                         T.C. Memo. 1997-174



                       UNITED STATES TAX COURT



 ESTATE OF ROMINE C. HOGARD, DECEASED, JAMES C. ELLIOTT, PERSONAL
REPRESENTATIVE, AND BILL F. STEWART, PERSONAL REPRESENTATIVE, AND
      WANDA L. HOGARD, ET AL.,1 Petitioners v. COMMISSIONER
                  OF INTERNAL REVENUE, Respondent


     Docket Nos.    3319-89, 19780-89,           Filed April 8, 1997.
                   27132-89, 27225-89.


     Paul R. Hodgson, for petitioners.

     David G. Hendricks and Osmun R. Latrobe, for respondent.



                         MEMORANDUM OPINION

     DAWSON, Judge:    These consolidated cases were assigned to

Special Trial Judge Lewis R. Carluzzo pursuant to section

7443A(b)(4) and Rules 180, 181, and 183.      All section references

     1
      Cases of the following petitioners are consolidated
herewith: Gilmore & Wilson Construction Co. & Subsidiary, docket
No. 19780-89; Charles T. and Bettye Gilmore, docket No. 27132-89;
and Jerry L. Wilson, docket No. 27225-89.
                                             - 2 -


are to the Internal Revenue Code in effect for the years in

issue.       All Rule references are to the Tax Court Rules of

Practice and Procedure.                The Court agrees with and adopts the

Special Trial Judge's opinion, which is set forth below.

                          OPINION OF THE SPECIAL TRIAL JUDGE

       CARLUZZO, Special Trial Judge:                  Respondent determined

deficiencies, additions to tax, and increased interest with

respect to Romine C. and Wanda L. Hogard's Federal income taxes

as follows:
                                Additions to Tax and Increased Interest
                           Sec.        Sec.        Sec.        Sec.      Sec.
Year      Deficiency      6653(a)   6653(a)(1) 6653(a)(2)      6659     6621(c)
1979      $22,580.00     $1,129.00     ---         ---      $6,774.00      2
1980       28,358.00      1,417.90     ---         ---       8,507.40      2
1981       28,662.00        ---     $1,433.10       1        8,598.60      2
1982       15,366.40        ---        768.32       1        4,609.92      2

       1    50 percent of the interest due on the deficiency.

       2    Interest on the entire deficiency to be computed at 120 percent of the
            standard underpayment rate.

       Respondent determined deficiencies, additions to tax, and

increased interest with respect to Gilmore & Wilson Construction

Co. & Subsidiary's Federal income taxes as follows:
                                    Additions to Tax and Increased Interest
                             Sec.         Sec.        Sec.        Sec.       Sec.
  TYE       Deficiency      6653(a)    6653(a)(1) 6653(a)(2)      6659      6621(c)
7/31/80     $27,845.00      1,392.25      ---         ---      $8,353.50       2
7/31/81      10,595.20        ---        $529.76       1        3,178.56       2
7/31/83           ---         ---       2,149.31       1       12,895.84       2

       1    50 percent of the interest due on the deficiency.

       2 Interest on the entire deficiency to be computed at 120 percent of the
         standard underpayment rate.

       Respondent determined deficiencies, additions to tax, and

increased interest with respect to Charles T. and Bettye

Gilmore's Federal income taxes as follows:
                                         - 3 -

                              Additions to Tax and Increased Interest
                     Sec.          Sec.        Sec.     Sec.    Sec.   Sec.
Year   Deficiency   6653(a)     6653(a)(1) 6653(a)(2) 6659 6621(c) 6661(a)
1979     $2,647       $132          ---         ---      $794    2     ---
1980     12,047        602          ---         ---     3,614    2     ---
1981      6,332        ---          $317         1      1,900    2     ---
1982     29,649        ---         1,482         1      7,667    2    $1,023

       1   50 percent of the interest due on the deficiency.

