                        T.C. Memo. 2001-129



                      UNITED STATES TAX COURT



    ORELAND A. AND LUCILLE S. THORNSJO, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 5549-95, 8812-95,        Filed June 6, 2001.
                10657-95.



     Terrance A. Costello, for petitioners.

     Tracy A. Martinez, 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

section 7443A(b)(4) in effect when these proceedings commenced,



1
     Cases of the following petitioners are consolidated for
opinion: Donald L. and Diane J. Woolf, docket No. 8812-95; and
Lawrence J. and Dorothy A. Furlong, docket No. 10657-95.
                                 - 2 -

and Rules 180, 181, and 183.   All section references are to the

Internal Revenue Code, and 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

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

notices of deficiency, respondent determined additions to tax

with respect to petitioners’ Federal income taxes for the years

and in the amounts as shown below:

               Oreland A. and Lucille S. Thornsjo

                                 Additions to Tax
    Year       Sec. 6653(a)(1)       Sec. 6653(a)(2)      Sec. 6659
    1979            $897                  -0-               $5,381
    1980             824                  -0-                4,943
                                            1
    1982             545                                     1,226
                                            1
    1983              14                                      -0-

                  Donald L. and Diane J. Woolf

                                 Additions to Tax
    Year       Sec. 6653(a)(1)       Sec. 6653(a)(2)      Sec. 6659
    1979            $1,012                -0-               $6,070
                                            1
    1982             1,393                                   5,480
                                            1
    1983                21                                    -0-

               Lawrence J. and Dorothy A. Furlong

                                 Additions to Tax
    Year       Sec. 6653(a)(1)       Sec. 6653(a)(2)      Sec. 6659
    1979            $1,878                -0-               $8,721
    1
      Fifty percent of the interest payable with respect to the
portion of the underpayment that is attributable to negligence.
The underpayments were determined and assessed pursuant to a
partnership-level proceeding. See secs. 6231-6233. With regard
                               - 3 -

to petitioners Oreland A. and Lucille S. Thornsjo, respondent
determined underpayments attributable to negligence of $10,901
and $285 for 1982 and 1983, respectively. With regard to
petitioners Donald L. and Diane J. Woolf, respondent determined
underpayments attributable to negligence of $27,859 and $424 for
1982 and 1983, respectively.

     The issues for decisions are:     (1) Whether petitioners are

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

negligence or intentional disregard of rules or regulations and

(2) whether petitioners are liable for additions to tax under

section 6659 for underpayments of tax attributable to valuation

overstatements.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.2   Petitioners Oreland A. and Lucille S. Thornsjo resided

in St. Louis Park, Minnesota, when they filed the petition in

this case.   Petitioners Donald L. and Diane J. Woolf resided in

Chaska, Minnesota, when they filed the petition in this case.

Petitioners Lawrence J. and Dorothy A. Furlong resided in White


2
     It would appear that petitioners have abandoned any
contention regarding the statute of limitations (the so-called
Davenport issue). This Court’s opinion on that issue was
affirmed by the Court of Appeals for the Eleventh Circuit. See
Davenport Recycling Associates v. Commissioner, 220 F.3d 1255
(11th Cir. 2000), affg. T.C. Memo. 1998-347; West v.
Commissioner, T.C. Memo. 2000-389; Kohn v. Commissioner, T.C.
Memo. 1999-150; see also Klein v. United States, 86 F. Supp. 2d
690 (E.D. Mich. 1999); Clark v. United States, 68 F. Supp. 2d
1333, 1342-1346 (N.D. Ga. 1999). However, if we are mistaken in
this regard, then we refer the parties to paragraphs 17 and 18 of
the stipulation of facts, and we decide the Davenport issue in
respondent’s favor based on the foregoing precedent.
                                 - 4 -

Bear Lake, Minnesota, when they filed the petition in this case.

References to Thornsjo are to petitioner Oreland A. Thornsjo.

References to Woolf are to petitioner Donald L. Woolf.

References to Furlong are to petitioner Lawrence J. Furlong.

A.   The Hamilton Transactions

     These consolidated cases are part of the Plastics Recycling

group of cases.   The additions to tax arise from the disallowance

of losses, investment credits, and energy credits claimed by

petitioners with respect to a partnership called Hamilton

Recycling Associates (Hamilton or the partnership).

     For a detailed discussion of the transactions involved in

the Plastics Recycling cases, see Provizer v. Commissioner, T.C.

Memo. 1992-177, affd. per curiam without published opinion 996

F.2d 1216 (6th Cir. 1993).   The underlying transactions involving

the Sentinel recycling machines (recyclers) in these cases are

substantially identical to the transactions in Provizer v.

Commissioner, supra.

      In a series of simultaneous transactions closely resembling

those in Provizer, that for convenience are referred to herein as

the Hamilton transactions, Packaging Industries Group (PI) of
                                 - 5 -

Hyannis, Massachusetts, manufactured and sold3 four Sentinel EPS4

Recyclers to Ethynol Cogeneration, Inc. (ECI) for $1,520,000

each.   The sale of the recyclers from PI to ECI was partially

financed with nonrecourse promissory notes.   For each recycler,

ECI agreed to pay PI $112,750 in cash and a 12-year nonrecourse

promissory note of $1,407,250.

     Simultaneously, ECI resold the recyclers to F & G Equipment

Corp. (F&G) for $1,750,000 per machine.   For each machine, F&G

agreed to pay ECI $128,250 in cash, with the balance financed

through a partial recourse promissory note of $1,621,750.   The

note was recourse to the extent of 20 percent of its face value.

However, the recourse portion was payable only after the

nonrecourse portion was satisfied.

     In turn, F&G leased the recyclers to Hamilton.   Pursuant to

the lease and in accordance with applicable provisions of the


3
     Terms such as sale and lease, as well as their derivatives,
are used for convenience only and do not imply that the
particular transaction was a sale or lease for Federal tax
purposes. Similarly, terms such as joint venture and agreement
are also used for convenience only and do not imply that the
particular arrangement was a joint venture or an agreement for
Federal tax purposes.
4
     EPS stands for expanded polystyrene. The case of Provizer
v. Commissioner, T.C. Memo. 1992-177, affd. per curiam without
published opinion 996 F.2d 1216 (6th Cir. 1993), involved
Sentinel expanded polyethylene (EPE) recyclers. However, the EPS
recycler partnerships and the EPE recycler partnerships are
essentially identical. See Davenport Recycling Associates v.
Commissioner, supra; see also Ulanoff v. Commissioner, T.C. Memo.
1999-170 (same); Gottsegen v. Commissioner, T.C. Memo. 1997-314
(involving both the EPE and EPS recyclers).
                               - 6 -

Internal Revenue Code and Treasury regulations, F&G elected to

treat Hamilton as having purchased the recyclers for purposes of

the investment and business energy tax credits.

