                         T.C. Memo. 2003-303



                       UNITED STATES TAX COURT



        ROBERT S. COHEN AND MARGERY COHEN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2439-95.              Filed November 3, 2003.


     Christopher S. Rizek, for petitioners.

     Louise R. Forbes and D. Sean McMahon, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:    This case was assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) in effect when these proceedings commenced and Rules

180, 181, and 183.    Unless otherwise indicated, section

references are to the Internal Revenue Code in effect at relevant

times, and Rule references are to the Tax Court Rules of Practice
                               - 2 -

and Procedure.   The Court agrees with and adopts the opinion of

the Special Trial Judge, which is set forth below.

                 OPINION OF THE SPECIAL TRIAL JUDGE

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

notice of deficiency, respondent determined additions to tax with

respect to petitioners’ 1982 Federal income tax of $6,116 under

section 6659 for valuation overstatement, $1,495 under section

6653(a)(1) for negligence, and under section 6653(a)(2) in an

amount equal to 50 percent of the interest due on $29,894, the

amount of the underpayment attributable to negligence.     The

underpayment was determined pursuant to a partnership-level

proceeding.1   See secs. 6221-6233.    After concessions,2 there are

two issues remaining for decision.     The first issue is whether

petitioners are liable for the additions to tax under the

provisions of section 6653(a)(1) and (2) for negligence or



     1
        The deficiency notice apparently is based on the
assumption that petitioners invested $25,000 in SAB Foam
Recycling Associates (SAB Foam) in 1982. In these proceedings
petitioner testified that he invested $12,500, and the parties
have stipulated the amounts of petitioners’ losses and credits
claimed on their 1982 tax return on the basis of a $12,500
investment in SAB Foam. See infra note 6 and accompanying text.
     2
        By stipulation, petitioners concede the imposition of the
valuation overstatement addition to tax under sec. 6659. In
addition, petitioners concede that the limitations period remains
open for assessment and collection of any penalties, additions to
tax, or interest attributable to partnership items for the 1982
tax year that may be held to be due from petitioners.
Petitioners previously raised the statute of limitations as a
defense in their petition.
                               - 3 -

intentional disregard of rules or regulations.     We hold that they

are liable for these additions to tax.     The second issue is

whether petitioners are entitled to the benefits of a settlement

offer that was made available to some other taxpayers. We hold

that they are not entitled to the benefits of that settlement

offer.

                         FINDINGS OF FACT

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

The stipulated facts and the attached exhibits are incorporated

by this reference.3   Petitioners resided in New York, New York,

at the time they filed the petition in this case.

A.   The Plastics Recycling Transaction

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

The issues in this group of cases center about a circular

multistep transaction involving the sale and lease of machines

designed to recycle plastic scrap.     The additions to tax arise

from the disallowance of losses, investment credits, and energy




      3
        The parties have stipulated that testimony and
documentary evidence admitted in Feinberg v. Commissioner, T.C.
Memo. 2003-304, and in Lewin v. Commissioner, T.C. Memo. 2003-
305, shall be admitted in the present case, subject to the
parties’ relevance objections, if any. In addition, the parties
have agreed to add to the record as exhibits the testimony of
Elliot Miller, in Provizer v. Commissioner, T.C. Memo. 1992-177,
affd. per curiam without published opinion 996 F.2d 1216 (6th
Cir. 1993), and of Stuart Becker, in Jaroff v. Commissioner, T.C.
Memo. 1996-527.
                               - 4 -

credits petitioners claimed with respect to a New York limited

partnership called SAB Foam Recycling Associates (SAB Foam).

     For a detailed discussion of the transactions involved in

the Plastics Recycling 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 involving the recycling machines

(recyclers) in this case are substantially similar to the

transactions involving the Sentinel polyethylene (EPE) recyclers

considered in Provizer and the Sentinel polystyrene (EPS)

recyclers considered in Gottsegen v. Commissioner, T.C. Memo.

1997-314.

     In a series of simultaneous transactions that for

convenience are referred to herein as the SAB Foam transactions,

Packaging Industries Group, Inc. (PI), of Hyannis, Massachusetts,

manufactured and sold4 four EPS5 recyclers to Ethynol


     4
        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.
     5
        In Provizer v. Commissioner, supra, the transaction
involved EPE recyclers, but the EPS recycler partnerships and the
EPE recycler partnerships are essentially identical. See
Davenport Recycling Associates v. Commissioner, T.C. Memo. 1998-
347, affd. 220 F.3d 1255 (11th Cir. 2000); see also Gottsegen v.
Commissioner, T.C. Memo. 1997-314 (involving both the EPE and the
EPS recyclers).
                                - 5 -

Cogeneration, Inc. (ECI), for $6,080,000 ($1,520,000 per

machine).   ECI agreed to pay PI $451,000 for the four recyclers

at the closing, with the balance of $5,629,000 financed through a

12-year nonrecourse promissory note (ECI note).    Each monthly

installment on the ECI note was $81,250.

     Simultaneously, ECI resold the recyclers to F&G Equipment

Corp. (F&G) for $7 million.   F&G agreed to pay ECI $513,000 at

the closing, with the balance of $6,487,000 financed through a

purportedly partial recourse promissory note (F&G note).    The F&G

note was recourse against F&G to the extent of 20 percent of its

face value.    However, the recourse portion was payable only after

F&G satisfied the nonrecourse portion of the note.    Each monthly

installment on the F&G note was $81,250.    In turn, F&G leased the

recyclers to SAB Foam for a monthly base rent of $81,250.

Pursuant to the lease and in accordance with applicable

provisions of the Internal Revenue Code and the Treasury

regulations, F&G elected to treat SAB Foam as having purchased

the recyclers for purposes of the investment and business energy

tax credits.

     Simultaneously, SAB Foam entered into a joint venture with

PI and Resin Recyclers, Inc. (RRI).     The joint venture agreement

provided that RRI was to assist SAB Foam with the placement of

recyclers with end-users and that PI was to pay a joint venture

fee to SAB Foam of $81,250.
                                 - 6 -

      In connection with the SAB Foam transactions, therefore, the

arrangement was that PI would pay a monthly joint venture fee to

SAB Foam, in the same amount that SAB Foam would pay monthly to

F&G as rent, in the same amount that F&G would pay monthly to ECI

on the F&G note, in the same amount that ECI would pay monthly to

PI on the ECI note.   In connection with these arrangements by PI,

ECI, F&G, SAB Foam, and RRI, these monthly payments were

offsetting, so they could be kept as bookkeeping entries with no

money actually changing hands.

      On its 1982 Form 1065, U.S. Partnership Return of Income,

SAB Foam reported that the four recyclers had an aggregate basis

of $7 million, or $1,750,000 each, for purposes of the investment

and business energy tax credits.    In the present case, the

undisputed evidence, including the stipulation of the parties,

establishes that the recyclers were not properly valued at

$1,750,000 but instead had a maximum value of $30,000 to $50,000

each.   SAB Foam reported a net ordinary loss of $662,556.     SAB

Foam included the portion of credits and losses attributed to

petitioners on Schedules K-1, Shareholder’s Share of Income,

Credits, Deductions, Etc., filed with SAB Foam’s partnership tax

return.

