                        T.C. Memo. 1997-314



                      UNITED STATES TAX COURT



                  ROBERT GOTTSEGEN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket Nos.   23766-93, 19554-94.     Filed July 8, 1997.




     Robert Gottsegen, pro se.

     Mary P. Hamilton, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   These consolidated cases were assigned to

Special Trial Judge Robert N. Armen, Jr., pursuant to the

provisions of section 7443A(b)(4) and Rules 180, 181, and 183.1

     1
         Unless otherwise indicated, all section references are to
                                                    (continued...)
                               - 2 -

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

Judge, which is set forth below.

                OPINION OF THE SPECIAL TRIAL JUDGE

     ARMEN, Special Trial Judge:   Respondent determined

deficiencies and accuracy-related penalties with respect to

petitioner's Federal income taxes for the years and in the

amounts as shown below:

                                       Accuracy-related penalty
     Year       Deficiency                   Sec. 6662(a)

     1989        $34,823                       $6,965
     1990          1,196                          239

     The present cases are a part of the Plastics Recycling group

of cases.   For a detailed discussion of the transactions involved

in the Plastics Recycling group of cases, see Provizer v.

Commissioner, T.C. Memo. 1992-177, affd. without published

opinion 996 F.2d 1216 (6th Cir. 1993).     The underlying

transactions involving the Sentinel recyclers in the present

cases are substantially identical to the transactions in Provizer

v. Commissioner, supra.

     Consistent with the resolution of some of the disputed

issues in Provizer v. Commissioner, supra, the parties filed a

Stipulation of Settled Issues concerning the adjustments related




(...continued)
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 - 3 -

to petitioner's participation in the Plastics Recycling Program.

The stipulation states in pertinent part as follows:

     1. Petitioner is not entitled to any deductions,
     losses, investment credits, business energy investment
     credits or any other tax benefits claimed on his tax
     returns as a result of his participation in the
     Plastics Recycling Program.

     2.   This stipulation resolves all issues that relate
     to the items claimed on petitioner's tax returns
     resulting from his participation in the Plastics
     Recycling Program with the exception of petitioner's
     liability for additions to the tax under the applicable
     provisions of Section 6662(a).

     After the foregoing stipulation, the issue remaining for

decision is whether petitioner is liable for accuracy-related

penalties under section 6662(a) for 1989 and 1990.    The

resolution of this issue turns on whether, for 1989, a

substantial valuation misstatement or a substantial

understatement of income tax exists for such year, or whether,

for 1989 and 1990, petitioner was negligent.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   Petitioner resided in Bermuda at the time that his

petition was filed with the Court.

A.   The Plastics Transactions

     The present cases involve petitioner's purchase of a

Sentinel expanded polyethylene (EPE) recycler in 1981 and two

Sentinel expanded polystyrene (EPS) recyclers in 1982.
                                - 4 -

     Transactions involving the Sentinel EPE recycler were

considered in Provizer v. Commissioner, supra.      Petitioner has

stipulated to substantially the same facts concerning the

underlying transactions as were found in Provizer, with the

exception of certain facts concerning (1) the Provizers, (2) the

expert opinions, (3) the value of the Sentinel EPE recycler, and

(4) other matters that we regard as having minimal significance.

The facts concerning the transactions as found in Provizer may be

summarized as follows:

     Packaging Industries, Inc. (PI) manufactured and sold six

Sentinel EPE recyclers to ECI Corp. for $981,000 each.     ECI

Corp., in turn, resold the recyclers to F&G Corp. for $1,162,666

each.   F&G Corp. then leased the recyclers to the Clearwater

Group partnership, which licensed the recyclers to FMEC Corp.,

which sublicensed them back to PI.      PI allegedly sublicensed the

recyclers to entities (the end-users), which 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 payment from FMEC Corp. based on the

quality and amount of recycled scrap.

     All of the foregoing transactions were executed

simultaneously.

     The sale of the recyclers from PI to ECI Corp. was financed

with nonrecourse notes.   Approximately 7 percent of the sales

price of the recyclers sold by ECI Corp. to F&G Corp. was paid in
                                 - 5 -

cash and the remainder was financed through notes.    The notes

provided that 10 percent of the amount thereof was recourse but

that the recourse portion was due only after the nonrecourse

portion had been paid in full.    All of the monthly payments

required among the entities in the above transactions offset each

other.

     In Provizer v. Commissioner, supra, we found that the market

value of a Sentinel EPE recycler in 1981 did not exceed $50,000

and that the nuts and bolts, or manufacturing, cost was $18,000.

Other recycling machines were commercially available during the

years in issue in Provizer, including the Buss-Condux

Plastcompactor, Nelmor/Weiss Densification System (Regenolux),

Cumberland Granulators, and Foremost Densilator.    Information

regarding these other machines was readily available.

B.   Petitioner and His Introduction to the Plastics Transactions

     Petitioner received a bachelor of science degree from New

York University and has completed post-graduate courses at

Harvard University.

     Petitioner is a businessman who was active in the plastics

industry from at least 1958 until 1989.    At one time or another

during his career as a business executive, petitioner has been

the chief executive officer (CEO) of approximately 12 different

plastics-related companies, which collectively employed many

individuals.   In 1981 and 1982 in particular, petitioner was the

CEO of Gotham Chicago Corp. (Gotham Corp.), a steam chest molding
                                - 6 -

operation once owned by petitioner's family.   During these years

petitioner was also actively involved in running several

privately held corporations.

     In addition to gaining experience as a CEO and business

executive, petitioner learned about plastic commodities, plastic

resins, and petrochemicals.    Petitioner has purchased millions of

dollars of plastic processing machinery and, except for the

recyclers that petitioner purchased in 1981 and 1982, has never

paid more than several hundred thousand dollars for an individual

piece of equipment.   Tax credits and benefits were important

considerations to petitioner in purchasing plastics-processing

equipment.

     Some of the companies in which petitioner was actively

involved, Gotham Corp. in particular, experienced problems with

the disposal of expanded polystyrene scrap.    Expanded polystyrene

is a highly porous form of polymer that can be produced in

various grades or densities.   The density of expanded polystyrene

varies inversely with the volume of trapped gases within the

polymer.   The gases trapped in the polymer are volatile.   Gotham

Corp. generated large quantities of expanded polystyrene that

were bulky and volatile.   Local landfills and dumps became

unwilling to accept the expanded polystyrene scrap generated by

Gotham Corp., thereby creating disposal problems for petitioner.

     In the mid-1970's petitioner became acquainted with Elliot

I. Miller (Miller), a practicing attorney experienced in tax
                                - 7 -

matters and corporate counsel to PI.    Miller knew a number of

attorneys, accountants, and business executives, some of whom

were involved in the plastics industry.    Miller put petitioner in

contact with John D. Bambara (Bambara), whom petitioner had known

since 1976, Raymond Grant (Grant), and Harris W. Freedman

(Freedman).

