                       T.C. Memo. 2001-311



                     UNITED STATES TAX COURT



             WAYNE AND PAMELA BERRY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6522-95.                   Filed December 13, 2001.


     Ketia Berry Wick and Rando Berry Wick, for petitioners.

     Robert S. Scarbrough, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WOLFE, Special Trial Judge:     In so-called affected items

notices of deficiency, respondent determined additions to tax

with respect to petitioners’ Federal income taxes for the years

and in the amounts as shown below:
                               - 2 -

                               Additions to Tax
                 Sec.         Sec.           Sec.          Sec.
     Year       6653(a)    6653(a)(1)     6653(a)(2)       6659
     1979        $398            -–           –-          $2,388
                                                1
     1982          –-        $1,660                        7,366
                                                1
     1984          --           363                        1,852
            1
           50 percent of the interest payable with respect
     to the portion of the underpayment that is attributable
     to negligence. Respondent determined underpayments
     attributable to negligence of $33,192 and $6,392 for
     1982 and 1984, respectively.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions,1 the remaining issue for decision is

whether petitioners are liable for additions to tax for

negligence or intentional disregard of rules or regulations under

section 6653(a) for 1979, and section 6653(a)(1) and (2) for 1982

and 1984, respectively.   We hold that petitioners are so liable.

                          FINDINGS OF FACT

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

found.   The stipulated facts and the attached exhibits are


     1
      Petitioners concede that for each of the years in issue
they are liable for additions to tax under sec. 6659 for
underpayments of tax attributable to valuation overstatements in
the amounts determined by respondent. Also, petitioners have
abandoned their argument that assessment and collection of the
additions to tax for the years in issue are barred by the statute
of limitations because petitioners allegedly received no notice
of the entry of decision from their tax matters partner. See
Davenport Recycling Associates v. Commissioner, 220 F.3d 1255
(11th Cir. 2000), affg. T.C. Memo. 1998-347.
                                - 3 -

incorporated herein by this reference.   Petitioners resided in

Lake Stevens, Washington, at the time the petition was filed.

A.   The Whitman Transactions

     These cases are part of the Plastics Recycling group of

cases.   The additions to tax arise from the disallowance of

losses, investment credits, and energy credits claimed by

petitioners with respect to a partnership known as Whitman

Recycling Associates (Whitman).

     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. per curiam without

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

have stipulated that the underlying transactions involving the

Sentinel recycling machines (recyclers) in this case are

substantially identical to the transactions in Provizer v.

Commissioner, supra.

      Whitman, a limited partnership, was organized on September

22, 1982.   It purported to lease four recyclers manufactured by

Packaging Industries (PI) of Hyannis, Massachusetts.   On its 1982

Federal income tax return, Whitman reported that each recycler

had a basis of $1,750,000, and the partnership reported a net

ordinary loss of $713,975.90.   The losses and credits reported by

Whitman were passed through to petitioners and the other limited

partners.
                                 - 4 -

B.   Petitioners’ Background

     In 1965, after graduating from high school in Lake Stevens,

Washington, Wayne Berry (petitioner) went to work at a sawmill.

After working at the sawmill for 5 months, he was drafted into

the U.S. Army.   The Army sent him to a military school in Georgia

for training to work with helicopters.    Then he served in Vietnam

for 3 years as a door gunner on a medivac helicopter.     In 1968,

he returned to Lake Stevens and married Pamela Berry, whom he had

met in high school.   With the assistance of his father, in Lake

Stevens he started a business that manufactured various interior

house products such as moldings, door jambs, window trim, and

base shoe.   Petitioner’s father had owned and sold a similar

business in California.   In 1973, petitioner purchased his

father’s interest, taking full control of the business.

Petitioner operated it as Apex Wood Products Corp. (Apex).    At

the time of trial, petitioner owned 98 percent of the stock of

Apex.

     During the years at issue, Pamela Berry was a flight

attendant for United Airlines.    She was married to petitioner

until 1992, when their divorce was finalized.

     Petitioners were financially successful.    During 2 of the 3

years in issue,2 they received total income (excluding claimed



     2
      Petitioners’ 1979 Federal income tax return was not part of
the record.
                                - 5 -

losses from a condominium in Hawaii and from Whitman and another

partnership) as follows:

                     1982                 1984
                   $146,879             $187,674

     Petitioners’ investment portfolio included a variety of

interests, including several tax-oriented investments.

