                         T.C. Memo. 2008-276



                       UNITED STATES TAX COURT



                  DEELDA L. WATSON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11370-06.                Filed December 10, 2008.



     Peter J. Ressler, for petitioner.

     James H. Harris, Jr., for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:    Respondent has determined additions to tax

arising from disallowed partnership losses relating to a

partnership in which petitioner and her deceased husband invested

in 1983.   The additions to tax are for petitioner’s 1983 and 1985

taxable (calendar) years and are as follows:
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                                      Additions to Tax
         Year              Sec. 6653(a)(1)       Sec. 6653(a)(2)

         1983                 $220.10           To be determined1
         1985                   23.75           To be determined2
            1
               Fifty percent of the statutory interest due
         on the $4,402 underpayment of tax for 1983.
             2
               Fifty percent of the statutory interest due
         on the $475 underpayment of tax for 1985.

     All section references are to the Internal Revenue Code in

effect for the years in issue.    We must decide whether negligence

caused any of petitioner’s 1983 and 1985 underpayments in tax,

thereby rendering petitioner subject to the section 6653(a)(1)

and (2) additions to tax.    Petitioner bears the burden of proof.

                           FINDINGS OF FACT

     Some facts are stipulated and are so found.    The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.   At the time she filed the petition, petitioner

resided in Pennsylvania.

The Investment

     In 1983, petitioner and her husband, U.S. Army Colonel

Dwayne C. Watson (Colonel Watson; together, the Watsons),

invested in Contra Costa Jojoba Research Partners (CCJRP).1    The

Watsons had been investing for 10 years and had at least $157,000

invested in mutual funds and various real estate, oil and gas,



     1
       The parties have so stipulated, although stipulated
documents relating to the Watsons’ investment all refer to Contra
Costa Jojoba Research Limited Partnership. We assume that the
two descriptions are to the same partnership and will refer to
that partnership as CCJRP, in accordance with the parties’
stipulation of the Watsons’ investment.
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leasing, and cable television ventures.   In 1983, Colonel Watson

was teaching at the U.S. Army War College in Carlisle,

Pennsylvania, and petitioner had a small business for decorative

painting.

     Paul E. Vallely (Major General Vallely2) was a student of

Colonel Watson’s at the War College.   He was also the general

partner of CCJRP.   Major General Vallely and Colonel Watson

discussed CCJRP one day at the Watsons’ home.   After about an

hour reviewing documents, Colonel Watson decided to invest in

CCJRP, and both he and petitioner signed the necessary documents.

For $5,500 cash and a promissory note for $8,250, the Watsons

purchased a 2.857-percent limited partnership interest.   In

evaluating the potential risks and rewards of CCJRP, Colonel

Watson relied exclusively on Major General Vallely for advice.

Neither Colonel Watson nor petitioner made any independent

investigation of CCJRP.   Among the documents that petitioners

signed that day were a promissory note, an offeree questionnaire,

a subscription agreement, and a limited guaranty agreement.    The

subscription agreement represents that the subscriber has

received a copy of a private placement memorandum with respect to

CCJRP and CCJRP’s agreement of limited partnership (CCJRP

agreement).   The private placement memorandum claims among other

things that the investment has “significant first year tax

deductions of approximately 232% with subsequent year tax


     2
       Apparently, Paul E. Vallely retired from the U.S. Army as
a major general in 1991. See McConnell v. Commissioner, T.C.
Memo. 2008-167 n.7.
                                - 4 -

deductions.”    The CCJRP agreement, including attachments (a

research and development agreement and a license agreement),

consists of 39 single-spaced pages.

     For 1983 and 1985, the Watsons filed joint Federal income

tax returns.    H&R Block prepared the Watsons’ 1983 Federal income

tax return.    Steven Clever (Mr. Clever), a certified public

accountant, prepared the Watsons’ 1985 Federal income tax return.

With respect to CCJRP, the Watsons gave H&R Block and Mr. Clever

only the relevant Schedules K-1, Partner’s Share of Income,

Credits, Deductions, etc.    The Watsons claimed losses from CCJRP

of $12,500 and $1,290 on their Federal income tax returns for

1983 and 1985, respectively.

The Underpayments of Tax
     On April 12, 1989, respondent mailed to CCJRP’s tax matters

partner notices of final partnership administrative adjustment

for CCJRP’s 1983, 1984, and 1985 tax years that disallowed

certain losses claimed by CCJRP.    On July 13, 1989, in response

to those notices, CCJRP’s tax matters partner filed a petition in
this court for review of the adjustments in a case styled Contra

Costa Jojoba Research Partners, Charles B. Toepfer, Tax Matters

Partner v. Commissioner, docket No. 17323-89 (Contra Costa).     On

January 28, 1994, the parties to Contra Costa filed a stipulation

to be bound by the Court’s findings and decisions in Utah Jojoba

I Research v. Commissioner, docket No. 7619-90 (Utah Jojoba I).

