                  T.C. Memo. 2007-119



                UNITED STATES TAX COURT



   DANIEL C. GREER AND WINNIE L. GREER, Petitioners
    v. COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 21795-03.               Filed May 10, 2007.



     Ps were investors in a purported tax shelter and
now dispute additions to tax related to R’s
disallowance of losses and credits resulting from the
investment.

     Ps argue that they were not negligent because they
relied upon the broker selling the purported shelter
and because R did not inform Ps that the promoter of
the shelter was under investigation. Ps further argue
that the amount of underpayment used to compute the
additions to tax should be reduced to reflect the
remittance paid by Ps before filing an action in the
Federal District Court, which remittance was later
ordered by the District Court to be returned to Ps.
                               - 2 -

          Held: P-husband’s actions regarding the
     partnership interest were negligent, and R was not
     required to advise Ps regarding R’s investigation of
     the promoter. Therefore, the additions to tax under
     sec. 6653(a)(1) and (2), I.R.C., are sustained.

          Held, further, the remittance which was repaid by
     R is excluded from R’s computations of the addition to
     tax under sec. 6653(a)(2), I.R.C.

          Held further, the addition to tax under sec. 6659,
     I.R.C., is sustained.



     Joy L. Hall, Martin J. Horwitz, and John A. Freeman, for

petitioner Daniel C. Greer

     Kenton Ball, for petitioner Winnie L. Greer.

     Aubrey C. Brown and Denise A. Diloreto, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   The issues in this case concern respondent’s

determinations that petitioners are liable for additions to tax

under sections 6653(a)(1) and (2), and 66591 on the deficiencies

in tax resulting from the disallowance of a partnership loss and

related tax credits claimed on petitioners’ 1982 joint Federal

income tax return and carried back to petitioners’ joint Federal

income tax returns for 1979 through 1981.   These tax benefits


     1
          Unless otherwise indicated, 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.
                                - 3 -

were claimed as a result of the unfortunate decision to

participate in a purported tax shelter in late 1982 to offset

dividend income petitioners received from a family-owned

corporation.

     Respondent determined the following additions to tax for

petitioners’ 1979, 1980, 1981, and 1982 tax years:

   Year          Sec. 6659        Sec. 6653(a)(1)     Sec. 6653(a)(2)
                                                              1
   1979          $2,895.60           $482.60
                                                              1
   1980           6,239.40          1,039.90
                                                              2
   1981           2,724.60              454.10
                                                              2
   1982          14,412.90          2,404.75
     1
         Respondent conceded the additional 50 percent interest.
     2
         50 percent additional interest

The partnership in question is subject to the provisions of the

Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA), Pub. L.

97-248, 96 Stat. 324, and the treatment of partnership items was

determined at the partnership level.      The underlying deficiencies

in income tax have been previously determined based upon the

TEFRA partnership case Madison Recycling Associates v.

Commissioner, T.C. Memo. 2001-85, affd. 295 F.3d 280 (2d Cir.

2002).

     The parties agree that any request for relief from joint and

several liability under section 6015 by petitioner wife should
                                 - 4 -

not be determined in this case but should be determined

separately.

                           FINDINGS OF FACT

        Some of the facts have been stipulated and are found

accordingly.    The stipulation of facts and the attached exhibits

are incorporated herein.    Petitioners resided in Lexington,

Kentucky, at the time they filed the petition in this case.

       Petitioner husband received a bachelor of science degree in

chemical engineering from the University of Kentucky in 1967.

Petitioner wife graduated from Louisiana State University with a

bachelor of arts degree in music in 1969.     She also received a

master’s degree in music education from Marshall University in

1973. Petitioners were married in 1967.

       Petitioner husband, referred to hereinafter as Mr. Greer,

was employed in 1967 as a chemical engineer for Exxon Chemical

Co.    From 1969 until July 1993, Mr. Greer was employed by Ashland

Oil Co., Inc., and its subsidiaries (AOI).     From 1975 to 1980,

Mr. Greer was a key assistant to the executive vice president of

AOI.    During that period, Mr. Greer participated in AOI’s

executive development program.    He also attended a petroleum

economics program at Northwestern University and took an

accounting course for nonfinancial managers at Ohio State

University.    In 1982, Mr. Greer was an executive in the part of

AOI’s business characterized as Ashland Development.     In that
                               - 5 -

year, petitioner wife was the sole proprietor of a photography

business.

