T.C. Memo. 1997-325
UNITED STATES TAX COURT
DAVID AND SHIRLEY SINGER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22931-86. Filed July 16, 1997.
Stuart A. Smith and David H. Schnabel, for petitioners.
Paul Colleran, Maureen T. O'Brien, and William T. Hayes, for
respondent.
CONTENTS
Page
MEMORANDUM FINDINGS OF FACT AND OPINION....................... 2
OPINION OF THE SPECIAL TRIAL JUDGE............................ 2
FINDINGS OF FACT.............................................. 5
A. The Plastics Recycling Transactions...................... 5
B. Plymouth Equipment Associates............................ 7
C. Richard Roberts.......................................... 9
D. Petitioners and Their Introduction to Plymouth
Equipment Associates.....................................10
OPINION.......................................................17
A. Section 6653(a)--Negligence..............................19
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1. The So-Called Oil Crisis..............................21
2. Petitioner's Purported Reliance on an Adviser.........24
3. Miscellaneous.........................................31
4. Conclusion as to Negligence...........................40
B. Section 6659--Valuation Overstatement....................41
1. The Grounds for Petitioners' Underpayments ...........42
2. Concession of the Deficiency..........................47
3. Section 6659(e).......................................50
C. Petitioners' Motion for Leave To File Motion for
Decision Ordering Relief from the Negligence Penalty
and the Penalty Rate of Interest and To File Supporting
Memorandum of Law........................................53
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Norman H. Wolfe pursuant to the provisions of section
7443A(b)(4) and Rules 180, 181, and 183. All section references
are to the Internal Revenue Code in effect for the tax year 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: This case is part of the
Plastics Recycling group of cases. For a detailed discussion of
the transactions involved in the Plastics Recycling cases, see
Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993). The facts of
the underlying transactions and the Sentinel recyclers in this
case are substantially identical to those considered in the
Provizer case.
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In a notice of deficiency dated March 26, 1986, respondent
determined a deficiency in petitioners' 1981 joint Federal income
tax in the amount of $102,686, plus an addition to tax under
section 6659 for valuation overstatement in the amount of
$30,465. Respondent also determined that interest on the
deficiency accruing after December 31, 1984, would be calculated
at 120 percent of the statutory rate under section 6621(c).1
In a first amendment to answer, respondent asserted
additions to tax for 1981 in the amount of $5,134 under section
6653(a)(1) for negligence, and under section 6653(a)(2) in the
amount of 50 percent of the interest due on the underpayment
attributable to negligence.
In respondent's trial memorandum and posttrial brief,
respondent asserted a lesser addition to tax under section 6659
for valuation overstatement in the amount of $24,758. We
consider the addition to tax under section 6659 to be reduced
accordingly.
1
The deficiency notice refers to sec. 6621(d). This section
was redesignated as sec. 6621(c) by sec. 1511(c)(1)(A) of the Tax
Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744, and
repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act
of 1989 (OBRA 1989), Pub. L. 101-239, 103 Stat. 2106, 2399,
effective for tax returns due after Dec. 31, 1989, OBRA 1989 sec.
7721(d), 103 Stat. 2400. The repeal does not affect the instant
case. For simplicity, we refer to this section as sec. 6621(c).
The annual rate of interest under sec. 6621(c) for interest
accruing after Dec. 31, 1984, equals 120 percent of the interest
payable under sec. 6601 with respect to any substantial
underpayment attributable to tax-motivated transactions.
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The parties filed a Stipulation of Settled Issues concerning
the adjustments relating to petitioners' participation in the
Plastics Recycling Program. The stipulation provides:
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 section 6621(d).
3. This stipulation resolves all issues that relate to
the items claimed on petitioners' tax returns resulting
from their participation in the Plastics Recycling
Program, with the exception of petitioners' potential
liability for additions to the tax for valuation
overstatements under I.R.C. §6659 and for negligence
under the applicable provisions of I.R.C. §6653(a).
4. With respect to the issue of the addition to the
tax under I.R.C. §6659, Petitioners do not intend to
contest the value of the Sentinel Recycler or the
existence of a valuation overstatement on the
Petitioners' returns; however, Petitioners reserve
their right to argue that the underpayment in tax is
not attributable to a valuation overstatement within
the meaning of I.R.C. §6659(a)(1), and that the
Secretary should have waived the addition to tax
pursuant to the provisions of I.R.C. §6659(e).
In their petition, petitioners raised the statute of
limitations on assessment as a bar to respondent's deficiency
determination. Respondent asserted otherwise in the answer, and
petitioners have not argued the statute of limitations elsewhere
in the record. In view of the third stipulation in the
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stipulation of settled issues, we consider that any statute of
limitations defense has been conceded by petitioners.
The issues remaining in this case are: (1) Whether
petitioners are liable for the additions to tax for negligence
under section 6653(a)(1) and (2); and (2) whether petitioners are
liable for the addition to tax under section 6659 for
underpayment of tax attributable to a valuation overstatement.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulated facts and attached exhibits are incorporated
herein by this reference.
A. The Plastics Recycling Transactions
This case concerns petitioners' investment in Plymouth
Equipment Associates (Plymouth), a limited partnership that
leased seven Sentinel expanded polyethylene (EPE) recyclers. The
transactions involving the Sentinel EPE recyclers leased by
Plymouth are substantially identical to those in the Clearwater
Group limited partnership (Clearwater), the partnership
considered in Provizer v. Commissioner, T.C. Memo. 1992-177.
Petitioners have stipulated substantially the same facts
concerning the underlying transactions as we found in the
Provizer case.
In transactions closely resembling those in the Provizer
case, Packaging Industries, Inc. (PI), manufactured and sold
seven Sentinel EPE recyclers to ECI Corp. for $981,000 each. ECI
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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.
No arm's-length negotiations for the price of the Sentinel
EPE recyclers took place 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 for
the above amounts under the structure of simultaneous
transactions, the fair market value of a Sentinel EPE recycler in
1981 was not in excess of $50,000.
PI allegedly sublicensed the recyclers to entities that
would use them to recycle plastic scrap. The sublicense
agreements provided that the end-users would transfer to PI 100
percent of the recycled scrap in exchange for a payment from FMEC
Corp. based on the quality and amount of recycled scrap.
Both Clearwater and Plymouth leased Sentinel EPE recyclers
from F & G Corp. and licensed those recyclers to FMEC Corp.
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Apart from leasing and licensing seven recyclers instead of six,
the underlying transactions involving Plymouth do not differ in
any substantive respect from the Clearwater transactions
considered in the Provizer case.
For convenience, we refer to the series of transactions
among PI, ECI Corp., F & G Corp., Plymouth, FMEC Corp., and PI as
the Plymouth transactions. In addition to the Plymouth
transactions, a number of other limited partnerships entered into
transactions similar to the Plymouth transactions, also involving
Sentinel EPE recyclers and Sentinel expanded polystyrene (EPS)
recyclers. We refer to these collectively as the Plastics
Recycling transactions.
B. Plymouth Equipment Associates
Plymouth is a New York limited partnership that closed on
December 21, 1981. Richard Roberts (Roberts) is the general
partner of Plymouth.
A private placement memorandum for Plymouth 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 memorandum. 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 Associates and a 5.82-percent interest
in Jefferson Recycling Associates. Like Plymouth, Taylor
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Recycling Associates, Empire Associates, and Jefferson 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 Plymouth offering memorandum states that the general
partner will receive fees from Plymouth in the amount of $37,500.
