                        T.C. Memo. 1996-262



                      UNITED STATES TAX COURT



        GEORGE W. BROOKE AND KAREN BROOKE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16340-89.            Filed June 7, 1996.



     George W. Brooke and Karen Brooke, pro se.

     Lavonne D. Lawson, for respondent.



                        MEMORANDUM OPINION

     WRIGHT, Judge:   This matter is before the Court on

respondent's motion for order to show cause why judgment should

not be entered against petitioners on the basis of a previously

decided case.   By order dated August 24, 1994, we granted

respondent's motion and ordered petitioners to show cause why

judgment should not be entered against them on the basis of the

Court's decisions in Wolf v. Commissioner, T.C. Memo. 1991-212,
                               - 2 -

affd. 4 F.3d 709 (9th Cir. 1993), Feldman v. Commissioner, T.C.

Memo. 1991-353, affd. without published opinion 5 F.3d 536 (9th

Cir. 1993), and Garcia v. Commissioner, T.C. Memo. 1991-451,

affd. without published opinion 5 F.3d 536 (9th Cir. 1993).

Respondent filed the above-referenced motion in the instant case

with respect to the disallowance of deductions, investment tax

credits, and related additions to tax in connection with

petitioners' participation in the Encore Leasing Program

(Encore).   In their response, petitioners failed to provide the

Court with an adequate basis upon which they could distinguish

themselves from the previously decided cases and were ordered to

either sign a stipulated decision in the instant case or appear

before the Court for a hearing on the matter.    This case was

heard at a motions session held on March 27, 1995, at Houston,

Texas, and was taken under advisement.

     Petitioners resided in Kountz, Texas, at the time the

petition was filed.   Mr. Brooke (petitioner) was employed as a

loan officer at a savings and loan when he invested in Encore.

The instant case arises out of petitioners' participation in

Encore.   Encore was in the business of leasing master recordings

of previously released pop and gospel albums.1   Trials were

     1
      For a detailed discussion of the facts and the applicable
law with respect to participation in the Encore Leasing Program,
see Booker v. Commissioner, T.C. Memo. 1996-261; Wolf v.
Commissioner, T.C. Memo. 1991-212, affd. 4 F.3d 709 (9th Cir.
1993); Feldman v. Commissioner, T.C. Memo. 1991-353, affd.
                                                   (continued...)
                                 - 3 -

conducted in the three above-mentioned cases with respect to

deficiencies in and additions to tax resulting from participation

in Encore.   In each case, we held in favor of respondent on all

issues; each case was affirmed by the Court of Appeals for the

Ninth Circuit.

     Petitioners were among a large number of persons nationwide

who invested in the Encore master recording lease program and who

claimed credits, deductions, and losses with respect thereto that

were disallowed by respondent.    In order to resolve common

issues, a test case was selected among the cases in which persons

whose credits, deductions, and losses had been disallowed by

respondent had petitioned this Court for a redetermination of

that disallowance.   We rendered an opinion in the test case, Wolf

v. Commissioner, supra, and held that the Encore lease

transaction was a sham entered into without the intent to make a

profit in which tax considerations were paramount.

     More specifically, in Wolf v. Commissioner, supra, this

Court held that:   (1) The taxpayers were not entitled to claimed

deductions and investment tax credits related to their

participation in Encore; (2) the taxpayers’ underpayments for the

years at issue were due to negligence or intentional disregard of

rules and regulations, and as a result, were liable for the

     1
      (...continued)
without published opinion 5 F.3d 536 (9th Cir. 1993); Garcia v.
Commissioner, T.C. Memo. 1991-451, affd. without published
opinion 5 F.3d 536 (9th Cir. 1993).
                              - 4 -

additions to tax under section 6653; (3) the taxpayers grossly

overvalued the subject master recording and were liable for the

addition to tax under section 6659 due to a valuation

overstatement; (4) the taxpayers were liable for the increased

rate of interest under section 6621(c) due to an underpayment of

tax in excess of $1,000 attributable to one or more enumerated

“tax motivated transactions”; and (5) the taxpayers were liable

for a penalty under section 6673 as a result of advancing

frivolous and groundless arguments.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and

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

Procedure.

     In Feldman v. Commissioner, supra, and Garcia v.

Commissioner, supra, the Court held:   (1) The taxpayers'

underpayments for the years at issue were due to negligence or

intentional disregard of rules and regulations, and as a result,

the taxpayers were liable for the additions to tax under section

6653; (2) the taxpayers grossly overvalued the subject master

recording and were liable for the addition to tax under section

6659 due to a valuation overstatement; and (3) the taxpayers were

liable for a penalty under section 6673 as a result of advancing

frivolous and groundless arguments.