B.   Private Offering Memorandum

      The private offering memorandum (memorandum) that generally

was distributed to potential investors contemplated the creation
                               - 7 -

of SAB Foam.   SAB Management, Ltd. (SAB Management), a New York

corporation, was SAB Foam’s general partner, its tax matters

partner (TMP), and a 1-percent owner.   The limited partners, or

investors, owned the remaining 99 percent of SAB Foam.

     The memorandum informed investors that the business of SAB

Foam would be conducted in accordance with the transaction

described above.   The memorandum warned potential investors of

significant business and tax risk factors associated with

investments in SAB Foam.   The memorandum was replete with

warnings.   In bold capital letters, the memorandum unequivocally

stated:   “THIS OFFERING INVOLVES A HIGH DEGREE OF RISK”.

     Specifically, the memorandum warned potential investors

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

Internal Revenue Service (IRS); (2) “On audit, the purchase price

of the Sentinel EPS recyclers to be paid by F&G to ECI may be

challenged by the * * * [IRS] as being in excess of the fair

market value thereof, a practice followed by * * * [the IRS] in

transactions it deems to be ‘tax shelters’.   Such purchase price

is the basis for computing the regular investment and energy tax

credits to be claimed by * * * [SAB Foam and ultimately by its

partners]”; (3) the partnership had no prior operating history;

(4) the general partner had limited experience in marketing

recycling or similar equipment; (5) the limited partners would

have no control over the conduct of the partnership’s business;
                                 - 8 -

(6) there was no established market for the sale, leasing, or

licensing of Sentinel EPS Recyclers; and (7) certain potential

conflicts of interest existed.

     The memorandum projected that in the initial year of

investment an investor contributing $50,000 for one unit would

receive total investment tax credits and business energy credits

of $81,529 plus tax deductions of $38,768.6   The memorandum

stated that an investor in SAB Foam was required to have an

individual net worth and/or net worth with a spouse of $1

million, inclusive of residences and personal property, or income

of $200,000 per year for each unit of investment.

     The memorandum included a marketing report by Stanley

Ulanoff (Ulanoff), a marketing consultant and professor, and a

technical opinion by Samuel Z. Burstein (Burstein), a mathematics

professor.   The memorandum warned investors not to rely on the

statements and opinions contained in the memorandum but to

conduct an independent investigation.

     The memorandum included a Form of Opinion of Counsel (tax

opinion) prepared by Boylan & Evans, a New York law firm.      The

tax opinion, addressed only to the general partner, included in

the first paragraph the following disclaimer:




     6
        Regardless of the memorandum, the parties have stipulated
that the projected tax deductions would be $39,988 for each
$50,000 unit of investment.
                                - 9 -

      We have consented to your inclusion of the proposed
      form of this letter in the Memorandum, but 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 tax opinion expressly warned that the investment and energy

tax credits available to limited partners would be reduced or

eliminated if the partnership could not demonstrate that the

price paid for the recyclers approximated their fair market

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

independent confirmation of the fair market value of the

recyclers.    Instead, the tax opinion clearly relied on Ulanoff’s

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

reasonable.   The tax opinion also states:   “PI, ECI, F&G, and the

Partnership have represented to us that the prices paid by ECI

and by F&G and the terms of the Lease were negotiated at arm’s

length.”   The tax opinion concludes 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

recyclers.

C.   Individuals Involved

      Petitioner received his B.A. degree from Alford University

and his J.D. degree from Fordham University.   After graduating

from law school in 1962, petitioner enlisted in the military and

was released from active duty as a first lieutenant.   He then
                               - 10 -

worked for a law firm in New York until he formed the law firm of

Lans, Feinberg, & Cohen (LFC) in 1968.    In practice he was

primarily a commercial litigator until the early eighties, when

New York passed an equitable distribution law with respect to

divorce.   Then he concentrated his practice on family law.

     Stuart Becker (Becker) organized and promoted SAB Foam.

Becker was the sole shareholder of Scanbo Management, Ltd.

(Scanbo), which wholly owned SAB Management.    Becker served as

the president of SAB Management and principal of Stuart Becker &

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

tax matters.    He does not have an engineering background, and he

is not an expert in plastics materials or plastics recycling.

     In his practice Becker specialized in tax matters generally

and particularly in tax-advantaged investments, so he had

considerable experience involving so-called tax shelter

transactions.   Becker received his B.S. degree in accounting from

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

York University School of Business Administration in 1973.     He

passed the certified public accountancy test in 1967 and was the

winner of the gold medal, awarded for achieving the highest score

on the examination for the year.    Since early 1966, Becker has

practiced as an accountant in the tax area.    From 1964 until

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

and in 1972 he joined the accounting firm of Richard A. Eisner &
                             - 11 -

Co. (Eisner Co.) as the partner in charge of the tax department.

In 1977, he was the founder and principal owner of Becker Co.

Becker learned of the Plastics Recycling transactions in 1981

when a prospective client presented him with an offering

memorandum concerning one of the transactions.   Subsequently he

organized limited partnerships to offer the Plastics Recycling

transaction to his clients and others.

     Petitioner had met Becker through his relationship with

Richard Eisner, Becker’s partner at Eisner Co., and through his

stepbrothers, who were Becker’s clients.   Petitioner retained

Becker on several occasions as an accounting expert.   In turn,

Becker retained petitioner and LFC on various legal matters,

including his own divorce.

     Elliot Miller (Miller) was one of the key figures in the

Plastics Recycling transactions and an acquaintance of Becker.

Miller was the corporate counsel to PI for many years and was a

9.1 percent shareholder of F&G.   He also represented F&G,

Burstein, and Raymond Grant, who was the sole shareholder of ECI.

Miller has practiced law from 1958 to the present, primarily in

the area of business and tax transactions and litigation.    For

some years he practiced as a partner in the firm of Miller &

Summit.

     Malcolm I. Lewin (Lewin) graduated from the City College of

New York and graduated from New York University Law School in
                               - 12 -

1966.   In 1967 Lewin came to work for Miller & Summit as the

two-partner partnership’s only associate.    He worked primarily on

corporate and transactional matters.    He was employed by Miller &

Summit for 4 years.   During that time, he performed a variety of

professional services for PI, which was a major client for

Miller.   On many occasions he visited the premises of PI, which

then were located in New Jersey and under different ownership

than in 1982.    After his employment by Miller & Summit ended in

1971, Lewin only rarely spoke with Miller.   Lewin joined LFC in

1971.

     H. Robert Feinberg (Feinberg) attended New York University

on scholarship and graduated in 3-1/2 years.   He joined the Naval

Reserve while attending Harvard Law School during the Korean War

and graduated from the law school in 1953.   He then attended

Officer’s Candidate School, received his commission, and served

in the Navy for 3 years, primarily at the Naval Supply Depot,

Bayonne, New Jersey, in charge of purchasing and contracting.

Within 2 weeks of separation from service he was hired by the New

York law firm of Jacobs & Persinger, and he became a partner

there in 1961.   Feinberg had some experience in litigation and

taxation, but later his practice focused on corporate financial

and commercial transactions.   Feinberg described himself as a

member of “the core of the corporate and corporate finance bar

within the Wall Street area * * * [that] were fairly well known
                              - 13 -

among each other and * * * were constantly working on deals”.     In

1978, he formed a new firm with an attorney who specialized in

real estate transactions, and later that firm merged with LFC.