     Bambara is the president of PI,2 a closely held corporation

that manufactures thermoplastic and other types of packaging

machinery.    PI holds itself out as the world's largest

manufacturer of blister packaging machinery and as fabricating

the industry's widest line of thermoforming machinery, including

highly specialized disposable medical and food packaging systems.

PI also manufactures the Sentinel polyethylene (EPE) and

polystyrene (EPS) recyclers, which recycle expanded polyethylene

and expanded polystyrene, respectively.

     Grant is a New York investment banker, attorney, and

accountant.    Grant is president of ECI, as well as the 100-

percent owner of its stock.

     Freedman is a certified public accountant in New York and is

also the president and chairman of the board of F&G Corp..3

     2
       Bambara, together with his wife and daughter, owns 100-
percent of the stock of PI. Bambara is also the president,
director, and 100-percent owner of FMEC Corp.
     3
       F&G Corp. was organized in 1979 as an S Corp. and was
originally owned equally by Grant and Freedman. In the early
1980's, Miller reorganized F&G as a subchapter C Corp. to act as
                                                   (continued...)
                               - 8 -

     In the spring of 1981, Grant had a discussion with Miller

regarding energy tax credits for recycling equipment.    Sometime

after this discussion, petitioner was considering the

installation of energy-saving equipment at one of his companies

and contacted Miller to discuss available tax credits.

Petitioner asked Miller whether PI had any equipment that could

be used to take advantage of tax credits.

     Miller contacted Bambara to discuss the idea.   Bambara told

Miller about a recycler prototype that Bambara thought might be

suitable for a venture centering around benefits from tax

credits.   Miller then arranged for an organizational meeting

including Miller, Bambara, Grant, petitioner, and Anthony

Giovannone, the executive vice president of PI.

     At the organization meeting, Bambara discussed the recycling

equipment that PI had developed in response to PI's actual or

potential problems with scrap disposal.   Bambara referred to PI's

ability to manufacture recyclers, and he mentioned PI's

proprietary interest in the prototype recycler.




     3
      (...continued)
a safe-harbor lessor and to satisfy the requirements of sec.
168(f). Ultimately, Freedman reduced his ownership interest in
F&G to 9.1 percent, and Grant sold his entire interest. At some
point in time not disclosed in the record, 10 new shareholders
were admitted to F&G, including Miller and petitioner. Miller
and petitioner each have a 9.1 percent ownership interest in F&G.
                                - 9 -

     1.     Petitioner's Purchase of the Sentinel EPE Recycler

     Shortly after the organizational meeting, petitioner viewed

a prototype Sentinel EPE recycler.      At the time, none of the

plastics-related companies in which petitioner was actively

involved generated expanded polyethylene scrap.

     Bambara told petitioner that Sentinel EPE recyclers were

unique because no other machine could recycle expanded

polyethylene.    Petitioner allegedly contacted manufacturers of

plastics-processing equipment and inquired whether such

manufacturers possessed equipment that could successfully recycle

expanded polyethylene.    According to petitioner, the

manufacturers "had all sorts of reservations and no * * * firm

assertions."    Also, petitioner allegedly "looked around the

industry [and] didn't see any machine" successfully recycling

expanded polyethylene.

     At Miller's direction, petitioner retained Stanley Ulanoff

(Ulanoff) and Samuel Burstein (Burstein) to issue marketing and

technical opinions, respectively, regarding the Sentinel EPE

recycler.    Petitioner did not think that he needed Ulanoff's and

Burstein's opinions in order to make an informed decision

regarding the Sentinel EPE recycler.      In this regard, petitioner

testified:

     I hired * * * [Ulanoff and Burstein] because I was told
     to hire them. I really didn't need them to tell me
     what the machine could do and the what -- the profit I
     could make. * * * Elliot Miller told me this is the
     way you do it. I did it.
                              - 10 -

     The record reveals little information about Ulanoff and

Burstein other than the fact that both were investors in Sentinel

recyclers.   There is no indication that either Ulanoff or

Burstein had any expertise in the plastics industry or that they

retained a plastics expert to help them analyze petitioner's

purchase of the Sentinel EPE recycler.

     Petitioner also retained the law firm of Windells, Marx,

Davis & Ives (WMDI) to issue a legal opinion.    On October 15,

1981, WMDI issued a legal opinion to petitioner.    The opinion was

not introduced into evidence at the trial of the present cases.

     Petitioner apparently retained WMDI because WMDI's tax

department, headed by John Y. Taggart (Taggart), was preparing

the legal opinion for the closings for all of the Sentinel EPE

recyclers manufactured by PI in 1981.    Taggart, in addition to

being the head of the WMDI's tax department, was an adjunct

professor at New York University and had previously been employed

by the U.S. Department of the Treasury.    Taggart also owned a

6.66-percent interest in a second-tier Plastics Recycling

partnership.

     There is no evidence in the record that Taggart or any other

member of WMDI had any expertise in the plastics industry.

Further, there is no evidence in the record that WMDI retained

experts in the plastics industry to help the firm analyze and

assess petitioner's purchase of the Sentinel EPE recycler.
                                - 11 -

     On October 7, 1981, in a series of transactions similar to

those of the Clearwater Group partnership in Provizer v.

Commissioner, T.C. Memo. 1992-177, affd. without published

opinion 996 F.2d 1216 (6th Cir. 1993), petitioner purchased

outright one Sentinel EPE recycler from ECI Corp. for

$1,162,667.4    As prearranged, petitioner leased the recycler to

FMEC Corp.     Thus, the significant transactions of petitioner's

purchase of the Sentinel EPE recycler differ from the underlying

transactions in Provizer in the following respects: (1) The form

of petitioner's interest in the equipment; (2) the entity from

which petitioner's interest was obtained; (3) the fact that

equipment was leased, rather than licensed, to FMEC Corp.; and

(4) the number of machines sold, leased, licensed, and

sublicensed.

     As of October 7, 1981, there was no established market for

operating Sentinel EPE recyclers.

     Petitioner never made a profit in any year from his Sentinel

EPE recycler.

     2.      Petitioner's Purchase of the Sentinel EPS Recyclers

     In 1982, PI manufactured Sentinel EPS recyclers which

recycled expanded polystyrene.     Bambara showed petitioner the

blueprints of the machine and explained to petitioner that the


     4
       Petitioner purchased the Sentinel EPE recycler for cash in
the amount of $43,700 and notes in the amount of $1,118,967. It
does not appear that petitioner made any payments on the note.
                              - 12 -

Sentinel EPS recycler could recycle expanded polystyrene into a

densified, devolatized polystyrene and would simultaneously

preserve the physical properties of polystyrene.   Petitioner

personally observed a Sentinel EPS recycler in operation.