We sustained the Commissioner’s disallowance of claimed losses in

Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-6, and
                                - 5 -

entered a decision on January 8, 1998, which became final on

April 9, 1998.    On the basis of the stipulation to be bound, and

following protracted efforts to find CCJRP’s tax matters partner,

the Court entered decision in Contra Costa on April 11, 2005.

Notices of Deficiency and Petition

      Respondent issued to petitioner notices of deficiency dated

March 13, 2006, for both 1983 and 1985, which (1) informed

petitioner that the losses of $12,500 and $1,290 that she and her

husband had claimed for 1983 and 1985 had been disallowed in

accordance with the agreement of the parties in Contra Costa and
(2) determined the additions to tax here in issue.   In response

to the notices, petitioner filed the petition.

                               OPINION

I.   Section 6653(a)

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

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

underpayment * * * is due to negligence or intentional disregard

of rules or regulations”.   Section 6653(a)(2) imposes a further
addition to tax equal to 50 percent of the interest due on the

“portion of the underpayment * * * attributable to * * *

negligence or intentional disregard”.

      “Negligence is lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.”    Fincher v. Commissioner, 105 T.C. 126, 140

(1995); Santa Monica Pictures, L.L.C. v. Commissioner, T.C. Memo.

2005-104.   In cases involving deductions resulting from a
                                  - 6 -

taxpayer’s investments, courts generally look both to the

reasonableness of the underlying investment and to the taxpayer’s

position taken on the return in evaluating whether the taxpayer

was negligent.    E.g., McDonough v. Commissioner, T.C. Memo. 2007-

101.    In Neonatology Associates, P.A. v. Commissioner, 299 F.3d

221, 234 (3d Cir. 2002), affg. 115 T.C. 43 (2000), the Court of

Appeals said:    “When * * * a taxpayer is presented with what

would appear to be a fabulous opportunity to avoid tax

obligations, he should recognize that he proceeds at his own

peril.”    That is, a taxpayer must make a “proper investigation or

exercise due diligence to verify the * * * tax legitimacy” of

such an investment.    Id. at 233.
II.    Arguments of the Parties

       Petitioner argues that the negligence additions are

inappropriate because she and her husband were moderate-income

investors who invested to make a profit rather than to obtain tax

benefits and who relied in good faith on investment advisers and

tax professionals.
       Respondent counters that the negligence additions are

appropriate because petitioner and her husband were experienced

investors who had a duty to investigate CCJRP because of the

obviously suspect tax benefits.      Moreover, the Watsons consulted

only with the promoter of CCJRP before making the investment and

provided insufficient facts to their return preparers to claim

reliance on their tax expertise.
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III.    Discussion

       This is one of a series of cases involving additions to tax

for negligence associated with investments in CCJRP.      E.g.,

Heller v. Commissioner, T.C. Memo. 2008-232; McConnell v.

Commissioner, T.C. Memo. 2008-167; Ghose v. Commissioner, T.C.

Memo. 2008-80.       In Heller, we said the following about CCJRP:

            CCJRP’s underlying activity lacked legitimacy, as
       we decided in Utah Jojoba I. See Utah Jojoba I
       Research v. Commissioner, supra (“[W]e hold that Utah I
       was not actively involved in a trade or business and
       also lacked a realistic prospect of entering a trade or
       business.”); see also Welch v. Commissioner, T.C. Memo.
       2002-39. Because CCJRP and the jojoba partnership at
       issue in Utah Jojoba I are essentially identical, we
       need not rehash in detail the license agreement and the
       research and development (R & D) agreement entered into
       between CCJRP and U.S. Agri Research & Development Corp
       (the same entity with which the partnership at issue in
       Utah Jojoba I entered into a license agreement and an R
       & D agreement). Suffice it to say that “the R & D
       agreement was designed and entered into solely to
       provide a mechanism to disguise the capital
       contributions of the limited partners as currently
       deductible expenditures and thus reduce the cost of
       their participation in the farming venture.” Utah
       Jojoba I Research v. Commissioner, supra. As the Court
       has stated in a number of other cases involving nearly
       identical jojoba partnerships:
                 First, the principal flaw in the
            structure of Blythe II [another jojoba R & D
            partnership subject to a stipulation to be
            bound by the outcome in Utah Jojoba I] was
            evident from the face of the very documents
            included in the offering. A reading of the R
            & D agreement and licensing agreement, both
            of which were included as part of the
            offering, plainly shows that the licensing
            agreement canceled or rendered ineffective
            the R & D agreement because of the concurrent
            execution of the two documents. Thus, the
            partnership was never engaged, either
            directly or indirectly, in the conduct of any
            research or experimentation. Rather, the
            partnership was merely a passive investor
            seeking royalty returns pursuant to the
                               - 8 -

          licensing agreement. Any experienced
          attorney capable of reading and understanding
          the subject documents should have understood
          the legal ramifications of the licensing
          agreement canceling out the R & D agreement.
          However, petitioners never consulted an
          attorney in connection with this investment,
          nor does it appear that they carefully
          scrutinized the offering themselves.

