                        T.C. Memo. 1996-441



                      UNITED STATES TAX COURT



                JAMES H. UPCHURCH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14784-88.               Filed September 26, 1996.



     Robert E. Kovacevich, for petitioner.

     James W. Clark and Keith Medleau, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined deficiencies in,

additions to, and increased interest on Federal income tax for

petitioner's 1980, 1981, 1982, and 1983 taxable years as follows:
                                   - 2 -

                                       Additions to Tax
                           Sec.         Sec.           Sec.
Year        Deficiency     6653(a)     6653(a)(1)     6653(a)(2)

1980          $4,176        $209              ---             ---
                                                               1
1981           5,373         ---             $269
                                                               1
1982           5,335         ---              267
                                                               1
1983           2,573         ---              129

                            Additions to Tax         Increased Interest
                            Sec.        Sec.                 Sec.
Year                        6659        6661                6621(c)
                                                               2
1980                       $1,253              ---
                                                               2
1981                        1,612              ---
                                           3                  2
1982                        1,601            $1,333.75
                                                               2
1983                         ---               ---
       1
       50 percent of the interest due on the deficiency.
       2
       The entire underpayment of income tax is a substantial
underpayment attributable to tax-motivated transactions under
sec. 6621(c).
     3
       For 1982 respondent, in an amendment to answer, determined
an addition to tax under section 6661 of $1,333.75 as an
alternative to the addition to tax under section 6659 shown.

       The issues remaining for our consideration concern whether

petitioner is liable for additions to tax under section 6653(a)1

for 1980; under section 6653(a)(1) and (2) for 1981, 1982, and

1983; and for increased interest under section 6621(c) for 1980,

1981, 1982, and 1983.    In an amendment to answer, respondent

alleged that petitioner was liable for an addition to tax under

section 6661 for 1982.    That addition to tax remains in

controversy.    The parties stipulated that the facts and

conclusions in the opinion rendered in Schillinger v.

       1
       All section references are to the Internal Revenue Code
in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 3 -

Commissioner, T.C. Memo. 1990-640, affd. 1 F.3d 954 (9th Cir.

1993), control as to the income tax deficiencies.    In the

aforementioned case it was decided that the taxpayer's energy

device had a fair market value not in excess of $1,000 (the

alleged purchase price was $80,000) and that the taxpayer was not

entitled to deductions and credits because his object was "solely

to gain a significant tax advantage and not to earn an economic

profit."    Petitioner has conceded the income tax deficiencies in

this case, which are based on a disallowance of $9,100 loss from

Evergreen Partnership I (Evergreen) and investment tax credit

carrybacks and an investment tax credit of $4,176, $5,373,

$5,335, $973 for 1980, 1981, 1982, and 1983, respectively.

Additionally, respondent conceded that petitioner is not liable

for additions to tax under section 6659 for the taxable years

1980, 1981, 1982, or 1983.

                          FINDINGS OF FACT2

     Petitioner resided in Veradale, Washington, at the time his

petition was filed in this case.    After high school, petitioner

served 4 years in the U.S. Marine Corps until September of 1955,

when he began college.    His major was in physical education.

Petitioner obtained a degree in 1959 and a master’s degree in

1961.    From 1961 through the time of trial, petitioner taught



     2
       The parties' stipulation of facts, along with stipulated
documents, are incorporated by this reference.
                               - 4 -

mathematics, biology, health, physical education, and was also

involved in coaching at the secondary school and college levels.

     Petitioner and George Chalich (Mr. Chalich) were friends who

had met in high school, played high school football together,

and, for a time, were teachers at the same school.   After Mr.

Chalich retired from teaching, he solicited petitioner's interest

in certain tax-sheltered annuities and investment opportunities.

Mr. Chalich sold investments for Professional Investors Group,

Inc. (Professional), a Washington corporation.   Mr. Chalich asked

petitioner if he knew of any other teachers who were interested

in investing.   Ultimately, petitioner and another friend and

teacher, Bill Pecha (Mr. Pecha) talked to Mr. Chalich about

investing.   Mr. Pecha, whose educational background was in

chemistry, and petitioner worked together in a college wrestling

program.

