                       T.C. Memo. 1996-527



                     UNITED STATES TAX COURT



           LEON M. AND MARY K. JAROFF,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 18885-89, 27392-89.     Filed November 27, 1996.



     Stuart A. Smith and David H. Schnabel, for petitioners.

     Maureen T. O'Brien and David N. Brodsky, for respondent.




1
     Docket Nos. 18885-89 and 27392-89 are consolidated for
purposes of trial, briefing, and opinion.
                               - 2 -

                             CONTENTS

                                                             Page
MEMORANDUM FINDINGS OF FACT AND OPINION....................... 2
OPINION OF THE SPECIAL TRIAL JUDGE............................ 3
FINDINGS OF FACT.............................................. 6
  A. The Plastics Recycling Transactions...................... 6
  B. The Partnerships......................................... 9
  C. Stuart Becker and Steven Leicht..........................11
  D. Petitioners and Their Introduction to the Partnership
     Transactions.............................................15
OPINION.......................................................20
  A. Section 6653(a)--Negligence..............................22
     1.   The Private Offering Memoranda......................24
     2.   The So-Called Oil Crisis............................30
     3.   Petitioners' Purported Reliance on a Tax
          Adviser.............................................33
          a.   The Circumstances Under Which a
               Taxpayer May Avoid Liability Under
               Section 6653(a)(1) and (2) Because
               of Reasonable Reliance on Competent
               and Fully Informed Professional
               Advice.........................................34
          b.   Becker and Tucker..............................36
     4.   Miscellaneous.......................................45
     5.   Conclusion as to Negligence.........................52
  B. Section 6659--Valuation Overstatement....................53
     1.   The Grounds for Petitioners' Underpayments..........54
     2.   Concession of the Deficiencies......................59
     3.   Section 6659(e).....................................62
  C. Petitioners' Motion For Leave To File Motion For
     Decision Ordering Relief From the Negligence Penalty
     and the Penalty Rate of Interest and To File Supporting
     Memorandum of Law........................................65

             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) and Rules 180, 181, and 183.   All section

references are to the Internal Revenue Code in effect for the tax

years in issue, unless otherwise indicated.   All Rule references

are to the Tax Court Rules of Practice and Procedure.   The Court
                              - 3 -

agrees with and adopts the opinion of the Special Trial Judge,

which is set forth below.

               OPINION OF THE SPECIAL TRIAL JUDGE

     WOLFE, Special Trial Judge:   These consolidated 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

facts of the underlying transactions involving the Sentinel

recyclers in these consolidated cases are substantially identical

to those in the transaction considered in the Provizer case.

     In a notice of deficiency dated May 24, 1989, respondent

determined a deficiency in petitioners' 1982 Federal income tax

in the amount of $8,119, and additions to tax for that year in

the amount of $1,985 under section 66592 for valuation

overstatement, in the amount of $406 under section 6653(a)(1) for

negligence, and under section 6653(a)(1)(B)3 in an amount equal

to 50 percent of the interest due on the amount of the

underpayment attributable to negligence, $6,619.    Respondent also

determined that interest on deficiencies accruing after December

2
     In the alternative to the sec. 6659 addition to tax,
respondent determined an addition to tax under sec. 6661 for
substantial understatement of liability.
3
     For taxable year 1982, the addition to tax for negligence in
an amount equal to 50 percent of the interest due on the amount
of the underpayment attributable to negligence was provided for
under sec. 6653(a)(2), not sec. 6653(a)(1)(B).
                               - 4 -

31, 1984, would be calculated at 120 percent of the statutory

rate under section 6621(c).   The increased interest was

calculated on the amount of $6,619.    In her answer, respondent

asserted that the entire deficiency was subject to the increased

rate of interest under section 6621(c).    In her trial memorandum,

respondent asserted that the section 6659 addition to tax should

be reduced to $1,550, and that only $6,619 of the deficiency was

subject to section 6621(c) (as originally determined in the

notice of deficiency).   We consider the amounts in dispute in

docket No. 18885-89 to be adjusted accordingly.

     In a notice of deficiency dated August 18, 1989, respondent

determined a deficiency in petitioners' 1981 Federal income tax

in the amount of $20,837, and additions to tax for that year in

the amount of $1,299 under section 6659 for valuation

overstatement, in the amount of $1,042 under section 6653(a)(1)

for negligence, and under section 6653(a)(2) in an amount equal

to 50 percent of the interest due on the amount of the

underpayment attributable to negligence.    Respondent also

determined that interest on deficiencies accruing after December

31, 1984, would be calculated at 120 percent of the statutory

rate under section 6621(c).   The increased interest was

calculated on the amount of $4,329.    In an amendment to answer,

respondent asserted an increased addition to tax under section

6659 in the amount of $4,952, and also asserted that the entire

deficiency of $20,837 was subject to the increased rate of
                              - 5 -

interest under section 6621(c).   We consider the amounts in

dispute in docket No. 27392-89 to be adjusted accordingly.     For

each of these consolidated cases, the parties filed a Stipulation

of Settled Issues concerning the adjustments relating to

petitioners' participation in the Plastics Recycling Program.

The stipulations provide:

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

     2. 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. §6621(c),
     formerly §6621(d).

     3. 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 the tax for valuation
     overstatements under I.R.C. §6659 and for negligence
     under the applicable provisions of §6653(a).

     4. With respect to the issue of the addition to the
     tax under I.R.C. §6659, Petitioners do not intend to
     contest the value of the Sentinel Recycler or the
     existence of a valuation overstatement on the
     Petitioners' returns; however, Petitioners reserve
     their right to argue that the underpayment in tax is
     not attributable to a valuation overstatement within
     the meaning of I.R.C. §6659(a)(1), and that the
     Secretary should have waived the addition to tax
     pursuant to the provisions of I.R.C. §6659(e).

     Long after the trial of these consolidated cases, on

September 18, 1995, petitioners filed a Motion For Leave To File

Motion For Decision Ordering Relief From the Negligence Penalty
                               - 6 -

and the Penalty Rate of Interest and To File Supporting

Memorandum of Law under Rule 50.   On that same date, petitioners

lodged with the Court a motion for decision seeking relief from

the additions to tax for negligence and the increased rate of

interest, with attachments, and a memorandum in support of the

motion.   Subsequently, respondent filed an objection, with

attachments, and a memorandum in support thereof, and petitioners

filed a reply memorandum.   For reasons discussed in more detail

at the end of this opinion, and also in Farrell v. Commissioner,

T.C. Memo. 1996-295, petitioners' motion shall be denied.     See

also Gollin v. Commissioner, T.C. Memo. 1996-454; Grelsamer v.

Commissioner, T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C.

Memo. 1996-398.

     The issues remaining in these consolidated cases are:     (1)

Whether petitioners are liable for the additions to tax for

negligence under the provisions of section 6653(a); 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 are so found.

The stipulated facts and attached exhibits are incorporated

herein by this reference.

A.   The Plastics Recycling Transactions

     These consolidated cases concern petitioners' investments in
                                - 7 -

two limited partnerships that leased Sentinel expanded

polyethylene (EPE) recyclers:    SAB Resource Recovery Associates

(SAB Recovery) and SAB Resource Reclamation Associates (SAB

Reclamation).    For convenience, we refer to these two

partnerships collectively as the Partnerships.

     The transactions involving the Sentinel EPE Recyclers leased

by the Partnerships are substantially identical to those in the

Clearwater Group limited partnership (Clearwater), the

partnership considered in Provizer v. Commissioner, T.C. Memo.

1992-177.   Petitioners have stipulated substantially the same

facts concerning the underlying transactions as we found in the

Provizer case.

     In the Provizer case, Packaging Industries, Inc. (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
                                - 8 -

the above transactions offset each other.    These transactions

were done simultaneously.    Although the recyclers were sold and

leased for the above amounts under the structure of simultaneous

transactions, the fair market value of a Sentinel EPE recycler in

1981 was not in excess of $50,000.

     PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap.    The sublicense

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

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

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

     Like Clearwater, each of the Partnerships leased Sentinel

EPE recyclers from F & G Corp. and licensed those recyclers to

FMEC Corp.    The transactions of the Partnerships differ from the

underlying transactions in the Provizer case 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.    SAB Recovery

leased and licensed seven Sentinel EPE recyclers.    SAB

Reclamation was to lease and license eight recyclers, according

to its offering memorandum, but the SAB Reclamation partnership

tax return for 1982 indicates that it leased and licensed only

four recyclers.