     Petitioner retained Ulanoff and Burstein to issue marketing

and technical opinions, respectively, regarding the Sentinel EPS

recyclers.

     Petitioner also retained the law firm of Boylan & Evans to

issue a legal opinion regarding the Sentinel EPS recyclers.

William A. Boylan (Boylan) and John D. Evans (Evans) were

formerly partners at WMDI before leaving in 1982 and forming

their own law firm.   Boylan & Evans issued a legal opinion on

December 1, 1982.

     There is no evidence in the record that any member of Boylan

& Evans had any expertise in the plastics industry or retained

plastic experts to assist the firm in evaluating petitioner's

purchase of the Sentinel EPS recyclers.

     Petitioner consulted with Miller regarding the details of

petitioner's purchase of the Sentinel EPS recyclers.    On

September 17, 1982, Miller organized Resin Recyclers, Inc. (RRI),

an S corporation wholly owned by petitioner, which was

specifically created for the Sentinel EPS recycler transactions.

     RRI was designed to be a joint venturer with PI and

partnerships investing in the Sentinel EPS recyclers.    In theory,

RRI was to place Sentinel EPS recyclers with end-users, and to
                              - 13 -

arrange for any scrap produced by the end-users to be further

reprocessed and sold.   PI agreed to maintain and repair the

machines.

     On December 1, 1982, in a series of transactions similar to

those of the Clearwater Group partnership in Provizer v.

Commissioner, supra, petitioner purchased two Sentinel EPS

recyclers for a total of $3,500,000.5   Petitioner then entered

into a joint venture agreement with RRI and PI for the

"exploitation" of his recyclers.   Thus, the significant

transactions of petitioner's purchase of the Sentinel EPS

recyclers differ from the underlying transactions in Provizer in

the following respects: (1) The form of petitioner's interest in

the equipment; (2) the entity from which petitioner's interest

was obtained; (3) petitioner's participation in a joint venture

after purchasing the recyclers; and (4) the number of machines

sold, leased, licensed, and sublicensed.

     Petitioner, as the sole owner of RRI, was responsible for

placing his Sentinel EPS recyclers with end-users.   Because

petitioner was also responsible for placing other investors'

Sentinel EPS recyclers with end-users, he could not place his

recyclers in the most profitable locations; i.e., locations with

the most expanded polystyrene to recycle.   Rather, the most


     5
       Petitioner purchased the Sentinel EPS recyclers for cash
in the amount of $135,000 and a note in the amount of $3,365,000.
It does not appear that petitioner made any payments on the note.
                              - 14 -

profitable locations were reserved for the other Sentinel EPS

recyclers owned by other investors.

     Petitioner received "hundreds and hundreds" of complaints

regarding the recyclers for which RRI was responsible, including

the two recyclers that he owned.   The end-users complained that

the machines did not work; that they had fires; that too much

labor was involved; and that PI was not maintaining and repairing

the recyclers.   Petitioner "couldn't get someone to maintain the

equipment" and began to feel that the investment was "hopeless"

after "about 400 phone calls and pleadings and meetings."

Petitioner never profited in any year from his Sentinel EPS

recyclers, a fact that petitioner attributes to PI's alleged

failure to repair and maintain the recyclers.

     At the time of trial, petitioner could not recall the names

of the companies with which he placed his recyclers.   When asked

at trial if he knew where his Sentinel EPE and EPS recyclers were

presently located, petitioner replied that he did not have the

"vaguest idea" and that they had been "abandoned" by him because

PI would not maintain them.

     At the time that petitioner purchased the Sentinel EPS

recyclers, there was no established market for such recyclers.

C.   Expert Testimony

     The parties did not agree on the value of either the

Sentinel EPE or EPS recyclers, and petitioner did not stipulate
                             - 15 -

to be bound by the value of the Sentinel EPE recyclers that we

found in Provizer v. Commissioner, supra.

     At trial, petitioner did not offer expert testimony

regarding the value of either the Sentinel EPE or EPS recyclers.

In contrast, respondent offered expert testimony from Steven

Grossman (Grossman) and Richard S. Lindstrom (Lindstrom).

Although respondent's experts submitted reports concerning the

value of both the Sentinel EPE and EPS recyclers, the expert's

testimony at trial focused on the value of the Sentinel EPS

recyclers.

     1.   Grossman

     Grossman is a professor in the Plastics Engineering

Department at the University of Massachusetts at Lowell.    He has

a doctorate degree in Polymer Science and Engineering from the

University of Massachusetts and a bachelor of science degree in

chemistry from the University of Connecticut.   He also has

approximately 15 years of experience in the plastics industry,

including over 4 years' experience as a research and development

scientist at the Upjohn Co. in its Polymer Research Group.

     Grossman is also a partner in the law firm of Hayes,

Soloway, Hennessey, Grossman & Hage, P.C., which firm practices

in the area of intellectual property, including patents,

trademarks, copyrights, and trade secret protection.

     Grossman's reports concerning the value of the Sentinel EPE

and EPS recyclers were very similar, and we discuss them
                              - 16 -

together.   Grossman's reports discuss the limited market for the

recycled plastic material.   Grossman concluded that the Sentinel

EPE and EPS recyclers were unlikely to be successful products

because of the absence of any new technology, the absence of a

continuous source of suitable scrap, and the absence of any

established market.   Grossman suggested that a reasonable

comparison of the products available in the polyethylene industry

in 1981, and in the polystyrene industry in 1982, with the

Sentinel EPE and EPS recyclers, respectively, reveals that the

Sentinel recyclers had very little commercial value and were

similar to comparable products available on the market in

component form.   For these reasons, Grossman opined that the

Sentinel EPE and EPS recyclers did not justify the "one-of-a-

kind" price tag that they carried.

     Specifically, Grossman reported that there were several

machines on the market as early as 1981 that were functionally

equivalent to, and significantly less expensive than, both the

Sentinel EPE and EPS recyclers.   These machines included: (1) The

Japan Repro recycler, available in 1981 for $53,000; (2) the

Buss-Condux Plastcompactor, available before 1981 for $75,000;

(3) the Foremost Machine Builders' "Densilator", available from

1978-1981 for $20,000; and (4) the Midland Ross Extruder,

available in 1980 and 1981 for $120,000.   Grossman added that all

of these machines were "widely available".
                               - 17 -

     Grossman examined both the Sentinel EPS recycler and a Japan

Repro recycler and found that the construction of the two

machines was "nearly identical".    Further, Grossman concluded

that the recycled polystyrene produced by both machines would

also be nearly identical.    In Grossman's opinion, neither the

Japan Repro recycler nor the Sentinel EPS recycler represented "a

serious effort at recycling" because the end-product from both

machines was not completely devolatized and required further

processing.   It was also Grossman's opinion that an individual

who seriously wanted to recycle would not purchase either of

these machines.

