                        T.C. Memo. 1996-14



                      UNITED STATES TAX COURT



          THOMAS E. AND JOAN A. BENNETT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

        THEODORE H. AND MARILYN F. BLACK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 31758-85, 36202-86.   Filed January 22, 1996.



     Elliot I. Miller, for petitioners.

     Maureen T. O'Brien and Paul T. Colleran, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   These consolidated cases were assigned to

Special Trial Judge Norman H. Wolfe pursuant to the provisions of
                               - 2 -

section 7443A(b)(4) and Rules 180, 181, and 183.1    They were

tried and briefed separately but consolidated for purposes of

opinion.   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:     These cases are part of the

Plastics Recycling group of cases.     For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without

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

transaction in these cases is substantially identical to the

transaction considered in the Provizer case.

     In a notice of deficiency, respondent determined

deficiencies in the 1978, 1979, and 1981 joint Federal income

taxes of petitioners Bennett in the respective amounts of

$19,120, $954, and $37,715.2   Respondent also determined that

interest on deficiencies accruing after December 31, 1984, would

be calculated at 120 percent of the statutory rate under section




1
     All section references are to the Internal Revenue Code, in
effect for the years in issue, unless otherwise indicated. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
2
     The deficiencies in the Bennett case, docket No. 31758-85,
for taxable years 1978 and 1979 result from disallowance of
investment tax credit carrybacks and business energy credit
carrybacks from taxable year 1981.
                                - 3 -

6621(c).3    In an amendment to answer, respondent asserted the

following:    For taxable years 1978 and 1979, additions to tax for

negligence under section 6653(a); for taxable years 1978, 1979,

and 1981, additions to tax for valuation overstatement under

section 6659; and for taxable year 1981, additions to tax 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 the

underpayment attributable to negligence.4

     In a notice of deficiency, respondent determined a

deficiency with respect to the joint Federal income tax return

filed by petitioners Black for 1981 in the amount of $74,111.

Respondent also determined additions to tax in the amount of

$7,411 under section 6661, in the amount of $3,705 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 the

underpayment attributable to negligence.    In an answer to

3
     The notice of deficiency refers to sec. 6621(d). This
section was redesignated as sec. 6621(c) by sec. 1511(c)(1)(A) of
the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744
and repealed by sec. 7721(b) of the Omnibus Budget Reconciliation
Act of 1989 (OBRA 89), Pub. L. 101-239, 103 Stat. 2106, 2399,
effective for tax returns due after Dec. 31, 1989, OBRA 89 sec.
7721(d), 103 Stat. 2400. The repeal does not affect the instant
case. For simplicity, we will refer to this section as sec.
6621(c). The annual rate of interest under sec. 6621(c) for
interest accruing after Dec. 31, 1984, equals 120 percent of the
interest payable under sec. 6601 with respect to any substantial
underpayment attributable to tax-motivated transactions.

4
     Corresponding dollar figures were not set out by respondent
for these asserted additions to tax.
                               - 4 -

petition, respondent asserted that interest on deficiencies

accruing after December 31, 1984, would be calculated at 120

percent of the statutory rate under section 6621(c).   See supra

note 3.   In an amendment to answer, respondent asserted an

addition to tax under section 6659 for taxable year 1981.     See

supra note 4.

     Petitioners each filed a Stipulation of Settled Issues

relating to their participation in the "Plastics Recycling

Program" and the additions to tax relating thereto.    The parties

stipulated that petitioners Bennett and Black are not entitled to

any deductions, losses, investment tax credits, business energy

credits, or any other tax benefits claimed on their tax returns

as a result of their participation in the "Plastics Recycling

Program".   The parties further stipulated that the underpayments

in income tax attributable to petitioners' participation in the

"Plastics Recycling Program" are substantial underpayments

attributable to tax motivated transactions, subject to the

increased rate of interest established under section 6621(c).

     Respondent and petitioners Bennett also filed a stipulation

of settled issues with respect to tax benefits claimed in 1981

flowing from their interests in three other limited partnerships

not at issue herein:   Ludlow Oil & Gas Drilling Program 1980,

Monroe Oil & Gas Drilling Program 1980 Ltd., and Riefenberger No.

1 1981 Ltd.
                                - 5 -

     Respondent's determination of an addition to tax under

section 6661 with respect to petitioners Black was not

specifically addressed in the stipulation of settled issues nor

elsewhere in the record.    However, the third stipulation in the

stipulation of settled issues provides:

     This stipulation [of settled issues] resolves all
     issues that relate to the items claimed on petitioners'
     tax returns resulting from their participation in the
     Plastics Recycling Program, with the exception of
     petitioners' potential liability for additions to the
     tax for valuation overstatements under I.R.C. §6659 and
     for negligence under the applicable provisions of
     I.R.C. §6653(a).

Because of this stipulation, we consider any issue with respect

to the addition to tax under section 6661 to be settled.

     The issues for decision in these consolidated cases are:

(1) Whether petitioners are liable for additions to tax for

negligence or intentional disregard of rules or regulations under

section 6653(a); and (2) whether petitioners are liable for the

addition to tax under section 6659 for an underpayment of tax

attributable to valuation overstatement.

                           FINDINGS OF FACT

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

The stipulated facts and attached exhibits are incorporated by

this reference.   Petitioners Bennett resided in Avon,

Connecticut, when their petition was filed.   Petitioners Black

resided in New Canaan, Connecticut, when their petition was

filed.
                               - 6 -

     During 1981, Thomas E. Bennett (Bennett) was a vice

president at Ingersoll-Rand Company (Ingersoll-Rand).    His

spouse, Joan A. Bennett, was not employed outside the home.

Theodore H. Black (Black) was also a vice president of Ingersoll-

Rand during 1981.   His wife, Marilyn F. Black, was not employed

outside the home.

     For their respective investments of $25,000, petitioners

Bennett and Black each acquired a 2.605-percent interest in the

limited partnership Empire Associates (Empire) during 1981.    As a

result of the passthrough from Empire, on their respective 1981

Federal income tax returns petitioners each deducted an operating

loss in the amount of $20,510 and claimed investment tax credits

in the amount of $42,402.   Petitioners Bennett used $22,328 of

the claimed credits on their 1981 return and carried back the

unused portion of the credits to 1978 and 1979 in the respective

amounts of $19,120 and $954.   Respondent disallowed petitioners'

claimed deductions and credits related to Empire.   In docket No.

