Sann v. Commissioner

T.C. Memo. 1997-259

UNITED STATES TAX COURT

JOHN SANN AND MARIANNE SANN, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 21518-88, 21519-88, Filed June 10, 1997.
4789-89, 21209-90,
22399-90, 22466-90.

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

Louise R. Forbes, Paul Colleran, Gary S. Gross, Mary P.

Hamilton, and William T. Hayes, for respondent.

1
Cases of the following petitioners are consolidated for
opinion: John Sann and Marianne Sann, docket Nos. 21518-88 and
22466-90; Laurence M. Addington, docket Nos. 21519-88 and 22399-
90; and David M. Cohn, docket Nos. 4789-89 and 21209-90.
 - 2 -

CONTENTS

Page
MEMORANDUM FINDINGS OF FACT AND OPINION....................... 2
OPINION OF THE SPECIAL TRIAL JUDGE............................ 3
FINDINGS OF FACT.............................................. 7
A. The Plastics Recycling Transactions...................... 7
B. The Partnerships.........................................10
C. Richard Roberts..........................................12
D. Guy B. Maxfield..........................................13
E. Petitioners and Their Introduction to the Partnership
Transactions.............................................18
1. John and Marianne Sann...............................18
2. Laurence M. Addington................................22
3. David M. Cohn........................................25
OPINION.......................................................30
A. Statute of Limitations...................................33
B. Section 6653(a)--Negligence..............................39
1. The Private Offering Memoranda......................41
2. The So-Called Oil Crisis............................47
3. Petitioners' Purported Reliance on an Adviser.......50
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.........................................51
b. Maxfield.......................................53
4. Miscellaneous.......................................60
5. Conclusion as to Negligence.........................70
C. Section 6659--Valuation Overstatement....................71
1. The Grounds for Petitioners' Underpayments..........73
2. Concession of the Deficiency........................77
3. Section 6659(e).....................................81
D. Petitioners' Motions For Leave To File Motion For
Decision Ordering Relief From the Negligence Penalty
and the Penalty Rate of Interest and To File Supporting
Memorandum of Law........................................85

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: These cases were assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183. They were tried and
 - 3 -

briefed separately but consolidated for purposes of opinion.2

All section references are to the Internal Revenue Code in effect

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

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

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

Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

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

Plastics Recycling group of cases. For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

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

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

the underlying transactions and the Sentinel recyclers in these

cases are substantially identical to those considered in the

Provizer case.

In three notices of deficiency, issued on June 16, 1988, in

docket No. 21518-88 (Sann), on June 6, 1988, in docket No. 21519-

88 (Addington), and on December 22, 1988, in docket No. 4789-89

(Cohn), respondent determined the following deficiencies in and

additions to petitioners' 1981 Federal income taxes:

2
There were three separate trials for these cases. The cases
of John Sann and Marianne Sann, docket Nos. 21518-88 and 22466-
90, were consolidated for the purposes of receiving certain
testimony. The same procedure was followed for the cases of
Laurence M. Addington, docket Nos. 21519-88 and 22399-90, and the
cases of David M. Cohn, docket Nos. 4789-89 and 21209-90.
 - 4 -
Additions to Tax
Petitioners Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6659
1
Sann $192,666 $9,633.30 $54,582.60
1
Addington 63,137 3,156.85 18,840
1
Cohn 10,250 512.50 2,892.30
1
50 percent of the interest payable with respect to the portion of the
underpayment attributable to negligence. The additions to tax determined under
section 6653(a)(2) were calculated on the amount of $181,942 in the Sann case; on
the amount of $62,800 in the Addington case; and on the amount of $9,641 in the
Cohn case.

In another three notices of deficiency, issued on July 19, 1990,

in docket Nos. 22466-90 and 22399-90 (Sann and Addington,

respectively), and on July 20, 1990, in docket No. 21209-90,

(Cohn), respondent determined the following deficiencies in and

additions to petitioners' 1982 Federal income taxes:
Additions to Tax
2
Petitioners Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6659
1
Sann $94,403 $4,720 $23,030
1
Addington 44,317 2,215.85 10,649
1
Cohn 15,893 795 4,020
1
50 percent of the interest payable with respect to the portion of the
underpayment attributable to negligence. The additions to tax determined under
section 6653(a)(2) were calculated on the full amount of the deficiency in each
case.
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.
Respondent conceded the sec. 6661 additions to tax in the respective posttrial
briefs in each case.

In all six notices of deficiency, respondent also determined that

interest on the deficiencies accruing after December 31, 1984,

would be calculated at 120 percent of the statutory rate under

section 6621(c). In the posttrial brief for docket No. 4789-89

(Cohn), respondent asserted a lesser section 6659 addition to tax

in the amount of $2,447. We consider the section 6659 addition

to tax in docket No. 4789-89 to be accordingly reduced.

On July 1 and July 11, 1994, respondent filed motions for

leave to file amended answers in docket Nos. 4789-89 (Cohn) and
 - 5 -

21518-88 (Sann), respectively. This Court denied both motions on

July 11, 1994.

The parties in each of these cases filed substantively

identical Stipulations of Settled Issues concerning the

adjustments relating to petitioners' participation in the

Plastics Recycling Program. In general, the stipulations

provide:3

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 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' return. Petitioners, however, reserve the

3
The stipulations of settled issues in both of the Cohn
cases, and in the Addington case for 1981, are written in the
singular. Also, the stipulations of settled issues filed in the
Cohn cases expressly refer to the sec. 6659 addition to tax as an
unresolved issue in the third stipulation. Finally, the
stipulation of settled issues in the Cohn case for 1982 (docket
No. 21209-90) expressly refers to Foam Recycling and Jabrilach
Recycling, instead of "the Plastics Recycling Program".
 - 6 -

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 the tax pursuant to
I.R.C. §6659(e).

In the stipulations of settled issues for docket Nos. 21209-90

(Cohn), 22399-90 (Addington), and 22466-90 (Sann), petitioners

also reserved the right to argue whether the respective

assessments of tax and additions to tax for 1982 were barred by

the statute of limitations.

Long after the trials of these cases, in each case

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. These motions were filed with attached exhibits during the

last week of October and first week of November 1995.

Petitioners concurrently lodged with the Court motions for

decision ordering relief from the additions to tax for negligence

and the increased rate of interest, with attachments and

memoranda in support of the motions. Subsequently, respondent

filed objections, with attachments and memoranda in support

thereof, and petitioners thereafter filed reply memoranda. For

reasons discussed in more detail subsequently in this opinion,

and also in Farrell v. Commissioner, T.C. Memo. 1996-295, these

motions shall be denied. See also Friedman v. Commissioner, T.C.

Memo. 1996-558; Jaroff v. Commissioner, T.C. Memo. 1996-527;

Gollin v. Commissioner, T.C. Memo. 1996-454; Grelsamer v.
 - 7 -

Commissioner, T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C.

Memo. 1996-398.

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

Whether the assessments for 1982 are time-barred; (2) whether

petitioners are liable for the additions to tax for negligence

under section 6653(a)(1) and (2); and (3) whether petitioners are

liable for the additions to tax under section 6659 for

underpayments of tax attributable to valuation overstatements.

FINDINGS OF FACT

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

so found. The stipulated facts and attached exhibits are

incorporated in the respective cases by this reference.

A. The Plastics Recycling Transactions

These cases concern petitioners' indirect investments in

three limited partnerships that leased Sentinel expanded

polyethylene (EPE) recyclers: Empire Associates (Empire),

Plymouth Equipment Associates (Plymouth), and Foam Recycling

Associates (Foam). For convenience we refer to these

partnerships collectively as the Partnerships.

Petitioners acquired their indirect interests in the

Partnerships through three other partnerships: S&H Empire (a

tier of Empire), Plymouth Partners (a tier of Plymouth), and

Jabrilach Recycling (a tier of Foam).

The transactions involving the Sentinel EPE recyclers

purportedly leased by the Partnerships are substantially
 - 8 -

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.4

No arm's-length negotiations for the price of the Sentinel

EPE recycler took place between or among PI, ECI, and F & G Corp.

All of the monthly payments required among the entities in the

above transactions offset each other. These transactions were

done simultaneously. Although the recyclers were sold and leased

4
In the Foam transaction, such notes provided that 20 percent
of the notes were recourse but that the recourse portion of the
notes was only due after the nonrecourse portion, 80 percent, was
paid in full.
 - 9 -

for the above amounts under the structure of simultaneous

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

1981 and up to the end of 1982 was not in excess of $50,000.

PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap. The sublicense

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

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

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

Like Clearwater, Empire and Plymouth leased Sentinel EPE

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

Corp. The Empire and Plymouth transactions differ from the

underlying transactions in the Provizer case in two respects:

(1) The entity that leased the machines from F & G Corp. and

licensed them to FMEC Corp.; and (2) the circumstance that seven

machines were sold, leased, licensed, and sublicensed by Empire

and Plymouth. Foam leased four Sentinel EPE recyclers from F & G

Corp., but it did not license them to FMEC. Instead, in its

fourth transaction, Foam entered into (1) a 1-year consulting

agreement with the president of PI, John D. Bambara (Bambara),

who was to assist in the placement of the machines with end-

users, and (2) a joint venture agreement with PI for the further

processing and sale of the output of the Sentinel EPE recyclers.

For convenience, we refer to the series of transactions

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

Corp. or Bambara, and PI as the Partnership transactions. In
 - 10 -

addition to the Partnership transactions, a number of other

limited partnerships entered into transactions similar to the

Partnership transactions, also involving Sentinel EPE recyclers

and Sentinel expanded polystyrene (EPS) recyclers. We refer to

these collectively as the Plastics Recycling transactions.

B. The Partnerships

Empire, Plymouth, and Foam are New York limited

partnerships. Empire closed on November 23, 1981; Plymouth

closed on December 21, 1981; and Foam closed on September 22,

1982. Foam is subject to the provisions of the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA) Pub. L. 97-248, 96

Stat. 324.

Richard Roberts (Roberts) is the general partner of each of

the Partnerships. Roberts also was the Tax Matters Partner (TMP)

for Foam during 1982 and at all other times relevant hereto.

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 and a 4.37-percent interest in Taylor Recycling

Associates. Burstein owns a 2.605-percent interest in Empire and

a 5.82-percent interest in Jefferson Recycling Associates. Like

Empire and Plymouth, Taylor Recycling Associates and Jefferson
 - 11 -

Recycling Associates are 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 Empire, Plymouth, and Foam state

that the general partner will receive fees from those

partnerships in the respective amounts of $35,000, $37,500, and

$25,000.5 In addition, each of the offering memoranda provide

that the general partner may retain as additional compensation

all amounts not paid as sales commissions or offeree/purchaser

representative fees. According to the offering memoranda, 10

percent of the proceeds from each offering ($95,000 in the case

of Empire, $97,500 in the case of Plymouth, and $60,000 in the

case of Foam) was allocated to the payment of sales commissions

and offeree/purchaser representative fees. Consequently, Roberts

was scheduled to receive a minimum of $97,500 and up to a maximum

of $350,000 from the Partnerships.