Feinberg met Becker through petitioner and developed a

professional relationship with him.    This relationship included

referrals between LFC and Becker Co., as well as personal

matters.   Feinberg considered Becker a very bright and

sophisticated accountant.   Becker retained Feinberg to protect

his interests as a promoter of SAB Foam.   Becker did not employ

Feinberg to represent the partnership, but to advise him for his

own protection.

     Herbert Dooskin (Dooskin) received a B.A. in economics from

City College of New York and an M.B.A. from Baruch College.    He

began his career as a financial accountant in 1962 with Alexander

Grant & Co. (Alexander Grant), an accounting firm currently known

as Grant Thornton.   He became a partner in 1970, and when he left

the firm in 1986 for employment by a client, Dooskin was the

managing partner of the New York office and chairman of the

firm’s executive committee.   Dooskin was primarily an auditor and

was not a tax accountant.   Dooskin had met Lewin when they were

in college, and they served together in the Army.   In 1982, Lewin

brought the SAB Foam memorandum to Dooskin for review.    Dooskin

passed the memorandum on to Ronald Sacco (Sacco), a tax

professional at Alexander Grant, for review.   According to
                              - 14 -

Dooskin, Sacco’s view was that the investment and the economics

of the deal were “dependent upon the valuation of the equipment”.

After Dooskin and Sacco each spent about 3 hours reviewing the

matter, Dooskin concluded that the proposal “looked like a

legitimate business, * * * compressing plastic, and that it was

better than most”.   Neither Dooskin nor Sacco performed an

independent analysis of the valuation of the recyclers.    All of

Dooskin’s and Sacco’s information relating to the valuation of

the recyclers came from either Lewin or the memorandum.    Dooskin

made no separate charge to Lewin for the few hours he and his

associate spent examining the memorandum.

D.   Partnership-Level Litigation

      On August 15, 1988, respondent issued a notice of proposed

adjustments to tax return to SAB Foam for 1982 and 1983.   On

September 28, 1988, Robert L. Steele (Steele), a tax partner with

Becker Co., submitted a protest letter (protest) to respondent on

behalf of SAB Management.   The protest included the following

statement:

      We hereby agree to follow the Tax Court’s decision in
      the lead cases selected in accordance with the Order of
      June 12, 1987, such cases being:

           1. Elliot I. Miller, Petitioner
           v. Commissioner of Internal Revenue, Respondent,
           Docket No. 10382-86

           2. Elliot I. Miller and Myra K. Miller, Petitioner
           Commissioner of Internal Revenue, Respondent,
           Docket No. 10383-86
                               - 15 -

            3. *Leo Fine and Judith H. Fine, Petitioners
            v. Commissioner of Internal Revenue, Respondent,
            Docket No. 35437-85

     *         *        *        *        *         *          *

     * New controlling case:

            Harold M. Provizer and Joan Provizer, Petitioners
            v. Commissioner of Internal Revenue, Respondent,
            Docket No. 27141-86.

     On January 20, 1989, on behalf of SAB Foam Associates Becker

submitted the following notice to respondent:

          In our protest dated September 28, 1988, we stated
     that the Partnership agreed to be bound by the lead
     cases (Fine, Miller and Miller).

           Due to various changes in circumstances including
     but not limited to a settlement of all such then
     pending lead cases, the Partnership hereby withdraws
     its statement to be bound by such cases or any other
     case.

Becker mailed this notice by certified mail, return receipt

requested, and signed it “Stuart Becker, Tax Matters Partner”.

     On December 9, 1991, respondent issued a notice of final

partnership administrative adjustment (FPAA) to SAB Management

for 1982.    In the FPAA, respondent disallowed all items of

income, losses, deductions, and credits reported with respect to

SAB Foam’s equipment leasing activities for 1982.       Accordingly,

respondent:    (1) Increased ordinary income by $662,556; (2)

determined that SAB Foam’s investment and business energy tax

credits with respect to the recycling equipment were zero,

instead of the $7 million claimed as the qualified investment on
                                - 16 -

the partnership tax return; and (3) increased SAB Foam’s “other

income” by $5,626.

      Subsequently, SAB Foam’s TMP filed a petition with the

Court.    On September 7, 1993, the Court entered a decision in SAB

Foam Recycling Associates 1982 v. Commissioner, docket No. 5103-

92.    This decision reflected a full concession by SAB Foam of all

items of income (loss) and credit previously claimed for the

partnership.

E.    Petitioners’ Introduction to Plastics Recycling

       In 1981 and 1982, petitioner, Lewin, and Feinberg were

partners in LFC.     In 1981 Becker offered petitioner a limited

partnership share in SAB Resource Recycling Associates (SAB

Resource), a limited partnership structured substantially like

SAB Foam.    After discussing the investment with Lewin and

Feinberg, petitioners decided to purchase a quarter unit in SAB

Resource for $12,500.     Petitioners had no experience with the

plastics materials or the plastics recycling industry.

       On January 14, 1982, petitioner received a letter from SAB

Management, as general partner of SAB Resource, signed by Becker,

stating that the transaction contemplated by SAB Resource was

complete and distributing a modest initial royalty.     On June 7,

1982, SAB Management sent a memo to the limited partners,

including petitioners, purporting to update the status of their

investment in SAB Resource.
                              - 17 -

     According to their 1982 Federal income tax return,

petitioners invested $12,500 and acquired a 1.455882-percent

limited partnership interest in SAB Foam’s profits, losses, and

capital.   On their 1982 tax return, petitioners claimed an

ordinary loss of $9,646 from SAB Foam and an investment and

energy tax credit of $20,385.7

                              OPINION

     We have decided many Plastics Recycling cases.   Most of

these cases, like the present case, have presented issues

regarding additions to tax for negligence.   See, e.g., Weitzman

v. Commissioner, T.C. Memo. 2001-215; Thornsjo v. Commissioner,

T.C. Memo. 2001-129; West v. Commissioner, T.C. Memo. 2000-389;


     7
        The parties have stipulated that petitioners’ 1982
distributable share of SAB Foam’s loss was $9,646, that he
claimed as unadjusted basis of new recovery property eligible for
investment credit $101,912 resulting in a credit of $20,385, and
that petitioners reported these amounts on their 1982 Federal
income tax return. These numbers are consistent with a quarter
unit investment of $12,500, which petitioner testified to, and a
1.455882-percent limited partnership interest.

     The parties also stipulate the accuracy of the SAB Foam 1982
income tax return and the Form 1065 Schedules K-1, Partner’s
Share of Income, Credits, Deductions, etc., attached to that
return. According to the Schedule K-1 that SAB Foam prepared for
petitioners, petitioners invested $25,000, a half unit
investment, and received a 2.911764-percent limited partnership
interest in SAB Foam. This schedule shows a distributable share
of SAB Foam loss of $19,292 and unadjusted basis of new recovery
property of $203,823. The stipulations are inconsistent, and
petitioners’ 1982 Federal income tax return is inconsistent with
his 1982 Schedule K-1 issued by SAB Foam.

     The amounts of penalty in issue have not been disputed by
the parties, although liability for penalties is in dispute.
                              - 18 -

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

Commissioner, T.C. Memo. 2000-339, affd. 301 F.3d 714 (6th Cir.