31758-85, respondent disallowed petitioners Bennett's claimed

deductions related to three previously mentioned partnerships not

at issue herein.

     The facts of the underlying transaction in these cases are

substantially identical to those in Provizer v. Commissioner,

T.C. Memo. 1992-177, and may be summarized as follows.    In 1981,

Packaging Industries, Inc. (PI), manufactured and sold seven

Sentinel expanded polyethylene (EPE) recyclers to ECI Corp. for
                               - 7 -

$6,867,000 ($981,000 each), of which $533,000 was paid in cash.

ECI Corp., in turn, resold the recyclers to F & G Corp. for

$8,138,667 ($1,162,666 each), of which $618,000 was paid in cash.

F & G Corp. then leased the recyclers to Empire, which licensed

the recyclers to FMEC Corp., which sublicensed them back to PI.

All of the monthly payments required among the entities in the

above transactions offset each other.   These transactions were

accomplished simultaneously.   We refer to these transactions

collectively as the Empire transaction.

     In Provizer v. Commissioner, supra, we examined the

Clearwater transaction.   In the Clearwater transaction, PI sold

six EPE recyclers to ECI Corp. for $981,000 each, and ECI, in

turn, resold the recyclers to F & G Corp. for $1,162,666 each.       F

& G leased the recyclers to a limited partnership, Clearwater,

which licensed them to FMEC, which sublicensed them to PI.     The

transaction involved herein differs in two respects:   (1) Seven

Sentinel EPE recyclers were sold and leased rather than six; and

(2) Empire, rather than Clearwater, leased the recyclers from F &

G and then licensed them to FMEC.   Empire is therefore like

Clearwater, occupying the same link in the transactional chain.

The Sentinel EPE recyclers considered in these cases are the same

type of machines considered in the Provizer case.   The fair

market value of a Sentinel EPE recycler in 1981 was not in excess

of $50,000.
                               - 8 -

     PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap.    The sublicense

agreements provided that the end-users would transfer to PI 100

percent of the recycled scrap in exchange for a payment from FMEC

Corp. based on the quality and amount of recycled scrap.

     Bennett and Black each learned of the Empire transaction

from Edward Gallagher (Gallagher).     Gallagher was an officer in

the personal financial planning department at Bankers Trust.

Ingersoll-Rand had retained Bankers Trust in the early 1970's to

provide financial counseling to its officers.    Gallagher became

responsible for the Ingersoll-Rand account starting in the late

1970's and counseled executives on investment planning, estate

planning, income tax planning, and retirement planning.

Gallagher had been with Bankers Trust since 1964.     Before then he

had earned a B.A. degree from Holy Cross College in 1962, spent a

year in medical school, and served in the U.S. Army.

     Gallagher learned of the Empire transaction from Robert

Miller (Miller), a lawyer at the firm of Windels, Marx, Davies &

Ives (WMDI).   Ingersoll-Rand was a client of WMDI.   Miller

referred Gallagher to John Taggart (Taggart), the head of the tax

department at WMDI.   Gallagher discussed the transaction with

Taggart and the general partner of Empire, Richard Roberts

(Roberts).   Gallagher read the offering memorandum and used that

information to analyze the economics of the investment.      Gus

Kreischer (Kreischer), who was in charge of the tax section of
                                - 9 -

the trust department at Bankers Trust, reviewed WMDI's tax

opinion letter contained in the offering memorandum and reported

favorably to Gallagher with respect to the opinion.

     Gallagher discussed the Sentinel EPE recycler transactions

with about 11 executives at Ingersoll-Rand.    At the behest of

Bennett, Gallagher toured PI's Hyannis plant.    Upon his return

from Hyannis, Gallagher reported to the officers at Ingersoll-

Rand and told them that PI was a going concern, that he had seen

the recyclers, and that they were big machines.    Gallagher also

submitted a brief handwritten summary to the same effect.    He

prefaced his written summary by noting that he did "not have an

engineering background."    The summary included a list of six

purported current end-users of recyclers and contained the

following postscript:    "If you have any questions or would like

an opportunity to see the equipment in operation, please let me

know."   Gallagher made no representations about the uniqueness of

the recyclers.

     Neither Gallagher nor Bankers Trust received a commission

from Ingersoll-Rand for the investments in the Plastics Recycling

transactions.    However, Gallagher did receive what he admitted

was a "special deal."    The typical Plastics Recycling investment

entailed the acquisition of an interest in a partnership which

leased the recyclers.    Such an interest sold for a minimum of

$50,000.   In December of 1981, however, Gallagher was allowed to

purchase a 10-percent undivided interest directly in a recycler,
                               - 10 -

for which he paid approximately $10,000 in cash and $90,000 in

notes.    Gallagher told representatives of Bankers Trust and also

Bennett and probably Black that he was receiving this special

deal.

     Bennett is a graduate of the New York State Maritime

Academy, from which he received a degree in marine engineering in

1950.    After graduation he tested for a Coast Guard license and

was qualified to operate any ship as a third assistant engineer.

Bennett began working for Ingersoll-Rand in the fall of 1951.

Bennett started as an applications engineer in the centrifugal

pump marketing department where he was responsible for working on

worldwide customer inquiries, and was a specialist on power

plants and marine and navy equipment.    From 1951 to 1968 he

served in a marketing capacity and continuously dealt with

product pricing.   During 1972 he completed an advanced management

program at Harvard University.    By 1978 he had been promoted to

vice president in charge of strategic planning, and became

involved in the planning for all of the businesses and also

mergers and acquisition analysis and studies.    In mid-1981 he was

reassigned to the Torrington Company, an Ingersoll-Rand

subsidiary located in Torrington, Connecticut, which manufactured

roller bearings.

     As an officer of Ingersoll-Rand, Bennett received financial

counseling from Bankers Trust.    The Bankers Trust representative

during 1981, Gallagher, told him about Empire.    Bennett reviewed
                                - 11 -

the Empire offering memorandum and discussed the investment with

Gallagher and with other Ingersoll-Rand executives.     Bennett

insisted that Gallagher visit the PI plant and see the recyclers.