     Petitioner and Mr. Pecha discussed, with Mr. Chalich,

investment in an energy saving device through a promotion of

Saxon Energy Investment (Saxon).   Petitioner had also discussed

other possible investments with Mr. Chalich, including one

involving stamps (Philatelic) and another involving electrical

pain management (Xylocain).   Petitioner was interested in energy-

related investments because of increases in gasoline prices, the

effects of an oil embargo, and because sources of energy were

becoming more limited.   Petitioner discussed with Mr. Pecha the

possibility of investing in Saxon, which was being offered or
                               - 5 -

promoted by Professional and Mr. Chalich.   Petitioner, to some

extent, relied on Mr. Pecha's background in chemistry in

considering whether to become involved in Saxon.

     Petitioner attended about six meetings or discussions

conducted by Professional prior to investing in Saxon.

Professional advised petitioner that he could be at risk without

signing a note and that his investment in the energy device held

through the Evergreen partnership, would be funded by the refund

of prior years' income taxes generated by the carryback of

investment tax credits.   Petitioner was also advised that his

involvement in Evergreen would result in reductions of his

current (1983) and future years' tax liabilities.   Petitioner

also understood that he could retain any tax savings generated

through his investment.   Petitioner stated that he was interested

in the investment for retirement purposes and that his primary

motivation was not the tax benefits, but his actions belie that

statement.

     Petitioner was aware that Evergreen was to lease the energy

device, but after investing and claiming the tax benefits, he

made no effort to inquire whether the energy device had been

leased.   Petitioner was aware that, in addition to the initial

lease payment of about $12,700, the partnership and/or partners

were not obligated to make any payments unless the device was

leased to a user.   Petitioner believed that his 16.667-percent

interest in Evergreen (which held an interest in the energy
                                - 6 -

device) was worth about $64,000 to $76,000.   Petitioner's claim

for a refund reflects a cost basis of $990,000 for the energy

device, so that petitioner's 16.667-percent share of the cost

would have been $165,003.   Petitioner did not physically examine

the energy device or determine whether the value or price was

appropriate.    Mr. Chalich also acquired a 17.244-percent interest

in Evergreen.

     At the time of making the investment in Evergreen,

petitioner earned about $28,000 from his teaching, and his net

worth was less than $100,000.   Petitioner had some investment

experience by means of involvement in an investment club through

which shares of stock had been acquired.   Prior to investing,

petitioner did not make any specific inquiries concerning the

energy device or its use.   Petitioner generally discussed heating

costs with the school custodian where he worked.   Other than

people connected with Professional, petitioner did not consult

with anyone specifically qualified with respect to the technology

underlying the energy device or tax ramifications concerning the

investment.    Prior to investing in Evergreen, petitioner did not

consult with attorneys or accountants in connection with income

tax matters, including the preparation of his income tax return.

     Petitioner and his former wife (Sally Upchurch) went to Dave

Shriver (Mr. Shriver), an accountant, to discuss whether the

investment in the energy device transaction packaged by Saxon was

a viable investment and whether the tax aspects were proper.
                                - 7 -

Petitioner states that the accountant assured petitioner that it

was a proper investment.   Mr. Shriver, however, was connected

with Mr. Chalich and was a part of the Professional organization,

and he was referred to in Professional's advertising or

promotional brochure.   Professional earned commissions or income

on the sale of shelter investments to its clients.   In order to

invest, petitioner and Sally Upchurch borrowed $14,000 secured by

a second mortgage on their residence.   The loan, however, was at

least $3,000 less than the refunds and/or tax reductions

generated by the energy-device transaction.

     Petitioner and Sally Upchurch entered into an agreement with

Professional on June 8, 1983.   For a $1,500 fee, Professional was

to assist petitioner in developing a financial plan, which

included consultation on ways to increase capital.   In addition,

Professional was to provide a 1-hour conference with a lawyer and

another with an accountant.   There is no indication whether the

fee was paid or the services performed, other than the

consultations with Mr. Shriver, the accountant.