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

5
The Foam limited partnership agreement provided that the
$37,500 fee was "payable ten (10) days after the Closing." The
limited partnership agreements for Empire and Plymouth provided
that the fees of $35,000 and $37,500, respectively, were payable
"ten (10) days after the Sentinel Recyclers are delivered to a
licensee thereof." Such amounts were essentially guaranteed
because FMEC and PI were committed to be licensees of the
recyclers.
 - 12 -

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

the general partner has no prior experience in marketing

recycling equipment and is required to devote only such time to

the Partnerships as he deems necessary; (4) the limited partners

have no control over the conduct of the Partnerships' business;

(5) there is no established market for the Sentinel EPE

recyclers; (6) there are no assurances that market prices for

virgin resin will remain at their current costs per pound or that

the recycled pellets will be as marketable as virgin pellets; and

(7) certain potential conflicts of interest exist. The Foam

offering memorandum also notes that "since August 1981, PI has

become a sublicensee of 104 other Sentinel Recyclers" and that it

has "encountered longer start-up periods than anticipated".

C. Richard Roberts

Roberts is a businessman and the general partner in a number

of limited partnerships that leased and licensed Sentinel EPE

recyclers, including Empire, Plymouth, and Foam. He also is a 9-

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

the recyclers to the Partnerships. From 1982 through 1985,

6
The offering memoranda note that "Such purchase price is the
basis for computing the regular investment and energy tax credits
to be claimed by the Partnership."
 - 13 -

Roberts maintained the following office address with Raymond

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

Grant/Roberts
Investment Banking
Tax Sheltered Investments
745 Fifth Avenue, Suite 410
New York, New York 10022

Grant was instrumental in the hiring of Ulanoff as an evaluator

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

cruise. Roberts and Grant together have been general partners in

other investments.

Prior to the Partnership transactions, Roberts and Grant

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

(Freedman & Co.). Harris W. Freedman (Freedman), a certified

public accountant (C.P.A.) and the named partner in Freedman &

Co., was the president and chairman of the board of F & G Corp.

He also owned 94 percent of a Sentinel EPE recycler. Freedman &

Co. prepared the partnership returns for ECI Corp., F & G Corp.,

Empire, Plymouth, and Foam. It also provided tax services to

Bambara. Bambara is the 100-percent owner of FMEC Corp., as well

as its president, treasurer, clerk, and director. He, his wife,

and daughter also owned directly or indirectly 100 percent of the

stock of PI.

D. Guy B. Maxfield

Guy B. Maxfield (Maxfield) is an attorney specializing in

tax matters. He does not have an engineering background and he

is not an expert in plastics materials or plastics recycling.
 - 14 -

Maxfield earned an undergraduate degree in 1955 from Augustana

College and was elected to Phi Beta Kappa. He then attended

Michigan Law School where he became a member of the Law Review

and was elected to the Order of the Coif. He graduated Summa Cum

Laude in 1958. After law school Maxfield became employed by the

law firm of White & Case in New York City. In 1963 he left White

& Case to be an assistant professor in the graduate tax program

at the New York University (NYU) Law School. He became a full

professor 12 to 14 years later. Maxfield has written articles

for Law Reviews and co-authored a book on Federal estate and gift

taxation. During his tenure at NYU he has been "of counsel" to

various law firms. For approximately 10 years he was of counsel

to the law firm of Gifford, Woody, Carter & Hayes. Sometime in

1981 he became of counsel to the law firm of Sann & Howe. Among

his various functions at the firm, Maxfield reviewed tax-

advantaged investments at Sann & Howe.

Maxfield learned of the Plastics Recycling transactions in

1981 from John Y. Taggart (Taggart), a tax partner at the law

firm of Windels, Marx, Davies & Ives (WMDI). Taggart and other

attorneys at WMDI prepared the offering memoranda, tax opinion,

and other legal documents for Empire and Plymouth. Maxfield and

Taggart were close personal friends. They had known each other

since 1959 when they were colleagues at White & Case. Maxfield

was the "best man" at Taggart's wedding and named Taggart as

executor of his will. Before joining WMDI, Taggart also had been
 - 15 -

employed by the U.S. Treasury Department in the Office of Tax

Legislative Counsel, and then as a full-time member of the

faculty of the NYU Law School and editor in chief of the Tax Law

Review. Over the years, Maxfield and Taggart exchanged

information concerning investment opportunities that they

considered interesting. Taggart owned a 6.66-percent interest in

a second-tier Plastics Recycling partnership. Maxfield did not

consider Taggart to be an expert in engineering or plastics

recycling.

Maxfield estimates that in 1981 he spent 50 to 75 or more

hours investigating the Plastics Recycling transactions. His

investigation involved reading the offering memorandum and

questioning Roberts and Taggart. Scheduling conflicts prevented

him from visiting PI until 1982. However, another attorney at

Sann & Howe, Roger Wible (Wible), visited PI in 1981 and reported

his observations to Maxfield. Maxfield was told by Roberts and

persons at PI that competitive machines were not as efficient as

the Sentinel EPE recycler and that the owners of the other

machines had trouble placing them with end-users.

Maxfield was concerned with various aspects of the Plastics

Recycling transactions, such as how Roberts, as a promoter, would

profit from the transactions. In Maxfield's experience,

oftentimes promoters of tax advantaged investments were highly

compensated regardless of the success of the investment.

Maxfield understood from Roberts that the source of Roberts'
 - 16 -

profits, as a promoter, would be the operation of the

Partnerships. Maxfield satisfied himself that "the general

partner had a real economic incentive to make these things work

if he was going to ever sell anymore of--of these things."

Maxfield visited PI in 1982 to see what it was like and "to

hear from some of the technical people there." Although

Maxfield's perspective was that of "a tax lawyer" and "not a

scientist", he thought that he "could at least listen, and if * *

* [he] had questions on their discussion, * * *[he] could ask

them." As Maxfield explained his understanding, the Sentinel EPE

recyclers would serve the following function:

The function served by these recycling machines
[was to grind and chemically condense the plastic
waste,] which would then be reformatted into plastic
pellets and sold * * *
They would simply tell the factory we have a way--
we will dispose of--of your waste products without
charging you anything. We will provide a machine that
you can use without any cost.

In fact, end-users were not provided Sentinel EPE recyclers

without cost; they bore the service and installation costs.

According to Maxfield, among the criteria required of potential

end-users was "the physical space in their factory to have * * *

[the] machine installed" and the willingness to "spend something-

-roughly $5,000 or $6,000, if necessary, for the wiring of the

machine." Maxfield testified that he thought that there were

"thousands and thousands and thousands" of potential end-users

for the recycler.
 - 17 -

"One of the fundamental questions" Maxfield had about the

Plastics Recycling transactions was whether the Sentinel EPE

recycler was overpriced. Notwithstanding his concern, Maxfield

did not consult an independent expert about the machines.

Instead, he relied upon the reports of F & G Corp.'s evaluators,

Burstein and Ulanoff, as confirmation of the machine's purported

value. Maxfield did not know that Burstein and Ulanoff were

investors in the Plastics Recycling transactions. He never spoke

to them and did not ask Roberts or Taggart whether Burstein and

Ulanoff were investors. At a meeting held at Sann & Howe to

discuss the investment, Maxfield mentioned that hiring an

independent expert or appraiser was an option for confirming the

value of the machine. As Maxfield recalled:

I mentioned that specifically, it was [a] possibility,
and they--somebody said, well, who? And I said I
frankly don't know, and I also don't know what the
charge would be, I have no idea.
* * *
I don't believe any of the people at Sann & Howe
actually hired another expert, but I said that's a
possibility.

Maxfield also told the members of Sann & Howe that he considered

the relationship between the value of the recycled pellets and

the price of oil to be a negative aspect of the investment. As

he acknowledged, "I had no training to decide which way the price

of oil was going to go and therefore--so on."

Maxfield never represented to anyone at Sann & Howe that he

was an expert in plastics recycling or engineering. In addition,
 - 18 -

Maxfield always stressed that he "was not an investment analyst."

Maxfield described his role in analyzing and investigating the

Plastics Recycling transactions as follows: "I really viewed my

role as I was a conveyor of information and of my impressions. I

made it very clear to each of the potential investors, it's their

business decision, not mine." (Emphasis added.) Reflecting upon

his own decision to invest in the Plastics Recycling

transactions, Maxfield stated, "there were obviously--if I would

have asked the right questions, I wouldn't have made the

investment."

E. Petitioners and Their Introduction to the Partnership
Transactions

Petitioners in these cases do not have any education,

training, or experience in engineering, plastics recycling, or

plastics materials. They did not independently investigate the

Sentinel EPE recyclers or see a Sentinel EPE recycler or any

other type of plastics recycler prior to participating in the

recycling ventures. Petitioners never made a profit in any year

from their investments in the Partnerships.

1. John and Marianne Sann

Petitioners John Sann and Marianne Sann resided in

Larchmont, New York, when their petitions were filed. John Sann

(Sann) was born and raised in Amsterdam in the Netherlands.

After attending the Lyceum and the University of Lausanne in

Switzerland, he served in the Royal Air Force in England and the
 - 19 -

Dutch Air Force in Holland for several years. He then pursued a

law degree at the University of Amsterdam, transferred to

Columbia Law School in New York City, and graduated in 1952.

Sann became a member of the New York bar, and in 1955 he joined

the law firm of Mitchell, Capron. In 1960 he joined the law firm

of Debevoise & Plimpton. Sann left Debevoise & Plimpton in 1970

and, with Edwin Howe, formed the law firm of Sann & Howe. He

remained a name partner at Sann & Howe until 1993.

Sann specializes in international law. He advises foreign

individuals and entities regarding investments in the United

States. Among his clients for many years have been Royal Dutch

Shell in the Hague and Shell Transport and Trading in London.

Together these two companies own the worldwide group of Shell

companies. Sann has counseled executives of the two companies

with respect to investments in the United States for their

corporate pension funds. On a personal level, Sann has invested

in the stock market, securities, mutual funds, investment

partnerships, and real estate. Sann approaches each of his

personal investments "separately and individually, depending on

the nature of the investment."

In 1981, Sann acquired an indirect, limited partnership

interest in Empire with a $43,750 investment in S&H Empire, and

an indirect limited partnership interest in Plymouth with a

$50,000 investment in Plymouth Partners. In 1982, he acquired an
 - 20 -

indirect, limited partnership interest in Foam with a $50,000

investment in Jabrilach Recycling.

As a result of Sann's indirect investments in Empire and

Plymouth, on their 1981 Federal income tax return Sann and his

wife Marianne claimed operating losses in the respective amounts

of $31,520 and $35,636, and investment tax and business energy

credits totaling $156,900.7 The Sanns also claimed operating

losses from Empire and Plymouth on their 1982 return in the

respective amounts of $710 and $1,132. As a result of his

indirect investment in Foam, on their 1982 return the Sanns

claimed an operating loss in the amount of $35,272 and investment

tax and business energy credits totaling $76,767.8 Respondent

disallowed the Sanns' claimed operating losses and credits

related to Empire, Plymouth, and Foam in full, except for the

operating losses from Empire and Plymouth claimed on their 1982

return. In addition, with respect to Empire, respondent

determined a distributive share of income in the amount of $4,375

for 1981.