       2   Interest on the entire deficiency to be computed at 120 percent of the
           standard underpayment rate.

       Respondent determined deficiencies, additions to tax, and

increased interest with respect to Jerry L. Wilson's Federal

income taxes as follows:
                              Additions to Tax and Increased Interest
                     Sec.          Sec.        Sec.     Sec.    Sec.   Sec.
Year   Deficiency   6653(a)     6653(a)(1) 6653(a)(2) 6659 6621(c) 6661(a)
1979    $11,657      $583           ---         ---    $3,497    2     ---
1980      1,397        70           ---         ---       419    2     ---
1982     49,452       ---         $2,473         1     12,180    2    $2,213

       1   50 percent of the interest due on the deficiency.

       2   Interest on the entire deficiency to be computed at 120 percent of the
           standard underpayment rate.

       These cases are part of the Plastics Recycling group of

cases.     For a detailed discussion of the transactions involved in

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

Memo. 1992-177, affd. without published opinion 996 F.2d 1216

(6th Cir. 1993).        The underlying transactions involving the

Sentinel recyclers in this case are substantially identical to

the transactions considered in the Provizer case.

       Consistent with the resolution of some of the disputed

issues in Provizer, in each of these cases petitioners filed a

Stipulation of Settled Issues concerning the adjustments related

to their participation in the Plastics Recycling Program.                      Each

stipulation states:
                               - 4 -


     1. Petitioners are not entitled to any deductions,
     losses, investment credits, business energy credits or
     any other tax benefits claimed on their tax returns for
     the taxable years in issue as a result of their
     participation in the Plastics Recycling Program.

     2. The underpayments in income tax attributable to the
     investment credit and business energy investment credit
     claimed with respect to petitioners' participation in
     the Plastics Recycling Program are subject to the
     addition to tax for valuation overstatements determined
     under I.R.C. section 6659 using an applicable
     percentage of 30 percent.

     3. The underpayments in income tax attributable to
     petitioners' participation in the Plastics Recycling
     Program are substantial underpayments attributable to
     tax motivated transactions, subject to the increased
     rate of interest established under I.R.C. section
     6621(c) as set forth in the notice of deficiency.

     4. This stipulation resolves all issues that relate to
     the items claimed on petitioners' tax returns resulting
     from their participation in the Plastics Recycling
     Program, with the exception of petitioners' potential
     liability for additions to tax for negligence under the
     applicable provisions of section 6653(a).

     The issue remaining for decision is whether petitioners are

liable for the additions to tax for negligence under the relevant

provisions of section 6653 for the years in issue.   Although not

specifically addressed in the Stipulation of Settled Issues,

because neither evidence nor argument was presented on the point

by the affected petitioners, we deem those petitioners to have

conceded respondent's determinations with respect to the section

6661 addition to tax.   Rule 149(b); Murphy v. Commissioner, 103

T.C. 111, 119 (1994); Rothstein v. Commissioner, 90 T.C. 488, 497

(1988).
                               - 5 -


Background

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

found.   When the petitions were filed in these cases, all of the

individual petitioners resided in Tulsa, Oklahoma, which is also

the principal place of business of the corporate petitioner.

Romine C. Hogard and Bettye Gilmore died after their petitions

were filed.

     In 1982, Romine C. Hogard (Hogard) was the president and

apparently the sole shareholder of a corporation whose business

involved coin-operated entertainment machines.   He had a high

school education.   Neither the educational nor employment

background of Wanda L. Hogard has been placed in the record.     The

parties stipulated that she was a "housewife" during 1982.

     Charles T. Gilmore (Gilmore) graduated from Oklahoma A&M

College in 1952 with a bachelor of science degree in marketing.

Gilmore was in the military from 1952 through 1954.   From 1954

through 1966, Gilmore worked for Knuckles Construction Co.

The record contains no information regarding the educational or

employment background of Bettye Gilmore.

     Jerry Wilson (Wilson) has a bachelor of science degree from

the University of Arkansas.   After graduation, he worked for an

architect and later became employed by Knuckles Construction Co.

     In 1966 Gilmore and Wilson organized the Gilmore & Wilson

Construction Co. (G&W), a corporation through which they
                                - 6 -


conducted a business engaged in the construction of houses and

commercial buildings.   Since the formation of G&W, Gilmore has

been the office manager and handled its business affairs, and

Wilson has been the president and design planner.