     For convenience, we refer to the series of transactions

among PI, ECI Corp., F & G Corp., each of the Partnerships, FMEC

Corp., and PI as the Partnership transactions.    In addition to
                                 - 9 -

the Partnership transactions, a number of other limited

partnerships entered into transactions similar to the Partnership

transactions, also involving Sentinel EPE recyclers and Sentinel

expanded polystyrene (EPS) recyclers.     We refer to these

collectively as the Plastics Recycling transactions.

     B.   The Partnerships

     SAB Recovery and SAB Reclamation are New York limited

partnerships.   SAB Recovery was formed in late 1981 and SAB

Reclamation was formed in early 1982.     Both partnerships were

organized and promoted by Stuart Becker (Becker), a certified

public accountant (C.P.A.) and the founder and principal owner of

Stuart Becker & Co., P.C. (Becker Co.), an accounting firm that

specialized in tax matters.     Becker organized a total of six

recycling partnerships (the SAB Recycling Partnerships).      Two of

the SAB Recycling Partnerships closed in late 1981, two closed in

early 1982, and two more closed in late 1982.

     The general partner of each of the SAB Recycling

Partnerships, including SAB Recovery and SAB Reclamation, is SAB

Management Ltd. (SAB Management).     SAB Management is wholly owned

by Scanbo Management Ltd. (Scanbo), which is wholly owned by

Becker.   Scanbo is an acronym for three of Becker's children:

Scott, Andy, and Bonnie.     The officers and directors of SAB

Management and Scanbo are as follows:     (1) Becker, president and

director; (2) Noel Tucker (Tucker), vice president, treasurer,

and director; and (3) Steven Leicht (Leicht), vice president,
                              - 10 -

secretary, and director.   During the years in issue, Tucker and

Leicht also worked at Becker Co.   Tucker was vice president.

Each owned approximately 5 to 7 percent of the stock of Becker

Co.   SAB Management did not engage in any business before

becoming involved with the SAB Recycling Partnerships. With

respect to each of the Partnerships, a private placement

memorandum was distributed to potential limited partners.

Reports by F & G Corp.'s evaluators, Dr. Stanley M. Ulanoff

(Ulanoff), a marketing consultant, and Dr. Samuel Z. Burstein

(Burstein), a mathematics professor, were appended to the

offering memoranda.   Ulanoff owns a 1.27-percent interest in

Plymouth Equipment Associates and a 4.37-percent interest in

Taylor Recycling Associates, partnerships that leased Sentinel

recyclers.   Burstein owns a 2.605-percent interest in Empire

Associates and a 5.82-percent interest in Jefferson Recycling

Associates, also partnerships that leased Sentinel recyclers.

Burstein also was a client and business associate of Elliot I.

Miller (Miller), the corporate counsel to PI.

      The offering memoranda for SAB Recovery and SAB Reclamation

state that the general partner will receive fees from those

partnerships in the respective amounts of $97,800 and $110,000.

SAB Management received fees of approximately $500,000 as the

general partner of the SAB Recycling Partnerships.   In addition,

Becker Co. prepared the partnership returns and Schedules K-1 for

all of the SAB Recycling Partnerships and received fees for those
                             - 11 -

services.

     The offering memoranda for the Partnerships also allocate

7.5 percent of the proceeds from each offering to the payment of

sales commissions and offeree representative fees.    In addition,

the offering memoranda provide that the respective general

partners "may retain as additional compensation all amounts not

paid as sales commissions or offeree representative fees."

However, neither SAB Management nor Becker retained or received

any sales commissions or offeree representative fees.   Instead,

after the closing of each SAB Recycling Partnership, Becker

rebated to each investor whose investment was not subject to a

sales commission or offeree representative fee an amount equal to

7.5 percent of such investor's original investment.

     The offering memoranda list significant business and tax

risk factors associated with investments in the Partnerships.

Specifically, the offering memoranda state:   (1) There is a

substantial likelihood of audit by the Internal Revenue Service

(IRS) and the purchase price paid by F & G Corp. to ECI Corp.

probably will be challenged as being in excess of fair market

value; (2) the Partnerships have no prior operating history; (3)

the general partner has no prior experience in marketing

recycling or similar equipment; (4) the limited partners have no

control over the conduct of the Partnerships' business; (5) there

is no established market for the Sentinel EPE recyclers; (6)

there are no assurances that market prices for virgin resin will
                              - 12 -

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.

C.   Stuart Becker and Steven Leicht

      Becker does not have an engineering background, and he is

not an expert in plastics materials or plastics recycling.    He

received a B.S. degree in accounting from New York University in

1964 and an M.B.A. in taxation from New York University School of

Business Administration in 1973.   He passed the certified public

accountancy test in 1967 and was the winner of the gold medal,

awarded for achieving the highest score on the examination for

that year.   Since early 1966, Becker has practiced as an

accountant exclusively in the tax area.    From 1964 until 1972 he

worked for the accounting firm of Touche, Ross & Co., and in 1972

he joined the accounting firm of Richard A. Eisner & Co. as the

partner in charge of the tax department.    In 1977, Becker founded

Becker Co.

      Becker had considerable experience involving tax shelter

transactions before he organized the SAB Recycling Partnerships.

He prepared opinions regarding tax shelters' economic and tax

projections, advised individuals and companies with respect to

investments in tax shelters, lectured extensively about tax

shelter investments generally, and lectured and published with

respect to leveraged tax shelters.     Becker described a leveraged

tax shelter as "a transaction where [the ratio of] the effective
                              - 13 -

[tax] writeoff, which includes the value of the tax credit, * * *

[to the amount invested] exceeds one to one."   Becker Co.

specialized in tax-advantaged investments.   From 1980 to 1982,

approximately 60 percent of the work done by Becker Co. involved

tax-sheltered and private investments.   Becker has owned minority

interests in general partners of numerous limited partnerships.

Prior to organizing the SAB Recycling Partnerships, Becker owned

5 percent of the general partner of partnerships involved in

approximately 14 transactions concerning river transportation

(such as barges, tow boats, and grain elevators).

     Although investment counseling was related to his firm's

line of business, Becker did not consider himself in the business

of providing investment advice.   Becker did not normally hire

other professionals for consultation or advice.    In circumstances

where he believed there was a need for outside advice, he would

so advise the client.   Between 30 and 40 of Becker's clients

invested in the Plastics Recycling partnerships.

     Becker learned of the Plastics Recycling transactions when a

prospective client presented him with an offering memorandum

concerning the transactions in August or September 1981.     Becker

reviewed the offering memorandum and spoke to Miller, one of the

key figures in the transactions and an acquaintance of Becker's.

Miller was a shareholder of F & G Corp. and, as noted, the

corporate counsel to PI.   He also represented Robert Grant

(Grant), the president and 100-percent owner of the stock of ECI
                              - 14 -

Corp., and some of Grant's clients.    Thereafter, Becker

recommended the investment to the prospective client.     Although

the prospective client did not invest in the Plastics Recycling

transactions, Becker became interested in the proposal and

organized the SAB Recycling Partnerships in order to make similar

investments in Sentinel EPE recyclers conveniently available to

appropriate clients.

     In organizing the SAB Recycling Partnerships, Becker was not

allowed to change the format of the transactions or the purchase,

lease, or licensing prices of the Sentinel EPE recyclers.    He was

allowed only to conduct a limited investigation of the proposed

investments and choose whether or not to organize similar

partnerships.   Becker relied heavily upon the offering materials

and discussions with persons involved in the matter to evaluate

the Plastics Recycling transactions.    He and two other members of

Becker Co., Leicht and Tucker, investigated PI and visited its

plant in Hyannis, Massachusetts, where they saw the Sentinel EPE

recyclers.   Tucker did not testify.

     During his investigation of the Plastics Recycling

transactions, Becker did not hire any plastics, engineering, or

technical experts, or recommend that his clients do so.     Becker

discussed the transactions with Michael Canno (Canno) of the

Equitable Bag Co., a manufacturer of paper and plastic bags.

Canno never saw the recyclers or the pellets and never wrote any

reports assessing the equipment or the pellets.    In addition,
                              - 15 -

Becker retained a law firm, Rabin & Silverman, to assist him in

organizing the SAB Recycling Partnerships.   See Spears v.

Commissioner, T.C. Memo. 1996-341, to the effect that in

employing the law firm, Becker sought particularly to protect

himself against liability.

