Lewin v. Comm'r

T.C. Memo. 2003-305

UNITED STATES TAX COURT

MALCOLM I. LEWIN AND TRINA LEWIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 477-95. Filed November 3, 2003.

Christopher S. Rizek, for petitioners.

Louise R. Forbes and D. Sean McMahon, for respondent.

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) in effect when these proceedings commenced and Rules

180, 181, and 183. Unless otherwise indicated, section

references are to the Internal Revenue Code in effect at relevant

times, and Rule references are to the Tax Court Rules of Practice
 - 2 -

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: In a so-called affected items

notice of deficiency, respondent determined additions to tax with

respect to petitioners’ 1982 Federal income tax of $6,006 under

section 6659 for valuation overstatement, $1,237 under section

6653(a)(1) for negligence, and under section 6653(a)(2) in an

amount equal to 50 percent of the interest due on $24,747, the

amount of the underpayment attributable to negligence. The

underpayment was determined pursuant to a partnership-level

proceeding. See secs. 6221-6233. After concessions,1 there are

two issues remaining for decision. The first issue is whether

petitioners are liable for the additions to tax under the

provisions of section 6653(a)(1) and (2) for negligence or

intentional disregard of rules or regulations. We hold that they

are liable for these additions to tax. The second issue is

whether petitioners are entitled to the benefits of a settlement

offer that was made available to some other taxpayers. We hold

1
By stipulation, petitioners concede the imposition of the
valuation overstatement addition to tax under sec. 6659. In
addition, petitioners concede that the limitations period remains
open for assessment and collection of any penalties, additions to
tax, or interest attributable to partnership items for the 1982
tax year that may be held to be due from petitioners.
Petitioners previously raised the statute of limitations as a
defense in their petition.
 - 3 -

that they are not entitled to the benefits of that settlement

offer.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulated facts and the attached exhibits are incorporated

by this reference.2 Petitioners resided in North Caldwell, New

Jersey, at the time they filed the petition in this case.

A. The Plastics Recycling Transaction

This case is part of the Plastics Recycling group of cases.

The issues in this group of cases center about a circular

multistep transaction involving the sale and lease of machines

designed to recycle plastic scrap. The additions to tax arise

from the disallowance of losses, investment credits, and energy

credits petitioners claimed with respect to a New York limited

partnership called SAB Foam Recycling Associates (SAB Foam).

For a detailed discussion of the transactions involved in

the Plastics Recycling cases, see Provizer v. Commissioner, T.C.

Memo. 1992-177, affd. per curiam without published opinion 996

2
The parties have stipulated that testimony and
documentary evidence admitted in Cohen v. Commissioner, T.C.
Memo. 2003-303, and in Feinberg v. Commissioner, T.C. Memo. 2003-
304, shall be admitted in the present case, subject to the
parties’ relevance objections, if any. In addition, the parties
have agreed to add to the record as exhibits the testimony of
Elliot Miller in Provizer v. Commissioner, T.C. Memo. 1992-177,
affd. per curiam without published opinion 996 F.2d 1216 (6th
Cir. 1993), and of Stuart Becker in Jaroff v. Commissioner, T.C.
Memo. 1996-527.
 - 4 -

F.2d 1216 (6th Cir. 1993). The parties have stipulated that the

underlying transactions involving the recycling machines

(recyclers) in this case are substantially similar to the

transactions involving the Sentinel polyethylene (EPE) recyclers

considered in Provizer and the Sentinel polystyrene (EPS)

recyclers considered in Gottsegen v. Commissioner, T.C. Memo.

1997-314.

In a series of simultaneous transactions that for

convenience are referred to herein as the SAB Foam transactions,

Packaging Industries Group, Inc. (PI), of Hyannis, Massachusetts,

manufactured and sold3 four EPS4 recyclers to Ethynol

Cogeneration, Inc. (ECI), for $6,080,000 ($1,520,000 per

machine). ECI agreed to pay PI $451,000 for the four recyclers

at the closing, with the balance of $5,629,000 financed through a

12-year nonrecourse promissory note (ECI note). Each monthly

installment on the ECI note was $81,250.

3
Terms such as “sale” and “lease”, as well as their
derivatives, are used for convenience only and do not imply that
the particular transaction was a sale or lease for Federal tax
purposes. Similarly, terms such as “joint venture” and
“agreement” are also used for convenience only and do not imply
that the particular arrangement was a joint venture or an
agreement for Federal tax purposes.
4
In Provizer v. Commissioner, supra, the transaction
involved EPE recyclers, but the EPS recycler partnerships and the
EPE recycler partnerships are essentially identical. See
Davenport Recycling Associates v. Commissioner, T.C. Memo. 1998-
347, affd. 220 F.3d 1255 (11th Cir. 2000); see also Gottsegen v.
Commissioner, T.C. Memo. 1997-314 (involving both the EPE and the
EPS recyclers).
 - 5 -

Simultaneously, ECI resold the recyclers to F&G Equipment

Corp. (F&G) for $7 million. F&G agreed to pay ECI $513,000 at

the closing, with the balance of $6,487,000 financed through a

purportedly partial recourse promissory note (F&G note). The F&G

note was recourse against F&G to the extent of 20 percent of its

face value. However, the recourse portion was payable only after

F&G satisfied the nonrecourse portion of the note. Each monthly

installment on the F&G note was $81,250. In turn, F&G leased the

recyclers to SAB Foam for a monthly base rent of $81,250.

Pursuant to the lease and in accordance with applicable

provisions of the Internal Revenue Code and the Treasury

regulations, F&G elected to treat SAB Foam as having purchased

the recyclers for purposes of the investment and business energy

tax credits.

Simultaneously, SAB Foam entered into a joint venture with

PI and Resin Recyclers, Inc. (RRI). The joint venture agreement

provided that RRI was to assist SAB Foam with the placement of

recyclers with end-users and that PI was to pay a monthly joint

venture fee to SAB Foam of $81,250.

In connection with the SAB Foam transactions, therefore, the

arrangement was that PI would pay a monthly joint venture fee to

SAB Foam, in the same amount that SAB Foam would pay monthly to

F&G as rent, in the same amount that F&G would pay monthly to ECI

on the F&G note, in the same amount that ECI would pay monthly to
 - 6 -

PI on the ECI note. In connection with these arrangements by PI,

ECI, F&G, SAB Foam, and RRI, these monthly payments were

offsetting, so they could be kept as bookkeeping entries with no

money actually changing hands.

On its 1982 Form 1065, U.S. Partnership Return of Income,

SAB Foam reported that the four recyclers had an aggregate basis

of $7 million, or $1,750,000 each, for purposes of the investment

and business energy tax credits. In the present case, the

undisputed evidence, including the stipulation of the parties,

establishes that the recyclers were not properly valued at

$1,750,000 but instead had a maximum value of $30,000 to $50,000

each. SAB Foam reported a net ordinary loss of $662,556. SAB

Foam included the portion of credits and losses attributed to

petitioners on the Schedule K-1, Shareholder’s Share of Income,

Credits, Deductions, Etc., issued to petitioners and filed with

SAB Foam’s partnership tax return.

B. Private Offering Memorandum

The private offering memorandum (memorandum) that generally

was distributed to potential investors contemplated the creation

of SAB Foam. SAB Management, Ltd. (SAB Management), a New York

corporation, was SAB Foam’s general partner, its tax matters

partner (TMP), and a 1-percent owner. The limited partners, or

investors, owned the remaining 99 percent of SAB Foam.
 - 7 -

The memorandum informed investors that the business of SAB

Foam would be conducted in accordance with the transaction

described above. The memorandum warned potential investors of

significant business and tax risk factors associated with

investments in SAB Foam. The memorandum was replete with

warnings. In bold capital letters, the memorandum unequivocally

stated: “THIS OFFERING INVOLVES A HIGH DEGREE OF RISK”.