     Prior to 1982, the Gilmores owned stocks, maintained a

savings account, and invested in certificates of deposit.      Prior

to 1982, Wilson maintained a savings account and invested in

certificates of deposit.    In addition, the Gilmores invested in

residential real estate properties that they held for rent, as

did Gilmore and Wilson through a partnership.    The investment

history of the Hogards is unknown.

     When Knuckles Construction Co. experienced accounting

problems in 1962, Bill F. Stewart (Stewart), who was a friend of

the construction company's owner, was consulted for assistance in

resolving the problems.    This is how Stewart met, and later

secured as clients, Gilmore and Wilson.

     Stewart has a bachelor of science degree in commerce and

business administration.    He has taken courses towards a master's

degree in accounting and a few law school courses.    Stewart

became a certified public accountant in 1947 and began his career

as such with a national accounting firm.    In 1951, Stewart

started his own accounting business which focused primarily on

preparing individual income tax returns and providing tax advice.
                               - 7 -


     Wilson and Gilmore relied on Stewart for accounting and tax

assistance in organizing G&W, including establishing the

company's record-keeping systems and a profit sharing plan.

Stewart also assisted Gilmore and Wilson in the formation of a

partnership to acquire and manage certain real estate.   G&W's

books and records were maintained by Stewart, who typically

prepared the corporation's Federal income tax returns, including

the returns for the years in issue.    G&W's returns were reviewed

by Gilmore and Wilson before the returns were filed.

     The Hogards became clients of Stewart in the mid-1960's.

Details regarding the nature and extent of their relationship or

the services that Stewart provided to the Hogards are unclear.

     It appears that Stewart, or one of his associates, prepared

all of the relevant Federal income tax returns and applications

for tentative refunds involved in these cases; however, we note

that the record contains only unfiled copies of some of these

documents, so our finding on this point is not established.   We

also note that Exhibit 3-C, which was attached to the stipulation

of facts, is a copy of a 1981 individual Federal income tax

return for Romine C. Hogard.   Unlike the other years in issue, we

do not have a copy of a joint Federal income tax return for the

Hogards for that year.   Nevertheless, the notice of deficiency

for the Hogards makes determinations as though they filed a joint

return for that year, and the parties have proceeded accordingly.
                               - 8 -


Neither party has addressed this apparent inconsistency, and we

proceed as though Exhibit 3-C was not, in fact, a copy of a

return that was actually filed with respondent.

     With respect to the preparation of their individual Federal

income tax returns, the Gilmores and Wilson accumulated and

forwarded the necessary documentation to Stewart.     Stewart

received the Hogards' tax information from Hogard's secretary.

Before the returns were signed and filed, the Gilmores and Wilson

reviewed their respective returns.     It is unknown whether the

Hogards did the same.

     In early 1982, Stewart learned about the Clearwater group

partnership (Clearwater), Southeast Recovery Associates

(Southeast), and Esplanade Associates (Esplanade) through Bill

Storey (Storey), who was the accountant of a friend of one of

Stewart's clients.   Clearwater, Southeast, and Esplanade are

limited partnerships which purportedly engaged in licensing

Sentinel expanded polyethylene (EPE) recyclers manufactured by

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

     At some point, Stewart reviewed the Clearwater offering

memorandum.   Stewart later received the offering memoranda for

Esplanade and Southeast and was advised that they were similar to

the Clearwater offering memorandum.     The respective offering

memoranda for Southeast and Esplanade allocate 10 percent of the

proceeds from each offering to the payment of sales commissions
                               - 9 -


and offeree representative fees.   In addition, the offering

memoranda list significant business and tax risks associated with

an investment including:   (1) A substantial likelihood of an

audit by the Internal Revenue Service (IRS) and that the purchase

price paid by F&G to ECI would probably be challenged as being in

excess of fair market value; (2) that Southeast and Esplanade had

no prior operating history; (3) that Samuel Winer, the general

partner of southeast and Esplanade, had no prior experience in

recycling or similar equipment; (4) that the limited partners had

no control over the conduct of Southeast's and Esplanade's

business; (5) that there was no established market for the

recyclers; (6) that there were no assurances that market prices

for virgin resin would remain at their current costs per pound or

that the recycled pellets would be as marketable as virgin

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

existed.   The value of the Sentinel recyclers was grossly

overstated in the promotional materials.