     Grossman's opinion regarding the Sentinel EPE recycler was

based on the descriptions of such recycler as set forth in the

writings of other professionals.    He neither tested nor examined

the Sentinel EPE recycler.

     Grossman's opinion regarding the Sentinel EPS recycler was

based on his personal examination of a Sentinel EPS recycler, as

well as the descriptions of such recyclers as set forth in the

writings of other professionals .    Grossman did not, however,

observe the Sentinel EPS recycler in actual operation.

     Finally, Grossman reported on the relationship between the

plastics industry and the petrochemical industry.    Grossman noted

that although the development of the petrochemical industry is a

contributing factor in the growth of the plastics industry, the

two industries have a "remarkable degree of independence".
                               - 18 -

Grossman observed that the "oil crisis" in 1973 triggered "dire"

predictions about the future of plastics that had not been

fulfilled in 1981.    Grossman stated that the cost of a plastic

product depends, in large part, on technology and the price of

alternative materials.    Grossman's studies concluded that a 300-

percent increase in oil prices results in a 30-40 percent

increase in the cost of plastic.

     Grossman did not specifically value either the Sentinel EPE

Recycler or the Sentinel EPS Recycler.    However, as previously

stated, Grossman concluded that existing technology was available

that provided equivalent capability of recycling polyethylene and

polystyrene.   Specifically regarding the Sentinel EPS recycler,

Grossman also concluded that recycling equipment that achieved

the same result as the Sentinel EPS recycler sold for about

$50,000 during the relevant period.

     2.   Lindstrom

     Lindstrom graduated from Massachusetts Institute of

Technology with a bachelor's degree in chemical engineering.

From 1956 until 1989 Lindstrom worked for Arthur D. Little, Inc.

in the areas of process and product evaluation and improvement

and new product development, with special emphasis on plastics,

elastomers, and fibers.    At the time of trial, Lindstrom

continued to pursue these areas as a consultant.

     In his report, Lindstrom determined that several different

types of equipment capable of recycling expanded polyethylene
                             - 19 -

were available and priced at approximately $50,000 in 1981.

Similarly, Lindstrom determined that several different types of

equipment capable of recycling expanded polystyrene were

available and priced between $25,000 and $100,000 in 1982.

Lindstrom found that, based on his research, "there were

available in 1981 commercial units that could be purchased for

$50,000 or less that were totally equal to the Sentinel EPE

recycler in function, product quality, and capacity."   With

respect to the Sentinel EPS recycler, Lindstrom stated that

"several machines were available that could reprocess expanded

polystyrene into higher quality, more useful, higher value

product and these machines or processing systems cost $50,000 to

$100,000 in 1982."

     Lindstrom examined the Japan Repro recycler, the Buss-Condux

Plastcompactor, and the Nelmor Regenolux.   Lindstrom found that

these machines were functionally equivalent to the Sentinel EPS

recycler and were available in the years and at the prices

reported by Grossman, detailed supra.   Lindstrom also reported

that various equipment companies, such as the Cumberland

Engineering Division of John Brown Plastics Machinery, were

willing to provide customized recycling programs to companies at

a minimum cost of $50,000.

     Lindstrom found that in "average-use situations", the

Sentinel EPE recycler could process 200 pounds of plastic per
                              - 20 -

hour and the Sentinel EPS recycler could process between 100 and

200 pounds of plastic per hour.

     Lindstrom observed a Sentinel EPE recycler in operation at

PI, and he was allowed to take photographs of the recycler and

look at its blueprints.   Based on his observations and study,

Lindstrom estimated the manufacturing cost of the Sentinel EPE

recycler to be approximately $20,000.    Lindstrom concluded that

the market value of the Sentinel EPE recycler did not exceed

$50,000.

     Lindstrom observed a Sentinel EPS recycler in operation and

was allowed to inspect the machine closely.    Lindstrom estimated

the manufacturing cost of the Sentinel EPS recycler to be

approximately $20,000 and market value of the machine to be

approximately $25,000.

D.   Petitioner's Federal Income Tax Returns

     On his 1989 and 1990 individual income tax returns (Forms

1040), petitioner claimed that his Sentinel EPE recycler had a

basis of $1,162,667, and that his Sentinel EPS recyclers had an

aggregate basis of $3,500,000.    Also on his 1989 and 1990

returns, petitioner claimed a depreciation deduction (and a net

loss) in the amount of $89,842 per year with respect to his

Sentinel EPE recycler.6   Finally, petitioner claimed net

     6
       Petitioner did not claim any depreciation deductions for
his Sentinel EPS recyclers on his 1989 and 1990 returns because
he had fully depreciated those recyclers on his returns for prior
                                                   (continued...)
                              - 21 -

operating loss (NOL) deductions in the amount of $2,240,458 and

$2,200,426, on his 1989 and 1990 income tax returns,

respectively, with respect to his Sentinel EPE and EPS recyclers.

The NOL deductions represented carryforwards of NOL's claimed by

petitioner for the taxable years 1983 through 1988.

E.   The Notices of Deficiency

     In the notices of deficiency, respondent disallowed all

items of loss, deductions, and credits related to the Sentinel

recyclers and increased petitioner's income accordingly.

     In addition, respondent determined that, for 1989,

petitioner was liable for the accuracy-related penalty under

section 6662(a) based on: (1) Negligence; (2) substantial

understatement of income tax liability; and (3) substantial

valuation misstatement.   See sec. 6662(b)(1), (2), and (3).

Respondent also determined that, for 1989 and 1990, petitioner

was liable for the accuracy-related penalty based on negligence.

See sec. 6662(b)(1).



     6
      (...continued)
years based on a 5-year recovery period and had therefore already

recovered the purported purchase price of those machines; i.e.,
$3,500,000.

     Depreciation deductions for petitioner's Sentinel EPS
recyclers served to give rise to, or to increase, net operating
losses claimed by petitioner on returns for years prior to those
in issue, which net operating losses were carried forward to the
years in issue. In this regard, see the discussion in the text,
infra.
                                - 22 -

F.   Petitioner's Contentions

     1.    The Sentinel EPE Recycler

     Petitioner contends that he was interested in the Sentinel

EPE recycler "within the context of an investment opportunity".

In this regard, petitioner further contends that he determined

that the effect of rising oil prices in the plastics industry

would make recycling expanded polyethylene a profitable activity

and that, because plastic is an oil derivative and further

because the United States was experiencing an oil-crisis in 1981,

the recycled expanded polyethylene would be a valuable commodity.

