time, Carmagnola preliminarily estimated
that the value of the Sentinel EPE recycler was $250,000.
However, after additional information became available to him,
- 49 -
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" of a Sentinel EPE recycler and that to
determine whether the machines actually could be profitable, he
required additional information from PI. Carmagnola also
indicates that in preparing the report, he did not have
information available concerning research and development costs
of the machines and that he estimated those costs in his
valuations of the machines.
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, counsel
for petitioners obtained copies of these reports and urge that
they support the reasonableness of the values reported on
petitioners' returns. Not surprisingly, said 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
- 50 -
the Plastics Recycling cases before us.) The Carmagnola reports
were a part of the record considered by this Court and reviewed
by the Sixth Circuit Court of Appeals in Provizer v.
Commissioner, T.C. Memo. 1992-177, where we held the taxpayers
negligent. Consistent therewith, we find in these consolidated
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 cite a number of cases in support of their
position, but primarily rely on Durrett v. Commissioner, 71 F.3d
515 (5th Cir. 1996), affg. in part and revg. in part T.C. Memo.
1994-179; Chamberlain v. Commissioner, 66 F.3d 729 (5th Cir.
1995), affg. in part and revg. in part T.C. Memo. 1994-228;
Wright v. Commissioner, T.C. Memo. 1994-288; Wood v.
Commissioner, T.C. Memo. 1991-205; Davis v. Commissioner, T.C.
Memo. 1989-607; and Mollen v. United States, 72 AFTR 2d 93-6443,
93-2 USTC par. 50,585 (D. Ariz. 1993).
This Court dismissed the negligence additions to tax in the
Wright, Wood, and Davis cases for reasons inapposite to the facts
herein. In the Wright case, the taxpayers were unsophisticated
investors with little or no experience in financial matters;
nothing in their lives had given them the experience they needed
to manage their money or to recognize the importance or meaning
of the warning signs inherent in the investment at issue. In
- 51 -
Wood, a group of consolidated cases, all of the taxpayers had
profit objectives, the transactions were not sham transactions,
and one pair of taxpayers inspected the equipment at issue. 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.
Unlike the taxpayer in Wright, as a former business reporter
for Time, petitioner plainly had the experience and education
necessary to recognize the importance or meaning of the warning
signs inherent in the Partnership transactions. In contrast to
the Wood case, the Partnership transactions are shams lacking
economic substance; we are not convinced that petitioner had an
honest objective of making an economic profit; and he did not
inspect the recyclers. Unlike the circumstances of the Davis
case, Tucker and Becker were not long-term advisers of
petitioner; Becker was not independent of the SAB Recycling
Partnerships; and the offering memoranda warned that the general
partner had no prior experience in marketing recycling or similar
equipment. Accordingly, petitioners' reliance on the Wright,
Wood, and Davis cases is misplaced.
In Mollen v. United States, supra, the taxpayer was a
medical doctor who specialized in diabetes and who, on behalf of
the Arizona Medical Association, led a continuing medical
- 52 -
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. at 93-6447, 93-2 USTC
par. 50,585, at 89,895; see Zfass v. Commissioner, T.C. Memo.
1996-167.
Petitioner and Becker have no formal education, expertise,
or experience in plastics recycling. Tucker never represented
that he was expert in plastics recycling, and petitioner had no
reason to believe otherwise. There is no showing in the record
that petitioner, Tucker, or Becker 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 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
- 53 -
Sentinel EPE recycler, and never prepared any kind of formal,
written analysis of the venture. In the end, Becker Co. and
petitioner relied upon representations by insiders to the
Plastics Recycling transactions, and neither Becker Co. nor
petitioner hired any independent experts in the field of plastic
materials or plastics recycling. Accordingly, we consider
petitioners' arguments with respect to the Mollen case
inapplicable under the circumstances of these consolidated 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 a pair of 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).
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 Foulds v. Commissioner, T.C. Memo. 1994-489 (the well-
educated taxpayer failed to establish the substance of advice,
and the purported adviser lacked tax expertise), affd. without
- 54 -
published opinion 94 F.3d 651 (9th Cir. 1996); Chakales v.