     After the 1981 SAB Recycling Partnerships closed, Becker had

an accountant sent to PI to confirm, by serial number, that as of

December 31, 1981, the equipment that was leased to the 1981 SAB

Recycling Partnerships was indeed available for use.    Becker

arranged for this verification, independent of PI, because he

understood that the investment tax and business energy credits

would not be available if the qualifying property was not

available for use.

     Leicht also familiarized himself with the Plastics Recycling

transactions.   Leicht has a B.A. degree in finance and accounting

from Penn State University, a J.D. from SUNY Buffalo, and an

LL.M. in taxation from New York University School of Law.    Leicht

ran a mathematical check on the numbers contained in the offering

materials for Becker, but he did not test the underlying

assumptions upon which they were based.   He also visited PI in

Hyannis and met with Miller and other insiders to the

transactions.   Leicht never communicated an opinion as to the

value of the recyclers other than what was presented in the

offering memoranda.   He has no education or expertise in plastics

materials or plastics recycling.
                              - 16 -

D. Petitioners and Their Introduction to the Partnership
Transactions

     Leon M. and Mary K. Jaroff resided in New York, New York,

when their petition was filed.    Leon M. Jaroff (petitioner)

earned degrees in electrical engineering and mathematics from the

University of Michigan in 1950.    He then moved to New York and

worked for an engineering magazine entitled Materials and

Methods.   Six months later he joined the staff of Life magazine.

Over approximately the next 8 years, petitioner was employed as a

researcher, then as a reporter in New York, and then as a bureau

correspondent for Life magazine.    While working in the Chicago

bureau in 1958, petitioner transferred to Time magazine (Time).

Several years later, he was promoted to Detroit bureau chief.      In

1964 petitioner was transferred to New York to write for the

business section of Time.   Subsequently, petitioner was employed

as a science writer for Time, the science editor for that

magazine, and then as a senior editor.    In 1980 Time, Inc.

started a science magazine, Discover, and petitioner was chosen

to be its first managing editor.    Petitioner was the managing

editor of the science magazine Discover for 4-1/2 years,

including the taxable years in issue.    Mary K. Jaroff was a sales

executive with Institutional Investor Systems during the taxable

years in issue.

     Petitioner acquired a second-tier, 0.895928-percent interest

in SAB Recovery--through the partnership Resource Partners--for
                              - 17 -

$10,000 in 1981.4   As a result of his second-tier interest in SAB

Recovery, on their 1981 return petitioners claimed an operating

loss in the amount of $7,940 and investment tax and business

energy credits totaling $16,508.   Petitioners also claimed a $458

loss from SAB Recovery on their 1982 return.   In 1982, petitioner

acquired a second-tier, approximately 1.8-percent5 interest in

SAB Reclamation--through the partnership V & L Equities--for

$10,000.6   As a result of his second-tier interest in SAB

4
   The record does not directly disclose petitioner's percentage
interest in SAB Recovery. Petitioner testified that he invested
$10,000, through Resource Partners, in SAB Recovery. Attached to
the 1981 Partnership return of SAB Recovery is a Schedule K-1,
Partner's Share of Income, Credits, Deductions, etc, of an
individual who invested $10,000 in SAB Recovery. For $10,000,
that limited partner acquired a 0.895928-percent interest in SAB
Recovery. The amount of SAB Recovery's operating loss allocated
to that partner was $7,940, and the amount of basis allocated to
that partner was $82,537, which results in a combined investment
and business energy credit in the amount of $16,508. ($82,537 x
10% = $8,254. $8,254 x 2 = $16,508). Those figures are
consistent with the loss and credits claimed by petitioners on
their 1981 income tax return.
5
     The record does not directly disclose petitioner's
percentage interest in SAB Reclamation. However, on its 1982
partnership return, SAB Reclamation reported a loss in the amount
of ($445,560), and a basis in the recyclers in the amount of
$4,650,668. Petitioner was allocated a loss in the amount of
($8,021), and a basis in the recyclers in the amount of $83,712.
(($8,021)/($445,560) = 0.018002. 0.018 x $4,650,668 =
$83,712.02).
6
     The record does not directly disclose the amount that
petitioner invested in V & L Equities for his second-tier
interest in SAB Reclamation. However, the Schedule K-1 for V & L
Equities for 1982, attached to the SAB Reclamation partnership
return, shows that V & L Equities acquired a 9-percent interest
in SAB Reclamation for $50,000. Petitioner had a 1.8-percent
second-tier interest in SAB Reclamation. (0.018/0.09 = 0.2. 0.2
x $50,000 = $10,000).
                              - 18 -

Reclamation, on their 1982 return petitioners claimed an

operating loss in the amount of $8,0217 and investment tax and

business energy credits in the amount of $16,742.   Respondent

disallowed the operating losses and credits related to SAB

Recovery and claimed by petitioners on their 1981 return.    With

respect to petitioners' 1982 return, respondent disallowed $432

of the claimed $458 loss related to SAB Recovery; $2,475 of the

claimed $8,021 loss related to SAB Reclamation; and $5,166 of the

claimed $16,742 investment tax and business energy credits

related to SAB Reclamation.




7
     The total operating loss claimed by petitioners on their
1982 return, from both SAB Reclamation and SAB Recovery, was
$8,479. ($8,021 + $458 = $8,479).
                                - 19 -

       Petitioner learned of the Plastics Recycling transactions

from Noel Tucker of Becker Co. in 1981.      Petitioner had been

referred to Becker Co. in 1980 by Richard Snyder (Snyder), who at

the time was the chief executive officer of Simon & Schuster,

Inc.    Petitioner and Snyder frequented the same fitness center

and often talked while exercising.       While "bemoaning * * * [his]

financial status" on one such occasion, petitioner told Snyder

that he "would love to increase" his income and that his "taxes

[were] all screwed up".    Snyder was a client of Becker Co. and he

recommended the firm to petitioner.      Petitioner contacted Becker,

who "almost immediately turned * * * [him] over to Noel Tucker."

Tucker serviced petitioner's account for approximately 1 year,

and then it was turned over to a new member of the firm, Harry

Shuffrin.

       Tucker suggested the Plastics Recycling transactions to

petitioner in 1981 and provided him with a copy of the SAB

Recovery offering memorandum.    Petitioner claims that he and his

wife Mary devoted several evenings to the offering memorandum and

"read it very carefully".    The "possibility of being audited" and

"a statement about there being some risk" concerned petitioner,

and he raised these concerns with Tucker.      According to

petitioner, Tucker indicated that such warnings or caveats are

routine and that the venture was sound.      Petitioner recalled

believing that Tucker had not visited PI but that Becker had

visited PI several times, "often with experts in tow," and that
                                - 20 -

the Sentinel EPE recycler "was supposed to be better than * * *

the state-of-the-art machines at that time."    Petitioner could

not recall speaking to Becker about SAB Recovery.    After his

initial introduction to Becker, and except for an occasional

phone conversation with Leicht when Tucker was out of the office,

during his first year as a client, petitioner recalled dealing

only with Tucker.

     Petitioner confirmed at trial that if he needs information,

he knows how to get it.   He is familiar with a library and how to

get information from various publications.    Petitioner knew how

to locate plastics trade journals, but he did not consult any

such magazines before investing in the Partnerships.    Petitioner

explained that "one of the ways * * * [he] [gets] information

best is to go to experts, generally in the [fields] of science

and technology and medicine."    He did not, however, consult

anyone outside of Becker Co. about the Partnerships.    Petitioner

was never led to believe that Becker was an engineer or had any

expertise in plastics.    He knew that Tucker was an accountant but

assumed that Tucker was "relying upon the advice [of] experts

that Stuart Becker had engaged."    Petitioner did not ask Tucker

who those experts were.

     Petitioners never made a profit in any year from their

participation in SAB Recovery and SAB Reclamation.    Petitioner

did not see a Sentinel EPE recycler prior to investing in the

Partnerships.   He has no education or work experience in plastics
                              - 21 -

recycling or plastics materials.

