                       T.C. Memo. 1996-538




                     UNITED STATES TAX COURT



           ALLAN J. AND BRENDA BECKER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 28975-89.                 Filed December 9, 1996.



     David M. Kohane, Jeffrey H. Schechter, and Ivan Taback, for

petitioners.

     Barry J. Laterman, for respondent.

                            CONTENTS

                                                            Page
MEMORANDUM FINDINGS OF FACT AND OPINION....................... 2
OPINION OF THE SPECIAL TRIAL JUDGE............................ 2
FINDINGS OF FACT.............................................. 5
  A. The Plastics Recycling Transactions...................... 5
  B. The Partnerships......................................... 9
  C. Stuart Becker............................................11
  D. Petitioner Allan J. Becker and His Introduction to
     the Partnership Transactions.............................14
OPINION.......................................................18
                               - 2 -

  A. Statute of Limitations...................................21
  B. Section 6653(a)--Negligence..............................25
  C. Section 6659--Valuation Overstatement....................41

             MEMORANDUM FINDINGS OF FACT AND OPINION

     DAWSON, Judge:   This case was assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.     All section references

are to the Internal Revenue Code in effect for the tax years in

issue, unless otherwise indicated.     All Rule references are to

the Tax Court Rules of Practice and Procedure.     The Court agrees

with and adopts the opinion of the Special Trial Judge, which is

set forth below.

               OPINION OF THE SPECIAL TRIAL JUDGE

     WOLFE, Special Trial Judge:     This case is part of the

Plastics Recycling group of cases.     For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

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

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

the underlying transactions involving the Sentinel recyclers in

this case are substantially identical to the transaction

considered in the Provizer case.

     In a notice of deficiency dated September 6, 1989,

respondent determined a deficiency in petitioner Allan J.

Becker's 1982 Federal income tax in the amount of $9,901, and

additions to tax for that year in the amount of $527.70 under
                               - 3 -

section 66591 for valuation overstatement, in the amount of

$495.05 under section 6653(a)(1) for negligence, and under

section 6653(a)(1)(B)2 in an amount equal to 50 percent of the

interest due on the amount of the underpayment attributable to

negligence.   Respondent also determined that interest on the

deficiency accruing after December 31, 1984, would be calculated

at 120 percent of the statutory rate under section 6621(c).     Both

the increased rate of interest and the additional interest for

negligence were calculated on the amount of $1,899.

     In a second notice of deficiency dated September 6, 1989,

respondent determined a deficiency in petitioners' 1979 joint

Federal income tax in the amount of $262.   The deficiency for

taxable year 1979 was due entirely to the disallowance of an

investment credit carryback from 1982.

     In a notice of deficiency dated October 5, 1989, respondent

determined a deficiency in petitioner Allan J. Becker's 1981

Federal income tax in the amount of $15,377, and an addition to

tax for that year in the amount of $4,613 under section 6659 for

valuation overstatement.   Respondent also determined that

interest on the deficiency accruing after December 31, 1984,

1
     In the alternative to the sec. 6659 addition to tax,
respondent determined an addition to tax under sec. 6661 for
substantial understatement of liability.
2
     For taxable year 1982, the addition to tax for negligence in
an amount equal to 50 percent of the interest due on the amount
of the underpayment attributable to negligence was provided for
under sec. 6653(a)(2), not sec. 6653(a)(1)(B).
                                  - 4 -

would be calculated at 120 percent of the statutory rate under

section 6621(c).

      In her answer, respondent asserted negligence additions to

tax for 1979 and 1981, increased additions to tax under sections

6653(a)(2) and 6659 for 1982, and a decreased addition to tax

under section 6659 for 1981, as follows:

    Year   Sec. 6653(a)   Sec. 6653(a)(1)   Sec. 6653(a)(2)   Sec. 6659
    1979     $13.10              --                --             --
                                                   1
    1981       --             $768.85                           $3,714
                                                   1
    1982       --                --                              2,401
1
     50 percent of the interest due on the amount of the
underpayment attributable to negligence. Respondent asserted
that the amounts of the underpayments attributable to negligence
for 1981 and 1982, respectively, were $15,377 and $9,901.

For taxable year 1982, respondent also asserted that the

increased rate of interest under section 6621(c) applied to the

entire deficiency for that year.     We consider the amounts in

dispute to be adjusted accordingly.

      The parties filed a Stipulation of Settled Issues concerning

the adjustments relating to petitioner Allan J. Becker's

participation in the Plastics Recycling Program.       The stipulation

provides:

      1. Petitioners are not entitled to any deductions,
      losses, investment credits, business energy investment
      credits or any other tax benefits claimed on their
      1979, 1981 and 1982 returns as a result of their
      participation in the Plastics Recycling Program.

      2. The underpayments in income tax attributable to
      petitioners' participation in the Plastics Recycling
      Program are substantial underpayments attributable to
      tax motivated transactions, subject to the increased
      rate of interest established under I.R.C. §6621(c),
                               - 5 -

     formerly §6621(d).

     3. This stipulation resolves all issues that relate to
     the items claimed on petitioners' tax returns resulting
     from their participation in the Plastics Recycling
     Program, with the exception of petitioners' potential
     liability for additions to the tax for valuation
     overstatements under I.R.C. §6659 and for negligence
     under the applicable provisions of §6653(a).

     4. With respect to the issue of the addition to the
     tax under I.R.C. §6659, petitioners do not intend to
     contest the issue of the value of the Sentinel Recycler
     or the existence of a valuation overstatement on the
     petitioners' returns; however, petitioners reserve
     their right to contend that the Section 6659 penalty is
     not applicable in this case.

     The issues remaining in this case are:   (1) Whether the

assessments in this case are time-barred; (2) whether petitioners

are liable for the additions to tax for negligence under the

provisions of section 6653(a); and (3) whether petitioners are

liable for additions to tax under section 6659 for underpayments

of tax attributable to valuation overstatements.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulated facts and attached exhibits are incorporated

herein by this reference.

A.   The Plastics Recycling Transactions

     This case concerns petitioner Allan J. Becker's investments

in two limited partnerships:   SAB Resource Recovery Associates

(SAB Recovery) and SAB Resource Recycling Associates (SAB
                               - 6 -

Recycling).3   SAB Recovery and SAB Recycling purported to lease

Sentinel expanded polyethylene (EPE) recyclers.    SAB Recovery

also owned interests in two partnerships that purported to lease

Sentinel EPE recyclers, Scarborough Leasing Associates

(Scarborough) and Plymouth Equipment Associates (Plymouth).    For

convenience, we refer to these four partnerships collectively as

the Partnerships.

     The transactions involving the Sentinel EPE recyclers

purportedly leased by the Partnerships are substantially

identical to those in the Clearwater Group limited partnership

(Clearwater), the partnership considered in Provizer v.

Commissioner, T.C. Memo. 1992-177.     Petitioners have stipulated

substantially the same facts concerning the underlying

transactions as we found in the Provizer case.

     In the Provizer case, 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 Clearwater, which licensed the recyclers to FMEC Corp., which

sublicensed them back to PI.   The sales of the recyclers from PI

to ECI Corp. were financed with nonrecourse notes.    Approximately

7 percent of the sales price of the recyclers sold by ECI Corp.

3
     The record here does not include copies of the SAB Recovery
and SAB Recycling offering memoranda. For a more detailed
discussion of SAB Recovery and SAB Recycling, see Gollin v.
Commissioner, T.C. Memo. 1996-454.
                                - 7 -

to F & G Corp. was paid in cash with the remainder financed

through notes.    These notes provided that 10 percent of the notes

were recourse but that the recourse portion of the notes was only

due after the nonrecourse portion, 90 percent, was paid in full.

       All of the monthly payments required among the entities in

the above transactions offset each other.      These transactions

were done simultaneously.    Although the recyclers were sold and

leased for the above amounts under the structure of simultaneous

transactions, the fair market value of a Sentinel EPE recycler in

1981 was not in excess of $50,000.

       PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap.      The sublicense

agreements provided that the end-users would transfer to PI 100

percent of the recycled scrap in exchange for a payment from FMEC

Corp. based on the quality and amount of recycled scrap.

       The six Sentinel EPE recyclers purportedly leased by

Clearwater were used infrequently and often were not in use at

all.    PI failed promptly to pick up the scrap and at times, did

not pay the end-user for the scrap that it did pick up.        Also, PI

sometimes failed promptly to reclaim the machines that were

rejected by prospective end-users.      One of the six recyclers

bought by Clearwater, for example, was placed with four different

end-users in 4 years.    The first end-user refused to accept

delivery of the recycler.    The second end-user found the recycler

to be too costly and noisy.    PI took 6 months to pick up the
                                - 8 -

recycler after PI was notified by the second end-user that it no

longer wanted the recycler.    The third end-user ran a

cost/benefit analysis on the recycler and found it unprofitable.

PI waited another 6 months before picking up the recycler.    The

last end-user used the machine infrequently and was not paid for

the recycled scrap produced.

     Like Clearwater, each of the Partnerships leased Sentinel

EPE recyclers from F & G Corp. and licensed those recyclers to

FMEC Corp.    The transactions of the Partnerships differ from the

underlying transactions in the Provizer case in the following

respects:    (1) The entity that leased the machines from F & G

Corp. and licensed them to FMEC Corp., and (2) the number of

machines sold, leased, licensed, and sublicensed.    Each of the

Partnerships leased and licensed seven Sentinel EPE recyclers.4

     For convenience, we refer to the series of transactions

among PI, ECI Corp., F & G Corp., each of the Partnerships, FMEC

Corp., and PI as the Partnership transactions.    In addition to

the Partnership transactions, a number of other limited

4
     The 1981 partnership returns for SAB Recovery, Scarborough,
and Plymouth indicate that those partnerships leased and licensed
seven Sentinel EPE recyclers. Although the record is without a
partnership return or a copy of the offering memorandum for SAB
Recycling, the amount of basis allocated to petitioner Allan J.
Becker, based on his interest in SAB Recycling, is consistent
with ownership of seven Sentinel EPE recyclers. SAB Recovery,
Scarborough, and Plymouth each reported a basis in their seven
recyclers in the amount of $8,138,667. Petitioner Allan J.
Becker acquired a 0.507692-percent interest in SAB Recycling in
1982. On his 1982 return, he reported a basis in the recyclers
in the amount of $41,320 ($8,138,667 x 0.00507692 = $41,319.36).
                               - 9 -

partnerships entered into transactions similar to the Partnership

transactions, also involving Sentinel EPE recyclers and Sentinel

expanded polystyrene (EPS) recyclers.    We refer to these

collectively as the Plastics Recycling transactions.

B.   The Partnerships

     SAB Recovery and SAB Recycling were organized and promoted

by petitioner's brother Stuart Becker (Becker), a certified

public accountant and the founder and principal owner of Stuart

Becker & Co., P.C. (Becker Co.), an accounting firm that

specialized in tax matters.   SAB Recovery was formed in late 1981

and SAB Recycling was formed in early 1982.    Becker organized a

total of six recycling partnerships (the SAB Recycling

Partnerships).   Two of the SAB Recycling Partnerships closed in

late 1981, two closed in early 1982, and two more closed in late

1982.

     The general partner of each of the SAB Recycling

Partnerships, including SAB Recovery and SAB Recycling, is SAB

Management Ltd. (SAB Management).   SAB Management is wholly owned

by Scanbo Management Ltd. (Scanbo), which is wholly owned by

Becker.   Scanbo is an acronym for the names of three of Becker's

children:   Scott, Andy, and Bonnie.   SAB Management did not

engage in any business before becoming involved with the SAB

Recycling Partnerships.

     With respect to each of the SAB Recycling Partnerships, a

private placement memorandum was distributed to potential limited
                               - 10 -

partners.    Reports by F & G Corp.'s evaluators, Dr. Stanley M.

Ulanoff (Ulanoff), who had a background in marketing, and Dr.

Samuel Z. Burstein (Burstein), a mathematics professor, were

appended to the offering memoranda.     Ulanoff owns a 1.27-percent

interest in Plymouth Equipment Associates and a 4.37-percent

interest in Taylor Recycling Associates, partnerships that leased

Sentinel recyclers.   Burstein owns a 2.605-percent interest in

Empire Associates and a 5.82-percent interest in Jefferson

Recycling Associates, also partnerships that leased Sentinel

recyclers.   Burstein also was a client and business associate of

Elliot I. Miller (Miller), the corporate counsel to PI.

     SAB Management received fees of approximately $500,000 as

the general partner of the SAB Recycling Partnerships.    In

addition, Becker Co. prepared the partnership returns and Forms

K-1 for all of the SAB Recycling Partnerships and received fees

for those services.   Although the Plastics Recycling transactions

generally provided for commissions to finders or brokers in the

transactions, neither SAB Management nor Becker retained or

received any sales commissions or offeree representative fees.

Instead, after the closing of each SAB Recycling Partnership,

Becker rebated to each investor the portion of such investor's

original investment that would have otherwise been allocated to a

sales commission or offeree representative fee.

     At the time of the closings for the Sentinel EPE recyclers,

there was no established market for leasing or operating the
                              - 11 -

Sentinel EPE recyclers.   The Sentinel EPE recyclers were placed

with end-users that did not have sufficient amounts of scrap ever

to pay off the notes on the machines.   The Partnerships had no

net equity value and the only activity in which they were

involved lacked any potential for profit.

C.   Stuart Becker

      Becker does not have an engineering background, and he is

not an expert in plastics materials or plastics recycling.    He

received a B.S. degree in accounting from New York University in

1964 and an M.B.A. in taxation from New York University School of

Business Administration in 1973.   He passed the certified public

accountancy test in 1967 and was the winner of the gold medal,

awarded for achieving the highest score on the examination for

that year.   Since early 1966, Becker has practiced as an

accountant exclusively in the tax area.    From 1964 until 1972 he

worked for the accounting firm of Touche, Ross & Co., and in 1972

he joined the accounting firm of Richard A. Eisner & Co. as the

partner in charge of the tax department.    In 1977, Becker founded

Becker Co.

      Becker had considerable experience involving tax shelter

transactions before he organized the SAB Recycling Partnerships.

He prepared opinions regarding tax shelters' economic and tax

projections, advised individuals and companies with respect to

investments in tax shelters, lectured extensively about tax

shelter investments generally, and lectured and published with
                              - 12 -

respect to leveraged tax shelters.     Becker described a leveraged

tax shelter as "a transaction where * * * [the ratio of] the

effective * * * [tax] writeoff, which includes the value of the

tax credit, * * * [to the amount invested] exceeds one to one."

Becker Co. specialized in tax-advantaged investments.    From 1980

to 1982, approximately 60 percent of the work done by Becker Co.

involved tax sheltered and private investments.    Becker has owned

minority interests in general partners of numerous limited

partnerships.   Prior to organizing the SAB Recycling

Partnerships, Becker owned 5 percent of the general partner of

partnerships involved in approximately 14 transactions concerning

river transportation (such as barges, tow boats, and grain

elevators).

     Although investment counseling was related to his firm's

line of business, Becker did not consider himself in the business

of providing investment advice.   Becker did not normally hire

other professionals for consultation or advice.    In circumstances

where he believed there was a need for outside advice, he would

so advise the client.   Between 30 and 40 of Becker's clients

invested in the Plastics Recycling transactions.