     Petitioner contends that he made financial projections in

order to determine the annual cash flow that he could expect from

a Sentinel EPE recycler.   In this regard, petitioner contends

that in calculating his income stream, he assumed the following:

(1) The machine could process between 200 and 400 pounds of

recycled expanded polyethylene per hour for 7,000 hours per year;

and (2) the price of oil would continue to rise, increasing the

price of polyethylene resin, such that petitioner would profit 20

to 30 cents per pound.   From this calculation, petitioner

contends that he concluded that he could purchase a Sentinel EPE

recycler and reasonably expect to make a profit.

     2.   The Sentinel EPS Recyclers

     Petitioner contends that he was interested in recycling

expanded polystyrene for two reasons:    (1) To solve his expanded

polystyrene disposal problem; and (2) to make a profit.      In this
                              - 23 -

regard, petitioner contends that he "scrutinized the market for

availability of machinery that could [recycle] polystyrene,

looked at equipment that was available, [and] came to the

informed conclusion that there was no machine available that

could do what John Bambara convinced me his machine could do."

Petitioner contends further that he observed the Japan Repro

recycler in operation and concluded that the machine did not

successfully recycle expanded polystyrene in that it densified,

but did not completely devolatize, expanded polystyrene, so that

the recycled product did not have the physical properties of

polystyrene that he needed in order to make a "commercially

acceptable product."

     Although petitioner allegedly researched other, less

expensive recycling machinery manufactured by Nelmor Co.,

Cumberland Engineering, and Foremost Machine Builders, Inc.,

petitioner was unable to recall the names and models of the

equipment that he researched, but contends that, in 1982, he was

not aware of any machinery manufactured by these companies that

could recycle expanded polystyrene.

     As with expanded polyethylene, petitioner contends that he

determined that the effect of rising oil prices on the plastics

industry would make recycled expanded polystyrene a valuable

commodity.   In this regard, petitioner contends that he made

financial projections in order to determine the annual cash flow

that he could expect from a Sentinel EPS recycler.   From these
                                - 24 -

financial projections, which mirrored those made for the Sentinel

EPE recycler, petitioner contends that he concluded that he could

purchase two Sentinel EPS recyclers and reasonably expect to make

a profit.

G.   Ultimate Finding of Fact

     At all relevant times, the fair market value of the Sentinel

EPE recycler and the Sentinel EPS recycler did not exceed $50,000

per machine.


                                OPINION

A.   Background

     We have decided many Plastics Recycling cases.   The majority

of these cases, like the consolidated cases herein, presented

issues regarding additions to tax for negligence and valuation

overstatement.    See Greene v. Commissioner, T.C. Memo. 1997-296;

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

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

therein).

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

without published opinion 996 F.2d 1216 (6th Cir. 1993), a test

case for the Plastics Recycling group of cases, this Court: (1)

Found that each Sentinel EPE recycler had a fair market value not

in excess of $50,000; (2) held that the transaction, which was

almost identical to the transactions in the present cases, was a

sham because it lacked economic substance and a business purpose;
                              - 25 -

(3) upheld the additions to tax for negligence under section

6653(a)(1) and (2); (4) upheld the addition to tax for valuation

overstatement under section 6659 because the underpayment of

taxes was directly related to the overvaluation of the Sentinel

EPE recyclers; and (5) held that losses and credits claimed with

respect to the Clearwater Group partnership were attributable to

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

In reaching the conclusion that the transaction lacked business

purpose, this Court relied heavily upon the overvaluation of the

Sentinel EPE recyclers.

     Although petitioner has not agreed to be bound by Provizer

v. Commissioner, supra, petitioner has stipulated that his

purchase of the Sentinel EPE and EPS recyclers is similar to the

acquisition of the Sentinel EPE and EPS recyclers described in

Provizer.   The underlying transactions in the present cases, as

well as the Sentinel EPE recycler in the present cases, represent

the same type of transaction and same type of machine considered

in Provizer.   Set against this background, we consider whether

petitioner is liable for the accuracy-related penalties for 1989

and 1990.

     Section 6662(a) imposes an addition to tax equal to 20

percent of the underpayment of tax attributable to, inter alia,

(1) Negligence or disregard of rules or regulations, or (2) any

substantial understatement of income tax, or (3) any substantial
                               - 26 -

valuation misstatement.   Sec. 6662(b)(1)-(3).   The term

"underpayment of tax" is defined by section 6664(a) to mean, as

relevant herein, the amount by which the income tax imposed by

law exceeds the amount of income tax reported by the taxpayer on

the taxpayer's income tax return.

     Also as relevant herein, the accuracy-related penalty does

not apply with respect to any portion of the underpayment if it

is shown that there was reasonable cause for such portion and

that the taxpayer acted in good faith with respect to such

portion.   Sec. 6664(c)(1).   The determination of whether a

taxpayer acted with reasonable cause and in good faith is made on

a case-by-case basis, taking into account all the pertinent facts

and circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.     The

most important factor is the extent of the taxpayer's effort to

assess the taxpayer's proper tax liability for the year.       Id.

     Petitioner bears the burden of proving that respondent's

determination of the accuracy-related penalty is erroneous.      Rule

142(a); INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    Moreover, in

evaluating evidence, the Court is not bound to accept as gospel,

the unverified and undocumented testimony of a taxpayer.

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).
                              - 27 -

     B.   Substantial Valuation Misstatement

     In the notice of deficiency for 1989, respondent determined

that the accuracy-related penalty should be imposed based on

either a substantial valuation misstatement or a substantial

understatement of income tax or negligence.     We begin with

whether there was a substantial valuation misstatement for 1989.

     As relevant herein, section 6662(e) provides that there is a

substantial valuation misstatement if the value or adjusted basis

of any property claimed on a return is 200 percent or more of the

amount determined to be the correct amount.    Sec. 6662(e)(1)(A).

Also, as relevant herein, section 6662(e) does not apply unless

the portion of the underpayment attributable to the substantial

valuation misstatement exceeds $5,000.    Sec. 6662(e)(2).

     Respondent contends that the adjusted basis of the Sentinel

EPE and EPS recyclers claimed by petitioner on his 1989 return

exceeds by at least 200 percent, the fair market value of the

recyclers.   Petitioner bears the burden of proving that

respondent's determination is erroneous.    Rule 142(a); Bixby v.

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

     1.   The Sentinel EPE Recycler

     In order to establish the market value of the Sentinel EPE

recycler, respondent presented the testimony and expert witness

reports of Grossman and Lindstrom.     Opinions of experts are not

binding on this Court and may be rejected entirely if contrary to
                              - 28 -

our judgment.   Helvering v. National Grocery Co., 304 U.S. 282

(1938); Laureys v. Commissioner, 92 T.C. 101, 122-129 (1989);

Chiu v. Commissioner, 84 T.C. 722, 734 (1985).

