                         T.C. Memo. 1995-525



                       UNITED STATES TAX COURT



                 DAVID C. WILSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


               REVIE CEE SOREY, II, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 21243-85, 7908-89.      Filed November 6, 1995.



    Lois C. Blaesing and Chauncey W. Tuttle, Jr., for

petitioners.

     Mary P. Hamilton, Paul Colleran, and William T. Hayes, for

respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION
                               - 2 -

     DAWSON, Judge:   These cases were assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.1    They were tried and

briefed separately but consolidated for purposes of opinion.       The

Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

               OPINION OF THE SPECIAL TRIAL JUDGE

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

Plastics Recycling group of cases.     For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

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

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

the underlying transaction in these cases are substantially

identical to those in the Provizer case.     Through a second tier

partnership, Efron Investors, petitioners David C. Wilson

(Wilson) and Revie Cee Sorey II (Sorey), invested in the

Clearwater Group limited partnership (Clearwater), the same

partnership considered in the Provizer case.     Pursuant to

petitioners' requests at trial, this Court took judicial notice

of our opinion in the Provizer case.

     By statutory notice of deficiency respondent determined a

deficiency in Wilson's 1981 Federal income tax in the amount of

1
     All section references are to the Internal Revenue Code in
effect for the tax years at issue, unless otherwise stated. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                         - 3 -

$37,959.55 and also determined that interest on deficiencies

accruing after December 31, 1984, would be calculated at 120

percent of the statutory rate under section 6621(c).2                    In a

notice of deficiency, respondent determined the following

deficiencies in and additions to Sorey's Federal income taxes:

                        Increased
                        Interest                     Additions to Tax
Year       Deficiency   Sec. 6621(c)   Sec. 6653(a)(1) Sec. 6653(a)(2)     Sec. 6659
                              1
1978       $10,022                            ---             ---          $3,006.60
1979           382           ---              ---             ---             114.60
                              1                                2
1981        11,737                          $586.85                         3,521.10
       1
       120 percent of the interest payable under sec. 6601 with respect to any
substantial underpayment attributable to tax-motivated transactions.
       2
       50 percent of the interest payable with respect to the portion of the
underpayment attributable to negligence.

The deficiencies in the Sorey case, docket No. 7908-89, for

taxable years 1978 and 1979 result from disallowance of

investment tax credit carrybacks and business energy credit

carrybacks from taxable year 1981.               In addition to the above

deficiencies and additions to tax, in amended answers, respondent

asserted the following:            (1) In the Wilson case, docket No.


2
     The notice of deficiency in the Wilson case, docket No.
21243-85, 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
89), Pub. L. 101-239, 103 Stat. 2106, 2399, effective for tax
returns due after Dec. 31, 1989, OBRA 89 sec. 7721(d), 103 Stat.
2400. The repeal does not affect the instant cases. For
simplicity, we shall 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.
                              - 4 -

21243-85, additions to tax for 1981 in the amount of $7,364 under

section 6659 for valuation overstatement, in the amount of $1,898

under section 6653(a)(1) for negligence, and under section

6653(a)(2) in an amount equal to 50 percent of the interest due

on the underpayment attributable to negligence; and (2) in the

Sorey case, docket No. 7908-89, additions to tax in the amount of

$501 and $19 under section 6653(a) for taxable years 1978 and

1979, respectively.

     In her opening brief in docket No. 7908-89, respondent

asserted that Sorey was liable for the addition to tax under

section 6659 for 1981 in the amount of $1,442.60, as opposed to

$3,521.10 as determined in the notice of deficiency.   We consider

the section 6659 addition to tax for 1981 asserted in docket No.

7908-89 reduced to correspond to the amount in dispute as set

forth in respondent's opening brief and amend the pleadings to

conform to the proof pursuant to Rule 41(b).

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

expert reports and testimony offered by respondent are admissible

into evidence; (2) whether petitioners are entitled to claimed

deductions and tax credits with respect to Clearwater as passed

through Efron Investors to petitioners; (3) whether petitioners

are liable for additions to tax under section 6653(a)(1) and (2)

for 1981 and whether petitioner Sorey is liable for additions to

tax for negligence or intentional disregard of rules or

regulations under section 6653(a) for 1978 and 1979; (4) whether
                               - 5 -

petitioners are liable for the additions to tax under section

6659 for underpayments of tax attributable to valuation

overstatement; and (5) whether petitioners are liable for

increased interest under section 6621(c).