Gallagher did so and reported back to the executives.     Bennett

knew Gallagher was not an engineer and "could not assess the

machine in terms of its technical capability."    Gallagher

arranged for the general partner of Empire, Roberts, to meet with

the officers at the Ingersoll-Rand corporate headquarters.

Bennett did not attend that meeting.

     Ingersoll-Rand manufactures machinery, including

construction equipment, pumps, air compressors, rock drills,

pneumatic tools, and bearings.    Its 1993 revenues were slightly

more than $4 billion.    One of Ingersoll-Rand's subsidiaries

during 1981, Improved Machinery Company (IMCO), manufactured

plastic injection molding equipment.     Bennett was aware of IMCO

and the nature of its business in 1981.    He had been to the IMCO

plant several times and knew that IMCO's injection molding

machine used pellets, probably the same type produced by the

Sentinel EPE recycler.    Bennett did not, however, talk to anyone

at IMCO about the Empire transaction or the Sentinel EPE recycler

prior to making his investment in Empire.    Bennett knew that

several recyclers purportedly had been placed with end-users

before he invested in Empire.    However, Bennett did not see a

Sentinel EPE recycler prior to investing in Empire, nor did he
                               - 12 -

investigate whether there were any existing or potential

competitors for the Sentinel EPE recycler.

     Black joined the U.S. Marine Corps. at the end of 1945.     In

1949 he entered the U.S. Naval Academy, and in 1953 he graduated

with a bachelor of science degree in electrical engineering.

Black began his career at Ingersoll-Rand in 1957.    Over the

course of his career, Black held the positions of salesman,

technical personnel director, account manager, general manager,

district manager, president, and chairman and chief executive

officer.   As general manager of the turbo products division in

1967, he first became responsible for pricing specially

engineered equipment with unique proprietary technology.    In the

fall of 1974, Black attended an advanced management program at

Harvard University.

     Black first heard of the Sentinel EPE recyclers from

Gallagher in 1981.    He had no formal education, training, or

background in chemical engineering, plastics engineering, or

plastics processing, although he had substantial knowledge of

some plastics processing from the standpoint of the seller of

machinery.   His investigation of the Empire transaction did not

extend beyond discussions with Gallagher and a review of the

offering memorandum.    Black did not see a Sentinel EPE recycler

prior to investing in Empire, did not speak to anyone at IMCO,

and never did a personal investigation of the competition.

                               OPINION
                              - 13 -

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

case involving the Clearwater transaction, this Court (1) found

that each Sentinel EPE recycler had a fair market value not in

excess of $50,000, (2) held that the Clearwater transaction was a

sham because it lacked economic substance and a business purpose,

(3) upheld the section 6659 addition to tax for valuation

overstatement since the underpayment of taxes was directly

related to the overstatement of the value of the Sentinel EPE

recyclers, and (4) held that losses and credits claimed with

respect to Clearwater were attributable to tax-motivated

transactions within the meaning of section 6621(c).   In reaching

the conclusion that the Clearwater transaction lacked economic

substance and a business purpose, this Court relied heavily upon

the overvaluation of the Sentinel EPE recyclers.

     Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that their investment in

the Sentinel EPE recyclers was similar to the investment

described in Provizer v. Commissioner, supra.   The underlying

transaction in these cases (the Empire transaction) is in all

material respects identical to the transaction considered in the

Provizer case.   The Sentinel EPE recyclers considered in these

cases are the same type of machines considered in the Provizer

case.

     Based on the entire records in these cases, including the

extensive stipulations, testimony of respondent's experts, and
                                - 14 -

petitioners' testimony, we hold that the Empire transaction was a

sham and lacked economic substance.      In reaching this conclusion,

we rely heavily upon the overvaluation of the Sentinel EPE

recyclers.    Respondent is sustained on the question of the

underlying deficiency.    We note that petitioners have explicitly

conceded this issue in stipulations of settled issues filed

shortly before trial.    The record plainly supports respondent's

determination regardless of such concessions.     For a detailed

discussion of the facts and the applicable law in a substantially

identical case, see Provizer v. Commissioner, supra.

Issue 1.     Sec. 6653(a) Negligence

     In the notice of deficiency in docket No. 36202-86,

respondent determined that petitioners Black were liable for the

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

1981.   Petitioners Black have the burden of proving that

respondent's determination is erroneous.     Rule 142(a); Luman v.

Commissioner, 79 T.C. 846, 860-861 (1982).      In an amendment to

answer, respondent asserted that petitioners Bennett were liable

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

(2) for 1981, and under section 6653(a) for 1978 and 1979.

Because these additions to tax were raised for the first time in

respondent's amendment to answer, respondent bears the burden of

proof on this issue.     Rule 142(a); Vecchio v. Commissioner, 103

T.C. 170, 196 (1994).
                              - 15 -

     Section 6653(a) for 1978 and 1979 and section 6653(a)(1) for

taxable year 1981 provide for an addition to tax equal to 5

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

is due to negligence or intentional disregard of rules or

regulations.   Section 6653(a)(2) for taxable year 1981 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.   Negligence is defined as the failure

to exercise the due care that a reasonable and ordinarily prudent

person would employ under the circumstances.    Neely v.

Commissioner, 85 T.C. 934, 947 (1985).   The question is whether a

particular taxpayer's actions in connection with the transactions

were reasonable in light of his experience and the nature of the

investment or business.   See Henry Schwartz Corp. v.

Commissioner, 60 T.C. 728, 740 (1973).

     Petitioners each contend that they were reasonable in

claiming deductions and investment credits with respect to their

investment in Empire.   To support this contention, petitioners

each allege, in general terms, the following:   (1) That claiming

the deductions and credits with respect to Empire was reasonable

in light of a so-called oil crisis in the United Sates in 1981,

and (2) that in claiming the deductions and credits, petitioners

reasonably relied upon Gallagher and the offering materials.

     Petitioners argue, in general terms, that they were

reasonable in claiming the deductions and credits related to
                               - 16 -

Empire because of rising oil prices in the United States in 1981.