Petitioners maintained a brokerage account with Merrill Lynch.

They invested in a company called Shaman, a clothing import

company that distributed merchandise through stores in the

Seattle metropolitan area.    They conducted a Schedule C business

involving lithographic prints.3   In addition to petitioners’

investments specifically listed in the record, Kirk Clothier

(Clothier), petitioners’ accountant, testified that he had joined

together with them in “several” investments.       Petitioner alluded

to investments prior to Whitman when he testified that in


     3
      Petitioners reported their lithographic print business on a
Schedule C, Profit or Loss From Business or Profession (Schedule
C). On the Schedule C, petitioners indicated: The name of their
business was “WAYNE D. BERRY ARTS”, the main business activity
was “ART WORKS”, and the product was “LITHOGRAPHIC PRINTS”. At
trial, petitioner briefly summarized the business as an
arrangement in which he “purchased the rights to the marketing
profits generated from the sale of the * * * [lithographic
prints].” On each of the two tax returns of petitioners in the
record, 1982 and 1984, petitioners reported zero gross income
from the business.
     Although the record is incomplete regarding petitioners’
lithographic print business, we note that lithographic prints are
a familiar tax-sheltering device. See, e.g., Rose v.
Commissioner, 88 T.C. 386 (1987), affd. 868 F.2d 851 (6th Cir.
1989); Bronson v. Commissioner, T.C. Memo. 1993-233; Gangel v.
Commissioner, T.C. Memo. 1991-358; Ballard v. Commissioner, T.C.
Memo. 1988-436.
                                - 6 -

deciding to invest in Whitman he “felt confident of * * *

[Clothier’s] ability and expertise” because in “all of the * * *

[investments] that I’ve been involved with Kirk [Clothier], he

has invested in the same ones”.   Petitioner also explained that

the Whitman Recycling transaction “was the second involvement I

had with Kirk Clothier.”

     Petitioner was introduced to the Whitman investment by

Clothier.   Clothier explained to petitioner that investing in

Whitman could serve three purposes:     To make money, to shelter

taxes, and to help the environment.     Petitioners paid $25,000 for

a 2.75-percent limited partnership interest in Whitman.

Petitioners did not personally review Whitman’s offering

memorandum or investigate Whitman before becoming participants in

the partnership.    Nor did petitioners have any education or work

experience in the plastics materials or the plastics recycling

industry.

     As a result of their payment of $25,000 for their interest

in Whitman, petitioners claimed on their 1982 Federal income tax

return a net operating loss deduction of $19,635.     They also

claimed investment credits totaling $38,763, which was limited to

their 1982 income tax liability (as reduced by the partnership

loss) of $24,815.   Of the $13,948 balance of the unused credits,

$8,007 was carried back to 1979, generating a tax refund claim of
                                 - 7 -

$7,960,4 which was petitioners’ total tax liability for 1979.

The remaining balance of the unused credits, $5,942, was carried

forward to 1983.     On their 1984 Federal income tax return,

petitioners claimed a net operating loss deduction of $492 as a

result of their investment in Whitman.

C.   Kirk Clothier

     Clothier is a certified public accountant (C.P.A.), and

holds a master’s degree in taxation.     His accounting firm is

located in Seattle, Washington.     He has practiced accounting

since 1971.    Clothier was introduced to petitioner by

petitioner’s brother, who played volleyball with Clothier in

college.   In 1973 or 1974, Clothier began assisting petitioners

with their personal income tax returns as well as the corporate

income tax returns and financial statements of Apex.      Petitioner

and Apex continued to employ the services of Clothier until 1997,

when petitioner switched to a local accountant for the purpose of

convenience.    In petitioner’s words:   “every year it became more

difficult to get down * * * [to Seattle]” from Lake Stevens,

which is located 45 miles north of Seattle.

     Clothier’s services to petitioners were not limited to the

preparation of their income tax returns.     As Apex became more



     4
      The discrepancy between the amount carried back to 1979,
$8,007, and the amount of the refund, $7,960, is due to the fact
that the carryback caused petitioners to lose a child care credit
of $47 for 1979.
                               - 8 -

profitable, petitioners were left with increasing amounts of

discretionary income.   Clothier began providing petitioners with

investment advice, meeting with petitioner several times each

year.