According to the offering memorandum, 10 percent of the proceeds
from the offering--$97,500--was allocated to the payment of sales
commissions and offeree representative fees. The offering
memorandum further provides that the general partner "may retain
as additional compensation all amounts not paid as sales
commissions or offeree representative fees". Roberts therefore
was to receive a minimum of $37,500 and up to $135,000 from
Plymouth.
The offering memorandum lists significant business and tax
risk factors associated with an investment in Plymouth.
Specifically, the offering memorandum states: (1) There is a
substantial likelihood of audit by the Internal Revenue Service
(IRS) and the purchase price paid by F & G Corp. to ECI Corp.
probably will be challenged as being in excess of fair market
value; (2) Plymouth has no prior operating history; (3) the
general partner has no prior experience in marketing recycling or
similar equipment; (4) the limited partners have no control over
the conduct of Plymouth's business; (5) there is no established
market for the Sentinel EPE recyclers; (6) there are no
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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.
Although the offering memorandum represented that the
Sentinel EPE recycler was a unique machine, it was not. Several
machines capable of densifying low density materials were already
on the market in 1981. Other plastics recycling machines
available during 1981 ranged in price from $20,000 to $200,000,
including the Foremost Densilator, Nelmor/Weiss Densification
System (Regenolux), Buss-Condux Plastcompactor, and Cumberland
Granulator. See Provizer v. Commissioner, T.C. Memo. 1992-177.
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 Plymouth. He also is a 9-percent
shareholder in F & G Corp., the corporation that leased the
recyclers to Plymouth. From 1982 through 1985, Roberts
maintained the following office address with Raymond Grant
(Grant), the sole owner and president of ECI Corp.:
Grant/Roberts
Investment Banking
Tax Sheltered Investments
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
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cruise. Roberts and Grant together have been general partners in
other investments.
Prior to the Plymouth 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., and
Plymouth. It also provided tax services to John D. Bambara
(Bambara). Bambara is the 100-percent owner of FMEC Corp., as
well as its president, treasurer, clerk, and director. He, his
wife, and daughter also owned directly or indirectly 100 percent
of the stock of PI.
D. Petitioners and Their Introduction to Plymouth Equipment
Associates
Petitioners resided in Fort Lee, New Jersey, at the time
their petition was filed. Hereafter, reference to petitioner in
the singular denotes David Singer.
In 1930, at the age of 16, petitioner left high school
during his sophomore year and entered the work force. By the
late 1930's he was selling, with some success, sundry goods and
dresses. Petitioner then served in the Army for 45 months.
Approximately 1 year after completing his military service
petitioner became a salesman for a floor covering business, Hy
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Abrams Co., owned by his brother-in-law. Petitioner also helped
his father, a carpenter, collect rent on houses his father owned
on the lower East Side of Manhattan. In the 1950's his father
sold those houses and purchased several apartment buildings in
Harlem. Together the buildings had a total of 28 apartment
units.
In 1960 petitioner's father passed away, and petitioner
inherited the apartment buildings. At that time petitioner's
brother-in-law offered to sell him an interest in Hy Abrams Co.,
but only if petitioner sold the apartment buildings so he could
devote more time to the business. Petitioner did so and invested
the proceeds in Hy Abrams Co. for a 30-percent interest. Hy
Abrams Co. became Hy Abrams Corp., and petitioner was named vice
president, although he continued to devote his attention
primarily to sales activities. In 1978 petitioner's brother-in-
law retired, and the corporation was liquidated. Petitioner was
not yet ready to retire, and with his daughter he started his own
floor covering business named Singer Carpet Distributors, Inc.
(Singer Carpet). Petitioner operated Singer Carpet out of a
warehouse in New Jersey for 4 years before retiring at the age of
68.
On their 1981 Federal income tax return, petitioners
reported gross income from wages, interest, dividends, and
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capital gains2 in the amount of $373,286, less $34,669 in losses
from partnerships, trusts, etc., including losses here in issue.
Consequently, in the absence of significant deductions or
credits, petitioners were subject to payment of Federal income
taxes in a substantial amount for taxable year 1981.
In 1981, petitioner acquired a 5.07-percent limited
partnership interest in Plymouth for $50,000. As a result of the
investment in Plymouth, on their 1981 return petitioner and his
wife Shirley claimed an operating loss in the amount of $40,555,
and investment tax and business energy credits totaling $82,526.
Respondent disallowed petitioners' claimed operating loss and
credits related to Plymouth in full.
Petitioner learned of the Plastics Recycling transactions
and Plymouth in November or December of 1981 from Abraham
Bramnick (Bramnick). Bramnick is a stockbroker with the
brokerage house Bond Richmond in New York City. Petitioner and
Bramnick have known each other socially since the late 1960's or
early 1970's. Prior to 1981, petitioner and Bramnick invested in
some initial public offerings (IPO's) together, and according to
petitioner, most of these were successful. Petitioner recalled
his introduction to the Plastics Recycling transactions and
Plymouth as follows:
2
The bulk of petitioners' income for 1981 derived from gross
capital gains in the amount of $313,523 ($292,960 of which was
short-term capital gain).
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There was one before [Plymouth], I think it was Empire,
and for some reason or other, I didn't jump at it and
then [Bramnick] called me, well, you missed it, because
they've got all the members they needed, they don't
have it--they may not have it again. Then they came
back a week or two later, I don't remember, but he
said, this thing is alive again * * *.
Petitioner did not recount any other conversations he may have
had with Bramnick or the substance of the broker's advice, if
any. Bramnick did not testify at the trial of this case.
Petitioner also discussed the Plastics Recycling
transactions with Martin Bach (Bach), a certified public
accountant (C.P.A.). Bach and petitioner were introduced
sometime in 1981 by Bramnick. At the time, petitioner was
looking for a tax return preparer. Petitioner retained Bach, and
Bach prepared petitioners' return for 1981 and for several years
thereafter.
Bach does not have any education or work experience in
engineering, plastics materials, or plastics recycling. He
graduated cum laude with a B.S. degree in accounting from Long
Island University in 1947. Three years later he became a
certified public accountant in New York State. After college,
Bach worked for several accounting firms before founding his own
practice in 1956, named Martin Bach & Co., P.C. (Bach & Co.).
Bach headed Bach & Co. for approximately 30 years until his
practice was taken over by another firm. Located in the Wall
Street area, Bach & Co. primarily serviced stock brokerage
houses. The firm represented clients before the Securities and
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Exchange Commission (SEC), provided tax services, and performed
certified audits on a monthly and annual basis. Bach & Co.
performed accounting services for approximately 50 brokerage
houses during Bach's tenure and employed five accountants at its
peak. Over the course of his career, Bach reviewed a large
number of prospectuses and offering circulars that were filed
with the SEC, as well as private placements that had been
suggested to clients.
Like petitioner, Bach learned of the Plastics Recycling
transactions and Plymouth in 1981 from Bramnick. Bond Richmond
was a longstanding client of Bach & Co., and Bramnick was Bach's
primary contact at Bond Richmond. On occasion, Bramnick
forwarded private placement memoranda to Bach, "just to look at".
In this instance, Bramnick sent Bach the Plymouth offering
memorandum and asked him what he thought about it. Bach reviewed
the offering memorandum for approximately 3 hours. He found the
economic projections "very lucrative", to the investor, even if
reduced "by 50-percent". Bach then met with Bramnick and told
him that he thought the situation was interesting and that it
warranted further investigation. He also received a phone call
from petitioner asking for his thoughts about Plymouth.