     Simultaneously, Hamilton entered into a joint venture with

PI and Resin Recyclers Inc. (RRI) for the “exploitation” of the

recyclers.   The joint venture agreement provided that RRI was to

assist Hamilton with the placement of recyclers with end-users.

At the same time, PI, ECI, F&G, Hamilton, and RRI entered into

arrangements providing that PI would pay a monthly joint venture

fee to Hamilton, in the same amount that Hamilton would pay as

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

on its note to ECI, in the same amount that ECI would pay each

month on its note to PI.   In connection with these arrangements,

PI, ECI, F&G, Hamilton, and RRI entered into offset agreements

providing that these monthly payments would only be kept as

bookkeeping entries, and no money actually was transferred.

Consequently, all of the monthly payments required among the

entities in the above transactions offset each other, and the

transactions occurred simultaneously.

     The parties have stipulated that as of September 30, 1983,

only one Sentinel EPS recycler was placed in service by Hamilton.

However, on its 1982 tax return, also stipulated in evidence,

Hamilton reported that the four recyclers had a combined basis of

$7 million for purposes of the investment and business energy tax
                               - 7 -

credits.   The parties further stipulated that in 1982 the

recyclers were not properly valued at $1,750,000 each but instead

had a maximum value of only $30,000 to $50,000 each.     On its

1982, 1983, and 1984 tax returns, Hamilton reported net ordinary

losses of $713,291, $36,205, and $16,720, respectively.     The

losses and credits reported by Hamilton on its tax returns were

passed through to Hamilton’s limited partners.     The portions

attributable to petitioners, respectively, were included on

Schedules K-1 (Form 1120S), Partners Share of Income, Credits,

Deductions, Inc., issued to them and filed with Hamilton’s tax

returns.

B.   The Private Offering Memorandum

       Generally, Hamilton distributed a private offering

memorandum to potential investors.     The offering memorandum

informed investors that Hamilton’s business would be conducted in

accordance with the transaction described above.     The offering

memorandum also warned potential investors of significant

business and tax risks associated with investing in Hamilton.

     Specifically, the offering memorandum warned potential

investors that:   (1) There was a substantial likelihood of an

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

purchase price of the Sentinel EPS Recyclers to be paid by F&G to

ECI may be challenged by the * * * [IRS] as being in excess of

the fair market value thereof, a practice followed by * * * [the

IRS] in transactions it deems to be tax shelters”; (3) the
                                - 8 -

partnership had no prior operating history; (4) the limited

partners would have no control over the conduct of the

partnership’s business; (5) there was no established market for

the Sentinel EPS recyclers; (6) there are no assurances that

market prices for virgin resin will remain at their current costs

per pound or that the recycled pellets will be as marketable as

virgin pellets; and (7) certain potential conflicts of interest

exist.

     The offering memorandum contained a marketing opinion by

Stanley Ulanoff (Ulanoff) and a technical opinion by Samuel

Burstein (Burstein).    Ulanoff owned a 4.37-percent interest in

Taylor Recycling Associates, which purported to lease four

plastic recyclers, and Burstein owned a 5.8-percent interest in

Jefferson Recycling Associates, which also purported to lease

four plastic recyclers.    The offering memorandum disclosed that

Burstein was a client of PI’s corporate counsel.    The offering

memorandum also warned potential investors not to rely on the

statements and opinions contained in the memorandum, but to

conduct an independent investigation.

C.   Partnership-Level Litigation

     On March 3, 1989, respondent issued Notices of Final

Partnership Administrative Adjustment (FPAA) to Hamilton’s tax

matters partner (TMP) for 1982, 1983, and 1984.    Subsequently, on

March 13, 1989, copies of these FPAA’s were issued to Thornsjo,

Woolf, and Furlong.    In the FPAA’s, respondent disallowed the
                                 - 9 -

losses that Hamilton had reported on its 1982, 1983, and 1984

Federal income tax returns and determined that Hamilton did not

incur “a loss in a trade or business or in an activity entered

into for profit or with respect to property held for the

production of income.”     In the FPAA’s, respondent also determined

that for purposes of the investment tax and business energy

credits Hamilton’s basis in the recycling equipment was zero,

rather than $7 million.

     Subsequently, a petition was filed by Hamilton’s TMP.         On

February 23, 1994, the Court entered a decision in Hamilton

Recycling Associates v. Commissioner, docket No. 9990-89.          This

decision reflects a full concession by Hamilton of all items of

income, loss, and the underlying equipment valuation used for tax

credit purposes.

D.   Richard C. Schluter

     Richard C. Schluter (Schluter) is a certified public account

(C.P.A.), who practiced from 1964 until his retirement in 1991.

Much of his practice related to the construction industry, and

many of his clients needed bonding for contracts.       Also, he

represented individuals, and about half his practice was tax-

related.

     In the late 1960’s, Schluter became involved with various

aspects of tax shelter promotions.       From 1971 until his

retirement, Schluter compiled public offering securities audits,

mostly for tax shelter promotions.       Schluter also reviewed tax
                                - 10 -

shelter prospectuses for clients who were considering investing

in them.   At times he would invest along with his clients because

in his view if “a person didn’t get involved, they did not know

what they were talking about.”    Prior to 1982, Schluter had

participated as a general partner of a limited partnership that

owned an apartment house.    Prior to 1982, less than 1 percent of

Schluter’s clients’ tax returns ever were audited by the IRS.      As

to tax shelters, only one of Schluter’s clients who invested in a

computer leasing transaction was audited before 1982, and this

audit resulted favorably for his client, who received a refund

from the IRS.

     In October 1982, Schluter learned about a tax shelter

involving Hamilton when Paul Fitzgerald, a client and former

partner in Schluter’s C.P.A. firm, asked him to review Hamilton’s

private offering memorandum.    Schluter reviewed the offering

memorandum and noted that the prospectus was throughly prepared;

it contained a tax opinion from a New York law firm; it included

the marketing opinion of Stanley Ulanoff (Ulanoff) and the

technical opinion of Samuel Burstein (Burstein).     Schluter

considered that the financial projections prepared by the C.P.A.

appeared to be reasonable.   Schluter never inquired into

Ulanoff’s or Burstein’s background.      Schluter also arranged for

his firm’s tax manager, Don Wilson (Wilson), to review the

Hamilton offering memorandum.    After reviewing the prospectus and

discussing it with Wilson and Fitzgerald, Schluter concluded that
                                - 11 -

the recyclers’ actual value was a potential issue.    However, from

his experience prior to 1982 it was Schluter’s view that an audit

was unlikely and that even if the IRS questioned the recyclers’

value, the IRS would merely adjust the recyclers’ value and

reduce an investor’s deductions and credits.