                              OPINION

     We have decided a large number of the Plastics Recycling

group of cases.8   The majority of these cases, like the

consolidated cases herein, raised issues regarding additions to

tax for negligence and valuation overstatement.   We have found


8
     Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993), concerned the
substance of the partnership transaction and also the additions
to tax.
     The following cases concerned the addition to tax for
negligence, inter alia: Gollin v. Commissioner, T.C. Memo. 1996-
454; Grelsamer v. Commissioner, T.C. Memo. 1996-399; Zenkel v.
Commissioner, T.C. Memo. 1996-398; Estate of Busch v.
Commissioner, T.C. Memo. 1996-342; Spears v. Commissioner, T.C.
Memo. 1996-341; Stone v. Commissioner, T.C. Memo. 1996-230;
Reimann v. Commissioner, T.C. Memo. 1996-84; Bennett v.
Commissioner, T.C. Memo. 1996-14; Atkind v. Commissioner, T.C.
Memo. 1995-582; Triemstra v. Commissioner, T.C. Memo. 1995-581;
Pace v. Commissioner, T.C. Memo. 1995-580; Dworkin v.
Commissioner, T.C. Memo. 1995-533; Wilson v Commissioner, T.C.
Memo. 1995-525; Avellini v. Commissioner, T.C. Memo. 1995-489;
Paulson v. Commissioner, T.C. Memo. 1995-387; Zidanich v.
Commissioner, T.C. Memo. 1995-382; Ramesh v. Commissioner, T.C.
Memo. 1995-346; Reister v. Commissioner, T.C. Memo. 1995-305;
Fralich v. Commissioner, T.C. Memo. 1995-257; Shapiro v.
Commissioner, T.C. Memo. 1995-224; Pierce v. Commissioner, T.C.
Memo. 1995-223; Fine v. Commissioner, T.C. Memo. 1995-222;
Pearlman v. Commissioner, T.C. Memo. 1995-182; Kott v.
Commissioner, T.C. Memo. 1995-181; Eisenberg v. Commissioner,
T.C. Memo. 1995-180.
     Greene v. Commissioner, 88 T.C. 376 (1987), concerned the
applicability of the safe-harbor leasing provisions of sec.
168(f)(8). Trost v. Commissioner, 95 T.C. 560 (1990), concerned
a jurisdictional issue.
     Farrell v. Commissioner, T.C. Memo. 1996-295; Baratelli v.
Commissioner, T.C. Memo. 1994-484; Estate of Satin v.
Commissioner, T.C. Memo. 1994-435; Fisher v. Commissioner, T.C.
Memo. 1994-434; Foam Recycling Associates v. Commissioner, T.C.
Memo. 1992-645; Madison Recycling Associates v. Commissioner,
T.C. Memo. 1992-605, concerned other issues.
                             - 22 -

the taxpayers liable for such additions to tax in all but one of

the opinions to date on these issues, although procedural rulings

have involved many more favorable results for taxpayers.9

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

case for the Plastics Recycling group of cases, this Court (1)

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

in excess of $50,000; (2) held that the transaction, which is

almost identical to the Partnership transactions in these

consolidated cases, was a sham because it lacked economic

substance and a business purpose; (3) upheld the section 6659

addition to tax for valuation overstatement since the

underpayment of taxes was directly related to the overstatement

of the value of the Sentinel EPE recyclers; and (4) held that

losses and credits claimed with respect to Clearwater were

attributable to tax-motivated transactions within the meaning of


9
     In Zidanich v. Commissioner, T.C. Memo. 1995-382, we held
the taxpayers liable for the sec. 6659 addition to tax, but not
liable for the negligence additions to tax under sec. 6653(a).
As indicated in our opinion, the Zidanich case, and the Steinberg
case consolidated with it for opinion, involved exceptional
circumstances.
     In Estate of Satin v. Commissioner, supra, and Fisher v.
Commissioner, supra, after the decision in Provizer v.
Commissioner, supra, the taxpayers were allowed to elect to
accept a beneficial settlement because of exceptional
circumstances. In Farrell v. Commissioner, supra, we rejected
the taxpayers' claim to a similar belated settlement arrangement
since the circumstances were different and the taxpayers
previously had rejected settlement and elected to litigate the
case. See also Gollin v. Commissioner, supra; Grelsamer v.
Commissioner, supra; Zenkel v. Commissioner, supra; Baratelli v.
Commissioner, supra.
                              - 23 -

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.

     Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that the investments in

the Sentinel EPE recyclers in these consolidated cases are

similar to the investment described in Provizer v. Commissioner,

supra.   The underlying transactions in these consolidated cases,

and the Sentinel EPE recyclers considered in these consolidated

cases, are the same type of transaction and same type of machines

considered in Provizer v. Commissioner, supra.

     Based on the entire record in these consolidated cases,

including the extensive stipulations, testimony of respondent's

experts, and petitioner's testimony, we hold that each of the

Partnership transactions herein was a sham and lacked economic

substance.   In reaching this conclusion, we rely heavily upon the

overvaluation of the Sentinel EPE recyclers.   Respondent is

sustained on the question of the underlying deficiencies.    We

note that petitioners have explicitly conceded this issue in the

stipulations of settled issues filed shortly before trial.     The

record plainly supports respondent's determinations regardless of

such concession.   For a detailed discussion of the facts and the

applicable law in a substantially identical case, see Provizer v.

Commissioner, supra.
                              - 24 -

A.   Section 6653(a)--Negligence

     In two notices of deficiency, respondent determined that

petitioners were liable for the additions to tax for negligence

under section 6653(a)(1) and (2) for 1981 and 1982.10

Petitioners have the burden of proving that respondent's

determinations of these additions to tax are erroneous.    Rule

142(a); Luman v. Commissioner, 79 T.C. 846, 860-861 (1982).

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

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

is due to negligence or intentional disregard of rules or

regulations.   Section 6653(a)(2) 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 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 employ

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

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

in connection with the transactions were reasonable in light of

his experience and the nature of the investment or business.      See

Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740 (1973).

When considering the negligence addition to tax, we evaluate the

particular facts of each case, judging the relative

10
     In the notice of deficiency for taxable year 1982,
respondent referred to sec. 6653(a)(2) as sec. 6653(a)(1)(B).
                                - 25 -

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.

     Petitioner maintains that he and his wife were reasonable in

claiming deductions and credits with respect to the Partnerships.

He claims that he (1) carefully read the SAB Recovery offering

memorandum; (2) intended and reasonably expected to make an

economic profit from the Partnerships in light of the so-called

oil crisis in the United States in 1981 and 1982; and (3)

reasonably relied upon Tucker as a qualified adviser on this

matter.

     1.   The Private Offering Memoranda

     Petitioner testified that he relied in part upon the SAB

Recovery offering memorandum.    He claimed that he and his wife

spent several consecutive evenings carefully reading it.

Petitioner did not indicate how much time, if any, he spent

reviewing the SAB Reclamation offering memorandum.

     Each of the offering memoranda highlighted a number of tax

risk factors and 12 business risk factors, including the

following:   (1) The Partnerships had no operating history; (2)

management of the Partnerships' business was dependent upon the

general partner, who had no experience in marketing recycling

equipment and who was required to devote only such time to the

Partnerships as such general partner deemed necessary; (3) the
                               - 26 -

limited partners had no right to take part in, or interfere in

any manner with, the management or conduct of the business of the

Partnerships; (4) there was no established market for the

Sentinel recyclers; and (5) although competitors were purportedly

not marketing comparable equipment, and the Sentinel recyclers

purportedly involved "carefully guarded trade secrets," PI did

"not intend to apply for a patent for protection against

appropriation and use by others."

     In these consolidated cases, the projected tax benefits in

the SAB Recovery and SAB Reclamation offering memoranda exceeded

petitioner's investments.    According to the offering memoranda,

for each $50,000 investor, the projected first-year tax benefits

were investment tax credits in the amounts of $82,639 and

$83,712, respectively, plus deductions in the amounts of $40,003

and $40,234, respectively.   As a result of petitioner's second-

tier, $10,000 investment in SAB Recovery, on their 1981 return

petitioners claimed an operating loss in the amount of $7,940 and

investment tax and business energy credits totaling $16,508; and

on their 1982 return they claimed an operating loss in the amount

of $458.   For petitioner's $10,000, second-tier investment in SAB

Reclamation in 1982, petitioners claimed an operating loss in the

amount of $8,021 and investment tax and business energy credits

in the amount of $16,742.

     Petitioner estimated that at the time he invested in the

Partnerships, he was working 70 hours a week at Discover
                               - 27 -

magazine, and "just the thought of pursuing any other kind of

activity was just out of the question for * * * [him]."