                          FINDINGS OF FACT

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

so found.   The stipulated facts and attached exhibits are

incorporated in the respective cases by this reference.

     Petitioners resided in Hammond, Indiana, when their

petitions were filed.   During 1981 Wilson was a professional

football player for the New Orleans Saints.   During 1978, 1979,

and 1981, Sorey was a professional football player for the

Chicago Bears.

     Petitioners are limited partners in Efron Investors (EI),

which is a limited partner in the Clearwater limited partnership.

The Clearwater limited partnership is the same recycling

partnership that we considered in Provizer v. Commissioner,

supra.   The underlying deficiencies in these cases resulted from

respondent's disallowance of claimed losses and tax credits that

were passed through both Clearwater and EI to petitioners.

     Petitioners have stipulated substantially the same facts

concerning the underlying transactions as we found in Provizer v.

Commissioner, supra.3   Those facts may be summarized as follows.

3
     The parties did not stipulate certain facts concerning the
                                                   (continued...)
                               - 6 -

In 1981, Packaging Industries, Inc. (PI), manufactured and sold

six Sentinel expanded polyethylene (EPE) recyclers to ECI Corp.

for $5,886,000 ($981,000 each).   ECI Corp., in turn, resold the

recyclers to F & G Corp. for $6,976,000 ($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.    All

of the monthly payments required among the entities in the above

transactions offset each other.   These transactions were done

simultaneously.   We refer to these transactions collectively as

the Clearwater transaction.   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

based on the quality and amount of recycled scrap.

     In 1981, EI acquired a 43.313-percent limited partnership

interest in Clearwater, Wilson acquired a 9.581-percent interest

in EI, and Sorey acquired a 3.194-percent interest in EI.    As a

result of passthrough from Clearwater and EI, Wilson deducted an

operating loss in the amount of $26,830 and claimed investment

3
 (...continued)
Provizers, facts regarding the expert opinions, and other matters
that we consider of minimal significance. Although the parties
did not stipulate our findings regarding the expert opinions,
they stipulated our ultimate finding of fact concerning the fair
market value of the recyclers during 1981.
                               - 7 -

tax and business energy credits totaling $57,898, and Sorey

deducted an operating loss in the amount of $8,945 and claimed

investment tax and business energy credits totaling $19,314.4

Wilson used $24,545 of the credits claimed with respect to his

investment in EI and Clearwater on his 1981 Federal income tax

return.5   Sorey used $4,805 of his claimed credits on his 1981

return and carried back the unused portion of the credits to 1978

and 1979 in the respective amounts of $10,021 and $4,488.

Respondent disallowed petitioners' claimed deductions and credits

related to EI's investment in Clearwater.   In docket No. 7908-89,

respondent disallowed the entire loss claimed with respect to

Sorey's investment in EI.

     EI is an Indiana limited partnership that was formed in May

of 1981 by Morton L. Efron (Efron) as the general partner and

Real Estate Financial Corp. (REFC) as the initial limited

partner.   Fred Gordon (Gordon) is the president of REFC, which is

owned by members of Gordon's family.



4
     On his 1981 Federal income tax return, Sorey claimed a
qualified investment for purposes of calculating the investment
tax credit in the amount of $96,628, $120 more than the purported
value of the Clearwater recyclers. Accordingly, Sorey claimed an
investment tax credit in the amount of $9,663. Respondent
disallowed Sorey's claimed investment tax credit in its entirety.
The record is unclear with respect to the additional $120 claimed
on Sorey's return.
5
     The record does not disclose how or whether Wilson utilized
the remaining credits reported with respect to his investment in
EI.
                                 - 8 -

     EI was formed to acquire limited partnership interests in an

office building in Buffalo, New York (the office building), and a

shopping center in Haslett, Michigan (the shopping center).     In

contemplation of these ventures, EI prepared a private placement

memorandum (the original offering memorandum) and distributed it

to potential limited partners.    At some time in late 1981, EI

abandoned the contemplated investment in the shopping center and

substituted limited partnership interests in Clearwater and a K-

Mart shopping center in Swansea, Massachusetts (the K-Mart

investment).   The revised investment objectives were presented in

a revised offering memorandum (the revised offering memorandum).

The revised offering memorandum indicated that EI intended to

invest in 100 percent of the limited partnership interests in the

office building (10 units), 43.75 percent of the limited

partnership interests in Clearwater (7 units), and 15.625 percent

of the limited partnership interests in the K-Mart investment (2-

1/2 units).