     In the present cases, petitioner declined to stipulate to

the value of the Sentinel EPE recycler at issue.    However,

petitioner presented no evidence by way of expert testimony to

contradict the findings made by respondent's experts.    In fact,

the following exchange at trial constitutes petitioner's primary

testimony regarding the value of the Sentinel EPE recycler:

     Q: Before you purchased the EPE recycler in 1981, what
     did you do to determine whether or not it was worth
     $1.1 million?

     A: I really can't expand too readily on what I
     previously said. I looked around the industry [and]
     didn't see any machine that was [successfully recycling
     expanded polyethylene].

     Petitioner provided few details regarding the equipment that

he researched and investigated.   Indeed, the record is devoid of

any evidence indicating that petitioner conducted a meaningful

investigation to value the Sentinel EPE recycler.

     In contrast, Lindstrom based his evaluation on a comparison

between the Sentinel EPE recycler and the other commercially

available machines.   Lindstrom estimated the market value of the

Sentinel EPE recycler at approximately $50,000 and estimated the

manufacturing cost to be in the range of $20,000.    Lindstrom came

to his conclusion based on a survey of competing machines and his

personal observation of the machines.
                                - 29 -

     Lindstrom's statements of his opinion and the basis for it

were reasonable and persuasive, and we rely heavily on his expert

report and testimony in making our finding of fact regarding

valuation.

     Grossman did not specifically value the Sentinel EPE

Recycler.    However, Grossman concluded that existing technology

was available that provided equivalent capability of recycling

polyethylene.    We found Grossman to be an impressive witness, and

we also rely heavily on his expert report and testimony in making

our finding of fact regarding valuation.

     We have found as an ultimate fact that the Sentinel EPE

recycler purchased by petitioner in 1981 did not have a fair

market value at that time in excess of $50,000.7    Having so

found, it follows that the adjusted basis of the Sentinel EPE

recycler claimed by petitioner on his returns is by definition

overstated within the meaning of section 6662(e).

     2.      The Sentinel EPS Recyclers

     In order to establish the fair market value of the Sentinel

EPS recyclers, respondent also presented the testimony and expert

witness reports of Grossman and Lindstrom.




     7
       We observe that our finding is consistent with the finding
in Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993), regarding the
fair market value of the Sentinel EPE recycler.
                                - 30 -

     Grossman testified that, in 1982, equipment comparable to

the Sentinel EPS recycler was "widely available" and

significantly less expensive.    Grossman examined a Sentinel EPS

recycler and a Japan Repro recycler and determined that the

mechanical construction of the two machines was "nearly

identical".   Grossman further concluded that the recycled

polystyrene produced by these machines would also be identical.

Grossman added that because of the existence of functionally

equivalent machines, the Sentinel EPS recycler did not add new

technology to the field of recycling and could not therefore

justify the "one-of-a-kind" price tag that it carried.

     Grossman did not specifically value the Sentinel EPS

Recycler.   However, Grossman concluded that recycling equipment

that achieved the same result as the Sentinel EPS recycler sold

for about $50,000 during the relevant period.

     Lindstrom based his valuation on a comparison between the

Sentinel EPS recycler and other commercially available machines.

Lindstrom estimated the market value of the Sentinel EPS recycler

at approximately $25,000 and estimated the manufacturing cost to

be in the range of $20,000.

     Although petitioner declined to stipulate to the value of

the Sentinel EPS recyclers at issue in these cases, he failed to

present any evidence by way of expert testimony that rebutted

respondent's experts.   Rather than present expert testimony,

petitioner, on cross-examination, challenged the findings of
                                - 31 -

respondent's experts.     However, we think that petitioner's

attempt to discredit Grossman's and Lindstrom's findings was

unpersuasive.     To the contrary, we found both Grossman and

Lindstrom to be qualified, impressive, and credible experts, and

we rely heavily on their reports and testimony in making our

finding of fact regarding valuation.

     We have found as an ultimate fact that the Sentinel EPS

recyclers purchased by petitioner in 1982 did not have a fair

market value at that time in excess of $50,000 per machine.     The

purchase price of $1,750,000 per machine is therefore inflated by

35 times its actual value.     Having so found, it follows that the

adjusted basis of the Sentinel EPS recycler claimed by petitioner

on his returns is by definition overstated within the meaning of

section 6662(e).

     In summary, petitioner overstated the value of his Sentinel

EPE and EPS recyclers within the meaning of section 6662(e).

Further, petitioner failed to present any persuasive evidence,

nor are we able to conclude independently that petitioner acted

with reasonable cause and good faith in valuing his recyclers.

Thus, petitioner is liable for the accuracy-related penalty for

1989.

C.   Substantial Understatement of Income Tax

        Respondent also determined that petitioner was liable for

the accuracy-related penalty for 1989 because he substantially
                                 - 32 -

understated his Federal income tax for that year.        See sec.

6662(b)(2).

     As relevant herein, section 6662(a) imposes an accuracy-

related penalty equal to 20-percent of an underpayment that is

due to a substantial understatement of income tax.        See sec.

6662(d).   An individual substantially understates his or her

income tax when the reported tax is understated by the greater of

10-percent of the tax required to be shown on the return or

$5,000.    Sec. 6662(d)(1)(A).   Tax is not understated to the

extent that the treatment of the item related thereto is based on

substantial authority or is adequately disclosed in the return or

in a statement attached to the return.        Sec. 6662(d)(2)(B).

However, in the case of a tax shelter, (1) adequate disclosure

will not serve to avoid the penalty, and (2) substantial

authority will avoid the penalty only if the taxpayer reasonably

believed that the tax treatment of the item by the taxpayer was

more likely than not the proper treatment.        Sec. 6662(d)(2)(C).

     Petitioner reported zero tax on his 1989 return.       The

correct amount due, as stipulated by the parties, was $34,823.

Therefore, petitioner understated his income tax in an amount

greater than $5,000 or 10-percent of the tax required to be shown

on his return.

     Petitioner makes no argument with regard to substantial

authority or adequate disclosure, and we think that no such

argument can be persuasively made.        Moreover, for the reasons
                               - 33 -

discussed in the negligence portion of this opinion, Part D,

infra, we do not think that petitioner acted with reasonable

cause and in good faith with respect to the substantial

understatement.   Accordingly, we sustain respondent's

determination that petitioner is liable for the accuracy-related

penalty under section 6662(a) based on the understatement of

income tax for 1989.8

D.   Negligence

     In the notices of deficiency, respondent determined that

petitioner was liable for the accuracy-related penalty for

negligence for both 1989 and 1990.