Next, Bach contacted Peter Gardino (Gardino), a broker who
had traded for one of Bach & Co.'s former accounts. During 1981
Gardino was working in the syndicate department of a brokerage
house. Gardino reviewed the Plymouth offering memorandum and
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arranged for the two of them to visit the PI plant in Hyannis,
Massachusetts, sometime in November. Bach invited Bramnick to go
with them. Bach explained: "I thought he would go too, but he
didn't want to go." Petitioner recalled that Bach also extended
an invitation to him to visit the PI plant in Hyannis, but
petitioner declined.
Gardino and Bach toured the PI plant. Bach testified that
he was impressed with the plant and the "spirit of the workers."
Although the Sentinel EPE recycler was explained to Bach, he did
not understand "the technicalities of the machine too well".
Bach recalls being told that the Sentinel EPE recycler was
unique, but he could not remember what he was told about the
capability of the machine or its place in the market. He
testified, "I just don't remember being told specifically by
anybody anything--they told me a lot of things when I was up
there, but I don't remember all the things they told me. Pete
[Gardino] was asking most of the questions." Bach did not review
any of the accounting or cost records pertaining to the Sentinel
EPE recycler while he was at PI, nor did he ask to see them.
In addition to touring the PI plant, Bach and Gardino were
taken by a PI representative to visit some end-users of the
machines and see them in operation. Gardino and Bach questioned
the end-users, but Bach's lack of understanding limited the
number of questions he could ask to one. Bach recalled that,
"The only question I asked the people was about the breakdown,
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does the machine breakdown because I don't have a great technical
background." He understood from the end-users that the machine
was functioning perfectly well.
Bach did not consult an independent appraiser with respect
to the value of the Sentinel EPE recycler, but instead relied
upon the representations in the Plymouth offering memorandum. As
Bach recalled: "I believe that I saw * * * an independent
appraisal stating how they got to the value of the machine based
upon the production, the income the pellets would bring, the
royalties, et cetera." Bach did not investigate the market for
recycled resin pellets. Nor did he contact the F & G Corp.
evaluators or inquire if either of them had an interest in the
Plastics Recycling transactions. Bach concluded that the author
of the appraisal--whose name he could not recall--was independent
based on what he read in the offering memorandum.3
After returning from Hyannis, Bach related his observations
to Bramnick. Bach recalled speaking to petitioner only by
telephone. Bach could not recall the substance of his
communication to petitioner or for how long they spoke. He
characterized petitioner as "basically only an annual tax
account" and explained that he "didn't see * * * [petitioner] on
a regular basis". With respect to Plymouth, Bach "spoke mostly
3
The reports by the F & G Corp. evaluators, Ulanoff and
Burstein, are the only reports appended to the offering
memorandum that assess the Sentinel EPE recycler in any respect.
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to Mr. Bramnick", who in turn saw petitioner on a regular basis.
Bach recalled arguing with Bramnick because Bramnick wanted
petitioner to purchase two limited partnership units at a cost of
$100,000, whereas Bach thought "one is enough". Bond Richmond,
not Bach, was petitioner's offeree representative for Plymouth,
and that status entitled it to a commission equal to 10 percent
of petitioner's investment.
In contrast to Bach's recollection of events, petitioner
claims that after Bach returned from Hyannis, he and his wife
discussed the Plymouth transaction with Bach at a dinner meeting.
According to petitioner, Bach informed them that he and a client
had visited PI and thought well of it, and that Bach was taking
another client, who petitioner knew was "a very successful
attorney for some insurance company." As petitioner recalls, "I
said if it was good enough for those fellows, it's * * * good
enough for me. So that's when we made up our mind to do it."
Petitioners have no education or work experience in plastics
materials or plastics recycling. They did not read the Plymouth
offering memorandum, see a Sentinel EPE recycler, or otherwise
investigate Plymouth or the Plastics Recycling transactions to
any extent. Petitioners never made a profit in any year from
their investment in Plymouth.
OPINION
We have decided a large number of the Plastics Recycling
group of cases. Provizer v. Commissioner, T.C. Memo. 1992-177,
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affd. without published opinion 996 F.2d 1216 (6th Cir. 1993),
concerned the substance of the partnership transaction and also
the additions to tax. See also Greene v. Commissioner, T.C.
Memo. 1997-296; Kaliban v. Commissioner, T.C. Memo. 1997-271;
Sann v. Commissioner, T.C. Memo 1997-259 (and cases cited
therein). The majority of these cases, like the present case,
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.
In Provizer v. Commissioner, supra, 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-motivated
transactions within the meaning of section 6621(c). In reaching
the conclusion that the Clearwater transaction lacked economic
substance and a business purpose, this Court relied heavily upon
the overvaluation of the Sentinel EPE recyclers.
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Although petitioners have not agreed to be bound by the
Provizer opinion, they have stipulated that their investment in
the Sentinel EPE recyclers in this case is similar to the
investment described in Provizer v. Commissioner, supra. The
underlying transactions in this case, and the Sentinel EPE
recyclers purportedly leased by Plymouth, are the same type of
transactions and same type of machines considered in Provizer v.
Commissioner, supra.
Based on the entire record in this case, including the
extensive stipulations, testimony of respondent's experts, and
petitioner's testimony, we hold that the Plymouth transaction was
a sham and lacked economic substance. In reaching this
conclusion, we rely heavily upon the overvaluation of the
Sentinel EPE recyclers. Respondent is sustained on the question
of the underlying deficiency. We note that petitioners have
explicitly conceded this issue in the stipulation of settled
issues filed shortly before trial. The record plainly supports
respondent's determination regardless of such concession. For a
detailed discussion of the facts and the applicable law in a
substantially identical case, see Provizer v. Commissioner,
supra.
A. Section 6653(a)--Negligence
Respondent asserted the additions to tax for negligence
under section 6653(a)(1) and (2) for 1981 in an amended answer.
Ordinarily, because these additions to tax were raised for the
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first time in an amended answer, respondent would have the burden
of proof. Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170,
196 (1994); Bagby v. Commissioner, 102 T.C. 596, 612 (1994).
However, by order dated April 1, 1994, this Court granted a
motion for sanctions by respondent, and the burden of proof with
respect to the negligence issues in this case was placed on
petitioners.
Section 6653(a)(1) imposes an addition to tax equal to 5
percent of the underpayment if any part of an underpayment of tax
is due to negligence or intentional disregard of rules or
regulations. Section 6653(a)(2) imposes an addition to tax equal
to 50 percent of the interest payable with respect to the portion
of the underpayment attributable to negligence or intentional
disregard of rules or regulations.
Negligence is defined as the failure to exercise the due
care that a reasonable and ordinarily prudent person would employ
under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947
(1985). The question is whether a particular taxpayer's actions
in connection with the transactions were reasonable in light of
his experience and the nature of the investment or business. See
Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740 (1973).
When considering the negligence addition to tax, we evaluate the
particular facts of each case, judging the relative
sophistication of the taxpayers, as well as the manner in which
they approached their investment. McPike v. Commissioner, T.C.
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Memo. 1996-46. Compare Spears v. Commissioner, T.C. Memo. 1996-
341 with Zidanich v. Commissioner, T.C. Memo. 1995-382.