     Petitioner and Sally Upchurch acquired a 16.667-percent

interest in Evergreen, which, in turn, was to hold an interest in

an energy-saving device.   Petitioner's understanding of the

transaction was that an interest in the energy device would be

purchased by the investors, through Evergreen, which would lease

the device to a user who would save on energy.    He did not expect

a profit in the early years of the energy device's operation
                               - 8 -

because the revenue from the expected energy savings would be

utilized to make lease payments.   He expected to recoup his

investment by means of the tax benefits.

     Petitioner was married to Sally Upchurch from 1961 to 1985,

when they were divorced.   Petitioner filed joint returns for

1980, 1981, and 1982 with Sally Upchurch, who had prepared the

returns.   Their 1983 Federal income tax return and claim for

refund of 3 prior years' taxes were prepared by Mr. Shriver, and

after claiming the pass-through deduction and credits from

Evergreen, petitioner, and Sally Upchurch received refunds and

tax reductions which exceeded his out-of-pocket expenditure by

about $3,000.

     After the investment in Evergreen and the receipt of the tax

benefits, including the refunds, petitioner did not pursue or

keep track of his investment in the partnership or the energy

device or its operation.   Petitioner thought that Mr. Chalich and

others from Professional had attempted to contact Saxon Energy in

New York City.   Ultimately, petitioner agreed with respondent

that he was not entitled to the investment tax credits and

deductions purportedly generated by investment in the energy

device.

                              OPINION

     Petitioner concedes that he is liable for the underlying

income tax deficiencies, but contends that he is not liable for

the additions to tax and increased interest.   In that regard,
                                - 9 -

petitioner bears the burden of proof with respect to the

additions to tax under section 6653(a) and the increased interest

under section 6621(c).   Rule 142(a); Luman v. Commissioner, 79

T.C. 846, 860-861 (1982).   Respondent raised the section 6661

addition to tax by affirmative allegation in the answer and,

accordingly, bears the burden of proof with respect to that item.

Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170, 196 (1994).

     For 1980, section 6653(a), and for the 1981 through 1983 tax

years, section 6653(a)(1) 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) for 1981, 1982, and 1983 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
                              - 10 -

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

Memo. 1996-46.

     A taxpayer may avoid liability for the additions to tax

under section 6653(a)(1) and (2) by relying on competent

professional advice, if it was reasonable to rely on such 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, 1017

(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.   In order

for reliance on professional advice to excuse a taxpayer from the

additions to tax for negligence, the taxpayer must show that such

professional had the expertise and knowledge of the pertinent

facts to provide valuable and dependable advice on the subject

matter.   Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir.

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

Kozlowski v. Commissioner, T.C. Memo. 1993-430, affd. without

published opinion 70 F.3d 1279 (9th Cir. 1995).

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

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

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

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

T.C. 637, 652-653 (1990), affd. without published opinion 956

F.2d 274 (9th Cir. 1992), affd. without published opinion sub
                              - 11 -

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).   Reliance has also been rejected when

neither the taxpayer nor the advisers relied upon had knowledge

about the nontax business aspects of the contemplated venture.

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

Rogers v. Commissioner, T.C. Memo. 1990-619.

     Petitioner argues that his investment approach was

reasonably prudent for a person of his sophistication and

circumstances.   He describes himself as a person with a modest

net worth and no background or experience in tax matters.

Petitioner also explained that, at 50 years old, he was

unsophisticated and had not consulted an accountant or an

attorney up until his involvement in the energy device.   He also

notes that his ex-wife prepared their 1980, 1981, and 1982

returns and that he relied on an accountant or his advisers in

the particulars of deciding whether to invest, the bona fides of

the investment, and the manner in which the transaction should be

reported to respondent.
                              - 12 -

     Conversely, respondent argues that petitioner is college-

educated and without experience in energy devices.   Based on that

premise, respondent argues that petitioner's failure to inquire

about comparable costs of energy devices, obtain independent

appraisals, or seek the review of the promotional offering

materials by anyone other than the promoters and individuals

connected with the promoters, was not reasonable under the

circumstances.