Specifically, the memorandum warned potential investors

that: (1) There was a substantial likelihood of audit by the

Internal Revenue Service (IRS); (2) “On audit, the purchase price

of the Sentinel EPS recyclers to be paid by F&G to ECI may be

challenged by the * * * [IRS] as being in excess of the fair

market value thereof, a practice followed by * * * [the IRS] in

transactions it deems to be ‘tax shelters’. Such purchase price

is the basis for computing the regular investment and energy tax

credits to be claimed by * * * [SAB Foam and ultimately by its

partners]”; (3) the partnership had no prior operating history;

(4) the general partner had limited experience in marketing

recycling or similar equipment; (5) the limited partners would

have no control over the conduct of the partnership’s business;

(6) there was no established market for the sale, leasing, or

licensing of Sentinel EPS Recyclers; and (7) certain potential

conflicts of interest existed.
 - 8 -

The memorandum projected that in the initial year of

investment an investor contributing $50,000 for one unit would

receive total investment tax credits and business energy credits

of $81,529 plus tax deductions of $38,768. The memorandum stated

that an investor in SAB Foam was required to have an individual

net worth and/or net worth with a spouse of $1 million, inclusive

of residences and personal property, or income of $200,000 per

year for each unit of investment.

The memorandum included a marketing report by Stanley

Ulanoff (Ulanoff), a marketing consultant and professor, and a

technical opinion by Samuel Z. Burstein (Burstein), a mathematics

professor. The memorandum warned investors not to rely on the

statements and opinions contained in the memorandum but to

conduct an independent investigation.

The memorandum included a Form of Opinion of Counsel (tax

opinion) prepared by Boylan & Evans, a New York law firm. The

tax opinion, addressed only to the general partner, included in

the first paragraph the following disclaimer:

We have consented to your inclusion of the proposed
form of this letter in the Memorandum, but this letter
is intended for your own individual guidance and for
the purpose of assisting prospective purchasers and
their tax advisors in making their own analysis, and no
prospective purchaser is entitled to rely upon this
letter.

The tax opinion expressly warned that the investment and energy

tax credits available to limited partners would be reduced or
 - 9 -

eliminated if the partnership could not demonstrate that the

price paid for the recyclers approximated their fair market

value. The tax opinion did not purport to rely on any

independent confirmation of the fair market value of the

recyclers. Instead, the tax opinion clearly relied on Ulanoff’s

conclusion that the purchase price to be paid by F&G was fair and

reasonable. The tax opinion also states: “PI, ECI, F&G, and the

Partnership have represented to us that the prices paid by ECI

and by F&G and the terms of the Lease were negotiated at arm’s

length.” The tax opinion concludes that the basis to the

partnership upon which the aggregate investment and energy tax

credits are to be computed is the price paid by F&G for the

recyclers.

C. Individuals Involved

Malcolm I. Lewin (petitioner) graduated from the City

College of New York and graduated from New York University Law

School in 1966. In 1967, petitioner came to work for Miller &

Summit, a New York law firm, as the two-partner partnership’s

only associate. Elliot Miller (Miller) was one of the partners.

Petitioner worked primarily on corporate and transactional

matters. He was employed by Miller & Summit for about 4 years.

During that time, he performed a variety of professional services

for PI, which was a major client for Miller. On many occasions

he visited the premises of PI, which then were located in New
 - 10 -

Jersey and under different ownership than in 1982. After his

employment by Miller & Summit ended in 1971, petitioner joined

the New York law firm of Lans, Feinberg, & Cohen (LFC).

Thereafter, petitioner only rarely spoke with Miller

Miller was one of the key figures in the Plastics Recycling

transactions and an acquaintance of Stuart Becker (Becker).

Miller was the corporate counsel to PI for many years and was a

9.1-percent shareholder of F&G. He also represented F&G,

Burstein, and Raymond Grant, who was the sole shareholder of ECI.

Miller practiced law from 1958 to the present, primarily in the

area of business and tax transactions and litigation. For some

years he practiced as a partner in the firm of Miller & Summit.

Robert S. Cohen (Cohen) received his B.A. degree from Alford

University and his J.D. degree from Fordham University. After

graduating from law school in 1962, Cohen enlisted in the

military and was released from active duty as a first lieutenant.

He then worked for a law firm in New York until he formed LFC in

1968. In practice he was primarily a commercial litigator until

the early eighties, when New York passed an equitable

distribution law with respect to divorce. Then he concentrated

his practice on family law.

Becker organized and promoted SAB Foam. Becker was the sole

shareholder of Scanbo Management, Ltd. (Scanbo), which wholly

owned SAB Management. Becker served as the president of SAB
 - 11 -

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

Co.), an accounting firm that emphasized tax matters. He does

not have an engineering background, and he is not an expert in

plastics materials or plastics recycling.

In his practice Becker specialized in tax matters generally

and particularly in tax-advantaged investments, so he had

considerable experience involving so-called tax shelter

transactions. Becker received his B.S. degree in accounting from

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

York University School of Business Administration in 1973. He

passed the certified public accountancy test in 1967 and was the

winner of the gold medal, awarded for achieving the highest score

on the examination for the year. Since early 1966, Becker has

practiced as an accountant in the tax area. From 1964 until

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

and in 1972 he joined the accounting firm of Richard A. Eisner &

Co. (Eisner Co.) as the partner in charge of the tax department.

In 1977, he was the founder and principal owner of Becker Co.

Becker learned of the Plastics Recycling transactions in 1981

when a prospective client presented him with an offering

memorandum concerning one of the transactions. Subsequently he

organized limited partnerships to offer the Plastics Recycling

transaction to his clients and others.
 - 12 -

Cohen had met Becker through his relationship with Richard

Eisner, Becker’s partner at Eisner Co., and through his

stepbrothers, who were Becker’s clients. Cohen retained Becker

on several occasions as an accounting expert. In turn, Becker

retained Cohen and LFC on various legal matters, including his

own divorce.

H. Robert Feinberg (Feinberg) attended New York University

School of Commerce, Accounts & Finance on a university

scholarship and graduated in 3-1/2 years. He joined the Naval

Reserve while attending Harvard Law School during the Korean War

and graduated from the law school in 1953. He then attended

Officer’s Candidate School, received his commission, transferred

to the Naval Supply Depot, Bayonne, New Jersey, for supply corps

school, and then, at the request of the captain of the base, was

assigned to the Naval Supply Depot at Bayonne. He served 3 years

on active duty with the Navy primarily at that Supply Depot in

charge of purchasing and contracting. Within 2 weeks of

separation from service he was hired by the New York law firm of

Jacobs & Persinger, and he became a partner there in 1961.

Feinberg had some experience in litigation and taxation, but

later his practice focused on corporate financial and commercial

transactions. Feinberg described himself as a member of “the

core of the corporate and corporate finance bar within the Wall

Street area * * * [that] were fairly well known among each other
 - 13 -

and * * * were constantly working on deals”. In 1978, he formed

a new firm with an attorney who specialized in real estate

transactions, and later that firm merged with LFC.

Feinberg met Becker through Cohen and developed a

professional relationship with him. This relationship included

referrals between LFC and Becker Co., as well as personal

matters. Feinberg considered Becker a very bright and

sophisticated accountant. Becker retained Feinberg to protect

his interests as a promoter of SAB Foam. Becker did not employ

Feinberg to represent the partnership but to advise him for his

own protection. Petitioner did not know Becker personally but

rather knew of him from his relationship with both Cohen and

Feinberg.