Petitioners contend that they were reasonable in claiming a
loss deduction and investment tax and business energy credits
with respect to Plymouth. Petitioner maintains that he expected
an economic profit in light of the so-called oil crisis in the
United States in 1981, and that he reasonably relied upon Bach as
a qualified adviser on this matter.
1. The So-Called Oil Crisis
Petitioner claims that he reasonably expected to make an
economic profit because plastic is an oil derivative and the
United States was experiencing a so-called oil crisis when he
invested in Plymouth. Based upon our review of the record, we
find petitioner's claim unconvincing, regardless of the so-called
oil crisis. Moreover, testimony by one of respondent's experts
establishes that the oil pricing changes during the late 1970's
and early 1980's did not justify petitioners' claiming excessive
investment credits and purported losses based on vastly
exaggerated valuations of recycling machinery.
Petitioner testified that he "was told by Marty [Bach] or
Abe Bramnick that the potential of the investment is great
because oil is going crazy and this thing was something".
Bramnick did not testify at the trial of this case, and Bach
could not recall the substance of his communications with
petitioner. Petitioner did not read the Plymouth offering
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memorandum or in any manner attempt to research the business
aspects of the Plymouth transaction. In view of petitioners'
failure seriously to investigate or learn about the Plymouth
transaction, we are not convinced that they invested in Plymouth
with an honest objective of making an economic profit, regardless
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 Plymouth and claim the associated operating loss and credits.
The offering memorandum warned that there could be no assurances
that prices for new resin pellets would remain at their then
current level. One of respondent's experts, Steven Grossman,
explained that the price of plastics materials is not directly
proportional to the price of oil. In his report, he stated that
less than 10 percent of crude oil is utilized for making plastics
materials and that studies have shown that "a 300% increase in
crude oil prices results in only a 30 to 40% increase in the cost
of plastics products." Furthermore, during 1980 and 1981, in
addition to the media coverage of the so-called oil crisis, there
was "extensive continuing press coverage of questionable tax
shelter plans." Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th
Cir. 1984), affg. 79 T.C. 714 (1982).
Petitioners' reliance on Krause v. Commissioner, 99 T.C. 132
(1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024
(10th Cir. 1994), is misplaced. The facts in the Krause case are
- 23 -
distinctly different from the facts of this case. 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 case, however, as explained by respondent's expert
Steven Grossman, the price of plastics materials was not directly
proportional to the price of oil, and there is no persuasive
evidence that the so-called oil crisis had a substantial bearing
on petitioners' decision to invest. While EOR was, according to
our Krause opinion, in the forefront of national policy and the
media during the late 1970's and 1980's, there is no showing in
the record that the so-called energy crisis would provide a
reasonable basis for petitioners' investing in recycling of
polyethylene, particularly in the machinery here in question.
In addition, the taxpayers in the Krause opinion were
experienced in or investigated the oil industry and EOR
technology specifically. One of the taxpayers in the Krause case
- 24 -
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 case, petitioners are 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. We consider petitioners'
arguments with respect to the Krause case inapplicable.
2. Petitioner's Purported Reliance on an Adviser
Petitioner contends that he reasonably relied upon Bach as a
qualified adviser on this matter.
A taxpayer may avoid liability for the additions to tax
under section 6653(a)(1) and (2) if he or she reasonably relied
on competent professional advice. United States v. Boyle, 469
U.S. 241, 250-251 (1985); Freytag v. Commissioner, 89 T.C. 849,
888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.
868 (1991). Reliance on professional advice, standing alone, is
not an absolute defense to negligence, but rather a factor to be
considered. Freytag v. Commissioner, supra. For reliance on
professional advice to excuse a taxpayer from the negligence
additions to tax, the taxpayer must show that such professional
had the expertise and knowledge of the pertinent facts to provide
informed advice on the subject matter. David v. Commissioner, 43
- 25 -
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, T.C. Memo. 1997-191; Sacks v. Commissioner, T.C.
Memo. 1994-217, affd. 82 F.3d 918 (9th Cir. 1996); Kozlowski v.
Commissioner, T.C. Memo. 1993-430, affd. without published
opinion 70 F.3d 1279 (9th Cir. 1995); see also, e.g., Kaliban v.
Commissioner, T.C. Memo. 1997-271; Sann v. Commissioner, T.C.
Memo. 1997-259; 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
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
- 26 -
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 in Sann v. Commissioner,
supra.
Bach has no education or work experience in engineering,
plastics materials, or plastics recycling. His investigation of
the Plastics Recycling transactions and Plymouth consisted of a
review of the offering memorandum, plus a visit to the PI plant
and some end-users chosen by a PI representative. Bach
acknowledged that he does not "have a great technical background"
and that he "didn't understand the technicalities of the machine
too well even though it was explained to [him]". Because of his
limited technical background, the only question he posed to the
end-users with whom he spoke was whether the machine broke down.
Bach indicated that he deferred to Gardino with respect to
the technical aspects of the Sentinel EPE recycler. He claimed
that Gardino had a technical background, understood the
technicalities of the machine, and "asked a lot of questions
about how the machine operates, what it does." When asked if he
- 27 -
could elaborate on Gardino's technical background, however, Bach
replied: "No. All I know is that * * * he was the head of the
syndicate department and used to pass on all offerings that came
into * * * his place of business, * * * and even though he wasn't
an engineer, he had an engineering background." Bach did not
know what type of degree Gardino earned in college or whether he
had any experience in plastics recycling. Gardino did not
testify at the trial of this case.
Bach acknowledged that he was not qualified to assess the
value of the Sentinel EPE recycler. He did not consult an
independent appraiser or anyone with expertise in plastics
materials or plastics recycling. Bach relied upon the Plymouth
offering memorandum for the value of the machine. He recalled
reading "an independent appraisal stating how they got to the
value of the machine based upon the production, the income the
pellets would bring". However, Bach did not investigate the
market for recycled resin pellets. Nor did he contact Ulanoff or
Burstein, or inquire whether they had an interest in the Plastics
Recycling transactions. He concluded that the author of the
appraisal was independent based solely on the offering
memorandum. In fact, Ulanoff and Burstein each invested in
several Plastics Recycling partnerships, and as the offering
memorandum disclosed, Burstein was a client and business
associate of the corporate counsel to PI, Miller.
- 28 -
Upon returning from his visit to the PI plant in Hyannis,
Bach recalled speaking to petitioner about his observations, "but
not face-to-face. I know we spoke on the telephone." However,
Bach could not recall the substance of his communication with
petitioner or for how long they spoke on the phone. Petitioner
claims that he and his wife had a dinner meeting with Bach to
discuss his observations at PI. According to petitioner, Bach
informed him over dinner that Plymouth "was a wonderful deal,"
that another of Bach's clients purportedly "felt it was very
good," and that Bach intended to accompany another client to
Hyannis. Bach has no recollection of any such meeting.
We hold that petitioner's purported reliance on Bach was not
reasonable, not in good faith, nor based upon full disclosure.
Petitioner met and retained Bach to prepare his and his wife's
tax return in 1981. Bach characterized petitioners as an annual
tax account whom he saw infrequently. Bramnick was at least one
of petitioner's stock brokers and sometimes was an investment
adviser to petitioner. Bramnick introduced the Plastics
Recycling transactions and Plymouth to petitioner, as well as to
Bach. His firm, Bond Richmond, was the offeree representative
for petitioners and as such received a 10-percent commission on
petitioners' investment. Bach testified that he spoke mostly to
Bramnick with respect to Plymouth and that Bramnick saw
petitioner on a regular basis. However, notwithstanding
- 29 -
Bramnick's obvious involvement in this matter, petitioner
purports to have relied on Bach.
