                         T.C. Memo. 2000-151



                       UNITED STATES TAX COURT


                    JOHN S. HALPERN, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 13245-96.               Filed April 28, 2000.


     Richard A. Levine, for petitioner.

     Michael A. Menillo and Tyrone J. Montague, for respondent.


                          MEMORANDUM OPINION

     DAWSON, Judge:    This case was assigned to Special Trial

Judge Carleton D. Powell pursuant to Rules 180, 181, and 183.

All Rule references are to the Tax Court Rules of Practice 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

     POWELL, Special Trial Judge:    By notice of deficiency

respondent determined additions to tax under sections 6653(a)(1)
                                - 2 -

and 66591 in the respective amounts of $5,564 and $33,383 due

from petitioner for the taxable year 1981.   Respondent also

determined an addition to tax under section 6653(a)(2) in the

amount of 50 percent of the interest due on a deficiency in the

amount of $111,277 and that the increased interest provisions of

section 6621(c) applied.

     After a concession by respondent regarding the

inapplicability of the additions to tax regarding petitioner’s

investment in Greenfield Arbitrage Partners, the sole issue

before the Court at this time is whether petitioner is foreclosed

from litigating the items contained in the notice of deficiency

regarding Resource Reclamation Associates (RRA) by a closing

agreement that he and respondent executed pursuant to section

7122.    Petitioner resided in New York, New York, at the time the

petition was filed.

                             Background

     The relevant facts may be summarized as follows.   On his

1981 Federal income tax return petitioner claimed, inter alia,

ordinary losses from his limited partnership interest in Resource

Reclamation Associates (RRA) and Greenfield Arbitrage Partners

(Greenfield) in the respective amounts of $41,074 and $74,972.

Petitioner further reported $424,106 of property qualifying for



     1
        Section references are to the Internal Revenue Code in
effect for the year in issue.
                               - 3 -

the investment tax credit and $424,106 of property qualifying for

the business energy credit, partially resulting in a $43,722

claimed regular investment tax credit and resulting in a $42,411

claimed business energy investment credit with respect to RRA.

Petitioner invested $50,000 in RRA.

     By letter dated February 19, 1988, respondent proposed to

disallow the deductions from RRA and Greenfield and the credits

from RRA.   Petitioner was represented by the law firm of Kirkland

& Ellis with respect to the Greenfield issues.   By letter dated

March 30, 1988, Kirkland & Ellis asked that the RRA issues be

deferred until the Greenfield issues are resolved.   On September

6, 1990, respondent’s Appeals Office executed a closing agreement

with respect to the Greenfield issues.   That agreement was signed

by Steven Kamerman (Mr. Kamerman) on behalf of petitioner.

     With regard to RRA, on August 2, 1990, Mr. Kamerman and

petitioner executed a closing agreement.   That agreement was

signed by respondent’s Appeals Office on September 6, 1990.     The

agreement provided, inter alia:

          (1) The taxpayer [petitioner] has claimed income,
     deductions, and/or credits on his tax returns for the
     taxable years 1981 and 1982 relating to the Resource
     Reclamation Assoc. tax shelter (hereafter the TAX SHELTER)
     which are in dispute between the taxpayer and the
     Commissioner of Internal Revenue (hereafter the IRS).

          (2) Items of income, deductions, and/or credits
     relating to the TAX SHELTER are in issue in a case pending
     before the United States Tax Court Harold M. Provizer and
     Joan Provizer v. Commissioner, Docket No. 27141-86
     (hereafter the CONTROLLING CASE).
                               - 4 -

          (3) The taxpayer and the IRS desire to settle the
     disputed TAX SHELTER issues on the same basis as finally
     determined in the CONTROLLING CASE.

          NOW IT IS HEREBY DETERMINED AND AGREED for federal
     income tax purposes that;

          (1) The above adjustment * * * shall be determined by
     application of the same formula as that which resolved the
     TAX SHELTER adjustment, whether litigated or settled, in the
     CONTROLLING CASE, as set forth in the final decision, as
     defined by section 7481 in the CONTROLLING CASE.