     Becker learned of the Plastics Recycling transactions when a

prospective client presented him with an offering memorandum

concerning the transactions in August or September 1981.    Becker

reviewed the offering memorandum and spoke to Miller, one of the

key figures in the transactions and an acquaintance of Becker's.
                              - 13 -

Miller was a shareholder of F & G Corp. and, as noted, the

corporate counsel to PI.   He also represented Robert Grant

(Grant), the president and 100 percent owner of the stock of ECI

Corp., and some of Grant's clients.    Thereafter, Becker

recommended the investment to the prospective client.     Although

the prospective client did not invest in the Plastics Recycling

transactions, Becker became interested in the proposal and

organized the SAB Recycling Partnerships in order to make similar

investments in Sentinel EPE recyclers conveniently available to

appropriate clients.

     In organizing the SAB Recycling Partnerships, Becker was not

allowed to change the format of the transactions or the purchase,

lease, or licensing prices of the Sentinel EPE recyclers.     He was

allowed only to conduct a limited investigation of the proposed

investments and choose whether or not to organize similar

partnerships.   Becker relied heavily upon the offering materials

and discussions with persons involved in the matter to evaluate

the Plastics Recycling transactions.    He and two other members of

Becker Co., Leicht and Tucker, investigated PI and visited its

plant in Hyannis, Massachusetts, where they saw the Sentinel EPE

recyclers.

     During his investigation of the Plastics Recycling

transactions, Becker did not hire any plastics, engineering, or

technical experts, or recommend that his clients do so.     Becker

discussed the transactions with Michael Canno (Canno) of the
                              - 14 -

Equitable Bag Co., a manufacturer of paper and plastic bags.

Canno never saw the recyclers or the pellets and never wrote any

reports assessing the equipment or the pellets.   In addition,

Becker retained a law firm, Rabin & Silverman, to assist him in

organizing the SAB Recycling Partnerships.   See Spears v.

Commissioner, T.C. Memo. 1996-341, to the effect that in

employing the law firm, Becker sought particularly to protect

himself against liability.

     After the 1981 SAB Recycling Partnerships closed, Becker had

an accountant sent to PI to confirm, by serial number, that as of

December 31, 1981, the equipment that was leased to the 1981 SAB

Recycling Partnerships was indeed available for use.   Becker

arranged for this verification, independent of PI, because he

understood that the investment tax and business energy credits

would not be available if the qualifying property were not

available for use.

D. Petitioner Allan J. Becker and His Introduction to the
Partnership Transactions

     At the time their petition was filed, petitioner Allan J.

Becker resided in Mahwah, New Jersey, and petitioner Brenda

Becker resided in North Ballmer, New York.   Petitioners Allan J.

Becker and Brenda Becker were divorced on December 24, 1980.

Brenda Becker did not invest in the Plastics Recycling Program,

and no notice of deficiency has been issued to her for taxable

years 1981 and 1982.   The parties stipulated that Brenda Becker
                               - 15 -

is not liable for any tax, interest, or additions to tax

resulting from any deductions, losses, investment credits,

business energy investment credits, or any other tax benefits

claimed by Allan J. Becker on his 1981 and 1982 tax returns as a

result of his participation in the Plastics Recycling Program.

Allan J. Becker did not tell Brenda Becker that he was investing

in the Partnership transactions, nor did he inform her that he

was filing an application for refund for taxable year 1979.

Hereinafter, references to "petitioner" shall be to Allan J.

Becker.

     After graduating high school, petitioner worked for 3 years

as a draftsman with a division of Sherry Rand, and also attended

college classes at night.   In 1960 petitioner joined his father's

food brokerage company, Sidney Becker Associates, Inc. (SBA).

Petitioner handled sales in the New York metropolitan area.    By

1981 petitioner had acquired 49 percent of SBA and was an officer

of the company.   SBA's gross sales during the years 1981 and 1982

ranged from $400,000 to $500,000.

     Petitioner acquired a 0.671946-percent interest in SAB

Recovery for $7,500 in 1981.   As a result of his interest in SAB

Recovery, on his 1981 return petitioner claimed an operating loss

in the amount of $5,955 and investment tax and business energy

credits in the amount of $12,380.   He claimed a loss in the

amount of $344 from SAB Recovery on his 1982 return.   Petitioner

acquired a 0.507692-percent interest in SAB Recycling for $5,000
                               - 16 -

in 1982.   As a result of his interest in SAB Recycling, on his

1982 return petitioner claimed an operating loss in the amount of

$3,974 and investment tax and business energy credits in the

amount of $8,002.5   Petitioner carried back an additional $262 in

business energy credits to 1979.   Except for $20 of the $344 loss

from SAB Recovery that petitioner claimed on his 1982 return,

respondent disallowed these amounts in full.

     Petitioner learned of the Plastics Recycling transactions in

the fall of 1981 from Stuart Becker.    Becker had been preparing

the tax returns for SBA and petitioner since the early 1960's.

He also provided tax advice, tax-oriented financial advice, and

representation services before the Internal Revenue Service.

Becker characterized his relationship with petitioner during the

years at issue as social.   Both men were recently divorced at the

time, and they had frequent discussions about personal matters as

well as SBA.

     In the fall of 1981 Becker sent a copy of the SAB Recovery

offering memorandum to petitioner and "told him to look at it and

call me with any questions."   Petitioner subsequently telephoned

Becker and asked him to explain the investment.   Becker gave

petitioner a synopsis of the transaction and its tax aspects.     He

5
     On his 1982 return, petitioner claimed a total loss of
$4,318 ($3,974 from SAB Recycling and $344 from SAB Recovery).
Petitioner reported a combined investment tax and business energy
credit from SAB Recycling in the amount of $8,264 (separately,
each of the credits was in the amount of $4,132). The business
energy credit was subject to a limitation of $3,870.
                              - 17 -

explained "that there were substantial tax benefits generated

from the transaction, but if it didn't fly economically those tax

advantages, i.e., the tax recapture, would have to be returned."

The two discussed the economics of the transaction, and Becker

told petitioner of his speaking to Canno and visiting Hyannis.

Becker also confirmed to petitioner that their father was

investing in a Plastics Recycling transaction.

     Petitioner met with Becker for breakfast approximately 10

days later to discuss personal matters.   Their conversation

turned to SAB Recovery, and petitioner expressed some reluctance

because he had never before invested in a tax shelter.    According

to petitioner, Becker told him that he would save more in taxes

than he invested.   Petitioner described his reaction as follows:

"I just said I can't believe it.   It was beyond my imagination,

because I never was involved in anything like that, where you

could make an investment and save a lot more than that investment

in taxes."   Petitioner understood from Becker that Becker and

some of his associates had investigated the Plastics Recycling

transactions.   Petitioner invested in SAB Recovery after his

father verified that he, too, was investing in a Plastics

Recycling transaction.

     In early 1982, Becker sent petitioner a copy of the SAB

Recycling offering memorandum.   Petitioner invested in SAB

Recycling after briefly speaking with Becker, and again

confirming with his father that he, too, was investing in another
                               - 18 -

Plastics Recycling transaction.    Becker Co. prepared petitioner's

1981 and 1982 returns and petitioner reviewed them.    Petitioner

and Becker did not discuss the Partnership transactions in

conjunction with the preparation of either return.    Petitioner

understood that his brother's (Becker) background was tax

oriented.

     Petitioner has no education or work experience in plastics

recycling or plastics materials.    He never read the SAB Recovery

and SAB Recycling offering memoranda.    Petitioner did not see a

Sentinel recycler prior to investing in the Partnership

transactions or otherwise independently investigate the Sentinel

recyclers.    He did not know when or in what amounts the

Partnerships were projected to realize a profit.    Petitioner was

unaware that Becker, as president and sole shareholder of the

general partner of the SAB Recycling partnerships, received

substantial fees from the Partnerships.    In the end, petitioner

knew that the Partnerships leased plastics recyclers, and that

his brother, the accountant, claimed the machines were state-of-

the-art.    Petitioner made little, if any, effort to learn more

about the transaction, although he was an experienced businessman

and corporate officer.    Petitioner never made a profit in any

year from his participation in the Partnership transactions.