     In 1981 or 1982, Clothier was introduced to the Whitman tax

shelter by Ed Margolin (Margolin), a marketer of Whitman.     After

speaking with Margolin, Clothier contacted an attorney connected

with the tax shelter.   The identity of the attorney is unclear,

but the parties have stipulated that the attorney was either the

attorney for Samuel Winer (general partner and tax matters

partner of Whitman) or the attorney who wrote the legal opinion

contained in the offering memorandum for Whitman.    Clothier also

asked one of his other clients, Lee Connel (Connel), an engineer,

to discuss the equipment with Winer.   At trial, Clothier

testified that he thought Margolin later told him:   “he had gone

down and met with Mr. Winer personally and done some personal

investigation of the investment.”   At that point, Clothier

proposed the investment to petitioner.   Prior to these

conversations, Clothier had no knowledge of or experience in the

plastics recycling industry.

     At trial, Clothier had difficulty remembering how much

information he had given petitioner before petitioner decided to

invest in Whitman.   Clothier recalled telling petitioner that he

had contacted the attorney who wrote the legal opinion, that the
                               - 9 -

attorney was from a reputable law firm, that one of his clients

made some phone calls to investigate the equipment, and that he

thought that Margolin had spoken with Winer.

                              OPINION

     We have decided many Plastics Recycling cases.   Most of

these cases, like the present case, have presented issues

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

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

Memo. 2000-389; Barber v. Commissioner, T.C. Memo. 2000-372;

Barlow v. Commissioner, T.C. Memo. 2000-339; Ulanoff v.

Commissioner, T.C. Memo. 1999-170; 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), affd. sub nom. Addington v. Commissioner, 205 F.3d 54

(2d Cir. 2000).   In all but two of the Plastics Recycling cases,

we found the taxpayers liable for the additions to tax for

negligence.   Moreover, in all of those cases we found the

taxpayers liable for additions to tax for valuation

overstatement.

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

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

(1) Found that each recycler had a fair market value of not more

than $50,000; (2) held that the transaction, which was virtually

identical to the transaction in the present case, was a sham
                              - 10 -

because it lacked economic substance and a business purpose;

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

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

valuation overstatement under section 6659 because the

underpayment of taxes was directly related to the overvaluation

of the recyclers; and (5) held that the partnership losses and

tax credits claimed with respect to the plastics recycling

partnership at issue were attributable to tax-motivated

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

found that other recyclers were commercially available during the

year in issue.   In reaching the conclusion that the transaction

lacked a business purpose, this Court relied heavily upon the

overvaluation of the recyclers.   Id.

     Neither petitioners nor respondent had a copy of the

offering memorandum for Whitman available at the time of trial,

nearly 20 years after petitioners’ investment.   In Barber v.

Commissioner, supra, where the taxpayers, like petitioners, were

limited partners in Whitman, we explained:

          In a 4-step series of simultaneous transactions
     closely resembling those described in the Provizer case
     and stipulated by the parties herein, Packaging
     Industries of Hyannis, Massachusetts (PI) manufactured
                        - 11 -

and sold2 four Sentinel EPS3 recyclers to ECI Corp.
(ECI) for $1,520,000 each. ECI simultaneously resold
the recyclers to F&G Corp. (F&G) for $1,750,000 each.
F&G simultaneously leased the recyclers to Whitman.
Finally, Whitman simultaneously entered in a joint
venture with PI and Resin Recyclers Inc. (RRI) to
“exploit” the recyclers and place them with end-users.
Under this latter arrangement, PI was required to pay
Whitman a monthly joint venture fee.
     For convenience, we refer to the series of
transactions between and among PI, ECI, F&G, Whitman,
and RRI as the Whitman transactions.
     The sales of the Sentinel EPS recyclers from PI to
ECI were financed using 12-year nonrecourse notes. The
sales of the recyclers from ECI to F&G were financed
using 12-year “partial recourse” notes; however, the
recourse portion of the notes was payable only after
the first 80 percent of the notes, the nonrecourse
portion, was paid. No negotiations for the price of
the recyclers took place between, or among, PI, ECI and
F&G.
     At the closing of the Whitman partnership, PI,
ECI, F&G, Whitman, and RRI entered into arrangements
whereby PI would pay a monthly joint venture fee to
Whitman, in the same amount that Whitman would pay as
monthly rent to F&G, in the same amount that F&G would
pay monthly on its note to ECI, in the same amount that
ECI would pay monthly on its note to PI. Further, in
connection with the closing of the Whitman partnership,
PI, ECI, F&G, Whitman, and RRI entered into offset
agreements providing that the foregoing payments were
bookkeeping entries only and were never in fact paid.
Also in connection with the closing of the Whitman
partnership, PI, ECI, F&G, Whitman, and RRI also
entered into cross-indemnification agreements. [Id.]
     2
      Terms such as sale and lease, as well as their
derivatives, are used for convenience only and do not
imply that the particular transaction was a sale or
lease for Federal tax purposes. Similarly, terms such
as joint venture and agreement are also used for
convenience only and do not imply that the particular
arrangement was a joint venture or an agreement for
Federal tax purposes.
     3
      EPS stands for expanded polystyrene. The case of
Provizer v. Commissioner, T.C. Memo. 1992-177, * * *
affd. per curiam without published opinion 996 F.2d
                              - 12 -