     Petitioner, in arguing that his reliance on advisers was

reasonable, relies, in particular, on the following three

opinions:   Wentz v. Commissioner, 105 T.C. 1 (1995); Chamberlain

v. Commissioner, 66 F.3d 729 (5th Cir. 1995), affg. in part and

revg. in part T.C. Memo. 1994-228; and Norgaard v. Commissioner,

939 F.2d 874 (9th Cir. 1991), affg. in part and revg. in part

T.C. Memo. 1989-390.   In Wentz v. Commissioner, supra at 15,

reliance on advisers was not a factor, and we held that the

taxpayers' legal position, although rejected by the Court, was

"reasonable under the circumstances".   In that connection,

petitioner does not argue that his reporting position was

reasonable.   Instead, petitioner has conceded that he is liable

for the income tax deficiency in each year.

     In Chamberlain v. Commissioner, supra at 732-733, the Court

of Appeals for the Fifth Circuit expressed the following standard

for reliance on professional advice:
                               - 13 -

     The reliance must be objectively reasonable; taxpayers
     may not rely on someone with an inherent conflict of
     interest, or someone with no knowledge concerning that
     matter upon which the advice is given. In this regard,
     the Supreme Court noted that "when an accountant or
     attorney advises a taxpayer on a matter of tax law,
     such as whether liability exists, it is reasonable for
     the taxpayer to rely on that advice." [Fn. refs.
     omitted.]

The Court of Appeals, in a footnote, made the comment that the

Chamberlain case "demonstrates that one may enter into a

transaction without a profit motive but not be negligent in

claiming a tax loss if that claim is in reasonable reliance on

the advice of a tax expert."   Id. at 733 n.23.

     Respondent contends that the Chamberlain holding is

distinguishable from petitioner's situation.   The tax or

professional adviser in Chamberlain was an accountant

unaffiliated with the investment promoters or sellers and,

therefore, did not have a conflict of interest.    See Chamberlain

v. Commissioner, T.C. Memo. 1994-228.

     Finally, in Norgaard v. Commissioner, supra at 880, the

Court of Appeals for the Ninth Circuit found that the taxpayers'

method of accounting for gambling losses met the standard of due

care or "what a reasonable and prudent person would do" and

consequently that they were not negligent.   Respondent contends

that Norgaard is distinguishable because the deductions in that

case would have been allowable if substantiated.   Here,

petitioner must show that he met the standard of care that the

Court of Appeals for the Ninth Circuit found was met in Norgaard.
                               - 14 -

In other words, the taxpayers in Norgaard met their burden by

convincing the Court that their accounting system was reasonable

under the circumstances, and petitioner must show that his

approach here was, in a like manner, reasonable.

     Petitioner has conceded the income tax deficiencies,

agreeing that the facts and conclusions of Schillinger v.

Commissioner, T.C. Memo. 1990-640, control that aspect of the

case.    In Schillinger, we found that the energy device which the

taxpayers claimed had a cost of $80,000 in fact had a fair market

value of $1,000.   In addition, we found that the taxpayer in

Schillinger invested in the energy-device leasing program solely

to gain a tax advantage and not to earn an economic profit.

     Here, petitioner claims to have invested for retirement

purposes and that his primary motivation was not the related tax

benefits.   Petitioner's actions, however, do not support his

claim.   Petitioner, during his trial testimony, exhibited an

understanding of the details and operation of the energy-device

leasing transaction.   He understood that he had no obligations

beyond the front-end payment of the amount of his investment and

consulting fees of Professional.   Moreover, petitioner knew that

the cost of his investment would be funded by the refund of taxes

already paid.   In this regard, petitioner netted and received

more than $3,000 in excess of his expenditure to become involved

in the transaction.
                               - 15 -

     Petitioner characterized himself as a person of modest means

at the time of his involvement in the transaction.   He earned

about $28,000 annually from teaching, and his net worth was less

than $100,000.   Although petitioner attended several meetings

prior to investing, after the investment and receipt, in cash, of

the tax benefits, he did nothing to determine the status of his

investment.   Petitioner did not personally observe the energy

device, of which he thought his share of the cost approximated

$70,000.3   Additionally, he did not ascertain whether any energy

device had actually been leased.   In this regard, it was

petitioner's understanding that lease payments would be made from

the lessee's energy savings.

