                        T.C. Memo. 1998-126



                      UNITED STATES TAX COURT



     ROBERT P. NEUMANN AND SALLY A. NEUMANN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23431-96.                     Filed March 31, 1998.



     Jon M. Ishibashi, for petitioners.

     Allan E. Staines, for respondent.



                        MEMORANDUM OPINION

     PAJAK, Special Trial Judge:   This case was heard pursuant to

section 7443A(b)(3) of the Code and Rules 180, 181, and 182.     All

section references are to the Internal Revenue Code in effect for

the years in issue.   All Rule references are to the Tax Court

Rules of Practice and Procedure.   Respondent determined additions

to tax in petitioners' Federal income taxes as follows:
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                                 Additions to Tax
Year        Sec. 6653(a)(1)         Sec. 6653(a)(2)         Sec. 6659
1981             $587                     *                   $3,523
1984              642                     **                   3,854

*   An amount equal to 50 percent of the interest due on $11,744.

** An amount equal to 50 percent of the interest due on $12,846.

       After concessions, the issues remaining for decision are:

(1) Whether petitioners are liable for additions to tax for

negligence under section 6653(a)(1) and (2); and (2) whether

petitioners are liable for additions to tax for valuation

overstatement under section 6659.

       This is an affected items proceeding which arises out of

petitioners' participation in the Alamo East Enterprises and

Alamo East Enterprises 1984 partnerships (the Alamo

partnerships), which leased master recordings.            The parties

stipulated that the Alamo partnerships were involved in the

Encore Leasing Tax Shelter (Encore Leasing).            See Miller v.

Commissioner, 104 T.C. 378 (1995).          Some of the other facts in

the instant case also have been stipulated and are so found.            For

clarity and convenience, the findings of fact and opinion have

been combined.

       Petitioners resided in Danville, California, at the time the

petition was filed.       During 1984, petitioner Robert P. Neumann

(petitioner) was the president of Thompson Electric, an

electrical contracting firm located in San Ramon, California.
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Petitioners are the sole stockholders of Thompson Electric.

Petitioner has no experience in the music recording industry.

     During 1984, petitioner was a partner in the Alamo

partnerships.   The Alamo partnerships were formed by Neil Orsi

(Orsi), who served as the partnerships' managing general partner.

     During 1984, petitioners invested $10,000 in Alamo East

Enterprises 1984.   On their 1984 Federal income tax return,

petitioners claimed net loss deductions in the total amount of

$23,858 and investment tax credits in the amount of $17,962 with

respect to their participation in the Alamo partnerships.

Petitioners applied a portion of the investment tax credits to

offset their 1984 taxes (except for their alternative minimum

tax) and carried back $11,744 of the investment tax credits to

offset their 1981 tax liability.

     On May 8, 1995, this Court granted respondent's motions to

dismiss for lack of prosecution petitions filed by Orsi, as tax

matters partner, on behalf of the Alamo partnerships.     The Court

further decided that the adjustments for the 1984 taxable year

were correct as determined and set forth in the Notices of Final

Partnership Administrative Adjustment (FPAA).   Respondent's

determinations in the FPAA's involved only the activities

surrounding the leasing of master recordings with respect to both

partnerships.
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     In the notice of deficiency, respondent determined that

petitioners were liable for additions to tax for negligence under

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

valuation overstatement under section 6659.

     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 or

regulations.   Section 6653(a)(2) provides for an addition to tax

equal to 50 percent of the interest payable on the deficiency

with respect to the portion of the underpayment which is

attributable to negligence or intentional disregard of rules or

regulations.

     Negligence is defined as the lack of due care or 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).   Petitioners bear the burden to prove that respondent's

negligence determinations are erroneous.   Rule 142(a); Bixby v.

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

     Under certain circumstances, reliance on the advice of a

competent professional adviser may overcome respondent's finding

of negligence.   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
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to negligence, but rather a factor to be considered.      Freytag v.

Commissioner, supra at 888.    A taxpayer's reliance on

professional advice is an acceptable excuse from the negligence

additions to tax where such reliance was reasonable.      United

States v. Boyle, supra.    Reliance on professional advice must be

objectively reasonable.     Goldman v. Commissioner, 39 F.3d 402,

408 (2d Cir. 1994), affg. T.C. Memo. 1993-480.