2002); 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).   Although we have

considered each case on its own particular facts and

circumstances, in all but two of the Plastics Recycling cases,8

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 group of cases, we resolved the Plastics Recycling

issues as follows:   (1) We found that each recycler had a fair

market value of not more than $50,000; (2) we 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) we sustained the additions to tax for

negligence under section 6653(a)(1) and (2); (4) we sustained the

addition to tax for valuation overstatement under section 6659

because the underpayment of taxes related directly to the


     8
        In Dyckman v. Commissioner, T.C. Memo. 1999-79, and
Zidanich v. Commissioner, T.C. Memo. 1995-382, we held the
taxpayers were not negligent with respect to their participation
in the Plastics Recycling program. Both cases involved unusual
circumstances not present in this case.
                               - 19 -

overvaluation of the recyclers; and (5) we 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.    See id.   In reaching the conclusion

that the transaction lacked a business purpose, this Court relied

heavily upon the overvaluation of the recyclers.    Similarly, in

Gottsegen v. Commissioner, T.C. Memo. 1997-314, we found that

each EPS recycler had a fair market value of not more than

$50,000 and relied heavily on the overvaluation of the recyclers

in concluding that the taxpayer was negligent and liable for

accuracy-related penalties.   See Addington v. Commissioner,

supra.

Issue 1. Section 6653(a)(1) and (2) Additions to Tax for
Negligence

     Section 6653(a)(1) provides for 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.   Section 6653(a)(2) provides for 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
                               - 20 -

exercise under the circumstances.   See Neely v. Commissioner, 85

T.C. 934, 947-948 (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 transactions.   See

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

see also Turner v. Commissioner, T.C. Memo. 1995-363 (“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.”).   The determination of negligence is factual.

     Respondent determined that petitioners are liable for

negligence under section 6653(a)(1) and (2) with respect to the

underpayment of tax attributable to petitioners’ investment in

SAB Foam.   Respondent’s determination of negligence is presumed

correct, and petitioners have the burden of proving that they

were not negligent.    See Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933); see also Addington v. Commissioner, supra;

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

T.C. Memo. 1993-480; Luman v. Commissioner, 79 T.C. 846, 860-861

(1982); Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).9


     9
        Cf. sec. 7491(c), which places the burden of production
on the Commissioner with respect to a taxpayer’s liability for
penalties and additions to tax. Sec. 7491(c) is effective for
court proceedings arising in connection with examinations
                                                   (continued...)
                              - 21 -

     A taxpayer may avoid liability for negligence under section

6653(a)(1) and (2) if he or she reasonably relied on competent

professional advice.   United States v. Boyle, 469 U.S. 241, 250-

251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

Reliance on professional advice, standing alone, is not an

absolute defense to negligence, but rather a factor to be

considered.   Freytag v. Commissioner, supra.   For reliance on

professional advice to excuse a taxpayer from the negligence

additions to tax, the taxpayer must show that the professional

had the expertise and knowledge of the pertinent facts to provide

informed advice on the subject matter.   David v. Commissioner, 43

F.3d 788, 789-790 (2d Cir. 1995), affg. T.C. Memo. 1993-621;

Goldman v. Commissioner, supra at 408; see Freytag v.

Commissioner, supra; Sann v. Commissioner, supra.

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

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

Commissioner, supra; see Berry v. Commissioner, T.C. Memo. 2001-

311; Carroll v. Commissioner, T.C. Memo. 2000-184.   Pleas of

reliance have been rejected when neither the taxpayer nor the



     9
      (...continued)
commencing after July 22, 1998. Petitioners do not contend, nor
is there evidence, that their examination commenced after July
22, 1998, or that sec. 7491(c) is applicable in this case.
                              - 22 -

advisers purportedly relied upon by the taxpayer knew anything

about the nontax business aspects of the contemplated venture.

See David v. Commissioner, supra; Goldman v. Commissioner, supra.

     Petitioners primarily contend that they were not negligent

because they reasonably relied on the memorandum and their

advisers.   Petitioner had no education or experience in plastics

materials or plastics recycling, nor had he seen a Sentinel EPS

recycler, when he invested in SAB Foam.   Moreover, he did not

consult with anyone who had such expertise in plastics or

plastics recycling.   The memorandum was essentially a sales-

oriented document, and it contained numerous warnings that

prospective investors should not rely on it.   Petitioners’

advisers either lacked knowledge about the subject of the

proposed investment or were part of the sales group and therefore

inherently and obviously unreliable.   Under the circumstances of

this case petitioners’ purported reliance on the materials in the

memorandum, as well as their advisers, does not relieve them of

liability for the additions to tax for negligence.   Petitioners

argue that they are different from the numerous other investors

who have negligently speculated on the Plastics Recycling deal

because they or their friends had a special relationship with

Becker or Miller.   As explained below, we consider this argument

to be contrary to the facts of this case and wholly unpersuasive.
                                - 23 -

     A.    The Memorandum and Petitioner’s Colleagues

     1.     The Memorandum

     Petitioner contends that before purchasing shares in SAB

Foam he read the memorandum and its accompanying materials.      The

purported value of the recyclers is what generated the deductions

and credits.     The memorandum clearly reflects this circumstance.

The recyclers, which in fact have a value of no more than $50,000

each, were reported by SAB Foam to have a basis of $1,750,000

each.     As a result of the purported value of the recyclers,

petitioners’ investment of $12,500 produced for them on their

1982 tax return claimed tax credits of $20,385 and deductions of

$9,646.     The direct benefits claimed on petitioners’ tax return,

from the tax credits alone, far exceeded their cash investment.

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

177, “except for a few weeks at the beginning, petitioners never

had any money in the deal.”    Under these circumstances, a

reasonably prudent person would have asked a qualified adviser

whether such a windfall were not “too good to be true.”    See

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

     The memorandum included numerous caveats and warnings

regarding the business and tax risks of SAB Foam.     It stated that

the offering involved a high degree of risk and that each offeree

should consult his own professional advisers as to legal, tax,

accounting, and other matters relating to any purchase of any
                                - 24 -

units in the partnership.    A careful consideration of the

memorandum, and the discussion of high writeoffs and risk of

audit, would have alerted a prudent investor to question the

nature of the promised tax benefits.

     Moreover, the tax opinion made clear that there was no

independent evaluation of the SAB Foam transactions.    The opinion

indicated that Boylan & Evans relied on the statements of the

general partner and “other statements of fact and opinion

furnished to us by persons familiar with the transaction

described in the Memorandum.”    Boylan & Evans clearly based its

conclusion about the fair market value of the recyclers 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 SAB transactions and the

enormous price paid for the recyclers (largely with nonrecourse

notes exchanged in a plainly circular transaction), petitioner

should have questioned whether the prices were in fact negotiated

at arm’s length.   Under these circumstances, petitioner’s claim

that he reasonably and in good faith relied on the tax opinion is

unconvincing.   A sophisticated, experienced, and intelligent

lawyer like petitioner would know, or at least should know,

better than to rely blindly upon a document with the warnings and

defects of the memorandum.
                              - 25 -

     Petitioner’s contention that he reasonably relied on the

expert opinions of Ulanoff and Burstein is unjustified.     He

testified that he had discussed the valuation of the recyclers

with Becker, Lewin, and Feinberg, and that Becker had told him he

could rely on the valuations in the memorandum.    As discussed

below, Becker testified at length in Jaroff v. Commissioner, T.C.