Commissioner, T.C. Memo. 1994-408 (reliance on a 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 an 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). Here we have found that neither Tucker nor
Becker, the advisers consulted by petitioner, possessed
sufficient knowledge of the plastics recycling business to render
a competent opinion. This circumstance has been deemed relevant
by the Court of Appeals for the Second Circuit, the court to
which appeal in these cases lies. 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 shall not relieve petitioners of the
negligence additions to tax based upon the Court of Appeals'
- 55 -
decisions in the Durrett and Chamberlain cases.12
5. Conclusion as to Negligence
Under the circumstances of these consolidated cases,
petitioners failed to exercise due care in claiming large
deductions and tax credits with respect to the Partnerships on
their Federal income tax returns. We hold that petitioner did
not reasonably rely upon the offering memoranda, Tucker and
Becker, or in good faith investigate the underlying viability,
financial structure, and economics of the Partnership
transactions. We are unconvinced by the claim of petitioner, an
experienced business and science journalist and editor with a
leading national investigative news magazine, that he reasonably
failed to inquire about his investments and simply relied on the
offering circulars and Becker Co., despite warnings in the
offering circulars and explanations by Tucker and Becker about
the limitations of Becker's investigation. Petitioner knew or
should have known better. We hold, upon consideration of the
entire record, that petitioners are liable for the negligence
additions to tax under section 6653(a)(1) and (2) for the taxable
years at issue. Respondent is sustained on this issue.
12
Other cases cited by petitioners are inapplicable and
distinguishable for the following general, nonexclusive reasons:
(1) They involve far less sophisticated, if not unsophisticated,
taxpayers; (2) the reasonableness of the respective taxpayers'
reliance on expert advice was established in those cases on
grounds that do not exist here; and (3) the advice given was
within the adviser's area of expertise.
- 56 -
B. Section 6659--Valuation Overstatement
In notices of deficiency, respondent determined that
petitioners were liable for the section 6659 addition to tax on
the portion of their underpayments attributable to valuation
overstatement. Petitioners have the burden of proving that
respondent's determinations of the section 6659 additions to tax
are erroneous. Rule 142(a); Luman v. Commissioner, 79 T.C. at
860-861. In docket No. 27392-89, in her answer to petition
respondent asserted an increased amount under section 6659.
Respondent has the burden of proof with respect to the increased
addition to tax. Rule 142(a); Bagby v. Commissioner, 102 T.C.
596, 612 (1994).
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
- 57 -
1981 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 additions to tax at the rate of 30 percent of the portions
of their underpayments attributable to such valuation
overstatements.
Petitioners contend that section 6659 does not apply in
their consolidated cases for the following three reasons: (1)
Disallowance of the claimed tax benefits was attributable to
other than a valuation overstatement; (2) petitioners' concession
of the claimed tax benefits precludes imposition of the section
6659 additions to tax; and (3) respondent erroneously failed to
waive the section 6659 additions to tax. We reject each of these
arguments 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. at 178 (citing Todd v. Commissioner,
supra). However, when valuation is an integral factor in
- 58 -
disallowing deductions and credits, section 6659 is applicable.
See Illes v. Commissioner, 982 F.2d 163, 167 (6th Cir. 1992),
affg. T.C. Memo. 1991-449; Gilman v. Commissioner, 933 F.2d 143,
151 (2d Cir. 1991) (the 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 are sham transactions
lacking 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 the following cases to support
this argument: 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; and Todd v. Commissioner, supra.
Petitioners' argument rests on the mistaken premise that our
holding herein that the Partnership transactions lacked economic
- 59 -
substance was separate and independent from the overvaluation of
the Sentinel EPE recyclers. To the contrary, in holding that the
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
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
- 60 -
Appeals for the Second Circuit, the court to which appeal in
these cases lies. 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."' Id. 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. at 566-
567; Zirker v. Commissioner, 87 T.C. 970, 978-979 (1986); Donahue
v. Commissioner, T.C. Memo. 1991-181, affd. without published
opinion 959 F.2d 234 (6th Cir. 1992), affd. sub nom. Pasternak v.
- 61 -
Commissioner, 990 F.2d 893 (6th Cir. 1993).
Petitioners' reliance on Gainer v. Commissioner, supra;
McCrary v. Commissioner, 92 T.C. 827 (1989), and Todd 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, supra at
859. Petitioners' consolidated cases present just such a
"different situation": overvaluation of the recyclers was
integral to and inseparable from petitioners' claimed tax
benefits and our holding that the Partnership transactions lacked
economic substance.13
13
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
- 62 -
2. Concession of the Deficiencies
Petitioners argue that their concession of the deficiencies
precludes imposition of the section 6659 additions to tax.
Petitioners contend that their concession renders any inquiry
into the grounds for such deficiencies moot. Absent such
inquiry, petitioners argue that it cannot be known whether their
underpayments were attributable to a valuation overstatement or
another 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, supra, and McCrary v. Commissioner, supra.