     MFA Corp. (MFA) is the ministerial agent for EI.    Efron owns

50 percent of the stock of MFA, and REFC owns the remaining 50

percent.   The revised offering memorandum provides that Efron, as

general partner of EI, and MFA, as the ministerial agent for EI,

will receive substantial fees, compensation, and profits from EI.

The contemplated payments to MFA include:    (1) $100,000 for

supervisory management of the office building and ministerial

fees; (2) $100,000-$125,000 as loan commitment fees; (3) $25,000
                               - 9 -

for note collection guarantees; and (4) a maximum of $100,750 in

investment advisory fees.   In addition, MFA was also the

ministerial agent for the office building limited partnership

and, according to the revised offering memorandum, received

substantial payments in that capacity.

      Efron obtained financing for the EI investments through

local banks.   Like a number of limited partners in EI,

petitioners in these cases made a cash downpayment to EI and then

signed installment promissory notes for the remainder of the

purchase price.   Thereafter, Efron pledged any promissory notes

received from limited partners as security for loans to EI.     In

addition to lending funds directly to EI, the banks also offered

loans to individual limited partners for the downpayments needed

with respect to the EI investments.    Donald Cassaday (Cassaday),

a vice president of the First Bank of Whiting, was involved with

arranging the financing for EI with Efron and arranged required

financing for some of the EI limited partners.

      Wilson and Sorey subscribed to purchase limited partnership

units in EI in the respective amounts of 1-1/2 units ($150,000)

and one-half of a unit ($50,000).   Wilson did not borrow any

funds with respect to his investment in EI.   The record is

unclear as to how Sorey financed acquisition of his investment in

EI.

      Wilson learned of EI and the Clearwater transaction from

Efron.   In 1981, Wilson began to play professional football as a
                               - 10 -

quarterback for the New Orleans Saints of the National Football

League.   Prior to playing professional football, Wilson attended

a junior college in southern California for 2 years and the

University of Illinois for 1-1/2 years.    He played quarterback

for the University of Illinois for 1 year, but lost his

eligibility to play football during his planned last year there

and in 1981, decided to play in the National Football League.

Wilson's college background and the litigation by which he became

eligible to play football in the Big Ten for the 1980 season but

was prevented from playing in that league for 1981 are described

in Wilson v. Intercollegiate (Big Ten) Conference Athletic

Association, 668 F.2d 962 (7th Cir. 1982).    While attending the

University of Illinois, Wilson met Wayne Paulson (Paulson).

Through Paulson, Wilson met Efron, who became his sports agent

and his attorney for negotiation of his initial contract with the

New Orleans Saints.    At the time of trial, Efron had been

Wilson's sports agent for 13 years, and over the years he had

responsibilities with respect to the management of Wilson's funds

and investments.   Nevertheless, as to the EI investment in

Clearwater in issue here, Efron sent Wilson copies of the

offering circulars, kept him informed, and obtained Wilson's

approval of the investment.

     Sorey also learned of EI and the Clearwater transaction from

Efron.    During the years in issue, Sorey was a professional

football player for the Chicago Bears of the National Football
                                - 11 -

League.    Efron was Sorey's sports attorney and agent in 1981 and

throughout his professional football career, commencing in 1975.

Efron was involved in Sorey's business decisions, and he

consulted with his client and advised him, at least as to the EI

investment in Clearwater, before Sorey made the investment.

     Efron was the general partner of EI.      In addition, Efron

owned limited partnership interests in EI through Efron and Efron

Real Estate, a partnership owned by Efron and his wife, and AMBI

Real Estate, a partnership owned by Efron and his sister.      EI was

the first partnership for which Efron served as a general

partner.   Efron organized EI so that he could earn legal fees and

fees for managing the partnership.       He received compensation and

fees as the general partner of EI and as a 50-percent shareholder

of MFA.    Efron learned of the Clearwater transaction from Gordon.