A.   G&L Sale and Madison Purchase

     Mr. Greer was the president and chief executive officer of

G&L Communications, Inc. (G&L), a family-owned cable television

business which operated in Kentucky.   G&L was incorporated in

December 1979, and the assets of G&L were sold to a third party in

November 1982.   G&L was an S corporation.   Petitioners were

shareholders of G&L at the time the assets were sold and received

dividends of approximately $250,000 on the sale.    Prior to their

dividends from G&L, petitioners had not held cash assets this

large.   This profit led Mr. Greer to seek advice from Hamilton

Gregg & Co. (HG), an investment broker and securities dealer with

a seat on the New York Stock Exchange.   Mr. Greer had been

introduced to HG through a program at a Holiday Inn in Southport,

Ohio, in 1979.   Other AOI executives also attended this program.

     Mr. Greer’s primary contact at HG was Ed Gallagher, and Mr.

Greer met with Mr. Gallagher in late November 1982.    Mr. Gallagher

explained the tax consequences of the dividends and suggested

purchasing municipal bonds or a limited partnership interest to

reduce petitioners’ tax liability for 1982.    Shortly thereafter,

Mr. Gallagher delivered a copy of the Offering Memorandum of

Madison Recycling Associates (the offering memorandum) to Mr.

Greer.   This offering memorandum and the attachments were the only
                                 - 6 -

documents Mr. Greer reviewed prior to purchasing an interest in

Madison Recycling Associates (Madison).   On December 16, 1982, Mr.

Greer executed a check payable to Madison in the amount of

$50,000.   This check purchased a 5.5-percent limited partnership

unit in Madison.

     The offering memorandum sets forth warnings to potential

purchasers, including Mr. Greer, of risks involved, informing

these purchasers that “There is a substantial likelihood that the

Service will audit the federal income tax returns filed by the

partnership and each limited partner.”    Other warnings provided:

     (a)   This offering involves a high degree of risk.    See

     certain business risks and tax risks and consequences;

     (b)   an investment in the partnership involves a high

     degree of risk and should only be considered by those

     who could afford to lose their cash investment and

     anticipated tax benefits;

     (c)   the draft legal opinion attached to the private

     offering memorandum was prepared for the general

     partner’s use only and should not be relied upon by

     potential investors;

     (d)   prospective purchasers should not consider the

     contents of the offering memorandum or any other

     communications from the partnership or general partner

     as legal, tax, accounting, or other expert advice;
                               - 7 -

     (e)   no representations, warranties, or assurances are

     made or should be inferred concerning the economic

     return or tax advantages which may accrue to the limited

     partners;

     (f)   prospective purchasers, before investing, should

     consult with their own professional advisors as to

     legal, tax, business, accounting, and other matters

     relating to an investment in the partnership;

     (g)   investment in Madison should be considered only by

     persons having substantial net worth and substantial

     present and anticipated income; and

     (h)   prospective purchasers will be afforded an

     opportunity to obtain all additional information they

     may reasonably request relating to the offering, Mr.

     Roberts, or any documents attached to the offering

     memorandum.

In addition, the offering memorandum warns that Madison is a tax

shelter by stating to potential purchasers, including Mr. Greer,

that “On audit, the purchase price of the Sentinel EPS Recyclers

to be paid by F & G to ECI may be challenged by the Service as

being in excess of the fair market value thereof, a practice

followed by it in transactions it deems to be ‘tax shelters’.”

The offering memorandum advises that Madison “is a newly-formed
                               - 8 -

entity with no operating history and is subject to all the risks

inherent in starting a new business.”