     Petitioners have not agreed to be bound by the previously

decided cases; however, after concessions by the parties, the
                               - 5 -

sole issue for our determination is whether petitioners are

liable for the additions to tax for negligence under section

6653(a)(1) and (2) for the taxable year 1984.    The underlying

transaction in the instant case is essentially identical to the

transaction considered in the test case.

      Petitioners claimed $7,959 in deductions and $15,000 in

investment tax credits with respect to their participation in

Encore in the taxable year 1984.   Petitioners' investment in the

Encore program totaled $10,000 in 1984.    Petitioners earned 60

cents in 1984 from the Encore program.     Section 6653(a)(1)

provides for an addition to tax equal to 5 percent of any

underpayment if any part of the underpayment is due to negligence

or intentional disregard of rules and regulations.    Section

6653(a)(2) provides for an addition to tax of 50 percent of the

interest on that portion of the underpayment attributable to

negligence.   Negligence is defined as a lack of due care or the

failure to act as a reasonable person would act under similar

circumstances.   Chamberlain v. Commissioner, 66 F.3d 729, 732

(5th Cir. 1995), affg. in part and revg. in part T.C. Memo. 1994-

228; Heasley v. Commissioner, 902 F.2d 380, 383 (5th Cir. 1990),

revg. T.C. Memo. 1988-408; Neely v. Commissioner, 85 T.C. 934,

947 (1985).   Petitioner bears the burden of proving that no part

of the underpayment for the year at issue is due to negligence or

intentional disregard of rules and regulations.    Rule 142(a);

Bixby v. Commissioner, 58 T.C. 757 (1972).    The negligence
                                - 6 -

penalty under section 6653 is correctly assessed in cases where

claimed deductions are not supported by the facts.    Sandvall v.

Commissioner, 898 F.2d 455 (5th Cir. 1990), affg. T.C. Memo.

1989-56 and T.C. Memo. 1989-189; Marcello v. Commissioner, 380

F.2d 499 (5th Cir. 1967), affg. in part and remanding in part 43

T.C. 168 (1964).

     Petitioners contend that they acted in a reasonable manner

and exercised ordinary business care and prudence in claiming

deductions and credits with respect to their participation in

Encore.   In support of their contentions, petitioners allege that

they relied upon the financial advice of qualified advisers.

Specifically, petitioners argue that they relied on the advice of

two individuals, Mr. Aaron Howell and Mr. Derwyn Booker.

According to petitioners, Howell has over 20 years' experience as

a professional entertainer and has some experience in the

recording industry.    Mr. Booker was petitioners' investment

counselor and was a paid promoter for Encore.2

     Under some circumstances, a taxpayer may avoid liability for

the additions to tax under section 6653(a)(1) if reasonable

reliance on a competent professional adviser is shown.     United

States v. Boyle, 469 U.S. 241 (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


     2
      See Booker v. Commissioner, supra.
                               - 7 -

factor to be considered.   Freytag v. Commissioner, supra at 888.

In order for reliance on professional advice to excuse a taxpayer

from the negligence additions to tax, the reliance must be

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

Reliance on representations by insiders, promoters, or offering

materials has been held an inadequate defense to negligence.

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); Marine v. Commissioner, 92 T.C. 958,

992-993 (1989), affd. without published opinion 921 F.2d 280 (9th

Cir. 1991).   Reliance on a professional adviser can be inadequate

when the taxpayer and his adviser knew nothing about the nontax

business aspects of the venture.   Beck v. Commissioner, 85 T.C.

557 (1985); Flowers v. Commissioner, 80 T.C. 914 (1983).

     Based upon our review of the record in the instant case, we

find that petitioners' reliance on both Mr. Howell and Mr. Booker

was not reasonable.   We do not believe Mr. Howell's experience as

a professional entertainer, with some experience in the recording

industry, gave him the expertise to properly evaluate the

economic sense of participation in Encore.   We find that

petitioners have failed to show that Mr. Howell is a competent

professional financial adviser with respect to the leasing and

exploitation of a master recording.    It is simply not reasonable

or prudent for petitioners to rely upon an adviser regarding
                                 - 8 -

matters outside of his field of expertise or with respect to

facts which he does not verify.

     During 1984, Mr. Booker worked as an agent for Encore,

selling its tax shelters at a commission rate of 20 percent of

receipts from the sales of leases.       Booker v. Commissioner, T.C.