     Subsequently, Schluter requested that Ernest Mejia, a

licensed financial broker, review the Hamilton transaction.      In

1979 or 1980, Schluter had become acquainted with Mejia, who sold

life insurance to and instituted an employee stock ownership plan

for a company owned by Woolf.    Schluter also had prepared Mejia’s

tax return for 1 year.

     In addition to reviewing the financial projections in the

offering memorandum, Mejia visited PI’s business location to

observe the operation of a recycler.     Based upon his observation,

Mejia reported to Schluter that the recyclers appeared to operate

satisfactorily.   However, Mejia’s involvement with Hamilton was

not limited to reviewing the transaction.    Mejia also acted as a

broker on the transaction.

     Schluter also learned of a C.P.A. in Oklahoma who was

familiar with the plastic recycler transactions.    Schluter was

told that the Oklahoma C.P.A. was “so sold on the program he

became a general partner.”   Schluter and the Oklahoma C.P.A.

discussed the recyclers’ value and agreed that they had

reservations regarding the value of the recyclers.    However,

Schluter and the Oklahoma C.P.A. conjectured that based upon the
                               - 12 -

cost of computers at the time the recyclers appeared to be

reasonably priced.    In his testimony, Schluter did not explain

how the cost of computers is related to the value of the

recyclers.

       Schluter acknowledges that he does not have any education or

experience in the plastics or plastics recycling industries.

Despite this lack of expertise, Schluter contends that he

believed that Hamilton was a good investment because plastic is a

byproduct of oil and in the early 1980’s oil was in limited

production.    Schluter also believed that as a result of

increasing oil prices the price per pound of recycled plastics

would be increasing.    Sometime during 1982, Schluter advised

Thornsjo, Woolf, and Furlong to invest in Hamilton.     At this

time, Schluter also explained to Thornsjo, Woolf, and Furlong

that Hamilton was a tax shelter.    In his words:   “They knew it

was a tax shelter.”

       Subsequently, Schluter reviewed Hamilton’s 1982 financial

statements.    In 1983, Schluter learned that Hamilton, as well as

other plastics recycling partnerships, were being audited by the

IRS.    Sometime thereafter, Schluter contacted the accounting firm

that represented Hamilton during the audit.    Schluter asserts

that Hamilton’s accountants told him that the IRS reviewed the

partnership’s records and completed their work without comment.

       On August 13, 1983, Schluter read a Wall Street Journal

(WSJ) article that reported that the plastics recycling promoters
                               - 13 -

had agreed to an injunction that barred them from promoting tax

shelters.   On August 15, 1983, Schluter received and reviewed a

letter from Hamilton’s TMP that discussed the WSJ article.

Sometime thereafter, petitioners contacted Schluter regarding the

article.    Schluter told petitioners that Hamilton’s TMP had sent

him a letter discussing the WSJ article and that the letter

addressed his concerns.

     In 1984, petitioners contacted Schluter regarding IRS

correspondence they had received, which stated that deductions

and credits relating to Hamilton were not allowable and that the

IRS planned to audit their returns.     On September 11, 1984, the

IRS began an audit of Hamilton by contacting Hamilton’s TMP.

Thereafter, Hamilton’s TMP kept Schluter and other Hamilton

investors advised of all developments regarding the IRS audit.

E.   Thornsjo

      After his graduation from the University of Minnesota with a

bachelor of arts degree and military service and 2 years of

graduate school education, Thornsjo began working for Honeywell

as a manager in the avionics field.     Thornsjo worked for

Honeywell for 35 years.    Immediately before his retirement,

Thornsjo was the director of Honeywell’s automatic test equipment

business, a $145 million business.      Previously Thornsjo had been

employed as the general director of Honeywell’s Apollo program.

Thornsjo’s business experience is reflected by his

accomplishments at Honeywell in the area of operational
                                - 14 -

management and organizational development and by various

managerial achievements as well as the highly responsible

position to which he rose during his career as a result of his

ability.

     Thornsjo met Schluter and retained his services as a C.P.A.

sometime during 1978.   Prior to 1982, Thornsjo had invested only

small amounts in the stock market.       In 1982, Thornsjo learned

about Hamilton from Schluter.    However, Thornsjo did not receive

or review Hamilton’s offering memorandum.       Instead, Thornsjo met

with Schluter a number of times and discussed the offering

memorandum with him.    During these discussions, Schluter

explained that Hamilton was involved in a high-risk business.

Schluter also told Thornsjo that he had reservations regarding

the recyclers’ valuation.

     During one of these discussions, Schluter gave Thornsjo a

sample of recycling material.    Thornsjo contends that he took the

sample to a chemical engineer at Honeywell.       Thornsjo asserts

that this Honeywell engineer told him that there were no other

plastics recycling machines on the market.       Thornsjo also

contends that he consulted with a colleague who was familiar with

investments.   Thornsjo claims that his colleague told him that

investing in startups held risks but generally made sense.       At

trial, Thornsjo did not provide any details regarding the

engineer’s or his colleague’s background or their familiarity
                              - 15 -

with the plastics recycling industry.   Moreover, the engineer and

Thornsjo’s colleague did not testify during the trial.

     Thornsjo does not have any education or experience with the

plastics or plastics recycling industries.   Moreover, Thornsjo

did not personally review the Hamilton offering memorandum prior

to investing in Hamilton.   He did not employ a capable and

responsible person to investigate the value of the plastic

recyclers before investing.   Instead, Thornsjo contends that he

relied upon Schluter’s, the Honeywell engineer’s, and his

colleague’s advice when he invested in Hamilton.   Thornsjo also

contends that he invested in Hamilton because he considered

Hamilton a good investment for his retirement.   In 1982, Thornsjo

paid $25,000 for his partnership interest in Hamilton.

     As a result of his investment in Hamilton, on his 1982

Federal income tax return Thornsjo claimed a net operating loss

deduction of $19,578 and investment tax and business energy

credits totaling $38,500, which was limited to his 1982 income

tax liability (as reduced by the partnership loss) of $4,088.