     In 1981 Gordon was counsel to EI, to Efron as the general

partner of EI, to Efron personally, and to MFA.      He and Efron

have known each other since meeting at the University of Michigan

in 1955.   In the early 1960's Efron and Gordon began investing

together in the stock market, real estate, business loans, and

other investments.   Gordon is an attorney who holds a master's

degree in business administration and at one time was employed by

the Internal Revenue Service.    Prior to the date of the

Clearwater private placement offering, Gordon had experience

involving the evaluation of tax shelters.      Gordon was paid a fee

in the amount of 10 percent of some investments he guided to
                               - 12 -

Clearwater; however, he did not receive a fee directly from

Clearwater for the EI investments.      Efron was aware that Gordon

received commissions from the sale of some units in recycling

ventures.6   Gordon recommended investing in the Clearwater

offering to the investors in EI, as well as to some of Gordon's

other clients.

     Wilson attended a junior college in southern California for

2 years and then attended the University of Illinois for 1-1/2

years.   At the University of Illinois, he majored in physical

education.   Wilson has had no additional formal education since

leaving the University of Illinois in 1981 to play professional

football for the New Orleans Saints.

     Prior to entering the National Football League, Sorey

attended the University of Illinois.      When he was drafted by the

6
     The Clearwater offering memorandum states that the
partnership will pay sales commissions and fees to offeree
representatives in an amount equal to 10 percent of the price
paid by the investor represented by such person. The offering
memorandum further states that if such fees are not paid "they
will either be retained by the general partner as additional
compensation if permitted by applicable state law, or applied in
reduction of the subscription price." The Efron Investors'
Schedule K-1 for 1981 shows that EI paid full price, $350,000,
for its seven units of Clearwater, so the 10-percent commission
was not applied to reduce the subscription price. Gordon
specifically stated that in the case of EI he did not directly
receive the sales commission. Efron expressed doubt that he
individually had been an offeree representative in connection
with Clearwater or any other transaction. There are suggestions
that the commission might have been paid to MFA or offeree
representatives of individual investors, but the record on this
subject is inconclusive. Wayne Paulson was Wilson's offeree
representative and Norman Diamond was Sorey's offeree
representative with respect to EI.
                               - 13 -

Chicago Bears in 1975, he had less than one semester of study to

complete to earn his degree.   In 1993, he received a bachelor of

arts degree in sociology from the University of Illinois.     In

addition, at the time of trial, Sorey had earned credit hours in

pursuit of a master's degree in athletic administration and was

the director of the Hammond Boys and Girls Club of Northwest

Indiana.

     Petitioners do not have any formal training or work

experience relating to investments.      Petitioners do not have any

education or work experience in plastics recycling or plastics

materials.   They did not independently investigate the Sentinel

recyclers or see a Sentinel recycler or any other type of plastic

recycler prior to participating in the recycling ventures.

                               OPINION

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

case involving the Clearwater transaction and another tier

partnership, 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
                                - 14 -

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.

     Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that their investments in

the Sentinel EPE recyclers were similar to the investment

described in Provizer, and, pursuant to their request, we have

taken judicial notice of our opinion in the Provizer case.

Petitioners invested in EI, a tier partnership that invested in

Clearwater.   The underlying transaction in these cases (the

Clearwater transaction), and the Sentinel EPE recyclers

considered in these cases, are the same transaction and machines

considered in Provizer.

Issue 1.   Admissibility of Expert Reports and Testimony

     Before addressing the substantive issues in these cases, we

resolve an evidentiary issue.    At trial, respondent offered in

evidence the expert opinions and testimony of Steven Grossman

(Grossman) and Richard Lindstrom (Lindstrom).      At trial and in

their reply briefs, petitioners object to the admissibility of

the testimony and reports.

     The expert reports and testimony of Grossman and Lindstrom

are identical to the testimony and reports in Fine v.

Commissioner, T.C. Memo. 1995-222.       In addition, petitioners'

arguments with respect to the admissibility of the expert
                              - 15 -

testimony and reports are identical to the arguments made in the

Fine case.   For discussions of the reports and testimony, see

Fine v. Commissioner, supra, and Provizer v. Commissioner, supra.

For a discussion of the testimony and petitioners' arguments

concerning the admissibility of the testimony and reports, see

Fine.

     For reasons set forth in Fine v. Commissioner, supra, we

hold that the reports and testimony of Grossman and Lindstrom are

relevant and admissible, and that Grossman and Lindstrom are

experts in the fields of plastics, engineering, and technical

information.   We do not, however, accept Grossman and Lindstrom

as experts with respect to the ability of the average person, who

has not had extensive education in science and engineering, to

conduct technical research, and we have limited our consideration

of their reports and testimony to the areas of their expertise.

We also hold that Grossman's report meets the requirements of

Rule 143(f).

