                          T.C. Memo. 2001-215



                      UNITED STATES TAX COURT



                JEFFREY H. WEITZMAN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 467-00.                         Filed August 13, 2001.


     Jeffrey H. Weitzman, pro se.

     Christine Colley, for respondent.



                          MEMORANDUM OPINION

     DEAN, Special Trial Judge:     In a so-called affected items

notice of deficiency, respondent determined petitioner is liable

for additions to tax of $1,080 under section 6653(a)(1), 50

percent of the interest due on $21,604 under section 6653(a)(2),

and $5,001 under section 6659 for the 1982 taxable year.1


     1
         Unless otherwise indicated, section references are to the
                                                    (continued...)
                              - 2 -

     Petitioner concedes that he is liable for an addition to tax

of $5,001 pursuant to section 6659 for an underpayment of tax

attributable to valuation overstatement.   The remaining issue for

decision is whether petitioner is liable for additions to tax

pursuant to section 6653(a)(1) and (2) for negligence or

intentional disregard of rules or regulations.

                           Background

     The stipulation of facts and the accompanying exhibits are

incorporated herein by reference.   Petitioner resided in New

York, New York, at the time his petition was filed with the

Court.

     This case is part of the Plastics Recycling group of cases.

The additions to tax arise from the disallowance of losses,

investment credits, and energy credits claimed by petitioner with

respect to a partnership known as Foam Recycling Associates (Foam

or the partnership).

     For a detailed discussion of the transactions involved in

the Plastics Recycling group of cases, see Provizer v.

Commissioner, T.C. Memo. 1992-177, affd. per curiam without

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

have stipulated that the underlying transactions in petitioner’s


     1
      (...continued)
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

case are substantially identical to the transactions in Provizer

v. Commissioner, supra.   In Provizer, the Court held that the

transactions involving Sentinel EPE2 recyclers (recyclers) were

so lacking in economic substance that they were to be disregarded

for Federal income tax purposes.

     In a series of simultaneous transactions closely resembling

those in Provizer, Packaging Industries Group, Inc. (PI),

manufactured and sold3 four recyclers to Ethynol Cogeneration,

Inc. (ECI), for $3,924,000.   ECI agreed to pay PI $327,000 for

the recyclers at closing, with the balance of $3,597,000 financed

through a 12-year nonrecourse promissory note (ECI note).    ECI

resold the recyclers to F&G Equipment Corp. (F&G) for $4,650,668.

F&G agreed to pay $377,000 in cash, with the balance of

$4,273,668 financed through a 12-year partial recourse promissory

note (F&G note).   The F&G note was purportedly recourse to the

extent of 20 percent of its face value; however, the recourse

portion was payable only after the nonrecourse portion was

satisfied.



     2
         EPE stands for expanded polyethylene.
     3
        Terms such as “sale” and “lease”, as well as their
derivatives, are used for convenience only and do not imply that
the particular transaction was a sale or lease for Federal tax
purposes. Similarly, terms such as “joint venture” and
“agreement” are also used for convenience only and do not imply
that the particular arrangement was a joint venture or an
agreement for Federal tax purposes.
                               - 4 -

     F&G leased the recyclers to Foam under a lease term of 9-1/2

years, and the partnership entered into a joint venture with PI

to “exploit” the recyclers and place them with end-users.     The

partnership also agreed to pay a $50,000 consulting fee to John

Bambara, president and controlling shareholder of PI.

     In connection with these transactions, PI was required to

pay a monthly joint venture fee to Foam, in the same amount as

Foam’s monthly base rent to F&G, in the same amount as F&G’s

monthly payment to ECI on the F&G note, in the same amount as

ECI’s monthly payment to PI on the ECI note.   All of these

entities, however, entered into offset agreements making the

foregoing payments nothing more than bookkeeping entries.

     By a private placement offering memorandum (offering

memorandum) prepared by the law firm of Windels, Marx, Davies &

Ives dated August 30, 1982, 12 limited partnership units in Foam

were offered to potential investors at $50,000 per partnership

unit.   Pursuant to the offering memorandum, the limited partners

would own 99 percent of Foam, and the general partner, Richard

Roberts, would own the remaining 1 percent.    As provided by the

offering memorandum, each limited partner was required to have a

net worth (including residence and personal property) of more

than $1 million or have income in excess of $200,000, for each

investment unit.
                               - 5 -

     The offering memorandum informed investors that Foam’s

business would be conducted in accordance with the transactions

described above.   The offering memorandum was replete with

warnings.   The front page of the memorandum cautioned in bold

capital letters that “THIS OFFERING INVOLVES A HIGH DEGREE OF

RISK”.   Significant business and tax risks associated with an

investment in the partnership were specifically enumerated in the

offering memorandum.   Those risks included the following:

(1) There was a substantial likelihood of audit by the Internal

Revenue Service (IRS), and the IRS might challenge the fair

market value of the recyclers, recharacterize F&G’s lease to the

partnership as other than a bona fide lease, and assert that the

partnership transactions were not conducted with the objective of

making an economic profit exclusive of tax benefits; (2) the

partnership had no prior operating history; (3) the management of

the partnership’s business would be dependent on the services of

the general partner, who had limited experience in marketing

recycling or similar equipment and who was only required to

devote such time to the affairs of the partnership as he deemed

necessary; (4) the limited partners would have no control over

the conduct of the partnership’s business; (5) there were no

assurances that market prices for new resin pellets would remain

at the current cost per pound or that the recycled pellets would
                                 - 6 -

be as marketable as virgin pellets; and (6) certain potential

conflicts of interest existed.

     The disclosure of potential conflicts of interest in the

offering memorandum made clear that the parties involved in the

partnership transactions had ongoing business relationships and

that many of the individuals involved had interests in more than

one entity involved in the transactions.   The memorandum revealed

that:   (1) Richard Roberts (Roberts), the general partner of Foam

was a 9-percent shareholder of F&G; (2) the executive vice

president of PI was a 9.1-percent shareholder of F&G; (3) Elliot

Miller (Miller), general counsel for PI, was a 9.1-percent

shareholder of F&G; and (4) Miller was the attorney for Samuel

Burstein, one of the F&G evaluators, and Miller also represented

Roberts in connection with certain tax and other matters, F&G in

corporate matters, and other individuals involved in the

transactions in a variety of matters.

     The absence of independent representation was also stressed

in the offering memorandum:

          Prospective purchasers have not been independently
     represented in connection with the structuring or
     conduct of the Offering. Each prospective purchaser is
     urged to seek independent advice and counsel before
     making an investment in the Partnership.

     The offering memorandum prominently touted the anticipated

tax benefits for a limited partner in the initial year of

investment:
                              - 7 -

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


                            Projected
                        Regular Investment       Projected Tax
            Payment   and Energy Tax Credits       Deductions
     1982   $50,000         $76,736                  $39,878

     The Limited partners are not liable for any additional
     payment beyond their cash investment for their Units,
     nor are they subject to any further assessment.

     The offering memorandum also included a tax opinion prepared

by the law firm of Boylan & Evans concerning the tax issues

involved in the Plastics Recycling program.    William A. Boylan

and John D. Evans were formerly partners at Windels, Marx, Davies

& Ives before leaving in 1982 and forming their own law firm.

The opinion letter was addressed to Foam’s general partner and

stated that “this letter is intended for your own individual

guidance and for the purpose of assisting prospective purchasers

and their tax advisors in making their own analysis, and no

prospective purchaser is entitled to rely upon this letter.”     The

offering memorandum also emphasized that the opinion provided by

Boylan & Evans was for the general partner’s individual guidance

and that prospective purchasers were not permitted to rely upon

the advice in the opinion.

     The opinion expressly warned that the investment and energy

tax credits available to limited partners would be reduced or
                               - 8 -

eliminated if the partnership could not demonstrate that the

price paid for the recyclers approximated their fair market

value.   The opinion did not purport to rely on any independent

confirmation of the fair market value of the recyclers.   Rather,

the opinion clearly relied on Stanley Ulanoff’s (Ulanoff)

conclusion that the purchase price to be paid by F&G was fair and

reasonable.   The opinion also relied on the representations of PI

and other entities involved in the transactions that “the prices

paid by ECI and by F&G and the terms of the Lease were negotiated

at arm’s length” to reach the conclusion that “the basis to the

Partnership upon which the aggregate investment and energy tax

credits are to be computed is the price paid by F&G for the

Sentinel Recyclers”.

     Also included in the offering memorandum were the reports of

two “F&G Evaluators”, Samuel Z. Burstein (Burstein) and Ulanoff.

Burstein was a professor of mathematics at New York University.

Burstein’s report concluded that the recyclers were capable of

continuous recycling.   The report also concluded that the

recycling system would yield a material having commercial value.