The balance of the credits, $34,412, was carried back to 1979 and

1980 to generate tax refund claims of $17,937 and $16,475,

respectively.   On his 1983 Federal income tax return, Thornsjo

claimed a net operating loss deduction of $963 as a result of his

investment in Hamilton.
                              - 16 -

F.   Woolf

      In 1965, Woolf started a construction equipment company

called Ditch Witch of Minnesota (Ditch Witch).   Ditch Witch sold

heavy equipment for underground construction such as boring,

trenching, hauling, backhoe and related components.   Describing

his business career Woolf said he started Ditch Witch “from

nothing, and built it to a very successful business.”   In the

early 1980’s, Ditch Witch had annual gross receipts of $1,500,000

to $2,500,000.

      Prior to 1982, Woolf had made only modest investments in

securities.   He did invest in a bowling alley with four other

individuals, but Woolf decided “it looked like a Mickey Mouse

deal” and sold his interest for a long-term capital gain of more

than $25,000 in 1979.   Although Schluter brought other proposals

to his attention, Woolf preferred to invest his capital in Ditch

Witch.   He did invest individually in rental properties

throughout Minnesota, but these were mostly shop facilities that

he owned and rented to Ditch Witch.    Also, Woolf sold 30 percent

of Ditch Witch to employees through an ESOP.   Ditch Witch also

had a target pension plan, in which Woolf participated.    At the

time of trial, Woolf still owned 30 to 40 percent of Ditch Witch

and had sold or otherwise transferred the rest to his son-in-law.
                               - 17 -

     Sometime during 1978, Woolf met Schluter.   Thereafter

Schluter prepared Woolf’s and Ditch Witch’s tax returns.      In

addition, Schluter provided tax and business advice to Woolf.

     In 1982, Schluter told Woolf about Hamilton.   As a result,

Woolf received and briefly reviewed the Hamilton offering

memorandum, but he did not read the entire offering memorandum.

     Before he invested in Hamilton, Woolf was informed that

Schluter had reservations as to the value of the recyclers.

Nevertheless, Woolf did not take any further steps to determine

whether the recyclers were accurately valued.    Woolf has no

education or work experience in the plastics recycling or

plastics industries.

     In 1982, Woolf paid $25,000 for his partnership interest in

Hamilton.   Woolf contends that he invested in Hamilton because of

Schluter’s advice.   Woolf also contends that he participated in

Hamilton because he believed recycling was good for the

environment.   Schluter told Woolf that Hamilton was a tax

shelter.    Woolf understood the meaning of the term “tax shelter”

and knew that Hamilton was a tax shelter.

     As a result of his partnership interest in Hamilton, on his

1982 Federal income tax return Woolf claimed a net operating loss

deduction of $19,578 and investment tax and business energy

credits totaling $38,500, which was limited to his 1982 income

tax liability (as reduced by the partnership loss) of $18,266.
                                 - 18 -

The balance of the credits, $20,234, was carried back to 1979 to

generate a tax refund claim of $20,234.      On his 1983 Federal

income tax return, Woolf claimed a net operating loss deduction

of $962 from his investment in Hamilton.

G.   Furlong

      After graduating from high school, Furlong went to work for

his family’s gasoline and fuel business, Furlong Oil, Inc.

Furlong Oil was a distributor for Phillips Petroleum Co. and

delivered fuel oil to homes and gasoline at wholesale to service

stations.      Upon his father’s death in 1964, Furlong took over

Furlong Oil.      Furlong sold the business in 1992 and retired in

1996.   During 1979 and other years, Furlong was a member of a

partnership that leased 12 over-the-road trucks to one company,

United Petroleum.      The partnership was paid per mile, both ways,

loaded and empty, and hauled freight out of Chicago.      On his 1979

Federal income tax return, Furlong reported that he received from

United Petroleum rental income of $117,714, in addition to his

salary of $27,657 from Furlong Oil.

      Furlong met Schluter sometime during 1975 or 1976.

Thereafter, Schluter did all of the record keeping and accounting

work for Furlong Oil.      He prepared all of Furlong Oil’s tax

returns, as well as Furlong’s personal tax returns.      Furlong also

developed a social relationship with Schluter, and they regularly

had lunch and played golf together.
                              - 19 -

     Prior to 1982, Furlong did not make many investments.    In

1981 at Schluter’s suggestion, he did invest in a partnership

called Jacobs and Stewart that was building office buildings.

Furlong considered this investment unsuccessful.    His 1979 tax

return also reflects an investment in Glenaire Apartments and in

several investments described as “Gas and Go Ten-Ten Truck Stop”

and “Schmidt and Furlong Gas and Go”.   Sometime during 1982,

Schluter told Furlong about Hamilton while they were playing

golf.   Subsequently, Schluter and Furlong discussed Hamilton a

number of times, generally during their golfing afternoons, and

as a result of these discussions, Furlong paid $25,000 for his

partnership interest in Hamilton.

     Furlong does not have any education or work experience in

the plastics recycling or plastics industries.    Moreover, Furlong

did not personally review Hamilton’s offering memorandum or

investigate Hamilton before becoming a participant in the

partnership.   Instead, Furlong relied upon Schluter’s advice

about Hamilton.   Furlong also contends that Schluter never told

him that he had questions regarding Hamilton’s valuation of the

recyclers.   Furthermore, Furlong asserts that he invested in

Hamilton for additional income for his retirement because Furlong

Oil did not have a pension plan.    However, Furlong also testified

that he knew that Hamilton was a tax shelter.    Schluter told

Furlong that Hamilton was a tax shelter; Furlong knew what a tax
                              - 20 -

shelter was; and Furlong knew that in purchasing a partnership

interest in Hamilton he was buying an interest in a tax shelter.

     As a result of his investment in Hamilton, Furlong carried

back to 1979 a net operating loss deduction of $20,361.   Furlong

also carried back investment tax and business energy credits that

he had claimed on his 1982 Federal income tax return that were in

excess of his 1982 tax liability.   Accordingly, Furlong carried

back a balance of the credits to 1979 to generate a tax refund

claim.

                              OPINION

     We have decided many Plastics Recycling cases.   Most of

these cases, like the present case, raised issues regarding

additions to tax for negligence and valuation overstatement.

See, e.g., West v. Commissioner, T.C. Memo. 2000-389; Barber v.

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

Memo. 2000-339; Carroll v. Commissioner, T.C. Memo. 2000-184;

Ulanoff v. Commissioner, T.C. Memo. 1999-170; Gottsegen v.

Commissioner, T.C. Memo. 1997-314; Greene v. Commissioner, T.C.