     Stewart read the marketing opinion of Stanley Ulanoff

(Ulanoff), the technical opinion of Samuel Z. Burnstein

(Burnstein), and the tax opinion of John Y. Taggart (Taggart).

Ulanoff owns a 1.27-percent interest in Plymouth Equipment

Associates and a 4.37-percent interest in Taylor Recycling

Associates, both of which leased Sentinel recyclers.   Burnstein

owns a 2.605-percent interest in Empire Associates and a 5.82-
                               - 10 -


percent interest in Jefferson Recycling Associates, both of which

leased Sentinel recyclers.    Both Ulanoff and Burnstein's opinions

are included in all offering memoranda involving the recyclers.

Taggart and other members of the law firm of Windels, Marx,

Davies & Ives prepared the offering memorandum, tax opinion, and

other legal documents for the initial Plastics Recycling

partnership, Clearwater, and 16 other Plastics Recycling

partnerships.    Taggart was the head of the tax department of

Windels, Marx, Davies & Ives and taught tax law as an adjunct

professor at New York University (NYU) Law School.    Taggart had

previously been employed by the U.S. Department of the Treasury

and as a full-time faculty member of NYU Law School.    Taggart

owned a 6.66-percent interest in a second-tier Plastics Recycling

partnership.

     Samuel L. Winer (Winer) is the general partner of Esplanade

and Southeast.   Aside from being the general partner of Esplanade

and Southeast, Winer is also an investment banker and financial

consultant with offices in Clearwater, Florida.    He is also the

general partner in other plastics recycling limited partnerships

including Clearwater, Poly Reclamation Associates, and Sunbelt

Partnership Group.   For his services to Esplanade and Southeast,

Winer received $60,000 from each partnership out of the proceeds

of the Esplanade and Southeast private offerings.
                              - 11 -


     PI is a closely held corporation which manufactures

thermoplastic and other types of packaging machinery.   PI holds

itself out as the world's largest manufacturer of blister

packaging machinery and as fabricating the industry's widest line

of thermoforming machinery including highly specialized

disposable medical and food packaging systems.   PI also

manufactures both the Sentinel EPE and EPS Recyclers, which

recycle expanded polyethylene and expanded polystyrene.

     Stewart and Storey decided to visit PI's facilities in

Hyannis, Massachusetts, to see whether the recyclers performed as

described in the offering memorandum.   At their own cost, they

flew to New York where they met Winer, who provided them with

transportation to Hyannis.   At PI's facilities, they observed a

demonstration of the recyclers and listened to a presentation

about the recyclers.   Stewart, Storey, and 10 to 12 other people

attended a luncheon paid for by PI at which they discussed the

investment.   During this trip, Stewart was told that the disposal

of plastic was expensive, the recycler was unique, the price of

the recycler was reasonable, there were no patents on the

recycler, and some recyclers had sold for prices in excess of

those in the offering memorandum.   Other than Winer, Stewart did

not recall the names of the individuals with whom he spoke at PI.

     The recycler demonstration convinced Stewart that the

recycler performed as stated in the offering memorandum.
                              - 12 -


However, Stewart performed no tests on the quality of its output.

He did not know the names of companies who would use the

recyclers and did not inquire about the market for scrap pellets

or the cash-flow to be generated by the recyclers, pellets, or

the investment as a whole.

     Storey advised Stewart that he was entitled to a commission

in connection with an investment by any of Stewart's clients in

Southeast or Esplanade.   Storey and Stewart agreed to split the

commissions resulting from any subsequent investment by Stewart's

clients in Southeast or Esplanade.

     Stewart has no detailed knowledge or expertise in plastics

recycling, machinery, or materials.    Instead, he relied on the

individuals associated with Southeast and Esplanade and the

authors of the various opinions appended to the offering

memoranda to have the necessary expertise with regard to the

transactions involved in Southeast and Esplanade.