     As a matter of perspective, we find it difficult to believe

that petitioner was expecting the energy device or his

partnership investment to provide an income stream or residual

value for retirement or any other purpose.    A reasonable person

with a $100,000 net worth and $28,000 salary, who was buying a

16-percent interest in an energy device allegedly worth almost $1

million, could be expected to have more than a detached interest

in seeing the device and/or verifying its value or the eventual

outcome of its proposed energy savings.   This is especially so

     3
       Although he testified to a value for his interest of about
$70,000, petitioner's claim for a refund reflects that he was
claiming an investment credit based on $165,003 value, which
represents his 16.667-percent interest in Evergreen and the
energy device. Accordingly, the energy device had a purported
cost of $990,000.
                              - 16 -

for a well-educated person like petitioner, who had not been

significantly involved in businesses or investments prior to that

time.   A reasonable person in these circumstances would be more

concerned about the bona fides of the transaction.   Once

petitioner was at least $3,000 ahead from the refund of his 1980,

1981, and 1982 taxes and reductions in 1983 tax, he lacked

interest in the transaction and its ultimate outcome.   This

reflects that petitioner's primary, if not sole, motivation for

involvement in the transaction was the tax benefit received on

the front end, rather than an interest in income or retirement

income sources.

     Petitioner contends that he reasonably relied on his friend,

Mr. Chalich (the salesman and coinvestor); his coworker, Mr.

Pecha (the chemistry teacher and coinvestor); and Mr. Shriver

(the accountant connected with the promoter/sales organization).

There is no allegation that Mr. Chalich had any expertise in

energy devices or the economics of the transaction in question.

Other than their long-term friendship, which has no bearing on

this issue, petitioner has not shown that it was reasonable to

rely on Mr. Chalich.

     Concerning Mr. Pecha, he was a chemistry teacher and

involved in a wrestling program with petitioner.   In addition,

Mr. Pecha also invested in the same Saxon energy-device leasing

transaction as petitioner.   Although petitioner relied on Mr.

Pecha's educational and teaching background with respect to the
                              - 17 -

technical aspects of the energy-device transaction, such

reliance, considering petitioner's background and experience, did

not rise to the level of the duty of care standard that would be

reasonable in these circumstances.     Petitioner has not shown that

Mr. Pecha, other than his background in chemistry, had any

specialized knowledge or technical qualifications necessary to

assess the effectiveness or economics of the energy device in

question.   There is no indication that Mr. Pecha ever personally

observed the device or that he had conducted independent research

concerning it.   Considering petitioner's level of education and

his limited understanding of the mechanics of the transaction,

his reliance on Mr. Pecha was not reasonable.

     Petitioner also claims that the accountant, Mr. Shriver,

assured him that the energy-device transaction was a proper

investment.   In this regard, petitioner also contends that Mr.

Shriver was an independent certified public accountant, so as not

to be connected with the promoters or to have a financial

interest in the sale of the investment.    Petitioner's claim of

Mr. Shriver's independence is not supported in the record.    To

the contrary, Professional's (a self-proclaimed promoter or

seller of tax shelters) brochure contains the following statement

about Mr. Shriver:

     We arrange for a qualified tax specialist to be
     available for consultation and to provide accounting
     services to whatever extent you may need. By
     appointment, an initial hour of time with David
     Shriver, C.P.A.,is provided with your financial plan.
                             - 18 -

     Should you elect to schedule more time with Mr.
     Shriver, he will discuss a fee schedule for the
     services to be rendered.

Petitioner entered into a $1,500 agreement with Professional for

service, which included 1 hour with a "certified public

accountant", whom we must assume is Mr. Shriver.   Petitioner has

failed to show Mr. Shriver's independence from the organization

that, at the very least, benefits from the sale of the investment

opportunity on which Mr. Shriver opined.   Considering established

precedent and the specific circumstances of this case, it was not

reasonable for petitioner to rely on the individuals in question.