Bach does not have any education, experience, or expertise
in engineering, plastics materials, or plastics recycling. He
indicated that his lack of technical background hindered his
investigation of Plymouth and the Sentinel EPE recycler. Bach
acknowledged that he had no competence to value the machines; yet
he did not independently confirm their value or the economic
viability of the Plastics Recycling transactions. Instead, he
relied on the offering memorandum and representations by insiders
for the value of the machines and the economic viability of the
Plastics Recycling transactions. See Vojticek v. Commissioner,
T.C. Memo. 1995-444, to the effect that advice from such persons
"is better classified as sales promotion."
The purported value of the Sentinel EPE recycler generated
the deductions and credits in this case, and that circumstance
was reflected in the Plymouth offering memorandum. Petitioners
did not read the offering memorandum, but Bach did. Certainly
Bach recognized and understood the nature of the tax benefits,
and he discussed Plymouth and his investigation with Bramnick and
petitioner. In his discussions with Bach and Bramnick,
petitioner learned or should have learned about the amount and
nature of the tax benefits. Indeed, the tax benefits involved
herein were not inconsequential and certainly would have been of
interest to petitioners in a year in which they recognized in
- 30 -
excess of $300,000 in capital gains, mostly short-term gains.
Bramnick urged that petitioner acquire two units of the Plymouth
partnership for $100,000, but Bach, the tax return preparer,
counseled that $50,000 of this transaction was enough. The
direct reductions claimed on petitioners' 1981 tax return, from
the investment tax credits alone, equaled 165 percent of their
cash investment. Therefore, 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 * * * [Plymouth
transaction]." A reasonably prudent person would have asked a
qualified adviser if such a windfall were not too good to be
true. McCrary v. Commissioner, 92 T.C. at 850.
Petitioner's own testimony is the only account in the record
regarding the advice petitioner received from Bach and Bramnick.
Bach could not recall the substance of his communications with
petitioner, and Bramnick did not testify in the trial of this
case.4 Petitioner's testimony in this case is self-serving and
often not credible, and this Court is not required to accept it
4
Petitioners failure to call Bramnick to testify gives rise
to the inference that his testimony would not have been favorable
to them. See Mecom v. Commissioner, 101 T.C. 374, 386 (1993),
affd. without published opinion 40 F.3d 385 (5th Cir. 1994);
Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d
409 (5th Cir. 1968); Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th
Cir. 1947); Sacks v. Commissioner, T.C. Memo. 1994-217, affd. 82
F.3d 918 (9th Cir. 1996).
- 31 -
as true. Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir.
1964), affg. 41 T.C. 593 (1964); Niedringhaus v. Commissioner, 99
T.C. 202, 212 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77
(1986); Snyder v. Commissioner, T.C. Memo. 1995-285; Sacks v.
Commissioner, T.C. Memo. 1994-217. Petitioner owned significant
interests in two successful floor covering companies,
participated in successful real estate ventures and IPO's, and in
1981 his investment decisions yielded capital gains in excess of
$300,000. His demonstrated business acumen and investment
sophistication show that he possessed the intelligence and
experience to recognize that further investigation of the
transaction in issue was required. A taxpayer may rely upon his
adviser's expertise (in this case accounting), 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. sub nom. Patin
v. Commissioner, 88 T.C. 1086 (1987); Lax v. Commissioner, T.C.
Memo. 1994-329; Sacks v. Commissioner, supra; Rogers v.
Commissioner, T.C. Memo. 1990-619.
3. Miscellaneous
Petitioners stipulated that the fair market value of a
Sentinel EPE recycler in 1981 was not in excess of $50,000.
Notwithstanding this concession, petitioners contend that they
- 32 -
were reasonable in claiming credits on their 1981 Federal income
tax return 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
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
- 33 -
of the machines and that he estimated those costs in his
valuations of the machines.
Respondent rejected the Carmagnola reports and considered
them unsatisfactory for any purpose, and there is no indication
in the record that respondent used them as a basis for any
determinations in the notice of deficiency. Even so, counsel for
petitioners obtained copies of these reports and urge that they
support the reasonableness of the value reported on petitioners'
1981 return. Not surprisingly, petitioners' counsel did not call
Carmagnola to testify in this case, 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 Sixth
Circuit Court of Appeals in the Provizer case, where we held the
taxpayers negligent. Consistent therewith, we find in this case,
as we have found previously, that the reports prepared by
Carmagnola are unreliable and of no consequence.
Petitioners cite a number of cases in support of their
position, including Balboa Energy Fund 1981 v. Commissioner, 85
F.3d 634 (9th Cir. 1996), affg. in part and revg. in part without
published opinion Osterhout v. Commissioner, T.C. Memo. 1993-251;
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
- 34 -
revg. in part T.C. Memo. 1994-228; Mollen v. United States, 72
AFTR 2d 93-6443, 93-2 USTC par. 50,585 (D. Ariz. 1993); Wright v.
Commissioner, T.C. Memo. 1994-288; Daoust v. Commissioner, T.C.
Memo. 1994-203; Wood v. Commissioner, T.C. Memo. 1991-205; and
Davis v. Commissioner, T.C. Memo. 1989-607.
Petitioners' reliance on the Wright, Daoust, Wood, and Davis
cases is misplaced. The taxpayers in the Wright case had an
objective of making a profit; relied upon an adviser who
expressly recommended the subject investment; reviewed the
offering memorandum; were advised that the investment had already
survived an IRS audit unchanged; and personally monitored the
investment. In the Daoust case, the taxpayer husband relied upon
the advice of two qualified independent investment advisers and
an independent C.P.A., who also was the taxpayer husband's
brother. In the Wood case, a group of consolidated cases, a
financial planner recommended the investment, all of the
taxpayers had profit objectives, the transactions were not sham
transactions, and one taxpayer husband and wife inspected the
equipment at issue. The taxpayers in the Davis case relied in
part upon the express recommendation of a "trusted and long-term
adviser", and in part upon their review of the offering materials
(which did not reflect that the principals in the venture lacked
experience in the pertinent line of business). Davis v.
Commissioner, supra. In contrast to those cases, Bach was not a
trusted and long-term adviser to petitioners but a recently
- 35 -
employed tax return preparer, and there is no showing in the
record that he expressly recommended Plymouth to them.
Petitioners did not read the offering memorandum, see a Sentinel
EPE recycler, or make any effort to learn about the Plymouth
transactions. In addition, the Plymouth transaction is a sham
lacking economic substance, and we are not convinced that
petitioners had an honest objective of making a profit.
Accordingly, we consider the Wright, Daoust, Wood, and Davis
cases distinguishable from the instant case.
In Mollen v. United States, supra, the taxpayer was a
medical doctor who specialized in diabetes and who, on behalf of
the Arizona Medical Association, led a continuing medical
education (CME) accreditation program for local hospitals. The
underlying tax matter involved the taxpayer's investment in
Diabetics CME Group, Ltd., a limited partnership which invested
in the production, marketing, and distribution of medical
educational video tapes. The District Court found that the
taxpayer's personal expertise and insight in the underlying
investment gave him reason to believe it would be economically
profitable. Although the taxpayer was not experienced in
business or tax matters, he did consult with an accountant and a
tax lawyer regarding those matters. Moreover, the District Court
noted that the propriety of the taxpayer's disallowed deduction
therein was "reasonably debatable." See Zfass v. Commissioner,
- 36 -
F.3d (4th Cir. June 23, 1997), affg. T.C. Memo. 1996-167,
and sustaining findings of negligence in a similar transaction.