     The offering memorandum further advises that

     management of [Madison’s] business will be dependent
     upon the services of [Mr. Roberts] who has had limited
     experience in marketing recycling or similar equipment
     and who is required by the Partnership Agreement to
     devote only such time to the affairs of [Madison] as he,
     in his absolute discretion, deems necessary

and that Mr. Roberts had other business commitments that would

require a substantial portion of his time and efforts.     The

Madison limited partners, including Mr. Greer, had no control over

the conduct of Madison’s business.     The offering memorandum

explains that a Sentinel EPS Recycler has “no history of

commercial use, there is no established market for its sale, lease

or license, and there can be no assurance that PI (Packing

Industries Group, Inc.) will meet its obligations under the

aforementioned warranties.”   The offering memorandum also points

out risks that the recycled resin pellets may not be marketable

and that the price would fluctuate.

     The offering memorandum also states that Mr. Roberts, the

general partner of Madison, may have a potential conflict of

interest with the limited partners of Madison because Mr. Roberts

is not prohibited from engaging in activities that compete with

Madison and that he is a general partner in other partnerships
                                 - 9 -

buying, leasing, and licensing the same Sentinel EPS Recyclers

and/or other recycling equipment.    With respect to this potential

conflict of interest, the offering memorandum provides:

     The existence of such other limited partnerships may
     create conflicts and result in actions taken by, or
     omitted to be taken by, (Mr. Roberts) which may be
     adverse to the interest of the Limited Partners.
     Furthermore, PI, ECI, F&G, RRI, some of the shareholders
     of F&G, ECI, and RRI, are, and may again become, engaged
     in the business of buying, selling, leasing, licensing
     the use of and/or operating recycling equipment,
     including other Sentinel EPS Recyclers and other
     recycling equipment similar in design and function, or
     rendering consulting services with respect thereto.

     Before he invested in Madison, Mr. Greer expected that

Madison was going to provide a tax savings of approximately $1.75

for each dollar invested.    The offering memorandum sets forth the

1982 tax benefits/savings of an investment in Madison as follows:

    Projected Regular       Projected Tax Payment
       Investment             Energy Tax Credits      Deductions

           $50,000                 $77,000              $38,610

     Included as part of the offering memorandum package was the

legal opinion, an undated “form of opinion” letter (form of

opinion), which was based on facts supplied by Madison’s general

partner.    The form of opinion stated:   “This letter is intended

for your [the general partner’s] own individual guidance and for

the purpose of assisting prospective purchasers and their tax

advisors in making their own analysis, and no prospective
                              - 10 -

purchaser is entitled to rely upon this letter.”   In the

discussion of the tax savings and consequences relating to an

investment in Madison, the offering memorandum further provides:

     Prospective purchasers are expected to consult with
     their own professional tax advisers regarding such tax
     risks and the contents of the proposed form of opinion
     of counsel included as Appendix E hereto (the “Opinion
     of Counsel”). Since the Opinion of Counsel will be
     provided to the General Partner for his individual
     guidance, prospective purchasers are not permitted to
     rely upon the advice contained therein.

     PROSPECTIVE PURCHASERS MUST RELY UPON THEIR OWN
     PROFESSIONAL ADVISERS WITH RESPECT TO THE TAX BENEFITS
     AND TAX RISKS RELATING TO AN INVESTMENT IN THE
     PARTNERSHIP. [Capitalized in the original.]

The offering memorandum also provides:

     The [partnership] Units are being offered through * * *
     [HGSC] as Placement Agent on a best efforts basis. * * *
     [HGSC] will be paid a selling commission equal to 10% of
     the per Unit offering price for each Unit sold. This
     selling commission may also be paid to other qualified
     broker-dealers as selling agents for each Unit sold by
     them.

     The Madison partnership agreement designated Mr. Roberts, the

general partner, as the tax matters partner for the partnership

and granted Mr. Roberts a power of attorney authorizing him to

conduct all activities necessary to carry out the provisions of

the partnership agreement.

      In addition to reading the offering memorandum, Mr. Greer

discussed the Madison partnership with some of his coworkers at

AOI who also participated in Madison.
                                - 11 -

        Mr. Greer showed the offering memorandum to his tax return

preparer and tax adviser to confirm the tax computations Madison

represented would result from his investment prior to purchasing a

limited partnership unit.    The tax adviser and return preparer Mr.