Petitioner testified that he invested in the Partnerships to

obtain an additional source of income to help offset current and

future tuition bills of his children, as well as alimony payments

to his former wife.   According to petitioner, the long-term

projected royalty payments, and not the tax benefits, primarily

induced him to invest in the Partnerships.   Petitioners claimed

three children as dependents on their 1981 and 1982 returns.

They deducted alimony paid--in the amount of $3,600--only on

their 1981 return.    Petitioners reported income from wages,

interest, and dividends in the amount of $154,209 in 1981, and in

the amount of $182,556 in 1982.    Petitioner testified that, after

purportedly reading the SAB Recovery offering memorandum over

several nights, his primary concern was the risk of being

audited.

     Petitioner testified that the tax benefits flowing from the

Partnerships were explained to him, and that he understood they

would exceed his cash invested.    He was not so well informed or

concerned about the business aspects of the Partnerships,

however.   Petitioner testified that he thought that the Sentinel

EPE recycler had an advantage over its competitors because "it

was supposed to be better * * * than the state-of-the-art

machines at that time," but the offering memoranda warned that PI

was not patenting the machine to protect against appropriation
                              - 28 -

and use by others.   The financial structure of the Partnerships

was not clear to petitioner from the offering memoranda, and at

trial he could not recall that the offering memoranda warned that

there was no established market for the recyclers.    This point

was discussed in a section of the offering memorandum entitled,

"No Established Market for the Sentinel Recyclers".    The offering

memoranda explained that "There is presently no established

market for leasing or licensing the use of the Sentinel Recyclers

or comparable recycling equipment", and that "there can be no

assurance that the Sentinel Recyclers will be placed * * * to any

significant extent".   Notwithstanding petitioner's purported

economic profit motive for investing in the Partnerships, the

record in these consolidated cases indicates that petitioners did

not carefully read the offering memoranda, did not give due

consideration to all of the information set out therein, and

ultimately did not place a great deal of reliance, if any, on the

representations therein.

     The direct reductions in petitioners' Federal income taxes,

from the investment tax credits alone, ranged from 165 percent to

167 percent of their cash investments, without consideration of

any rebated commissions or advance royalty payments.    Therefore,

after adjustments of withholding, estimated tax, or final

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

Memo. 1992-177, "except for a few weeks at the beginning,

petitioners never had any money in the * * * [Partnership
                              - 29 -

transactions]."   In view of the disproportionately large tax

benefits claimed on petitioners' Federal income tax returns,

relative to the dollar amounts invested, further investigation of

the Partnership transactions clearly was required.   A careful

consideration of the materials in the offering memoranda in these

cases, especially the discussions of high writeoffs and risk of

audit, should have alerted a prudent and reasonable investor to

the questionable nature of the promised deductions and credits.

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

affg. Dister v. Commissioner, T.C. Memo. 1987-217; Sacks v.

Commissioner, T.C. Memo. 1994-217, affd. 82 F.3d 918 (9th Cir.

1996).   A reasonably prudent person would not conclude without

substantial investigation that the Government was providing tax

benefits so disproportionate to the taxpayers' investment of

their own capital.

     Petitioners' reliance upon the Court of Appeals for the

Ninth Circuit's partial reversal of our decision in Osterhout v.

Commissioner, T.C. Memo. 1993-251, affd. in part and revd. in

part without published opinion sub nom. Balboa Energy Fund 1981

v. Commissioner, 85 F.3d 634 (9th Cir. 1996), is misplaced.      In

Osterhout, we found that certain oil and gas partnerships were

not engaged in a trade or business and sustained the

Commissioner's imposition of the negligence additions to tax with
                              - 30 -

respect to one of the partners therein.11   The Court of Appeals

for the Ninth Circuit reversed our imposition of the negligence

additions to tax.   Petitioners point out that the taxpayer in

that case relied in part upon a tax opinion contained in the

offering materials.




11
     Osterhout v. Commissioner, T.C. Memo. 1993-251, affd. in
part and revd. in part without published opinion sub nom. Balboa
Energy Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir. 1996),
involved a group of consolidated cases. The parties therein
agreed to be bound by the Court's opinion regarding the
application of the additions to tax under sec. 6653(a), inter
alia. Accordingly, although the Court's analysis focused on one
taxpayer, the additions to tax were sustained with respect to all
of the taxpayers.
                              - 31 -

     In the consolidated cases before us, however, petitioner's

testimony indicates that he and his wife did not carefully read

the offering memoranda and therefore did not place a great deal

of reliance, if any, upon the tax opinion letter attached

thereto.   Moreover, the offering memoranda for the Partnerships

herein warned prospective investors that the accompanying tax

opinion letters were not in final form and were prepared for the

general partner, and that prospective investors should consult

their own professional advisers with respect to the tax benefits

and tax risks associated with the Partnerships.    The tax opinion

letters accompanying the SAB Recovery and SAB Reclamation

offering memoranda were addressed solely to the general partner

and began with the following opening disclaimer:

     This opinion is provided to you for your individual
     guidance. We expect that prospective investors will
     rely upon their own professional advisors with respect
     to all tax issues arising in connection with an
     investment in the Partnership and the operations
     thereof. We recognize that you intend to include this
     letter with your offering materials and we have
     consented to that with the understanding that the
     purpose in distributing it is to assist your offerees'
     and their tax advisors in making their own analysis and
     not to permit any prospective investor to rely upon our
     advice in this matter. [Emphasis added.]

Accordingly, the tax opinion letters expressly indicate that

prospective investors such as petitioners were not to rely upon

the tax opinion letter.   See Collins v. Commissioner, supra.    The

limited, technical opinion of tax counsel expressed in these

letters was not designed as advice upon which taxpayers might
                                - 32 -

rely, and the opinion of counsel itself so states.



2.   The So-Called Oil Crisis

     Petitioner contends that he reasonably expected to make an

economic profit from the Partnership transactions because plastic

is an oil derivative and the United States was experiencing a so-

called oil crisis during the years 1981 and 1982.    Based upon our

review of the record, we find petitioner's contention

unconvincing, regardless of the so-called oil crisis.    Moreover,

testimony by one of respondent's experts establishes that the oil

pricing changes during the late 1970's and early 1980's did not

justify petitioners' claiming excessive investment credits and

purported losses based on vastly exaggerated valuations of

recycling machinery.

     By 1981 petitioner had approximately 30 years' experience

as, variously, a reporter, bureau correspondent, and editor for

the magazines Life, Time, and Discover.   He confirmed at trial

that if he needs information, he knows how to get it.    In

addition to utilizing libraries and varying publications,

petitioner noted that "one of the ways that * * * [he] [gets]

information best is to go to experts, * * * generally in the

[fields] of science and technology and medicine."    Despite his

research and reporting experience, and the resources available to

him at Time, Inc., petitioner did not educate himself in, or

personally investigate, the plastics recycling transactions; nor
                                - 33 -

did he consult anyone outside of Becker Co.    In addition,

petitioner and his wife did not carefully read the SAB Recovery

offering memorandum or seriously attempt to resolve the numerous

caveats and warnings therein.    We are not convinced that

petitioner gave sufficient consideration to the business aspects

of the Partnerships to demonstrate that he really intended and

reasonably expected to make an economic profit from the

transactions, regardless of the so-called oil crisis.

     Moreover, petitioners did not explain how the so-called oil

crisis provided a reasonable basis for them to invest in the

Partnerships and claim the associated tax deductions and credits.

The offering materials warned that there could be no assurances

that prices for new resin pellets would remain at their then-

current level.    One of respondent's experts, Steven Grossman,

explained that the price of plastics materials is not directly

proportional to the price of oil.    In his report, he stated that

less than 10 percent of crude oil is utilized for making plastics

materials and that studies have shown that "a 300% increase in

crude oil prices results in only a 30 to 40% increase in the cost

of plastics products."   Furthermore, during 1980 and 1981, in

addition to 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).

     Petitioners' reliance on Krause v. Commissioner, 99 T.C. 132
                              - 34 -

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

(10th Cir. 1994), is misplaced.   The facts in Krause v.