In contrast, petitioners and their purported adviser 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.
Further, neither Bach nor petitioners consulted or hired any
independent experts in the field of plastic materials or plastics
recycling.5 Instead, they relied upon the offering materials and
representations by insiders to the Plastics Recycling
transactions. We consider petitioners' arguments with respect to
Mollen v. United States, supra, inapplicable under the
circumstances of this case, particularly in light of the opinion
of the Court of Appeals for the Fourth Circuit in Zfass v.
Commissioner, supra.
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
5
Bach testified that he discussed the Plastics Recycling
transactions and visited PI with Gardino, whom he claims had a
technical background. However, Gardino did not testify in this
case, and the record does not show that he was qualified to
analyze the Sentinel EPE recycler or the Plastics Recycling
transactions.
- 37 -
not engaged in a trade or business and sustained respondent's
imposition of the negligence additions to tax with respect to one
of the partners therein.6 The Court of Appeals for the Ninth
Circuit reversed our imposition of the negligence additions to
tax. Petitioners point out that the taxpayer in that case relied
in part upon a tax opinion contained in the offering materials.
However, petitioners did not read the Plymouth offering
memorandum, let alone the tax opinion appended thereto.
Moreover, the Plymouth offering memorandum warned
prospective investors that the accompanying tax opinion letter
was not in final form and was prepared for the general partner,
and that prospective investors should consult their own
professional advisers with respect to the tax benefits and tax
risks associated with Plymouth. The tax opinion letter
accompanying the Plymouth offering memorandum was 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
6
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.
- 38 -
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.]
Accordingly, the tax opinion letter expressly indicated that
prospective investors such as petitioners were not to rely upon
the tax opinion letter. See Collins v. Commissioner, 857 F.2d
1383, 1386 (9th Cir. 1988), affg. Dister v. Commissioner, T.C.
Memo. 1987-217. The limited, technical opinion of tax counsel
expressed in this letter was not designed as advice upon which
taxpayers might rely and the opinion of counsel itself so states.
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 the Tax Court imposing negligence additions to tax.
See Foulds v. Commissioner, T.C. Memo. 1994-489 (the well-
- 39 -
educated taxpayer failed to establish the substance of advice,
and the purported adviser lacked tax expertise), affd. without
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. 849 (1987)(reliance on tax advice given by attorneys and
C.P.A.'s held unreasonable absent a showing that the taxpayers
consulted any experts regarding the bona fides of the
transactions).
Bach did not possess sufficient knowledge of the plastics or
recycling industries to render a competent opinion. This fact
has been deemed relevant by the Court of Appeals for the Second
Circuit. See David v. Commissioner, 43 F.3d at 789-790
(taxpayers' reliance on expert advice not reasonable where expert
lacks knowledge of business in which taxpayers invested), affg.
T.C. Memo. 1993-621; Goldman v. Commissioner, 39 F.3d 402 (2d
Cir. 1994) (same), affg. T.C. Memo. 1993-480. Accordingly,
petitioners will not be relieved of the negligence additions to
- 40 -
tax based upon the decisions in the Durrett and Chamberlain cases
by the Court of Appeals for the Fifth Circuit.
4. Conclusion as to Negligence
Under the circumstances of this case, petitioners failed to
exercise due care in claiming a large loss deduction and tax
credits with respect to Plymouth on their 1981 Federal income tax
return. Petitioner declined to read the offering memorandum,
visit PI, or otherwise learn about the Plymouth transactions and
the Sentinel EPE recycler to any significant extent. Instead,
petitioner purports to have relied on Bach, the accountant he
only recently had retained to prepare petitioners' tax return.
Bach had no education or experience in plastics materials or
plastics recycling, and he ultimately relied upon the offering
memorandum for the value of, capabilities, and market demand for
the machines. The tax benefits flowing from Plymouth were
contingent upon the purported value of the Sentinel EPE recycler.
Yet neither petitioner nor Bach in good faith investigated the
fair market value of a Sentinel EPE recycler, or the underlying
viability, financial structure, and economics of the Plymouth
transaction. We hold, upon consideration of the entire record,
that petitioners are liable for the negligence additions to tax
under section 6653(a)(1) and (2) for the taxable year at issue.
We note that in this case because of sanctions, petitioners have
the burden of proof with respect to negligence. However, on this
record respondent has proved petitioners' negligence, and our
- 41 -
holding on this issue is the same, regardless of the incidence of
the burden of proof. Respondent is sustained on this issue.
B. Section 6659--Valuation Overstatement
In the notice of deficiency, respondent determined that
petitioners were liable for the section 6659 addition to tax on
the portion of their underpayment attributable to valuation
overstatement. In respondent's trial memorandum and posttrial
brief, respondent conceded that the section 6659 addition to tax
is to be applied only to the portion of the deficiency
attributable to the disallowed investment tax and business energy
credits derived from Plymouth. Petitioners have the burden of
proving that respondent's determination of the section 6659
addition to tax is erroneous. Rule 142(a); Luman v.
Commissioner, 79 T.C. 846, 860-861 (1982).
A graduated addition to tax is imposed when an individual
has an underpayment of tax that equals or exceeds $1,000 and "is
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 a purported value
- 42 -
of $1,162,666 for each Sentinel EPE recycler. Petitioners
concede that the fair market value of a Sentinel EPE recycler in
1981 was not in excess of $50,000. Therefore, if disallowance of
petitioners' claimed tax benefits is attributable to such
valuation overstatements, petitioners are liable for the section
6659 addition to tax at the rate of 30 percent of the
underpayment of tax attributable to the investment tax and
business energy credits claimed with respect to Plymouth.
Petitioners contend that section 6659 does not apply in
their case for the following three reasons: (1) Disallowance of
the claimed tax benefits was attributable to other than a
valuation overstatement; (2) petitioners' concession of the
claimed tax benefits precludes imposition of the section 6659
addition to tax; and (3) respondent erroneously failed to waive
the section 6659 addition 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.
- 43 -
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 Zfass v. Commissioner, F.3d (4th Cir. June 23, 1997),
affg. T.C. Memo. 1996-167; 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
investment tax and business energy credits was not "attributable
to" a valuation overstatement. According to petitioners, the
credits were disallowed because the Plymouth transaction lacked
economic substance, not because of any valuation overstatement.
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
deficiency. 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
- 44 -
(9th Cir. 1990), affg. T.C. Memo. 1988-416; McCrary v.
Commissioner, supra; Todd v. Commissioner, supra.
Petitioners' argument rests on the mistaken premise that our
holding herein that the Plymouth transaction lacked economic
substance was separate and independent from the overvaluation of
the Sentinel EPE recyclers. To the contrary, in holding that the
Plymouth transaction 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 operating loss; (2) the underpayment
of tax; and (3) our finding that the Plymouth transaction lacked
economic substance.
Petitioners argue that in Provizer v. Commissioner, T.C.