     1216 (6th Cir. 1993), involved Sentinel expanded
     polyethylene (EPE) recyclers. However, the EPS
     recycler partnerships and the EPE recycler partnerships
     are essentially identical. See Davenport Recycling
     Associates v. Commissioner, T.C. Memo. 1998-347, * * *
     affd. 220 F.3d 1255, * * * (11th Cir. 2000); see also
     Gottsegen v. Commissioner, T.C. Memo. 1997-314 * * *
     (involving both the EPE and EPS recyclers); Ulanoff v.
     Commissioner, T.C. Memo. 1999-170 * * * (same).

A.   The Private Offering Memorandum

     In Barber v. Commissioner, supra, significant portions of

the Whitman offering memorandum were summarized as follows:

          By a private placement offering memorandum dated
     September 28, 1982 (the offering memorandum),
     subscriptions for 18 limited partnership units in
     Whitman were offered by the partnership’s promoter to
     potential limited partners at $50,000 per partnership
     unit. Pursuant to the offering memorandum, the limited
     partners would own 99 percent of Whitman and the
     general partner, Sam Winer, would own the remaining 1
     percent. Also pursuant to the offering memorandum,
     each limited partner was required to have a net worth
     (including residence and personal property) in excess
     of $1 million, or net income in excess of $200,000, for
     each investment unit.
          The offering memorandum stated that Winer would
     receive $62,000 for administrative and other services
     to be paid from the proceeds of the private placement
     offering as “management fees”. The offering memorandum
     also stated that the partnership would pay “fees of
     purchaser representatives and selling commissions” from
     the proceeds of the offering in an amount equal to 10
     percent of the aggregate price of the units. Thus,
     Winer would earn a 10-percent commission upon selling
     an interest in the partnership. In addition, the
     offering memorandum stated that Winer could “retain as
     additional compensation all amounts not paid as
     purchaser representative fees or sales commissions in
     connection with the Offering”.
          The face of the offering memorandum warned, in
     bold capital letters, that “THIS OFFERING INVOLVES A
     HIGH DEGREE OF RISK”. The offering memorandum also
     warned that “An investment in the partnership involves
     a high degree of business and tax risks and should,
                        - 13 -

therefore, be considered only by persons who have a
substantial net worth and substantial present and
anticipated income and who can afford to lose all of
their cash investment and all or a portion of their
anticipated tax benefits.” The offering memorandum
went on to enumerate significant business and tax risks
associated with an investment in Whitman. Among those
risks, the offering memorandum stated: (1) There was a
substantial likelihood of audit by the Internal Revenue
Service, and the purchase price paid by F&G to ECI
might be challenged as being in excess of the fair
market value; (2) the partnership had no prior
operating history; (3) the management of the
partnership’s business would be dependent on the
services of the general partner, who had limited
experience in marketing recycling or similar equipment;
(4) the limited partners would have no control over the
conduct of the partnership’s business; (5) there were
no assurances that market prices for virgin resin would
remain at their current costs per pound or that the
recycled pellets would be as marketable as virgin
pellets; and (6) certain potential conflicts of
interest existed.
     The offering memorandum informed investors that
the Whitman transactions would be executed
simultaneously.
     The offering memorandum prominently touted the
anticipated tax benefits for the initial year of
investment for an investor in the partnership. In this
regard, the offering memorandum stated, in part, as
follows:

          The principal tax benefits expected from
     an investment in the Partnership are to be
     derived from the Limited Partner’s share of
     investment and energy tax credits and tax
     deductions expected to be generated by the
     Partnership in 1982. The tax benefits on a
     per Unit basis are as follows:

                      Projected Regular    Projected
                        Investment and        Tax
            Payment   Energy Tax Credits   Deductions
     1982   $50,000        $77,000          $38,940

     The Limited Partners are not liable for any
     additional payment beyond their cash
     investment for their Units, nor are they
     subject to any further assessment. [Id.]
                              - 14 -


B.   Section 6653(a)(1) and (2) Negligence

      Respondent determined that petitioners were liable for

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

with respect to underpayments attributable to petitioners’

investment in Whitman.   Petitioners contend that they were not

negligent because:   (1) They lacked investment experience and

sophistication, and (2) they reasonably relied upon their C.P.A.

      Section 6653(a) for 1979, and section 6653(a)(1) for 1982

and 1984, 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 1982 and 1984 provides for an addition to

tax equal to 50 percent of the interest payable with respect to

the portion of the underpayment attributable to negligence or

intentional disregard of rules or regulations.

      Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would

exercise under the circumstances.   Neely v. Commissioner, 85 T.C.

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

particular taxpayer’s actions are reasonable in light of the

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

taxpayer’s actions in connection with the transactions.     See

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

The determination of negligence is highly factual.   When
                                - 15 -

considering the negligence addition, we evaluate the particular

facts of each case, judging the relative sophistication of the

taxpayers as well as the manner in which the taxpayers approached

their investment.     Turner v. Commissioner, T.C. Memo. 1995-363.

     Respondent’s determination of negligence is presumed

correct, and petitioners bear the burden of proving that they

were not negligent.    Neely v. Commissioner, supra.     See generally

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).5

     With respect to the large number of Plastics Recycling cases

that have come before this Court, we have seen taxpayers from all

walks of life and with greatly varying levels of education and

investment experience.    In all such cases, there have been only

two in which we held that the taxpayers were not negligent with

respect to their participation in the Plastics Recycling Program,

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

Commissioner, T.C. Memo. 1995-382.       Both cases involved unusual

circumstances not present in the instant case, as discussed

further below.




     5
      Compare sec. 7491(c), which places the burden of production
on respondent with respect to a taxpayer’s liability for
penalties and additions to tax. Sec. 7491(c) is effective for
court proceedings arising in connection with examinations
commencing after July 22, 1998. Petitioners do not contend, nor
is there evidence, that their examination commenced after July
22, 1998, or that sec. 7491 is applicable in this case. The
notices of deficiency sent to petitioners with respect to the
years in issue are dated Jan. 27, 1995.
                                - 16 -

1.   Petitioners’ Investment Experience and Sophistication.

      Petitioners argue that their lack of education and their

lack of investment experience are factors supporting their claim

that they were not negligent in investing in Whitman.

Petitioners compare their backgrounds with those of the taxpayers

in Dyckman v. Commissioner, supra, and Zidanich v. Commissioner,

supra.

      In Dyckman and Zidanich we held for the taxpayers on the

issue of negligence based on special and unusual circumstances.

One of the circumstances favoring taxpayers was their complete

lack of sophistication in investment matters.       In Dyckman v.

Commissioner, supra, the taxpayers were a carpet salesman and an

elementary school teacher.   Their combined net worth was $50,000.

Until the year in issue, their investment experience had been

limited to bank accounts, a few certificates of deposit, and

securities financed through withholdings from their paychecks for

investment through employer plans.       Id.   In Zidanich v.

Commissioner, supra, Mr. Zidanich was a steel worker and Mrs.

Zidanich was a legal secretary.    Prior to their investment at

issue, their only investments were in stocks and bonds financed

through withholding from Mr. Zidanich’s paychecks and purchased

through a company plan.   Id.

      Petitioner argues that his education level is similar to

that of most of the taxpayers in the Dyckman and Zidanich cases,
                             - 17 -

in that petitioner had no formal education beyond high school.