Commissioner, supra, are distinctly different from the facts of

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

limited partnerships whose investment objectives concerned

enhanced oil recovery (EOR) technology.    The Krause opinion

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.    Id. at 135-136.   In holding that

the taxpayers in the Krause case were not liable for the

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

Government's expert witnesses acknowledged that "investors may

have been significantly and reasonably influenced by the energy

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

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

however, as explained by respondent's expert Steven Grossman, the

price of plastics materials was not directly proportional to the

price of oil, and there is no persuasive evidence that the so-

called oil crisis had a substantial bearing on petitioner's

decision to invest.   While EOR was, according to our Krause

opinion, in the forefront of national policy and the media during

the late 1970's and 1980's, there is no showing in these records

that the so-called energy crisis would provide a reasonable basis

for petitioner's investing in recycling of polyethylene,

particularly in the machinery here in question.
                              - 35 -

     In addition, the taxpayers in the Krause case were

experienced in or investigated the oil industry and EOR

technology specifically.   One of the taxpayers in Krause v.

Commissioner, supra, undertook significant investigation of the

proposed investment including researching EOR technology.    The

other taxpayer was a geological and mining engineer whose work

included research of oil recovery methods and who hired an

independent geologic engineer to review the offering materials.

Id. at 166.   In the present cases, petitioners were not

experienced or educated in plastics recycling.   Petitioner did

not independently investigate the Sentinel recyclers or hire an

expert in plastics to evaluate the Partnership transactions.    We

consider petitioners' arguments with respect to the Krause case

inapplicable.

     3.   Petitioners' Purported Reliance on a Tax Adviser

     Petitioner maintains that he reasonably relied upon the

advice of a qualified adviser, Tucker, and that he relied on

various representations allegedly made by Tucker about what

Becker had done.

     The concept of negligence and the argument of reliance on an

expert are highly fact intensive.   Petitioner is well educated;

he earned degrees in electrical engineering and mathematics from

the University of Michigan.   For approximately 30 years, he

worked variously as a reporter, bureau correspondent, editor,

senior editor, and managing editor for Life magazine, Time
                              - 36 -

magazine, and Discover magazine.    This experienced business and

science journalist claims that he relied upon an accountant to

investigate the tax law and the underlying business circumstances

of a proposed investment, the success of which depended upon a

purportedly technologically unique machine.     Becker, who is

experienced in tax matters, explains that he made an

investigation within the limits of his resources and abilities

and that he and Tucker fully disclosed what he had done.     For

reasons set forth below, we believe that petitioner did not

reasonably rely upon Tucker, and ultimately Becker, with respect

to valuation problems requiring expertise in engineering and

plastics technology.

          a. The Circumstances Under Which a Taxpayer
          May Avoid Liability Under Section 6653(a)(1)
          and (2) Because of Reasonable Reliance on
          Competent and Fully Informed Professional
          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.    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).   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

additions to tax, the taxpayer must show that the professional
                              - 37 -

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; Sacks v.

Commissioner, T.C. Memo. 1994-217, affd. 82 F.3d 918 (9th Cir.

1996); Kozlowski v. Commissioner, T.C. Memo. 1993-430, affd.

without published opinion 70 F.3d 1279 (9th Cir. 1995); see also

Stone v. Commissioner, T.C. Memo. 1996-230; Reimann v.

Commissioner, T.C. Memo. 1996-84.

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

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

Commissioner, 990 F.2d 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), affd. without published opinion sub

nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991);

Marine v. Commissioner, 92 T.C. 958, 992-993 (1989), affd.

without published opinion 921 F.2d 280 (9th Cir. 1991); McCrary

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

91 T.C. 524, 565 (1988).   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.     David v. Commissioner,
                               - 38 -

supra; Goldman v. Commissioner, supra; Freytag v. Commissioner,

supra; Beck v. Commissioner, 85 T.C. 557 (1985); Lax v.

Commissioner, T.C. Memo. 1994-329, affd. without published

opinion 72 F.3d 123 (3d Cir. 1995); Sacks v. Commissioner, supra;

Steerman v. Commissioner, T.C. Memo. 1993-447; Rogers v.

Commissioner, T.C. Memo. 1990-619; see also the Plastics

Recycling cases cited supra note 8.

     In the instant consolidated cases, petitioner maintains that

he reasonably relied upon Tucker as a qualified adviser on this

matter.   Although petitioner testified that he did not discuss

the Plastics Recycling transactions with Becker, and he does not

argue that he relied on Becker, the substance of petitioner's

testimony is that he relied upon Tucker's representations about

what Becker had done to investigate the Plastics Recycling

transactions.   Tucker did not testify at trial; Becker did.

          b.    Becker and Tucker

     Becker had no education, special qualifications, or

professional skills in plastics engineering, plastics recycling,

or plastics materials.    In evaluating the Plastics Recycling

transactions and organizing the SAB Recycling Partnerships,

Becker supposedly relied upon:      (1) The offering materials; (2) a

tour of the PI facility in Hyannis; (3) discussions with insiders

to the transactions; (4) Canno; and (5) his investigation of the

reputation and background of PI and persons involved in the

transactions.
                               - 39 -

     Despite his lack of knowledge regarding the product, the

target market, and the technical aspects at the heart of the

Plastics Recycling transactions, Becker did not hire an expert in

plastics materials or plastics recycling, or recommend that his

clients do so.   The only independent person having any connection

with the plastics industry with whom Becker spoke was Canno.

Canno was a client of Becker Co. and was a part owner and the

production manager of Equitable Bag Co., a manufacturer of paper

and plastic bags.   Becker spoke to Canno about the recyclers and

PI, but did not hire or pay him for any advice.    Canno did not

visit the PI plant in Hyannis, see or test a Sentinel EPE

recycler, or see or test any of the output from a Sentinel EPE

recycler or the recycled resin pellets after they were further

processed by PI.    According to Becker, Canno endorsed the

Partnership transactions after reviewing the offering materials.

Asked at trial if Canno had done any type of comparables

analysis, Becker replied:    "I don't know what Mr. Canno did."

     Becker visited the PI plant in Hyannis, toured the facility,

viewed a Sentinel EPE recycler in operation, and saw products

that were produced from recycled plastic.    Becker claims that he

was told by PI personnel that the recycler was unique and that it

was the only machine of its type.    In fact, the Sentinel EPE

recycler was not unique; instead, several machines capable of

densifying low density materials were already on the market.

Other plastics recycling machines available during 1981 and 1982
                              - 40 -

ranged in price from $20,000 to $200,000, including the Foremost

Densilator, Nelmor/Weiss Densification System (Regenolux), Buss-

Condux Plastcompactor, and Cumberland Granulator.    See Provizer

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

     Becker was also told that PI had put an enormous amount of

research and development--10 to 12 years' worth--into the

creation and production of the Sentinel EPE recycler.     When he

asked to see the cost records for some kind of independent

verification, however, his request was denied.   Becker was

informed that such information was proprietary and secret, and

that he would just have to take PI's representations as true.

Although PI claimed that all of its information was a trade

secret, and that it never obtained patents on any of its

machines, PI had in fact obtained numerous patents prior to the

recycling transactions and had also applied for a trademark for

the Sentinel recyclers.   Becker decided to accept PI's

representations after speaking with Miller (the corporate counsel

to PI), Canno (who had never been to PI's plant or seen a

Sentinel EPE recycler), and a surrogate judge from Rhode Island

who did business in the Boston/Cape Cod area (and who had no

expertise in engineering or plastics materials).    Becker

testified that he was allowed to see PI's internal accounting

controls regarding the allocation of royalty payments and PI's

recordkeeping system in general.   In Provizer v. Commissioner,

supra, this Court found that "PI had no cost accounting system or
                              - 41 -

records."

     Becker confirmed at trial that he relied on the offering

materials and discussions with PI personnel to establish the

value and purported uniqueness of the recyclers.    Becker

testified that he relied upon the reports of Ulanoff and Burstein

contained in the offering materials, despite the fact that:     (1)

Ulanoff's report did not contain any hard data to

support his opinion; (2) Ulanoff was not an economics or plastics

expert; (3) Becker did not know whether Burstein was an engineer;

and (4) Burstein was a client of Miller's and was not an

independent expert.   In addition, Ulanoff and Burstein each owned

an interest in more than one partnership that owned Sentinel

recyclers as part of the Plastics Recycling Program.

     Becker explained at trial that in the course of his practice

when evaluating prospective investments for clients, he focuses

on the economics of the transaction and investigates whether

there is a need or market for the product or service.    With

respect to the Partnership transactions, the records indicate

that Becker overlooked several red flags regarding the economic

viability and market for the Sentinel EPE recyclers.    The

offering memoranda for the Partnership transactions warned that

there was no established market for the Sentinel EPE recyclers.