Greer contacted was John Artis, a certified public accountant with

the accounting firm of Smith, Goolsby, Artis, & Reams in Ashland,

Kentucky (the accounting firm).    The accounting firm had prepared

petitioners’ income tax returns for approximately 10 years before

1982.     Mr. Artis did not read the entire offering memorandum, but

based upon his conversations with Mr. Greer, he understood that

the tax benefits associated with the Madison interest exceeded the

dollars invested.   Because of this understanding, Mr. Artis told

Mr. Greer that Madison was “fairly aggressive” from a tax

standpoint.    Mr. Artis was not asked by Mr. Greer to provide a

written tax opinion about the merits of the tax treatment

represented in the Madison offering memorandum; rather, Mr. Greer

asked him to confirm the amount of the tax benefits petitioners

would claim on their tax return for 1982, if Mr. Greer purchased

the limited partnership interest.    Mr. Artis told Mr. Greer the

result on the 1982 return he computed would be in accord with the

benefits Mr. Greer expected.

     Petitioners’ capital contribution was limited to their

$50,000 investment in Madison because Mr. Greer purchased a 5.5-

percent limited partnership unit in Madison that was not subject
                               - 12 -

to further assessment, and as a limited partner, Mr. Greer was not

personally liable for the debts, obligations, or losses in Madison

in excess of his $50,000 capital contribution.

B.   The Underlying Madison Transaction

     The Madison promotion involved the following simultaneous

transactions:

     (1)   On or about December 31, 1982, PI sold four Sentinel EPS

Recyclers to Ethynol Cogeneration, Inc. (ECI), for $1,520,000 each

or a total of $6,080,000.

     (2)   The consideration of $6,080,000 provided by ECI

consisted of cash in the amount of $481,000 and a 12-year

nonrecourse note in the amount of $5,599,000, which was secured by

a first lien on the four recyclers.

     (3)   ECI sold the four recyclers to F&G Equipment Corp. (F&G)

for $7 million or $1.75 million each.

     (4)   The consideration provided by F&G consisted of cash in

the amount of $553,000 and a 12-year note in the amount of

$6,447,000, of which 80 percent was nonrecourse.   The nonrecourse

portion of the note was senior to the recourse portion.   The note

was secured by a second lien on the four recyclers.

     (5)   F&G agreed to lease the four recyclers to Madison.   The

lease agreement terminated in 9-1/2 years and required an annual

lease payment of $960,000, or $80,000 per month.
                               - 13 -

     (6)   Madison simultaneously entered into a joint venture

agreement with PI and Resin Recyclers, Inc. (RRI), to “exploit”

the recyclers and place them with end-users.

     (7)   Under the joint venture agreement, Madison received a

fixed monthly “joint venture fee” of $80,000, which is equal to

the monthly lease payment made to F&G.   The joint venture fee was

to commence 9 months after the joint venture agreement closed.

     (8)   After the transactions were completed, the four

recyclers were owned by F&G.

C.   Madison Subscription Agreement

     Mr. Greer signed a completed, notarized Madison Subscription

Agreement and Purchaser Suitability Representations (Madison

subscription agreement), required for purchasing a limited

partnership interest in Madison during 1982.   At the time Mr.

Greer executed the Madison subscription agreement, he did not meet

the net worth suitability (net worth exceeds $1 million) for

purchasing an interest in Madison.    Mr. Greer submitted his

subscription agreement to purchase an interest in Madison using

another option, in which he acknowledged that he did not meet

either the net worth or annual net income suitability test to

purchase an interest in Madison but represented and warranted that

he had sufficient business knowledge and financial knowledge, and
                               - 14 -

was capable of evaluating the risks and merits of investing in

Madison.

D.   TEFRA Case

      Mr. Greer was notified by the District Director of the

Internal Revenue Service (IRS) in New York City that an

examination of Madison’s partnership income tax return for 1982

had commenced by a letter sent on January 23, 1985.   On December

24, 1987, the same District Director issued a Notice of Final

Partnership Administrative Adjustment for 1982 (FPAA) to Richard

Roberts, the Madison tax matters partner.   Petitioners were sent a

copy of the FPAA on February 16, 1988.   Following the issuance of

the FPAA, as the result of a petition filed on May 17, 1988,

petitioners became parties with other Madison partners in a

docketed case in this Court (docket No. 10601-88) under the TEFRA

provisions challenging the determinations made in the FPAA.