Petitioners' open-ended concession does 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, supra, and stipulated by the parties. As a
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."), affg. T.C. Memo. 1989-684.
- 63 -
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' concession, 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. Dybsand v. Commissioner, supra. Even
in situations in which there are arguably two grounds to support
a deficiency and one supports a section 6659 addition to tax and
the other does not, the taxpayer may still be liable for the
addition to tax. Gainer v. Commissioner, 893 F.2d 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 consolidated cases, no argument was made and
no evidence was presented to the Court that disallowance and
concession of the claimed investment tax credits and other tax
benefits related to anything other than a valuation
overstatement. To the contrary, petitioners stipulated
substantially the same facts concerning the Partnership
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transactions as we found in Provizer v. Commissioner, T.C. Memo.
1992-177. In the Provizer case, we held that the taxpayers were
liable for the section 6659 addition to tax because the
underpayment of taxes was directly related to the overvaluation
of the Sentinel EPE recyclers. The overvaluation of the
recyclers, exceeding 2,325 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, 92 T.C.
827 (1989), 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 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 recyclers. We
hold that petitioners' reliance on McCrary v. Commissioner,
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supra, is inappropriate.14
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 was not
in excess of $50,000. Given those concessions, and the fact that
the record here plainly shows that the overvaluations of the
recyclers was the only reason for the 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 the Commissioner 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
14
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
13, 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.
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claimed on the returns and that such claims were made in good
faith. The Commissioner'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 the Commissioner'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 well
after the trial of these consolidated cases. Petitioners made
their request more than 6 months after the trial of these
consolidated cases. We are reluctant to find that respondent
abused her discretion in these consolidated cases when she was
not timely requested to exercise it and 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 Tucker in
deciding on the valuation claimed on their tax returns.
Petitioners contend that such reliance was reasonable and,
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therefore, that respondent should have waived the section 6659
additions to tax.15 However, as we explained above in finding
petitioners liable for the negligence additions to tax,
petitioners' purported reliance on the offering materials and
Tucker was not reasonable.
Petitioners did not carefully read the offering memoranda.
To the extent that they reviewed either of them, they did not
give due consideration to the numerous warnings and caveats
contained therein. We found petitioner's recollection of events
to be unreliable and his testimony suspect. Becker possessed no
special qualifications or professional skills in the recycling or
plastics industries, and the record indicates the same was true
of Tucker. Despite these obvious limitations, Tucker, Becker,
and petitioners never hired or consulted any plastics engineering
or technical experts with respect to the Plastics Recycling
transactions. Becker spoke with 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 anyway. At trial, Becker
confirmed that in the end he relied exclusively on PI, its
personnel, and the offering materials as to the value and
15
In their posttrial brief, petitioners referenced the reports
prepared by Carmagnola in support of the reasonableness of the
claimed valuation. For reasons discussed supra, we consider the
reports prepared by Carmagnola to be unreliable and of no
consequence.
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purported uniqueness of the machines.
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, the Tenth Circuit Court of Appeals held that
the Commissioner had abused her discretion for not waiving a
section 6661 addition to tax. Like the section 6659 addition, a
section 6661 addition to tax may be waived by the Commissioner if
the taxpayer demonstrates that there was reasonable cause for his
underpayment and that he acted in good faith. Sec. 6661(c). The
taxpayer in Mauerman relied upon independent attorneys and
accountants for advice as to whether payments were properly
deductible or capitalized. The advice relied upon by the
taxpayer in Mauerman was within the scope of the advisers'
expertise, the interpretation of the tax laws as applied to
undisputed facts. In these consolidated cases, particularly with
respect to valuation, petitioners relied upon advice that was
outside the scope of expertise and experience of Tucker and
Becker. 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
consolidated cases, respondent could find that petitioner's
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purported reliance on the offering materials, Tucker, and Becker
was unreasonable. The record in these consolidated cases does
not establish an abuse of discretion on the part of respondent
but supports respondent's position. We hold that respondent's
refusal to waive the section 6659 addition to tax is not an abuse
of discretion. Petitioners are liable for the respective section
6659 additions to tax at the rate of 30 percent of the portions
of their underpayments attributable to valuation overstatements.
Respondent is sustained on this issue.