Becker never saw any marketing plans for selling the pellets or

leasing the recyclers.   He accepted representations by PI

personnel that they would be marketing the recyclers to clients
                              - 42 -

and that there was a sufficient base of end-users for the

machines; yet he never saw PI's client list.   At the time of the

closing of the Partnerships, Becker did not know who the end-

users were or whether there were any end-users actually committed

to the transaction.

     Becker purportedly checked the price of the pellets by

reading trade journals of the plastics industry.   However, he did

not use those same journals to investigate the recyclers'

purported value or to see whether there were any advertisements

for comparable machines.   In concluding that the Partnerships

would be economically profitable, Becker made two assumptions

that he concedes were unsupported by any hard data:   (1) That

there was a market for the pellets; and (2) that market demand

for them would increase.

     Becker had a financial interest in SAB Recovery, SAB

Reclamation, and the SAB Recycling Partnerships, generally.    He

received fees in excess of $500,000 with respect to the SAB

Recycling Partnerships, and more than $200,000 of those fees was

derived from SAB Recovery and SAB Reclamation.   Becker also

received fees for investment advice from some individual

investors.   In addition, Becker Co. received fees from the SAB

Recycling Partnerships for preparing their partnership returns.

As Becker himself testified, potential investors could not have

read the offering materials and remained ignorant of the

financial benefits accruing to him.
                              - 43 -

     Petitioner's recollection of Becker's investigation, as

purportedly told to him by Tucker, is inconsistent with Becker's

testimony.   According to petitioner, he understood from Tucker

that Tucker had not visited the PI plant in Hyannis, but that

"Becker had gone many times" and "had taken experts in plastics

and manufacturing along with him."     In contrast, Becker testified

that he visited PI just "one or two" times and that Tucker

visited PI once or twice.   Becker was "quite certain" that Tucker

accompanied him on one of his visits to PI, although he did not

indicate when that visit occurred.     As for taking along experts

in plastics and manufacturing, Becker testified that he did not

hire any independent experts other than counsel to represent him

as general partner, and that he relied on PI for the value and

uniqueness of the Sentinel recycler.

     Becker and petitioner also have differing recollections

regarding whether the two of them discussed the Plastics

Recycling transactions.   According to petitioner, after he first

contacted Becker, Becker took him on as a client and "almost

immediately turned * * * [him] over to Noel Tucker."    Petitioner

testified that thereafter, except for an occasional phone

conversation with Leicht, his dealings "were entirely with Noel

Tucker" until his account was turned over to Shuffrin.    In

contrast, Becker testified that he spoke to petitioner "more than

once", although to the best of his recollection only once prior

to the closing of SAB Recovery.   Becker testified that "Mr.
                              - 44 -

Jaroff called me after discussing the transaction with Mr.

Tucker, and asked me * * * to confirm the information that Noel

[Tucker] had given him".   As Becker recalled, he and petitioner

discussed the Plastics Recycling transactions for approximately

15 to 30 minutes in Tucker's office.     Asked if his testimony

would be different if petitioner were to testify that he had met

Becker only once, and that he had spoken only to Tucker and

Shuffrin about the Partnerships, Becker replied:     "No.   * * * [My

testimony] wouldn't be different."     Asked if he had a definite

recollection of talking to petitioner, Becker replied:      "I recall

talking to him in Tucker's office."

     With respect to what he told petitioner, Becker's testimony

is inconsistent.   On direct examination, Becker testified that he

confirmed to petitioner that he and his associates at Becker Co.

had visited PI, observed the recyclers, and done everything they

thought appropriate.   Becker testified that "I just confirmed

that we believed that we had done an appropriate level of due

diligence."   On cross-examination, Becker modified his earlier

testimony and said:

     I [told Jaroff] that I had done a high degree of
     investigation, review, and analysis, as opposed to
     saying I did due diligence * * *. I had told him about
     some of the things that I had done, some of [the] other
     things that Mr. Tucker had done, and we also had
     discussed the investment with Jaroff. I had indicated
     to him that, based upon my knowledge of his financial
     circumstance, he could afford the risk. That was
     basically the substance of my discussions with Mr.
     Jaroff.
                              - 45 -

Becker testified that he was very careful not to mislead any of

his clients regarding the particulars of his investigation.    As

he put it:   "I don't recall saying to a client I did due

diligence * * * [Rather,] I told * * * [my clients] precisely

what I had done to investigate or analyze the transaction.    I

didn't just say I did due diligence, and leave it open for them

to define what I might or might not have done."

     The record shows that petitioner did not carefully read the

offering memoranda; did not independently research the Plastics

Recycling transactions; and did not consult any experts in

plastics materials or plastics recycling.   Petitioner claims that

he relied on Tucker, and particularly relied on Tucker's

purported representations about what Becker had done to

investigate the Plastics Recycling transactions.   As petitioner

recalls them, however, Tucker's purported representations

contradict Becker's testimony regarding what he had done.    We

find petitioner's recollection of Tucker's representations to be

unreliable, and his failure to call Tucker to testify gives rise

to the inference that such testimony would not have been

favorable to petitioners.   Mecom v. Commissioner, 101 T.C. 374,

386 (1993), affd. without published opinion 40 F.3d 385 (5th Cir.

1994); Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392

F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947); Sacks v. Commissioner, T.C. Memo. 1994-217.     We are
                               - 46 -

not required to accept petitioner's self-serving testimony as

true, particularly when inconsistent and contradicted by other

evidence.    Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir.

1964), affg. 41 T.C. 593 (1964); Niedringhaus v. Commissioner, 99

T.C. 202, 212 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77

(1986); Snyder v. Commissioner, T.C. Memo. 1995-285; Sacks v.

Commissioner, supra.

       Petitioner does not allege that Tucker misled or deceived

him.    As a member of Becker Co., Tucker was privy to the

particulars of Becker's investigation.    Certainly he knew that

Becker did not take any experts with him to PI, especially

considering Becker's testimony that Tucker was with him on one

such occasion.    To the extent that Tucker related the particulars

of Becker's investigation to petitioner, we have no reason to

doubt that his representations were accurate and forthright.     In

addition, Becker's testimony convinces us that petitioner

discussed the Plastics Recycling transactions with Becker and

that Becker supplemented the representations made by Tucker, so

that petitioner knew "precisely what * * * [Becker] had done to

investigate or analyze the transaction."    Accordingly, we find

that petitioner was fully apprised of the particulars of Becker

Co.'s investigation, consistent with the facts as we have found

them.

       We hold that petitioner's purported reliance on Tucker, and

indirectly on Becker, was not reasonable, not in good faith, nor
                              - 47 -

based upon full disclosure.   The purported value of the Sentinel

EPE recycler generated the deductions and credits in these cases,

and that circumstance was reflected in the offering memoranda.

Petitioner testified that the tax benefits were explained to him

and that he recognized that the Sentinel recycler was "very

expensive."   Certainly Tucker and Becker recognized the nature of

the tax benefits and, given petitioner's education and

professional experience, he should have recognized it as well.

Yet neither petitioner, nor Tucker, nor Becker verified the

purported value of the Sentinel EPE recycler.   Petitioner

ultimately relied on Becker, and Becker confirmed at trial that

he relied on PI for the value of the Sentinel EPE recyclers.

     In the end, Tucker, Becker, and petitioner relied on PI

personnel for the value of the Sentinel EPE recyclers and the

economic viability of the Partnership transactions.   See Vojticek

v. Commissioner, T.C. Memo. 1995-444, to the effect that advice

from such persons "is better classified as sales promotion."

Tucker and Becker did not have any education, special

qualifications, or professional skills in plastics materials or

plastics recycling.   A taxpayer may rely upon his adviser's

expertise (in these cases accounting and tax advice), but it is

not reasonable or prudent to rely upon a tax adviser regarding

matters outside of his field of expertise or with respect to

facts that he does not verify.   See David v. Commissioner, 43

F.3d at 789-790; Goldman v. Commissioner, 39 F.3d at 408; Skeen
                              - 48 -

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

Commissioner, 88 T.C. 1086 (1987); Lax v. Commissioner, T.C.

Memo. 1994-329; Sacks v. Commissioner, supra; Rogers v.

Commissioner, T.C. Memo. 1990-619; see also Gollin v.

Commissioner, T.C. Memo. 1996-454; Grelsamer v. Commissioner,

T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C. Memo. 1996-398;

Estate of Busch v. Commissioner, T.C. Memo. 1996-342; Spears v.