Memo. 1996-261.     During the latter part of 1984, Mr. Booker

issued three newsletters directed to his master recording lease

clients entitled DERWYN J. BOOKER, TAX ADVANTAGED INVESTMENT

COUNSELING.   Id.     Mr. Booker received commissions from Encore in

the amount of $11,010 in 1984 and in the amount of $2,976 in 1985

with respect to his 1984 master lease sales.       Id.   As stated

earlier, reliance on representations by insiders or promoters is

an inadequate defense to negligence.      Reliance on professional

advice must be objectively reasonable.       Chamberlain v.

Commissioner, supra at 732; Goldman v. Commissioner, 39 F.3d 402

(2d Cir. 1994), affg. T.C. Memo. 1993-480.      Taxpayers may not

rely on someone with an inherent conflict of interest.        Goldman

v. Commissioner, supra at 408.     Additionally, taxpayers must be

able to show that the adviser reached his or her decisions

independently.    See Leonhart v. Commissioner, 414 F.2d 749 (4th

Cir. 1969), affg. T.C. Memo. 1968-98.      As an agent for Encore,

Mr. Booker had an inherent conflict of interest, as a result of

which petitioners can in no way show that Mr. Booker reached his

decisions independently when advising them.      We find that any
                               - 9 -

reliance upon Mr. Booker's advice with respect to Encore was not

objectively reasonable.

     Moreover, no independent experts in the field of leasing

master recordings were ever consulted by petitioners.

Petitioners claimed deductions and investment tax credits based

upon the assumption that they were leasing a master recording

purportedly worth $496,000, as listed in the offering materials,

and were responsible for marketing such recording for profit.

Clearly, this type of transaction would require a careful and

meaningful investigation.

     Petitioners liken their situation to that of investors in

traded stocks who, due to their inability to fully evaluate such

investments, rely on the expertise of a stockbroker.

Petitioners, through their interest in Encore, however, were

purportedly engaged in the trade or business of commercially

developing and marketing a master recording with the intent to

make a profit.   Such activity requires a degree of participation

and investigation higher than that which petitioners took and

higher than that which a casual investor in stocks undertakes.

We believe that a reasonable investor would have done more than

petitioners did in determining the profitability of entering into

a trade or business with the intent of making a profit.   We find

that petitioners' actions, in failing to conduct anything

approaching a meaningful investigation of Encore, were not the

actions that a reasonable and ordinarily prudent person would

have taken under the circumstances.
                              - 10 -

     Moreover, any consideration of the Encore prospectus and

accompanying tax opinion, in light of their discussions of tax

advantages, risk of audit, and risk of litigation in the Tax

Court, would have alerted a prudent and reasonable investor to

the questionable nature of the promised deductions and investment

tax credits.   Although page 1 of the prospectus refers to an

"exciting business opportunity while taking advantage of current

tax laws", it mentions very little about said opportunity, while

strongly emphasizing the benefits derived from the investment tax

credit.   The prospectus contains a letter from tax Attorney Mr.

Henry D. Nunez, stating the following:

     upon request by Encore, we will assist a lessee and
     their counsel and accountants if the Internal Revenue
     Service challenges the tax structure of the transaction
     as set forth in the Opinion and the lessee is unable to
     reach a satisfactory resolution at the initial audit
     level. Such assistance would include advice in
     connection with their appearances before the appellate
     division of the Internal Revenue Service. We would
     also be available to assist the lessee’s counsel in
     defense before the U.S. District Court, U.S. Tax Court
     or the U.S. Court of Claims.

     Encore's prospectus contains in substance only one page,

discussing in general terms the gospel record market.   The

prospectus does not specifically address the master recordings

leased by Encore, the quality of such, nor any other facets of

the Encore program.

     The “How Our Program Works” section of the prospectus is one

page in length containing four paragraphs.   Three paragraphs are

devoted to the tax aspects of the program, and one paragraph

refers to the lease agreement.   The remainder of the page
                              - 11 -

outlines in tables the amount of advance payment required from

the lessee and the amount of investment tax credit passed through

to the lessee.   The "Financial Section" of the prospectus

contains two paragraphs and explains the investment tax credit

available with respect to the sound recordings and computer

software.   There is no analysis in the prospectus of the

potential nontax, economic profitability of its leasing program.

Also, there is no information in the prospectus regarding the

marketability of the master recordings that Encore intends to

lease nor any information concerning how master recordings can be

marketed.   A simple review of such information should have raised

serious questions in the minds of ordinarily prudent investors.

     Based upon careful consideration of the record, we find that

petitioners failed to show that the instant case differs to any

material degree from the previously decided cases in which we

held the taxpayers liable for the additions to tax for negligence

in connection with their participation in Encore.    Accordingly,

petitioners are liable for the additions to tax under section

6653(a)(1) and (2) due to negligence for the taxable year 1984.

     To reflect the foregoing,

                                      An appropriate order and

                                 decision will be entered for

                                 respondent.