C. Petitioners' 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
Long after the trial of these consolidated cases,
petitioners 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. Petitioners also lodged with the Court a motion for decision
seeking relief from the additions to tax for negligence and from
the increased rate of interest, with attachments, and a
memorandum in support of the motion. Respondent filed an
objection, with attachments, and a memorandum in support thereof,
and petitioners thereafter filed a reply memorandum. Petitioners
argue that they should be afforded the same settlement that was
reached between other taxpayers and the IRS in docket Nos. 10382-
86 and 10383-86, each of which was styled Miller v. Commissioner.
See Farrell v. Commissioner, T.C. Memo. 1996-295 (denying a
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motion similar to petitioners' motion); see also Gollin v.
Commissioner, T.C. Memo. 1996-454; Grelsamer v. Commissioner,
T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C. Memo. 1996-398.
Counsel for petitioners seek to raise a new issue long after
the trial of these consolidated cases. Resolution of such issue
might well require a new trial. Such a further trial "would be
contrary to 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
trial and briefing and after the issuance of numerous opinions on
issues and facts closely analogous to those in these consolidated
cases, petitioners' motion for leave is not well founded.
Farrell v. Commissioner, supra.
Even if petitioners' motion for leave were granted, the
arguments set forth in the motion and the attached memorandum
lodged with this Court are invalid, and the motion would be
denied. Therefore, and for reasons set forth in more detail
below, petitioners' motion for leave shall be denied.
Some of our discussion of background and circumstances
underlying petitioners' motion is drawn from documents submitted
by the parties and findings of this Court in two earlier
decisions. See Estate of Satin v. Commissioner, T.C. Memo. 1994-
- 71 -
435; Fisher v. Commissioner, T.C. Memo. 1994-434. Such matters
are not disputed by the parties. We discuss the background
matters for the sake of completeness. As we have noted, granting
petitioners' motion for leave would require further proceedings.
The Estate of Satin and Fisher cases involved Stipulation of
Settlement agreements (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:
Provizer v. Commissioner, T.C. Memo. 1992-177, and the two Miller
cases. We held in Estate of Satin and Fisher 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 timely, so they effectively
rejected it.16
In 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. Pursuant to the offer,
taxpayers had 30 days to accept the following terms: (1)
16
In their motion for decision, petitioners state: "After the
lead counsel for taxpayers and Respondent had agreed upon the
designation of the lead cases, Respondent's counsel prepared
piggyback agreements and offered them to counsel for the
taxpayers in this case and to other taxpayers." (Emphasis added.)
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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.17 Petitioners assert that the Plastics Recycling
project settlement offer was extended to them, but they did not
accept the offer timely, so they effectively rejected it.18
In December 1988, the Miller cases were disposed of by
settlement agreement between the taxpayers and respondent.19
17
Although the record does not include a settlement offer to
petitioners, petitioners have attached to their motion 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.
18
In their motion for decision, petitioners state:
"Respondent formulated a standard settlement position which was
extended to all taxpayers having docketed or non-docketed cases
in the plastics recycling group, including Petitioner." (Emphasis
added.)
19
Although it is not otherwise a part of the record in these
consolidated cases, respondent attached copies of the Miller
closing agreement and disclosure waiver to her objection to
petitioners' motion for leave, and petitioners do not dispute the
accuracy of the document.
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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 the provisions of section 6661 and section
6653(a). The increased interest 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, supra; Fisher v. Commissioner, supra.
Petitioners argue that they are similarly situated to
Miller, the taxpayer in the Miller cases, and that pursuant to
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/or the settlement offer 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) (Frankfurter, J., concurring); see Baker
v. United States, 748 F.2d 1465 (11th Cir. 1984); Farmers' &
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Merchants' Bank v. United States, 476 F.2d 406 (4th Cir. 1973).
According to petitioners, the principle of equality precludes the
Commissioner 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. Miller foreclosed any potential
liability for increased interest in his cases by making payments
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 consolidated 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
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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." (Emphasis added.) 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 consolidated cases, or in the Court's opinions in
Estate of Satin v. Commissioner, T.C. Memo. 1994-435, or Fisher
v. Commissioner, T.C. Memo. 1994-434, or in any of the material
submitted to us in these consolidated 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 rejected a settlement offer made to them prior to trial of a
test case. In contrast, Miller negotiated for himself and
accepted an offer that was essentially the same as the Plastics
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Recycling project settlement offer rejected by petitioners prior
to trial. Accordingly, petitioners' motion is not supported by
the principle of equality on which they rely. Cf. Baratelli v.
Commissioner, T.C. Memo. 1994-484.
In order to reflect the foregoing,
An appropriate order will
be issued denying petitioners'
motion, and decisions will be
entered under Rule 155.