T.C. Memo. 2000-367
UNITED STATES TAX COURT
PAMELA OSOWSKI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10801-89. Filed December 4, 2000.
Burton W. Kanter, for petitioner.
Paul L. Darcy, for respondent.
MEMORANDUM OPINION
LARO, Judge: This case was submitted to the Court fully
stipulated under Rule 122. Respondent determined a $5,416
deficiency in petitioner’s 1981 Federal income tax and additions
thereto of $270.80 and $1,624.80 under sections 6653(a)(1) and
6659, respectively. Respondent also determined as to the entire
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deficiency that petitioner was liable for the time sensitive
addition to tax under section 6653(a)(2) and the increased rate
of interest under section 6621(c).
Following concessions by the parties, we must decide:
1. Whether petitioner is liable for an addition to tax
under section 6659 equal to 30 percent of the deficiency arising
from a disallowed investment tax credit and loss that petitioner
claimed from a partnership named Grade Partners (Grade), and
2. Whether petitioner is liable for the increased rate of
interest under section 6621(c) on the deficiency.
We hold for respondent as to both issues. Section
references are to the Internal Revenue Code in effect for the
year in issue. Rule references are to the Tax Court Rules of
Practice and Procedure.
Background
The parties have filed with the Court a stipulation of facts
and accompanying exhibits. We find the stipulated facts
accordingly, and we set forth the relevant facts in this
background section. We also set forth in this section facts
which we find from the exhibits and from matters which petitioner
admitted under Rule 90. Petitioner resided in New York, New
York, when she petitioned the Court.
Petitioner timely filed her 1981 Federal income tax return.
She claimed thereon a $689 loss from Grade, a $9,380 investment
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tax credit from Grade, an income tax liability (exclusive of the
investment tax credit) of $4,646, and an income tax liability
(after applying $4,646 of the investment tax credit to 1981) of
zero. Respondent disallowed the $689 loss and the $4,646
investment tax credit applied to 1981.
Petitioner has a 7-percent limited partnership interest in
the profits and losses of Grade. Grade, in turn, has a 16.6666-
percent limited partnership interest in the profits and losses of
Degree Associates (Degree). Degree is a limited partnership with
1 general partner; namely, Joel Mallin. Degree’s stated purpose
was to lease and exploit energy management systems equipment
which, when installed, would control the use of energy in a
plastics manufacturing plant operated by Milor Corporation. An
investment in Degree carried a very high degree of risk.
Degree’s promoter distributed a private placement
memorandum (PPM) on Degree to potential investors. The PPM
listed cash-flow and economic projections for 1981 to 2011 (PPM
projections) which were predicated upon the assumption that: (1)
The projected level of energy conservation would be achieved, (2)
the cost of energy would increase 18.5 percent per year between
1981 and 2011, and (3) the energy management systems equipment
would remain useful for that 30-year period. The PPM projections
predicted total pretax receipts by Degree of $4,502,490 between
1981 and 2011, the present value of which equals $181,228, when
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discounted at 14 percent.1 The PPM projections predicted that
the total up-front investment by Degree in the energy management
systems equipment would be $292,500 in 1981, which means that the
net present value of Degree's net receipts was a negative
$111,272 ($181,228 less $292,500).
Degree claimed that it placed the energy management systems
equipment in service during 1981 and that the equipment had a tax
basis and fair market value of $8,040,000. Grade's claimed share
of the basis in the equipment was $1,339,464 (16.6666 percent
times $8,040,000), and petitioner’s claimed share of that basis
was $93,800 (7 percent times $1,339,464). The equipment had a
true fair market value of no more than $354,000, and Degree's
claimed fair market value and tax basis of the equipment exceeded
the equipment's true fair market value by approximately 2,271
percent.
Petitioner never read the PPM, and she never discussed the
PPM with Mr. Mallin. Before participating in Degree, petitioner
had no experience in the development, operation, or marketing of
energy management systems, she had no knowledge of the components
and equipment constituting the energy management systems
equipment, and she had no knowledge of whether or not the energy
management systems equipment was installed in Milor Corporation.
1
The yield on long-term U.S. Treasury bonds was generally
14 percent in 1981.
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Burton Kanter is a tax attorney, and petitioner was his
executive secretary from March 1962 to June 1970. Mr. Kanter
advised petitioner to participate in Degree, and she relied
solely upon his advice in making her decision to do so. Mr.
Kanter has no experience in the development, operation,
marketing, or appraisal of energy management systems.
Petitioner's participation in Degree was not motivated by a
desire for economic profit. She participated in Degree solely
for tax reasons.