7
The Sanns claimed a total of $158,128 in investment credits
on their 1981 return. The notice of deficiency indicates that
$74,210 of the credits derived from Empire and that $82,690 of
the credits derived from Plymouth. The record in docket No.
21518-88 does not indicate the source of the additional $1,228 in
credits claimed by the Sanns.
8
The total investment credit claimed by the Sanns on their
1982 return was $101,502.
 - 21 -

Sann learned of the Plastics Recycling transactions and the

Partnerships from Maxfield, who at the time was of counsel at

Sann & Howe. The two had been introduced earlier in the year by

a mutual friend, and Maxfield had been hired to provide general

tax expertise to the firm. Maxfield told Sann that he had heard

about the Plastics Recycling transactions from Taggart. Sann had

met Taggart a year or so earlier and knew of him as a tax lawyer.

Maxfield provided Sann with a copy of an offering memorandum and

he reviewed it. By Sann's account, he spent 60 to 70 hours over

a 7- to 10-day period studying the offering memorandum.

Sann discussed the transactions with other members of Sann &

Howe, including Maxfield, at informal and formal meetings. He

queried Taggart, by phone, about his impression of PI and the

machines, and Sann testified that Taggart had responded in a

positive way. Sann did not know that Taggart was making an

investment in the Plastics Recycling transactions. He understood

that Wible was impressed with what he had seen on his visit to

PI. Sann also spoke to his contacts in the oil business, and he

asserts that from them he understood that the consensus was that

the price of oil would gradually continue to rise, though at a

lower rate than in the past. However, Sann did not consider such

speculation to be an ironclad assurance of the direction of the

price of oil.

Sann did not investigate PI or any of the entities involved

in the Plastics Recycling transactions. He recalled that Roberts
 - 22 -

visited Sann & Howe once to speak "to all those who were

interested in investing" and that he "answered any questions that

anybody might have." Sann was not overly concerned by the fact

that Roberts only had to devote as much time as he felt necessary

to the operation of the Partnerships because, as Sann understood

the arrangement, PI was going to find the end-users, not the

Partnerships, and thus "the real operation, the real work would

be done in * * * Hyannis by PI." Maxfield informed Sann about

his visit to PI in 1982.

Sann discussed the price of the recycler with Maxfield, but

he denies that Maxfield raised the option of hiring an

independent expert or appraiser. Sann never saw a Sentinel EPE

recycler, investigated its value, or investigated any other

competing recyclers for a price comparison. Sann allegedly

assumed, and understood from others, that the Sentinel EPE

recycler was a unique machine and that it was priced on a take-

it-or-leave-it basis. With respect to the uniqueness of the

Sentinel EPE recycler and its purported value, Sann acknowledges

that he "relied, indeed, to a large extent, probably too much, on

the contents of the offering memorandum and the expert opinions

contained in the memorandum."

2. Laurence M. Addington

Petitioner Laurence M. Addington (Addington) resided in New

York, New York, when his petitions were filed. Addington earned

an undergraduate degree from the University of Minnesota in 1958
 - 23 -

and a law degree from Yale Law School in 1961. After service in

the Army, Addington moved to New York City and was employed in

the trust department of the Morgan Guaranty Trust Company.

Approximately 4 or 5 years later, in 1967, he joined the law firm

of Breed, Abbott & Morgan and practiced in their trusts and

estates department. In 1973 he joined the law firm of Sann &

Howe, and he became a partner in that firm the following year.

Addington specializes in estate planning and administration.

In 1981, Addington acquired an indirect, limited partnership

interest in Empire with a $25,000 investment in S&H Empire, and

an indirect limited partnership interest in Plymouth with a

$6,520 investment in Plymouth Partners. In 1982, he acquired an

indirect, limited partnership interest in Foam with a $25,000

investment in Jabrilach Recycling.

As a result of his indirect investments in Empire and

Plymouth, on his 1981 Federal income tax return Addington claimed

operating losses in the respective amounts of $18,013 and $4,454,

and investment tax and business energy credits totaling $53,416.9

Addington also claimed operating losses from Empire and Plymouth

on his 1982 return in the respective amounts of $406 and $141.

As a result of his indirect investment in Foam, on his 1982

return Addington claimed an operating loss in the amount of

9
The notice of deficiency in docket No. 21519-88 indicates
that of the $53,416 in credits, $43,080 derived from Empire
($21,876 in investment tax credits and $21,204 in business energy
credits) and $10,336 derived from Plymouth ($5,158 in investment
tax and business energy credits each).
 - 24 -

$17,637 and an investment tax and business energy credit totaling

$35,094.10 Respondent disallowed Addington's claimed operating

losses and credits related to Empire, Plymouth, and Foam in full,

except for the operating losses from Empire and Plymouth claimed

on his 1982 return. In addition, with respect to Empire,

respondent determined that Addington had a distributive share of

income in the amount of $2,500 for 1981.

Addington learned of the Plastics Recycling transactions and

the Partnerships from Maxfield at a firm meeting. At the

meeting, Maxfield briefly described the transactions and made an

offering memorandum available for review. Addington spent

approximately 1 hour perusing it. He did not check the figures

in the cash-flow analysis section of the offering memorandum.

Although he was aware of the tax benefits, Addington claims that

he had no idea how they were derived. At trial, Addington could

not recall ever having met Roberts. He could not recall reading

that the tax benefits were generated by the purported value of

the machine, nor could he recall reading about any potential

conflicts of interest.

After reviewing the offering memorandum, Addington spoke to

Maxfield. He understood that Maxfield's investigation had

entailed speaking to Roberts and Taggart, and he also was aware

10
Addington claimed an investment credit totaling $35,498 on
his 1982 return. Of that amount, $35,094 derived from Foam. The
investment tax credit and business energy credit generated by
Foam each were in the amount of $19,192. However, his business
energy credit was subject to limitation of $15,902.
 - 25 -

of Maxfield's visit to PI in 1982. Maxfield explained the

transactions to Addington in his own words. The two also

discussed PI, the people organizing the Partnerships, and the

value of the machine. Maxfield explained to Addington that an

audit would focus on the value of the machine. Addington

understood that Wible had visited PI and that he was impressed by

the factory and the machines. Addington also recalled speaking

to Sann about the proposal. Although he was initially skeptical,

Addington felt "more positive" about the investment after

speaking with Maxfield and Sann.

Addington never met Roberts or knew anything about him. He

did not believe that the success of the Partnerships depended

upon Roberts' personal efforts. Addington did not know how the

Sentinel EPE recycler worked, in a technical sense, and he never

saw one or asked to see one. He did not personally investigate

the recyclers or the entities involved in the transactions.

Addington knew that Maxfield's expertise was in taxation, and he

had no reason to believe that Maxfield had a background in

plastics recycling or engineering. He recalled that Maxfield did

not press anyone to invest in the Plastics Recycling

transactions, and Addington never felt like he was being

subjected to a hard sell.

3. David M. Cohn

Petitioner David M. Cohn (Cohn) resided in New York, New

York, when his petitions were filed. Cohn earned an
 - 26 -

undergraduate degree from Brandeis University and then a law

degree from the NYU Law School in 1972. After law school he

worked for 2 ½ years as an associate in the law firm of Paul,

Weiss, Rifkind, Wharton & Garrison (Paul, Weiss). He then was

employed for 1 year in the office of general counsel at Macy's.

Cohn returned to Paul, Weiss for another 2 years, and then worked

for a year in the asset swap legal division of Bankers Trust. He

joined the law firm of Sann & Howe in approximately 1979 and

became a partner in that firm in 1982. Cohn has specialized in

real estate law throughout his career. At Sann & Howe, he

advised foreign investors with respect to joint ventures with

developers and investments in office buildings and residential

property. In that role, Cohn was "very involved in * * * whether

the deals worked or not."

In 1981, Cohn acquired an indirect, limited partnership

interest in Empire through a $6,250 investment in S&H Empire. In

1982, he acquired an indirect, limited partnership interest in

Foam through a $6,000 investment in Jabrilach Recycling.

As a result of his indirect investment in Empire, on his

1981 Federal income tax return Cohn claimed an operating loss in

the amount of $4,503 and investment tax and business energy

credits totaling $8,156.11 Cohn also claimed an operating loss

from Empire on his 1982 return in the amount of $101. As a

11
The investment tax and business energy credits flowing from
Empire totaled $5,300 each. However, Cohn's business energy
credit for 1981 was subject to a limitation to $2,856.
 - 27 -

result of his indirect investment in Foam, on his 1982 return

Cohn claimed an operating loss in the amount of $4,232 and

investment tax and business energy credits totaling $9,212.12

Respondent disallowed Cohn's claimed operating losses and credits

related to his indirect investments in Empire and Foam in full,

except for the operating loss from Empire claimed on his 1982

return. In addition, with respect to Empire, respondent

determined that Cohn had a distributive share of income in the

amount of $625 for 1981.

Cohn learned of the Plastics Recycling transactions and the

Partnerships from Maxfield. He reviewed an offering memorandum

for approximately 3 to 4 hours and then questioned Maxfield about

it. Cohn considered that the mechanics of the deal "would have

been [Maxfield's] strong suit and not mine." He described his

12
On his 1982 return, Cohn claimed a total investment credit
in the amount of $13,401. In his petition, Cohn asserts that his
distributive share of Jabrilach Recycling's investment tax credit
through Foam was $13,401.
However, Cohn's 1982 Schedule K-1, Partner's Share of
Income, Credits, Deductions, etc., attached to Jabrilach
Recycling's 1982 Form 1065, indicates that Cohn's share of basis
in the recyclers owned by Foam was $46,060. Accordingly, the
total investment tax and business energy credits available to
Cohn from his indirect interest in Foam was $9,212 ($4,606 each).
Cohn's 1982 return indicates that the additional $4,189 in
credits was comprised of $745 in investment tax credits from
other qualifying property, and carried over business energy
credits in the amount of $3,444. It is unclear from his 1982
return how much, if any, of the carried over business energy
credits was from Empire. Respondent disallowed Cohn's claimed
credits in full.
 - 28 -

understanding of how the value of the machines was determined as

follows:

It was explained to me [by Maxfield]. How much I
understood about it I don't know, but I didn't know how
it got this valuation, how we got to this valuation,
and it was explained to me that, under this provision,
you could do this, and this provision, you could do
that.
* * * * * * *
As to the overall valuation, it didn't--I don't
think I questioned it, because to me the valuation was
based upon the projections of profit, that if you could
get this kind of profit out, the[n] a unique machine,
which is what I thought we were investing in, was worth
whatever they could [get] for it. So, I didn't analyze
the nuts and bolts of each machine.

Cohn understood that the potential economic returns were

dependent upon the price of oil. He spoke to Sann about the

price of oil after Sann had spoken to his contacts in the oil

business.

Cohn spent approximately 10 to 12 hours discussing the

investment with Maxfield, as well as Sann, Addington, Wible, and

Chuck Kellert (Kellert), another partner at Sann & Howe. He also

attended some of the firm meetings regarding the investment.

Cohn understood that Maxfield was satisfied with the offering

memorandum and tax opinion, but he could not recall Maxfield

mentioning the option of hiring an independent appraiser or

expert. He recalled that Wible spoke approvingly of his visit to

PI and that the others thought positively about the investment.