Memo. 1997-296; Kaliban v. Commissioner, T.C. Memo. 1997-271;

Sann v. Commissioner, T.C. Memo. 1997-259 n.13 (and cases cited

therein), affd. sub nom. Addington v. Commissioner, 205 F.3d 54

(2d Cir. 2000).   In all but two of those cases, we found the

taxpayers liable for the additions to tax for negligence.

Moreover, in all of those cases we found the taxpayers liable for

additions to tax for valuation overstatement.
                              - 21 -
     In Provizer v. Commissioner, T.C. Memo. 1992-177, the test

cases for the Plastics Recycling group of cases, this Court:

(1) Found that each recycler had a fair market value of not more

than $50,000; (2) held that the transaction, which was virtually

identical to the transactions in the present cases, was a sham

because it lacked economic substance and a business purpose;

(3) sustained the additions to tax for negligence under section

6653(a)(1) and (2); (4) sustained the addition to tax for

valuation overstatement under section 6659 because the

underpayment of taxes was directly related to the overvaluation

of the recyclers; and (5) held that the partnership losses and

tax credits claimed with respect to the plastics recycling

partnership at issue were attributable to tax-motivated

transactions within the meaning of section 6621(c).     We also

found that other recyclers were commercially available during the

year in issue.   See Provizer v. Commissioner, supra.    In reaching

the conclusion that the transaction lacked a business purpose,

this Court heavily relied upon the overvaluation of the

recyclers.   Similarly, in Gottsegen v. Commissioner, supra, we

found that each Sentinel EPS recycler had a fair market value not

in excess of $50,000.

A.   Section 6653(a)(1) and (2) Negligence

     In each of the present cases, respondent determined that

petitioners were liable for additions to tax for negligence under

section 6653(a)(1) and (2) with respect to an underpayment
                              - 22 -
attributable to petitioners’ investment in Hamilton.    In each

case, petitioners contend that they were not negligent because:

(1) They reasonably relied in good faith upon the advice of a

competent and experienced accountant in deciding to invest in

Hamilton, and (2) they intended to make a profit from their

investment in Hamilton.   Thornsjo also argues that he was not

negligent because he conducted a reasonable independent

investigation by consulting an unidentified Honeywell engineer

and a work colleague at his place of employment.

     Section 6653(a)(1) and (2) imposes additions to tax if any

part of the underpayment of tax is due to negligence or

intentional disregard of rules or regulations.    Negligence is

defined as the failure to exercise the due care that a reasonable

and ordinarily prudent person would exercise under the

circumstances.   See Neely v. Commissioner, 85 T.C. 934, 947

(1985).   The pertinent question is whether a particular

taxpayer’s actions are reasonable in light of the taxpayer’s

experience, the nature of the investment, and the taxpayer’s

actions in connection with the transactions.   See Henry Schwartz

Corp. v. Commissioner, 60 T.C. 728, 740 (1973).    When considering

the negligence additions to tax, we evaluate the particular facts

of each case, judging the relative sophistication of the

taxpayers, as well as the manner in which they approached their

investment.   See McPike v. Commissioner, T.C. Memo. 1996-46.
                               - 23 -
1.   Petitioners’ Purported Reliance on an Adviser

      In each of these cases, petitioners claim that they

reasonably relied upon Schluter’s advice.   A taxpayer may avoid

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

(2) if he or she reasonably relied on competent professional

advice.   See United States v. Boyle, 469 U.S. 241, 250-251

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

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

also American Properties, Inc. v. Commissioner, 28 T.C. 1100,

1116-1117 (1957), affd. per curiam 262 F.2d 150 (9th Cir. 1958).

Reliance on professional advice, standing alone, is not an

absolute defense to negligence, but rather a factor to be

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

professional advice to excuse a taxpayer from the negligence

additions to tax, the taxpayer must show that the professional

had the expertise and knowledge of the pertinent facts to provide

informed advice on the subject matter.   See Chakales v.

Commissioner, 79 F.3d 726 (8th Cir. 1996), affg. T.C. Memo. 1994-

408; David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995),

affg. T.C. Memo. 1993-621; Freytag v. Commissioner, supra; Sann

v. Commissioner, supra.

      Moreover, reliance on representations by insiders,

promoters, or offering materials has been held an inadequate

defense to negligence.    See Pasternak v. Commissioner, 990 F.2d
                               - 24 -
893 (6th Cir. 1993), affg. Donahue v. Commissioner, T.C. Memo.

1991-181; Laverne v. Commissioner, 94 T.C. 637, 652-653 (1990),

affd. without published opinion 956 F.2d 274 (9th Cir. 1992);

Sann v. Commissioner, supra.   Pleas of reliance have been

rejected when neither the taxpayer nor the advisers purportedly

relied upon by the taxpayer knew anything about the nontax

business aspects of the contemplated venture.   See David v.

Commissioner, supra; Freytag v. Commissioner, supra.

     In these cases, the purported value of the recyclers

generated the deductions and credits.   This circumstance was

clearly reflected in the offering memorandum.   Prior to

purchasing partnership interests in Hamilton, Thornsjo and

Furlong did not read the offering memorandum and Woolf only

briefly reviewed it.   However, Schluter read the offering

memorandum and was fully aware of the tax benefits associated

with a so-called investment in Hamilton.   In their discussions

with Schluter, petitioners surely learned or should have learned

about the amount and nature of the tax benefits.   Plainly the tax

benefits associated with purchasing a partnership share in

Hamilton, including the carrybacks, were very substantial.     The

direct reductions claimed on petitioners’ tax returns, from the

investment tax credit alone, exceeded their cash investment.

Therefore, like the taxpayers in Provizer v. Commissioner, T.C.

Memo. 1992-177, “except for a few weeks at the beginning,
                                - 25 -
petitioners never had any money in the * * * [partnership

transaction].”   Under these circumstances, a reasonably prudent

person would have asked a qualified adviser if such a windfall

were not too good to be true.    See McCrary v. Commissioner, 92

T.C. 827, 850 (1989).

     Schluter understood that such a windfall was too good to be

true.   Although, Schluter had no expertise with plastics

recycling, Schluter knew that the recyclers’ actual value was a

potential issue that was likely to be raised by the IRS.    Despite

his concerns, Schluter failed to consult an independent appraiser

or anyone with expertise in plastics or plastics recycling.    If

Schluter had made a reasonable effort to determine the fair

market value of the recyclers, he would have determined that the

recyclers’ price was grossly inflated.   At that point a

reasonable person would have inquired why the partnership would

be willing to “invest” in machines at far in excess of their fair

market value when it could purchase other much less expensive

machines that performed virtually the same functions.   In any

event, Schluter testified that his clients had been audited only

rarely and that in his view, even if petitioners were audited,

IRS only would adjust the recyclers’ value and therefore would

reduce petitioners’ deductions and tax credits.