Herbert Dooskin (Dooskin) received a B.A. in economics from

City College of New York and an M.B.A. from Baruch College. He

began his career as a financial accountant in 1962 with Alexander

Grant & Co. (Alexander Grant), an accounting firm currently known

as Grant Thornton. He became a partner in 1970, and when he left

the firm in 1986 for employment by a client, Dooskin was the

managing partner of the New York office and chairman of the

firm’s executive committee. Dooskin was primarily an auditor and

was not a tax accountant. Dooskin had met petitioner when they

were in college, and they served together in the Army. In 1982,

petitioner brought the memorandum to Dooskin for review. Dooskin
 - 14 -

passed the memorandum on to Ronald Sacco (Sacco), a tax

professional at Alexander Grant, for review. According to

Dooskin, Sacco’s view was that the investment and the economics

of the deal were “dependent upon the valuation of the equipment”.

After Dooskin and Sacco each spent about 3 hours reviewing the

matter, Dooskin concluded that the proposal “looked like a

legitimate business, * * * compressing plastic, and that it was

better than most”. Neither Dooskin nor Sacco performed an

independent analysis of the valuation of the recyclers. All of

Dooskin’s and Sacco’s information relating to the valuation of

the recyclers came from either petitioner or the memorandum.

Dooskin made no separate charge to petitioner for the few hours

he and his associate spent examining the memorandum.

D. Partnership-Level Litigation

On August 15, 1988, respondent issued a notice of proposed

adjustments to tax return to SAB Foam for 1982 and 1983. On

September 28, 1988, Robert L. Steele, a tax partner with Becker

Co., submitted a protest letter (protest letter) to respondent on

behalf of SAB Management. The protest letter included the

following statement:

We hereby agree to follow the Tax Court’s decision in
the lead cases selected in accordance with the Order of
June 12, 1987, such cases being:

1. Elliot I. Miller, Petitioner
v. Commissioner of Internal Revenue, Respondent,
Docket No. 10382-86
 - 15 -

2. Elliot I. Miller and Myra K. Miller, Petitioner
v. Commissioner of Internal Revenue, Respondent,
Docket No. 10383-86

3. *Leo Fine and Judith H. Fine, Petitioners
v. Commissioner of Internal Revenue, Respondent,
Docket No. 35437-85

* * * * * * *

* New controlling case:

Harold M. Provizer and Joan Provizer, Petitioners
v. Commissioner of Internal Revenue, Respondent,
Docket No. 27141-86.

On January 20, 1989, on behalf of SAB Foam, Becker

submitted the following notice to respondent:

In our protest dated September 28, 1988, we stated
that the Partnership agreed to be bound by the lead
cases (Fine, Miller and Miller).

Due to various changes in circumstances including
but not limited to a settlement of all such then
pending lead cases, the Partnership hereby withdraws
its statement to be bound by such cases or any other
case.

Becker mailed this notice by certified mail, return receipt

requested, and signed it “Stuart Becker, Tax Matters Partner”.

On December 9, 1991, respondent issued a notice of final

partnership administrative adjustment (FPAA) to SAB Management

for 1982. In the FPAA, respondent disallowed all items of

income, losses, deductions, and credits reported with respect to

SAB Foam’s equipment leasing activities for 1982. Accordingly,

respondent: (1) Increased ordinary income by $662,556; (2)

determined that SAB Foam’s investment and business energy tax
 - 16 -

credits with respect to the recycling equipment were zero,

instead of the $7 million claimed as the qualified investment on

the partnership tax return; and (3) increased SAB Foam’s “other

income” by $5,626.

Subsequently, SAB Foam’s TMP filed a petition with the

Court. On September 7, 1993, the Court entered a decision in SAB

Foam Recycling Associates 1982 v. Commissioner, docket No. 5103-

92. This decision reflected a full concession by SAB Foam of all

items of income (loss) and credit previously claimed for the

partnership.

E. Petitioners’ Introduction to Plastics Recycling

In 1981 and 1982, petitioner, Cohen, and Feinberg were

partners in LFC. In 1981, Feinberg approached petitioner about

SAB Resource Recycling Associates (SAB Resource), a limited

partnership structured substantially like SAB Foam. Petitioner

explained to Feinberg his alleged familiarity with PI and

suggested Miller as a resource for more information. He then

talked with Miller about the transaction. Miller reminded

petitioner of his experience with PI but never specifically

discussed the value of the machines with petitioner. Instead,

Miller stated to petitioner that valuations were done on the

recyclers and that as to the people who did the valuations, “he

knew them, they were qualified, they appeared to be qualified”.

Petitioner next sought the advice of his friend Dooskin.
 - 17 -

According to petitioner, Dooskin and his associate Sacco reported

favorably on the memorandum. Petitioner claimed 20 years later

that he remembered Dooskin’s saying “that they had reviewed a lot

of deals in this time and this was certainly a lot better than

many, if not most, of those they had looked at”. They added,

according to petitioner, “that the issue of the value that was

assigned to the machines was something to look at more

carefully.”

After discussing the investment with Miller and Dooskin, and

then further with Cohen and Feinberg, petitioner was ready to

invest in SAB Resource. When petitioner tried to invest in SAB

Resource, however, Feinberg informed him that the investment

opportunity had closed.

On January 14, 1982, the limited partners of SAB Resource,

including Cohen and Feinberg, received a letter from SAB

Management, the general partner of SAB Resource. The letter,

signed by Becker, stated that the transaction contemplated by SAB

Resource was complete and distributed a modest initial royalty.

On June 7, 1982, SAB Management sent a memo to the limited

partners purporting to update the status of their investment in

SAB Resource.

In 1982, Feinberg again approached petitioner with an

investment opportunity. This time the proposal related to SAB

Foam. Petitioner again forwarded the memorandum to Dooskin, who
 - 18 -

gave the same response that he had given concerning SAB Resource.

Petitioner discussed the initial results of the SAB Resource

transactions with Feinberg, saw the letters of January 14 and

June 7, and invested in SAB Foam.

According to the Schedule K-1 issued by SAB Foam to

petitioners for 1982 and reflected on petitioners’ 1982 Federal

income tax return, petitioners invested $12,500 and acquired a

1.455882-percent limited partnership interest in SAB Foam’s

profits, losses, and capital. On their 1982 tax return,

petitioners claimed an ordinary loss of $9,646 from SAB Foam and

an investment and energy tax credit of $20,021. Petitioners had

no experience with the plastics materials or the plastics

recycling industry.

OPINION

We have decided many Plastics Recycling cases. Most of

these cases, like the present case, have presented issues

regarding additions to tax for negligence. See, e.g., Weitzman

v. Commissioner, T.C. Memo. 2001-215; Thornsjo v. Commissioner,

T.C. Memo. 2001-129; West v. Commissioner, T.C. Memo. 2000-389;

Barber v. Commissioner, T.C. Memo. 2000-372; Barlow v.

Commissioner, T.C. Memo. 2000-339, affd. 301 F.3d 714 (6th Cir.

2002); Ulanoff v. Commissioner, T.C. Memo. 1999-170; Merino v.

Commissioner, T.C. Memo. 1997-385, affd. 196 F.3d 147, 151-155

(3d Cir. 1999); Greene v. Commissioner, T.C. Memo. 1997-296;
 - 19 -

Kaliban v. Commissioner, T.C. Memo. 1997-271; Sann v.