Cohn could not recall meeting Roberts. He understood that he

could expect to receive profits from the royalties in accordance

with the timetable set out in the offering memorandum.
 - 29 -

Cohn questioned Maxfield about the status of his 1981

investment when no profits were forthcoming. Cohn recalled that

the progress reports he had seen "did not look great and scared *

* * [him] a little bit." Maxfield's "responses were not euphoric

but good enough [for Cohn] to invest again in 1982." Even though

he had yet to receive any distributions from Empire, Cohn

invested in Foam in 1982. Cohn testified that Maxfield spoke

positively about his visit to PI that year. Cohn recalled that

"much further investigation" had been undertaken and that

"Explanations were given as to why the [projected economic]

return [for Empire] had not come forth." Other than perhaps

Maxfield's visit to PI, however, Cohn did not elaborate upon what

"further investigation" had been done. The explanation he

received with respect to Empire's lack of economic return was

that "the market was weak at that--for those few months".

Cohn thought that the plastics recycling business "was just

slow" until he read an article in the Wall Street Journal

reporting that "there was an injunction * * * restraining Mr.

Roberts from pushing these things." At that point Cohn recalled

that discussions at Sann & Howe "focused on the fact that we had

dealt with a promoter who had not--that we had been sold a bill

of goods is the best way I can put it." Cohn recalled that there

was a feeling that the investment did not produce as projected,

"And personally, you know, how could I or how could we be so

stupid as to--and then we would go through what--the recollection
 - 30 -

of what more could we have done, but it certainly was mea culpa

time."

OPINION

We have decided a large number of the Plastics Recycling

group of cases.13 The majority of these cases, like the present

13
Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993), concerned the
substance of the partnership transaction and also the additions
to tax.
The following cases concerned the addition to tax for
negligence, inter alia: Estate of Hogard v. Commissioner, T.C.
Memo. 1997-174; Henry v. Commissioner, T.C. Memo. 1997-86; Skyrms
v. Commissioner, T.C. Memo. 1997-69; Friedman v. Commissioner,
T.C. Memo. 1996-558; Becker v. Commissioner, T.C. Memo. 1996-538;
Jaroff v. Commissioner, T.C. Memo. 1996-527; 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,
(continued...)
 - 31 -

cases, raised issues regarding additions to tax for negligence

and valuation overstatement. We have found the taxpayers liable

for such additions to tax in all but one of the opinions to date

on these issues, although procedural rulings have involved many

more favorable results for taxpayers.14

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 Clearwater transaction

was a sham because it lacked economic substance and a business

purpose, (3) upheld the section 6659 addition to tax for

valuation overstatement since the underpayment of taxes was

directly related to the overstatement of the value of the

Sentinel EPE recyclers, and (4) held that losses and credits

claimed with respect to Clearwater were attributable to tax-

13
(...continued)
T.C. Memo. 1992-605, concerned other issues.
14
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 Baratelli v. Commissioner, supra; Zenkel v.
Commissioner, T.C. Memo. 1996-398.
 - 32 -

motivated transactions within the meaning of section 6621(c). In

reaching the conclusion that the transaction lacked economic

substance and a business purpose, this Court relied heavily upon

the overvaluation of the Sentinel EPE recyclers.

Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that their investments in

the Sentinel EPE recyclers in these cases are similar to the

investment described in Provizer v. Commissioner, supra. The

underlying transactions in these cases, and the Sentinel EPE

recyclers purportedly leased by the Partnerships, are the same

type of transaction and same type of machines considered in

Provizer v. Commissioner, supra.

Based on the entire records in these cases, including the

extensive stipulations, testimony of respondent's experts, and

petitioners' testimony, we hold that each of the Partnership

transactions herein was a sham and lacked economic substance. In

reaching this conclusion, we rely heavily upon the overvaluation

of the Sentinel EPE recyclers. Respondent is sustained on the

question of the underlying deficiencies. We note that

petitioners have explicitly conceded this issue in the

stipulations of settled issues filed shortly before trial. The

records plainly support respondent's determinations regardless of

such concessions. For a detailed discussion of the facts and the

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

Commissioner, supra.
 - 33 -

A. Statute of Limitations

Petitioners contend that the section 6229(a) period of

limitations for assessing their partnership items for the 1982

tax year expired on June 30, 1987, several years before

respondent issued the respective notices of deficiency for

1982.15

In general, section 6229(a) provides that the period for

assessing any income tax attributable to partnership items (or

affected items) for a partnership taxable year will not expire

until the later of a date which is 3 years after the partnership

files its information return for the taxable year in question or

the last day for filing such return for such year (without

extensions). This minimum 3-year period may be extended,

suspended, or otherwise modified as provided elsewhere in section

6229. The relevant modifications with respect to petitioners'

cases are in subsections (b), (d), and (f) of section 6229.

Section 6229(b) provides as follows:

(b) EXTENSION BY AGREEMENT.-

(1) IN GENERAL.-The period described in subsection
(a) (including an extension period under this
subsection) may be extended-

(A) with respect to any partner, by an
agreement entered into by the Secretary and
such partner, and

(B) with respect to all partners, by an
agreement entered into by the Secretary and

15
The parties do not dispute that resolution of this issue is
governed by the TEFRA partnership provisions, secs. 6221-6233.
 - 34 -

the tax matters partner (or any other person
authorized by the partnership in writing to
enter into such an agreement),

before the expiration of such period.

(2) COORDINATION WITH SECTION 6501(c)(4).--Any
agreement under section 6501(c)(4) shall apply with
respect to the period described in subsection (a) only
if the agreement expressly provides that such agreement
applies to tax attributable to partnership items.

Section 6229(d) provides that the running of the limitations

period is suspended from the date when the notice of Final

Partnership Administrative Adjustment (FPAA) is mailed to the

partnership's TMP for (1) the period during which an action may

be brought for judicial review of the FPAA, and if such an action

is brought, until the decision of the court becomes final, and

(2) for 1 year thereafter. The period during which an action may

be brought is generally 150 days. Sec. 6226(a) and (b); see sec.

7503.

Section 6229(f) provides that if partnership items become

nonpartnership items before the expiration of the limitations

period otherwise provided, then the limitations period shall not

expire before the date that is 1 year after the date on which

partnership items become nonpartnership items.

Foam filed its partnership return for the 1982 tax year on

March 16, 1983. Therefore, the limitations period was initially

set to expire on April 15, 1986. Sec. 6229(a). However, on

November 5, 1985, one of the attorneys-in-fact for Foam, Shaye

Jacobson (Jacobson), executed a Form 872-P, Consent to Extend the
 - 35 -

Time to Assess Tax Attributable to Items of a Partnership, with

respect to Foam's 1982 tax year.16 Petitioners concede that this

consent extended the period of limitations for assessment of

partnership items for all partners of Foam to June 30, 1987.

Prior to June 30, 1987, petitioners executed extensions of

time for assessment (the Consents) with respect to their 1982 tax

years.17 Cohn (or on Cohn's behalf his authorized

representative, Bernard L. Dikman (Dikman), C.P.A.) executed a

series of 3 Forms 872, Consent to Extend the Time to Assess Tax.

The first was executed on February 26, 1986, and extended the

limitations period until June 30, 1987. The second was executed

on March 6, 1987, and extended the limitations period until

December 31, 1988. The third was executed on February 12, 1988,

and extended the limitations period until December 31, 1989.

Addington and the Sanns executed Forms 872-A, Special

Consent to Extend the Time to Assess Tax, on December 22, 1985

and March 13, 1986, respectively. Each of the Forms 872-A

extended the period of limitations until the 90th day after (1)

the IRS office considering the case received a Form 872-T, Notice

of Termination of Special Consent to Extend the Time to Assess

Tax, from the taxpayer; (2) the IRS mailed a Form 872-T to the

16
A member of Freedman & Co., Jacobson had been named an
attorney-in-fact for Foam Recycling, along with Freedman, in a
Form 2848, Power and Declaration of Representative, executed by
Roberts on Apr. 2, 1984.
17
The records in these cases indicate, and the parties do not
dispute, that petitioners timely executed their respective
Consents in accordance with sec. 6501(c)(4).
 - 36 -

taxpayer; or (3) the IRS mailed a notice of deficiency to the

taxpayer. On November 21, 1989, Addington and the Sanns, through

their counsel, executed Forms 872-T for the purpose of

terminating the Forms 872-A. The Forms 872-T were received by

the IRS on November 27, 1989. The 90th day after November 27,

1989 was February 25, 1990.

On December 20, 1989, a Notice of Beginning of

Administrative Proceedings (NBAP) with respect to Foam's 1982 tax

year was issued to Foam's TMP and to each of petitioners. One

day later, on December 21, 1989, an FPAA with respect to Foam's

1982 tax year was issued to Foam's TMP and to each of

petitioners. Under section 6229(d), the issuance of the FPAA

operated to suspend the period of limitations until May 20, 1991.

In addition, because the NBAP and FPAA were issued within 120

days of each other, petitioners had the option to elect to have

their partnership items treated as nonpartnership items. Sec.

6223(e). On January 31, 1990, petitioners, through their

respective counsel, so elected.

The consequences of petitioners' elections to treat their

partnership items as nonpartnership items were twofold. First,

petitioners no longer could petition for, or be treated as

parties to, any judicial review of the FPAA. Secs. 6226(d)(1)(A)

and (d)(2), 6231(b)(1)(D), 6223(e)(3)(B). Second, under section

6229(f), the limitations periods with respect to petitioners'

former partnership items could not expire less than 1 year later,

or January 31, 1991. Respondent issued the 1982 notices of
 - 37 -

deficiency at issue in these cases to petitioners on July 19 and

20, 1990.18

Petitioners argue that the Consents were not effective to

extend respondent's time to make the adjustments at the

partnership level to which any deficiency or addition to tax

could be attributed. We disagree.

Section 6229(b)(2) provides that any agreement under section

6501(c)(4) shall apply with respect to the limitations period

described in subsection (a) only if such agreement expressly

provides that such agreement applies to tax attributable to

partnership items. The Forms 872-A executed by the Sanns and

Addington contained the following restrictive language:

(5) The amount of any deficiency assessment is to be
limited to that resulting from any adjustments to (a)
items affected by the carryover or continuing tax
effect caused by adjustments to any prior tax return;
(b) the taxpayer's distributive share of any item of
income, gain, loss, deduction, or credit of, or
distribution from

JABRILACH RECYCLING #XX-XXXXXXX

(c) the tax basis of the taxpayer's interest(s) in the
aforementioned partnership(s) or organization(s)
treated by the taxpayer(s) as a partnership; and (d);
any gain or loss (or the character or timing thereof)
realized upon the sale or exchange, abandonment, or
other disposition of taxpayer's interest in such
partnership(s) or organization(s) treated by the
taxpayer as a partnership; including any consequential
changes to other items based on such adjustment.

18
The notices of deficiency for the 1982 tax year were issued
to Addington and the Sanns on July 19, 1990, and to Cohn on July
20, 1990.
 - 38 -

Of the 3 Forms 872 executed by or on behalf of Cohn, the first

contained no such language. However, the second contained

similar restrictive language, and the third incorporated such

language by reference.

In Foam Recycling Associates v. Commissioner, T.C. Memo.