     At the time Ulanoff prepared his report, he was a professor

of marketing at Baruch College and also the author of numerous

books on technical and marketing subjects.   Ulanoff’s report

concluded that the price paid by F&G for the recyclers, the rent

paid by Foam, and the joint venture profits were all fair and
                                - 9 -

reasonable.   Both Burstein and Ulanoff held investments in

plastics recycling transactions.    The offering memorandum

disclosed that Burstein was a client and business associate of

PI’s corporate counsel.

     Petitioner is an attorney who practiced real estate law in a

New York firm during the year in issue.    During the course of a

real estate transaction in 1979, petitioner was impressed with

his client’s financial adviser, Harris W. Freedman (Freedman).

After the real estate transaction was completed, petitioner

retained Freedman’s accounting firm, H.W. Freedman & Co., to

prepare his annual tax returns.

     In addition to being the named partner in an accounting

firm, Freedman was the president of F&G.    In 1982, Freedman sent

petitioner a private placement memorandum for Foam.    Petitioner

has no education or work experience in plastics recycling or

plastics materials.    Petitioner discussed the investment with

Freedman.    He read the offering memorandum and reviewed it with

Jake Jacobson (Jacobson), his tax return preparer from H.W.

Freedman & Co.    He also discussed the transaction with one of the

associates in the tax department of petitioner’s law firm.    The

associate told petitioner that he “might have a supportable tax

position”.

     After reviewing the offering memorandum with petitioner,

Jacobson came to petitioner’s office and told him that he had
                               - 10 -

personally visited the Sentinel facility and had spoken with the

president of PI.    Jacobson told petitioner that it was a viable

investment.   Petitioner then purchased a $12,500 partnership

interest in Foam.

     On his 1982 Federal income tax return, petitioner claimed a

loss of $10,101 as his distributive share of the partnership’s

reported loss for 1982.   He also claimed a regular investment

credit and an energy investment credit in the aggregate amount of

$16,669.   Thus, the tax benefits petitioner claimed for his

initial year of investment in the Partnership exceeded his

$12,500 investment.   In 1986 petitioner filed an amended Federal

income tax return for 1982.    On the amended return petitioner

deducted his $12,500 investment in Foam and reversed the credits

and net loss from the Partnership he claimed on his original 1982

return.

     Foam was a so-called TEFRA partnership subject to the

unified partnership audit and litigation procedures set forth in

sections 6221 through 6233.    See Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a),

96 Stat. 648.   On December 21, 1989, a notice of final

partnership administrative adjustment (FPAA) with respect to

Foam’s 1982 tax year was issued to petitioner and to Richard

Roberts, Foam’s general partner and tax matters partner.     The

FPAA advised petitioner of adjustments to the 1982 Form 1065,
                               - 11 -

Partnership Return of Income, filed by Foam.   The FPAA disallowed

all deductions and credits claimed by Foam in connection with its

plastics recycling activity.

     On October 25, 1999, respondent issued a notice of

deficiency to petitioner for additions to tax for his 1982

taxable year.   The additions relate to the deductions and credits

petitioner claimed on his original 1982 return with respect to

his investment in Foam.

                            Discussion

     We have decided many Plastics Recycling cases.   Most of

those cases, like the present case, have presented issues

regarding additions to tax for negligence.   See, e.g., West v.

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

Memo. 2000-372; Barlow v. Commissioner, T.C. Memo. 2000-339;

Carroll v. Commissioner, T.C. Memo. 2000-184; Ulanoff v.

Commissioner, T.C. Memo. 1999-170; Greene v. Commissioner, T.C.

Memo. 1997-296; Kaliban v. Commissioner, T.C. Memo. 1997-271;

Sann v. Commissioner, T.C. Memo. 1997-259 n.13 (and cases cited

therein), affd. sub nom. Addington v. Commissioner, 205 F.3d 54

(2d Cir. 2000).   In all but a few of those cases, we found the

taxpayers liable for the additions to tax for negligence.

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

case for the Plastics Recycling group of cases, this Court:     (1)

Found that each recycler had a fair market value of not more than
                             - 12 -

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

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

because it lacked economic substance and a business purpose; (3)

sustained the additions to tax for negligence under section

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

valuation overstatement under section 6659 because the

underpayment of taxes was directly related to the overvaluation

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

tax credits claimed with respect to the plastics recycling

partnership at issue were attributable to tax-motivated

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

found that other recyclers were commercially available during the

years in issue.   Id.