Memo. 1996-527, and he said no such thing.   Neither Ulanoff nor

Burstein was an expert in plastics or plastics recycling, and

both relied on information provided by PI and other parties

related to the transaction in providing their reports.    In

addition, Ulanoff and Burstein each owned an interest in at least

one partnership that owned recyclers as part of the Plastics

Recycling program.   See, e.g., Jaroff v. Commissioner, T.C. Memo.

1996-527.   Petitioner did not independently obtain these

individuals’ advice but rather received their reports as part of

the promotional material received from SAB Foam.    Reliance on the

memorandum, and the reports therein, is simply an inadequate

defense for petitioners.   Given the well-disclosed fact that the

investment and energy tax credits generated by SAB Foam depended

on the fair market value of the recyclers, petitioner should have

made inquiries about the value of the recyclers rather than

merely relying on the promotional reports of Ulanoff and

Burstein.
                               - 26 -

     2.   Becker

     As we have recited above, petitioner contends that both he

and his partner, Feinberg, had a special relationship with Becker

and therefore were entitled to rely upon him as his other clients

were not.

     At the outset the Court noted that Becker was on

petitioner’s witness list, but that petitioner’s counsel had

decided not to call him.    The Court questioned counsel in this

matter because of petitioner’s specific reliance on his

relationship with Becker.    However, petitioner’s obviously well-

prepared and capable counsel adhered to his decision not to call

upon Becker concerning the supposedly special relationship but,

instead, to rely upon Becker’s extensive testimony in the Jaroff

case.10   See Bresler v. Commissioner, 65 T.C. 182, 188 (1975),


     10
        The colloquy concerning petitioner’s counsel’s failure
to provide Becker’s testimony about his close relationship with
petitioner and Feinberg is as follows:

     THE COURT: I didn’t hear you mention Mr. Becker’s name
     as a witness.

     MR. RIZEK: We are not going to call Mr. Becker as an
     additional witness. I think the 300 pages or so that
     we stipulated to in the supplemental stipulation are
     more than adequate to cover any points we wanted to
     establish with Mr. Becker.

     THE COURT: Well, that may be, but you’re going to talk
     a lot about how these parties all had a relationship
     with Mr. Becker and all that sort of thing and you’re
     not calling Mr. Becker?

                                                     (continued...)
                              - 27 -

Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d

409 (5th Cir. 1968), and Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947), to the effect that the failure of a party to offer

available testimony gives rise to the inference that it would

have been unfavorable to his contention.   Accordingly, we review

Becker’s testimony in the Jaroff case below and consider the

extent of his expertise and the likelihood that he gave special

assurances or guaranties to petitioner.

     Becker had no education, special qualifications, or

professional skills in plastics engineering, plastics recycling,

or plastics materials.   In evaluating the Plastics Recycling

transactions and organizing the SAB recycling partnerships,

Becker supposedly relied upon:   (1) The memorandum and the

accompanying materials; (2) a tour of the PI facility in Hyannis;

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

Canno (Canno), a client of Becker Co.; and (5) his investigation

of the reputation and background of PI and persons involved in

the transactions.




     10
      (...continued)
     MR. RIZEK: We are not calling Mr. Becker. We don’t
     think it’s necessary, Your Honor. I don’t think
     there’s going to be any doubt at the conclusion of the
     evidence that’s presented here that these Petitioners
     had fairly long standing relationships independent of
     this particular transaction with Mr. Becker.
                              - 28 -

     Despite his lack of knowledge regarding the product, the

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

Plastics Recycling transactions, Becker did not hire an expert in

plastics materials or plastics recycling.   The only independent

person having any connection with the plastics industry with whom

Becker spoke was Canno.   Canno was part owner and the production

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

bags.   Becker spoke to Canno about the recyclers and PI, but he

did not hire or pay him for any advice.   Canno did not visit the

PI plant in Hyannis, see or test a recycler, or see or test any

of the output from a recycler or the recycled resin pellets after

further processing.   According to Becker, Canno endorsed the

Plastics Recycling transactions after reviewing the memorandum.

When asked whether Canno had performed any type of comparables

analysis, Becker replied:   “I don’t know what Mr. Canno did.”

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

viewed a recycler in operation, and saw products that were

produced from recycled plastic.   Becker claims that PI personnel

told him that the recycler was the only machine of its type.     In

fact, the recycler was not unique; instead, as we have found in

many cases involving substantially similar machines, several

comparable machines were available in 1981 and 1982 ranging in

price from $20,000 to $200,000.   See, e.g., Provizer v.

Commissioner, T.C. Memo. 1992-177.
                              - 29 -

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

research and development (i.e., 10 to 12 years’ worth) into the

creation and production of the recyclers.    When he asked to see

the cost records for some kind of independent verification,

however, his request was denied.   Becker was informed that such

information was proprietary and secret, and that he would just

have to take PI’s representations as true.   Becker decided to

accept PI’s representations after speaking with Miller (corporate

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

recycler), and a surrogate judge from Rhode Island who did

business in the Boston-Cape Cod area (and who had no experience

in engineering or plastics materials).   Becker testified that he

was allowed to see PI’s internal accounting controls regarding

the allocation of royalty payments and PI’s record-keeping system

in general.   In Provizer v. Commissioner, supra, though, this

Court found that “PI had no cost accounting system or records.”

     Becker confirmed in his testimony that he relied on the

memorandum and discussions with PI personnel to establish the

value and purported uniqueness of the recyclers.   Becker

testified that he relied upon the reports of Ulanoff and Burstein

contained in the offering materials, despite the fact that:    (1)

Ulanoff’s report did not contain any hard data to support his

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

Becker did not know whether Burstein was an engineer; and (4)
                                - 30 -

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

expert.

     Becker further explained in his testimony that in the course

of his practice when evaluating prospective investments for

clients, he focuses on the economics of the transaction and

investigates whether there is a need or market for the product or

service.   The records indicate, though, that Becker overlooked

several red flags regarding the economic viability of and market

for the recyclers.   The memorandum warned that there was no

established market for the recyclers.    Becker never saw any

marketing plans for selling the pellets (the product of the

recyclers) or leasing the recyclers.     He accepted representations

by PI personnel that they would be marketing the recyclers to

clients and that there was a sufficient base of end-users for the

machines; yet he never saw PI’s client list.    At the time of the

closing of the various partnerships, Becker did not know who the

end-users were or whether there were any end-users actually

committed to the transaction.

     Becker purportedly checked the price of the pellets by

reading trade journals of the plastics industry.    He did not,

however, use those same journals to investigate the recyclers’

purported value.   In concluding that the SAB partnerships would

be economically profitable, Becker made two assumptions that he

concedes were unsupported by any hard data:    (1) That there was a
                               - 31 -

market for the pellets, and (2) that market demand for them would

increase.

     Becker had a financial interest in the SAB recycling

partnerships generally.    Directly or indirectly he received fees

of more than $500,000 with respect to the SAB recycling

partnerships.   Becker also received fees for investment advice

from some individual investors and from the SAB recycling

partnerships for preparing their partnership returns.   As Becker

himself indicated in his testimony, potential investors could not

have read the memorandum and remained ignorant of the financial

benefits accruing to him.