          (2) All issues involving the above adjustment shall be
     resolved as if the taxpayer was the same as the petitioner
     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 SHELTER adjustment,
     the resolution of the TAX SHELTER issue and the
     applicability of such additions to tax or interest to that
     TAX SHELTER issue as determined in the CONTROLLING CASE,
     whether by litigation or settlement, shall apply to the
     taxpayer as if the taxpayer was the same as the petitioner
     in the CONTROLLING CASE. [Fn. refs. omitted.]

     The Provizer case referenced as the controlling case in the

agreement was decided adversely to the taxpayers by this Court.

The Court also sustained the additions to tax under sections

6653(a)(1), (2), and 6659 and determined that the increased

interest provisions of section 6621(c) were applicable.   See

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

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

     The facts concerning the transactions in Provizer may be

summarized as follows.   Packaging Industries Group, Inc. (PI),

manufactured and sold six Sentinel Recyclers (the recyclers) to

Ethynol Cogeneration, Inc. (ECI), for $981,000 each.   ECI, in
                                - 5 -

turn, resold the recyclers to F&G Equipment Corp. (F&G Corp.) for

$1,162,666 each.   F&G Corp. leased the recyclers to the

Clearwater Group partnership, which then licensed the recyclers

to First Massachusetts Equipment Corp. (FMEC) which sublicensed

them back to PI.   PI allegedly sublicensed the recyclers to

entities (the end-users), which 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 payment from FMEC based on the quality and amount of

recycled scrap.    All of the foregoing transactions were executed

simultaneously.

     The sale of the recyclers from PI to ECI was financed with

nonrecourse notes.   Approximately 7 percent of the sales price of

the recyclers sold by ECI to F&G Corp. was paid in cash, and the

remainder was financed through notes.    The notes provided that 10

percent of the amount thereof was recourse but that the recourse

portion was due only after the nonrecourse portion had been paid

in full.   All of the monthly payments required among the entities

in the above transactions offset each other.    In Provizer v.

Commissioner, supra, we found that the market value of a Sentinel

Recycler in 1981 did not exceed $50,000 and that the nuts and

bolts, or manufacturing, cost was $18,000.

     The Provizers were limited partners in a partnership named

Clearwater Group (Clearwater) and the general partner was Samuel
                                - 6 -

L. Winer (Mr. Winer).   Clearwater was one of many Plastics

Recycling partnerships in which Mr. Winer was the general

partner.    In this case, petitioner invested in RRA, and the

general partner was Richard Roberts (Mr. Roberts).      Like Mr.

Winer, Mr. Roberts was the general partner in many Plastics

Recycling partnerships.2   In Greene v. Commissioner, T.C. Memo.

1997-296, the Court found that “The transactions involving the

Sentinel EPE recyclers leased by * * * [RRA] are substantially

identical to those in” Clearwater.      Moreover, we have carefully

examined the private offering memorandum in RRA and do not find

that there is any meaningful difference between the structural

facts of the partnership set out in the offering memorandum and

the facts that this Court found in Provizer.

     On July 27, 1998, respondent filed a Motion for Entry of

Decision.   The gravamen of that motion is that petitioner is

bound by the closing agreement.   In opposition to respondent’s

motion, petitioner alleges that (1) he was not afforded an


     2
        See, e.g., Ulanoff v. Commissioner, T.C. Memo. 1999-170
(Plymouth Equipment Associates and Taylor Recycling Associates);
Merino v. Commissioner, T.C. Memo. 1997-385 (Northeast Resource
Recovery Associates), affd. 196 F.3d 147 (3d Cir. 1999); Sann v.
Commissioner, T.C. Memo. 1997-259, affd. sub nom. Addington v.
Commissioner, 205 F.3d 54 (2d Cir. 2000) (Empire Associates,
Plymouth Equipment Associates, and Foam Recycling Associates);
Zenkel v. Commissioner, T.C Memo. 1996-398 (Phoenix Recycling
Group and Scarborough Leasing Associates (where Mr. Winer was
also a general partner)); Stone v. Commissioner, T.C. Memo. 1996-
230 (Northeast Resource Recovery Associates and Hyannis Recycling
Associates); Pace v. Commissioner, T.C. Memo. 1995-580 (Hyannis
Recycling Associates).
                                 - 7 -

opportunity to settle his case as were other similarly situated

taxpayers; (2) the notice of deficiency is invalid because

respondent did not audit RRA; (3) the closing agreement “relates

only to the items * * * relating to * * * [RRA], the ‘TAX

SHELTER’ defined in the Closing Agreement” and Provizer v.

