                        T.C. Memo. 1996-167




                      UNITED STATES TAX COURT



          HYMAN S. AND GAILE S. ZFASS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9290-94.               Filed April 2, 1996.



     Craig D. Bell, for petitioners.

     William L. Ringuette, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   Respondent determined the following additions

to petitioners' Federal income taxes in two notices of deficiency,

both dated March 3, 1994:
                                    -2-

                                     Additions to Tax

Year              Sec. 6653(a)(1)         Sec. 6653(a)(2)      Sec. 6659

1982                   $789                   $18,278           $4,732
1983                    540                    10,545            3,242



       Following a concession by respondent,1 the issues for decision

are:       (1) Whether Hyman S. Zfass (petitioner) is liable for

additions to tax under section 6653(a)(1) and (2) for 1982 and

1983, and (2) whether petitioner is liable for additions to tax

under section 6659 for 1982 and 1983.

       All section references are to the Internal Revenue Code for

the years under consideration.       All Rule references are to the Tax

Court Rules of Practice and Procedure.

                              FINDINGS OF FACT

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

Background

       Petitioners, husband and wife, resided in Richmond, Virginia,

at the time they filed their petition.           Petitioners timely filed


       1
          The parties have stipulated that Mrs. Zfass was not
involved in the purchase of the partnership interest involved
herein and was unaware of the substantial understatements on the
1982 and 1983 tax returns. Respondent concedes that Mrs. Zfass
is an innocent spouse for both years in issue and hence not
liable for any of the additions to tax involved herein.
                                          -3-

joint Federal income tax returns for 1982 and 1983, the years under

consideration.

     Petitioner     is     a    medical   doctor    who    has   been    practicing

medicine for more than 50 years.                 Over the years, petitioner’s

practice has focused, to a considerable extent, on sports and

exercise medicine.

     In   1982,     petitioner       acquired       a     2.83-percent     interest

(represented by one partner unit) in Therapeutics CME Group, L.P.,

a Connecticut limited partnership (the partnership), for $17,160.

The stated purpose of the partnership was to acquire by lease and

thereafter exploit a series of video disk master programs on

exercise and      sports       therapy.   The    master    programs     were   to   be

produced by World Video Corp. in connection with the School of

Continuing Education and the Television Center of Hahnemann Medical

College and Hospital of Philadelphia (Hahnemann).                The partnership

was to arrange for the reproduction of the programs on video

cassettes and video disks and thereafter sell them principally to

members of the medical profession for use in satisfying their

continuing medical education requirements.

     Petitioner     learned       about    the   partnership     from    B.    Roland

Freasier, Jr., petitioner’s friend and a person whom petitioner had

used as an accountant and attorney, and from whom he obtained

investment advice.       Freasier arranged for petitioner to meet with

Virgil Williams, the partnership's tax matters partner. Williams
                                 -4-

provided petitioner with a private placement memorandum (which was

more than an inch thick) for the partnership, which petitioner read

“from cover to cover”.   Williams also provided petitioner with two

videotapes that were represented to be comparable to those that the

partnership would be marketing.    Petitioner watched the tapes at

his home and recognized the moderator on the tapes as a well-known

and respected physician.     Petitioner was also familiar with the

favorable reputation enjoyed by Hahnemann.

     A significant portion of the private placement memorandum was

dedicated to a discussion of the tax aspects of an investment in

the partnership.   The private placement memorandum contained a

summary of the offering which, in pertinent part, stated:

ESTIMATED TAX EFFECT
PER $17,000 UNIT:
                           Although Therapeutics CME Group, L.P.
                           (“Partnership”) may have income from its
                           operations, for illustration purposes,
                           the figures below do not take into
                           account any income and assume a 50% tax
                           bracket taxpayer. The Internal Revenue
                           Service (the “IRS” or “Service”) may
                           disallow any of the various elements used
                           in calculating Partnership expenses and
                           credits thereby reducing federal income
                           tax benefits on an investment.

                                 1982            1983

Capital contribution           $ 8,500         $ 8,500
Deductible Loss Equivalent      31,903          27,745
Tax Write-off to Cash
 Investment Ratio              3.8 to 1       3.3 to 1

     The private placement memorandum, as well as a tax opinion
                                       -5-

letter that was attached to the memorandum, informed a potential

investor     that    the   Internal    Revenue     Service    (IRS)    had    been

conducting    a     “tax   shelter    program”    to   identify     and   examine

“abusive” tax shelters and that such a program “increases the

likelihood that the Partnership’s and a Partner’s return may be

audited.”     The private placement memorandum also informed the

reader that the depreciation deductions and investment tax credit

that the partnership intended to claim and pass through to its

partners would be based on a fair market value of each master video

disk of $877,663, and that there was no assurance “that the Masters

could be sold for the appraised value or that the lease fee program

will provide the Partnership with a fair return on equity.”