                               OPINION

     We have decided a large number of the Plastics Recycling
                              - 19 -

group of cases.6   The majority of these cases, like the present

case, raised issues regarding additions to tax for negligence and

valuation overstatement.   We have found the taxpayers liable for

such additions to tax in all but one of the opinions to date on

these issues, although procedural rulings have involved many more




6
     Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993), concerned the
substance of the partnership transaction and also the additions
to tax.
     The following cases concerned the addition to tax for
negligence, inter alia: Jaroff v. Commissioner, T.C. Memo. 1996-
527; Gollin v. Commissioner, T.C. Memo. 1996-454; Grelsamer v.
Commissioner, T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C.
Memo. 1996-398; Estate of Busch v. Commissioner, T.C. Memo. 1996-
342; Spears v. Commissioner, T.C. Memo. 1996-341; Stone v.
Commissioner, T.C. Memo. 1996-230; Reimann v. Commissioner, T.C.
Memo. 1996-84; Bennett v. Commissioner, T.C. Memo. 1996-14;
Atkind v. Commissioner, T.C. Memo. 1995-582; Triemstra v.
Commissioner, T.C. Memo. 1995-581; Pace v. Commissioner, T.C.
Memo. 1995-580; Dworkin v. Commissioner, T.C. Memo. 1995-533;
Wilson v Commissioner, T.C. Memo. 1995-525; Avellini v.
Commissioner, T.C. Memo. 1995-489; Paulson v. Commissioner, T.C.
Memo. 1995-387; Zidanich v. Commissioner, T.C. Memo. 1995-382;
Ramesh v. Commissioner, T.C. Memo. 1995-346; Reister v.
Commissioner, T.C. Memo. 1995-305; Fralich v. Commissioner, T.C.
Memo. 1995-257; Shapiro v. Commissioner, T.C. Memo. 1995-224;
Pierce v. Commissioner, T.C. Memo. 1995-223; Fine v.
Commissioner, T.C. Memo. 1995-222; Pearlman v. Commissioner, T.C.
Memo. 1995-182; Kott v. Commissioner, T.C. Memo. 1995-181;
Eisenberg v. Commissioner, T.C. Memo. 1995-180.
     Greene v. Commissioner, 88 T.C. 376 (1987), concerned the
applicability of the safe-harbor leasing provisions of sec.
168(f)(8). Trost v. Commissioner, 95 T.C. 560 (1990), concerned
a jurisdictional issue.
     Farrell v. Commissioner, T.C. Memo. 1996-295; Baratelli v.
Commissioner, T.C. Memo. 1994-484; Estate of Satin v.
Commissioner, T.C. Memo. 1994-435; Fisher v. Commissioner, T.C.
Memo. 1994-434; Foam Recycling Associates v. Commissioner, T.C.
Memo. 1992-645; Madison Recycling Associates v. Commissioner,
T.C. Memo. 1992-605, concerned other issues.
                             - 20 -

favorable results for taxpayers.7

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

almost identical to the Partnership transactions in this case,

was a sham because it lacked economic substance and a business

purpose, (3) upheld the section 6659 addition to tax for

valuation overstatement since the underpayment of taxes was

directly related to the overstatement of the value of the

Sentinel EPE recyclers, and (4) held that losses and credits

claimed with respect to Clearwater were attributable to tax-

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

reaching the conclusion that the transaction lacked economic

substance and a business purpose, this Court relied heavily upon


7
     In Zidanich v. Commissioner, T.C. Memo. 1995-382, we held
the taxpayers liable for the sec. 6659 addition to tax, but not
liable for the negligence additions to tax under sec. 6653(a).
As indicated in our opinion, the Zidanich case, and the Steinberg
case consolidated with it for opinion, involved exceptional
circumstances.
     In Estate of Satin v. Commissioner, supra, and Fisher v.
Commissioner, supra, after the decision in Provizer v.
Commissioner, supra, the taxpayers were allowed to elect to
accept a beneficial settlement because of exceptional
circumstances. In Farrell v. Commissioner, supra, we rejected
taxpayers' claim to a similar belated settlement arrangement
since the circumstances were different and taxpayers previously
had rejected settlement and elected to litigate the case. See
also Jaroff v. Commissioner, supra; Gollin v. Commissioner,
supra; Grelsamer v. Commissioner, supra; Zenkel v. Commissioner,
supra; Baratelli v. Commissioner, supra.
                              - 21 -

the overvaluation of the Sentinel EPE recyclers.

     Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that petitioner Allan J.

Becker's investments in the Sentinel EPE recyclers in this case

are similar to the investment described in Provizer v.

Commissioner, supra.   The underlying transactions in this case,

and the Sentinel EPE recyclers considered in this case, are the

same type of transaction and same type of machines considered in

Provizer v. Commissioner, supra.

     Based on the entire record in this case, including the

extensive stipulations, testimony of respondent's experts, and

petitioner Allan J. Becker's testimony, we hold that each of the

Partnership transactions herein was a sham and lacked economic

substance.   In reaching this conclusion, we rely heavily upon the

overvaluation of the Sentinel EPE recyclers.   Respondent is

sustained on the question of the underlying deficiencies.    We

note that petitioners have explicitly conceded this issue in the

first stipulation of facts and the stipulation of settled issues

filed shortly before trial.   The record plainly supports

respondent's determinations regardless of such concession.     For a

detailed discussion of the facts and the applicable law in a

substantially identical case, see Provizer v. Commissioner,

supra.

A. Statute of Limitations

     In their petition, petitioners alleged that each of the
                               - 22 -

notices of deficiency herein was issued after expiration of the

respective statutory limitations periods.8   Petitioners have the

burden of proving when the respective returns were filed and when

the general 3-year periods of limitations expired.     Miami

Purchasing Service Corp. v. Commissioner, 76 T.C. 818, 823

(1981).    Respondent bears the burden of proving that any

extensions of the periods of limitations are applicable.       Id.

     Section 6501(a) generally requires an assessment of tax to

be made within 3 years after a return is filed.     In the case of a

deficiency attributable to a credit carryback, such deficiency

may be assessed at any time before the expiration of the period

within which a deficiency for the taxable year of the unused

credit that results in such carryback may be assessed.      Sec.

6501(j).    If, before the expiration of the time to assess the tax

under section 6501(a), the parties consent in writing to extend

the time for the assessment of the tax, the tax may be assessed

at any time before the end of the period agreed upon.     Sec.

6501(c)(4).

     Petitioner filed his 1981 Federal income tax return on or

about April 15, 1982.    Therefore, in the absence of any

extension, the 3-year period of limitations for that year would

have expired on April 15, 1985.    Sec. 6501(a).   Prior to


8
     In their posttrial briefs, the parties addressed this issue
only with respect to the notice of deficiency for 1979 and
petitioner Brenda Becker.
                               - 23 -

expiration of the 3-year period, in February 1985 petitioner and

respondent executed a Form 872-A, Special Consent to Extend the

Time to Assess Tax.   The agreement extended the period of

limitations until the 90th day after (1) either party mailed to

the other a Form 872-T, Notice of Termination of Special Consent

to Extend the Time to Assess Tax, or (2) respondent issued a

notice of deficiency.   Neither petitioner nor respondent executed

a Form 872-T prior to issuance of the notice of deficiency for

1981, which was dated October 5, 1989.    Accordingly, the notice

of deficiency for taxable year 1981 was issued within the

statutory limitations period, as extended by agreement, and the

assessment for 1981 is not barred by the statute of limitations.

     The deficiency in petitioners' 1979 Federal income tax is

attributable entirely to an unused credit carryback from 1982.