While a lack of any significant formal education beyond high

school has been a factor in some cases where we have found that

taxpayers were not negligent under section 6653, such cases are

exceptions rather than the norm.   For examples of cases in which

we have held the taxpayers negligent despite their modest formal

education, see Singer v. Commissioner, T.C. Memo. 1997-325

(taxpayer, who worked with success in the floor covering

business, quit high school during his sophomore year); Estate of

Hogard v. Commissioner, T.C. Memo. 1997-174 (taxpayer, an owner

of a business involving coin-operated entertainment machines, had

a high school education), affd. without published opinion sub

nom. Gilmore & Wilson Constr. Co. v. Commissioner, 166 F.3d 1221

(10th Cir. 1999); McPike v. Commissioner, T.C. Memo. 1996-46

(taxpayer, a firefighter, received no formal education beyond

high school, except for a few courses in fire science); Lax v.

Commissioner, T.C. Memo. 1994-329 (taxpayer, who spent his entire

working career in the textile business, had no formal post-high

school education), affd. without published opinion 72 F.3d 123

(3d Cir. 1995); Klieger v. Commissioner, T.C. Memo. 1992-734

(several of the taxpayers had only high school educations);

Gerber & Associates, Inc. v. Commissioner, T.C. Memo. 1987-446

(no formal post-high school education), affd. without published

opinion 876 F.2d 106 (7th Cir. 1989).
                              - 18 -

     The instant case is readily distinguishable from Dyckman v.

Commissioner, supra, and Zidanich v. Commissioner, supra.     At the

time he invested in Whitman, petitioner was a relatively

sophisticated investor, actively seeking out a variety of

investments, including tax-oriented investments or speculations.

Petitioner met personally with Clothier several times each year

to discuss investment opportunities.   Prior to their investment

in Whitman in 1982, petitioners invested without the advice of

their accountant in a condominium in Maui, Hawaii, and a

lithographic print business, and maintained a brokerage account

at Merrill Lynch.   In addition, petitioner had made other

investments with Clothier, including Shaman, a clothing import

company that distributed merchandise through stores in the

Seattle metropolitan area.   Petitioners’ investment experience

significantly surpasses the experience of other taxpayers who we

have found negligent under section 6653 for improperly sheltering

income.   See, e.g., McPike v. Commissioner, supra (taxpayers had

no previous investment experience other than their personal

residence).

     We also view petitioner’s career path as relevant in

determining his level of business and financial sophistication.

Petitioner is a true success story, in the tradition of American

entrepreneurship.   Petitioner cofounded a company in 1968.   By

1982 he owned the company, and from operating the business he
                               - 19 -

earned a six-figure salary.    Petitioners’ income (exclusive of

partnership losses) of $146,879 and $187,674 in 1982 and 1984,

respectively, shows that petitioners stood to benefit

substantially by the deductions and credits that Whitman offered.

Clothier explained to petitioner the immediate tax benefits of

the investment.   The expectation of such benefits motivated

petitioner to invest in Whitman.

     At trial, petitioner made a transparent attempt to downplay

his role in the success of Apex, describing his duties as

“strictly limited to production”.    He described his business

aptitude by saying:    “I think everybody has strengths and

weaknesses in what they do, and mine is, I’m more mechanically

inclined.”   As to the source of Apex’s success, petitioner said:

“I’ve been lucky”.    Petitioner also testified that he has been

diagnosed with dyslexia and that he does not enjoy reading.

     Petitioner’s claim that he lacks sophistication is self-

serving and inconsistent with the facts.    It is readily apparent

that petitioner completely dominates the operations of Apex and

is responsible for its remarkable success.    His alleged choice to

devote his efforts to the production operations of Apex as well

as his aversion to reading are not inconsistent with his

possessing business acumen.    We note that petitioner acquired

equipment in the name of Lake Stevens Leasing, which he described

as a d/b/a for himself, that leased equipment to Apex.
                                - 20 -

Petitioner testified that his accountant told him there were tax

advantages in this arrangement with respect to investment

credits.   The arrangement certainly is not unique, but it is tax-

efficient and sophisticated.    As petitioner himself admitted:   “I

do have a business sense of making a business operate” and “I

know what it takes to get the product out the door to get income

out of it.”   Petitioner’s own testimony that he cofounded, built

up, and now owns 98 percent of the highly successful Apex

business is inconsistent with his argument that he lacks business

capabilities.

      In short, petitioner was not lacking in investment

experience or sophistication.    Petitioner’s active role in

seeking investments as well as founding, building, and operating

a successful corporate enterprise and all the knowledge and

experience associated with such a successful business career

support the conclusion that he was capable of properly

investigating and analyzing the Whitman tax shelter and that his

failure to do so was negligent.