     Stewart advised Gilmore and Wilson about the Clearwater

partnership and told them that it was fully subscribed; however,

he also informed them of the opportunity to invest in Southeast

and/or Esplanade.   Prior to investing in Southeast, Gilmore and

Wilson met with Stewart several times.    It is unclear whether

Gilmore and Wilson attended these meetings separately.    During

these meetings, the energy crisis, the price of oil, and the

benefits of recycling plastic were discussed.    Stewart described
                               - 13 -


his visit to PI, the demonstration of the recycler, and his

discussions with various individuals at PI.    Stewart advised them

that the operation looked viable because it solved the problem of

plastic disposal, because the recyclers could be used by

companies which did not have to purchase the recyclers, and

because of the effect of rising oil prices on the plastics

industry.    The tax benefits of the investment were also

discussed.    Stewart informed Gilmore and Wilson that he intended

to make an investment in one of the partnerships, and

subsequently did so.    Gilmore and Wilson were aware that Stewart

had no background in plastics recycling, machinery, or materials.

     Stewart provided Gilmore and Wilson with Southeast's

offering memorandum.    Although Gilmore reviewed the offering

memorandum, he did not read it "cover to cover".    Gilmore read

Ulanoff's marketing report and Taggart's tax opinion, and he was

impressed with their credentials.    Gilmore made no independent

investigation of the projections in the offering memorandum.

Gilmore did not know the value of the recyclers and was

unfamiliar with nonrecourse notes.

     Wilson looked at the offering memorandum and attempted to

understand it to "the best of his ability", although the extent

of his review of the offering memorandum is unclear.    Wilson was

not concerned by the warnings on the front page of the offering

memorandum, the conflicts of interest described therein, or the
                              - 14 -


fact that Southeast had no operating history.    Wilson did not

seek another opinion regarding the investment, the recycler, or

the transactions involved in the investment.

     The Gilmores, Wilson, and G&W each invested $25,000 in

Southeast for a 2.91-percent interest in Southeast.    Stewart was

entitled to commissions related to the Gilmores', Wilson's, and

G&W's investments in Southeast.    Gilmore and Wilson were aware of

Stewart's commission arrangements with the promoters of

Southeast.

     Stewart apparently introduced the Hogards to the Esplanade

investment; however, the events leading to their decision to

invest in Esplanade are unknown.    In February 1982, the Hogards

invested $50,000 in Esplanade for 5.82-percent interest in the

profits, losses, and capital of Esplanade.

     After the investments, Stewart had some contact with Winer,

and he received letters regarding the recyclers.    The substance

or extent of any direct contacts among the Gilmores, Wilson, G&W,

the Hogards, and Winer, or any other individual associated with

Southeast, is unknown.

     From 1979 through 1981, the Gilmores' average adjusted gross

income was $70,488.   In 1982 their adjusted gross income

increased substantially to $220,713 due to a gain realized on the

disposition of a capital asset.    On their 1982 return, they

claimed investment tax credits of $43,042 and carried back
                              - 15 -


credits of $21,176 to 1979, $18,479 to 1980, and $6,332 to 1981.

These credits resulted from their investment in Southeast.     They

did not claim any losses with respect to Southeast on any of

these returns.

     From 1979 through 1980, Wilson's average adjusted gross

income was $82,444.   In 1982, his adjusted gross income increased

substantially to $231,282 due to a gain realized on the

disposition of a capital asset.   On his 1982 return, he claimed

investment tax credits of $43,042 and carried back credits of

$13,054 to 1979 and $881 to 1980.   The credits resulted from his

investment in Southeast.   Wilson did not claim any losses with

respect to Southeast on any of these returns.

     On its 1983 return, G&W claimed a loss of $20,452 related to

Southeast.   G&W also carried back investment tax credits of

$4,472 to 1980 and $10,514 to 1981.    These credits resulted from

G&W's investment in Southeast.

     On their 1982 return, the Hogards claimed a loss of $40,884

and investment tax credits of $81,200, which items related to

their investment in Esplanade.    They used $1,600 of the credits

in 1982 and carried back investment tax credits of $22,580 to

1979, $28,358 to 1980, and $28,662 to 1981.

     With respect to each petitioner, in the applicable notice of

deficiency, respondent disallowed all items of income, loss,

deductions, and credits attributable to Southeast or Esplanade.
                               - 16 -


Respondent also disallowed all of the investment tax credit

carrybacks claimed by petitioners.      Respondent also determined

that petitioners were liable for additions to tax as set forth in

the opening paragraphs of this opinion and that the

 increased rate of interest under section 6621(c) was applicable

to each year in issue.