     Negligence may be indicated by the failure (1) to make a

reasonable attempt to comply with applicable provisions of the

Internal Revenue Code and the supporting regulations thereunder,

(2) to exercise ordinary and reasonable care in preparing a tax

return, (3) to keep adequate books and records, or (4) to

properly substantiate items.   Sec. 1.6662-3(b) and (c), Income

Tax Regs.   Negligence also may be indicated by the failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.   Neely v. Commissioner, 85 T.C. 934, 947

(1985).



     8
       In view of our conclusion, we find it unnecessary to
decide whether the plan or arrangement involved in the present
cases constituted a "tax shelter" within the meaning of sec.
6662(d)(2)(C)(iii). However, see infra note 9 and the associated
text.
                              - 34 -

     Petitioner contends that he was not negligent because (1) he

reasonably relied upon the advice of independent advisers and (2)

he reasonably expected to make a profit from his purchase of the

Sentinel EPE and EPS recyclers.   Respondent, on the other hand,

contends that petitioner's reliance on Ulanoff, Burstein, WMDI,

and Boylan & Evans was not reasonable, and that it was not

reasonable for petitioner to expect to profit from his purchase

of the Sentinel recyclers.

     Under some circumstances, a taxpayer may avoid liability for

negligence if reasonable reliance on a competent professional

adviser is shown.   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 negligence, the

taxpayer must show that the professional had the requisite

expertise, as well as knowledge of the pertinent facts, to

provide informed advice on the subject matter.     David v.

Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995), affg. T.C.

Memo. 1993-621; Goldman v. Commissioner, 39 F.3d 402 (2d Cir.

1994), affg. T.C. Memo. 1993-480; Freytag v. Commissioner, supra.

     Reliance on representations by insiders or promoters has

been held an inadequate defense to negligence.     Goldman v.
                               - 35 -

Commissioner, supra; LaVerne v. Commissioner, 94 T.C. 637, 652-

653 (1990), affd. without published opinion 956 F.2d 274 (9th

Cir. 1992), affd. without published opinion sub nom. Cowles v.

Commissioner, 949 F.2d 401 (10th Cir. 1991).    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.    Freytag v.

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

     In his petition, petitioner contends that he was reasonable

in relying on:    (1) The marketing opinion of Ulanoff; (2) the

technical opinion of Burstein; and (3) the legal opinions of WMDI

and Boylan & Evans, dated October 15, 1981, and December 1, 1982,

respectively.    Respondent contends that petitioner was not

reasonable in relying on Ulanoff, Burstein, and members of WMDI

and Boylan & Evans because they were all investors in Sentinel

recyclers.

     Petitioner's testimony at trial indicates that he did not

actually rely on the reports by Ulanoff and Burstein.

Specifically, petitioner testified:

     I * * * hired [Ulanoff and Burstein] because I was told
     to hire them. I really didn't need them to tell me
     what the machine could do and the what -- the profit I
     could make. * * * Elliot Miller told me this is the way
     you do it. I did it.

Although petitioner contended in his petition that he relied on

Ulanoff and Burstein, petitioner did not argue this point at

trial.   On brief, petitioner repeated: "I did not need Burstein
                               - 36 -

and Ulanoff] to tell me what the machine would do and what the

profit would be."    Accordingly, we find that petitioner did not

in fact rely on the advice of Ulanoff and Burstein in purchasing

either his Sentinel EPE recycler in 1981 or his Sentinel EPS

recyclers in 1982.

     Further, we find that petitioner did not rely on the legal

opinion issued by WMDI in purchasing his Sentinel EPE recycler in

1981.   The legal opinion issued by WMDI on October 15, 1981, was

not introduced into evidence at trial, and the contents of such

opinion were not disclosed at trial.    We assume that because the

Sentinel EPS recyclers did not exist before 1982, the legal

opinion issued by WMDI on October 15, 1981, pertains to

petitioner's purchase of the Sentinel EPE recycler in 1981.    This

being the case, petitioner could not have possibly relied on the

opinion as it was issued on October 15, 1981, approximately 1

week after petitioner purchased his Sentinel EPE recycler.    Thus,

we find that petitioner did not, in fact, rely on the legal

opinion issued by WMDI in purchasing the Sentinel EPE recycler in

1981.

     Additionally, petitioner failed to argue, either on brief or

at trial, that he relied on the legal opinion issued by Boylan &

Evans in purchasing the Sentinel EPS recyclers.   In fact,

petitioner mentioned this opinion only when he was cross-examined

by respondent.   On the record before us, petitioner has failed to

persuade us that he relied on the opinion of Boylan & Evans in
                              - 37 -

purchasing his Sentinel EPS recyclers.    Further, we fail to

understand how petitioner could have carefully considered a legal

opinion dated December 1, 1982, when all of the operative

transactions regarding his purchase of the Sentinel EPS recyclers

occurred on that same date.

     In any event, even if petitioner did rely on either Ulanoff,

Burstein, WMDI, or Boylan & Evans in purchasing his recyclers,

that reliance would not have been reasonable.    Although

petitioner is an educated individual and accomplished business

executive with extensive knowledge of, and experience in, the

plastics industry, none of petitioner's supposed advisers had any

education or work experience in plastics materials or plastics

recycling.   Neither petitioner nor his advisers consulted any

independent experts to help them analyze or assess the recyclers.

Thus, we think that any reliance petitioner might have placed on

any of his supposed advisers was not reasonable.

     Petitioner suggests that his personal knowledge of, and

expertise in, the plastics industry made it reasonable for him to

research, investigate, and purchase Sentinel recyclers without

seeking independent expert advice.     Indeed, petitioner was more

capable of assessing the economic value of the recyclers than his

supposed advisers because of his knowledge about the plastics

industry and, in particular, his experience in pricing plastics

processing machinery.   Experience and knowledge alone, however,

do not make petitioner's actions reasonable.    For petitioner's
                                - 38 -

expertise to have made his actions reasonable, he must have

conducted a meaningful investigation into the investment.     For

the reasons below, we do not think petitioner conducted such an

investigation.

     There were several factors that should have alerted

petitioner to the fact that the Sentinel recyclers were

overvalued.   The exorbitant cost of the recyclers (i.e.,

$1,162,667 and $1,750,000 for the Sentinel EPE and EPS recyclers,

respectively) should have made petitioner question the purchases.

Here we are reminded that prior to purchasing the recyclers,

petitioner had never paid more than several hundred thousand

dollars for plastic processing equipment.    The price of the

Sentinel recyclers should have appeared particularly excessive to

petitioner because there was no established market for such

recyclers at the time that petitioner purchased them.