     Reliance on representations by insiders, promoters, or

offering materials generally is not an adequate defense to

negligence.   Gollin v. Commissioner, T.C. Memo. 1996-454.      A

taxpayer must be able to show that the adviser reached his or her

decision independently.     Leonhart v. Commissioner, 414 F.2d 749

(4th Cir. 1969), affg. per curiam T.C. Memo. 1968-98.       A taxpayer

ordinarily may not reasonably rely on someone with an inherent

conflict of interest.     Goldman v. Commissioner, supra.

     Petitioners contend they are not liable for negligence

additions to tax because they acted in a reasonable manner and

exercised ordinary business care and prudence with respect to

their participation in the Alamo partnerships.    Further,

petitioners argue they reasonably relied upon the independent

advice of their attorney Jeffrey Hansen (Hansen) and their

accountant George Minger (Minger).

     Based upon our review of the record, we find that

petitioners failed to prove that their actions were that of a
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reasonable and ordinarily prudent investor.    At the onset, we

note that petitioner readily admitted that he has no experience

in the music recording industry.   Indeed, petitioner was unsure

of the identity of the recording artists who perform on the

master recordings leased by the Alamo partnerships.

     Further, petitioners failed to introduce any evidence that

they conducted any research regarding the validity or viability

of the leasing of master recordings.    Petitioners failed to

investigate the marketability or the quality of the master

recordings.    They failed to seek independent appraisals regarding

the economic merit of leasing the master recordings.    There is no

evidence that petitioners even listened to the master recordings

prior to entering into the lease or that they discussed the

marketability of the master recordings with any record

distributor.   Petitioners did not inquire about the past

successes or failures of the leasing of master recordings.

Moreover, they did not inquire about Orsi or the other investors

with regard to their expertise in the record industry.    There is

also no evidence in the record that petitioners undertook any

measure, whether precautionary or investigatory, to ensure the

economic success of the leasing of master recordings.    We believe

that such activities require a greater degree of participation

and investigation on the part of petitioners.
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     Petitioners contend that in addition to relying on the

prospectus, the tax opinion presented by Henry Nunez (Nunez), who

was legal counsel on behalf of Encore Leasing, and Orsi's due

diligence, they sought the independent advice of their attorney

and accountant.    We have stated above that reliance on

representations by insiders, promoters, or offering materials

generally is not an adequate defense to negligence.     Gollin v.

Commissioner, supra.     It is clear that Orsi was a promoter.    At

the very least, both Orsi and Nunez were insiders.    Any

information they provided petitioners regarding investment

opportunities in the Alamo partnerships was self-serving.     As the

promoter, Orsi had a stake in whether the Alamo partnerships were

successful in securing investors.    Thus, Orsi had an inherent

conflict of interest.    Under these circumstances, petitioners

cannot show that Orsi reached his decisions independently when he

advised them.     Orsi cannot be considered a disinterested source.

Petitioners' reliance on Orsi was not objectively reasonable.

Notwithstanding that petitioners failed to produce a copy of any

prospectus or any tax opinion prepared by Nunez, petitioners'

reliance on such material also cannot be said to be reasonable.

Reliance on offering materials is not an adequate defense to

negligence.     Gollin v. Commissioner, supra.

     As for petitioners' contention that they are not liable for

the additions to tax due to negligence because they relied on the
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advice of independent advisers, we believe that in the instant

case such reliance does not rise to the level necessary to

overcome such a finding.   Although it appears that Hansen and

Minger were not investors in the Alamo partnerships, petitioners'

reliance on their professional advice was not reasonable.

     There is no evidence to indicate that either Hansen or

Minger had any expertise in the music recording industry.

Moreover, petitioner testified that both Hansen and Minger

rendered their opinions based solely on the prospectus and

Nunez's tax opinion.   Neither of them sought any independent

evaluations or appraisals.   We believe it incredible that

petitioners would argue that such reliance upon the cursory

review by advisers regarding matters outside their field of

expertise constitutes the actions of a reasonable and ordinarily

prudent investor.   We have stated before that investors cannot

escape the negligence penalty by relying on the advice of persons

who are not professional investment counselors.   Pasternak v.

Commissioner, 990 F.2d 893, 903 (6th Cir. 1993), affg. Donahue v.