     Petitioners have stipulated substantially the same facts

concerning the underlying transactions as we found in Provizer v.

Commissioner, T.C. Memo. 1992-177, with the exception of certain

facts concerning the Provizers, the expert opinions, and other

matters that we consider of minimal significance.

     Those facts may be summarized as follows.      In 1981, PI

manufactured and sold six Sentinel EPE Recyclers to ECI Corp. for

$981,000 each.   ECI Corp., in turn, resold the recyclers to F&G

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

to Clearwater, which licensed the recyclers to FMEC Corp., which

sublicensed them back to PI.   The sales of the recyclers from PI

to ECI Corp. were financed with nonrecourse notes.      Approximately

7 percent of the sales price of the recyclers sold by ECI Corp.

to F&G Corp. was paid in cash with the remainder financed through

notes.   These notes provided that 10 percent of the notes were

recourse but that the recourse portion of the notes was only due

after the nonrecourse portion, 90 percent, was paid in full.

     All of the monthly payments required among the entities in
                                - 17 -


these transactions offset each other and were made

simultaneously.     Although the recyclers were sold and leased

under the structure of simultaneous transactions, the fair market

value of a Sentinel EPE Recycler in 1981 was not in excess of

$50,000, and the nuts and bolts, or manufacturing cost, was

$18,000.     Other recycling machines were commercially available

during the years in issue including the Buss-Condux

Plastcompactor, Nelmor/Weiss Densification System (Regenolux),

Cumberland Granulators, and Foremost Densilator.

     PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap.      The sublicense

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

percent of the recycled scrap in exchange for payment from FMEC

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

     Like Clearwater, Southeast and Esplanade leased Sentinel EPE

Recyclers from F&G Corp. and licensed those recyclers to FMEC

Corp.     The transactions of Southeast and Esplanade differ from

the underlying transactions in Provizer v. Commissioner, supra,

in the following respects:     (1)   The entity that leased the

machines from F&G Corp. and licensed them to FMEC Corp; and (2)

the number of machines sold, leased, licensed, and sublicensed.

        In Provizer v. Commissioner, supra, a test case for the

Plastics Recycling group of cases, this Court found that each

Sentinel EPE recycler had a fair market value not in excess of
                               - 18 -


$50,000; (2) held that the transaction, which is almost identical

to the transactions in this case, was a sham because it lacked

economic substance and a business purpose; (3) upheld the section

6653(a)(1) and (2) additions to tax for negligence; (4) upheld

the section 6659 addition to tax for valuation overstatement

since the underpayment of taxes was directly related to the

overstatement of the value of the Sentinel EPE recyclers; and (5)

held that losses and credits claimed with respect to Clearwater

were attributable to tax-motivated transactions within the

meaning of section 6621(c).   In reaching the conclusion that the

transaction lacked economic substance and a business purpose,

this Court relied heavily upon the overvaluation of the Sentinel

EPE recyclers.

     Since our opinion in Provizer v. Commissioner, supra, we

have decided numerous Plastics Recycling cases and, with one

exception, have found the taxpayers liable for the addition to

tax under section 6653(a).    See Friedman v. Commissioner, T.C.

Memo. 1996-558, and cases cited therein; see also Henry v.

Commissioner, T.C. Memo. 1997-86; Skyrms v. Commissioner, T.C.

Memo. 1997-69.   Set against this background, we consider whether

the addition to tax for negligence should be imposed on any

petitioners.
                               - 19 -


Discussion

     Section 6653(a) for 1979 and 1980 and section 6653(a)(1) for

1981, 1982, and 1983 impose an addition to tax equal to 5 percent

of the underpayment if any part of any underpayment in tax is due

to negligence or disregard of rules or regulations.     Section

6653(a)(2) for 1981, 1982, and 1983 imposes an addition to tax

equal to 50 percent of the interest payable with respect to the

portion of the underpayment attributable to negligence or

disregard of rules or regulations.      Petitioners bear the burden

of proving that any underpayment was not due to negligence.       Rule

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

     Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would employ

under the circumstances.    Neely v. Commissioner, 85 T.C. 934, 947

(1985).   The question is whether a particular taxpayer's actions

in connection with the transactions were reasonable in light of

his or her experience and the nature of the investment or

business.    Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740

(1973).   When considering the negligence addition 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.    McPike v. Commissioner, T.C.