Issue 2. Deductions and Tax Credits With Respect to EI and
Clearwater

     The underlying transaction in these cases is substantially

identical in all respects to the transaction in Provizer v.

Commissioner, supra.   The parties have stipulated the facts

concerning the deficiencies essentially as set forth in our

Provizer opinion.   Based on these records, we hold that the

Clearwater transaction was a sham and lacked economic substance.
                                - 16 -

In reaching this conclusion, we rely heavily upon the

overvaluation of the Sentinel EPE recyclers.      Accordingly,

respondent is sustained on this issue with respect to the

underlying deficiency for 1981 in docket No. 21243-85 and the

underlying deficiencies for 1978 and 1979 in docket No. 7908-89.

With respect to the underlying deficiency for 1981 in docket No.

7908-89, we sustain respondent's disallowance of the deductions

and credits claimed with respect to EI's investment in

Clearwater.7    We also note that each petitioner has stated his

concession of this issue on brief.       The record plainly supports

respondent's determinations regardless of such concessions.      For

a detailed discussion of the facts and the applicable law, see

Provizer v. Commissioner, supra.

Issue 3.   Sec. 6653(a) Negligence

     In the notice of deficiency in docket No. 7908-89,

respondent determined that Sorey was liable for the negligence

additions to tax under section 6653(a)(1) and (2) for 1981.

Sorey has the burden of proving that respondent's determination

is erroneous.    Rule 142(a); Luman v. Commissioner, 79 T.C. 846,

860-861 (1982).    In addition, in her first amendments to answer,

7
     Respondent determined that Sorey was not entitled to any
deduction on his 1981 Federal income tax return with respect to
his investment in EI, however the notice of deficiency states
that only items "reported with respect to your [Sorey's]
equipment leasing activities for the year 1981 in Efron
Investors, Ltd. Partnership are disallowed." We sustain only
respondent's disallowance of the losses and credits claimed with
respect to EI's investment in Clearwater.
                              - 17 -

respondent asserted that Wilson was liable for the negligence

additions to tax under section 6653(a)(1) and (2) for 1981, and

that Sorey was liable for the negligence additions to tax under

section 6653(a) for 1978 and 1979.     Because these additions to

tax were raised for the first time in respondent's amendments to

answer, respondent bears the burden of proof on these issues.

Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170, 196 (1994).

     Section 6653(a) for 1978 and 1979 and section 6653(a)(1) for

taxable year 1981 provide for 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) for taxable year 1981 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.   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).

     As a result of their investments in EI, petitioners had

available to them investment tax and business energy credits with

respect to EI's investment in Clearwater that exceeded their
                                      - 18 -

respective investments in Clearwater.            The table below shows the

amounts of credits related to Clearwater available to petitioners

and the amounts of petitioners' investments in Clearwater through

EI.

                          Investment Tax and              Investment
      Petitioners       Business Energy Credits         in Clearwater1

      Wilson                    $57,898                     $33,533
      Sorey                      19,314                      11,179
      1
       Calculated as follows:

      EI's Investment in Clearwater        Wilson's Share of EI
               $350,000                x         9.581%           =$33,533

      EI's Investment in Clearwater    x   Sorey's Share of EI
               $350,000                          3.194%           =$11,179

The total benefits available to petitioners were not used

entirely on their 1981 tax returns.            Wilson deducted an operating

loss of $26,830, attributable to the Clearwater investment, and

used $24,545 of the credits on his 1981 return.              The record does

not disclose Wilson's use of the additional credits, whether for

carryover to later years in which he continued employment as a

professional football player or otherwise.             Sorey used $4,805 of

the claimed credits on his 1981 return and carried back $10,021

of credits to 1978 and $4,488 of credits to 1979.                 Like the

taxpayers in Provizer v. Commissioner, T.C. Memo. 1992-177,

"except for a few weeks at the beginning, petitioners [Wilson and

Sorey] never had any money in the [Clearwater] deal."                 In light

of the large tax benefits claimed on petitioners' 1981 Federal

income tax returns, and available for prompt use on their other

tax returns, we conclude that further investigation of the
                               - 19 -

investment clearly was required.    A reasonably prudent person

would have asked a qualified independent tax adviser if this

windfall were not too good to be true.    McCrary v. Commissioner,

92 T.C. 827, 850 (1989).

       Petitioners contend that they were reasonable in claiming

deductions and credits with respect to EI's investment in

Clearwater.    To support their contention, petitioners allege that

they were so-called unsophisticated investors and that in

claiming the deductions and credits, they relied on qualified

advisers.    Wilson and Sorey each argue that their reliance on the

advice of Efron insulates them from the negligence additions to

tax.    In addition, Wilson contends he relied on Paulson, his

offeree representative with respect to his investment in EI, and

Sorey contends that he relied on Cassaday, his banker, and Norman

Diamond, his accountant and offeree representative with respect

to EI.    Wilson and Sorey argue that they are not liable for the

negligence additions to tax because of their reliance on those

individuals.