     Schluter also contends that he discussed the recyclers’

value with an unidentified C.P.A. from Oklahoma and with Mejia.
                              - 26 -
The unidentified C.P.A. and Mejia did not testify at trial.

Moreover, petitioners failed to introduce any evidence that

indicates that this C.P.A. or Mejia had any expertise in plastics

or plastics recycling.   Schluter’s assertions that he and the

unidentified C.P.A. concluded that the recyclers’ valuation was

reasonable based upon the value of computers in 1982 is

unconvincing.   At trial, Schluter did not explain how the cost of

computers in 1982 related to the valuation of plastic recyclers.

Moreover, Mejia acted as a broker on the transactions.    See West

v. Commissioner, T.C. Memo. 2000-389, concerning Mejia activities

in marketing plastic recycling tax shelter partnerships.    As we

have already stated, reliance on representations by promoters is

not an adequate defense to negligence.   See Pasternak v.

Commissioner, supra; Laverne v. Commissioner, supra; Sann v.

Commissioner, T.C. Memo. 1997-259.

     Moreover, Schluter’s reliance upon the offering materials,

which included a marketing report prepared by Ulanoff and a

technical opinion prepared by Burstein, to determine the

recyclers’ value was not reasonable.   Schluter never investigated

whether Ulanoff or Burstein had an interest in Plastics Recycling

transactions.   In fact, Ulanoff and Burstein each invested in

several Plastics Recycling partnerships.   The offering memorandum

also disclosed that Burstein was a client and business associate

of PI’s corporate counsel.
                                - 27 -
     Schluter also made an unconvincing statement that he

believed that Hamilton would be economically profitable because

plastic is an oil derivative.    At trial, Schluter failed to

explain adequately how the so-called oil crisis provided a

reasonable basis to invest in Hamilton.    Schluter also failed to

explain away the numerous business-related caveats and warnings

in the offering memorandum.    Contrary to Schluter’s contention,

the offering memorandum warned that there could be no assurances

that the price of new resin pellets would remain at their then-

current level.   Schluter also failed to consult with an

independent consultant who had knowledge about plastics or

plastics recycling to ascertain the business aspects of the

Hamilton transaction.

     Prior to 1982, Schluter was fully aware of the concept and

practical effect of tax shelters.    From 1964 to his retirement in

1991, Schluter was involved with the preparation and marketing of

tax shelters.    During the 1980's besides the media coverage of

the so-called oil crisis there was “extensive continuing press

coverage of questionable tax shelter plans.”    Zmuda v.

Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C.

714 (1982).

     Under these circumstances, we are convinced that Schluter

was not concerned with Hamilton’s economic or business aspects.

Rather, we find that Schluter understood and marketed Hamilton as
                               - 28 -
a tax shelter.   Schluter’s own testimony supports this

conclusion.   At trial, Schluter testified that he informed

Thornsjo, Woolf, and Furlong that Hamilton was a tax shelter.      He

expressed certainty that each petitioner knew Hamilton was a tax

shelter.   Thus it was not reasonable for petitioners to claim

substantial tax credits and partnership losses on the basis of

Schluter’s advice.

2.   Thornsjo’s Own Investigation of Hamilton

      Thornsjo also contends that he was not negligent because he

independently investigated the Hamilton transaction by consulting

with a Honeywell engineer and a colleague.      These individuals did

not testify at trial.    Moreover, Thornsjo has not provided any

evidence that indicates that these individuals had any expertise

with plastics or plastics recycling.    Under these circumstances,

we do not believe that Thornsjo conducted a reasonable

independent investigation of Hamilton.

3.   Petitioners’ Purported Profit Motive

      In each of these cases, petitioners contend that they

invested in Hamilton for economic profit and as a source of

income for retirement.    Each petitioner had an extensive business

background and had enjoyed a successful career.     Furlong and

Woolf had been the heads of their own companies, and Thornsjo was

a senior executive at Honeywell.    Accordingly, all three of these

petitioners were experienced businessmen who had been involved
                               - 29 -
with financial decisions in their business careers.     Moreover,

petitioners were fully warned by Schluter that the valuation of

the recyclers concerned him.   Nevertheless, petitioners

disregarded these warnings and failed to consult any independent

advisers with expertise in plastics or plastics recycling.

Petitioners also failed to conduct a reasonable independent

investigation into the market value of the recyclers or any of

the other economics of the Hamilton transaction.

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

(1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024

(10th Cir. 1994), is misplaced.     The facts in the Krause case are

distinguishable from the facts in these cases.    In Krause, the

taxpayers invested in limited partnerships whose investment

objectives concerned enhanced oil recovery (EOR) technology.

Krause states that during the late 1970’s and early 1980’s, the

Federal Government adopted specific programs to aid research and

development of EOR technology.    See id. at 135-136.   In holding

that the taxpayers in Krause were not liable for the negligence

addition 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 1970s and early 1980s to invest

in EOR technology.”   Id. at 177.    While EOR was, according to our

opinion in Krause, at the forefront of national policy and the
                               - 30 -
media during the late 1970’s and early 1980’s, petitioners have

failed to demonstrate that the so-called energy crisis provided a

reasonable basis for them to invest in Hamilton.

       In addition, the taxpayers in Krause were either experienced

in or investigated the oil industry and EOR specifically.     One of

the taxpayers in Krause undertook a significant investigation of

the proposed investment, including researching EOR.    The other

taxpayer was a geological and mining engineer who hired an

independent expert to review the offering materials.    See id. at

166.    In the present cases, petitioners did not have any

experience or education in plastics recycling.    Moreover, Woolf

and Furlong did not undertake any independent investigation of

the recyclers, and Thornsjo’s cursory inquiries did not amount to

a reasonably thorough investigation, particularly for a person of

his stature and background.

       Petitioners next argue that they were not negligent because

they continued to monitor their investments in Hamilton.     To

support this argument, petitioners assert that Schluter read a

WSJ article regarding Hamilton, that Schluter read a letter from

Hamilton’s TMP regarding the WSJ article, that they contacted

Schluter with regard to the WSJ article, that they contacted

Schluter with regard to IRS correspondence, and that Schluter

monitored and discussed with them progress reports regarding

Hamilton’s IRS audit.    Contrary to petitioners’ arguments, these
                              - 31 -
minimal and occasional inquiries do not demonstrate that

petitioners were concerned with the business aspects or the

economic profitability of Hamilton.    Instead, these circumstances

confirm petitioners’ true motivation for investing in Hamilton,

which was to receive tax benefits.