Over the next 13 years the following occurred:   The denial of the

partners’ motion for summary judgment pursuant to Madison

Recycling Associates v. Commissioner, T.C. Memo. 1992-605, a

concession by the partners regarding the adjustments in the FPAA,

and an opinion, Madison Recycling Associates v. Commissioner, T.C.

Memo. 2001-85, finding that the FPAA was timely, which was

affirmed by Madison Recycling Associates v. Commissioner, 295 F.3d

280 (2d Cir. 2002).   The result is that no dispute as to the

partnership adjustments in the FPAA for 1982 remains.
                                - 15 -

E.   District Court Case

        In December 1992, after this Court had denied the partners’

motion for summary judgment, petitioners had mailed in one package

to respondent’s IRS Service Center in Cincinnati, Ohio, Forms

1040X, Amended U.S. Individual Income Tax Return, for 1982 and the

carryback years 1979 through 1981.    One set of Forms 1040X

reported additional tax and interest and included a check in the

amount of $189,769.    A second set of Forms 1040X bore the legend

“PROTECTIVE CLAIM” and sought refunds of the entire amount paid in

the check.    In August 1993, Mr. Greer filed a complaint in the

United States District Court for the Eastern District of Kentucky,

naming the United States as a defendant.    Mr. Greer’s complaint

was designated civil case No. 93-CV-194-HRW in the District Court

and was assigned to District Court Judge Henry Wilhoit.    Mr.

Greer’s complaint sought the refund of the $189,769, plus

interest, and alleged as one of the jurisdictional grounds section

6226.    The United States in seeking to dismiss Mr. Greer’s

complaint asserted that no assessment of the $189,769 was

permitted under section 6225(a)(2).

        On September 21, 1994, the District Court entered the

following order (the Order):

          This matter is before the Court on defendant’s
     motion to dismiss plaintiff’s complaint based on lack of
     subject matter jurisdiction. Defendant’s motion to
     dismiss, although subsequent in time to plaintiff’s
     motion for partial summary judgment, logically precedes
     a summary judgment motion on the merits.
                                - 16 -


          Defendant claims in its motion that this Court is
     without subject matter jurisdiction over plaintiff’s tax
     refund action as dictated by applicable tax statutes.
     Although the Court does not concede to the absence of
     subject matter jurisdiction under 28 U.S.C. § 1346, it
     feels it is appropriate to dismiss the action without
     prejudice, subject to the plaintiff’s right to refile
     pending the outcome of related tax court litigation, now
     awaiting resolution in excess of six years.

     IT IS THEREFORE ORDERED AND ADJUDGED:

                (1)   that defendant’s motion to dismiss is
     SUSTAINED,

               (2) that the plaintiff’s complaint is
     DISMISSED without prejudice,

               (3) that the defendant repay the plaintiff
     the amount of tax deficiency paid by the plaintiff as a
     prerequisite to the filing of this action, plus
     interest,

               (4) that plaintiff’s motion for summary
     judgement is OVERRULED as MOOT.

(Emphasis in the original.)

The District Court subsequently overruled the plaintiff’s motion

to set aside the Order and defendant’s motion to alter or amend

the Order.   Petitioners were repaid the $189,769, plus interest,

in early June 1995, after plaintiff’s counsel brought defendant’s

failure to repay to Judge Wilhoit’s attention.

F.   The Present Case

     After respondent issued notices of deficiency to petitioners

for 1979 through 1982, petitioners timely filed a petition in this

Court in December 2003, contesting the additions to tax and other

items since conceded by petitioners.
                                - 17 -

                               OPINION

       Our task is to determine the applicability of additions to

tax.    Petitioners have the burden of proof.    Because a remittance

petitioners made in December 1992 was repaid by Order of the

District Court of the Eastern District of Kentucky, there is a

related issue concerning the amounts of the deficiencies in income

tax to which the addition to tax under section 6653(a)(2) would

apply, if we determine that additions to tax under section

6653(a)(1) and (2) should apply at all.