     Petitioner had a clear basic understanding of the dynamics

and magnitude of this energy-device transaction.   He was aware

that his tax benefits and any potential for income stemmed from

the lease of a device whose purported cost, relative to his net

worth and income, was substantial.    His focus was primarily, if

not solely on the tax benefits.   Petitioner would have otherwise

been concerned about the bona fides of the transaction.   If

petitioner was interested in income (retirement or otherwise) he

would, at the very least, want to know whether such an energy

device existed, operated, was leased and had value equivalent to

the claims on which his reported credits and deductions were

based.

     Accordingly, it was not reasonable for him to ignore the

bona fides of the transaction or to rely on persons who were

without specialized knowledge or who had a financial interest in
                              - 19 -

or direct connection to the sale of the tax-shelter product.

Therefore, petitioner is liable for the additions to tax for

negligence for 1980 under section 6653(a) and for 1981, 1982, and

1983 under section 6653(a)(1) and (2).

     Respondent, in an amendment to the answer, alleged in the

alternative, if petitioner was not found liable for an addition

to tax under section 6659 for the 1982 taxable year, that

petitioner should be found liable for an addition under section

6661.   Section 6661 provides for a 25-percent addition if there

is a substantial understatement.   An understatement is

substantial when it exceeds the greater of $5,000 or 10 percent

of the amount of tax required to be shown on the return.     Sec.

6661(b)(1)(A).   Respondent points out that the income tax

deficiency for 1982 resulting from petitioner's investment in

Evergreen exceeded $5,000 and that petitioner has conceded that

he is liable for that portion of the deficiency.

     Section 6661(b)(2)(B)(i) and (ii) provides for reductions in

the understatement to the extent that there was adequate

disclosure or substantial authority.   In the case of a tax

shelter, however, the adequate disclosure exception does not

apply, and in addition to having substantial authority, a

taxpayer must have reasonably believed it to be more likely than

not that the tax treatment was proper.   Sec. 6661(b)(2)(C)(i)(I)

and (II).
                               - 20 -

     Respondent bears the burden of proof because the section

6661 addition to tax was first raised in respondent's answer,

rather than in the notice of deficiency.   Rule 142(a).

Respondent contends that the record reflects the following facts

that satisfy her burden: (1) Petitioner knew that he would

receive tax benefits $3,000 over his total cash investment; (2)

petitioner conducted virtually no independent investigation or

evaluation of the promoter's (or its associates' or agents')

expertise or of the economic viability of the energy device; (3)

after investing, no inquiry was made as to whether an energy

device had been placed in service, even though deductions and

credits were claimed.   In summary, respondent contends that the

record reflects that petitioner was motivated by tax benefits

rather than economic profit.   Respondent also notes that other

taxpayers with the same or substantially similar investments in

energy devices have been found by this Court to have lacked

substantial authority for the treatment of the tax shelter items,

citing Schillinger v. Commissioner, T.C. Memo. 1990-640.

     Petitioner argues that he relied on persons whom he believed

to be more knowledgeable and that such reliance was reasonable.

Petitioner references four court opinions which he believes

support his position that section 6661 should not be applied

here.   Durrett v. Commissioner, 71 F.3d 515 (5th Cir. 1996),

affg. in part and revg. in part T.C. Memo. 1994-179; Vorsheck v.

Commissioner, 933 F.2d 757 (9th Cir. 1991); Heasley v.
                              - 21 -

Commissioner, 902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo.

1988-408; and Rosenthal v. Commissioner, T.C. Memo. 1995-603.

     Section 1.6661-6(b), Income Tax Regs., provides that:

     Reliance on * * * the advice of a professional (such as
     an appraiser, an attorney, or an accountant) would not
     necessarily constitute a showing of reasonable cause
     and good faith. * * * Reliance on * * * professional
     advice * * *, however, would constitute a showing of
     reasonable cause and good faith if, under all the
     circumstances, such reliance was reasonable and the
     taxpayer acted in good faith. * * *

     It is evident from the record that petitioner did not have

substantial authority, and, because of the nature of the

transaction (tax shelter), he is not entitled to rely on adequate

disclosure to reduce any substantial understatement.