1992-645, this Court found that an extension agreement containing

restrictive language virtually identical to that in petitioners'

Consents satisfied the requirements of section 6229(b)(2). Cohn

argues that in his case, the first Form 872 executed on his

behalf did not satisfy section 6229(b)(2), and that the

limitations period under section 6229(a) expired before he

executed the second Form 872 on March 6, 1987. However, as Cohn

conceded, the period of limitations under section 6229(a) had

been validly extended by Jacobson until June 30, 1987.

Therefore, the limitations period on assessment for 1982 was

still open when Cohn executed the second Form 872 on March 6,

1987.

Section 6229(b)(1) provides that the period of limitations

for assessing partnership items (or affected items) may be

extended before the expiration of such period. Subparagraphs (A)

and (B) of section 6229(b)(1) define by whom and for whom the

period of limitations may be extended. Petitioners concede that,

pursuant to the authority provided under section 6229(b)(1)(B),

the Form 872-A executed by Jacobson extended the time for making

adjustments at the partnership level with respect to all partners

until June 30, 1987. Likewise, the Consents executed by
 - 39 -

petitioners, pursuant to the authority provided under section

6229(b)(1)(A), also extended the time for making adjustments at

the partnership level, but only with respect to petitioners'

partnership items (or affected items) for taxable year 1982.

The respective Consents executed by petitioners were

executed prior to the expiration of the section 6229(a) period of

limitations on assessment for 1982, as extended by Jacobson for

all partners, and such Consents were sufficient to satisfy

section 6229(b)(2). See Foam Recycling Associates v.

Commissioner, supra. We hold that the period of limitations for

assessment of tax related to petitioners' former partnership

items (or affected items) for 1982 under section 6229(a) had not

yet expired when respondent issued the notices of deficiency for

docket Nos. 21209-90, 22399-90, and 22466-90. Respondent is

sustained on this issue.

B. Section 6653(a)--Negligence

In notices of deficiency for 1981 and 1982, respondent

determined that each of petitioners was liable for the additions

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

Petitioners have the burden of proving that respondent's

determinations of these additions to tax are erroneous. Rule

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

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

percent of the underpayment if any part of an underpayment of tax
 - 40 -

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

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.

Petitioners argue that they were reasonable in claiming

deductions and credits with respect to the Partnerships. They

maintain that they reviewed the offering memoranda, expected an

economic profit in light of the so-called oil crisis in the

United States in 1981, and that they reasonably relied upon

Maxfield as a qualified adviser on this matter.
 - 41 -
1. The Private Offering Memoranda

Petitioners each testified that they reviewed a copy of at least

one of the respective offering memoranda.19 Sann claims that he

spent 60 to 70 hours over a 7 to 10 day period studying one.

Addington recalls spending approximately 1 hour perusing one.

Cohn recalls that he spent 3 to 4 hours reviewing one.

Regardless of how much time petitioners may have devoted to the

offering memoranda, however, the records in these cases reveal

that they did not give due consideration to all of the

information set out therein, and that they did not pay sufficient

heed to the warnings and caveats contained therein.

The projected first-year tax benefits in each of the

offering memoranda exceeded petitioners' respective investments.

For each $50,000 investor, the projected first-year tax benefits

for the Partnerships were as follows:

19
It is not clear from the records in these cases whether
petitioners reviewed all three offering memoranda or just the
offering memorandum for Empire or Plymouth.
The offering memoranda and accompanying tax opinions for the
partnerships are substantially similar. WMDI prepared the
offering memoranda and tax opinions for Empire and Plymouth. The
law firm of Boylan & Evans prepared the tax opinion for Foam.
The two name partners of Boylan & Evans, William A. Boylan and
John D. Evans, were partners at WMDI during 1981, but left to
form their own firm in 1982.
The offering memoranda for Empire and Plymouth were included
in the records for docket Nos. 21518-88 and 21519-88 (the Sann
and Addington cases for 1981). Because Cohn did not invest in
Plymouth, only the Empire offering memorandum was included in the
record for his 1981 case, docket No. 4789-89.
 - 42 -
IT and BE Credits Deductions
Empire $84,813 $40,650
Plymouth 82,639 40,376
Foam 76,736 39,878

With respect to their combined indirect investments in Empire and

Plymouth, petitioners claimed the following total tax benefits on

their 1981 Federal income tax returns.20

Total Combined
Investment IT and BE Credits Loss
Sann $93,750 $156,900 $67,156
Addington 31,520 53,416 22,467
Cohn 6,250 8,156 4,503

With respect to their indirect investments in Foam, petitioners

claimed the following tax benefits on their 1982 Federal income

tax returns.

Investment IT and BE Credits Loss
Sann $50,000 $76,767 $35,272
Addington 25,000 35,094 17,637
Cohn 6,000 9,212 4,232

The total of investment tax and business energy credits

ostensibly generated by the Partnerships and available to

petitioners was more than 1 ½ times their cash investments.

Therefore, after adjustments of withholding, estimated tax, or

final payment, like the taxpayers in Provizer v. Commissioner,

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

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

transactions]." In view of the disproportionately large tax

benefits claimed on petitioners' Federal income tax returns,

20
As noted, Cohn invested in S&H Empire but not in Plymouth
Partners.
 - 43 -
relative to the dollar amounts invested, further investigation of

the Partnership transactions clearly was required.

The offering memoranda raised numerous caveats and warnings

with respect to the Partnerships, including: (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 he

deemed necessary; (3) the 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; (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." The

Foam offering memorandum also noted "that since August 1981, PI

[had] become a sublicensee of 104 other Sentinel Recyclers" and

had "encountered longer start-up periods than anticipated". 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-
 - 44 -
217; Sacks v. Commissioner, T.C. Memo. 1994-217, affd. 82 F.3d

918 (9th Cir. 1996).

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

respect to one of the partners therein.21 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.

In the cases before us, however, petitioners' purported

reliance on the tax opinion letters is questionable. The tax

opinion letters expressly warned that the investment tax and

business energy credits would be reduced or eliminated if the

Partnerships could not demonstrate that the price paid for the

21
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.
 - 45 -
recyclers approximated their fair market value. Neither of the

tax opinions purports to rely on any independent confirmation of

the fair market value of the recyclers. Rather, the tax opinions

refer to representations by PI and/or other entities involved in

the transactions for the value of the Sentinel EPE recycler. For

example, in the tax opinion appended to the offering memoranda

for Empire and Plymouth, WMDI states:

PI has represented that its pricing policies are a
trade secret, but that its price for the Sentinel
Recyclers to the company which will sell the machines
to the company from which the Partnership will lease
them is no less than it would charge any other
purchaser.

In the tax opinion appended to the Foam offering memorandum,

Boylan & Evans state that "PI, ECI, F & G [Corp.] and the

Partnership have represented to us that the prices paid by ECI

and F & G [Corp.] * * * were negotiated at arm's length." In

fact, as petitioners stipulated, no arm's-length negotiations for

the price of the Sentinel EPE recycler took place between or

among PI, ECI, and F & G Corp.

The offering memoranda for the Partnerships warned

prospective investors that the accompanying tax opinion letters

were not in final form and were prepared for the general

partner,22 and that prospective investors "MUST RELY UPON THEIR

OWN PROFESSIONAL ADVISERS WITH RESPECT TO THE TAX BENEFITS AND

22
Each of the offering memoranda notes that the opinion letter
of counsel "will be provided to the General Partner for his
individual guidance," and that prospective investors "are not
permitted to rely upon the advice contained therein."
 - 46 -
TAX RISKS RELATING TO AN INVESTMENT IN THE PARTNERSHIP." The tax

opinion letters accompanying the Empire and Plymouth 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 their
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'
tax advisors in making their own analysis and not to
permit any prospective investor to rely upon our advice
in this matter. [Emphasis added.]

The tax opinion letter accompanying the Foam offering memorandum,

addressed solely to Roberts, similarly states: "[T]his letter is

intended for your own individual guidance and for the purpose of

assisting prospective purchasers and their tax advisors in making

their own analysis, and no prospective purchaser is entitled to

rely upon this letter." 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 at 1386. The limited, technical opinions of

tax counsel expressed in these letters were not designed as

advice upon which taxpayers might rely and the opinions of

counsel themselves so state.
 - 47 -
2. The So-Called Oil Crisis

Petitioners testified that they reasonably expected to make

an economic profit from the Partnership transactions because

plastic is an oil derivative and the United States was

experiencing a so-called oil crisis when they invested in the

Partnerships. Based upon our review of the records, we find

petitioners' claims unconvincing, regardless of the so-called oil

crisis. Moreover, persuasive testimony by one of respondent's

experts establishes that the oil pricing changes during the late

1970's and early 1980's did not justify petitioners' claiming

excessive investment credits and purported losses based on vastly

exaggerated valuations of recycling machinery.

Petitioners did not educate themselves in, or personally

investigate, the business aspects of the Plastics Recycling

transactions. Nor did they attempt to resolve the numerous

business-related caveats and warnings in the offering memoranda.

Petitioners purport to have relied on Maxfield, but Maxfield made

it clear to all concerned that he was not an investment analyst

and that he had no training to decide whether the price of oil

was going to increase or decrease. Maxfield also told the

members of Sann & Howe that he considered the relationship

between the potential value of the recycled pellets and the price

of oil to be a negative aspect of the proposed investment. In

addition, petitioners received progress reports with respect to
 - 48 -
Empire that revealed that as late as August 1982, despite the so-

called oil crisis, only one of its seven recyclers was actually

generating revenue. Nonetheless, petitioners subsequently

invested in Foam, through Jabrilach Recycling, and claim that

they expected to receive an economic profit because of the so-

called oil crisis.

Moreover, petitioners did not adequately 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). Certainly

Cohn, an admitted "news nut", was aware of such media coverage.
 - 49 -
Petitioners' reliance on Krause v. Commissioner, 99 T.C. 132

(1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024

(10th Cir. 1994), is misplaced. The facts in the Krause case 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 or

reasonably should have had a substantial bearing on petitioners'

decisions 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
 - 50 -
for petitioners' investing in recycling of polyethylene,

particularly in the machinery here in question.

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 the Krause case

undertook significant investigation of the proposed investment

including researching EOR technology. The other taxpayer was a

geological and mining engineer whose work included research of

oil recovery methods and who hired an independent geologic

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

present cases, petitioners were not experienced or educated in

plastics recycling, and they did not independently investigate

the Sentinel EPE recyclers or hire an expert in plastics to

evaluate the Partnership transactions. Although Sann spoke to

client contacts in the oil business, he recognized that their

opinions about the future price of oil were nothing more than

speculation. We consider petitioners' arguments with respect to

the Krause case inapplicable.

3. Petitioners' Purported Reliance on an Adviser

Petitioners claim that they reasonably relied upon the

advice of a qualified adviser, Maxfield.

The concept of negligence and the argument of reliance on an

expert are highly fact intensive. Petitioners in these cases are

very well educated and sophisticated attorneys. Sann specializes

in international law and has advised foreign individuals and
 - 51 -
entities with respect to investments in the United States;

Addington specializes in estate planning and administration; and

Cohn specializes in real estate law and has advised foreign

investors with respect to joint ventures and real estate

investments in the United States. These sophisticated attorneys

ultimately relied upon another attorney 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. The attorney allegedly relied

upon by petitioners had no expertise in plastics materials or

plastics recycling and stressed to petitioners that he was not an

investment analyst. In the end, he relied upon the offering

materials and persons connected to the transactions for the value

of the machine, and fully disclosed the limitations of his

investigation to petitioners.