Memo. 1992-177, we found that the Clearwater transaction lacked
economic substance for reasons independent of the valuation
reported in that case. According to petitioners, the purported
value of the recyclers in the Clearwater transaction was
predicated upon a projected stream of royalty income, and this
Court merely rejected the 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
- 45 -
recyclers in this case is the ground for our holding herein that
the Plymouth transaction lacked economic substance.
Moreover, a virtually identical argument was rejected in
Gilman v. Commissioner, supra. In the Gilman case, the taxpayers
engaged in a computer equipment sale and leaseback transaction
that this Court held was a sham transaction lacking economic
substance. The taxpayers therein, citing Todd v. Commissioner,
supra, and Heasley v. Commissioner, supra, argued that their
underpayment of taxes derived from nonrecognition of the
transaction for lack of economic substance, independent of any
overvaluation. The Court of Appeals for the Second Circuit
sustained imposition of the section 6659 addition to tax because
overvaluation of the computer equipment contributed directly to
this Court's earlier conclusion that the transaction lacked
economic substance and was a sham. Gilman v. Commissioner, supra
at 151. In addition, the Court of Appeals for the Second Circuit
agreed with this Court and with the Court of Appeals for the
Eighth Circuit that "'when an underpayment stems from disallowed
* * * investment credits due to lack of economic substance, the
deficiency is * * * subject to the penalty under section 6659.'"
Gilman v. Commissioner, supra at 151 (quoting Massengill v.
Commissioner, 876 F.2d 616, 619-620 (8th Cir. 1989), affg. T.C.
Memo. 1988-427); see also Zfass v. Commissioner, supra; 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-
- 46 -
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, supra, and McCrary v. Commissioner, 92 T.C. at
827, is misplaced. In those cases, in contrast to the case
herein, it was found that a valuation overstatement did not
contribute to an underpayment of taxes. In the Todd and Gainer
cases, the underpayments were due exclusively to the fact that
the property in each case had not been placed in service. In the
McCrary case, the underpayments were deemed to result from a
concession that the agreement at issue was a license and not a
lease. Although property was overvalued in each of those cases,
the overvaluations were not the 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' case
presents just such a "different situation": overvaluation of the
recyclers was integral to and inseparable from petitioners'
claimed tax benefits and our holding that the Plymouth
transaction lacked economic substance.7
7
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.
(continued...)
- 47 -
2. Concession of the Deficiency
Petitioners argue that their concession of the deficiency
precludes imposition of the section 6659 addition to tax.
Petitioners contend that their concession renders any inquiry
into the grounds for such deficiency moot. Absent such inquiry,
petitioners argue that it cannot be known if their underpayment
was attributable to a valuation overstatement or other
discrepancy. Without a finding that a valuation overstatement
contributed to an underpayment, according to petitioners, section
6659 cannot apply. In support of this line of reasoning,
petitioners rely heavily upon Heasley v. Commissioner, 902 F.2d
380 (5th Cir. 1990), and McCrary v. Commissioner, supra.
Petitioners' open-ended concession does not obviate our
finding that the Plymouth transaction 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
7
(...continued)
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
Courts of Appeals for the Second, Fourth, Sixth and Eighth
Circuits 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; Zfass v. Commissioner, supra.
- 48 -
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 Plymouth, petitioners
claimed an operating loss deduction and credits that resulted in
an underpayment of tax, and we held that the Plymouth transaction
lacked economic substance. Regardless of petitioners'
concession, in this case the underpayment of tax was attributable
to the valuation overstatement.
Moreover, concession of the investment tax credit in and of
itself does not relieve taxpayers of liability for the section
6659 addition to tax. See Dybsand v. Commissioner, T.C. Memo.
1994-56; Chiechi v. Commissioner, T.C. Memo. 1993-630. Instead,
the ground upon which the investment tax credit is disallowed or
conceded is significant. Dybsand v. Commissioner, supra. Even
in situations in which there are arguably two grounds to support
a deficiency and one supports a section 6659 addition to tax and
the other does not, the taxpayer may still be liable for the
addition to tax. Gainer v. Commissioner, 893 F.2d at 228; Irom
v. Commissioner, 866 F.2d 545, 547 (2d Cir. 1989), vacating in
part T.C. Memo. 1988-211; Harness v. Commissioner, T.C. Memo.
1991-321.
In the present case, 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
- 49 -
overstatement. To the contrary, petitioners stipulated
substantially the same facts concerning the Plymouth transaction
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 2,325 percent, was an
integral part of our findings in Provizer that the transaction
was a sham and lacked economic substance. Similarly, the record
in this case plainly shows that the overvaluation of the
recyclers is integral to and is the core of our holding that the
Plymouth transaction was a sham and lacked economic substance.
Petitioners' reliance on McCrary v. Commissioner, supra, is
misplaced. In that case, the taxpayers conceded disentitlement
to their claimed tax benefits and the section 6659 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 record in this case
plainly shows that petitioners' underpayment was attributable to
overvaluation of the Sentinel EPE recyclers. We hold that
- 50 -
petitioners' reliance on McCrary v. Commissioner, 92 T.C. at 827,
is inappropriate.8
We held in Provizer v. Commissioner, supra, that each
Sentinel EPE recycler had a fair market value not in excess of
$50,000. Our finding in the Provizer case that the Sentinel EPE
recyclers had been overvalued was integral to and inseparable
from our holding of a lack of economic substance. Petitioners
stipulated that the Plymouth transaction was similar to the
Clearwater transaction described in the Provizer case, and that
the fair market value of a Sentinel EPE recycler in 1981 was not
in excess of $50,000. Given those concessions, and the fact that
the record here plainly shows that the overvaluation of the
recyclers was the only reason for the disallowance of the claimed
investment tax and business energy credits, we conclude that the
amount of the deficiency corresponding thereto was attributable
to overvaluation of the Sentinel EPE recyclers.
3. Section 6659(e)
Petitioners argue that respondent erroneously failed to
waive the section 6659 addition to tax. Section 6659(e)
authorizes respondent to waive all or part of the addition to tax
8
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
8 to the effect that the Courts of Appeals for the Second,
Fourth, Sixth, and Eighth Circuits and this Court have not
followed the Heasley opinion with respect to the application of
sec. 6659.
- 51 -
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 her
discretion is arbitrary, capricious, or unreasonable. See
Mailman v. Commissioner, 91 T.C. 1079 (1988); Estate of Gardner
v. Commissioner, 82 T.C. 989 (1984); Haught v. Commissioner, T.C.
Memo. 1993-58.
We note initially that petitioners did not request
respondent to waive the section 6659 addition to tax until more
than 4 months after the trial of this case. We are reluctant to
find that respondent abused any discretion in this case 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 a waiver but instead, we have
considered the issue on its merits. Petitioners urge that
petitioner relied on Bach in deciding on the valuation claimed on
their 1981 tax return. Petitioners contend that such reliance
was reasonable and, therefore, that respondent should have waived
- 52 -
the section 6659 addition to tax. However, as we explained above
in finding petitioners liable for the negligence additions to
tax, petitioner's purported reliance on Bach was not reasonable.
Bach did not have any education or experience in plastics
materials or plastics recycling. He acknowledged that he was not
qualified to assess the machines and that his technical
limitations hindered his investigation at Hyannis. In the end,
neither petitioner nor Bach in good faith investigated the fair
market value of a Sentinel EPE recycler, or the underlying
viability, financial structure, and economics of the Plymouth
transaction.