Commissioner, T.C. Memo. 1997-259 n.13 (and cases cited therein),

affd. sub nom. Addington v. Commissioner, 205 F.3d 54 (2d Cir.

2000). Although we have considered each case on its own

particular facts and circumstances, in all but two of the

Plastics Recycling cases5 we found the taxpayers liable for the

additions to tax for negligence.

In Provizer v. Commissioner, T.C. Memo. 1992-177, the test

case for the group of cases, we resolved the Plastics Recycling

issues as follows: (1) We found that each recycler had a fair

market value of not more than $50,000; (2) we held that the

transaction, which was virtually identical to the transaction in

the present case, was a sham because it lacked economic substance

and a business purpose; (3) we sustained the additions to tax for

negligence under section 6653(a)(1) and (2); (4) we sustained the

addition to tax for valuation overstatement under section 6659

because the underpayment of taxes related directly to the

overvaluation of the recyclers; and (5) we held that the

partnership losses and tax credits claimed with respect to the

Plastics Recycling partnership at issue were attributable to tax-

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

5
In Dyckman v. Commissioner, T.C. Memo. 1999-79, and
Zidanich v. Commissioner, T.C. Memo. 1995-382, we held the
taxpayers were not negligent with respect to their participation
in the Plastics Recycling program. Both cases involved unusual
circumstances not present in this case.
 - 20 -

also found that other recyclers were commercially available

during the years in issue. See id. In reaching the conclusion

that the transaction lacked a business purpose, this Court relied

heavily upon the overvaluation of the recyclers. Similarly, in

Gottsegen v. Commissioner, T.C. Memo. 1997-314, we found that

each EPS recycler had a fair market value of not more than

$50,000 and relied heavily on the overvaluation of the recyclers

in concluding that the taxpayer was negligent and liable for

accuracy-related penalties. See Addington v. Commissioner,

supra.

Issue 1. Section 6653(a)(1) and (2) Additions to Tax for
Negligence

Section 6653(a)(1) provides for an addition to tax equal to

5 percent of the underpayment if any part of the underpayment of

tax is due to negligence or intentional disregard of rules or

regulations. Section 6653(a)(2) provides for 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

exercise under the circumstances. See Neely v. Commissioner, 85

T.C. 934, 947-948 (1985). The pertinent question is whether a

particular taxpayer’s actions are reasonable in light of the

taxpayer’s experience, the nature of the investment, and the
 - 21 -

taxpayer’s actions in connection with the transactions. See

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

see also Turner v. Commissioner, T.C. Memo. 1995-363 (“When

considering the negligence addition, we evaluate the particular

facts of each case, judging the relative sophistication of the

taxpayers as well as the manner in which the taxpayers approached

their investment.”). The determination of negligence is highly

factual. See Merino v. Commissioner, 196 F.3d at 151, 154.

Respondent determined that petitioners are liable for

negligence under section 6653(a)(1) and (2) with respect to the

underpayment of tax attributable to petitioners’ investment in

SAB Foam. Respondent’s determination of negligence is presumed

correct, and petitioners have the burden of proving that they

were not negligent. See Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933); see also Addington v. Commissioner, supra;

Merino v. Commissioner, 196 F.3d 147 (3d Cir. 1999); Goldman v.

Commissioner, 39 F.3d 402, 407 (2d Cir. 1994), affg. T.C. Memo.

1993-480; Luman v. Commissioner, 79 T.C. 846, 860-861 (1982);

Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).6

6
Cf. sec. 7491(c), which places the burden of production
on the Commissioner with respect to a taxpayer’s liability for
penalties and additions to tax. Sec. 7491(c) is effective for
court proceedings arising in connection with examinations
commencing after July 22, 1998. Petitioners do not contend, nor
is there evidence, that their examination commenced after July
22, 1998, or that sec. 7491(c) is applicable in this case.
 - 22 -

A taxpayer may avoid liability for negligence under section

6653(a)(1) and (2) if he or she reasonably relied on competent

professional advice. United States v. Boyle, 469 U.S. 241, 250-

251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

Reliance on professional advice, standing alone, is not an

absolute defense to negligence but rather a factor to be

considered. Freytag v. Commissioner, supra. For reliance on

professional advice to excuse a taxpayer from the negligence

additions to tax, the taxpayer must show that the professional

had the expertise and knowledge of the pertinent facts to provide

informed advice on the subject matter. David v. Commissioner, 43

F.3d 788, 789-790 (2d Cir. 1995), affg. T.C. Memo. 1993-621;

Goldman v. Commissioner, supra at 408; see Freytag v.

Commissioner, supra; Sann v. Commissioner, T.C. Memo. 1997-259.

Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

negligence. Goldman v. Commissioner, supra; Sann v.

Commissioner, supra; see Berry v. Commissioner, T.C. Memo. 2001-

311; Carroll v. Commissioner, T.C. Memo. 2000-184. Pleas of

reliance have been rejected when neither the taxpayer nor the

advisers purportedly relied upon by the taxpayer knew anything

about the nontax business aspects of the contemplated venture.

See David v. Commissioner, supra; Goldman v. Commissioner, supra.
 - 23 -

Petitioners primarily contend that they were not negligent

because they reasonably relied on the memorandum and their

advisers. Petitioners had no education or experience in plastics

materials or plastics recycling, nor had they seen a Sentinel EPS

recycler, when they invested in SAB Foam. Moreover, they did not

consult with anyone who had such expertise in plastics or

plastics recycling.

As an associate for Miller & Summit, petitioner may have

learned about business practices of PI long ago, but that in no

way establishes him as an authority about PI or the plastics

industry. When petitioner was employed by Miller & Summit and

was assigned work for PI, that company was located in New Jersey

under different ownership and had not yet manufactured any

recyclers. By the time of the transactions in issue, PI had

moved to Hyannis, Massachusetts. Nothing in the record

establishes that petitioner had any special knowledge about PI or

its business in 1981-82. Petitioner’s knowledge of SAB Foam,

rather, is derived primarily from the memorandum and Miller.

The memorandum was essentially a sales-oriented document,

and it contained numerous warnings that prospective investors

should not rely on it. Petitioners’ advisers either lacked

knowledge about the subject of the proposed investment or were

part of the sales group and therefore inherently and obviously

unreliable. Under the circumstances of this case petitioners’
 - 24 -

purported reliance on the materials in the memorandum, as well as

their advisers, does not relieve them of liability for the

additions to tax for negligence. Petitioners argue that they are

different from the numerous other investors who have negligently

speculated on the Plastics Recycling deal because they or their

friends had a special relationship with Miller or Becker. As

explained below, we consider this argument to be contrary to the

facts of this case and wholly unpersuasive.

A. The Memorandum and Petitioners’ Colleagues

1. The Memorandum

Petitioner contends that before purchasing shares in SAB

Foam he read the memorandum and its accompanying materials. The

purported value of the recyclers is what generated the deductions

and credits. The memorandum clearly reflects this circumstance.

The recyclers, which in fact have a value of no more than $50,000

each, were reported by SAB Foam to have a basis of $1,750,000

each. As a result of the purported value of the recyclers,

petitioners’ investment of $12,500 produced for them on their

1982 tax return claimed tax credits of $20,021 and deductions of

$9,646. The direct benefits claimed on petitioners’ tax return,

from the tax credits alone, far exceeded their cash investment.

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 deal.” Under these circumstances, a
 - 25 -

reasonably prudent person would have asked a qualified adviser

whether such a windfall were not “too good to be true.” See

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

The memorandum included numerous caveats and warnings

regarding the business and tax risks of SAB Foam. It stated that

the offering involved a high degree of risk and that each offeree

should consult his own professional advisers as to legal, tax,

accounting, and other matters relating to any purchase of any

units in the partnership. A careful consideration of the

memorandum, and the discussion of high writeoffs and risk of

audit, would have alerted a prudent investor to question the

nature of the promised tax benefits.