Petitioners placed into the record several documents from the

period 1979 to 1981, including speeches by William L. Wearly

(Wearly), chairman of the board of Ingersoll-Rand; articles from

Modern Plastics magazine; and an energy projections report from

the U.S. Department of Energy (DOE).    Wearly's speeches, given at

colleges and universities, discussed business and national policy

challenges.    One of his concerns was U.S. dependency on foreign

oil.    The Modern Plastics articles and DOE report speculated on

the price of oil, among other things.    Petitioners failed to

explain, however, the connection between these speculative

materials and the Empire investment.    We find petitioners' vague,

general claims concerning the so-called oil crisis to be without

merit.

       Petitioners' reliance on Krause v. Commissioner, 99 T.C. 132

(1992) (citing Todd v. Commissioner, 89 T.C. 912 (1987), affd.

862 F.2d 540 (5th Cir., 1988), affd. sub nom. Hildebrand v.

Commissioner, 28 F.3d 1024 (10th Cir. 1994), is misplaced.       The

facts in the Krause case are distinctly different from the facts

of these cases.    In the Krause case, the taxpayers invested in

limited partnerships whose investment objectives concerned

enhanced oil recovery (EOR) technology.    The Krause opinion notes

that during the late 1970's and early 1980's, the Federal

Government adopted specific programs to aid research and

development of EOR technology.    Id. at 135-136.   In holding that
                                - 17 -

the taxpayers in the Krause case were not liable for the

negligence additions to tax, this Court noted that one of the

Government's expert witnesses acknowledged that "investors may

have been significantly and reasonably influenced by the energy

price hysteria that existed in the late 1970's and early 1980's

to invest in EOR technology."    Id. at 177.   In the present cases,

however, one of respondent's experts, Steven Grossman, noted that

the price of plastics materials is not directly proportional to

the price of oil, that less than 10 percent of crude oil is

utilized for making plastics materials, and that studies have

shown that "a 300% increase in crude oil prices results in only a

30 to 40% increase in the cost of plastics products."    While EOR

was, according to our Krause opinion, in the forefront of

national policy and the media during the late 1970's and 1980's,

there is no showing in these records that the so-called energy

crisis would provide a reasonable basis for petitioners'

investing in recycling of polyethylene, particularly in the

machinery here in question.

     Moreover, the taxpayers in the Krause opinion were

experienced in or investigated the oil industry and EOR

technology specifically.   One of the taxpayers in the Krause case

undertook significant investigation of the proposed investment

including researching EOR technology.    The other taxpayer was a

geological and mining engineer whose work included research of

oil recovery methods and who hired an independent geologic
                               - 18 -

engineer to review the offering materials.     Id. at 166.    In the

present cases, Black testified that he has no formal background

or education in plastics engineering or plastics processing,

although he is knowledgeable about polyethylene "for the purposes

of selling machinery", and nothing in the records indicates that

Bennett had any experience or knowledge in plastics or plastics

recycling.    Moreover, although they had the personal ability to

do so and the resources to have it done, petitioners did not

independently investigate the Sentinel EPE recyclers.    They did

not hire an expert in plastics to evaluate the Empire transaction

either.   We consider petitioners' arguments with respect to the

Krause case inapplicable.

      Petitioners' reliance on Rousseau v. United States, 91-1

USTC par. 50252 (E.D. La. 1991), is similarly misplaced.      In

Rousseau, the property underlying the investment, ethanol

producing equipment, was widely considered at that time to be a

viable fuel alternative to oil and its potential for profit was

apparent.    In addition, the taxpayer therein conducted an

independent investigation of the investment and researched the

market for the sale of ethanol in the United States.    In

contrast, as we noted in distinguishing the Krause case, there is

no showing in these records that the so-called energy crisis

would provide a reasonable basis for petitioners' investing in

the polyethylene recyclers here in question.    See supra pp. 16-

17.   Petitioners did not independently investigate the Sentinel
                              - 19 -

EPE recyclers or hire an expert in plastics to evaluate the

Empire transaction.   This inattention to the machinery involved

in the transaction is particularly telling since petitioners each

had experience in pricing and selling machinery and ready access

to IMCO, an Ingersoll-Rand subsidiary involved in plastics and

which Bennett believed used pellets like those produced by the

Sentinel EPE recycler.   The facts of petitioners' cases are

distinctly different from the Rousseau case.   Accordingly, we do

not find petitioners' arguments with respect to the Rousseau case

applicable.

     In each of the cases before us, petitioners' investigation

of the Empire transaction and the Sentinel EPE recyclers was

limited to conversations with Gallagher and other Ingersoll-Rand

executives and examination of the Empire offering materials.

Nonetheless, petitioners argue that their reliance on Gallagher

and the representations in the offering materials insulate them

from the negligence additions to tax.

     Under some circumstances a taxpayer may avoid liability for

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

reasonable reliance on a competent professional adviser is shown.

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.   Id.     In

order for reliance on professional advice to excuse a taxpayer
                              - 20 -

from the negligence additions to tax, the reliance must be

reasonable, in good faith, and based upon full disclosure.      Id.;

see Weis v. Commissioner, 94 T.C. 473, 487 (1990); Ewing v.

Commissioner, 91 T.C. 396, 423-424 (1988), affd. without

published opinion 940 F.2d 1534 (9th Cir. 1991); Pritchett v.

Commissioner, 63 T.C. 149, 174-175 (1974).

     Reliance on representations by insiders, promoters, or

offering materials has been held 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); Marine v.

Commissioner, 92 T.C. 958, 992-993 (1989), affd. without

published opinion 921 F.2d 280 (9th Cir. 1991); McCrary v.

Commissioner, 92 T.C. 827, 850 (1989); Rybak v. Commissioner, 91

T.C. 524, 565 (1988).   We have rejected pleas of reliance when

neither the taxpayer nor the advisers purportedly relied upon by

the taxpayer knew anything about the nontax business aspects of

the contemplated venture.   Beck v. Commissioner, 85 T.C. 557

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

Commissioner, T.C. Memo. 1993-447.

     The record here shows that petitioners' "adviser" in this

matter, Gallagher, possessed no special qualifications or

professional skills in the recycling or plastics industries.

Gallagher testified that Bankers Trust's due diligence involved
                               - 21 -

only a review of the tax opinion letter.   He explained that he

relied upon the people at Ingersoll-Rand to make their own

judgments of the value of the machines involved in the Empire

transaction since many of them were engineers and many had their

own resources to ascertain the value of machinery.   Gallagher

testified that the taxpayers he advised at Ingersoll-Rand

concerning the Empire transaction "absolutely" understood that

they were not to rely upon him as to the value of the machinery.