       Section 6653(a)(1) imposes an addition to tax equal to 5

percent of the underpayment if any part of the underpayment of tax

is due to negligence or intentional disregard of rules or

regulations.    An additional amount is added under section

6653(a)(2), equal to 50 percent of the interest payable with

respect to the portion of the underpayment attributable to

negligence.

       Negligence is defined as the failure to exercise the due care

that a reasonable and ordinarily prudent person would exercise

under the circumstances.    Marcello v. Commissioner, 380 F.2d 499,

506 (5th Cir. 1967), affg. in part and remanding in part 43 T.C.

168 (1964) and T.C. Memo. 1964-299.      The reasonableness of a

particular taxpayer’s actions is viewed in light of the taxpayer’s

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

actions regarding the transaction.    Henry Schwartz Corp. v.
                                - 18 -

Commissioner, 60 T.C. 728, 740 (1973).    The taxpayer’s reliance

upon a qualified adviser is also a factor, and the specific

expertise of the adviser is considered.    Patin v. Commissioner, 88

T.C. 1086, 1130-1131 (1987), affd. sub nom. Hatheway v.

Commissioner, 856 F.2d 186 (4th Cir. 1988), affd. sub nom. Skeen

v. Commissioner, 864 F.2d 93 (9th Cir. 1989), affd. without

published opinion 865 F.2d 1264 (5th Cir. 1989), affd. sub nom.

Gomberg v.    Commissioner, 868 F.2d. 865 (6th Cir. 1989).

     Mr. Greer had no prior experience in the recycling business.

He relied upon the purported value of the Sentinal EPS Recyclers

set forth in the offering memorandum.    He made no attempt to

verify the value of the recyclers.   Given the nature of the tax

benefits claimed, this omission supports respondent’s assertion of

negligence.    Rybak v. Commissioner, 91 T.C. 524, 565 (1988).   Mr.

Greer contacted his longstanding tax accountant, and the

accountant warned Mr. Greer that the transaction was fairly

aggressive.    Rather than seek a written opinion from his

accountant on the validity of the tax benefits, Mr. Greer relied

upon HG, the investment brokerage firm that brought him the

transaction.    Obviously, the brokerage firm received a commission.

In addition, the individuals at HG who sold the Madison

transaction to Mr. Greer did not have specialized tax expertise.

     Mr. Greer asserts that HG came recommended by his employer.

Regardless, Mr. Greer’s business experience prior to 1982 was such
                               - 19 -

that he should have understood HG’s motivation in suggesting the

transaction to him.   In addition, the offering memorandum made

clear the commissions that would be paid to HG, thus indicating

their interest in selling the Madison transaction.   Mr. Greer was

also astute enough to know the difference between a sales broker

and a tax expert.

     Petitioners also argue that they should be relieved of the

additions to tax because respondent failed to advise them that Mr.

Roberts was under investigation in late 1982 and 1983.

Petitioners admit this is a novel argument.    We find no support

for this legal position, and we note that Mr. Greer read a news

article in August 1983 which explained that Mr. Roberts had agreed

to a settlement with the Department of Justice “in federal court”

which imposed upon him reporting requirements that restricted his

actions in selling recycling tax promotions.   Mr. Greer took no

remedial actions after learning of the questionable nature of Mr.

Roberts’s tax shelter strategy; rather he purportedly relied upon

vague assurances from HG personnel.

     The record establishes that Mr. Greer aggressively sought to

reduce the 1982 tax liability through Madison and consulted with

his tax return preparer about the transaction to verify the tax

benefits, not to obtain an independent opinion on the merits of

the tax scheme.   Given that the expected tax refunds were 175

percent of the dollars invested, Mr. Greer’s rush to invest in
                               - 20 -

Madison was certainly not prudent, and his failure to obtain

expert tax advice regarding the merits of the tax scheme was

negligent.   Accordingly, the additions to tax under section 6653

are sustained.   See Barlow v. Commissioner, 301 F.3d 714, 724 (6th

Cir. 2002), affg. T.C. Memo. 2000-339.