Moreover, the tax opinion made clear that there was no

independent evaluation of the SAB Foam transactions. The opinion

indicated that Boylan & Evans relied on the statements of the

general partner and “other statements of fact and opinion

furnished to us by persons familiar with the transaction

described in the Memorandum.” Boylan & Evans clearly based its

conclusion about the fair market value of the recyclers on the

assumption that the parties to the transactions had negotiated

prices at arm’s length. In light of the close relationships

existing among the parties to the SAB Foam transactions and the

enormous price paid for the recyclers (largely with nonrecourse

notes exchanged in a plainly circular transaction), petitioners
 - 26 -

should have questioned whether the prices were in fact negotiated

at arm’s length. Under these circumstances, petitioners’ claim

that they reasonably and in good faith relied on the tax opinion

is unconvincing. A sophisticated, experienced, and intelligent

lawyer like petitioner would know, or at least should know,

better than to rely blindly upon a document with the warnings and

defects of the memorandum.

Petitioners’ contention that they reasonably relied on the

expert opinions of Ulanoff and Burstein is unjustified. Neither

Ulanoff nor Burstein was an expert in plastics or plastics

recycling, and both relied on information provided by PI and

other parties related to the transaction in providing their

reports. In addition, Ulanoff and Burstein each owned an

interest in at least one partnership that owned recyclers as part

of the Plastics Recycling program. See, e.g., Jaroff v.

Commissioner, T.C. Memo. 1996-527. Petitioners did not

independently obtain these individuals’ advice but rather

received their reports as part of the promotional material

received from SAB Foam. Reliance on the memorandum, and the

reports therein, is simply an inadequate defense for petitioners.

Given the well-disclosed fact that the investment and energy tax

credits generated by SAB Foam depended on the fair market value

of the recyclers, petitioner should have made inquiries about the

value of the recyclers rather than merely relying on the
 - 27 -

promotional reports of Ulanoff and Burstein and any discussions

he may have had with Miller or Dooskin.

2. Miller

Petitioner also contends that he reasonably relied on

Miller. When approached by petitioner with respect to the

offering memorandum for SAB Resource and later as to the

memorandum for SAB Foam, Miller was supportive of the investment.

With regard to the value of the recyclers, Miller was supportive

of the expert reports by Ulanoff and Burstein. The memorandum

disclosed that Miller was a 9.1-percent shareholder of F&G, was

corporate counsel to PI, and represented Raymond Grant, the sole

shareholder of ECI. The memorandum also noted that “Miller

[would] receive substantial additional compensation for

representing PI in connection with this transaction.” Not

surprisingly, Miller was supportive of SAB Foam.

Nothing in the record suggests that Miller had any expertise

or knowledge with respect to plastics or plastics recycling, or

that petitioners believed he had any such knowledge or expertise.

There is also no showing that petitioner had any special or

enduring friendship with Miller, despite petitioner’s contrary

argument. Miller’s testimony indicates that during the time in

issue he had only a tenuous acquaintance with petitioner. Miller

specifically stated that after petitioner ceased working for him,

10 years before the investment in issue, Miller saw petitioner
 - 28 -

only rarely. Given the extent to which Miller was immersed in

the plastics recycling partnerships, how much he stood to benefit

financially, and his lack of expertise regarding plastics

materials and plastics recycling, we do not consider petitioners’

purported reliance on Miller reasonable or in good faith. “It is

unreasonable for taxpayers to rely on the advice of someone who

they should know has a conflict of interest.” Addington v.

Commissioner, 205 F.3d at 59. See Vojticek v. Commissioner, T.C.

Memo. 1995-444, to the effect that advice from such persons “is

better classified as sales promotion.”

3. Becker

Petitioner also contends that through his partners, Cohen

and Feinberg, he had a special relationship with Becker and

therefore was entitled to rely upon Becker as the accountant’s

other clients were not. Most of petitioner’s interaction with

Becker was indirect and through his partners.

At the outset the Court noted that Becker was on

petitioner’s witness list, but that petitioners’ counsel had

decided not to call him. The Court questioned counsel in this

matter because of petitioner’s specific reliance on his

relationship with Becker. However, petitioners’ obviously well-

prepared and capable counsel adhered to his decision not to call

upon Becker concerning the supposedly special relationship but,

instead, to rely upon Becker’s extensive testimony in the Jaroff
 - 29 -

case.7 See Bresler v. Commissioner, 65 T.C. 182, 188 (1975),

Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d

409 (5th Cir. 1968), and Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947), to the effect that the failure of a party to offer

available testimony gives rise to the inference that it would

have been unfavorable to his contention. Accordingly, we review

Becker’s testimony in the Jaroff case below and consider the

extent of his expertise and the likelihood that he gave special

assurances or guarantees to petitioner or petitioner’s partners.

7
The colloquy concerning petitioner’s counsel’s failure to
provide Becker’s testimony about his close relationship with
Cohen and Feinberg is as follows:

THE COURT: I didn’t hear you mention Mr. Becker’s name
as a witness.

MR. RIZEK: We are not going to call Mr. Becker as an
additional witness. I think the 300 pages or so that
we stipulated to in the supplemental stipulation are
more than adequate to cover any points we wanted to
establish with Mr. Becker.

THE COURT: Well, that may be, but you’re going to talk
a lot about how these parties all had a relationship
with Mr. Becker and all that sort of thing and you’re
not calling Mr. Becker?

MR. RIZEK: We are not calling Mr. Becker. We don’t
think it’s necessary, Your Honor. I don’t think
there’s going to be any doubt at the conclusion of the
evidence that’s presented here that these Petitioners
had fairly long standing relationships independent of
this particular transaction with Mr. Becker.
 - 30 -

Becker had no education, special qualifications, or

professional skills in plastics engineering, plastics recycling,

or plastics materials. In evaluating the Plastics Recycling

transactions and organizing the SAB recycling partnerships,

Becker supposedly relied upon: (1) The memorandum and the

accompanying materials; (2) a tour of the PI facility in Hyannis;

(3) discussions with insiders to the transactions; (4) Michael

Canno (Canno), a client of Becker Co.; and (5) his investigation

of the reputation and background of PI and persons involved in

the transactions.

Despite his lack of knowledge regarding the product, the

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

Plastics Recycling transactions, Becker did not hire an expert in

plastics materials or plastics recycling. The only independent

person having any connection with the plastics industry with whom

Becker spoke was Canno. Canno was part owner and the production

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

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

did not hire or pay him for any advice. Canno did not visit the

PI plant in Hyannis, see or test a recycler, or see or test any

of the output from a recycler or the recycled resin pellets after

further processing. According to Becker, Canno endorsed the

Plastics Recycling transactions after reviewing the memorandum.
 - 31 -

When asked whether Canno had performed any type of comparables

analysis, Becker replied: “I don’t know what Mr. Canno did.”

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

viewed a recycler in operation, and saw products that were

produced from recycled plastic. Becker claims that PI personnel

told him that the recycler was the only machine of its type. In

fact, the recycler was not unique; instead, as we have found in

many cases involving substantially similar machines, several

comparable machines were available in 1981 and 1982 ranging in

price from $20,000 to $200,000. See, e.g., Provizer v.