4.   Conclusion as to Negligence

      We find that petitioners failed to exercise due care in

claiming large deductions and tax credits with respect to

Hamilton on their Federal income tax returns.   It was not

reasonable for petitioners to rely on the offering memorandum,

insiders to the transaction, or Schluter.   Schluter relied upon

the offering memorandum for the value of the recyclers.    Neither

Schluter nor petitioners undertook a good faith investigation of

the fair market value of the recyclers or the underlying economic

viability or financial structure of Hamilton.   Accordingly, we

hold that petitioners are liable for the negligence additions to

tax under section 6653(a)(1) and (2).

B.   Section 6659 Valuation Overstatement

      In his notices of deficiency, respondent determined that

petitioners were liable for section 6659 additions to tax on the

portions of their respective underpayments attributable to

valuation overstatements.   Under section 6659, 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
                              - 32 -
valuation overstatement.   See 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.     See sec.

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

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

underpayment.   See sec. 6659(b).

      Petitioners claimed tax benefits, including investment tax

credits and business energy credits, based on a purported value

of $1,750,000 for each recycler.    In the present cases,

petitioners have stipulated that the fair market value of a

recycler in 1982 was between $30,000 and $50,000.     Accordingly,

if disallowance of petitioners’ claimed benefits is attributable

to such valuation overstatements, petitioners are liable for

section 6659 additions to tax at the rate of 30 percent of the

underpayments of tax attributable to tax benefits claimed with

respect to Hamilton.

      Petitioners contend that section 6659 does not apply in

their cases because (1) disallowance of the claimed tax benefits

was attributable to other than a valuation overstatement, and (2)

Hamilton’s concession in the underlying partnership case

precludes imposition of the section 6659 additions to tax.

1.   The Grounds for Petitioners’ Underpayments

      Petitioners contend that the section 6659 addition to tax

does not apply in their cases because the disallowance of the
                               - 33 -
claimed tax benefits was not attributable to a valuation

overstatement.    Specifically, petitioners argue that where, as

here, the Commissioner completely disallows a tax benefit, the

tax underpayment cannot be attributable to a valuation

overstatement.    Petitioners also contend that there exists an

alternate ground for the disallowance of the claimed tax benefits

that is independent of an overvaluation overstatement.

Petitioners argue that the disallowance of the claimed benefits

was partially premised on the fact that only one of the four

recyclers leased by Hamilton was placed in service by September

30, 1983.    Petitioners cite the following cases to support their

argument:    Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990),

revg. T.C. Memo. 1988-408; Gainer v. Commissioner, 893 F.2d 225

(9th Cir 1990), affg. T.C. Memo. 1988-416; Todd v. Commissioner,

862 F.2d 540 (5th Cir. 1988), affg. 89 T.C. 912 (1987); McCrary

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

       Section 6659 does not apply to underpayments of tax that are

not “attributable to” valuation overstatements.    Todd v.

Commissioner, supra at 541; McCrary v. Commissioner, supra at

851.    “To the extent taxpayers claim tax benefits that are

disallowed on grounds separately and independently from alleged

valuation overstatements, the resulting underpayments of tax are

not regarded as attributable to valuation overstatements.”

Krause v. Commissioner, 99 T.C. 132, 178 (1992) (citing Todd v.

Commissioner, supra).    However, when valuation is an integral
                               - 34 -
factor in disallowing deductions and credits, section 6659 is

applicable.   See Merino v. Commissioner, 196 F.3d 147 (3d Cir.

1999), affg. T.C. Memo. 1997-385; Zfass v. Commissioner, 118 F.3d

184 (4th Cir. 1997), affg. T.C. Memo. 1996-167; Illes v.

Commissioner, 982 F.2d 163 (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; Massengill v. Commissioner, 876

F.2d 616 (8th Cir. 1989), affg. T.C. Memo. 1988-427.

     Petitioners’ reliance on Gainer v. Commissioner, supra, and

Todd v. Commissioner, supra, ignores that this Court as well as

the Court of Appeals for the Eighth Circuit, the court to which

appeals in these cases lie, has held that “When an underpayment

stems from disallowed depreciation deductions or investment

credit due to lack of economic substance, the deficiency is

attributable to overstatement of value, and subject to the

penalty under section 6659.”   Massengill v. Commissioner, supra

at 619-620.

     We also find that the facts in these cases are

distinguishable from the facts in Gainer v. Commissioner, supra,

Todd v. Commissioner, supra, and McCrary v. Commissioner, supra.

In Gainer and Todd, it was found that a valuation overstatement

did not contribute to an underpayment of taxes.   In those cases,

the underpayments were due exclusively to the fact that the

property in each case had not been placed in service.   In

McCrary, the underpayments were deemed to result from a
                              - 35 -
concession that the agreement at issue was a license and not a

lease.   Although property was overvalued in each of those cases,

the overvaluation was not the ground on which the taxpayers’

liabilities were sustained.   In contrast, a “different situation

exists where a valuation overstatement * * * is an integral part

of or is inseparable from the ground found for disallowance of an

item.”   McCrary v. Commissioner, supra at 859.   In the present

cases, we find that the overvaluation of the recyclers was

integral to and inseparable from petitioners’ claimed tax

benefits and the determination that Hamilton lacked economic

substance.5

     Petitioners’ argument that there exists an alternate ground

for the disallowance of the claimed benefits that is independent

of an overvaluation statement ignores the facts in their cases.

Contrary to petitioners’ argument, the FPAA’s do not indicate

that the disallowance of tax benefits was premised upon the

recyclers’ not being placed in service.   Instead, in the FPAA’s

respondent determined that Hamilton was not entitled to the



5
     To the extent that Heasley v. Commissioner, 902 F.2d 380
(5th Cir. 1990), revg. T.C. Memo. 1988-408, merely represents an
application of Todd v. Commissioner, 862 F.2d 540 (5th Cir.
1988), affg. 89 T.C. 912 (1987), we consider Heasley
distinguishable. To the extent that Heasley is based on a
concept that where an underpayment derives from the disallowance
of a transaction for lack of economic substance, the underpayment
cannot be attributable to an overvaluation, this Court, as well
as the Court of Appeals for the Eighth Circuit, has disagreed.
See Massengill v. Commissioner, 876 F.2d 616 (8th Cir. 1989),
affg. T.C. Memo. 1988-427.
                              - 36 -
losses it reported on its 1982, 1983, and 1984 Federal income tax

returns because Hamilton did not incur “a loss in a trade or

business or in an activity entered into for profit or with

respect to property held for the production of income.”   In the

FPAA’s, respondent also determined that Hamilton’s basis in the

recycling equipment was zero for purposes of the investment tax

and the business energy credits.   The parties have stipulated

that this Court’s decision in Hamilton Recycling Associates v.