     In this case, respondent determined that petitioner is

liable for additions to tax for negligence under section

6653(a)(1) and (2) with respect to underpayments of tax

attributable to petitioner’s investment in Foam.   Section

6653(a)(1) imposes 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.    An

additional amount is added to the tax under section 6653(a)(2) in

an amount equal to 50 percent of the interest payable with

respect to the portion of the underpayment attributable to

negligence.
                                - 13 -

     Petitioner has the burden of proving that he is not liable

for the addition to tax.    Addington v. Commissioner, supra at 58;

Goldman v. Commissioner, 39 F.3d 402, 407 (2d Cir. 1994), affg.

T.C. Memo. 1993-480; Bixby v. Commissioner, 58 T.C. 757, 791-792

(1972).   See generally Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933).4

     Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would

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

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

taxpayer’s actions are reasonable in light of the taxpayer’s

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

actions in connection with the transaction.     Henry Schwartz Corp.

v. Commissioner, 60 T.C. 728, 740 (1973).     The determination of

negligence is highly factual.    “When considering the negligence

addition, we evaluate the particular facts of each case, judging

the relative sophistication of the taxpayers as well as the

manner in which the taxpayers approached their investment.”

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

     Petitioner accepts the finding of the Court in Provizer v.

Commissioner, supra, that the Sentinel EPE Recyclers had a



     4
        Cf. sec. 7491(c), effective for court proceedings arising
in connection with examinations commencing after July 22, 1998.
Petitioner does not contend that his examination commenced after
July 22, 1998, or that sec. 7491 is applicable to his case.
                               - 14 -

maximum value of $50,000 each.    Petitioner, nevertheless,

contends that he was reasonable in claiming deductions and

credits with respect to the partnership on his 1982 Federal

income tax return based upon each recycler's having a value of

$1,162,667.   To support this contention petitioner argues that he

discussed the investment with his advisers and reviewed the

offering memorandum.   He alleges that his investigatory actions

were commensurate with the size of his investment.

     Under some circumstances a taxpayer may avoid liability for

the additions to tax under section 6653(a)(1) and (2) if

reasonable reliance on a competent professional adviser is shown.

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.    In order for reliance on professional advice to excuse a

taxpayer from negligence, the taxpayer must show that the

professional had the requisite expertise, as well as 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, supra;

Freytag v. Commissioner, supra.
                               - 15 -

     Reliance on representations by insiders or promoters, or on

offering materials has been held an inadequate defense to

negligence.    Goldman v. Commissioner, supra; 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).    Advice from such individuals “is better

classified as sales promotion.”    Vojticek v. Commissioner, T.C.

Memo. 1995-444.    Pleas of reliance also have been rejected when

neither the taxpayer nor the advisers purportedly relied on by

the taxpayer knew anything about the nontax business aspects of

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

v. Commissioner, supra.

        Petitioner claims that he reviewed the offering memorandum

and its accompanying materials and discussed the partnership

investment with Freedman, Jacobson, and an associate in his law

firm.    Petitioner’s purported reliance on these individuals and

on the materials in the offering memorandum, however, does not

relieve him of liability for the additions to tax for negligence.

     The offering memorandum itself, especially the numerous

warnings and discussions of tax benefits and risk of audit,

should have alerted a prudent and reasonable investor to the

questionable nature of the promised deductions and credits.    See

Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988),
                               - 16 -

affg. Dister v. Commissioner, T.C. Memo. 1987-217; Sacks v.

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

1996).   The total of investment and energy tax credits ostensibly

generated by the partnership and claimed by petitioner was almost

1-1/2 times his cash investment.   In addition, petitioner claimed

over $10,000 as a partnership loss.     Consequently, like the

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

“except for a few weeks at the beginning, [petitioner] never had

any money in the * * * [partnership].”     The disproportionately

large tax benefits claimed on petitioner’s Federal income tax

return, relative to the dollar amount invested, should have

alerted petitioner to the need for further investigation of the

partnership transactions.

     Any reliance petitioner may have placed on the materials in

the offering memorandum was unreasonable in light of the

memorandum’s specific warnings that potential investors should

not rely on the statements or opinions contained in it and that

they should seek independent advice.     See Collins v.

Commissioner, supra at 1386.   The tax opinion letter prepared by

Boylan & Evans included with the offering memorandum also

expressly cautioned prospective investors such as petitioner not

to rely upon the letter.