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). However, a taxpayer bears the responsibility for any

negligent errors of his or her professional adviser. See
 - 52 -
American Properties, Inc. v. Commissioner, 28 T.C. 1100, 1116-

1117 (1957), affd. per curiam 262 F.2d 150 (9th Cir. 1958); Buck

v. Commissioner, T.C. Memo. 1997-191. 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 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;

Buck v. Commissioner, supra; Sacks v. Commissioner, T.C. Memo.

1994-217; Kozlowski v. Commissioner, T.C. Memo. 1993-430, affd.

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

e.g., Friedman v. Commissioner, T.C. Memo. 1996-558; Gollin v.

Commissioner, T.C. Memo. 1996-454; 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
 - 53 -
nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991);

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

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

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

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

when neither the taxpayer nor the advisers purportedly relied

upon by the taxpayer knew anything about the nontax business

aspects of the contemplated venture. David v. Commissioner,

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

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

Commissioner, supra; 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 13.

b. Maxfield

Maxfield had no education, special qualifications, or

professional skills or experience in plastics engineering,

plastics recycling, or plastics materials. He did not consider

himself to be an investment analyst or an expert in tax shelters.

Maxfield never represented to the members of Sann & Howe that he

was an expert in plastics recycling or engineering, and he always

stressed that he was not an investment analyst. Even during the

course of his testimony, in recounting his observations at PI and

his understanding of how the machines worked, Maxfield was
 - 54 -
careful to preface his recollections by cautioning: "Remember *

* * I'm not a scientist" and "recognizing I'm not an engineer".

Maxfield testified that he spent approximately 50 to 75 or

more hours investigating the Plastics Recycling transactions.

His investigation consisted of reading the offering materials and

speaking with Roberts and Taggart in 1981, and visiting PI's

plant in Hyannis in 1982. He did not consider Taggart to be an

expert in plastics recycling or plastics engineering. Two of

Maxfield's principal concerns with respect to the Partnership

transactions were (1) "what was in it for the promoter", Roberts,

and (2) whether the Partnerships were "paying a fair price" for

the machines.

To learn "what was in it for the promoter", Maxfield spoke

to the promoter, Roberts. Maxfield was concerned about Roberts'

compensation and commitment to the Partnerships because in other

tax shelters he had seen, the promoter sometimes made a

substantial profit regardless of the success of the partnership.

Roberts explained to Maxfield that the source of his profits, as

the promoter, would be from the operation of the partnerships.

Maxfield concluded from his investigation of this issue that "the

general partner had a real economic incentive to make these

things work if he was going to ever sell any more of--of these

things." In contrast, Sann understood that "the real operation,

the real work would be done in * * * Hyannis by PI", not Roberts.
 - 55 -
Addington also understood that the success of the Partnerships

did not depend upon Roberts' personal efforts.

Maxfield knew that Roberts did not have "the capacity to

seek out end-users" for the recyclers. The offering memoranda

warned that the general partner had no prior experience in

marketing recycling or similar equipment and that,

the Partnership Agreement does not prohibit the General
Partner from engaging in any activity whatsoever,
including those which may be competitive with the
business of the Partnership, and [such] Agreement
requires the general partner to devote only such time
to the business of the partnership as he, in his
absolute discretion, deems necessary * * *

The offering memoranda also noted that Roberts would not be

liable to the Partnerships or the limited partners for errors in

judgment or other acts or omissions not amounting to fraud or

gross negligence. Roberts' "economic incentive" in the success

of the Partnerships, if any, derived from a 1-percent interest in

all items of income, gain, deduction, loss, and credit from the

Partnerships (for his respective $1,000 contributions). However,

regardless of how the Partnerships fared, Roberts was due to

receive a minimum of $97,500, and up to a maximum of $350,000,

from the three offerings.

To learn about the Sentinel recyclers, including how they

functioned, their potential market, and their fair market value,

Maxfield reviewed the offering memoranda and the reports by

Ulanoff and Burstein, spoke to Roberts, and visited PI in 1982.

One of Maxfield's concerns was whether it "was a hard sell to get
 - 56 -
these machines placed". He was told that it would not be

difficult to place the machines because the recyclers imposed

little or no cost on end-users and because end-users would be

relieved of the financial burden of removing their plastic waste.

Maxfield understood that among the criteria required of end-users

was the willingness to "spend something--roughly $5,000 or

$6,000, if necessary, for the wiring of the machine."

Maxfield allegedly was told by Roberts and Wible in 1981,

and persons at PI in 1982, that the Sentinel EPE recycler was

unique and had a "tremendous head-start" over its competitors.

He claims that he understood that competing recyclers were not as

efficient as the Sentinel EPE recyclers and were not easily

placed with end-users. However, despite the purported

technological edge PI supposedly enjoyed over its competitors,

the offering memoranda warned that "PI does not intend to apply

for a patent for protection against appropriation and use [of its

trade secrets] by others." In addition, the Sentinel recyclers

were not unique. By 1981, several machines capable of densifying

low density materials such as polyethylene and polystyrene were

already on the market, including the Foremost Densilator,

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

Plastcompactor, and Cumberland Granulator. In contrast to the

Sentinel EPE recycler, which was priced at $1,162,666, these

machines ranged in price from $20,000 to $200,000. See Provizer

v. Commissioner, T.C. Memo. 1992-177.
 - 57 -
Maxfield testified that he relied on the offering memoranda,

and in particular the reports by Ulanoff and Burstein appended

thereto, for the value of the recyclers. However, he never spoke

to Ulanoff or Burstein and never learned that they were investors

in the Plastics Recycling transactions. He did not ask Roberts

or Taggart whether Ulanoff and Burstein were investors in the

transaction. Although he knew that other plastics recycling

machines existed, Maxfield did not run any price comparisons or

independently investigate the capabilities of such competing

machines. In the end, Maxfield did not confirm the

representations in the offering memoranda upon which the

purported valuation of the recyclers was based. However, he did

caution the members of Sann & Howe on this point. Maxfield

testified:

[O]ne of the fundamental questions I had was is the
machine--are we paying a fair price, are we overpaying
for this machine?
Obviously, we could read the offering circular. I
was convinced, if the facts were as represented, we
weren't overpaying.
On the other hand, were the--was the offering
circular lying? I didn't have any judgment as to that,
and I said the only way to know, I suppose, would be to
hire another expert. [Emphasis added.]

Despite his express reservations, Maxfield and petitioners did

not hire an independent appraiser or expert, or otherwise

independently verify the "facts" as represented in the offering

memoranda. Reflecting on his own decision to invest, Maxfield

testified: "[I]f I would have asked the right questions, I

wouldn't have made the investment."
 - 58 -
We find that petitioners' purported reliance on Maxfield was

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

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

materials or plastics recycling. He never represented to anyone

at Sann & Howe that he knew anything about plastics recycling or

plastics materials, and petitioners never had reason to believe

otherwise. In addition, Maxfield never purported to be an expert

in tax shelters and stressed that he was not an investment

analyst. Maxfield viewed his role in the matter as nothing more

than "a conveyor of information and of * * *[his] impressions",

and he "made it very clear to each of the potential investors

[that it was] their business decision [to make], not * * *

[his]."

The purported value of the Sentinel EPE recycler generated

the deductions and credits in these cases. That circumstance was

reflected in the offering memoranda, and Maxfield also explained

the tax benefits to petitioners. Accordingly, petitioners

learned or should have learned of the nature of the tax benefits

from the offering materials or Maxfield or both.23 However,

neither Maxfield, petitioners, nor anyone else at Sann & Howe

23
It is not plausible that such experienced and sophisticated
attorneys as petitioners remained ignorant of the nature of the
tax benefits. If such was the case, their ignorance could only
be explained by (1) their failure to read the offering memoranda,
and (2) their failure to listen to Maxfield when he explained the
tax benefits to them.
 - 59 -
independently confirmed the value of the Sentinel EPE recycler.

Maxfield relied on the offering memoranda, and in particular the

reports of Ulanoff and Burstein, for the value of the machines.

He related this to petitioners and cautioned them that the only

way to know if the representations made in the offering memoranda

were true would be to hire an independent appraiser or expert.

In the end, petitioners and Maxfield relied on insiders

and/or financially interested persons 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." As petitioners knew or

certainly should have learned, Maxfield had no education, special

qualifications, or professional skills or experience in plastics

engineering, plastics recycling, or plastics materials. A

taxpayer may rely upon his adviser's expertise, but it is not

reasonable or prudent to rely upon an adviser regarding matters

outside of his field of expertise or with respect to facts that

he does not verify. See David v. Commissioner, 43 F.3d at 789-

790; Goldman v. Commissioner, 39 F.3d at 408; Skeen v.

Commissioner, 864 F.2d 93 (9th Cir. 1989), affg. Patin v.

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

Memo. 1994-329; Sacks v. Commissioner, T.C. Memo. 1994-217;

Rogers v. Commissioner, T.C. Memo. 1990-619.
 - 60 -
4. Miscellaneous

The parties in these consolidated cases stipulated that the

fair market value of a Sentinel EPE recycler in 1981 and up to

the end of 1982 was not in excess of $50,000. Notwithstanding

this concession, petitioners contend that they were reasonable in

claiming credits on their Federal income tax returns based upon

each recycler's having a value of $1,162,666. In support of this

position, petitioners submitted into evidence preliminary reports

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

president of Professional Plastic Associates. Carmagnola had

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

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

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

limited information available to him at that time, Carmagnola

preliminarily estimated that the value of the Sentinel EPE

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

became available to him, Carmagnola concluded in a signed

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

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

1981.

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
 - 61 -
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. 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, petitioners' counsel did

not call Carmagnola to testify in these cases, but preferred

instead to rely solely upon his preliminary, ill-founded

valuation estimates. (Carmagnola has not been called to testify

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

Carmagnola reports were a part of the record considered by this

Court and reviewed by the Court of Appeals for the Sixth Circuit

in the Provizer case, where we held the taxpayers negligent.

Consistent therewith, we find in these cases, as we have found

previously, that the reports prepared by Carmagnola are
 - 62 -
unreliable and of no consequence. Petitioners are not relieved

of the negligence additions to tax based on the preliminary

reports prepared by Carmagnola.

Petitioners submitted into the records of their cases a

group of reports or updates as evidence that they monitored their

investments in the Partnerships. A computer printout dated May

7, 1982, indicated that each of Empire's seven recyclers had been

shipped to various end-users. Subsequent computer printouts,

dated August 20 and September 30, 1982, indicated that only four

machines were running and, contrary to the earlier printout, one

machine had not been shipped. In a letter to Roberts dated

February 18, 1983, Bambara explained that "market prices for

polyethylene resin have remained relatively low" and "operations

of the machines * * * have not been profitable." Roberts

forwarded this letter to the limited partners approximately 2 ½

months later on May 9, 1983. Also, a review of the accounting

procedures relating to the recycling operations conducted by a

certified public accounting firm is among the documents submitted

into the records in these cases by petitioners.