     Petitioner discussed the possibility of purchasing an interest

in the partnership with Freasier.             Petitioner knew that acquiring

an interest in the partnership would provide him with immediate and

future tax advantages.       In particular, he understood that he would

receive tax benefits of up to $3.80 for each $1 invested.

     After petitioner became a limited partner in the partnership,

the partnership’s tax return was audited by the IRS.                As a result

of this audit, on February 27, 1987, the IRS sent petitioners, and

other partners in the partnership, a notice of final partnership

administrative       adjustment      (FPAA)     for    1982   and     1983.    The

partnership's tax matters partner thereafter filed a petition in

this Court to contest the adjustments contained in the FPAA.
                                     -6-

     The partnership was one of 27 partnerships for which there was

a test case, Charlton v. Commissioner, T.C. Memo. 1990-402, affd.

990 F.2d 1161 (9th Cir. 1993).             Like the partnership in which

petitioner   was   involved,   the    three    partnerships   at   issue   in

Charlton invested in the production of videotapes for use in

continuing medical education programs.         In Charlton, we held that:

(1) The three partnerships lacked the requisite profit objective;

(2) the sales forecast and the values of the license, leases, and

tapes were grossly overstated; and (3) these were sham transactions

entered into primarily for their tax benefits.          We therein upheld

the additions to tax for negligence and substantial understatement

of tax and imposed additional interest attributable to a tax-

motivated transaction.

     Following Charlton, on January 25, 1993, the partnership’s tax

matters partner and the IRS entered into a stipulated decision in

which the tax matters partner agreed to the disallowance of all

deductions and investment tax credits.           Thereafter, petitioners

were assessed $15,773 for 1982 and $10,805 for 1983; they concede

liability for those assessments. At issue herein are the resulting

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

and the additions to tax for valuation overstatement under section

6659.2

     2
          Petitioners request that we consider whether they are
liable for additional interest under sec. 6621(c). Because the
                                                   (continued...)
                                 -7-

                               OPINION

Issue 1.   Negligence

     Section   6653(a)(1)   provides     that   if   any   part   of   an

underpayment of tax is the result of negligence or intentional

disregard of rules or regulations, 5 percent of the underpayment is

added to the tax.   Section 6653(a)(2) imposes an addition to tax of

50 percent of the interest on the portion of the underpayment

attributable to negligence.    Negligence is defined as the failure

to exercise the due care that a reasonable, prudent person would

exercise under similar circumstances.      Zmuda v. Commissioner, 731

F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely v.

Commissioner, 85 T.C. 934, 947 (1985).     Respondent's determination

of negligence is presumed to be correct, and petitioner has the

burden of proving that it is erroneous.         Rule 142(a); Luman v.

Commissioner, 79 T.C. 846, 860-861 (1982).

     Reasonable reliance on the advice of experts can be sufficient

to avoid the negligence penalty.       Ewing v. Commissioner, 91 T.C.

396, 423 (1988), affd. without published opinion and affd. without

published opinion sub nom. Czarneski v. Commissioner, 940 F.2d 1534

     2
      (...continued)
applicability of the sec. 6621(c) increased rate of interest on
petitioners’ previously determined deficiencies for 1982 and 1983
is not a “deficiency” attributable to an affected item requiring
partner level determination, and thus is not one of the
adjustments in the notice of deficiency, we do not have
jurisdiction to consider (in the setting presented in this case)
whether petitioners are liable for additional interest. See
White v. Commissioner, 95 T.C. 209 (1990).
                                          -8-

(9th       Cir.   1991);     Industrial        Valley    Bank   &   Trust     Co.    v.

Commissioner, 66 T.C. 272, 283 (1976).                   Reliance on professional

advice, by itself, is not an absolute defense to negligence.                          A

taxpayer first must demonstrate that his reliance was reasonable.

Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d

1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

       A    taxpayer's       reliance     on    representations       by    insiders,

promoters, or offering materials can be an inadequate defense to

negligence.       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).           Reliance on a professional adviser can be

inadequate when the taxpayer and his adviser knew nothing about the

nontax business aspects of the venture.                  Beck v. Commissioner, 85

T.C. 557 (1985); Flowers v. Commissioner, 80 T.C. 914 (1983).                        In

order for reliance on professional advice to excuse a taxpayer from

the negligence additions to tax, the reliance must be reasonable,

in   good     faith,   and    based     upon    full    disclosure.        Freytag   v.