While he purportedly read the offering memorandum, Gallagher

could not recall at trial how the Empire transaction was

structured, how Empire was to receive income, or how much its

monthly lease payments were.   Gallagher could not even recall the

name of the purported end-user of the recycler in which he

personally had invested.

     Gallagher spoke with Taggart and Roberts, but the record

does not indicate what representations they may have made to him

or if he learned anything beyond the representations in the

offering memorandum.   Gallagher visited PI at the behest of

Bennett.   His observations were those of a layman, and he was

careful to caution that he was not an engineer.   As Bennett put

it, Gallagher "could not assess the [Sentinel EPE recycler]

machine in terms of its technical capability," but he could

verify the existence of the machines.

     In our view, petitioners' reliance on Gallagher was not

reasonable.   It was petitioners' reliance upon the purported
                                - 22 -

values of the Sentinel EPE recyclers that generated the

deductions and credits in these cases.    Yet the purported value

of the Sentinel EPE recyclers is the very thing that petitioners

and Gallagher did not verify.    A taxpayer may rely upon his

adviser's expertise (in these cases financial planning and tax

advice), but it is not reasonable or prudent to rely upon an

adviser regarding matters outside of his field of expertise or

with respect to facts which he does not verify.    See 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.

     In fact, both Black and Bennett plainly were more capable of

assessing the economic value of the recyclers than Gallagher

because of their experience pricing machinery at Ingersoll-Rand.

Petitioners also had ready access to the IMCO subsidiary of

Ingersoll-Rand, which was involved in plastics and possibly used

the same type of pellets produced by the Sentinel EPE recycler.

Petitioners had a list of supposed end-users of the recycler and

an open invitation from Gallagher to arrange for a tour to see

the equipment in operation.   Even though petitioners could have

independently investigated the recyclers, they did nothing more

than have Gallagher verify the existence of the recyclers.

Petitioners expected no more from Gallagher, for as Bennett

testified, he could not assess the machines from a technical
                                - 23 -

standpoint.    Petitioners are not insulated from the negligence

additions to tax by claiming reliance on Gallagher.

     Petitioners also contend that they read and reasonably

relied upon the Empire offering memorandum and the reports of the

evaluators annexed thereto.    However, a careful consideration of

the materials in the Empire offering memorandum, especially the

discussions in the prospectus of high writeoffs and risk of

audit, would have alerted a prudent and reasonable investor to

the questionable nature of the promised deductions and credits.

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

affg. Dister v. Commissioner, T.C. Memo. 1987-217.    The preface

to the memorandum contained the following:    NO OFFEREE SHOULD

CONSIDER THE CONTENTS OF THIS MEMORANDUM *** AS *** EXPERT

ADVICE. *** EACH OFFEREE SHOULD CONSULT HIS OWN PROFESSIONAL

ADVISERS AS TO LEGAL, TAX, ACCOUNTING AND OTHER MATTERS RELATING

TO ANY PURCHASE BY HIM OF UNITS.    It also clearly stated that the

Empire transaction involved significant tax risks and that in all

likelihood the Internal Revenue Service would challenge the

transaction.    In a "business risks" section, it warned that there

was no history for the partnership and no established market for

the recyclers or the pellets.

     At trial, Bennett could not recall having read those

business risk warnings or the statements that there was no market

for the recyclers or for the pellets of recycled plastic.     Black

could not recall having read that there was no market for the
                              - 24 -

pellets or the recycler.   Bennett testified that he was motivated

by the report of Stanley M. Ulanoff (Ulanoff), a marketer, which

was attached to the offering circular, even though Ulanoff had

not done a marketing analysis or put a value on the machine.    He

also testified that in his experience, the price of machinery is

generally predicated upon the performance aspects rather than the

production cost.   However, such an analysis was not done by

Ulanoff.   Black testified that he "relied on others" regarding

the evaluation of the recycler, but that it was "in hindsight,

not very brilliant on [his] part" to have done so.   It is

questionable from the records in these cases how closely

petitioners read the offering memorandum and to what extent they

relied on the representations therein.   However, even if

petitioners did thoroughly review the offering memorandum, such

reading does not relieve them of negligence.

     On its face, the Empire transaction should have raised

serious questions in the minds of ordinarily prudent investors.

According to the offering memorandum, the projected benefits for

each $50,000 investor were investment tax credits in 1981 of

$86,328 plus deductions in 1981 of $39,399.    In the first year of

the investment alone, petitioners each claimed an operating loss

in the amount of $20,510 and investment tax and business energy

credits related to Empire totaling $42,402, while petitioners
                                - 25 -

each invested only $25,000 in Empire.5   The direct reductions in

petitioners' respective Federal income taxes, from just the tax

credits, equaled 170 percent of their cash investment.

Therefore, 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 [Empire] deal."    Indeed,

Gallagher testified that he probably told petitioners that they

would never be out of pocket on their Empire investment.      A

reasonably prudent person would not conclude without substantial

investigation that the Government was providing significant tax

benefits to taxpayers in these circumstances.    McCrary v.

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

     The parties in these consolidated cases stipulated that the

fair market value of a Sentinel EPE recycler in 1981 and 1982 was

not in excess of $50,000.   Notwithstanding this concession,

petitioners contend that they were reasonable in claiming credits

on their Federal income tax returns based upon each recycler

having a value of $1,162,666.    In support of this position,

petitioners submitted into evidence preliminary reports prepared

for respondent by Ernest D. Carmagnola (Carmagnola), the

president of Professional Plastic Associates.    Carmagnola had

been retained by the Internal Revenue Service in 1984 to evaluate

5
     Petitioners Bennett used $22,328 of the claimed credits on
their 1981 return and carried back the unused portion of the
credits to 1978 and 1979 in the respective amounts of $19,120 and
$954.
                                - 26 -

the Sentinel EPE and EPS recyclers in light of what he described

as "the fantastic values placed on the [recyclers] by the

owners."   Based on limited information available to him at that

time, Carmagnola preliminarily estimated the value of the

Sentinel EPE recycler to be $250,000.     However, after additional

information became available to him, Carmagnola concluded in a

signed affidavit, dated March 16, 1993, that the machines

actually had a fair market value of not more than $50,000 each in

the fall of 1981 and 1982.