Commissioner, supra, did not involve items relating to RRA; and

(4) the closing agreement is invalid “because it was executed as

a result of a misrepresentation of fact or fraud perpetrated by

the Internal Revenue Service”.    Respondent’s motion and

petitioner’s opposition thereto were set for hearing on November

4, 1998.

     That hearing focused on whether there was a malfeasance or a

misrepresentation of a material fact on the part of respondent at

the time that the closing agreement was executed.    Subsequent to

the hearing, the Court issued an order denying respondent’s

motion for entry of decision on the ground that “there is a

genuine issue of material fact as to whether respondent committed

malfeasance or misrepresented a material fact in obtaining the

closing agreement in issue.”   This case was then calendared for

trial.

                           Discussion

     Section 7121(a) provides that the Secretary may enter into

an agreement in writing “with any person relating to the

liability of such person * * * in respect of any internal revenue
                                 - 8 -

tax for any taxable period.”     Section 7121(b) provides, inter

alia:

          SEC. 7121(b) Finality.-– * * * such agreement shall be
     final and conclusive, and, except upon a showing of fraud or
     malfeasance, or misrepresentation of a material fact-–

                  *    *    *    *       *    *   *

                  (2) in any suit, action, or proceeding, such
             agreement * * * shall not be annulled, modified, set
             aside, or disregarded.

     An agreement under section 7121(a) is referred to as a

closing agreement, and it is not disputed that petitioner

executed such a closing agreement.       The issue is whether he is

bound by that agreement.     Petitioner essentially makes two

arguments.     First, he contends that the agreement should be set

aside because of misrepresentation of material fact by

respondent.3    Second, he contends that, as we understand, under

the literal language of the agreement, he is not bound by the

agreement.     We now turn to those issues.

                 Misrepresentation of a Material Fact

     Petitioner contends that when he executed the closing

agreement his attorney, Mr. Kamerman, was told by Harris E.

Fisher (Mr. Fisher), the Appeals Officer handling his case, that

the Provizers were partners in RRA, when, in fact, they were

partners in another partnership, Clearwater.       He further contends



     3
         Petitioner does not argue that respondent committed
fraud.
                                 - 9 -

that, if he had known that the partnership was one other than

RRA, he would not have executed the closing agreement.

     We are willing to assume, but do not decide, that Mr. Fisher

may have represented that the Provizers were partners in RRA.4

Nonetheless, even if Mr. Fisher represented that the Provizers

were partners in RRA, we are not satisfied that that

misrepresentation constituted a “misrepresentation of a material

fact.”   Sec. 7121(b).

     A “material fact” has been defined as “[a] fact that is

significant or essential to the issue or matter at hand.”

Black’s Law Dictionary, 611 (7th ed. 1999).     For purposes of

section 7121, a misrepresentation is not synonymous with a

mistake:   It “denotes something more deliberate or more conscious

than mere error or mistake.”     Ingram v. Commissioner, 32 B.T.A.

1063, 1066 (1935).   Under section 7121, misrepresentation of a

material fact must go to the “essence of the agreement.”        Miller

v. IRS, 174 Bankr. 791, 796 (B.A.P. 9th Cir. 1994), affd. 81 F.3d

169 (9th Cir. 1996).     Since petitioner attacks the closing


     4
        Mr. Kamerman testified that Mr. Fisher made this
representation to him. Mr. Fisher testified that he did not
remember making any such representation. Mr. Kamerman professed
to have no knowledge of the Plastics Recycling tax shelter
project. It may be questionable whether he even knew that there
was more than one partnership involved. Furthermore, Mr. Roberts
resigned as general partner of RRA in 1983, long before
petitioner executed the closing agreement, and it is difficult to
understand how the identity of the general partner would have
affected Mr. Kamerman's decision to execute the closing
agreement.
                              - 10 -

agreement, he has the burden of establishing a misrepresentation

of a material fact with “clear and convincing proof”.   Hoge v.