In support of the contention that petitioner 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 this case. In Mauerman, the Court of Appeals for the
Tenth Circuit held that there was an abuse of discretion on the
part of the Commissioner for not waiving a section 6661 addition
to tax. Like section 6659, a section 6661 addition to tax may be
waived by the Commissioner if the taxpayer demonstrates that
there was reasonable cause for his underpayment and that he acted
in good faith. Sec. 6661(c). The taxpayer in Mauerman relied
upon independent attorneys and accountants for advice as to
whether payments were properly deductible or capitalized. The
advice relied upon by the taxpayer in Mauerman was within the
- 53 -
scope of the advisers' expertise, the interpretation of the tax
laws as applied to undisputed facts. In the present case,
however, particularly with respect to valuation, petitioner
relied upon advice which was outside the scope of expertise and
experience of the purported adviser. Bach had no education,
special qualifications, or professional skills or experience in
plastics engineering, plastics recycling, or plastics materials.
Consequently, we consider petitioners' reliance on the Mauerman
case inapplicable.
We hold that petitioners did not have a reasonable basis for
the adjusted bases or valuations claimed on their 1981 tax return
with respect to their investment in Plymouth. In this case,
respondent could find that petitioner's reliance on Bach was
unreasonable. The record in this case does not establish an
abuse of discretion on the part of respondent but supports
respondent's position. We hold that respondent's refusal to
waive the section 6659 addition to tax in this case is not an
abuse of discretion. Petitioners are liable for the section 6659
addition to tax at the rate of 30 percent of the underpayment of
tax attributable to the disallowed investment tax and business
energy credits. Respondent is sustained on this issue.
C. Petitioners' Motion for Leave To File Motion for Decision
Ordering Relief from the Negligence Penalty and the Penalty Rate
of Interest and To File Supporting Memorandum of Law
Approximately 4 months after the trial of this case,
petitioners filed a Motion For Leave to File Motion for Decision
- 54 -
Ordering Relief From the Negligence Penalty and the Penalty Rate
of Interest and to File Supporting Memorandum of Law under Rule
50. Petitioners also lodged with the Court a motion for decision
ordering relief from the additions to tax for negligence and from
the increased rate of interest, with attachments and a memorandum
in support of such motion. Respondent filed an objection, with
attachments and a memorandum in support thereof, and petitioners
thereafter filed a reply memorandum. Petitioners argue that they
should be afforded the same settlement that was reached between
other taxpayers and the IRS in docket Nos. 10382-86 and 10383-86,
each of which was styled Miller v. Commissioner. See Farrell v.
Commissioner, T.C. Memo. 1996-295 (denying a motion similar to
petitioners' motions); see also Kaliban v. Commissioner, T.C.
Memo. 1997-271; Sann v. Commissioner, T.C. Memo. 1997-259;
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 trial in this case. Resolution of such issue might well
require a new trial. Such further trial "would be contrary to
the established policy of this Court to try all issues raised in
a case in one proceeding and to avoid piecemeal and protracted
litigation." Markwardt v. Commissioner, 64 T.C. 989, 998 (1975);
see also Haft Trust v. Commissioner, 62 T.C. 145, 147 (1974).
- 55 -
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 this case, petitioners' motion for
leave is not well founded. Farrell v. Commissioner, supra.
Even if petitioners' motion for leave were granted, the
arguments set forth in their motion for decision and the attached
memorandum, lodged with this Court, are invalid and such motion
would be denied. Therefore, and for reasons set forth in more
detail below, petitioners' motion for leave shall be denied.
Some of our discussion of background and circumstances
underlying petitioners' motion is drawn from documents submitted
by the parties and findings of this Court in two earlier
decisions. See Estate of Satin v. Commissioner, T.C. Memo. 1994-
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' motion for leave would require further proceedings.
The Estate of Satin and Fisher cases involved Stipulation of
Settlement agreements (piggyback agreements) made available to
taxpayers in the Plastics Recycling project, whereby taxpayers
could agree to be bound by the results of three test cases:
Provizer v. Commissioner, T.C. Memo. 1992-177, and the two Miller
cases. We held in Estate of Satin and Fisher that the terms of
the piggyback agreement bound the parties to the results in all
- 56 -
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.9
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
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.10 Petitioners assert that the Plastics Recycling
9
In their motion for decision, petitioners state: "After the
lead counsel for taxpayers and Respondent had agreed upon the
designation of the lead cases, Respondent's counsel prepared
piggyback agreements and offered them to counsel for the
taxpayers in this case and to other taxpayers." (Emphasis added.)
10
In respondent's motion for leave to file an amended answer,
(continued...)
- 57 -
project settlement offer was extended to them, but they do not
claim to have accepted the offer timely, so they effectively
rejected it.11
In December 1988, the Miller cases were disposed of by
settlement agreement between the taxpayers and respondent.12
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
10
(...continued)
respondent attached a copy of a settlement offer that was
extended to petitioners and other taxpayers who at the time were
represented by counsel other than their present counsel. The
terms of the offer were as stated above, except that no mention
was made with respect to the execution of a closing agreement
(Form 906) stating the settlement and resolving the entire matter
for all years.
11
In their motion for decision, petitioners state:
"Respondent formulated a standard settlement position which was
extended to all taxpayers having docketed or non-docketed cases
in the plastics recycling group, including Petitioner." (Emphasis
added.)
12
Although it is not otherwise a part of the record in this
case, respondent attached copies of the Miller closing agreement
and disclosure waiver to her objection to petitioners' motion for
leave, and petitioners do not dispute the accuracy of the
document.
- 58 -
time. Respondent did not notify petitioners or any other
taxpayers of the disposition of the Miller cases. Estate of
Satin v. Commissioner, supra; Fisher v. Commissioner, supra.
Petitioners argue that they are similarly situated to
Miller, the taxpayer in the Miller cases, and that pursuant to
the principle of "equality" they are therefore entitled to the
same settlement agreement executed by respondent and Miller in
those cases. In effect, petitioners seek to resurrect the
piggyback agreement offer and/or the settlement offer they
previously failed to accept.
Petitioners contend that under the principle of "equality,"
the Commissioner has a duty of consistency toward similarly
situated taxpayers and cannot tax one and not tax another without
some rational basis for the difference. United States v. Kaiser,
363 U.S. 299, 308 (1960) (Frankfurter, J., concurring); see Baker
v. United States, 748 F.2d 1465 (11th Cir. 1984); Farmers' &
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
- 59 -
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 case. Liability for the increased rate of interest is
the principal difference between the settlement in the Miller
cases, which petitioners declined when they failed to accept the
piggyback agreement offer, and the settlement offer that
petitioners also failed to accept.
Petitioners argue that section 6621(c) must have been an
issue in the Miller cases since each of the decisions 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 instant case, or in the Court's
- 60 -
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 this case that would indicate that
the Millers were "otherwise subject to the penalty interest
provisions". Petitioners' argument is based on a false premise.
We find that petitioners and Miller were treated equally to
the extent they were similarly situated and differently to the
extent they were not. Miller foreclosed the applicability of the
section 6621(c) increased rate of interest in his cases, while
petitioners concede it applies in their case. 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' motion is not supported by the
principle of equality on which they rely. Cf. Baratelli v.
Commissioner, T.C. Memo. 1994-484.
To reflect the foregoing,
An appropriate order will be
issued denying petitioners'
motion, and decision will be
entered under Rule 155.