     Moreover, the tax opinion made clear that no independent

evaluation of the transactions involved in this case was
                              - 17 -

conducted.   The opinion indicated that Boylan & Evans, in

expressing its opinion, relied on the statements of the general

partner and “other statements of fact and opinion furnished to us

by persons familiar with the transactions described in the

Memorandum.”   Boylan & Evans’s conclusion about the fair market

value of the recyclers clearly was based on the assumption that

the parties to the transactions had negotiated prices at arm’s

length.   In light of the close relationships existing among the

parties to the transactions and the enormous price paid for the

recyclers, petitioner should have questioned whether the prices

were in fact negotiated at arm’s length.   Under these

circumstances, petitioner may not claim that he reasonably and in

good faith relied on Boylan & Evans’s tax opinion.

     Petitioner’s contention that he reasonably relied on the

expert opinions of Ulanoff and Burstein included with the

offering memorandum also is unjustified.   Both Ulanoff and

Burstein owned an interest in more than one partnership which

owned Sentinel Recyclers as part of the plastics recycling

program; thus their conclusions were unreliable.   See Provizer v.

Commissioner, supra.   Moreover, Ulanoff’s report contained no

elaboration about his basis for concluding that the price to be

paid for the recyclers by F&G and the rent to be paid by the

partnership were fair and reasonable.   Given the well-disclosed

fact that the investment and energy tax credits generated by the
                              - 18 -

partnership were dependent on the fair market value of the

recyclers, petitioner should have made inquiries into the value

of the recyclers rather than merely relying on unsubstantiated

conclusions.

     Petitioner does not suggest that any of the individuals with

whom he discussed the partnership had any expertise in plastics

or the plastics recycling industry.    The expertise of both

Jacobson and petitioner’s law firm associate is in taxation.

Nothing in the record suggests petitioner’s law firm associate

consulted with anyone who had any expertise in plastics or

investigated the partnership beyond looking at materials in the

offering memorandum.   The associate’s advice did not go any

further than indicating that the partnership “might have a

supportable tax position” if the facts and circumstances proved

to be as represented in the offering memorandum.    Although

Jacobson supposedly visited the Sentinel facility and concluded

that Foam was a viable investment, petitioner has presented no

evidence that Jacobson had any basis from which to draw such a

conclusion.

     Freedman’s experience with leveraged leasing does not make

him an expert on plastics.   Further, Freedman’s position as an

investor in plastics recycling transactions and as a shareholder

and president of F&G made him an interested party in the

investment at issue.   The fact that Freedman introduced the
                                - 19 -

partnership investment to petitioner should have put petitioner

on guard that Freedman was engaged in selling rather than acting

as an independent adviser.    “It is unreasonable for taxpayers to

rely on the advice of someone who they know has a conflict of

interest.”    Addington v. Commissioner, 205 F.3d at 59; see also

Goldman v. Commissioner, 39 F.3d at 408; LaVerne v.

Commissioner, 94 T.C. at 652.

     Likewise, Jacobson’s affiliation with Freedman should have

made petitioner wary of his recommendation.    Jacobson was

employed by Freedman’s accounting firm, H.W. Freedman & Co.

H.W. Freedman & Co. prepared the tax returns for ECI, F&G, and

partnerships engaged in plastics recycling transactions.      See

Provizer v. Commissioner, supra.    Freedman was also named in the

offering memorandum as president of F&G, lessors of the

recyclers.    Petitioner acknowledged at trial that Jacobson “was

more heavily involved in the investment than [petitioner]

realized”.    Petitioner should have examined Jacobson’s motives

for recommending the investment.    As a real estate attorney,

petitioner should have known to exercise caution in relying upon

his advice.

     Petitioner’s testimony suggests that in investing in the

partnership he never had a profit motive beyond anticipated tax

savings.   When asked at trial whether he expected that he would

receive a positive cashflow from his investment in the
                               - 20 -

partnership, petitioner responded:      “Well, I thought there might

be a residual value, but obviously the tax credits were the main

feature”.    He explained that the residual value he referred to

was the remaining value of the recyclers at the end of the

partnership’s lease.    Yet the tax opinion letter stated that

“the Partnership does not have an option to purchase the

Sentinel Recyclers even at fair market value, and any residual

value of the Sentinel Recyclers will inure solely to the benefit

of F&G.”    Thus, the partnership had nothing to gain from the

residual value of the recyclers at the end of its lease.

     Upon consideration of the entire record, we hold that

petitioner did not exercise due care in claiming substantial tax

credits and partnership losses.    It was not reasonable for

petitioner to rely on the offering memorandum, the expert

opinions contained therein, promoters, insiders to the

transaction, or his law firm associate.     Accordingly, petitioner

is liable for the negligence additions to tax under section

6653(a)(1) and (2).

     To reflect the foregoing,

                                            Decision will be entered

                                     for respondent.