Memo. 1996-46.   Compare Spears v. Commissioner, T.C. Memo. 1996-

341 with Zidanich v. Commissioner, T.C. Memo. 1995-382.
                              - 20 -


     Petitioners contend that they were not negligent because

they reasonably relied in good faith upon the advice of a

qualified, independent adviser, to whom they made full

disclosure.   In addition, petitioners contend that they were not

negligent because they reasonably expected to make a profit from

their investment in Southeast or Esplanade.   Respondent, on the

other hand, contends that petitioners were negligent because

their reliance on Stewart was not reasonable and they failed to

adequately or reasonably investigate the validity of the

underlying transactions or the value of the recyclers involved

with their investments.

     Turning our attention first to the Hogards, we note that the

record contains no evidence that they, or either of them, relied

upon the advice of Stewart, or any other adviser.    Respondent's

determination that they are liable for the addition to tax under

section 6653(a) is presumptively correct, and the burden is upon

the Hogards to prove otherwise.   Rule 142(a); Neely v.

Commissioner, supra; Bixby v. Commissioner, supra.    This they

have failed to do.   Accordingly, respondent's determinations are

sustained with respect to the Hogards.

     As for the Gilmores, Wilson, and G&W, under some

circumstances a taxpayer may avoid liability for the additions to

tax under section 6653(a) if reasonable reliance on a competent

professional adviser is shown.    United States v. Boyle, 469 U.S.
                              - 21 -


241, 250-251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888

(1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868

(1991).   Reliance on professional advice, standing alone, is not

an absolute defense to negligence, but rather a factor to be

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

professional advice to excuse a taxpayer from the negligence

addition to tax, the taxpayer must show that the professional had

the expertise and knowledge of the pertinent facts to provide

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

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

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

Memo. 1993-480; Freytag v. Commissioner, supra.

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

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

Commissioner, 94 T.C. 637, 652-653 (1990), affd. without

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

published opinion sub nom. Cowles v. Commissioner, 949 F.2d 401

(10th Cir. 1991).   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.   Freytag v. Commissioner, supra; Beck

v. Commissioner, 85 T.C. 557 (1985).
                             - 22 -


     Southeast's offering memorandum contains a description of

various business and tax risks associated with an investment.

Despite a review of the offering memorandum, Stewart made no

effort to verify the information contained in the offering

memorandum beyond visiting PI's facilities and discussing the

investment with unknown individuals at PI.   While Stewart claims

to have discussed the investment with fellow C.P.A.'s, the

substance and details surrounding any purported discussions are

unclear, and there is no indication that these C.P.A.'s had any

background or experience in the plastics industry.    Despite his

lack of knowledge regarding the recycler, the target market for

the recycler, and the technical aspects of the transactions,

Stewart did not contact an expert in plastics recycling or

engineering or recommend that the Gilmores, Wilson, or G&W do so.

     Although Stewart visited the PI plant in Hyannis and

observed a demonstration of the recycler, he was not qualified to

analyze or assess the recyclers on display or the facility.

Stewart made no adequate investigation into the value of the

recycler, although an investigation would have revealed the

existence of other plastics recycling machines available in 1981

and 1982 ranging in price from $20,000 to $200,000.   See Provizer

v. Commissioner, T.C. Memo. 1992-177.   Despite his lack of

special qualifications and professional skills in plastics

engineering, recycling, or materials, Stewart made no effort to
                               - 23 -


contact or consult with anyone who possessed such qualifications.

Given Stewart's background and experience, he undoubtedly was

aware that the tax benefits outlined in the offering memorandum

and claimed by petitioners depended in large part on the value of

the recycling machines.    Nevertheless, having no knowledge or

background regarding the value of the recyclers, he did nothing

sufficient to verify the representations made in the promotional

materials and by individuals associated with the promotion.     As

we view the matter, Stewart's trip to inspect the recyclers was

essentially superficial.    In effect, he relied not upon the

information he gathered through his own investigation, but upon

representations made by Southeast's promotional materials and

promoters.