Therefore, the timeliness of the notice of deficiency for 1979 is

controlled by the limitations period for assessing the 1982

deficiency.   Sec. 6501(j).   Petitioner filed his return for

1982--from which the unused credit was carried back--on or about

April 15, 1983.   Consequently, in the absence of any extension,

the 3-year period of limitations for 1982 would have expired on

April 15, 1986.   Sec. 6501(a).   Before such time, however, in

February 1986 petitioner and respondent executed a Form 872-A,

and indefinitely extended the limitations period under the same

terms agreed upon for 1981.    Neither petitioner nor respondent

executed a Form 872-T prior to issuance of the notices of
                               - 24 -

deficiency for 1979 and 1982, each of which was dated September

6, 1989.    As to petitioner, therefore, the notices of deficiency

for taxable years 1979 and 1982 were timely issued, as extended

by statute and agreement, and the assessments for 1979 and 1982

are not barred by the statute of limitations.

     With respect to petitioner Brenda Becker, however, the

notice of deficiency for 1979 was not timely issued.   The Form

872-A executed by respondent and petitioner for 1982 was not

signed by Brenda Becker, nor does her name appear in the

document.   Brenda Becker did not personally execute a Form 872,

Consent to Extend the Time to Assess Tax, for 1979 or 1982.

Respondent has not shown that when petitioner signed the Form

872-A for 1982, he was acting as an authorized agent for, or

otherwise on behalf of, Brenda Becker.   To the contrary,

petitioner's testimony indicates that Brenda Becker had no

knowledge about his investments in the Partnership transactions,

his application for and receipt of a refund for taxable year

1979, or his extension of the period of limitations for 1982.     We

hold that the Form 872-A executed by petitioner and respondent

did not extend the period of limitations with respect to Brenda

Becker.    Consequently, the notice of deficiency for 1979 is time

barred as to Brenda Becker.9   Tallal v. Commissioner, 77 T.C.

9
     Although the matter is not addressed by the parties, we note
that their Second Stipulation of Facts arguably renders the
statute of limitations issue with respect to petitioner Brenda
                                                   (continued...)
                              - 25 -

1291 (1981).

B.   Section 6653(a)--Negligence

     In a notice of deficiency, respondent determined that

petitioner Allan J. Becker was liable for the additions to tax

for negligence under section 6653(a)(1) and (2) for 1982.10

Petitioner has the burden of proving that respondent's

determination of these additions to tax are erroneous.   Rule

142(a); Luman v. Commissioner, 79 T.C. 846, 860-861 (1982).     In

her answer, respondent asserted that both petitioners were liable

for the addition to tax for negligence under section 6653(a) for

1979; that petitioner Allan J. Becker was liable for additions to

tax for negligence under section 6653(a)(1) and (2) for 1981; and

increased the amount of the deficiency subject to section

6653(a)(2) for 1982.   Because these additions to tax were raised

for the first time, or increased, in her answer, the burden of

proof to that extent is shifted to respondent.   Rule 142(a);

Vecchio v. Commissioner, 103 T.C. 170, 196 (1994); Bagby v.


9
 (...continued)
Becker moot. The parties stipulated that she is not liable for
any tax, interest, or additions to tax resulting from any losses
or investment tax and business energy credits claimed by
petitioner on his 1981 and 1982 tax returns as a result of his
participation in the Plastics Recycling Program. The 1979
deficiency and addition to tax resulted exclusively from the
carryback of an unused business energy credit claimed by
petitioner in 1982, as a result of his participation in SAB
Recovery.
10
     In the notice of deficiency issued for taxable year 1982,
respondent referred to sec. 6653(a)(2) as sec. 6653(a)(1)(B).
                              - 26 -

Commissioner, 102 T.C. 596, 612 (1994).

     Section 6653(a) for 1979 and section 6653(a)(1) for 1981 and

1982 impose 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) imposes 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 employ

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

(1985).   The question is whether a particular taxpayer's actions

in connection with the transactions were reasonable in light of

his experience and the nature of the investment or business.    See

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

When considering the negligence addition to tax, we evaluate the

particular facts of each case, judging the relative

sophistication of the taxpayers, as well as the manner in which

they approached their investment.   McPike v. Commissioner, T.C.

Memo. 1996-46.   Compare Spears v. Commissioner, T.C. Memo. 1996-

341, with Zidanich v. Commissioner, T.C. Memo. 1995-382.

     In the present case, petitioner contends that he reasonably

relied upon the advice of a qualified adviser, Stuart Becker.    A

taxpayer may avoid liability for the additions to tax under the
                              - 27 -

provisions of section 6653 if he or she reasonably relied on

competent professional advice.   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 the negligence

additions to tax, the taxpayer must show that such professional

had the expertise and 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; Sacks v.

Commissioner, T.C. Memo. 1994-217, affd. 82 F.3d 918 (9th Cir.

1996); Kozlowski v. Commissioner, T.C. Memo. 1993-430, affd.

without published opinion 70 F.3d 1279 (9th Cir. 1995); Prohaska

v. Commissioner, T.C. Memo. 1991-306, affd. without published

opinion sub nom. Virovec v. Commissioner, 983 F.2d 1071 (6th Cir.

1992); Prohaska v. Commissioner, T.C. Memo. 1991-305, affd.

without published opinion sub nom. Virovec v. Commissioner, 983

F.2d 1071 (6th Cir. 1992); see also Stone v. Commissioner, T.C.

Memo. 1996-230; Reimann v. Commissioner, T.C. Memo. 1996-84.

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to
                              - 28 -

negligence.   Goldman v. Commissioner, supra; Pasternak v.

Commissioner, 990 F.2d 893 (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. 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); McCrary

v. Commissioner, 92 T.C. 827, 850 (1989); Rybak v. Commissioner,

91 T.C. 524, 565 (1988).   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.   David v. Commissioner,

supra, Goldman v. Commissioner, supra; Freytag v. Commissioner,

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

Commissioner, T.C. Memo. 1994-329, affd. without published

opinion 72 F.3d 123 (3d Cir. 1995); Sacks v. Commissioner, supra;

Steerman v. Commissioner, T.C. Memo. 1993-447; Rogers v.

Commissioner, T.C. Memo. 1990-619; see also the Plastics

Recycling cases cited supra note 6.

     Petitioner's purported adviser, Becker, had no education,

special qualifications, or professional skills in plastics

engineering, plastics recycling, or plastics materials.    In

evaluating the Plastics Recycling transactions and organizing the

SAB Recycling Partnerships, Becker supposedly relied upon:
                               - 29 -

(1) The offering materials; (2) a tour of the PI facility in

Hyannis; (3) discussions with insiders to the transactions; (4)

Canno; and (5) his investigation of the reputation and background

of PI and persons involved in the transactions.

     Despite his lack of knowledge regarding the product, the

target market, and the technical aspects at the heart of the

Plastics Recycling transactions, Becker did not hire an expert in

plastics materials or plastics recycling, or recommend that his

clients do so.   The only independent person having any connection

with the plastics industry with whom Becker spoke was Canno.

Canno was a client of Becker Co., and was a part owner and the

production manager of Equitable Bag Co., a manufacturer of paper

and plastic bags.   Becker spoke to Canno about the recyclers and

PI, but did not hire or pay him for any advice.   Canno did not

visit the PI plant in Hyannis, see or test a Sentinel EPE

recycler, or see or test any of the output from a Sentinel EPE

recycler or the recycled resin pellets after they were further

processed by PI.    According to Becker, Canno endorsed the

Partnership transactions after reviewing the offering materials.

Asked at trial if Canno had done any type of comparables

analysis, Becker replied, "I don't know what Mr. Canno did."

     Becker visited the PI plant in Hyannis, toured the facility,

viewed a Sentinel EPE recycler in operation, and saw products

that were produced from recycled plastic.   Becker claims that he

was told by PI personnel that the recycler was unique and that it
                              - 30 -

was the only machine of its type.   In fact, the Sentinel EPE

recycler was not unique; instead, several machines capable of

densifying low density materials were already on the market.