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

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

research and development (i.e., 10 to 12 years’ worth) into the

creation and production of the recyclers. When he asked to see

the cost records for some kind of independent verification,

however, his request was denied. Becker was informed that such

information was proprietary and secret, and that he would just

have to take PI’s representations as true. Becker decided to

accept PI’s representations after speaking with Miller (corporate

counsel to PI), Canno (who had never been to PI’s plant or seen a

recycler), and a surrogate judge from Rhode Island who did

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

in engineering or plastics materials). Becker testified that he

was allowed to see PI’s internal accounting controls regarding
 - 32 -

the allocation of royalty payments and PI’s record-keeping system

in general. In Provizer v. Commissioner, supra, though, this

Court found that “PI had no cost accounting system or records.”

Becker confirmed in his testimony that he relied on the

memorandum and discussions with PI personnel to establish the

value and purported uniqueness of the recyclers. Becker

testified that he relied upon the reports of Ulanoff and Burstein

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

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

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

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

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

expert.

Becker further explained in his testimony that in the course

of his practice when evaluating prospective investments for

clients, he focuses on the economics of the transaction and

investigates whether there is a need or market for the product or

service. The records indicate, though, that Becker overlooked

several red flags regarding the economic viability of and market

for the recyclers. The memorandum warned that there was no

established market for the recyclers. Becker never saw any

marketing plans for selling the pellets (the product of the

recyclers) or leasing the recyclers. He accepted representations

by PI personnel that they would be marketing the recyclers to
 - 33 -

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

machines; yet he never saw PI’s client list. At the time of the

closing of the various partnerships, Becker did not know who the

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

committed to the transaction.

Becker purportedly checked the price of the pellets by

reading trade journals of the plastics industry. He did not,

however, use those same journals to investigate the recyclers’

purported value. In concluding that the SAB partnerships would

be economically profitable, Becker made two assumptions that he

concedes were unsupported by any hard data: (1) That there was a

market for the pellets, and (2) that market demand for them would

increase.

Becker had a financial interest in the SAB recycling

partnerships generally. Directly or indirectly he received fees

of more than $500,000 with respect to the SAB recycling

partnerships. Becker also received fees for investment advice

from some individual investors and from the SAB recycling

partnerships for preparing their partnership returns. As Becker

himself indicated in his testimony, potential investors could not

have read the memorandum and remained ignorant of the financial

benefits accruing to him.

Petitioner is a very well-educated and highly accomplished

and sophisticated attorney. Without question, he possessed the
 - 34 -

intellect, skills, experience, and resources to have the

viability of the SAB Foam transactions thoroughly investigated

either by himself or by an independent qualified expert.

Petitioners claim that they relied on Becker, known through Cohen

and Feinberg, for the bona fides and viability of the SAB Foam

transactions. Yet Becker’s expertise was in taxation, not

plastics materials or plastics recycling, and his investigation

and analysis of the Plastics Recycling transactions reflected

this circumstance. Moreover, Becker indicated that he was

careful not to mislead any of his clients regarding the

particulars of his limited investigation. As he put it: “I

don’t recall saying to a client I did due diligence * * *

[Rather,] I told [my clients] precisely what I had done to

investigate or analyze the transaction. I didn’t just say I did

due diligence, and leave it open for them to define what I might

or might not have done.”

The purported value of the recyclers generated the

deductions and credits in this case, and that circumstance was

clearly reflected in the memorandum. Certainly Becker recognized

the nature of the tax benefits and, given his education and

experience, petitioner should have recognized it as well. Yet

petitioner, Cohen, Feinberg, and Becker neglected to verify the

purported value of the recyclers. Becker confirmed in his

testimony incorporated in this record by stipulation that he
 - 35 -

relied on PI for the value of the recyclers. An investor as

sophisticated as petitioner either learned or should have learned

the source and shortcomings of Becker’s valuation information

when he reported to them and “precisely” disclosed “what [he] had

done to investigate or analyze the transaction.” Accordingly, we

hold that petitioners did not in good faith or reasonably rely on

Becker as an expert or qualified professional working in the area

of his expertise to establish the fair market value of the

recyclers and the viability or bona fides of the SAB Foam

transactions. Becker never assumed such responsibility, and he

fully described the particulars of his investigation, taking care

not to mischaracterize it as “due diligence”.

In the end, petitioners indirectly and Becker directly

relied upon PI personnel for the value of the recyclers and the

economic viability of the SAB Foam transactions. See Vojticek v.

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

such persons “is better classified as sales promotion.” As

explained above, Becker did not have any education, special

qualifications, or professional skills in plastics materials or

plastics recycling. A taxpayer may rely upon his adviser’s

advice and expertise (in this case accounting and tax advice)

only where such reliance is objectively reasonable, but it is not

reasonable or prudent to rely upon a tax adviser regarding

matters outside his field of expertise or with respect to facts
 - 36 -

that he does not verify. See Addington v. Commissioner, 205 F.3d

at 58; Goldman v. Commissioner, 39 F.3d at 408; Skeen v.

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

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

Memo. 1994-329, affd. 72 F.3d 123 (3d Cir. 1995); Rogers v.

Commissioner, T.C. Memo. 1990-619.

4. Cohen and Feinberg

Petitioner also relied upon his partners Cohen and

Feinberg.8 Cohen’s knowledge of the SAB Foam transactions was

derived from his review of the memorandum and his discussions

with Becker. Cohen testified that Becker told him he could rely

on the valuations attached to the memorandum.9 Feinberg’s

knowledge of the SAB Foam transactions was also derived from his

review of the memorandum and his discussions with Becker. After

Becker retained Feinberg to protect Becker’s interests as general

partner of SAB Foam, Feinberg instructed Becker to verify the

information in the memorandum, including the valuations, and

8
Feinberg testified that “there was a very, very close
professional as well as a personal and social relationship among
us” and that they “shared information on a daily basis”.
9
We note that Cohen testified: “I remember we talked
about the valuations that were obtained and I remember him
telling me in words or in substance that I could rely on those
valuations.” We consider Cohen’s testimony inconsistent with
Becker’s testimony, and as to this matter we consider Becker’s
testimony reliable and Cohen’s alleged recollection unreliable.
See supra note 7 to the effect that this problem was known to
petitioner and his counsel, who chose not to call upon Becker for
clarifying testimony.
 - 37 -

according to Feinberg, Becker complied.10 We already have

established, though, that petitioners may not reasonably rely on

Becker’s advice. Since Cohen and Feinberg themselves lacked the

expertise and knowledge of the pertinent facts to provide

informed advice to petitioner, any advice they gave petitioner

about SAB Foam plainly was of very limited value. See David v.

Commissioner, 43 F.3d 788 (2d Cir. 1995). Cohen and Feinberg

were partners and coinvestors rather than advisers on whom

petitioners could rely with respect to the SAB Foam transactions.

We hold that it was not reasonable for petitioner to rely upon

the advice received from either Cohen or Feinberg.

10
We note that Feinberg testified that the expert opinions
of Ulanoff and Burstein had passed petitioner’s review partly
because of Becker’s representation. With regard to SAB Resource,
petitioner claims that he had instructed Becker to:

go up to Hyannis and make sure that there were machines
there, that there were orders for machines there, that
the machines were producing product of the type that
were described in the expert opinions as to what the
machines were supposed to generate, or at least
appeared to do that, and to see if there was some
reasonable relationship to justify the price of the
machine. [Emphasis added.].

According to Feinberg, Becker confirmed that he had performed the
suggested tasks. With regard to SAB Foam, Feinberg testified
that he discussed the valuation with Becker on the same basis as
with the previous transaction (i.e., SAB Resource).