These documents do not convince us that petitioners closely

monitored their investments in the Partnerships. Roberts

forwarded the August 10, 1982 computer printout to petitioners on

August 25, 1982, several weeks before Foam closed. It indicated

that no recycled material had been collected from three of the
 - 63 -
four machines in operation. Two other machines, which had been

shipped to their respective end-users at least 3 months earlier

had not yet been hooked up. Although an end-user apparently had

been awaiting Empire's last recycler for at least 3 months, as

indicated by the May 7 and August 10 printouts, the recycler had

not yet been shipped. The information in the August 10 update

and the other progress reports submitted by petitioners raised

serious questions with respect to the demand for the Sentinel EPE

recyclers, the demand for recycled plastic pellets, and the

responsiveness of PI. Nonetheless, petitioners all invested in

Foam, through Jabrilach Recycling, in 1982 without further

investigation. Petitioners have failed to establish that they

monitored their investments closely. They cannot reasonably be

relieved of the negligence additions to tax on the ground of

alleged attentiveness to their investments as they have not

established such attentiveness, either before or after they made

the investments.

Petitioners cite a number of cases in support of their

positions, 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;

Anderson v. Commissioner, 62 F.3d 1266 (10th Cir. 1995), affg.

T.C. Memo. 1993-607; Mollen v. United States, 72 AFTR 2d 93-6443,
 - 64 -
93-2 USTC par. 50,585 (D. Ariz. 1993); Daoust v. Commissioner,

T.C. Memo. 1994-203; and Davis v. Commissioner, T.C. Memo. 1989-

607.

This Court rejected the negligence additions to tax in the

Davis and Daoust cases for reasons inapposite to the facts of

petitioners' cases. The taxpayers in the Davis case reasonably

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

of the investment venture, and the offering materials reviewed by

the taxpayers did not reflect that the principals in the venture

lacked experience in the pertinent line of business. In

contrast, petitioners purport to have relied on Maxfield, a

recently hired colleague contemplating a similar investment.

Maxfield acted as a conveyor of information and of his

impressions, not as an adviser with expertise in plastics

recycling, and he made it clear to petitioners and others at Sann

& Howe that it was each individual's own business decision to

make, not his. In addition, the offering memoranda warned that

the Partnerships had no prior operating history and that the

general partner had no prior experience in marketing recycling or

similar equipment.

The Daoust case involved a cattle breeding venture that this

Court had previously held lacked economic substance and a

business purpose. See Rasmussen v. Commissioner, T.C. Memo.

1992-212 (where we also held the taxpayers negligent because,

inter alia, they relied solely on representations made in the
 - 65 -
offering memorandum and persons having a financial connection

with the investment). In the Daoust case, we declined to sustain

the negligence additions to tax because the taxpayer husband,

whose family had some history in farming, reasonably relied upon

the advice of two qualified independent investment advisers and

an independent certified public accountant, who also was the

taxpayer husband's brother. In the cases before us, petitioners

relied on Maxfield, who disclosed that he relied on the offering

materials and persons connected to the investments for the value

of the machines and economic viability of the Partnership

transactions. We find that the facts of petitioners' cases more

closely resemble the facts in the Rasmussen case than the Daoust

case. Petitioners' reliance on the Davis and Daoust cases is

misplaced.

In Mollen, the taxpayer was a medical doctor who specialized

in diabetes and who, on behalf of the Arizona Medical

Association, led a continuing medical education (CME)

accreditation program for local hospitals. The underlying tax

matter involved the taxpayer's investment in Diabetics CME Group,

Ltd., a limited partnership that invested in the production,

marketing, and distribution of medical educational video tapes.

The District Court found that the taxpayer's personal expertise

and insight in the underlying investment gave him reason to

believe it would be economically profitable. Although the

taxpayer was not experienced in business or tax matters, he did
 - 66 -
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.

In contrast, petitioners in these cases did not have 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. Although Sann

spoke to client contacts in the oil business about the price of

oil, he understood that they could only speculate about the

direction of the price of oil. Moreover, petitioners' purported

adviser, Maxfield, advised the members of Sann & Howe that the

relationship between the price of the recycled pellets and the

price of oil was a negative aspect of the investment.

Petitioners and Maxfield relied upon the offering materials and

persons with an interest in the Plastics Recycling transactions.

Accordingly, we consider petitioners' arguments with respect to

the Mollen case inapplicable under the circumstances of these

cases.

Petitioners' arguments are not supported by Anderson v.

Commissioner, supra, where the taxpayers were found liable for

the negligence additions to tax. In Anderson, the taxpayers

claimed tax benefits based upon their acquisition of property

listed at $124,500, for which they actually paid $6,225 in a cash
 - 67 -
downpayment (5 percent of the purchase price) plus a 5-year

financing arrangement. Had the acquisition been nothing more

than a $6,225 passive investment in an ongoing business, noted

the Court of Appeals, it would have been reasonable for the

taxpayers to rely on the advice of a good friend who had

thoroughly investigated the investment.24 However, because the

transaction was structured and represented as a purchase in the

amount of $124,500, the Court of Appeals held that something more

was required.

In the cases before us, petitioners claimed tax benefits

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

Partnerships, an interest in $20,927,98825 worth of recycling

machines in 1981 and 1982. Based on total investments ranging

from $6,250 to $93,750 in 1981 alone, petitioners each claimed

qualified investments in new investment credit property with

bases ranging from $52,997 to $784,496.26 These inflated bases

generated claims to first-year tax credits in 1981 ranging from

$8,156 to $156,900, and claims to deductible losses ranging from

24
The adviser had his accountant and attorney review and check
out the structure of the investment; he spoke with the investment
principal; he looked into the principal's background and checked
out his references, banks, other business connections, and the
Better Business Bureau; and he spoke with competitors to make
sure the venture was viable.
25
Eighteen recyclers (4 owned by Foam, 7 each by Empire and
Plymouth) each valued at $1,162,666 totals $20,927,988.
26
The basis figures were derived from petitioners' 1981 Forms
3468, Schedule B, Computation of Business Energy Investment
Credit.
 - 68 -
$4,503 to $67,156. Clearly these were substantial transactions

requiring careful investigation under the Anderson case. Unlike

the adviser in Anderson, neither Maxfield nor petitioners

thoroughly investigated or educated themselves in the industry of

the proposed investment. In view of the substantial basis

claimed for the interest of each petitioner in the machinery (in

each case a substantial amount greater than the cash invested),

from which the investment credits stemmed, plainly something more

was required. Accordingly, we consider petitioners' reliance on

the Anderson case inappropriate.

Petitioners' reliance on the Durrett and Chamberlain cases

is also misplaced. In those cases, the Court of Appeals for the

Fifth Circuit reversed this Court's imposition of the negligence

additions to tax in two nonplastics recycling cases. 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 this 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
 - 69 -
published opinion 94 F.3d 651 (9th Cir. 1996); Chakales v.

Commissioner, T.C. Memo. 1994-408 (reliance on long-term adviser,

who was a tax attorney and accountant, and who in turn relied on

a promoter of the venture, held unreasonable), affd. 79 F.3d 726

(8th Cir. 1996); Kozlowski v. Commissioner, T.C. Memo. 1993-430

(reliance on adviser held unreasonable absent a showing that the

adviser understood the transaction and was qualified to give an

opinion whether it was bona fide), affd. without published

opinion 70 F.3d 1279 (9th Cir. 1995); Freytag v. Commissioner, 89

T.C. at 849 (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).

The records in the cases before us fail to establish that

Maxfield possessed sufficient knowledge of the plastics or

recycling industries to render a competent opinion.27 This fact

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

27
As explained in more detail above, Maxfield relied upon the
representations in the offering memoranda and the reports of
Ulanoff and Burstein for the value of the Sentinel EPE recycler,
which generated the tax benefits in these cases. He did not
independently confirm such representations and, recognizing this,
told the members of Sann & Howe that the only way to confirm the
fair market value of a Sentinel recycler would be to hire an
independent expert or appraiser.
 - 70 -
business in which taxpayers invested); Goldman v. Commissioner,

39 F.3d at 408 (same). Accordingly, petitioners will not be

relieved of the negligence additions to tax based upon the

decisions in the Durrett and Chamberlain cases by the Court of

Appeals for the Fifth Circuit.28

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. It was not reasonable for

petitioners to rely on the offering memoranda, insiders to the

transactions, or Maxfield. Maxfield acted as a conveyor of

information and of his impressions, not an investment analyst,

and he stressed that the decision to invest rested with each

individual and not with him. He explained the tax benefits to

petitioners, although these benefits also were clearly explained

in the offering memoranda. Maxfield disclosed that he was

relying on the offering materials for the value of the Sentinel

EPE recycler, and that he did not know whether the

representations therein were true. He mentioned that the only

way to confirm the purported value of the recyclers was to hire

28
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.
 - 71 -
an independent appraiser or expert, but his suggestion went

unheeded.

Sann acknowledged that he relied "to a large extent,

probably too much, on the contents of the offering memorandum and

the expert opinions" appended thereto. Addington did little more

than discuss the investment with Maxfield. Cohn reviewed the

offering materials and spoke with others at Sann & Howe.

Petitioners and Maxfield did not in good faith investigate the

fair market value of a Sentinel EPE recycler, or the underlying

viability, financial structure, and economics of the Partnership

transactions. Their reliance on the offering materials and

interested persons was not reasonable. In Cohn's words, "how

could we be so stupid * * * it certainly was mea culpa time." We

hold, upon consideration of the entire records, 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.

C. Section 6659--Valuation Overstatement

In all six notices of deficiency, respondent determined that

petitioners were liable for the section 6659 addition to tax on

the portions of their respective underpayments attributable to

valuation overstatement. Petitioners have the burden of proving

that respondent's determinations of the section 6659 additions to

tax in their cases are erroneous. Rule 142(a); Luman v.

Commissioner, 79 T.C. at 860-861.
 - 72 -
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 investment tax

credits and business energy credits, based on purported values of

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

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

up to the end of 1982 was not in excess of $50,000. Therefore,

if disallowance of petitioners' claimed tax benefits is

attributable to such valuation overstatements, petitioners are

liable for the section 6659 additions to tax at the rate of 30

percent of the underpayments of tax attributable to the tax

benefits claimed with respect to the Partnerships.

Petitioners contend that section 6659 does not apply in

their cases for the following three reasons: (1) Disallowance of

the claimed tax benefits was attributable to other than a

valuation overstatement; (2) petitioners' concessions of the

claimed tax benefits preclude imposition of the section 6659

additions to tax; and (3) respondent erroneously failed to waive
 - 73 -
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. at 827; 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

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
 - 74 -
because the Partnership transactions lacked economic substance,

not because of any valuation overstatements. It follows,

petitioners reason, that because the "attributable to" language

of section 6659 requires a direct causative relationship between

a valuation overstatement and an underpayment in tax, section

6659 cannot apply to their deficiencies. Petitioners cite 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

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
 - 75 -
value of the recyclers in the Clearwater transaction was

predicated upon a projected stream of royalty income, and this

Court merely rejected the taxpayer's valuation method.

Petitioners misread and distort our Provizer opinion. In the

Provizer case, overvaluation of the Sentinel EPE recyclers,

irrespective of the technique employed by the taxpayers in their

efforts to justify the overvaluation, was the dominant factor

that led us to hold that the Clearwater transaction lacked

economic substance. Likewise, overvaluation of the Sentinel EPE

recyclers in these cases is the ground for our holding herein

that the Partnership transactions lacked economic substance.