2.   Petitioners’ Reliance on Their C.P.A.

      Petitioners claim that their reliance on Clothier’s advice

was reasonable.   Under some circumstances a taxpayer may avoid

liability for negligence if reasonable reliance on a competent

professional adviser is shown.    See United States v. Boyle, 469

U.S. 241, 250-251 (1985); Freytag v. Commissioner, 89 T.C. 849,
                                - 21 -

888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. on other

grounds 501 U.S. 868 (1991).    However, 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 expertise and knowledge of the pertinent facts to provide

informed advice on the subject matter.    See Chakales v.

Commissioner, 79 F.3d 726, 730 (8th Cir. 1996), affg. T.C. Memo.

1994-408; David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir.

1995), affg. T.C. Memo. 1993-621; Freytag v. Commissioner, supra;

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

     Moreover, reliance on representations by insiders,

promoters, or offering materials has been held an inadequate

defense to negligence.    See Pasternak v. Commissioner, 990 F.2d

893, 903 (6th Cir. 1993), affg. Donahue v. Commissioner, T.C.

Memo. 1991-181; LaVerne v. Commissioner, 94 T.C. 637, 652-653

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

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

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

Commissioner, supra.     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
                                - 22 -

the contemplated venture.    See David v. Commissioner, supra;

Freytag v. Commissioner, supra.

     The purported value of the recyclers generated the

deductions and credits.6    This circumstance was clearly reflected

in the offering memorandum.    Although petitioner was given a copy

of the offering memorandum, petitioner chose not to read it.

Instead, he exclusively relied on representations made by

Clothier.    In his discussions with petitioner about Whitman,

Clothier emphasized the tax benefits that petitioner would enjoy

if he made the investment.    The offering memorandum prominently

announced that an investment of $50,000 in Whitman would produce

approximately $77,000 in immediate investment and energy tax

credits.    Petitioners’ investment of $25,000 produced for them

tax credits totaling $38,763.    Like the taxpayers in Provizer v.

Commissioner, T.C. Memo. 1992-177, “except for a few weeks at the

beginning, petitioners never had any money in the deal.”    Under

these circumstances, a reasonably prudent person would have asked

a qualified adviser if such a windfall were not too good to be

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

     In support of their claim that their reliance on Clothier



     6
      On its 1982 tax return, Whitman reported that each of the
four recyclers had a basis of $1,750,000. In Provizer v.
Commissioner, T.C. Memo. 1992-177, affd. per curiam without
published opinion 996 F.2d 1216 (6th Cir. 1993), the test cases
for the Plastics Recycling group of cases, this Court found that
each recycler had a fair market value of not more than $50,000.
                               - 23 -

was reasonable, petitioners emphasized that Clothier had invested

with them in the investments that Clothier had proposed prior to

Whitman.    However, petitioners did not claim, nor is there

evidence, that Clothier invested in Whitman.    Apparently,

Clothier’s decision not to invest in Whitman did not dissuade

petitioners.

     Like petitioners, Clothier had no knowledge of the plastics

recycling industry.    Moreover, Clothier did not consult with any

persons who had expertise in plastics recycling.    Instead,

Clothier’s sources of information about Whitman were limited to

the offering memorandum and the representations of insiders.     The

only persons with whom Clothier remembers discussing Whitman

were:   (1) Margolin, a Whitman sales representative; (2) Connel,

a client of Clothier; and (3) either Winer’s attorney or one of

the attorneys who wrote the tax opinion of Whitman.    Each of

these contacts either had a self-interest in the promotion of

Whitman or had no knowledge about the plastics recycling

industry.

     Clothier’s reliance on Margolin was unreasonable.    Clothier

remembers Margolin telling him that Whitman was a reasonable

investment and that it had tax shelter advantages.    These

conclusory remarks, without further investigation, were not a

proper basis for reliance, especially since there is no evidence

that Margolin had any expertise with plastics recycling although
                              - 24 -

he was marketing the partnership interests.    We have consistently

held that advice from such persons is better classified as sales

promotion.   See Singer v. Commissioner, T.C. Memo. 1997-325;

Vojticek v. Commissioner, T.C. Memo. 1995-444.     We note that

Margolin did not testify, and that circumstance suggests that if

he had testified, his testimony would have been unfavorable to

petitioners.   See Wichita Terminal Elevator Co. v. Commissioner,

6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

The commission for selling units under the Whitman promotion was

equal to 10 percent of the sales price.    See Barber v.