We consider Feinberg’s testimony inconsistent with Becker’s
testimony, and as to this matter we consider Becker’s testimony
reliable and Feinberg’s alleged recollection unreliable. See
supra note 7 to the effect that this problem was known to
petitioner and his counsel, who chose not to call upon Becker for
clarifying testimony.
 - 38 -

B. Alleged Experts

Petitioners contend that Dooskin and Sacco provided the

requisite independent analysis of the investment. We disagree.

Dooskin and Sacco, neither of whom had any knowledge of the

plastics recycling industry, reviewed the memorandum for, at

most, 7 hours combined. Their only knowledge of SAB Foam came

from the memorandum (i.e., promotional material) and from what

petitioner told them. Dooskin testified that he informed

petitioner the investment “passed muster”, but that the economics

of the investment “was dependent upon the valuation of the

equipment”. Petitioners, however, failed to undertake the

necessary due diligence and seek a thorough and independent

analysis of the value of the recyclers despite Dooskin’s warning.

We are not convinced that Dooskin’s and Sacco’s review of the

memorandum was any more than a very limited inquiry. Neither

petitioner nor his partners made any separate payment for

professional services by Dooskin and Sacco, and consequently they

could not expect the accountants to do more than read the

memorandum for form and apparent professionalism, potential

benefits, and obvious dangers.

C. Petitioners’ Relationship With Miller and Becker

Regardless of the foregoing, petitioners contend that

petitioner’s alleged “deep and longstanding professional

relationship” with his advisers justified his reliance on them.
 - 39 -

We disagree. See Barlow v. Commissioner, T.C. Memo. 2000-339;

cf. Dyckman v. Commissioner, T.C. Memo. 1999-79; Zidanich v.

Commissioner, T.C. Memo. 1995-382. Petitioner was sufficiently

experienced and sophisticated to know that SAB Foam was a tax

shelter, and that the value of the transaction depended on the

value of the underlying assets; and he failed to consult either

an independent appraiser or anyone with expertise in plastics

recycling.

In addition, the evidence does not support petitioner’s

claims that he had a unique and special relationship with his

advisers Miller and Becker. Cf. Dyckman v. Commissioner, supra

(absolving taxpayers from the negligence penalty, in part,

because of the long-term special relationship of trust and

friendship between the taxpayers and their adviser).

First, petitioner contends that he “kept in touch” with

Miller over the 10 years after he left Miller & Summit. At

trial, however, Miller testified that after petitioner left the

firm, they “rarely” kept in touch. On this matter, we consider

Miller a more reliable witness than petitioner. Miller’s

testimony clearly shows that he had no special and close

relationship with petitioner during the years in issue.

Petitioner asserts that he also had an especially close

relationship with PI. Petitioner testified, however, that he did

not do any work for PI after he left Miller & Summit, and that
 - 40 -

was 10 years before the years in issue. As noted above, by the

time in issue PI was under new ownership in a new location, and

there is no reason to believe petitioner had any great knowledge

about the company or its business in 1982.

Second, Cohen and Feinberg claim to have a particularly

close relationship with Becker. Becker, however, testified that

he had a “very close relationship with the majority of [his]

clients.” Cohen and Feinberg were not singled out, and nothing

in the evidence demonstrates that Becker treated Cohen and

Feinberg any differently from any other client.11 Becker offered

the investments in SAB Foam and other similar partnerships to

many of his clients.

D. Miscellaneous

We dismiss petitioners’ contention that the allegedly

successful 1981 investment enjoyed by Cohen and Feinberg in SAB

Resource evidenced the reasonableness of the 1982 investment in

SAB Foam. SAB Resource limited partners received a royalty

payment within 3 months of their investment in addition to the

11
Becker testified:

there is nothing different that I told to one client
about the same issue than I told to another client.
There may have been things I said to one client that
might not have been said to another. But, if I spoke
about one issue while I might not have used precisely
the same words, in substance, * * * what was said to
one client on one matter, was said to every other
client when that matter was discussed.
 - 41 -

credits and deductions. Petitioners argue that this makes the

case different from other similar cases and makes their

subsequent investment in SAB Foam reasonable. The modest royalty

was not sufficient to change the character of the deal.

Petitioners’ assertion that the amount invested was

“relatively small” is irrelevant when considering the amount of

tax benefits quickly claimed. The tax benefits and risks of the

transaction were substantial, and they were set forth in the

memorandum for anyone to see. Undoubtedly investors as

sophisticated as petitioner and his partners knew the size of the

potential benefits and risks here or should have known them if

they had been properly careful.

E. Conclusion as to Negligence

Under the circumstances of this case, petitioners failed to

exercise due care in claiming large deductions and tax credits

with respect to SAB Foam on their Federal income tax return. In

view of petitioner’s sophistication, experience, and education,

it was not reasonable for petitioners to rely as they did on an

interconnected group of advisers, promoters, and insiders, none

of whom had any expertise in plastics recycling. Petitioner

should have been able to determine that the recyclers were not

unique, that they were not worth the amount ascribed to them, and

that SAB Foam lacked economic substance and had no potential for

profit. None of the so-called advisers undertook a good faith
 - 42 -

investigation of the fair market value of the recyclers or of the

underlying economic viability or financial structure of SAB Foam.

Further, most of petitioner’s professional advisers had a

financial interest in either SAB Foam or another similar

partnership. The Plastics Recycling transaction was a sham, and,

as a sophisticated attorney, petitioner should have been able to

figure this out if he really had tried. Upon consideration of

the entire record, respondent’s determinations that petitioners

are subject to negligence penalties under section 6653(a)(1) and

(2), with respect to their tax return for 1982, are sustained.

Issue 2. Piggyback Agreement

Petitioners argue that they are entitled to the benefits of

the Stipulation of Settlement for Tax Shelter Adjustments

(piggyback agreement) applicable to Plastics Recycling cases.

Petitioners claim they are in essentially the same position as

the taxpayers in Fisher v. Commissioner, T.C. Memo. 1994-434, and

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

Additionally, petitioners argue that in the stipulation of facts

in the present case, “the parties unequivocally stipulated that

petitioner agreed to be bound to the lead cases under the

piggyback agreement. (Supp. Stip., pars. 34-35).” Respondent

disagrees with these arguments, and we agree with respondent.

In Fisher and Estate of Satin this Court summarized the

background of the piggyback agreement in the Plastics Recycling
 - 43 -

group of cases. On June 12, 1987, this Court ordered that the

lead counsel for the taxpayers in the Plastics Recycling cases

and respondent designate test or lead cases which would present

all issues involved in the Plastics Recycling cases. In a letter

dated August 14, 1987, respondent notified the Court that lead

counsel for the taxpayers and respondent had selected the

following docketed cases as the lead cases in the Plastics

Recycling group: (1) Fine v. Commissioner, docket No. 35437-85;

(2) Miller v. Commissioner, docket No. 10382-86; and (3) Miller

v. Commissioner, docket No. 10383-86. In early 1988, the Fine

case concluded without trial. The parties, thereafter, selected,

and the Court designated, the case of Provizer v. Commissioner,

docket No. 27141-86, as a lead case along with the two Miller

cases.

After the lead counsel for the taxpayers and respondent

agreed upon the test cases, respondent prepared a piggyback

agreement with respect to the Plastics Recycling project so that

taxpayers who did not wish to litigate their cases individually

could agree to be bound by the results of the test cases. Fisher

v. Commissioner, supra; Estate of Satin v. Commissioner, supra.