Commissioner, T.C. Memo. 1991-181; Rybak v. Commissioner, 91 T.C.

524, 565 (1988).

     In sum, we believe that a reasonable investor would have

done more to protect his or her investment than what petitioners

did in the instant case.   We find petitioners' actions, in

failing to conduct anything approaching a meaningful
                                - 9 -


investigation of the Alamo partnerships, were not the actions

that a reasonable and ordinary prudent person would have taken

under the circumstances.   Accordingly, we conclude that the

underpayments for the years at issue were due to negligence under

section 6653.

     If the Court finds petitioners negligent, as we have,

petitioners request a finding under section 6653(a)(2) as to the

portion of the underpayment that is attributable to negligence,

and the time period during which the underpayments were unpaid.

Petitioners' concerns about the periods for which section

6653(a)(2) applies can be addressed in the Rule 155 computation.

     Section 6653(c)(1) defines an underpayment in the case of a

tax to which section 6211 is applicable as "a deficiency as

defined in [section 6211]."    Under section 6211, the term

deficiency means "the amount by which the tax imposed * * *

exceeds the excess of * * * the amount shown as the tax by the

taxpayer upon his return."    In determining whether an

underpayment exists, the tax shown on the taxpayer's return

"shall be taken into account only if such return was filed on or

before the last day prescribed for the filing of such return."

Sec. 6653(c)(1).   The tax reported on an amended return filed

subsequent to the due date of the original return does not negate

the existence of an understatement.     Emmons v. Commissioner, 92
                              - 10 -


T.C. 342, 348-349 (1989), affd. 898 F.2d 50 (5th Cir. 1990); Deel

v. Commissioner, T.C. Memo. 1990-545.

     In the instant case, after the last day prescribed for

filing a return for 1981, petitioners filed an amended return for

that year which is an admission of an underpayment of tax of

$11,744.   See sec. 301.6653-1(c)(1), Proced. & Admin. Regs.   We

note that respondent's transcripts also reflect this same amount.

Accordingly, we find that the amount of the underpayment

attributable to negligence under section 6653 for 1981 is

$11,744.   Petitioners did not make any arguments with respect to

1984 regarding the amount of any underpayment attributable to

negligence under section 6653.   Therefore, we sustain

respondent's determination on this point for 1984.

     The next issue is whether petitioners are liable for the

additions to tax under section 6659 for a valuation

overstatement.   Section 6659 imposes a graduated addition to tax

wherever an individual has an underpayment of tax which equals or

exceeds $1,000 and which is attributable to a valuation

overstatement.   The amount "attributable to" a valuation

overstatement is equal to the difference between a taxpayer's

correct tax liability and the tax liability as reduced by the

valuation overstatement.   A valuation overstatement occurs when

the value of any property or the adjusted basis of any property,

claimed on any return is 150 percent or more of the amount
                              - 11 -


determined to be the correct amount of such valuation or adjusted

basis (as the case may be).   Sec. 6659(c).   In the instant case,

respondent determined that the value claimed was more than 250

percent of the correct value, and therefore the applicable

percentage was 30.

     In an affected items proceeding, res judicata precludes the

relitigation of any issue resolved in the partnership proceeding,

including the value or basis of partnership assets.    N.C.F.

Energy Partners v. Commissioner, 89 T.C. 741, 747 (1987).    As

stated, this Court has decided that the adjustments in the

related partnerships proceedings for 1984 are correct as to the

Alamo partnerships as set forth in the FPAA's.    Thus the bases of

Alamo East Enterprises and Alamo East Enterprises 1984 are "0"

and "0", instead of $500,000 and $5,458,450, as claimed by the

respective partnerships for 1984.   The respondent determined that

$12,846 was an amount attributable to a valuation overstatement

for 1984.   On this record we find that petitioners did not meet

their burden to prove that respondent's determination was wrong.

Accordingly, we sustain respondent's determination as to 1984 on

this issue.   For 1981, respondent's determination is the result

of an investment tax credit carryback from 1984 due to the

valuation overstatement.   We therefore sustain the addition to

tax for the valuation overstatement for 1981.
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     To the extent we have not addressed petitioners' other

arguments, the Court finds them to be without merit.

                                        Decision will be entered

                                   under Rule 155.