      Petitioner is a very well-educated and highly accomplished

and sophisticated attorney.    Without question, he possessed the

intellect, skills, experience, and resources to have the

viability of the SAB transactions thoroughly investigated either

by himself or by an independent qualified expert.   Petitioners

claim that they relied on Becker for the bona fides and viability

of the SAB transactions.    Yet Becker’s expertise was in taxation,

not plastics materials or plastics recycling, and his

investigation and analysis of the Plastics Recycling transactions

reflected this circumstance.    Moreover, Becker indicated that he

was careful not to mislead any of his clients regarding the

particulars of his limited investigation.   As he put it:   “I

don’t recall saying to a client I did due diligence * * *
                               - 32 -

[Rather,] I told [my clients] precisely what I had done to

investigate or analyze the transaction.   I didn’t just say I did

due diligence, and leave it open for them to define what I might

or might not have done.”11

     The purported value of the recyclers generated the

deductions and credits in this case, and that circumstance was

clearly reflected in the memorandum.    Certainly Becker recognized

the nature of the tax benefits and, given his education and

experience, petitioner should have recognized it as well.    Yet

neither petitioner nor Becker verified the purported value of the

recyclers.   Becker confirmed in his testimony incorporated in

this record by stipulation that he relied on PI for the value of

the recyclers.   Investors as sophisticated as petitioner either

learned or should have learned the source and shortcomings of

Becker’s valuation information when he reported to them and

“precisely” disclosed “what [he] had done to investigate or

analyze the transaction.”    Accordingly, we hold that petitioners

did not in good faith or reasonably rely on Becker as an expert

or qualified professional working in the area of his expertise to


     11
        We note that petitioner testified: “I remember we talked
about the valuations that were obtained and I remember him
telling me in words or in substance that I could rely on those
valuations.” We consider petitioner’s testimony inconsistent
with Becker’s testimony, and as to this matter we consider
Becker’s testimony reliable and petitioner’s alleged recollection
unreliable. See supra note 10 to the effect that this problem
was known to petitioner and his counsel, who chose not to call
upon Becker for clarifying testimony.
                              - 33 -

establish the fair market value of the recyclers and the

viability or bona fides of the SAB transactions.   Becker never

assumed such responsibility, and he fully described the

particulars of his investigation, taking care not to

mischaracterize it as “due diligence”.

     In the end, petitioners indirectly and Becker directly

relied upon PI personnel for the value of the recyclers and the

economic viability of the SAB Foam transactions.   See Vojticek v.

Commissioner, T.C. Memo. 1995-444, to the effect that advice from

such persons “is better classified as sales promotion.”    As

explained above, Becker did not have any education, special

qualifications, or professional skills in plastics materials or

plastics recycling.   A taxpayer may rely upon his adviser’s

advice and expertise (in this case accounting and tax advice)

only where such reliance is objectively reasonable, but it is not

reasonable or prudent to rely upon a tax adviser regarding

matters outside his field of expertise or with respect to facts

that he does not verify.   See Addington v. Commissioner, 205 F.3d

at 58; Goldman v. Commissioner, 39 F.3d at 408; Skeen v.

Commissioner, 864 F.2d 93 (9th Cir. 1989), affg. Patin v.

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

Memo. 1994-329, affd. 72 F.3d 123 (3d Cir. 1995); Rogers v.

Commissioner, T.C. Memo. 1990-619.
                              - 34 -

     3.   Miller

     Petitioner also contends that he reasonably relied on

Miller.   Most of petitioner’s interaction with Miller was

indirect and through his partner Lewin.    When first approached by

Lewin, in response to the offering memorandum for SAB Resource,

Miller was supportive of the investment.   With regard to the

value of the recyclers, Miller was supportive of the expert

reports by Ulanoff and Burstein.   The memorandum disclosed that

Miller was a 9.1-percent shareholder of F&G, was corporate

counsel to PI, and represented Raymond Grant, the sole

shareholder of ECI.   The memorandum also noted that “Miller

[would] receive substantial additional compensation for

representing PI in connection with this transaction.”    Not

surprisingly, Miller was supportive of SAB Foam.

     Nothing in the record suggests that Miller had any expertise

or knowledge with respect to plastics or plastics recycling, or

that petitioners believed he had any such knowledge or expertise.

There is also no showing that petitioner had any special or

enduring friendship with Miller.   Petitioner’s relationship with

Miller was indirect, through Lewin’s tenuous acquaintance with

Miller.   Given the extent to which Miller was immersed in the SAB

partnerships, how much he stood to benefit financially, and his

lack of expertise regarding plastics materials and plastics

recycling, we do not consider petitioners’ purported reliance on
                                - 35 -

Miller reasonable or in good faith.      “It is unreasonable for

taxpayers to rely on the advice of someone who they should know

has a conflict of interest.”    Addington v. Commissioner, supra at

59.   See Vojticek v. Commissioner, supra, to the effect that

advice from such persons “is better classified as sales

promotion”.

      4.   Feinberg and Lewin

      Petitioner also relied upon his partners Feinberg and Lewin.

After Becker retained Feinberg to protect Becker’s interests as

general partner of SAB Foam, Feinberg reviewed the memorandum and

instructed Becker to verify the information in that document.

Feinberg’s knowledge of the transaction was derived from his

review of the memorandum and his discussions with Becker.      We

already have established that petitioners may not reasonably rely

on Becker’s advice.   Since Feinberg himself lacked the expertise

and knowledge of the pertinent facts to provide informed advice

to petitioner, any advice he gave petitioners about SAB Foam

plainly was of very limited value.       See David v. Commissioner, 43

F.3d 788 (2d Cir. 1995).    Feinberg was a partner and a coinvestor

rather than an adviser on whom petitioners could rely with

respect to the transaction here.

      We also hold that it was not reasonable for petitioners to

rely upon the advice received from Lewin.      As an associate for

Miller & Summit, Lewin may have learned about business practices
                                - 36 -

of PI long ago, but that in no way establishes him as an

authority about PI or the plastics industry.     When Lewin was

employed by Miller and was assigned work for PI, that company was

located in New Jersey under different ownership and had not yet

manufactured any recyclers.     By the time of the transactions in

issue PI had moved to Hyannis, Massachusetts.     Nothing in the

record establishes that Lewin had any special knowledge about PI

or its business in 1981-82.     Lewin’s knowledge of SAB Foam is

derived primarily from the memorandum and Miller.

     B.   Alleged Experts

     Petitioners contend that Dooskin and Sacco provided the

requisite independent analysis of the investment.     We disagree.

Dooskin and Sacco, neither of whom had any knowledge of the

plastics recycling industry, reviewed the memorandum for, at

most, 7 hours combined.     Their only knowledge of SAB Foam came

from the memorandum (i.e., promotional material).     Dooskin

testified that he informed Lewin the investment “passed muster”,

but that the economics of the investment “was dependent upon the

valuation of the equipment”.     Petitioners, however, failed to

undertake the necessary due diligence and seek a thorough and

independent analysis of the value of the recyclers despite

Dooskin’s warning.   We are not convinced that Dooskin’s and

Sacco’s review of the memorandum was any more than a very limited

inquiry on behalf of Lewin.     Neither petitioner nor his partners
                              - 37 -

made any separate payment for professional services by Dooskin

and Sacco, and consequently they could not expect the accountants

to do more than read the memorandum for form and apparent

professionalism, potential benefits, and obvious dangers.