     Taking the above into consideration, the Gilmores', Wilson's

and G&W's (through Gilmore and Wilson) reliance upon Stewart was

not reasonable.   A taxpayer may rely upon his adviser's

expertise, in this case financial planning and tax advice, but it

is not reasonable to rely upon an adviser regarding matters

outside his field of expertise or with respect to facts which he

does not verify, in this case the value of the recycler.    Skeen

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

Commissioner, 88 T.C. 1086 (1987).

     Moreover, Stewart was not an independent adviser since he

was entitled to receive compensation from Southeast for the
                              - 24 -


Gilmores', Wilson's, and G&W's investments in Southeast.     Because

Stewart was paid to sell the investment, his advice was suspect.

     The Gilmores, Wilson, and G&W (through Gilmore and Wilson)

contend that they reviewed Southeast's offering memorandum.       The

extent of their review of the offering memorandum is unclear;

however, a review of that document would have indicated the

numerous business and tax risks associated with an investment.

The preface to the offering memorandum warned the potential

investor not to consider its contents as expert advice and to

seek advice from the investor's own advisers.     The offering

memorandum also clearly stated that the transactions involved

significant tax risks and that in all likelihood the IRS would

challenge the validity of the transactions and the purported

value of the recycling machines.   The "business risks" section of

the offering memorandum warned that there was no history for

Southeast and that there was no established market for the

recyclers or pellets produced therefrom.     The Gilmores, Wilson,

and G&W failed to carefully consider the offering memorandum and

to take into account its warnings.     Statements regarding the

business and tax risks and the warnings placed on the front page

of the offering memorandum would have alerted a prudent and

reasonable investor to the questionable nature of the promised

deductions and credits.   See Collins v. Commissioner, 857 F.2d
                             - 25 -


1383, 1386 (9th Cir. 1988), affg. Dister v. Commissioner, T.C.

Memo. 1987-217.

     The Gilmores', Wilson's, and G&W's contention that they

reasonably relied upon Stewart's advice is further undermined by

their successful business backgrounds.   In view of their success

in the construction business and profitable real estate

investments, we find it difficult to accept the proposition that

they did not know or have reason to know that the value of the

recyclers was grossly overstated.   We find it more likely than

not that they were so interested in the expected tax benefits

that would result from the investment that they failed to

investigate and seek advice on the underlying transactions that

were to generate those tax benefits.   Our conclusion on this

point is supported by the fact that the Gilmores' and Wilson's

investments in Southeast, which were not consistent with their

prior investment histories, occurred in a year that capital

transactions were expected to, and did, generate large capital

gains.

     The Gilmores, Wilson, and G&W also contend that the

investment was reasonable because they expected to make a profit.

We have severe reservations about the validity of their claims on

this point; however, even if true, their profit motives are not

dispositive of the issue here in dispute.   Whether or not they

intended to profit from their investments in Southeast, they
                              - 26 -


failed to exercise due care in claiming tax benefits from that

investment.   Their subjective intent does not excuse them from

the consequences of claiming deductions and credits to which

under the circumstances they were clearly not entitled.   See

Klieger v. Commissioner, T.C. Memo. 1992-734.

     We have considered and find unpersuasive petitioners'

arguments comparing this case with other cases that were resolved

in the taxpayers' favor with respect to the negligence addition

to tax.

     The Gilmores, Wilson, and G&W failed to exercise due care in

claiming the deductions and tax credits relating to their

respective investments in Southeast.   We find that they did not

reasonably rely upon Stewart or in good faith investigate the

aspect of the investment that generated the "attractive" tax

benefits--the value of the Sentinel recycler.   Therefore, we hold

that these petitioners and the Hogards are liable for the

negligence additions to tax under the provisions of section

6653(a) for 1979 and 1980 and section 6653(a)(1) and (2) for

1981, 1982, and 1983.
                             - 27 -


     To reflect the foregoing, and to ensure that each of the

Stipulations of Settled Issues is properly taken into account,


                                   Decisions will be entered

                              under Rule 155.