       Under some circumstances a taxpayer may avoid liability for

the additions to tax for negligence under section 6653(a) if

reasonable reliance on a competent professional adviser is shown.

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.    Id.   In
                              - 20 -

order for reliance on professional advice to excuse a taxpayer

from the negligence additions to tax, the reliance must be

reasonable, in good faith, and based upon full disclosure.      Id.;

see Weis v. Commissioner, 94 T.C. 473, 487 (1990); Ewing v.

Commissioner, 91 T.C. 396, 423-424 (1988), affd. without

published opinion 940 F.2d 1534 (9th Cir. 1991); Pritchett v.

Commissioner, 63 T.C. 149, 174-175 (1974).

     In 1981, Wilson began to play professional football for the

National Football League.   He was 22 years old at that time.

Wilson acquired his interest in EI in 1981 upon the recommenda-

tion of his sports agent and attorney, Efron.    Wilson met Efron

through a mutual friend, Wayne Paulson.    He met Paulson while he

was at the University of Illinois.     He transferred there in 1980,

so in 1981, Paulson and Efron were recent acquaintances of

Wilson.   Wilson was represented by other counsel in his

litigation with the Big Ten concerning his football eligibility.

Efron represented Wilson as agent and attorney with respect to

Wilson's initial contract to play professional football, and

Efron arranged for his substantial fee to be withheld from

Wilson's compensation and paid directly to Efron.    Wilson had no

significant savings and had made no investments prior to his

purchase of 1-1/2 units of EI, with a face value of $150,000.     In

connection with this very large investment, Efron provided Wilson

a copy of the offering memorandum and discussed it with him, and

also provided a copy of the revised offering memorandum, which
                               - 21 -

included a description of the Clearwater transaction, and

discussed that with Wilson by telephone.    Paulson served as

Wilson's offeree representative as to EI, and he discussed the

investment with Wilson by telephone.    Wilson explained that the

conference was by telephone since he was in New Orleans and

Paulson was in Indiana in 1981.    As noted above, Morton Efron was

the general partner in EI and had a substantial financial

interest in the partnership and in its management.    Wayne Paulson

had introduced Wilson to Efron.    See Paulson v. Commissioner,

T.C. Memo. 1995-387, concerning Wayne Paulson's brother, as to

the relationship between Efron and Paulson.

     Efron was also Sorey's attorney and agent for his football

contracts in 1981.    Efron had represented Sorey since he began

playing professional football in 1975.    In 1981, Sorey was 26

years old.   Sorey testified that Efron was involved in all of his

business decisions.    Sorey learned of EI through the original

offering memorandum, which Efron sent to him.    Prior to 1981,

Sorey's only investments were real estate investments in which

Efron was involved and "some land deals" with his family.

Sorey's offeree representative with respect to EI was Norman

Diamond, his accountant, who had been introduced to Sorey early

in his career by Efron.    The record does not indicate that

Diamond made any extensive investigation of EI for Sorey's

benefit.   Sorey also discussed EI with Cassaday, the banker who,
                              - 22 -

as discussed above, was significantly involved in the financing

of EI.

     Petitioners Wilson and Sorey contend that they relied

heavily on Efron in making their investments in EI and in

claiming the associated tax deductions and credits.   Petitioners

argue that they should be relieved of the negligence additions to

tax under section 6653(a) because of their reliance on Efron.

Both Wilson and Sorey testified that they reviewed the original

offering memorandum and understood that EI was to invest solely

in real estate.   They testified that in early 1982, after they

invested in EI, they learned that the nature of the EI investment

had changed from a strictly real estate deal to a deal including

a recycling investment.   Although petitioners Wilson and Sorey

had an opportunity to read the revised offering memorandum, the

record indicates that they chose to spend little time on studying

the matter but chose, instead, to rely primarily upon the advice

of their advisers.