Commissioner, 33 B.T.A. 718, 725 (1935); see also Brinkman v.

Commissioner, T.C. Memo. 1989-217.

     If the partnerships were substantially identical, we do not

understand how the alleged misrepresentation could be considered

a “material fact”.   The question then is whether the RRA

partnership in which petitioner invested was substantially

different from Clearwater, the partnership involved in Provizer

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

     It would seem that the first logical step would be, as the

Court suggested to counsel, to examine the record in Provizer.

That record is a public document and has been available in the

Tax Court throughout these proceedings.   For reasons that are not

entirely clear, petitioner eschewed that approach.   This is

rather peculiar because in Greene v. Commissioner, T.C. Memo.

1997-296,5 the Court found that “The transactions involving the *

* * [recyclers] leased by * * * [RRA] are substantially identical

to those in” Clearwater.   It is true that that finding was based




     5
        There are two Greene cases–-Greene v. Commissioner, 88
T.C. 376 (1987), and Greene v. Commissioner, T.C. Memo. 1997-296.
In the first case Elliot I. Miller was counsel of record, and in
the second case Lanny M. Sagal was counsel. Mr. Kamerman has
suggested that Mr. Miller may have had a conflict of interest.
Mr. Miller was not counsel in the second Greene case that is
discussed above.
                               - 11 -

on a stipulated record.6   But, petitioner has not shown that any

of the facts stipulated in Greene were different from the RRA

facts.   As noted, we have examined the placement offering

memorandum in RRA, and the transactions set forth in the offering

appear virtually identical with the facts that the Court found in

Provizer.    Moreover, at trial, Elliot I. Miller (Mr. Miller), who

represented PI (the manufacturer of the recyclers) during the

relevant period, testified that the same type of machines went to

both RRA and Clearwater, and that the recyclers were delivered to

RRA during 1981.    Mr. Miller testified that the partnerships were

identical with two exceptions:

     The number of machines may not have been the same. * * *
     And the general partners were different. * * * But other
     than that, the transactions were the same.

     As to the materiality of the alleged misrepresentation, Mr.

Kamerman testified that he would not have recommended to

petitioner that he be bound by litigation involving another

partnership because there would be a “different general partner

from” RRA.    Mr. Kamerman explained, that in his view “the general

partner being different is a fundamental difference, and it’s the



     6
        Counsel has raised questions as to the competency of the
representation in the Greene cases; he did not know, and
apparently had made no effort to find out, however, what records
counsel in the Greene cases had. While petitioner has complained
that he cannot determine whether the partnerships were
substantially identical, it appears that there may have been
avenues that were available, but, for reasons that are not
readily apparent, were not explored.
                                - 12 -

general partner’s motive and intent in carrying out the business

that determines whether or not the tax shelter had a profit

motive.”

     In the context of this case, this is nonsense.    In Provizer

we found that the Plastics Recycling scheme was essentially an

economic sham.     At the heart of that conclusion was the fact that

the recyclers were grossly overvalued.     At no time did we

indicate that the identity of the general partner and his profit

motive had a material effect in resolving the Plastics Recyclying

cases.     The issue here is whether the alleged misrepresentation

was material in the context of whether the closing agreement

should stand, and Mr. Kamerman’s professed preoccupation with the

identity of the general partner really does not address that

issue.     Regardless who had been the general partner, the fact

remains that the foundations of both partnerships rested on the

same quicksand.

                         The Closing Agreement

     Petitioner argues that, by the terms of the agreement, he is

not bound to the result in Provizer.     Petitioner’s argument, as

we understand, focuses on the language in the preamble of the

agreement:

          (1) The taxpayer has claimed income, deductions, and/or
     credits * * * relating to the * * * [RRA] tax shelter
     (hereafter the TAX SHELTER) * * *.

          (2) Items of income, deductions, and/or credits
     relating to the TAX SHELTER are in issue in a case pending
                               - 13 -

     before the United States Tax Court Harold M. Provizer and
     Joan Provizer v. Commissioner, Docket No. 27141-86
     (hereafter the CONTROLLING CASE). [Fn. ref. omitted.]

According to petitioner, since the TAX SHELTER related to RRA and

RRA’s items of income, deductions, and/or credits were not in

issue in Provizer, he should not be bound by the agreement.     The

problem with this interpretation is that it essentially ignores

the operative parts of the agreement.