Other plastics recycling machines available during 1981 and 1982

ranged in price from $20,000 to $200,000, including the Foremost

Densilator, Nelmor/Weiss Densification System (Regenolux), Buss-

Condux Plastcompactor, and Cumberland Granulator.    See Provizer

v. Commissioner, T.C. Memo. 1992-177.

     Becker was also told that PI had put an enormous amount of

research and development--10 to 12 years' worth--into the

creation and production of the Sentinel EPE recycler.     When he

asked to see the cost records for some kind of independent

verification, however, his request was denied.   Becker was

informed that such information was proprietary and secret, and

that he would just have to take PI's representations as true.

Although PI claimed that all of its information was a trade

secret, and that it never obtained patents on any of its

machines, PI had in fact obtained numerous patents prior to the

recycling transactions, and had also applied for a trademark for

the Sentinel recyclers.   Becker decided to accept PI's

representations after speaking with Miller (the corporate counsel

to PI), Canno (who had never been to PI's plant or seen a

Sentinel EPE recycler), and a surrogate judge from Rhode Island

who did business in the Boston/Cape Cod area (and who had no

expertise in engineering or plastics materials).    Becker
                              - 31 -

testified that he was allowed to see PI's internal accounting

controls regarding the allocation of royalty payments and PI's

recordkeeping system in general.   In Provizer v. Commissioner,

supra, this Court found that "PI had no cost accounting system or

records."

     Becker confirmed at trial that he relied on the offering

materials and discussions with PI personnel to establish the

value and purported uniqueness of the recyclers.   Becker

testified that he relied upon the reports of Ulanoff and Burstein

contained in the offering materials, despite the fact:

(1) Ulanoff's report did not contain any hard data to support his

opinion; (2) Ulanoff was not an economics or plastics expert; (3)

Becker did not know whether Burstein was an engineer; and (4)

Burstein was a client of Miller's and was not an independent

expert.   In addition, Ulanoff and Burstein each owned an interest

in more than one partnership that owned Sentinel recyclers as

part of the Plastics Recycling Program.

     Becker explained at trial that in the course of his practice

when evaluating prospective investments for clients, he focuses

on the economics of the transaction and investigates whether

there is a need or market for the product or service.    With

respect to the Partnership transactions, the record indicates

that Becker overlooked several red flags regarding the economic

viability and market for the Sentinel EPE recyclers.    Becker

never saw any marketing plans for selling the pellets or leasing
                               - 32 -

the recyclers.   He accepted representations by PI personnel that

they would be marketing the recyclers to clients and that there

was a sufficient base of end-users for the machines, yet he never

saw PI's client list.   At the times the Partnerships closed,

Becker did not know who the end-users were or whether there were

any end-users actually committed to the transaction.

     Becker purportedly checked the price of the pellets by

reading trade journals of the plastics industry.   However, he did

not use those same journals to investigate the recyclers'

purported value or to see whether there were any advertisements

for comparable machines.   Information published prior to the

Plastics Recycling transactions indicated that several machines

capable of densifying low density materials were already on the

market, and that the price of polyethylene was declining during

the fourth quarter of 1981.   In concluding that the Partnerships

would be economically profitable, Becker made two assumptions

that he concedes were unsupported by any hard data:    (1) That

there was a market for the pellets; and (2) that market demand

for them would increase.

     Becker had a financial interest in SAB Recovery, SAB

Recycling, and the SAB Recycling Partnerships generally.    He

received fees in excess of $500,000 with respect to the SAB

Recycling Partnerships, which included SAB Recovery and SAB

Recycling.   Becker also received fees for investment advice from

some individual investors.    In addition, Becker Co. received fees
                                 - 33 -

from the SAB Recycling Partnerships for preparing their

partnership returns.   As Becker himself testified, potential

investors could not have read the offering materials and been

ignorant of the financial benefits accruing to him.

     Becker testified that he and petitioner discussed the

propriety of the tax benefits, Becker's visit to PI, and Canno's

comments.   Becker did not guarantee the tax benefits to

petitioner.    As he recalled, "I explained to * * * [petitioner],

as I had explained to virtually all the people I had spoken to,

that the only benefit he could count on * * * was a write-off of

the investment in the event the deal failed."    Becker thought it

was an appropriate investment for petitioner because, "It had

minimal risk on an after-tax basis, after-tax meaning a write-off

of the investment, not any of the other tax attributes that were

attributed to it".   Becker testified that he was very careful not

to mislead any of his clients regarding the particulars of his

investigation.   As he put it:    "I don't recall saying to a client

I did due diligence * * *.    [Rather,] I told * * * [my clients]

precisely what I had done to investigate or analyze the

transaction.   I didn't just say I did due diligence, and leave it

open for them to define what I might or might not have done."

     The record in this case shows that petitioner made no effort

to learn about the Sentinel EPE recyclers, the Partnerships, or

the Plastics Recycling transactions in general.    He ignored

Becker's instruction to read the offering memoranda, was unaware
                                - 34 -

of when and how the Partnerships were supposed to turn a profit,

and failed to read the available explanation that Becker received

substantial fees from the Partnerships.      In addition,

petitioner's recollection of events, and of what Becker told him,

is suspect.   Becker testified that he sent petitioner a copy of

the SAB Recovery offering memorandum and "told him to look at

it", and that he also sent him a copy of the SAB Recycling

offering memorandum.   Petitioner claims that he did not review

the SAB Recovery offering memorandum, and by extension the SAB

Recycling offering memorandum, because he "didn't know there was

an offering memorandum available."       Petitioner claims that during

their breakfast conversation, Becker indicated that "he felt

that, shortly down the road, * * * [SAB Recovery] would start to

show a profit, and I could reap the benefits of that."      Becker,

however, testified that he did not expect SAB Recovery to receive

any cash receipts in 1982.   He explained that he "didn't

legitimately and appropriately expect that we would close one day

and the checks would come in."    Becker "legitimately anticipated

that there would be little or no revenue in the first year of

operation of this equipment."

     Asked if he invested in the Partnerships without knowing

anything about them, petitioner replied as follows:

     I not--I didn't--I knew something about it. It wasn't
     just giving * * * [Becker] a check. I did know that
     they recycled plastics and they turned used plastic
     into usable plastic. And they did have state-of-the-
     art machinery, which is important to me.
                               - 35 -

Petitioner defined "state-of-the-art" as "highly-electronic,

rather than a lot of mechanical parts--electrical parts, where

you can just punch buttons in to the work, rather than people

physically moving levers and changing things."    However, the

Sentinel recyclers were not "state-of-the-art" by any definition.

The Sentinel EPE recycler was incapable of recycling expanded

polyethylene by itself, and had to be used in connection with

extruders and pelletizers.    In contrast, the Nelmor Regenolux,

which was available in 1981 for $38,000, was fully capable of

recycling expanded polyethylene or expanded polystyrene and

worked better than either the Sentinel EPE or EPS recycler.

     Petitioner testified that he invested in SAB Recovery based

on a conversation with his father, and Becker's "* * * pushing me

into it".    As for SAB Recycling, petitioner testified that he

decided to invest in that partnership after Becker purportedly

told him that SAB Recovery had done well, and again speaking with

his father.    However, petitioner failed to explain how SAB

Recovery had done well, except for generating claims to tax

benefits.    SAB Recovery received no cash receipts during 1982,

and to the extent that the Sentinel EPE recyclers had been placed

with end-users, they were placed with end-users that did not have

enough scrap ever to pay off the notes on the machines.

     Becker certainly recognized that the purported value of the

Sentinel EPE recycler generated the deductions and credits in

this case.    Becker explained the tax benefits to petitioner, and
                                - 36 -

warned him that the tax benefits were contingent upon the

economics of the transaction.    Yet neither petitioner nor Becker

verified the purported value of the Sentinel EPE recycler.