     We have rejected pleas of reliance when neither the taxpayer

nor the advisers purportedly relied upon by the taxpayer knew

anything about the nontax business aspects of the contemplated

venture.   Beck v. Commissioner, 85 T.C. 557 (1985); Flowers v.

Commissioner, 80 T.C. 914 (1983); Steerman v. Commissioner, T.C.

Memo. 1993-447.   The record does not show that Efron possessed

any special qualifications or professional skills in the

recycling or plastics industries.   In addition, Efron did not
                                - 23 -

hire anyone with plastics or recycling expertise to evaluate the

Clearwater transaction.   The record does not indicate that

Paulson, Cassaday, or Diamond had any plastics or recycling

expertise.

     The offering memorandum for EI and the revised offering

memorandum disclosed the fact that Efron was receiving

substantial compensation and fees as the general partner of EI

and as a 50-percent owner of MFA.    In addition, both of the EI

offering memoranda specifically warned potential investors that

they were "not to consider the contents of [the offering

memoranda] or any communication from the partnership or its

general partners as legal or tax advice", and Efron testified

that he advised every limited partner in EI to talk to an

independent adviser.   Petitioners had ample resources to employ

such advisers, but they chose not to do so.    Instead, they chose

to rely on Efron and his close associates, Paulson, Cassaday, and

Diamond.   Paulson had referred Wilson to Efron; Cassaday was the

banker who was heavily involved in financing EI; and Diamond was

the accountant who initially was referred to Sorey by Efron.

     In these cases, Efron's conflicts of interest were

substantial and were ostentatiously displayed in the offering

memoranda.   Efron himself testified that he urged investors to

consult independent advisers.    Certainly, Efron was not an

independent adviser, and he surely is not a person upon whom

Wilson and Sorey could rely in negotiations with EI.    His own
                               - 24 -

testimony indicates as much.    Paulson, Cassaday, and Diamond all

were associated with Efron, and the record indicates that

petitioners should have known about such associations.

       With respect to petitioners' claimed heavy reliance on

Efron, a promoter and general partner in EI, we recently have

suggested that advice from such persons "is better classified as

sales promotion."    See Vojticek v. Commissioner, T.C. Memo. 1995-

444.    The other individuals with whom petitioners claim to have

discussed the Efron investment were closely associated with

Efron, had no expertise in plastics or recycling, and in any

event, were not heavily relied upon by petitioners.

       Petitioners' reliance on brief on Heasley v. Commissioner,

902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408, is

misplaced.    The facts in the Heasley case are distinctly

different from the facts of these cases.    In the Heasley case,

the taxpayers actively monitored their investment.    Petitioners

have provided no evidence that they made any effort to monitor

their investment in EI.    Their testimony indicates that they paid

only casual attention to the shift of a major portion of the

investments of EI from real estate to plastics recycling.       In

addition, the taxpayers in the Heasley case were not educated

beyond high school.    Wilson had completed 3-1/2 years of college,

and Sorey was only a few credits short of requirements for his

B.A. degree from the University of Illinois at the time of their

investments in EI.    In contrast to the diligent but relatively
                               - 25 -

uneducated so-called blue-collar workers in Heasley, petitioners

were essentially college educated and relatively wealthy young

men.    Aside from their own abilities to read and consider the

proposed investment in EI, petitioners had the resources to

employ competent independent advisers and had been fully warned

that they should do so.    Unlike the taxpayers in Heasley,

petitioners here chose to pay little attention to their

investments and to ignore the admonitions in the offering

circular that they should consult with capable independent

advisers.    We consider petitioners' arguments with respect to the

Heasley case inapplicable to the circumstances here.

       From the record in these cases, we conclude that respondent

has satisfied her burden of proving negligence in the Wilson case

for 1981 and in the Sorey case for 1978 and 1979, and that Sorey

has failed to satisfy his burden of proof as to respondent's

determination of negligence for 1981.    We hold that petitioner

Sorey is liable for the negligence addition to tax for 1978,

1979, and 1981, and that petitioner Wilson is liable for such

addition to tax for negligence for 1981.