     C.   Petitioners’ Relationship With Becker and Miller

     Regardless of the foregoing, petitioners contend that

petitioner’s alleged “deep and longstanding professional

relationship” with his advisers justified his reliance on them.

We disagree.   See Barlow v. Commissioner, T.C. Memo. 2000-339;

cf. Dyckman v. Commissioner, T.C. Memo. 1999-79; Zidanich v.

Commissioner, T.C. Memo. 1995-382.     Petitioner was sufficiently

experienced and sophisticated to know that SAB Foam was a tax

shelter, and that the value of the transaction depended on the

value of the underlying assets, and he failed to consult either

an independent appraiser or anyone with expertise in plastics

recycling.

     In addition, the evidence does not support petitioners’

claims that he had a unique and special relationship with his

advisers Becker and Miller.   Cf. Dyckman v. Commissioner, supra

(absolving taxpayers from the negligence penalty, in part,

because of the long-term special relationship of trust and

friendship between the taxpayers and their adviser).

     First, petitioner claims to have a particularly close

relationship with Becker.   Petitioner testified that he “had an
                               - 38 -

unusual relationship with Stu”.    Becker, however, testified that

he had a “very close relationship with the majority of [his]

clients.”    Petitioner was not singled out, and nothing in the

evidence demonstrates that Becker treated petitioner any

differently from any other client.12    Becker offered the

investments in SAB Foam and other similar partnerships to many of

his clients.

      Second, petitioners contend that Lewin “kept in touch” with

Miller over the 10 years after he left Miller & Summit.      At

trial, however, Miller testified that after Lewin left the firm,

they “rarely” kept in touch.    On this matter, we consider Miller

a more reliable witness than either petitioner or Lewin.

Miller’s testimony clearly shows that he had no special and close

relationship with Lewin during the years in issue.    Petitioners

assert that Lewin also had an especially close relationship with

PI.   Lewin testified, however, that he did not do any work for PI

after he left Miller & Summit, and that was 10 years before the

years in issue.    As noted above, by the time in issue PI was



      12
           Becker testified:

      there is nothing different that I told to one client
      about the same issue than I told to another client.
      There may have been things I said to one client that
      might not have been said to another. But, if I spoke
      about one issue while I might not have used precisely
      the same words, in substance, * * * what was said to
      one client on one matter, was said to every other
      client when that matter was discussed.
                                - 39 -

under new ownership in a new location, and there is no reason to

believe Lewin had any great knowledge about the company or its

business in 1982.

     D.   Miscellaneous

     We dismiss petitioner’s contention that his allegedly

successful 1981 investment in SAB Resource evidenced the

reasonableness of the 1982 investment in SAB Foam.    Petitioners

received a royalty payment within 3 months of their investment in

addition to the credits and deductions.    Petitioners argue that

this makes the case different from other similar cases and makes

their subsequent investment in SAB Foam reasonable.    The modest

royalty was not sufficient to change the character of the deal.

     Petitioners’ assertion that the amount invested was

“relatively small” is irrelevant when considering the amount of

tax benefits quickly claimed.    The tax benefits and risks of the

transaction were substantial, and they were set forth in the

memorandum for anyone to see.    Undoubtedly investors as

sophisticated as petitioner and his partners knew the size of the

potential benefits and risks here or should have known them if

they had been properly careful.

     E.   Conclusion as to Negligence

     Under the circumstances of this case, petitioners failed to

exercise due care in claiming large deductions and tax credits

with respect to SAB Foam on their Federal income tax return.   In
                                 - 40 -

view of petitioner’s sophistication, experience, and education,

it was not reasonable for petitioners to rely as they did on an

interconnected group of advisers, promoters, and insiders, none

of whom had any expertise in plastics recycling.    Petitioner

should have been able to determine that the recyclers were not

unique, that they were not worth the amount ascribed to them, and

that SAB Foam lacked economic substance and had no potential for

profit.    None of the so-called advisers undertook a good faith

investigation of the fair market value of the recyclers or of the

underlying economic viability or financial structure of SAB Foam.

Further, most of petitioners’ professional advisers had a

financial interest in either SAB Foam or another similar

partnership.   The Plastics Recycling transaction was a sham, and,

as a sophisticated attorney, petitioner should have been able to

figure this out if he really had tried.    Upon consideration of

the entire record, respondent’s determinations that petitioners

are subject to negligence penalties under section 6653(a)(1) and

(2), with respect to their tax return for 1982, are sustained.

Issue 2.   Piggyback Agreement

     Petitioners argue that they are entitled to the benefits of

the Stipulation of Settlement for Tax Shelter Adjustments

(piggyback agreement) applicable to Plastics Recycling cases.

Petitioners claim they are in essentially the same position as

the taxpayers in Fisher v. Commissioner, T.C. Memo. 1994-434, and
                                - 41 -

Estate of Satin v. Commissioner, T.C. Memo. 1994-435.

Additionally, petitioners argue that in the stipulation of facts

in the present case, “the parties unequivocally stipulated that

petitioner agreed to be bound to the lead cases under the

piggyback agreement.   (Supp. Stip., pars. 34-35).”   Respondent

disagrees with these arguments, and we agree with respondent.

     In Fisher and Estate of Satin this Court summarized the

background of the piggyback agreement in the Plastics Recycling

group of cases.    On June 12, 1987, this Court ordered that the

lead counsel for the taxpayers in the Plastics Recycling cases

and respondent designate test or lead cases which would present

all issues involved in the Plastics Recycling cases.    In a letter

dated August 14, 1987, respondent notified the Court that lead

counsel for the taxpayers and respondent had selected the

following docketed cases as the lead cases in the Plastics

Recycling group:   (1) Fine v. Commissioner, docket No. 35437-85;

(2) Miller v. Commissioner, docket No. 10382-86; and (3) Miller

v. Commissioner, docket No. 10383-86.    In early 1988, the Fine

case concluded without trial.    The parties, thereafter, selected,

and the Court designated, the case of Provizer v. Commissioner,

docket No. 27141-86, as a lead case along with the two Miller

cases.

     After the lead counsel for the taxpayers and respondent

agreed upon the test cases, respondent prepared a piggyback
                             - 42 -

agreement with respect to the Plastics Recycling project so that

taxpayers who did not wish to litigate their cases individually

could agree to be bound by the results of the test cases.     Fisher

v. Commissioner, supra; Estate of Satin v. Commissioner, supra.