Moreover, a virtually identical argument was recently

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

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

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

756-758 (1970), affd. 445 F.2d 985 (10th Cir. 1971). In the

Gilman case, the taxpayers engaged in a computer equipment sale

and leaseback transaction that this Court held was a sham

transaction lacking economic substance. The taxpayers therein,

citing Todd v. Commissioner, supra, and Heasley v. Commissioner,

supra, argued that their underpayment of taxes derived from

nonrecognition of the transaction for lack of economic substance,

independent of any overvaluation. The Court of Appeals for the

Second Circuit sustained imposition of the section 6659 addition

to tax because overvaluation of the computer equipment
 - 76 -
contributed directly to this Court's earlier conclusion that the

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

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

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

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

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

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

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

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

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

Commissioner, 91 T.C. 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. Commissioner, 990 F.2d 893

(6th Cir. 1993).

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

v. Commissioner, 89 T.C. 912 (1987), and McCrary v. Commissioner,

92 T.C. at 827, 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
 - 77 -
each of those cases, the overvaluations were not the grounds 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' 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.29

2. Concession of the Deficiency

Petitioners argue that their concessions of the deficiencies

preclude imposition of the section 6659 additions to tax.

Petitioners contend that their concessions render any inquiry

into the grounds for such deficiencies moot. Absent such

inquiry, petitioners argue that it cannot be known if their

underpayments were attributable to a valuation overstatement or

other discrepancy. Without a finding that a valuation

29
To the extent that Heasley v. Commissioner, 902 F.2d 380
(5th Cir. 1990), revg. T.C. Memo. 1988-408, merely represents an
application of Todd v. Commissioner, 89 T.C. 912 (1987), affd.
862 F.2d 540 (5th Cir. 1988), we consider it distinguishable. To
the extent that the reversal in the Heasley case is based on a
concept that where an underpayment derives from the disallowance
of a transaction for lack of economic substance, the underpayment
cannot be attributable to an overvaluation, this Court and the
Court of Appeals for the Second Circuit have disagreed. See
Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991) ("The
lack of economic substance was due in part to the overvaluation,
and thus the underpayment was attributable to the valuation
overstatement"), affg. T.C. Memo. 1989-684.
 - 78 -
overstatement contributed to an underpayment, according to

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

of reasoning, petitioners rely heavily upon Heasley v.

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

Commissioner, supra.

Petitioners' open-ended concessions do not obviate our

finding that the Partnership transactions lacked economic

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

situation where we have "to decide difficult valuation questions

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

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

Sentinel EPE recycler was established in Provizer v.

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

As a consequence of the inflated value assigned to the recyclers

by the Partnerships, petitioners claimed deductions and credits

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

Partnership transactions lacked economic substance. Regardless

of petitioners' concessions, in these cases the underpayments of

tax were attributable to the valuation overstatements.

Moreover, concession of the investment tax credit in and of

itself does not relieve taxpayers of liability for the section

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

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

the ground upon which the investment tax credit is disallowed or

conceded is significant. Dybsand v. Commissioner, supra. Even
 - 79 -
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 cases, no argument was made and no evidence

was presented to the Court to prove 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 each stipulated

substantially the same facts concerning the Partnership

transactions as we found in Provizer v. Commissioner, supra. In

the Provizer case, we held that the taxpayers were liable for the

section 6659 addition to tax because the underpayment of taxes

was directly related to the overvaluation of the Sentinel EPE

recyclers. The overvaluation of the recyclers, exceeding 2325

percent, was an integral part of our findings in Provizer that

the transaction was a sham and lacked economic substance.

Similarly, the records in these cases plainly show that the

overvaluation of the recyclers is integral to and is the core of

our holding that the underlying transactions here were shams and

lacked economic substance.
 - 80 -
Petitioners reliance on McCrary v. Commissioner, supra, is

misplaced. In that case, the taxpayers conceded disentitlement

to their claimed tax benefits and the section 6659 addition to

tax was held inapplicable. However, the taxpayers' concession of

the claimed tax benefits, in and of itself, did not preclude

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

Commissioner, supra, the section 6659 addition to tax was

disallowed because the agreement at issue was conceded to be a

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

petitioners' cases plainly show that petitioners' underpayments

were attributable to overvaluation of the Sentinel EPE recyclers.

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

supra, is inappropriate.30

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 Provizer 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

30
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
29 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.
 - 81 -
market value of a Sentinel EPE recycler in 1981 and up to the end

of 1982 was not in excess of $50,000. Given those concessions,

and the fact that the records here plainly show 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 respondent to waive all or part of the addition to tax

for valuation overstatement if taxpayers establish that there was

a reasonable basis for the adjusted bases or valuations claimed

on the returns and that such claims were made in good faith.

Respondent's refusal to waive a section 6659 addition to tax is

reviewable by this Court for abuse of discretion. Krause v.

Commissioner, 99 T.C. at 179. Abuse of discretion has been found

in situations where respondent's refusal to exercise such

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 trials of these cases. Petitioners each made their
 - 82 -
requests approximately 4 months after the trials of their cases.

We are reluctant to find that respondent abused discretion in

these cases when respondent 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 offering materials and Maxfield in deciding on the valuation

claimed on their tax returns. Petitioners contend that such

reliance was reasonable and, therefore, that respondent should

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

explained above in finding petitioners liable for the negligence

additions to tax, petitioners' purported reliance on the offering

materials and on Maxfield, with respect to matters outside his

area of expertise, was not reasonable.

To varying degrees, each of petitioners reviewed at least

one of the offering memoranda for the Partnerships, each of which

contained numerous warnings and caveats, including the likelihood

that the value placed on the recyclers would be challenged by the

IRS as being in excess of fair market value. Petitioners could

not have failed to learn from either the offering materials or

Maxfield that the purported value of the Sentinel EPE recycler
 - 83 -
generated the tax benefits in these cases. Maxfield testified

that he explained the tax benefits to petitioners and warned them

that he was relying upon the offering materials, and in

particular the reports of Ulanoff and Burstein appended thereto,

for the value of the recyclers. Because he was not an engineer

and had no expertise in plastics materials or plastics recycling,

Maxfield cautioned that he did not know if the representations in

the offering materials were true, and that the only way to know

with any certainty would be to hire an independent expert or

appraiser. However, petitioners and Maxfield did not hire a

plastics engineering or technical expert with respect to the

Plastics Recycling transactions. In the end, petitioners and

Maxfield relied exclusively on the offering materials and

insiders to the transactions for the value and 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 Court of Appeals for the Tenth Circuit

held that the Commissioner had abused discretion by failing to

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

section 6661 addition to tax may be waived by the Commissioner if

the taxpayer demonstrates that there was reasonable cause for his

underpayment and that he acted in good faith. Sec. 6661(c). The
 - 84 -
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 petitioners' cases, however, particularly

with respect to valuation, petitioners relied upon advice that

was outside the scope of expertise and experience of their

purported adviser. Maxfield had no education, special

qualifications, or professional skills or experience in plastics

engineering, plastics recycling, or plastics materials, nor did

he consider himself to be an investment analyst or even an expert

in tax shelters. Consequently, petitioners' reliance on the

Mauerman case is rejected.

We hold that petitioners did not have a reasonable basis for

the adjusted bases or valuations claimed on their tax returns

with respect to their investments in the Partnerships. In these

cases, respondent could find that petitioners' respective

reliance on the offering materials and Maxfield was unreasonable.

The records in these cases do not establish an abuse of

discretion on the part of respondent but support respondent's

position. We hold that respondent's refusal to waive the section

6659 additions to tax in these cases 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
 - 85 -
underpayments of tax attributable to the disallowed tax benefits.

Respondent is sustained on this issue.

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

Long after the trials of these cases, petitioners each filed

a Motion For Leave To File Motion For Decision Ordering Relief

From the Negligence Penalty and the Penalty Rate of Interest and

To File Supporting Memorandum of Law under Rule 50. Petitioners

also lodged with the Court motions for decision ordering relief

from the additions to tax for negligence and from the increased

rate of interest, with attachments and memoranda in support of

the motions. Respondent filed objections, with attachments and

memoranda in support thereof and petitioners thereafter filed

reply memoranda. Petitioners argue that they should be afforded

the same settlement that was reached between other taxpayers and

the IRS in 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 motion similar to petitioners'

motions); see also Friedman v. Commissioner, T.C. Memo. 1996-558;

Jaroff v. Commissioner, T.C. Memo. 1996-527; 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 trials in these cases. Resolution of such issue might well
 - 86 -
require new trials. Such further trials "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 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 cases, petitioners' motions

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

Even if petitioners' motions for leave were granted, the

arguments set forth in each of petitioners' motions for decision

and attached memoranda, lodged with this Court, are invalid and

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

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

be denied.

Some of our discussion of background and circumstances

underlying petitioners' motions 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-

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

are not disputed by the parties. We discuss the background

matters for the sake of completeness. As we have noted, granting

petitioners' motions for leave would require further proceedings.
 - 87 -
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.31

On or about February of 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)

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

31
In each of their motions 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.)
 - 88 -
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.32 Petitioners assert that the Plastics Recycling

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

claim to have accepted the offer timely, so they effectively

rejected it.33

32
Except as discussed in infra note 33, the records do not
include a settlement offer to petitioners. However, petitioners
in each case 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.
33
In each of their motions 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.)
In docket Nos. 21518-88 (Sann) and 21519-88 (Addington),
respondent attached to the respective objections to petitioners'
motion for leave a copy of a letter extending the settlement
offer to Sann and Addington. The letters, dated December 6,
1988, were addressed to counsel for Sann and Addington at the
time, Stephen D. Gardner. Addington and the Sanns have not
disputed the accuracy of the copies of the settlement offers in
docket Nos. 21518-88 and 21519-88.
Respondent also attached to those same objections a copy of
the respective reply letters. Dated December 23, 1988, the reply
letters reject the offers of settlement but indicate a
willingness to be bound by a final decision in the Provizer case,
but only if the proposed form of stipulation is modified so as
not to bind them to a settlement, inter alia. Addington and the
Sanns have not disputed the accuracy of the copies of the reply
letters.
 - 89 -
In December 1988, the Miller cases were disposed of by

settlement agreement between the taxpayers and respondent.34

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.

34
Although it is not otherwise a part of the records in these
cases, respondent attached copies of the Miller closing agreement
and disclosure waiver to the objections to petitioners' motions
for leave, and petitioners do not dispute the accuracy of the
document.
 - 90 -
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' &

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 transactions, 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 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.
 - 91 -
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,

"if the Millers were not otherwise subject to the penalty

interest provisions because of the particular timing of their tax

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

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

is entirely conjectural and is not supported by the documentation

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

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

express term of the settlement documents in those cases and

apparently included in the decisions for completeness and

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

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

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 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
 - 92 -
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

Recycling project settlement offer rejected by petitioners prior

to trial. Accordingly, petitioners' motions are not supported by

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

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

To reflect the foregoing,

Appropriate orders will be issued

denying petitioners' motions, and

decisions will be entered for respondent

in docket Nos. 21518-88, 21519-88,

22399-90, 22466-90, and under Rule 155

in docket Nos. 4789-89 and 21209-90.