The piggyback agreement, as set forth in the Fisher and Estate of

Satin cases, provides as follows:

With respect to all adjustments in respondent’s notice
of deficiency relating to the Plastics Recycling tax
shelter, the parties stipulate the following terms of
settlement:
 - 44 -

1. THE ABOVE ADJUSTMENT IS THE ONLY ISSUE IN THIS
CASE;

2. The above adjustment(s), as specified in the
preamble, shall be determined by application of the
same formula as that which resolved the same tax
shelter adjustments with respect to the following
taxpayer(s):

Names(s): Harold M. Provizer and Joan Provizer v.
Commissioner of Internal Revenue
Tax Court Docket No.: 27141-86

Names(s): Elliot I. Miller v. Commissioner of Internal
Revenue
Tax Court Docket No.: 10382-86

Names(s): Elliot I. Miller and Myra K. Miller v.
Commissioner of Internal Revenue
Tax Court Docket No.: 10383-86

(hereinafter the CONTROLLING CASE)

3. All issues involving the above adjustment(s) shall
be resolved as if the petitioner(s) in this case
was/were the same as the taxpayer(s) in the CONTROLLING
CASE;

a. If the Court finds that any additions to tax or the
section 6621(c) interest are applicable to the
underpayment attributable to the above-designated tax
shelter adjustment(s), the resolution of the tax
shelter issue and the applicability of such addition to
tax or interest to that tax shelter issue in the
CONTROLLING CASE, whether by litigation or settlement,
shall apply to petitioner(s) as if the petitioner(s) in
this case was/were the same as the taxpayer(s) in the
CONTROLLING CASE;

4. If the adjustment is resolved in the CONTROLLING
CASE in a manner which affects the same issue in other
years (e.g., * losses in later years or affects
depreciation schedules), the resolution will apply to
petitioners’ later years as if the petitioners in this
case was/were the same as the taxpayer(s) in the
CONTROLLING CASE;
 - 45 -

5. A decision shall be submitted in this case when the
decision in the CONTROLLING CASE (whether litigated or
settled) becomes final under I.R.C. sec. 7481;

6. If the CONTROLLING CASE is appealed, the
petitioner(s) consent(s) to the assessment and
collection of the deficiency(ies), attributable to the
adjustment(s) formulated by reference to the Tax
Court’s opinion, notwithstanding the restrictions under
I.R.C. sec. 6213(a);

7. The petitioner(s) in this case will testify or
provide information in any case involving the same tax
shelter adjustment, if requested; and

8. The petitioner(s) in this case consent(s) to the
disclosure of all tax returns and tax return
information for the purpose of respondent’s discovering
or submitting evidence in any case involving the same
shelter adjustment(s).

The piggyback agreement was signed by counsel for the taxpayers

and respondent in the Fisher and Estate of Satin cases and filed

with the Court on September 12, 1988. Thereafter, the two Miller

cases were settled, and agreed decision documents in those cases

were entered by the Court on December 22, 1988. The settlement

provided that the taxpayers were not liable for the additions to

tax under section 6653(a) or increased interest for tax-motivated

transactions under section 6621(c) (Miller settlement). Fisher

v. Commissioner, supra; Estate of Satin v. Commissioner, supra.

This Court decided Provizer v. Commissioner, T.C. Memo.

1992-177, on March 27, 1992. In our Provizer opinion, and in the

affirmance, all of the Plastics Recycling issues were decided for

respondent, including the additions to tax under section 6653(a)

and increased interest under section 6621(c). Respondent did not
 - 46 -

notify the taxpayers in the Fisher and Estate of Satin cases or

notify any other taxpayers of the settlement of the Miller cases.

Respondent ultimately attempted collection from the Fisher and

Estate of Satin taxpayers pursuant to our decision in the

Provizer case and paragraph 5 of the piggyback agreement set

forth above. For reasons explained more fully in our above-cited

opinions, we held that the taxpayers in the Fisher and Estate of

Satin cases were entitled to be bound by the Miller settlement.

Petitioners contend that the protest letter is the

equivalent of a piggyback agreement that would entitle them to

the Miller settlement. We disagree. The piggyback agreement is

an intricately developed contract with specific provisions

tailored to the Plastics Recycling group of cases. Only the

execution of a piggyback agreement by both petitioners and

respondent could reflect the parties’ mutual assent to settle the

instant case based on the disposition of the lead case. See

Fisher v. Commissioner, supra, and Estate of Satin v.

Commissioner, supra, in which counsel for the taxpayers and

respondent’s counsel signed the piggyback agreement. Neither

petitioners’ counsel (or counsel for the general partner) in this

case nor respondent’s counsel executed a piggyback agreement.

Petitioners’ contention that the protest letter approximates a

piggyback agreement is mistaken. At best, the protest letter

indicates an intention that petitioners might be willing to enter
 - 47 -

into a formal piggyback agreement, but nothing in the record

indicates that petitioners followed up on any such intent.

The protest letter itself indicates an intention “to follow

the Tax Court’s decision in the lead cases” but omits any mention

of following a settlement of the lead cases, although that

possibility is specifically mentioned in paragraph 5 of the

piggyback agreement. Moreover, within a month after the Miller

settlement was executed, Becker as TMP, having become aware of

that settlement, submitted to respondent a clarification that SAB

Foam did not wish to be bound by the settlement and, therefore,

withdrew any statement of intention to be bound by any other

case.

The facts of this case are that petitioners’ TMP did not

execute the piggyback agreement. Instead he made it clear that

he did not wish to settle the case but to rely upon the results

of litigation. Petitioners’ unpersuasive argument is that, now

that the litigation of the lead case and many others has been

decided unfavorably to their position, they should be considered

to have accepted the piggyback agreement that their TMP

explicitly rejected.

Additionally, petitioners argue that a portion of the

stipulation of facts amounts to a concession by respondent’s

counsel that petitioners are entitled to the Miller settlement.

The stipulation paragraphs are as follows:
 - 48 -

34. On September 28, 1988 Robert L. Steele, on behalf
of the Tax Matters Partner of SAB Foam Recycling
Associates, filed a protest against the adjustments
to the 1982 and 1983 tax years proposed by the
Internal Revenue Service resulting from an examination
of SAB Foam Recycling Associates. In such protest the
Tax Matters Partner of SAB Foam Recycling Associates
agreed to follow the Tax Court’s decision in the
following lead cases: Miller v. Commissioner,
Docket No. 10382-89; Miller v. Commissioner, Docket No.
10383-86; and Provizer v. Commissioner, Docket No.
27141-86. A copy of the protest of the Tax Matters
Partner of SAB Foam Recycling Associates dated
September 28, 1988 is attached hereto and marked as
Exhibit 10-J. [See supra pp. 14-15.]

35. On January 20, 1989 Stuart Becker, as the
Tax Matters Partner of SAB Foam Recycling Associates,
sent a letter to the District Director of the Internal
Revenue Service withdrawing the September 28, 1988
agreement to be bound by the lead cases. A copy of the
January 20, 1989 letter is attached hereto as Exhibit
11-J. [See supra p. 15.]

The stipulation paragraphs quoted above merely summarize the

language of the protest letter and the withdrawal letter and

refer to attached exhibits for the specific language. The

language of the stipulation does not support the conclusion that

respondent agreed that the protest letter was equivalent to an

executed piggyback agreement. Petitioners’ counsel essentially

argues that by stipulation respondent’s counsel has agreed to

concede the issues in dispute in this case. The language of the

stipulation does not support this startling conclusion, nothing

else in the record supports it, and respondent’s counsel clearly

and explicitly has denied it. We disagree with petitioners’

counsel’s interpretation of the stipulation of facts.
 - 49 -

Accordingly, we hold that petitioners are not entitled to

the benefits of the Miller settlement or the piggyback agreement

concerning Plastics Recycling cases.

To reflect the foregoing,

Decision will be entered

under Rule 155.