Issue 4.    Sec. 6659 Valuation Overstatement

       Respondent determined that Sorey was liable for the

additions to tax for valuation overstatement under section 6659

on the underpayments of his 1978, 1979, and 1981 Federal income

taxes attributable to the investment tax credits and business
                                - 26 -

energy credits claimed with respect to EI and Clearwater.8       Sorey

has the burden of proving respondent's determinations of these

additions to tax erroneous.   Rule 142(a); Rybak v. Commissioner,

91 T.C. 524, 566 (1988).   Additionally, in a first amendment to

answer, respondent asserted that Wilson was liable for the

addition to tax for valuation overstatement under section 6659 on

the underpayment of his 1981 Federal income tax attributable to

the investment tax credit and business energy credit claimed with

respect to EI and Clearwater.    Because this addition to tax was

raised for the first time in respondent's amendment to answer,

respondent bears the burden of proving that Wilson is liable for

the section 6659 addition to tax.    Rule 142(a); Vecchio v.

Commissioner, 103 T.C. at 196.

     The underlying facts of these cases with respect to this

issue are substantially the same as those in Fine v.

Commissioner, T.C. Memo. 1995-222.       In addition, with the

exception of arguments pertaining to respondent's failure to

waive the section 6659 additions to tax, petitioners' arguments

with respect to this issue are identical to the arguments made in

8
     As noted, supra p. 4, on brief respondent decreased the
amount of the sec. 6659 addition to tax asserted with respect to
taxable year 1981 in docket No. 7908-89. The amount of the 1981
sec. 6659 addition to tax asserted in respondent's opening brief
corresponds to the amount of a sec. 6659 addition to tax
calculated by applying sec. 6659 only with respect to the EI
credits utilized on Sorey's 1981 Federal income tax return.
Credits utilized on Sorey's 1981 return in the amount of $4,805
times 30% equals $1,442, the amount of the sec. 6659 addition to
tax asserted in respondent's opening brief.
                                - 27 -

the Fine case.     For reasons set forth in the Fine opinion, we

hold that 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 credits claimed with respect to EI

and Clearwater.9

     Petitioners contend that respondent abused her discretion in

failing to waive the section 6659 additions to tax pursuant to

section 6659(e).     Section 6659(e) authorizes the Commissioner to

waive all or part of the addition to tax for a valuation

overstatement if the taxpayer establishes that there was a

reasonable basis for the valuation or adjusted basis claimed on

the return and that such claim was made in good faith.    The

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

reviewable by this Court for abuse of discretion.

     On these records, we hold that respondent did not abuse her

discretion in failing to waive the section 6659 additions to tax.

The records in these cases do not show that petitioners'

valuations were reasonable.    In addition, the records fail to

indicate that petitioners ever requested a waiver from respondent

pursuant to section 6659(e) until briefing after trial.    We are


9
     Sec. 6659 applies to returns filed after Dec. 31, 1981.
Although petitioner Sorey filed returns for 1978 and 1979 prior
to Dec. 31, 1981, he is liable for the additions to tax under
sec. 6659 for 1978 and 1979 because the underpayments of tax for
those years are attributable to the carryback of unused tax
credits claimed on his 1981 return. See Nielsen v. Commissioner,
87 T.C. 779 (1986).
                                - 28 -

reluctant to find that respondent abused her discretion here

when, for all the records show, she was not even timely requested

to exercise it.    See Haught v. Commissioner, T.C. Memo. 1993-58;

Lapin v. Commissioner, T.C. Memo. 1990-343, affd. without

published opinion 956 F.2d 1167 (9th Cir. 1992).       The records in

these cases do not establish an abuse of discretion on the part

of respondent but support respondent's position.       Accordingly, we

hold that respondent's refusal to waive the section 6659

additions to tax is not an abuse of discretion.

Issue 5.     Sec. 6621(c) Tax-Motivated Transactions

     In notices of deficiency, respondent determined that

interest on deficiencies accruing after December 31, 1984, would

be calculated under section 6621(c).     The annual rate of interest

under section 6621(c) equals 120 percent of the interest payable

under section 6601 with respect to any substantial underpayment

attributable to tax-motivated transactions.     An underpayment is

substantial if it exceeds $1,000.     Sec. 6621(c)(2).

     The underlying facts of these cases are substantially the

same as those in Fine v. Commissioner, supra.     In addition,

petitioners' arguments on brief with respect to this issue are

verbatim copies of the arguments in the taxpayers' briefs in the

Fine case.    For reasons set forth in the Fine opinion, we hold

that respondent's determination as to the applicable interest

rate for deficiencies attributable to tax-motivated transactions
                             - 29 -

is sustained, and the increased rate of interest applies for the

taxable years in issue.

     To reflect the foregoing,


                                      Decisions will be entered

                                 under Rule 155.