     If there is a conflict between the premises stated and the

operative part of a closing agreement, the parties are bound by

the operative part.   As we stated in Zaentz v. Commissioner, 90

T.C. 753, 761-762 (1988):

     section 7121 does not bind the parties as to the premises
     underlying their agreement, they are bound only as to the
     matters agreed upon. Sec. 7121(b). In fact, by excluding
     as grounds for rescission mistakes of fact or law, the
     statute contemplates that the parties may premise their
     agreement upon such a mistake. * * *

See also Estate of Magarian v. Commissioner, 97 T.C. 1, 5 (1991).

     Furthermore, by executing the closing agreement petitioner

and respondent obviously intended that the parties would be bound

to something, i.e., as stated by the operative part of the

agreement:   “All issues involving the above adjustment [relating

to RRA] shall be resolved as if the taxpayer [petitioner] was the

same as the petitioner in the CONTROLLING CASE.”   The controlling

case was Provizer.    Petitioner’s reading of the language in the

preamble, therefore, makes little sense.   On the other hand, if

the reference to RRA refers generically to the cases involving
                                - 14 -

the plastic recyclers, the parts of the agreement are in harmony.

This seems to us to be the more logical reading of the language

in the preamble, and, notwithstanding Mr. Kamerman’s testimony,

it probably was what was intended by the parties.   Cf. Overhauser

v. United States, 45 F.3d 1085, 1089 (7th Cir. 1995).

     In sum, we do not find that there was a misrepresentation of

a material fact, and, under section 7121(b)(2), we may not set

aside or disregard the closing agreement.   Furthermore, we find

that petitioner is bound by Provizer v. Commissioner, supra,

under the closing agreement.7

     Respondent also filed a motion for an award of a penalty

under section 6673.   That section provides, in relevant part,



     7
        At trial, petitioner raised the argument that the closing
agreement should be set aside because petitioner allegedly did
not receive a prior offer that was more favorable to him than
that which resulted from our Provizer v. Commissioner, T.C. Memo.
1992-177. The theory apparently was that this amounted to
malfeasance under sec. 7121(b), or at least it was on that theory
that the Court allowed examination of the witnesses on that
issue. Petitioner has not argued this point on brief, and it is
deemed conceded. See Burbage v. Commissioner, 82 T.C. 546, 547
(1984), affd. 774 F.2d 644 (4th Cir. 1985); Wolf v. Commissioner,
T.C. Memo. 1992-432, affd. 13 F.3d 189 (6th Cir. 1993). Aside
from the so-called TEFRA partnership provisions (see secs. 6621
through 6234 and on point sec. 6224(c)(2)) that do not apply
here, there is nothing in the Internal Revenue Code that requires
that an offer to one taxpayer be extended to other taxpayers.
Moreover, it should be noted that there was a patent
inconsistency in petitioner’s argument that Mr. Fisher’s alleged
misrepresentation was to a material fact and petitioner’s
insistence that he was entitled to an alleged settlement based
upon other Plastics Recycling cases. The latter argument must
assume that he was entitled to the offer because the cases were
substantially identical.
                              - 15 -

that if it appears to the Court that a proceeding has been

maintained primarily for delay or the taxpayer’s position is

frivolous or groundless, the Court may award a penalty to the

United States in an amount not in excess of $25,000.    See sec.

6673(a)(1).   We admit that we are concerned about petitioner’s

motives in pursuing this litigation.    Prior to the evidentiary

hearing, the Court told Mr. Kamerman, petitioner’s counsel at the

time, that if the two partnerships were substantially the same,

there was no misrepresentation of a material fact for purposes of

section 7121(b).   At the hearing, petitioner failed to introduce

any probative evidence on this point.    On the other hand, while

petitioner’s position on the misrepresentation of a material fact

is highly suspect, we cannot say that his argument concerning the

closing agreement was frivolous or made primarily for delay even

though we may disagree with its conclusion.    Accordingly, we

shall deny respondent’s motion for a penalty under section

6673(a).

                                          An appropriate order will

                                   be issued, and decision will be

                                   entered under Rule 155.