     We accord no weight to the Carmagnola reports submitted by

petitioners.     The projected valuations therein were based on

inadequate information,6 research, and investigation, and were

subsequently rejected and discredited by their author.

Respondent likewise rejected the reports and considered them

unsatisfactory for any purpose; and there is no indication in the

records that respondent used them as a basis for any

determinations in the notices of deficiency.     Even so,

petitioners' counsel obtained copies of these reports and urge

that they support the reasonableness of the values reported on

their returns.    Not surprisingly, petitioners did not call

6
     In one preliminary report, Carmagnola states that he has "a
serious concern of actual profit-level" of a Sentinel EPE
recycler and that to determine whether the machines actually
could be profitable, he required additional information from PI.
Carmagnola also indicates that in preparing the report, he did
not have information available concerning research and
development costs of the machines and that he estimated those
costs in his valuations of the machines.
                              - 27 -

Carmagnola to testify in these cases,7 but preferred instead to

rely solely upon his preliminary, ill-founded valuation

estimates.   The Carmagnola reports were a part of the record

considered by this Court and reviewed by the Sixth Circuit Court

of Appeals in the Provizer case, where we held the taxpayers

negligent.   Consistent therewith, we find in these cases, as we

have found previously, that the reports prepared by Carmagnola

are unreliable and of no consequence.   Petitioners are not

relieved of the negligence additions to tax based on the

preliminary reports prepared by Carmagnola.

     Petitioners' reliance on Mollen v. United States, 72 AFTR2d

93-6443, 93-2 USTC par. 50585 (D. Ariz. 1993) is misplaced.     The

taxpayer in Mollen was a medical doctor who specialized in

diabetes and who, on behalf of the Arizona Medical Association,

led a continuing medical education ("CME") accreditation program

for local hospitals.   The underlying tax matter involved the

taxpayer's investment in Diabetics CME Group, Ltd., a limited

partnership which invested in the production, marketing, and

distribution of medical educational video tapes.   The taxpayer's

personal expertise and insight in the underlying investment gave

him reason to believe it would be economically profitable.

Although the taxpayer was not experienced in business or tax

matters, he did consult with an accountant and a tax lawyer

7
     Carmagnola has not been called to testify in any of the
Plastics Recycling cases before us.
                              - 28 -

regarding those matters.   Moreover, as the District Court noted,

the propriety of the taxpayer's disallowed deduction therein was

"reasonably debatable."

     The records in these cases, on the other hand, show no

comparable evidence that either of petitioners or their

"adviser," Gallagher, had formal education, expertise, or

experience in plastics or plastics recycling, although Black

explained that he had substantial knowledge of polyethylene for

purposes of selling machinery.   As a representative of Bankers

Trust, Gallagher's due diligence responsibilities extended only

to a review of the tax opinion letter.   He took no responsibility

for the valuation of the machinery in the Empire transaction.

Petitioners had knowledge and experience in business and the

pricing of machinery, and ready access to IMCO, a subsidiary of

Ingersoll-Rand which manufactured plastic injection molding

equipment, and which Bennett believed used the same type of

pellets produced by the Sentinel EPE recycler.   However, they did

not utilize that knowledge and experience or consult anyone at

IMCO with respect to the purported value of the Sentinel EPE

recycler or its economic viability.    The facts of these cases are

distinctly different from those in the Mollen case.    We find

petitioners' arguments with respect to the Mollen case

inapplicable.

     Petitioners' arguments are not supported by Anderson v.

Commissioner, 62 F.3d 1266 (10th Cir. 1995), affg. T.C. Memo.
                              - 29 -

1993-607, where the taxpayers were found liable for negligence

additions to tax.   In Anderson, the taxpayers claimed tax

benefits based upon their acquisition of property listed at

$124,500, but for which they actually paid $6,225 in a cash

downpayment (5 percent of the purchase price) plus a 5-year

financing arrangement.   Had the acquisition been nothing more

than a $6,225 passive investment, noted the Court of Appeals, it

would have been reasonable for the taxpayers to rely on the

advice of a good friend who had thoroughly investigated the

investment.8   However, because the transaction was structured and

represented as a purchase in the amount of $124,500, the Court of

Appeals held that something more was required.

     In the cases before us, petitioners claimed tax benefits

based on the assumption that they leased, through Empire, an

interest in $8,138,662 worth of recycling machines.   Based on

their investments of $25,000 each, Black and Bennett each claimed

a qualified investment in new investment credit property with a

basis of $212,012, with resulting first-year tax credits of

$42,402 and deductible losses of $20,510, a substantial

transaction clearly requiring careful investigation under the

Anderson case.   Petitioners' adviser, Gallagher, reviewed the

8
     The adviser had his accountant and attorney review and check
out the structure of the investment; he spoke with the investment
principal; he looked into the principal's background and checked
out his references, banks, other business connections, and the
Better Business Bureau; and he spoke with competitors to make
sure the venture was viable.
                               - 30 -

offering memorandum, had conversations with Taggart and Roberts,

and visited the PI plant.   Unlike the adviser in Anderson, he did

not thoroughly investigate or educate himself in the industry

being invested in.   In fact, Gallagher made it clear at the trial

that Bankers Trust's due diligence responsibilities regarding

Empire were limited to a review of the tax opinion letter.    In

view of the $212,012 claimed basis for the interest of each

petitioner in the machinery, from which the investment credits

stemmed, a substantial amount and more than eight times greater

than the cash invested, plainly something more was required.

Accordingly, we find petitioners' reliance on the Anderson case

inapplicable.