Accordingly, we address whether petitioner's reliance was

"reasonable" and in "good faith."   The cases4 cited by petitioner

apply the same standard as set forth in section 1.6661-6(b),

Income Tax Regs.   In each of the cases, it appears that the

taxpayers relied on the advice of a tax professional who was

independent and had previously assisted the taxpayer, prior to

the time in question, in the acquisition and/or reporting of

transactions for investment and/or tax purposes.

     For purposes of reporting Federal income taxes, petitioner

had not relied on accountants or lawyers prior to his involvement

     4
       It is noted that Durrett v. Commissioner, 71 F.3d 515 (5th
Cir. 1996), affg. in part and revg. in part T.C. Memo. 1994-179,
involves whether good faith reliance on tax professionals is a
"defense" to sec. 6621(c) and does not specifically concern a
substantial understatement under sec. 6661.
                              - 22 -

with Professional and Evergreen.   His reliance in this setting

was not reasonable and/or in good faith.     Petitioner had no prior

experience with Mr. Shriver, who was connected with the

promoter/seller of the investment.     In a similar manner,

petitioner's friend, Mr. Chalich, was not qualified regarding the

technical aspects or physical properties of the investment.    In

addition, as a salesman for Professional, he was not independent.

As noted in the discussion concerning the addition to tax for

negligence, it was not reasonable for petitioner to rely on

Professional and its agents and associates because they earned

fees in connection with the sale of the tax shelters.

Furthermore, the individuals petitioner relied upon lacked not

only independence, but also any specific expertise concerning the

subject matter of petitioner's investment vehicle.

     We again note that petitioner, a college graduate with an

advanced degree, was knowledgeable about the manner in which the

transaction was to operate and that he would receive cash $3,000

greater than his out-of-pocket investment.     Also, petitioner was

aware that the energy device was to be leased and that it had a

substantial value.   Even though he stated that he was relying on

the investment for his retirement, he took no actions to

determine if the device existed, was in use, or had value.    After

he received his $3,000 plus return, he did virtually nothing that

would have supported the assertions he made in this case.
                              - 23 -

     Accordingly, the record supports respondent's assertion that

a substantial understatement under section 6661 exists with

respect to petitioner's 1982 taxable year.

     Respondent also determined that petitioner was liable for

increased interest under section 6621(c) for each of the taxable

years 1980, 1981, 1982, and 1983.    The increased interest equals

120 percent of the interest payable under section 6601 with

respect to any substantial underpayment attributable to a tax-

motivated transaction.   An underpayment is substantial if it

exceeds $1,000.   Sec. 6621(c)(2).   A "tax motivated transaction"

includes, among other categories, valuation overstatements within

the meaning of section 6659 and any sham or fraudulent

transaction.   See sec. 6621(c)(3)(A)(i) and (v).   Respondent has

conceded that section 6659 is not applicable in this case.

Accordingly, we consider whether the energy-device transaction

was a "sham or fraudulent".

     Transactions that lack economic substance or a profit motive

are sham transactions under section 6621(c).   See, e.g., Cherin

v. Commissioner, 89 T.C. 986, 1000 (1987); sec. 301.6621-2T Q&A-

4, Temporary Proced. & Admin. Regs., 49 Fed. Reg. 50392 (Dec. 28,

1984).   Respondent argues that the facts here support a holding

that petitioner's energy-device transaction was a tax motivated

transaction within the meaning of section 6621(c).   As with the

prior issues, petitioner argues that he did not expect to make an

immediate profit, but that he expected retirement income from the
                              - 24 -

transaction.   For the reasons already expressed herein,

petitioner's motivation for investment in the energy device was

to obtain the tax benefits, and his actions do not support his

claim that he intended or expected to earn profits upon

retirement or otherwise.   Accordingly, we hold that petitioner is

liable for the increased interest in each tax year.

     To reflect the foregoing and due to concessions,

                                    Decision will be entered

                               under Rule 155.