     Additionally, respondent's experts identified other machines

that were not only functionally equivalent to the Sentinel

recyclers but also significantly less expensive.    Here we recall

petitioner's testimony that in determining the value of the

Sentinel EPE recycler he "looked around the industry" and did not

discover any machines successfully recycling expanded

polyethylene.    Manufacturers questioned by petitioner allegedly

told him that they had "reservations" and "no firm assertions"

about recycling polyethylene.    Aside from this testimony,

petitioner offered few details in respect of his investigation
                              - 39 -

into the Sentinel EPE recyclers.   See Wichita Terminal Elevator

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

(10th Cir. 1947).

     Petitioner testified that he examined the Japan Repro

recycler, but that, based on his observations, that machine did

not produce a "commercially acceptable" product.   However,

petitioner presented no evidence, other than his own conclusory

and self-serving testimony, regarding what he viewed as the

differences between the Japan Repro recycler and the Sentinel EPS

recycler.

     Other than the Japan Repro recycler, petitioner could not

recall the name or model of any other recycler that he allegedly

considered before purchasing the Sentinel EPS recyclers.   There

is no indication in the record that petitioner surveyed the then

current literature regarding recyclers in order to identify

comparable recyclers and to determine the value of the Sentinel

EPS recycler.   Indeed, information regarding comparable, less

expensive recyclers was widely available.

     We think that if a potential purchaser, especially one as

technologically sophisticated as petitioner, had conducted a

meaningful investigation into the Sentinel recyclers, such

potential purchaser would have learned that comparable, less

expensive equipment existed and that the Sentinel recyclers were

overvalued.   Thus, we find that although petitioner may have been
                              - 40 -

capable of independently researching the Sentinel recyclers and

forming a reasonable opinion as to their value, he did not do so.

     In summary, we conclude that petitioner did not rely on

advice from Ulanoff, Burstein, WMDI, or Boylan & Evans, but that

even if petitioner had relied on such advice, such reliance would

have been unreasonable.

     We now turn to petitioner's second argument; i.e., that

petitioner's investment in the Sentinel recyclers was reasonable

because petitioner expected to make a profit.   Specifically,

petitioner projected that his recyclers could process between 200

and 400 pounds of expanded polystyrene and polyethylene per hour

for 7,000 hours per year, and would earn a profit of between 20

and 30 cents per pound.   Based on these calculations, petitioner

projected that, with respect to both the Sentinel EPE and EPS

recyclers, he would receive an annual cash flow of between

$280,000 and $840,000 per machine per year (200 lbs./hr. x 7,000

hr. x $.20 profit/lb., and 400 lbs./hr. x 7,000 hours x $.30

profit/lb.).

     We think that the assumptions on which petitioner based his

projections were not reasonable.   Lindstrom reported that in

"average use situations", the Sentinel EPE recylcer recycled 200

pounds of expanded polyethylene per hour and the EPS recycler

recycled between 100 and 200 pounds of expanded polystyrene per

hour, roughly one-half of petitioner's estimate.   We are also

reminded that petitioner, because he was the 100-percent owner of
                              - 41 -

RRI, was responsible for placing many Sentinel EPS recyclers with

end-users and could not place his personal recyclers in the most

profitable locations.   Thus, petitioner was unreasonable in his

estimate of the quantity of expanded polystyrene that his

recyclers could process.

     Further, petitioner's assumption that he could profit

between 20 and 30 cents per pound was based on his anticipation

of rising oil prices and its effect on the price of plastic

resins.   Aside from the highly speculative nature of this

assumption, respondent's expert, Grossman, testified that the

plastics industry is "remarkably independent" from the

petrochemical industry, and that a 300-percent rise in oil prices

would result in only a 30-40 percent price increase in plastic

products.

     Petitioner failed to provide the Court with any details

regarding his projections, simply stating that he used the same

formula that he has always used in purchasing machinery.     Thus,

it is not apparent whether petitioner's projections accounted for

expenses such as labor, transportation, and overhead.

Accordingly, we have insufficient information with respect to

petitioner's projections to conclude that they were reasonable.

     Finally, several independent factors persuade us that

petitioner was not particularly concerned with earning a profit

from his recyclers.   First, only 14 months after petitioner

purchased his Sentinel EPE recycler, he purchased two Sentinel
                               - 42 -

EPS recyclers.    It is peculiar that, although petitioner had yet

to make a profit from his purchase of a Sentinel EPE recycler, he

nevertheless continued to purchase additional, more expensive

recyclers, more than doubling his investment.

     Second, petitioner has presented no evidence that he made a

serious effort to monitor his investment in the Sentinel

recyclers.   At trial, petitioner could not recall the names of

the companies with which he placed his machines.

     Third, petitioner did not know the whereabouts of his

recyclers at the time of trial, stating that he had "abandoned"

the recyclers because PI failed to maintain them.   Petitioner

testified that he did not profit from his recyclers because of

continual repair problems and PI's failure to maintain and repair

the machines as agreed.   It would seem to us that a $4,662,667

investment would warrant repair and maintenance, even if such

repairs were not performed by PI as initially agreed.

     Taking all of the above factors into consideration, we think

it is more likely than not that petitioner purchased the Sentinel

recyclers in an effort to generate tax benefits rather than to

make a profit.9


     9
       Here we are reminded that petitioner learned about the
Sentinel recyclers after contacting Miller in an effort to locate
equipment that would enable petitioner to take advantage of tax
benefits.

     Although not directly germane to our conclusion set forth in
the text, supra, we nevertheless note that petitioner has
                                                   (continued...)
                              - 43 -

     In summary, we reject petitioner's contention that he

reasonably expected to profit from the Sentinel recyclers and

that he reasonably relied on advice from Ulanoff, Burstein, WMDI

and Boylan & Evans.   Rather, we conclude that petitioner failed

to exercise due care in claiming the deductions and tax credits

related to the purchase of the Sentinel recyclers.    Accordingly,

petitioner is liable for the accuracy-related penalty under

section 6662(a) for negligence for 1989 and 1990.

E.   Conclusion

     Because we have found that a substantial valuation

misstatement and substantial understatement of income tax exist

for 1989, and further because we have found that petitioner was

negligent in both 1989 and 1990, petitioner is liable for the

accuracy-related penalties under section 6662(a) for 1989 and

1990 as determined by respondent.

     To reflect the foregoing, as well as the parties'

Stipulation of Settled Issues,

                                      Decisions will be entered for

                                 respondent.



     9
      (...continued)
invested in tax shelters including movies, real estate, cattle
breeding, coal mining, and computers, and that he and RRI, along
with certain other individuals and entities, specifically
including Miller, Bambara, and PI, were enjoined in the mid-
1980's by the U.S. District Court for the District of
Massachusetts in respect of what was determined to be an abusive
tax shelter involving the leasing of recycling equipment. See
1985-1 C.B. 671; see also sec. 7408.