     Under the circumstances of these cases, petitioners Bennett

and Black failed to exercise due care in claiming the large

deductions and tax credits with respect to Empire on their

respective Federal income tax returns.   We hold that petitioners

did not reasonably rely upon Gallagher and the offering

memorandum, or in good faith investigate the underlying

viability, financial structure, and economics of the Empire

transaction.    In fact, the records indicate that petitioners were

more influenced by the fact that their fellow executives at

Ingersoll-Rand were investing in Sentinel EPE recycler

partnerships than by anything they learned from Gallagher or the

offering memorandum.   Black testified that he "was very impressed

by the fact that some of our supposed financial geniuses at
                               - 31 -

Ingersoll-Rand *** all invested in this," while Bennett testified

that he was "very much influenced" by the actions of his fellow

executives and that the investment by people he respected "made a

considerable impact" on him.   However, in our view the record in

these cases, including the testimony of Black and Bennett and

their manner in presenting that testimony, establishes that they

are men of education, experience, and talent in the business of

manufacturing and selling machinery, that during the time in

issue they were senior executives of a large machinery

manufacturing company, that they were highly knowledgeable about

appropriate pricing for a great variety of machinery, that they

had the ability and resources to learn the value of the machinery

involved in the Empire plastics recycling venture, in which they

invested, and that they could have obtained such information

without undue expense or effort.

     Upon consideration of the entire records, we hold that

petitioners are liable for the negligence additions to tax under

the provisions of section 6653(a)(1) and (2) for 1981.

Respondent is sustained on this issue.

Issue 2.   Sec. 6659 Valuation Overstatement

     In amendments to the answers, respondent asserted additions

to tax with respect to petitioners in these cases under section

6659 for valuation overstatement.   Because these additions were

raised for the first time in amendments to the answers,
                                - 32 -

respondent bears the burden of proof on these issues.   Rule

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

     A graduated addition to tax is imposed when an individual

has an underpayment of tax that equals or exceeds $1,000 and "is

attributable to" a valuation overstatement.   Sec. 6659(a), (d).

A valuation overstatement exists if the fair market value (or

adjusted basis) of property claimed on a return equals or exceeds

150 percent of the amount determined to be the correct amount.

Sec. 6659(c).   If the claimed valuation exceeds 250 percent of

the correct value, the addition is equal to 30 percent of the

underpayment.   Sec. 6659(b).

     Petitioners claimed tax benefits, including investment tax

credits, based on purported values of $1,162,666 for each

Sentinel EPE recycler.   Petitioners each concede that during 1981

the fair market value of a Sentinel EPE recycler was not in

excess of $50,000.   Therefore, if disallowance of petitioners'

claimed tax benefits is attributable to the valuation

overstatement, petitioners are liable for the section 6659

additions to tax at the rate of 30 percent of the underpayments

of tax attributable to the tax benefits claimed with respect to

Empire.

     Section 6659 does not apply to underpayments of tax that are

not "attributable to" valuation overstatements.   See McCrary v.

Commissioner, 92 T.C. 827 (1989); Todd v. Commissioner, 89 T.C.

912 (1987), affd. 862 F.2d 540 (5th Cir. 1988).   To the extent
                              - 33 -

taxpayers claim tax benefits that are disallowed on grounds

separate and independent from alleged valuation overstatements,

the resulting underpayments of tax are not regarded as

attributable to valuation overstatements.   Krause v.

Commissioner, 99 T.C. 132, 179 (1992) (citing Todd v.

Commissioner, supra), affd. sub nom. Hildebrand v. Commissioner,

28 F.3d 1024 (10th Cir. 1994).   However, when valuation is an

integral factor in disallowing deductions and credits, section

6659 is applicable.   See Illes v. Commissioner, 982 F.2d 163, 167

(6th Cir. 1992), affg. T.C. Memo. 1991-449; Gilman v.

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

1989-684 (section 6659 addition to tax applies if a finding of

lack of economic substance is "due in part" to a valuation

overstatement); Masters v. Commissioner, T.C. Memo. 1994-197;

Harness v. Commissioner, T.C. Memo. 1991-321.

     In the respective stipulations of settled issues,

petitioners conceded that they "are not entitled to any

deductions, losses, investment credits, business energy

investment credits, or any other tax benefits claimed on their

tax returns as a result of their participation in the Plastics

Recycling Program."   In Todd v. Commissioner, supra, and McCrary

v. Commissioner, supra, we denied application of section 6659,

even though the subject property was overvalued, because the

related deductions and credits had been conceded or denied in

their entirety on other grounds.   In Todd, we found that an
                              - 34 -

underpayment was not attributable to a valuation overstatement

because property was not placed in service during the years in

issue.   In McCrary, we found the taxpayers were not liable for

the section 6659 addition to tax when, prior to the trial of the

case, the taxpayers conceded that they were not entitled to the

investment tax credit because the agreement in question was a

license and not a lease.   In both cases the underpayment was

attributable to something other than a valuation overstatement.

     This Court has held that concession of the investment tax

credit in and of itself does not relieve taxpayers of liability

for the section 6659 addition to tax.   Dybsand v. Commissioner,

T.C. Memo. 1994-56; Chiechi v. Commissioner, T.C. Memo. 1993-630.

Instead, what is significant is the ground upon which the

investment tax credit is disallowed or conceded.   Chiechi v.

Commissioner, supra.   Even in situations in which there are

arguably two grounds to support a deficiency and one supports a

section 6659 addition to tax and the other does not, the taxpayer

may still be liable for the addition to tax.   Gainer v.

Commissioner, 893 F.2d 225, 228 (9th Cir. 1990), affg. T.C. Memo.

1988-416; Irom v. Commissioner, 866 F.2d 545, 547 (2d Cir. 1989),

vacating in part and remanding T.C. Memo. 1988-211; Harness v.

Commissioner, supra.

     No argument was made and no evidence was presented to the

Court in the present cases to prove that disallowance and

concession of the tax benefits related to anything other than a
                              - 35 -

valuation overstatement.   To the contrary, petitioners each

stipulated substantially the same facts concerning the underlying

transactions as we found in Provizer v. Commissioner, T.C. Memo.

1992-177.   In the Provizer case, we held that the taxpayers were

liable for the section 6659 addition to tax because the

underpayment of taxes was directly related to the overvaluation

of the Sentinel EPE recyclers.   The overvaluation of the

recyclers, exceeding 2325 percent, was an integral part of our

findings in Provizer that the transaction was a sham and lacked

economic substance.   Similarly, the records in these cases

plainly show that the overvaluation of the recyclers is integral

to and is the core of our holding that the underlying transaction

in these cases was a sham and lacked economic substance.

     Consistent with our findings in Provizer, petitioners each

stipulated that the Empire partnership had no net equity value,

that Empire's sole activity lacked any potential for profit, and

that the Empire transaction therefore lacked economic substance.