     Anticipating the potential application of section 6653(a)(2),

petitioners assert that respondent has incorrectly computed the

underpayment of tax which is attributable to negligence and

subject to the addition to tax, based upon 50 percent of the

interest payable under section 6601.    Petitioners argue to reduce

the deficiencies in 1981 and 1982 computed under section

6211(a)(1), despite respondent’s repayment of the $189,769 with

interest.

     Petitioners rely upon the definition of deficiency in section

6211 and argue they made a payment which should be characterized

as an amount collected without assessment as a deficiency under

section 6211(a)(1)(B).   They further argue this amount should not

be reduced by the subsequent repayment because that repayment was

not a rebate under section 6211(a)(2).

     There is a body of law holding that the deficiency procedures

may not be used to correct amounts collected and then erroneously

refunded because such erroneous payments are not rebates.    See,

e.g., O’Bryant v. United States, 49 F.3d 340 (7th Cir. 1995).       In

addition, amounts characterized as payments of tax are not
                                 - 21 -

generally treated as deposits.    Blatt v. United States, 34 F.3d

252 (4th Cir. 1994).

     Petitioners focus on how the payment was treated

administratively by respondent and how it was initially

represented by petitioners, but petitioners fail to overcome a

fundamental point.   Section 6225(a) provides that once a

proceeding in the Tax Court under section 6226 has commenced, no

assessment of a deficiency attributable to any partnership item

may be made before the proceeding in the Tax Court has become

final.   Section 6226(e)(1) specifically requires that a partner

may file a readjustment petition in the District Court under

section 6226 only if that partner “deposits” the TEFRA

partnership-related tax liability.    As previously stated, Mr.

Greer asserted section 6226 as one of the jurisdictional grounds

for his petition in the Federal District Court for the Eastern

District of Kentucky.   As a result, we find petitioners’ argument

that the remittance in question is an amount collected to be

inconsistent with petitioners’ efforts to obtain section 6226(e)

jurisdiction in District Court, regardless of how respondent may

have initially characterized the payment.

     It is clear from the record in the District Court that Mr.

Greer’s counsel sought the repayment.     If this repayment was not

the return of a deposit, then it was nevertheless not an erroneous

refund as that term is described in cases such as O’Bryant v.
                               - 22 -

United States, supra.   The District Court ordered the repayment,

and petitioners had not waived the restrictions on assessment

which arose when the partnership action was filed in the Tax

Court.   The District Court specifically noted in the Order that

the amount petitioners had paid was a prerequisite to filing the

action in District Court.   The District Court also ordered the

repayment to include interest, thus putting petitioners in the

position they were in before filing the amended returns and

protective claims, which meant the petitioners remained liable for

the entire potential deficiencies and penalties that could result

from the Tax Court partnership case and this current matter.

     Respondent’s representative in the District Court action

asserted the remittance made by petitioners could not be assessed

at that time, and we agree.   We do not find the remittance was an

unassessed amount collected as a deficiency.

     In conclusion, we hold that respondent has correctly computed

the amount of the underpayment of tax related to the section

6653(a)(2) addition to tax.

     The remaining issue is the addition to tax under section 6659

for a valuation overstatement of at least 150 percent of the

amount determined to be correct on any return.   Section 6659 has

since been repealed but was applicable at the time the partnership

return was filed.   The addition to tax has previously been held to

be applicable to carryback years before its enactment.   See
                               - 23 -

Nielsen v. Commissioner, 87 T.C. 779 (1986).     Therefore, if the

addition to tax is appropriate, it would apply to all the years

before us.   Here, respondent asserts an overstatement exceeding

250 percent of the value of the four Sentinel EPS Recyclers on the

partnership return.   Petitioners do not contest the value was

overstated as respondent asserts, but petitioners maintain that

the adjustment in question was not specifically tied to the value

of the recyclers.   Nevertheless, the FPAA notes the disallowance

of $7 million in investment tax credit property and $7 million in

business energy investment credit property.    Ultimately, these

adjustments were sustained.   Petitioners understandably make no

attempt to offer a reasonable basis for the value claimed on the

partnership return under section 6659(e).   Given these

circumstances, we reject petitioners’ argument and sustain the

addition to tax under section 6659 as determined by respondent.

     To reflect the foregoing and concessions by the parties,


                                    Decision will be entered

                               under Rule 155.