Commissioner, docket No. 9990-89, reflects a full concession by

Hamilton of all items of income, loss, and the underlying

equipment valuation used for tax credit purposes.   In effect the

parties in the underlying partnership litigation stipulated that

Hamilton was not an activity entered into for the production of

income; the transaction lacked economic substance and was a sham.

Moreover, a concession based upon petitioners’ suggested ground

would not have resulted in a full denial of the claimed losses

and the recyclers’ having a zero basis for purposes of the

investment tax and business energy credits.   Accordingly,

petitioners’ suggestion that our decision in Hamilton Recycling

Associates was premised upon the recyclers’ not having been

placed in service is unfounded.

     In the present cases, petitioners have conceded that the

recyclers’ fair market value in 1982 was between $30,000 and

$50,000.   Petitioners have also conceded that the Hamilton

transaction and the recyclers in these cases are substantially

identical to the transactions and recyclers considered in
                                - 37 -
Provizer v. Commissioner, T.C. Memo. 1992-177.     In Provizer, our

finding that the recyclers were overvalued was the dominant

factor that led us to hold that the transaction lacked economic

substance.   See Sann v. Commissioner, T.C. Memo. 1997-259.

Similarly, in the present cases the overvaluation of the

recyclers was a dominant factor in regard to:    (1) The disallowed

tax credits, and other benefits in these cases; (2) the

underpayments of tax; and (3) the determination that the Hamilton

transaction lacked economic substance.

      Lastly, we note that petitioners’ argument is similar to the

arguments that were raised in other plastics recycling cases.

See Merino v. Commissioner, T.C. Memo. 1997-385, affd. 196 F.3d

147 (3d Cir. 1999); Singer v. Commissioner, T.C. Memo. 1997-325;

Kaliban v. Commissioner, T.C. Memo. 1997-271; Sann v.

Commissioner, supra.     In all of those cases, we rejected this

argument.

2.   Concession of the Deficiency

      Petitioners also argue that Hamilton’s concession in the

underlying partnership case precludes imposition of the section

6659 additions to tax.    Petitioners contend that Hamilton’s

concession renders any inquiry into the grounds for such

deficiencies moot.   Petitioners argue that absent such inquiry it

cannot be known whether their underpayments were attributable to

a valuation overstatement or other discrepancy and that without a

finding that a valuation overstatement contributed to an
                              - 38 -
underpayment section 6659 cannot apply.   In support of this line

of reasoning, petitioners rely heavily upon Heasley v.

Commissioner, 902 F.2d 380 (5th Cir. 1990), and McCrary v.

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

     Hamilton’s concession does not obviate our finding that

Hamilton lacked economic substance due to overvaluation of the

recyclers.   The value of the recyclers was established in

Provizer v. Commissioner, supra, and stipulated by the parties.

As a consequence of the inflated value assigned to the recyclers

by Hamilton, petitioners claimed deductions and credits that

resulted in underpayments of tax.   Regardless of Hamilton’s

concession in the underlying partnership case, in these cases the

underpayments of tax were attributable to the valuation

overstatements.

     Moreover, concession of the investment tax credit in and of

itself does not relieve taxpayers of liability for the section

6659 addition to tax.   See Singer v. Commissioner, supra; Kaliban

v. Commissioner, supra; Sann v. Commissioner, supra; Dybsand v.

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

Memo. 1993-630.   Instead, the ground upon which the investment

tax credit is disallowed or conceded is significant.   See Dybsand

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.   See Gainer v.
                              - 39 -
Commissioner, 893 F.2d 225 (9th Cir. 1990); Irom v. Commissioner,

866 F.2d 545, 547 (2d Cir. 1989), vacating in part T.C. Memo.

1988-211; Harness v. Commissioner, T.C. Memo. 1991-321.

     In these cases, petitioners each stipulated substantially

the same facts concerning the Hamilton transaction as we found in

Provizer v. Commissioner, supra.    In Provizer, 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 recyclers.    The overvaluation of the

recyclers, exceeding 2,325 percent, was an integral part of our

findings in Provizer that the transaction was a sham and lacked

economic substance.   Similarly, the overvaluation of the

recyclers was integral to and was the core of our holding that

Hamilton was a sham and lacked economic substance.

     Petitioners’ reliance on McCrary v. Commissioner, supra, is

misplaced.   In McCrary, the taxpayers conceded entitlement to

their claimed tax benefits, and the section 6659 addition to tax

was held inapplicable.   However, the taxpayers’ concession of the

claimed tax benefits, in and of itself, did not preclude

imposition of the section 6659 addition to tax.    In McCrary v.

Commissioner, supra, the section 6659 addition to tax was

disallowed because the agreement at issue was conceded to be a

license and not a lease.   In contrast, in these cases

petitioners’ underpayments were attributable to overvaluation of
                              - 40 -
the recyclers.   Accordingly, petitioners’ reliance on McCrary v.

Commissioner, supra, is inappropriate.6

     In Provizer v. Commissioner, T.C. Memo. 1992-177, we held

that each recycler had a fair market value not in excess of

$50,000.   Our finding in Provizer that the recyclers had been

overvalued was integral to and inseparable from our holding of a

lack of economic substance.   Petitioners stipulated that the

transaction in Hamilton was substantially similar to the

transaction described in Provizer, and that the fair market value

of the recyclers in 1982 was between $30,000 and $50,000.     Given

these concessions, and that the overvaluation of the recyclers

was integral to and inseparable from the determination that

Hamilton lacked economic substance, we conclude that the

deficiencies were attributable to the overvaluation of the

recyclers.

     For the foregoing reasons, we hold that petitioners are

liable for the section 6659 additions to tax for valuation

overstatement.


6
     Petitioners’ citation of Heasley v. Commissioner, supra, in
support of the concession argument is also inappropriate. The
Heasley case was not decided by the Court of Appeals for the
Fifth Circuit on the basis of a concession. Moreover, see supra
note 5 to the effect that the Court of Appeals for the Eighth
Circuit and this Court have not followed the Court of Appeals for
the Fifth Circuit’s rationale with respect to the application of
sec. 6659.
                        - 41 -
To reflect the foregoing,

                            Decisions will be entered for

                    respondent.