The piggyback agreement, as set forth in the Fisher and Estate of

Satin cases, provides as follows:

     With respect to all adjustments in respondent’s notice
     of deficiency relating to the Plastics Recycling tax
     shelter, the parties stipulate the following terms of
     settlement:

     1. THE ABOVE ADJUSTMENT IS THE ONLY ISSUE IN THIS
     CASE;

     2. The above adjustment(s), as specified in the
     preamble, shall be determined by application of the
     same formula as that which resolved the same tax
     shelter adjustments with respect to the following
     taxpayer(s):

     Names(s): Harold M. Provizer and Joan Provizer v.
     Commissioner of Internal Revenue
     Tax Court Docket No.: 27141-86

     Names(s): Elliot I. Miller v. Commissioner of Internal
     Revenue
     Tax Court Docket No.: 10382-86

     Names(s): Elliot I. Miller and Myra K. Miller v.
     Commissioner of Internal Revenue
     Tax Court Docket No.: 10383-86

     (hereinafter the CONTROLLING CASE)

     3. All issues involving the above adjustment(s) shall
     be resolved as if the petitioner(s) in this case
     was/were the same as the taxpayer(s) in the CONTROLLING
     CASE;

     a. If the Court finds that any additions to tax or the
     section 6621(c) interest are applicable to the
     underpayment attributable to the above-designated tax
                             - 43 -

     shelter adjustment(s), the resolution of the tax
     shelter issue and the applicability of such addition to
     tax or interest to that tax shelter issue in the
     CONTROLLING CASE, whether by litigation or settlement,
     shall apply to petitioner(s) as if the petitioner(s) in
     this case was/were the same as the taxpayer(s) in the
     CONTROLLING CASE;

     4. If the adjustment is resolved in the CONTROLLING
     CASE in a manner which affects the same issue in other
     years (e.g., * losses in later years or affects
     depreciation schedules), the resolution will apply to
     petitioners’ later years as if the petitioners in this
     case was/were the same as the taxpayer(s) in the
     CONTROLLING CASE;

     5. A decision shall be submitted in this case when the
     decision in the CONTROLLING CASE (whether litigated or
     settled) becomes final under I.R.C. sec. 7481;

     6. If the CONTROLLING CASE is appealed, the
     petitioner(s) consent(s) to the assessment and
     collection of the deficiency(ies), attributable to the
     adjustment(s) formulated by reference to the Tax
     Court’s opinion, notwithstanding the restrictions under
     I.R.C. sec. 6213(a);

     7. The petitioner(s) in this case will testify or
     provide information in any case involving the same tax
     shelter adjustment, if requested; and

     8. The petitioner(s) in this case consent(s) to the
     disclosure of all tax returns and tax return
     information for the purpose of respondent’s discovering
     or submitting evidence in any case involving the same
     shelter adjustment(s).

The piggyback agreement was signed by counsel for the taxpayers

and respondent in the Fisher and Estate of Satin cases and filed

with the Court on September 12, 1988.   Thereafter, the two Miller

cases were settled, and agreed decision documents in those cases

were entered by the Court on December 22, 1988.   The settlement

provided that the taxpayers were not liable for the additions to
                              - 44 -

tax under section 6653(a) or increased interest for tax-motivated

transactions under section 6621(c) (Miller settlement).     Fisher

v. Commissioner, T.C. Memo. 1994-434; Estate of Satin v.

Commissioner, T.C. Memo. 1994-435.      This Court decided Provizer

v. Commissioner, T.C. Memo. 1992-177, on March 27, 1992.     In our

Provizer opinion, and in the affirmance, all of the Plastics

Recycling issues were decided for respondent, including the

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

under section 6621(c).   Respondent did not notify any other

taxpayers of the settlement of the Miller cases.     Respondent

ultimately attempted collection from the Fisher and Estate of

Satin taxpayers pursuant to our decision in the Provizer case and

paragraph 5 of the piggyback agreement set forth above.     For

reasons explained more fully in our above-cited opinions, we held

that the taxpayers in the Fisher and Estate of Satin cases were

entitled to be bound by the Miller settlement.

     Petitioners contend that the protest letter is the

equivalent of a piggyback agreement that would entitle them to

the Miller settlement.   We disagree.    The piggyback agreement is

an intricately developed contract with specific provisions

tailored to the Plastics Recycling group of cases.     Only the

execution of a piggyback agreement by both petitioners and

respondent could reflect the parties’ mutual assent to settle the

instant case based on the disposition of the lead case.     See
                              - 45 -

Fisher v. Commissioner, supra, and Estate of Satin v.

Commissioner, supra, “in which” counsel for the taxpayers and

respondent’s counsel signed the piggyback agreement.    Neither

petitioners’ counsel (or counsel for the general partner) in this

case nor respondent’s counsel executed a piggyback agreement.

Petitioners’ contention that the protest letter approximates a

piggyback agreement is mistaken.   At best, the protest letter

indicates an intention that petitioners might be willing to enter

into a formal piggyback agreement, but nothing in the record

indicates that petitioners followed up on any such intent.

     The protest letter itself indicates an intention “to follow

the Tax Court’s decision in the lead cases” but omits any mention

of following a settlement of the lead cases, although that

possibility is specifically mentioned in paragraph 5 of the

piggyback agreement.   Moreover, within a month after the Miller

settlement was executed, Becker as TMP, having become aware of

that settlement, submitted to respondent a clarification that SAB

Foam did not wish to be bound by the settlement and, therefore,

withdrew any statement of intention to be bound by any other

case.

     The facts of this case are that petitioners’ TMP did not

execute the piggyback agreement.   Instead he made it clear that

he did not wish to settle the case but to rely upon the results

of litigation.   Petitioners’ unpersuasive argument is that, now
                              - 46 -

that the litigation of the lead case and many others has been

decided unfavorably to their position, they should be considered

to have accepted the piggyback agreement that their TMP

explicitly rejected.

     Additionally, petitioners argue that a portion of the

stipulation of facts amounts to a concession by respondent’s

counsel that petitioners are entitled to the Miller settlement.

The stipulation paragraphs are as follows:

     34.   On September 28, 1988 Robert L Steele, on behalf
           of the Tax Matters Partner of SAB Foam Recycling
           Associates, filed a protest against the adjustments
           to the 1982 and 1983 tax years proposed by the
           Internal Revenue Service resulting from an examination
           of SAB Foam Recycling Associates. In such protest the
           Tax Matters Partner of SAB Foam Recycling Associates
           agreed to follow the Tax Court’s decision in the
           following lead cases: Miller v. Commissioner,
           Docket No. 10382-89; Miller v. Commissioner, Docket No.
           10383-86; and Provizer v. Commissioner, Docket No.
           27141-86. A copy of the protest of the Tax Matters
           Partner of SAB Foam Recycling Associates dated
           September 28, 1988 is attached hereto and marked as
           Exhibit 10-J [See supra p. 14.]

     35.   On January 20, 1989 Stuart Becker, as the
           Tax Matters Partner of SAB Foam Recycling Associates,
           sent a letter to the District Director of the Internal
           Revenue Service withdrawing the September 28, 1988
           agreement to be bound by the lead cases. A copy of the
           January 20, 1989 letter is attached hereto as Exhibit
           11-J. [See supra pp. 14-15.]

     The stipulation paragraphs quoted above merely summarize the

language of the protest letter and the withdrawal letter and

refer to attached exhibits for the specific language.   The

language of the stipulation does not support the conclusion that
                                - 47 -

respondent agreed that the protest letter was equivalent to an

executed piggyback agreement.    Petitioners’ counsel essentially

argues that by stipulation respondent’s counsel has agreed to

concede the issues in dispute in this case.    The language of the

stipulation does not support this startling conclusion, nothing

else in the record supports it, and respondent’s counsel clearly

and explicitly has denied it.    We disagree with petitioners’

counsel’s interpretation of the stipulation of facts.

     Accordingly, we hold that petitioners are not entitled to

the benefits of the Miller settlement or the piggyback agreement

concerning Plastics Recycling cases.

     To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