Commissioner, supra at 888.

       Petitioner contends that he is not liable for the section

6653(a)(1) and (2) additions to tax.                    He argues that he had the

"expertise and intelligence" to properly evaluate the quality of

the investment because of his experience as a medical doctor in

sports medicine, his knowledge of continuing medical education
                                         -9-

requirements, and his familiarity with the reputation of Hahnemann,

which was to produce the programs.               As for other aspects of the

investment, petitioner contends that it was reasonable for him to

rely on the recommendation of Freasier, petitioner's "long-standing

and trusted tax attorney".

     We do not believe petitioner's medical expertise gave him the

“expertise and intelligence” to decide whether his investment in

the partnership made economic sense.                 Indeed, in Charlton v.

Commissioner, supra, we held that the partnerships were sham

transactions     in    which    tax       considerations       were    paramount.

Petitioner's knowledge of sports medicine, Hahnemann's reputation,

and the continuing medical education needs of physicians provided

at   most   a   superficial     basis      for    evaluating    this   purported

investment opportunity.

     We believe that a reasonable investor would have done more

than petitioner did in determining whether an investment in the

partnership made economic sense.                In our opinion, petitioner’s

decision to become a partner in the partnership was tax driven, not

economically driven.

     The    record    is   devoid   of    any    evidence   that   Freasier   had

knowledge about the nontax aspects of the partnership beyond that

contained in the promotional material. (Freasier did not testify.)

Further, the record is devoid of the type of advice (tax vs.

investment) petitioner received from Freasier.                 In this regard,
                                  -10-

petitioner’s testimony was vague; he merely recalled having asked

Freasier whether the investment “would fly”.               We believe this

inquiry was directed to whether the purported tax deductions “would

fly”, not whether the economics of the investment “would fly”.           We

are not convinced that Freasier possessed sufficient knowledge

about the nontax aspects of the partnership to give petitioner

competent advice.

     Petitioner compares his case to Mollen v. United States, 72

AFTR 2d 93-6443, 93-2 USTC par. 50,585 (D. Ariz. 1993), in which a

medical doctor who invested in one of the partnerships described in

Charlton    v.   Commissioner,   T.C.    Memo.   1990-402,    avoided   the

imposition of negligence penalties because of reliance on advisers.

Mollen is not binding herein.

     In summary, petitioner failed to prove that any part of the

underpayment of his 1982 and 1983 taxes was due to reasonable

cause.     To the contrary, we hold that the entire underpayment of

taxes for both years was the result of petitioner’s negligence.

Accordingly, petitioner is liable for additions to tax under

section 6653(a)(1) and (2) for 1982 and 1983.

Issue 2.    Valuation Overstatement

     The second issue is whether petitioner is liable for additions

to tax under section 6659.    That section imposes an addition to tax

if an underpayment of tax of $1,000 or more is attributable to a

valuation    overstatement.      Sec.    6659(a),   (d).      A   valuation
                                      -11-

overstatement is found if the claimed fair market value or adjusted

basis of property is at least 150 percent of the correct amount.

Sec. 6659(c).

     Petitioner    claims      that   the    disallowance     of   the   claimed

partnership deductions and investment tax credits is unrelated to

any valuation overstatement, thus making the section 6659 addition

to tax inappropriate in this case.

     If an underpayment of tax is not "attributable to" a valuation

overstatement, the section 6659 addition does not apply.                       See

McCrary v. Commissioner, 92 T.C. 827 (1989).                 Section 6659 does

apply, however, when the claimed valuation was an integral factor

in disallowing deductions and credits.           See Illes v. Commissioner,

982 F.2d 163, 167 (6th Cir. 1992), affg. T.C. Memo. 1991-449.               When

a transaction lacks economic substance, the correct basis is zero;

any amount     claimed    is   a   valuation   overstatement.         Gilman    v.

Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), affg. T.C. Memo.

1989-684; Rybak v. Commissioner, 91 T.C. 524, 566-567 (1988).

     In Charlton v. Commissioner, supra, valuation overstatement

was central to the holding that the transactions were a sham.                   It

is   obvious    from     the   record   in     this   case     that   valuation

overstatement was a primary reason for the disallowance of the

claimed tax benefits.          Accordingly, we hold that petitioner is
                              -12-

liable for the section 6659 additions to tax for 1982 and 1983.

     To reflect respondent’s concession,



                                         Decision will be entered

                                     under Rule 155.