Petitioner relied on Becker.    Petitioner was well aware of

Becker's educational and professional background.    Becker's

expertise was in taxation, not plastics materials or plastics

recycling, and his investigation and analysis of the Plastics

Recycling transactions reflected this circumstance.    Petitioner

also spoke to his father, but there is no suggestion in the

record that petitioner's father knew anything about plastics

materials or plastics recycling, or that he advised petitioner

beyond confirming that he, too, was investing in Plastics

Recycling transactions.   In the end, Becker and petitioner relied

on PI personnel for the value of the Sentinel EPE recyclers and

the economic viability of the Partnership transactions.    See

Vojticek v. Commissioner, T.C. Memo. 1995-444, to the effect that

advice from such persons "is better classified as sales

promotion."

     We hold that petitioner did not reasonably or in good faith

rely on Becker as an expert or a qualified professional working

in the area of his expertise to establish the fair market value

of the Sentinel EPE recycler and economic viability of the

Partnership transactions.   Becker did not have any education,

special qualifications, or professional skills in plastics

materials or plastics recycling.    A taxpayer may rely upon his
                                - 37 -

adviser's expertise (in this case accounting and tax advice), but

it is not reasonable or prudent to rely upon a tax adviser

regarding matters outside of his field of expertise or with

respect to facts that he does not verify.   See David v.

Commissioner, 43 F.3d at 789-790; Goldman v. Commissioner, 39

F.3d at 408; Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989),

affg. Patin v. Commissioner, 88 T.C. 1086 (1987); Lax v.

Commissioner, T.C. Memo. 1994-329; Sacks v. Commissioner, T.C.

Memo. 1994-217; Prohaska v. Commissioner, T.C. Memo. 1991-306;

Prohaska v. Commissioner, T.C. Memo. 1991-305; Rogers v.

Commissioner, T.C. Memo. 1990-619; see also Jaroff v.

Commissioner, T.C. Memo. 1996-527; Gollin v. Commissioner, T.C.

Memo. 1996-454; Grelsamer v. Commissioner, T.C. Memo. 1996-399;

Zenkel v. Commissioner, T.C. Memo. 1996-398; Estate of Busch v.

Commissioner, T.C. Memo. 1996-342; Spears v. Commissioner, T.C.

Memo. 1996-341, with respect to Becker's advice in Plastics

Recycling cases.

     Petitioner's reliance on Heasley v. Commissioner, 902 F.2d

380 (5th Cir. 1990), revg. T.C. Memo. 1988-408; Reile v.

Commissioner, T.C. Memo. 1992-488; Davis v. Commissioner, T.C.

Memo. 1989-607, is misplaced.    In each of those cases, the Court

declined to sustain the negligence additions to tax in part

because the taxpayers relied upon a professional adviser.    The

facts of the instant case, however, are distinctly different from

the facts of those cases.
                              - 38 -

     The taxpayers in the Reile case, a married couple, had only

1 year of college between them and characterized themselves as

financial "dummies."   In the Davis case, the taxpayers relied

upon an adviser who was independent of the investment venture and

also relied upon their own review of the offering memorandum that

did not reflect that the principals in the venture lacked

experience in the pertinent line of business.   This Court

concluded that it was reasonable for the taxpayers to rely on

such information without taking extreme and expensive steps to

verify it.   In the Heasley case, the taxpayers were

unsophisticated, moderate-income investors who did not

independently investigate the venture at issue, or read the

accompanying prospectus in full.   The Court of Appeals for the

Fifth Circuit declined to sustain the negligence additions to tax

because:   (1) An independent investigation could have been

financially prohibitive; (2) the taxpayers read pertinent

portions of the prospectus and their advisers explained the rest;

and (3) the taxpayers monitored the investment.

     In the instant case, petitioner knew or should have known

that Becker was not independent of the Partnerships.   The record

shows that petitioner's ignorance of the Partnership transactions

was due not to a lack of experience, skills, or education.    It

would not have been financially prohibitive for petitioner to

visit PI or to research the published information indicating that

the Sentinel EPE recycler was not a state-of-the-art plastics
                               - 39 -

recycler.    Indeed, PI's Hyannis plant was not far from SBA's

biggest supplier, and Becker could have told petitioner where to

find plastics industry trade journals.      Moreover, petitioner did

not even read the offering materials provided to him by Becker--

despite express advice that he should do so.      Petitioner's

disregard of the offering materials undermines any contention

that he monitored his investments.      Accordingly, petitioner's

reliance on the Heasley, Reile, and Davis cases is misplaced.

See Prohaska v. Commissioner, T.C. Memo. 1991-306; Prohaska v.

Commissioner, T.C. Memo. 1991-305.

       The facts of petitioner's case also distinguish it from

Steinberg v. Commissioner, a Plastics Recycling case consolidated

for opinion with Zidanich v. Commissioner, T.C. Memo. 1995-382,

wherein this Court declined to impose the negligence additions to

tax.    In the Steinberg case, the taxpayers were husband and wife.

Neither had any financial or investment background.      The taxpayer

wife, who was not employed outside the home, had relied upon her

father in all financial matters.    He had advised her that after

his death she should rely upon her brother, a highly successful

investor.    Accordingly, on her father's death, Mrs. Steinberg

turned over management of her inherited funds to her brother,

Morton Efron (Efron).    Efron invested Mrs. Steinberg's

inheritance in a limited partnership, AMBI, which was formed as

an investment vehicle for Efron himself, his sister (Mrs.

Steinberg), and their spouses.    AMBI invested in a number of
                               - 40 -

ventures, including another limited partnership, Efron Investors

(EI), which in turn invested in Clearwater, the partnership

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

Efron did not inform Mrs. Steinberg of the investments in EI and

Clearwater, but simply told his sister that her AMBI investments

were "doing fine".    She did not learn of AMBI's investments in EI

and Clearwater until a few months before trial in the deficiency

proceedings arising out of those investments.    In contrast,

petitioner invested in the Partnerships of his own volition.

Petitioner was not kept in the dark by Becker; instead, Becker

provided petitioner with the offering materials, explained the

transaction and its risks to petitioner, and related the extent

of his investigation to petitioner.     In the Steinberg case, the

taxpayers turned over management of Mrs. Steinberg's inherited

assets to her brother, and he made the investment decisions in

question.    In the present case, Becker brought an investment to

his brother's attention, but petitioner made his own investment

decisions.    The facts and circumstances of petitioner's case are

distinctly different from the Steinberg case and we accordingly

consider it inapplicable.

     Under the circumstances of this case, petitioner failed to

exercise due care in claiming large deductions and tax credits

with respect to the Partnerships on his Federal income tax

returns.    It was not reasonable for him to claim such

disproportionately large tax benefits on his Federal income tax
                                - 41 -

returns without making any attempt to learn about the Partnership

transactions.    Petitioner acknowledged that he found the tax

benefits unbelievable.    Yet even after Becker expressly warned

that such tax benefits were contingent on the economics of the

transactions, petitioner made no effort to learn about the

Partnership transactions.     He ignored Becker's urging that he

should read the offering memoranda.      His claim that he did not

know offering materials were available is not credible and casts

doubt on the veracity of the rest of his testimony.      We hold that

petitioner did not reasonably rely upon Becker, or in good faith

investigate the underlying viability, financial structure, and

economics of the Partnership transactions.      Upon consideration of

the entire record, we hold that petitioner Allan J. Becker is

liable for the negligence additions to tax under section 6653 for

the taxable years at issue.     Respondent is sustained on this

issue.

C.   Section 6659--Valuation Overstatement

      In two notices of deficiency, respondent determined that

petitioner is liable for the section 6659 addition to tax on the

portion of his 1981 and 1982 underpayments attributable to

valuation overstatement.     Petitioner has the burden of proving

that respondent's determinations of the section 6659 additions to

tax are erroneous.     Rule 142(a); Luman v. Commissioner, 79 T.C.

at 860-861.     In her answer, respondent asserted an increased

amount due under section 6659 for 1982.      Respondent has the
                                 - 42 -

burden of proof with respect to the increased addition to tax.