Discussion
We review respondent’s determination that petitioner is
subject to sections 6621(c) and 6659. Petitioner, as the
taxpayer, bears the burden of disproving that determination. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In
order to meet her burden of proof, petitioner must introduce
sufficient evidence to: (1) Make a prima facie case establishing
that respondent committed the errors alleged in the petition and
(2) overcome the evidence submitted by (or otherwise favorable
to) respondent. See Lyon v. Commissioner, 1 B.T.A. 378, 379
(1925). The fact that the case was submitted to the Court fully
stipulated under Rule 122 does not change or otherwise lessen
petitioner’s burden. See Borchers v. Commissioner, 95 T.C. 82,
91 (1990), affd. on other issues 943 F.2d 22 (8th Cir. 1991).
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Section 6659 provides for an addition to tax for
underpayments attributable to valuation overstatements. A
valuation overstatement exists if, among other conditions, the
adjusted basis of property claimed on the return equals or
exceeds 150 percent of the correct basis. See sec. 6659(a), (c).
As to the year at issue, the addition to tax equals 30 percent of
an underpayment attributable to a valuation overstatement of 250
percent or more, unless the underpayment in tax is less than
$1,000 in which case the addition to tax does not apply. See
sec. 6659(b), (d). An addition to tax under section 6659 may
apply to an underpayment by an individual partner, where the
overvaluation is made on the partnership return. See Weis v.
Commissioner, 94 T.C. 473, 489 (1990).
Petitioner does not deny that respondent correctly
determined that she had an understatement of tax attributable to
a valuation overstatement within the meaning of section 6659.
Petitioner asserts that respondent should waive the resulting
addition to tax pursuant to section 6659(e). Section 6659(e)
authorizes respondent to waive all or part of an addition to tax
for valuation overstatement if a taxpayer establishes that he or
she had a reasonable basis for the adjusted bases or valuations
claimed on a return and that the claim was made in good faith.
Respondent's refusal to waive a section 6659 addition to tax
is reviewable by this Court for abuse of discretion. See Krause
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v. Commissioner, 99 T.C. 132, 179 (1992). On the record before
us, we are unable to conclude that respondent abused his
discretion. First, we are unable to find that petitioner ever
asked respondent to exercise his discretion before he issued the
notice of deficiency to her. Absent a timely request for a
waiver, which we do not find was present here, we cannot hold
that respondent abused his discretion in not waiving an addition
to tax under section 6659. See Martin Ice Cream Co. v.
Commissioner, 110 T.C. 189, 234-235 (1998); Haught v.
Commissioner, T.C. Memo. 1993-58; cf. Lapin v. Commissioner, T.C.
Memo. 1990-343, affd. without published opinion 956 F.2d 1167
(9th Cir. 1992).
Even if petitioner had made such a timely request, we find
nothing in the record to establish that she had the requisite
reasonable basis for the overstated valuation to overcome
respondent’s determination. The mere fact that she relied on Mr.
Kanter, a tax professional, in choosing to participate in Degree
does not mean that she reasonably reported the overstated
valuation on her income tax return. Indeed, the facts of this
case, including the facts that petitioner was aware of Mr.
Kanter’s qualifications from their longtime close business
relationship, that Mr. Kanter was not professionally qualified to
evaluate or appraise the energy management systems equipment,
that petitioner never read the PPM, and that petitioner never
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made an attempt independently to evaluate or appraise the energy
management systems equipment, point to the conclusion that any
reliance that petitioner placed on Mr. Kanter as to the valuation
was unreasonable. See Addington v. Commissioner, 205 F.3d 54, 62
(2d Cir. 2000), affg. Sann v. Commissioner, T.C. Memo. 1997-259;
Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), affg.
T.C. Memo. 1989-684; Singer v. Commissioner, T.C. Memo. 1997-325.
In light of the strict standard for abuse of discretion, we
conclude that respondent did not err by not exercising his
discretion under section 6659(e) to waive the addition to tax for
valuation overstatement.
Nor do we conclude that respondent erred as to the increased
rate of interest under section 6621(c). Section 6621(c) provides
that increased interest is due if a "substantial underpayment" is
attributable to a "tax motivated transaction". A substantial
underpayment is an underpayment of more than $1,000. See sec.
6621(c)(2). A tax-motivated transaction includes any valuation
overstatement under section 6659. See sec. 6621(c)(3)(A)(i).
Because we have determined that petitioner had a valuation
overstatement under section 6659, we hold that petitioner is
liable under section 6621(c) for an increased rate of interest on
the underpayment attributable thereto. See Barlow v.
Commissioner, T.C. Memo. 2000-339 (“once we decide that there is
a tax-motivated transaction such as a valuation overstatement * *
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*, the determination of additional interest is largely
mechanical.”).
We have considered all arguments in this case, and those
arguments not discussed herein are irrelevant or without merit.
Accordingly,
Decision will be entered
under Rule 155.