     Christensen v. Commissioner, T.C. Memo. 2001-185; see
     Finazzo v. Commissioner, T.C. Memo. 2002-56; Serfustini
     v. Commissioner, T.C. Memo. 2001-183; Carmena v.
     Commissioner, T.C. Memo. 2001-177; Nilsen v.
     Commissioner, T.C. Memo. 2001-163.

     The foregoing analysis leads to the conclusion that an

investment in CCJRP was not a reasonable investment from an

income tax perspective.   Petitioner argues, however, that she and

her husband did not invest in CCJRP for income tax benefits.   She

testified that Colonel Watson never mentioned to her any tax

breaks associated with the investment, and she argues:    “Here the

record clearly establishes that * * * Petitioner and Colonel

Watson entered * * * [into CCJRP] for the purposes of making

money, rather than to * * * [obtain] tax breaks.”   Even were we

to accept that no purpose of the Watsons’ in investing in CCJRP

was to obtain tax breaks (which we do not), the tax benefits

associated with an investment in CCJRP were prominently announced

in the private placement memorandum that we assume Colonel Watson

received from Major General Vallely.   The private placement

memorandum represents that an investment in CCJRP yields first-

year tax deductions of approximately 232 percent and subsequent

tax year deductions.   Even if Colonel Watson were indifferent to

the approximately 2½-to-1 tax writeoff that he would claim for
                                - 9 -

1983, and the deductions he would claim for subsequent years, he

was on notice that a generous tax benefit accompanied an

investment in CCJRP.   The Watsons were sufficiently experienced

investors that the generous tax benefits accompanying an

investment in CCJRP should have raised a red flag.    See Ghose v.

Commissioner, supra    (“The deduction of such a large loss in

proportion to petitioners’ investment claimed so close to when

that investment was made should have raised a red flag to

petitioners regarding the propriety of deductions for losses

related to their investment in CCJRP.”); Christensen v.
Commissioner, T.C. Memo. 2001-185 (rejecting argument that

investment motivated “solely by the potential to earn a profit”

immunized taxpayers from obligation to understand tax

consequences of investment).   A reasonable and ordinarily prudent

person would have seen that red flag and would have made a proper

investigation or would have exercised due diligence to verify the

tax legitimacy of the advertised tax benefits.    See Neonatology

Associates, P.A. v. Commissioner, supra.    Petitioner apparently
agrees that that was the proper course of action because she

claims that she and her husband relied on investment advisers and

tax professionals.

     Reasonable reliance on professional advice may serve as a

defense to additions to tax for negligence.    See United States v.

Boyle, 469 U.S. 241, 251 (1985).    In evaluating the potential

risks and rewards of CCJRP, Colonel Watson relied exclusively on

Major General Vallely for advice.    Nevertheless, petitioner has
                                - 10 -

failed to show that Major General Vallely had any demonstrated

tax expertise.    Moreover, she testified that Major General

Vallely was the man “selling” the investment in CCJRP to her and

Colonel Watson.    A reasonable and ordinarily prudent person would

not rely exclusively on the promoter of such an obviously tax-

risky and complex investment.    See LaVerne v. Commissioner, 94

T.C. 637, 652 (1990) (“The failure of petitioners to look beyond

the promotional materials supplied by the salespeople or to

consult independent advisers on so complex a matter as the

proposed investments in The Barbados partnerships is unreasonable

and is not in keeping with the standard of the ordinarily prudent

person.”), 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); McConnell v.

Commissioner, T.C. Memo. 2008-167 (rejecting reliance on Major

General Vallely’s advice as a defense to negligence additions

relating to an investment in CCJRP).     The Watsons’ apparent blind

faith in Major General Vallely constitutes a failure to exercise
due care before investing in CCJRP.

     Finally, petitioner argues that she and Colonel Watson

relied on professional tax return preparers to prepare their 1983

and 1985 returns.    The fact that professional tax return

preparers prepared those returns is insufficient to shield them

from liability for the negligence additions in question.     In all

likelihood, the Watsons’ tax return preparers merely transferred
                                - 11 -

the losses from the Schedules K-1 provided by CCJRP onto the

Watsons’ returns.   There is no evidence that suggests otherwise.

      Petitioner has failed in her defense to the section

6653(a)(1) and (2) additions to tax determined by respondent.

IV.   Conclusion

      On the premises stated,


                                          Decision will be entered

                                     for respondent.