Commissioner, T.C. Memo. 2000-372.     Clothier’s reliance on his

client, Lee Connel, was also unreasonable.    Connel was an

engineer by profession.   He had no experience with plastics

recycling.   Clothier unreasonably assumed that Connel’s

engineering background would qualify him to make a reliable

evaluation of the recyclers with minimal effort.    Even if Connel

were qualified, reliance on Connel would be unreasonable because

there is no evidence that Connel ever saw the recyclers.      Connel

did not testify at trial, and our knowledge of his alleged

investigation is based entirely on Clothier’s vague recollection.

     Under these circumstances, we are convinced that Clothier

was not concerned with Whitman’s economic or business aspects.

Rather, Clothier understood that Whitman was a tax shelter.

Clothier failed to consult an independent appraiser or anyone
                               - 25 -

with expertise in plastics recycling.     If Clothier had made a

reasonable effort to determine the fair market value of the

recyclers, he would have determined that the recyclers’ price was

grossly inflated.   At that point a reasonable person would have

inquired why the partnership would be willing to “invest” in

machines at far in excess of their fair market value when it

could have purchased other much less expensive machines that

performed virtually the same functions.     It was not reasonable

for petitioners to claim the substantial tax credits and

partnership losses in issue on the basis of Clothier’s advice.

     Petitioners compare their relationship with Clothier to the

relationships that the taxpayers had with their advisers in

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

Commissioner, T.C. Memo. 1995-382.      Such comparisons are

misplaced.   In Dyckman v. Commissioner, supra, the taxpayers were

close friends with their accountant, Mr. Kipness, as well as his

family.   Mrs. Dyckman tutored Mr. Kipness’s daughter.    When Mr.

Kipness and his family moved from New Jersey to California, the

Dyckmans continued to mail Mr. Kipness their tax information, and

he continued to prepare their returns for some time after the

move to California.   Id.   In Zidanich v. Commissioner, supra,

Mrs. Zidanich worked for the adviser’s father and subsequently

for the adviser himself for 23 years.     As to the other taxpayers

in Zidanich, the Steinbergs, Mrs. Steinberg relied entirely on
                              - 26 -

her brother as her adviser and trustee of the funds that she and

her brother had inherited from their parents.   Mrs. Steinberg did

not even know of the investment until the Internal Revenue

Service contacted her.   In view of her brother’s highly

successful career as an investor and investment manager, her

entrustment of her funds to him was not unreasonable.      Id.

     Here, there is no evidence of a personal friendship between

Clothier and petitioners outside of an accountant/client

relationship.   Clothier was a college acquaintance of

petitioner’s brother-–not petitioner.   Petitioners terminated

their relationship with Clothier because a distance of 45 miles

was too great an obstacle.   The Dyckmans continued to use their

accountant despite his permanent move with his family across the

country.   In sum, petitioners’ relationship with Clothier was not

the long-term relationship of friendship and trust with an

adviser that was present in the Dyckman and Zidanich cases.

     For the foregoing reasons, petitioners’ reliance on Dyckman

v. Commissioner, supra, and Zidanich v. Commissioner, supra, is

misplaced.

     In conclusion, we find that petitioners failed to exercise

due care in claiming large deductions and tax credits with

respect to Whitman on their Federal income tax returns.     The

disproportionately large tax benefits claimed on petitioners’

Federal income tax returns, relative to the dollar amount
                              - 27 -

invested, should have alerted petitioners to the need for further

investigation of the partnership transactions.   Their reliance on

Clothier was misplaced because Clothier knew little about the

business aspects of Whitman, and there is no reason for us to

think he misled petitioners about the extent of his own knowledge

in this respect.   Clothier relied on conclusory statements of

insiders as well as the conclusion of his client, an engineer,

who had no expertise in either taxes or the plastics recycling

industry and made only a casual inquiry about the transaction.

Neither Clothier nor petitioners undertook a good faith

investigation of the fair market value of the recyclers or the

underlying economic viability or financial structure of Whitman.

Accordingly, we hold that petitioners are liable for the

additions to tax for negligence under section 6653(a) for 1979

and section 6653(a)(1) and (2) for 1982 and 1984.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