Rule 142(a); Bagby v. Commissioner, 102 T.C. at 612.

     A graduated addition to tax is imposed when an individual

has an underpayment of tax that equals or exceeds $1,000 and "is

attributable to" a valuation overstatement.    Sec. 6659(a), (d).

A valuation overstatement exists if the fair market value (or

adjusted basis) of property claimed on a return equals or exceeds

150 percent of the amount determined to be the correct amount.

Sec. 6659(c).    If the claimed valuation exceeds 250 percent of

the correct value, the addition is equal to 30 percent of the

underpayment.    Sec. 6659(b).

     Petitioner claimed tax benefits, including an investment tax

credit and a business energy credit, based on purported values of

$1,162,666 for each Sentinel EPE recycler.    Petitioner concedes

that the fair market value of a Sentinel EPE recycler in 1981 was

not in excess of $50,000.    Therefore, if disallowance of

petitioner's claimed tax benefits is attributable to such

valuation overstatements, petitioner is liable for the section

6659 additions to tax at the rate of 30 percent of the portions

of his underpayments attributable to such valuation

overstatements.

     Petitioner contends that section 6659 does not apply in this

case because the deductions and credits he claimed were

purportedly disallowed on grounds other than a valuation

overstatement.    Petitioner relies on Gainer v. Commissioner, 893
                              - 43 -

F.2d 225 (9th Cir. 1990), affg. T.C. Memo. 1988-416; Todd v.

Commissioner, 89 T.C. 912 (1987), affd. 862 F.2d 540 (5th Cir.

1988), in support of this argument.

     Section 6659 does not apply to underpayments of tax that are

not "attributable to" valuation overstatements.   See McCrary v.

Commissioner, 92 T.C. 827 (1989); Todd v. Commissioner, supra.

To the extent taxpayers claim tax benefits that are disallowed on

grounds separate and independent from alleged valuation

overstatements, the resulting underpayments of tax are not

regarded as attributable to valuation overstatements.     Krause v.

Commissioner, 99 T.C. 132, 178 (1992) (citing Todd v.

Commissioner, supra), affd. sub nom. Hildebrand v. Commissioner,

28 F.3d 1024 (10th Cir. 1994).   However, when valuation is an

integral factor in disallowing deductions and credits, section

6659 is applicable.   See Illes v. Commissioner, 982 F.2d 163, 167

(6th Cir. 1992), affg. T.C. Memo. 1991-449; Gilman v.

Commissioner, 933 F.2d 143, 151 (2d Cir. 1991) (section 6659

addition to tax applies if a finding of lack of economic

substance is "due in part" to a valuation overstatement), affg.

T.C. Memo. 1989-684; Masters v. Commissioner, T.C. Memo. 1994-

197, affd. without published opinion 70 F.3d 1262 (4th Cir.

1995); Harness v. Commissioner, T.C. Memo. 1991-321.

     Petitioner has not shown that disallowance of his claimed

tax benefits was due to anything other than a valuation

overstatement.   In each of the notices of deficiency for 1981 and
                               - 44 -

1982, failure to establish the fair market value of the recycling

equipment is cited as a reason for disallowing petitioner's

claimed tax benefits.   Also, the respective explanations for the

section 6659 additions to tax make clear that the deficiencies

were attributable to valuation overstatements.   The notice of

deficiency for 1981 states that "The entire underpayment of your

income tax for * * * 1981 is attributable to a valuation

overstatement in excess of 250 percent under section 6659".

Similarly, the notice of deficiency for 1982 states that "Since

the underpayment of tax is attributable to a valuation

overstatement, you are liable for a penalty under section 6659".

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

of the Sentinel EPE recyclers was the dominant factor that led us

to hold that the Clearwater transaction lacked economic

substance.   Consistent therewith, in holding here that the

Partnership transactions lacked economic substance, we rely

heavily upon the overvaluation of the recyclers.   Overvaluation

of the recyclers was an integral factor in regard to:    (1) The

disallowed tax credits and other benefits in this case; (2) the

underpayments of tax; and (3) our holding that the Partnership

transactions lacked economic substance.

     Petitioner's reliance on Gainer v. Commissioner, supra, and

Todd v. Commissioner, supra, is misplaced.    See also McCrary v.

Commissioner, supra.    In those cases, in contrast to the present

case, it was found that a valuation overstatement did not
                              - 45 -

contribute to an underpayment of taxes.     In the Todd and Gainer

cases, the underpayments were due exclusively to the fact that

the property in each case had not been placed in service.    In the

McCrary case, the underpayments were deemed to result from a

concession that the agreement at issue was a license and not a

lease.   Although property was overvalued in each of those cases,

the overvaluations were not the ground on which the taxpayers'

liability was sustained.   In contrast, "a different situation

exists where a valuation overstatement * * * is an integral part

of or is inseparable from the ground found for disallowance of an

item."   McCrary v. Commissioner, supra at 859.    Petitioner's case

presents just such a "different situation":    overvaluation of the

recyclers was integral to and inseparable from petitioner's

claimed tax benefits and our holding that the Partnership

transactions lacked economic substance.11

     Moreover, an argument similar to petitioner's was recently

rejected in Gilman v. Commissioner, supra, by the Court of


11
     To the extent that Heasley v. Commissioner, 902 F.2d 380
(5th Cir. 1990), revg. T.C. Memo. 1988-408, merely represents an
application of Todd v. Commissioner, 89 T.C. 912 (1987), affd.
862 F.2d 540 (5th Cir. 1988), we consider it distinguishable. To
the extent that the reversal in the Heasley case is based on a
concept that where an underpayment derives from the disallowance
of a transaction for lack of economic substance, the underpayment
cannot be attributable to an overvaluation, this Court and the
Court of Appeals for the Second Circuit have disagreed. See
Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991) ("The
lack of economic substance was due in part to the overvaluation,
and thus the underpayment was attributable to the valuation
overstatement"), affg. T.C. Memo. 1989-684.
                                - 46 -

Appeals for the Second Circuit.    In the Gilman case, the

taxpayers engaged in a computer equipment sale and leaseback

transaction that this Court held was a sham transaction lacking

economic substance.   The taxpayers therein, citing Heasley v.

Commissioner, 902 F.2d at 380, and Todd v. Commissioner, 89 T.C.

at 912, argued that their underpayment of taxes derived from

nonrecognition of the transaction for lack of economic substance,

independent of any overvaluation.    The Court of Appeals for the

Second Circuit sustained imposition of the section 6659 addition

to tax because overvaluation of the computer equipment

contributed directly to this Court's conclusion that the

transaction lacked economic substance and was a sham.     Gilman v.

Commissioner, supra at 151.     In addition, the Court of Appeals

for the Second Circuit agreed with this Court and with the Court

of Appeals for the Eighth Circuit that "'when an underpayment

stems from disallowed * * * investment credits due to lack of

economic substance, the deficiency is * * * subject to the

penalty under section 6659.'"     Id. at 151 (quoting Massengill v.

Commissioner, 876 F.2d 616, 619-620 (8th Cir. 1989), affg. T.C.

Memo. 1988-427); see also Rybak v. Commissioner, 91 T.C. at 566-

567; Zirker v. Commissioner, 87 T.C. 970, 978-979 (1986); Donahue

v. Commissioner, T.C. Memo. 1991-181, affd. without published

opinion 959 F.2d 234 (6th Cir. 1992), affd. sub nom. Pasternak v.

Commissioner, 990 F.2d 893 (6th Cir. 1993).

     We hold that petitioner is liable for the respective section
                              - 47 -

6659 additions to tax at the rate of 30 percent of the portions

of his 1981 and 1982 underpayments attributable to valuation

overstatements.   Respondent is sustained on this issue.



     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