When a transaction lacks economic substance, section 6659 will

apply because the correct basis is zero and any basis claimed in

excess of that is a valuation overstatement.   Gilman v.

Commissioner, supra; Rybak v. Commissioner, 91 T.C. 524, 566-567

(1988); Zirker v. Commissioner, 87 T.C. 970, 978-979 (1986);

Donahue v. Commissioner, T.C. Memo. 1991-181, affd. without

published opinion 959 F.2d 234 (6th Cir. 1992), affd. sub nom.

Pasternak v. Commissioner, 990 F.2d 893 (6th Cir. 1993).
                              - 36 -

     We held in Provizer v. Commissioner, supra, that each

Sentinel EPE recycler had a fair market value not in excess of

$50,000.   Our finding in the Provizer case that the Sentinel EPE

recyclers had been overvalued was integral to and inseparable

from our finding of a lack of economic substance.   Petitioners

conceded that the Empire transaction was similar to the

Clearwater transaction described in Provizer v. Commissioner,

supra, and that the Empire transaction lacked economic substance.

Given those concessions, and the fact that the records here

plainly show that the overvaluation of the recyclers was the

reason for the disallowance of the tax benefits, and the fact

that no argument was made and no evidence was presented to the

Court to prove that disallowance and concession of the tax

benefits related to anything other than a valuation

overstatement, we conclude that the deficiencies caused by the

disallowance of the claimed tax benefits were attributable to the

overvaluation of the Sentinel EPE recyclers.

     Finally, we consider petitioners' express argument as to

waiver of the penalty.   On brief, petitioners each contested

imposition of the section 6659 addition to tax on the grounds

that respondent erroneously failed to waive the addition to tax.

Section 6659(e) authorizes respondent to waive all or part of the

addition to tax for valuation overstatements if taxpayers

establish that there was a reasonable basis for the adjusted

bases or valuations claimed on the returns and that such claims
                                - 37 -

were made in good faith.    Respondent's refusal to waive a section

6659 addition to tax is reviewable by this Court for abuse of

discretion.    Krause v. Commissioner, 99 T.C. at 179.

     Petitioners urge that they relied on Gallagher and the

offering materials in deciding on the valuation claimed on their

tax return.    Petitioners each contend that such reliance was

reasonable, and, therefore, respondent should have waived the

section 6659 addition to tax.    Petitioners rely upon Krause v.

Commissioner, supra; Rousseau v. United States, 91-1 USTC par.

50252 (E.D. La. 1991); and Mauerman v. Commissioner, 22 F.3d 1001

(10th Cir. 1994), revg. T.C. Memo. 1993-23, in support of their

argument.

     We have found that petitioners' purported reliance on

Gallagher, and the offering materials was not reasonable.

Gallagher was a representative of Bankers Trust.     He was not an

engineer and he never represented himself as being an expert in

plastics or plastics recycling.    In Gallagher's view, Bankers

Trust's due diligence responsibility, and therefore Gallagher's

own responsibility, was limited to reviewing the tax opinion

letter included in the offering memorandum.     The evaluators whose

reports were attached to the offering memorandum each owned

interests in partnerships that leased Sentinel EPE recyclers.

The offering memorandum contained numerous caveats, including the

following:    NO OFFEREE SHOULD CONSIDER THE CONTENTS OF THIS

MEMORANDUM *** AS *** EXPERT ADVICE.     *** EACH OFFEREE SHOULD
                              - 38 -

CONSULT HIS OWN PROFESSIONAL ADVISERS.    Petitioners were

experienced in pricing machinery, yet they did not make the

effort personally to see a Sentinel EPE recycler or independently

investigate the machinery prior to investing in Empire.

     Petitioners' reliance on Krause v. Commissioner, supra,

Rousseau v. United States, supra, and Mauerman v. Commissioner,

supra, in support of their contention that they acted reasonably,

is misplaced.   In the Krause and Rousseau cases, the section 6659

addition to tax was disallowed in light of the respective

holdings that the taxpayers in each case had a reasonable basis

for the valuations claimed on the tax returns or had reasonable

cause for the understatement on the return and were not subject

to negligence additions to tax.   In contrast, we have held that

petitioners herein did not act reasonably in claiming deductions

and investment tax credits related to Empire, that the errors on

petitioners' tax returns were caused by the excessive valuations

of the underlying machinery in the Empire transaction, that

petitioners lacked reasonable cause for such overvaluation, and

that each petitioner is therefore liable for the negligence

additions to tax under section 6653(a).    See supra pp. 14-28.

Accordingly, petitioners' reliance on the Krause and Rousseau

cases is misplaced.

     In Mauerman v. Commissioner, supra, the Tenth Circuit Court

of Appeals held that the Commissioner had abused her discretion

by failing to waive a section 6661 addition to tax.    Like section
                               - 39 -

6659, a section 6661 addition to tax may be waived by the

Commissioner if the taxpayer demonstrates that there was

reasonable cause for his underpayment and that he acted in good

faith.   Sec. 6661(c).   The taxpayer in Mauerman relied upon

independent attorneys and accountants for advice as to whether

payments were properly deductible or capitalized.    The advice

relied upon by the taxpayer in Mauerman was within the scope of

his advisers' expertise, the interpretation of the tax laws as

applied to undisputed facts.    Particularly with respect to

valuation, petitioners in these cases relied upon advice that was

outside the scope of expertise and experience of their advisers.

Consequently, we consider petitioners' reliance on the Mauerman

case inapplicable.

     We hold that petitioners did not have a reasonable basis for

the adjusted bases or valuations claimed on their tax returns

with respect to their investments in Empire.    In these cases,

respondent properly could find that petitioners' respective

reliance on Gallagher and the offering materials was

unreasonable.   The records in these cases do not establish an

abuse of discretion on the part of respondent but support

respondent's position.    We hold that respondent's refusal to

waive the section 6659 addition to tax is not an abuse of

discretion.   Petitioners are liable for the respective section

6659 additions to tax at the rate of 30 percent of the
                             - 40 -

underpayments of tax attributable to the disallowed tax benefits.

Respondent is sustained on this issue.


     To reflect the foregoing,


                                      Decisions will be entered

                                 under Rule 155.