Commissioner, T.C. Memo. 1996-341, with respect to Becker's

advice in Plastics Recycling cases.

     4.   Miscellaneous

     Petitioners stipulated that the fair market value of a

Sentinel EPE recycler in 1981 was not in excess of $50,000.

Notwithstanding this concession, petitioners contend that they

were reasonable in claiming credits on their Federal income tax

returns based upon each recycler having a value of $1,162,666.

In support of this position, petitioners submitted into evidence

preliminary reports prepared for respondent by Ernest D.

Carmagnola (Carmagnola), the president of Professional Plastic

Associates.   Carmagnola had been retained by the IRS in 1984 to

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

described as "the fantastic values placed on the * * *

[recyclers] by the owners."   Based on limited information

available to him at that time, Carmagnola preliminarily estimated

that the value of the Sentinel EPE recycler was $250,000.

However, after additional information became available to him,
                                - 49 -

Carmagnola concluded in a signed affidavit, dated March 16, 1993,

that the machines actually had a fair market value of not more

than $50,000 each in the fall of 1981 and 1982.

     We accord no weight to the Carmagnola reports submitted by

petitioners.    The projected valuations therein were based on

inadequate information, research, and investigation, and were

subsequently rejected and discredited by their author.    In one

preliminary report, Carmagnola states that he has "a serious

concern of actual profit" of a Sentinel EPE recycler and that to

determine whether the machines actually could be profitable, he

required additional information from PI.    Carmagnola also

indicates that in preparing the report, he did not have

information available concerning research and development costs

of the machines and that he estimated those costs in his

valuations of the machines.

     Respondent rejected the Carmagnola reports and considered

them unsatisfactory for any purpose, and there is no indication

in the records that respondent used them as a basis for any

determinations in the notices of deficiency.    Even so, counsel

for petitioners obtained copies of these reports and urge that

they support the reasonableness of the values reported on

petitioners' returns.    Not surprisingly, said counsel did not

call Carmagnola to testify in these cases, but preferred instead

to rely solely upon his preliminary ill-founded valuation

estimates.     (Carmagnola has not been called to testify in any of
                              - 50 -

the Plastics Recycling cases before us.)   The Carmagnola reports

were a part of the record considered by this Court and reviewed

by the Sixth Circuit Court of Appeals in Provizer v.

Commissioner, T.C. Memo. 1992-177, where we held the taxpayers

negligent.   Consistent therewith, we find in these consolidated

cases, as we have found previously, that the reports prepared by

Carmagnola are unreliable and of no consequence.   Petitioners are

not relieved of the negligence additions to tax based on the

preliminary reports prepared by Carmagnola.

     Petitioners cite a number of cases in support of their

position, but primarily rely on Durrett v. Commissioner, 71 F.3d

515 (5th Cir. 1996), affg. in part and revg. in part T.C. Memo.

1994-179; Chamberlain v. Commissioner, 66 F.3d 729 (5th Cir.

1995), affg. in part and revg. in part T.C. Memo. 1994-228;

Wright v. Commissioner, T.C. Memo. 1994-288; Wood v.

Commissioner, T.C. Memo. 1991-205; Davis v. Commissioner, T.C.

Memo. 1989-607; and Mollen v. United States, 72 AFTR 2d 93-6443,

93-2 USTC par. 50,585 (D. Ariz. 1993).

     This Court dismissed the negligence additions to tax in the

Wright, Wood, and Davis cases for reasons inapposite to the facts

herein.   In the Wright case, the taxpayers were unsophisticated

investors with little or no experience in financial matters;

nothing in their lives had given them the experience they needed

to manage their money or to recognize the importance or meaning

of the warning signs inherent in the investment at issue.   In
                              - 51 -

Wood, a group of consolidated cases, all of the taxpayers had

profit objectives, the transactions were not sham transactions,

and one pair of taxpayers inspected the equipment at issue.    In

the Davis case, the taxpayers reasonably relied upon a "trusted

and long-term adviser" who was independent of the investment

venture, and the offering materials reviewed by the taxpayers did

not reflect that the principals in the venture lacked experience

in the pertinent line of business.

     Unlike the taxpayer in Wright, as a former business reporter

for Time, petitioner plainly had the experience and education

necessary to recognize the importance or meaning of the warning

signs inherent in the Partnership transactions.   In contrast to

the Wood case, the Partnership transactions are shams lacking

economic substance; we are not convinced that petitioner had an

honest objective of making an economic profit; and he did not

inspect the recyclers.   Unlike the circumstances of the Davis

case, Tucker and Becker were not long-term advisers of

petitioner; Becker was not independent of the SAB Recycling

Partnerships; and the offering memoranda warned that the general

partner had no prior experience in marketing recycling or similar

equipment.   Accordingly, petitioners' reliance on the Wright,

Wood, and Davis cases is misplaced.

     In Mollen v. United States, supra, the taxpayer was a

medical doctor who specialized in diabetes and who, on behalf of

the Arizona Medical Association, led a continuing medical
                               - 52 -

education (CME) accreditation program for local hospitals.     The

underlying tax matter involved the taxpayer's investment in

Diabetics CME Group, Ltd., a limited partnership that invested in

the production, marketing, and distribution of medical

educational video tapes.   The District Court found that the

taxpayer's personal expertise and insight in the underlying

investment gave him reason to believe it would be economically

profitable.   Although the taxpayer was not experienced in

business or tax matters, he did consult with an accountant and a

tax lawyer regarding those matters.     Moreover, the District Court

noted that the propriety of the taxpayer's disallowed deduction

therein was "reasonably debatable."     Id. at 93-6447, 93-2 USTC

par. 50,585, at 89,895; see Zfass v. Commissioner, T.C. Memo.

1996-167.

     Petitioner and Becker have no formal education, expertise,

or experience in plastics recycling.    Tucker never represented

that he was expert in plastics recycling, and petitioner had no

reason to believe otherwise.   There is no showing in the record

that petitioner, Tucker, or Becker had any personal insight or

industry know-how in plastics recycling that would reasonably

lead them to believe that the Plastics Recycling transactions

would be economically profitable.   Becker purportedly discussed

the transactions with Canno, who apparently was familiar with the

plastics industry, but Canno was not hired by Becker to

investigate PI and the Sentinel EPE recycler, never saw a
                              - 53 -

Sentinel EPE recycler, and never prepared any kind of formal,

written analysis of the venture.   In the end, Becker Co. and

petitioner relied upon representations by insiders to the

Plastics Recycling transactions, and neither Becker Co. nor

petitioner hired any independent experts in the field of plastic

materials or plastics recycling.   Accordingly, we consider

petitioners' arguments with respect to the Mollen case

inapplicable under the circumstances of these consolidated cases.

     Petitioners also rely on two recent decisions by the Court

of Appeals for the Fifth Circuit that reversed this Court's

imposition of the negligence additions to tax in a pair of non-

plastics recycling cases:   Durrett v. Commissioner, 71 F.3d 515

(5th Cir. 1996), affg. in part and revg. in part T.C. Memo. 1994-

179 and Chamberlain v. Commissioner, 66 F.3d 729 (5th Cir. 1995).

The taxpayers in the Durrett and Chamberlain cases were among

thousands who invested in the First Western tax shelter program

involving alleged straddle transactions of forward contracts.    In

the Durrett and Chamberlain cases, the Court of Appeals for the

Fifth Circuit concluded that the taxpayers reasonably relied upon

professional advice concerning tax matters.   In other First

Western cases, however, the Courts of Appeals have affirmed

decisions of the Tax Court imposing negligence additions to tax.

See Foulds v. Commissioner, T.C. Memo. 1994-489 (the well-

educated taxpayer failed to establish the substance of advice,

and the purported adviser lacked tax expertise), affd. without
                              - 54 -

published opinion 94 F.3d 651 (9th Cir. 1996); Chakales v.

Commissioner, T.C. Memo. 1994-408 (reliance on a long-term

adviser, who was a tax attorney and accountant, and who in turn

relied on a promoter of the venture, held unreasonable), affd. 79

F.3d 726 (8th Cir. 1996); Kozlowski v. Commissioner, T.C. Memo.

1993-430 (reliance on an adviser held unreasonable absent a

showing that the adviser understood the transaction and was

qualified to give an opinion whether it was bona fide), affd.

without published opinion 70 F.3d 1279 (9th Cir. 1995); Freytag

v. Commissioner, 89 T.C. 849 (1987) (reliance on tax advice given

by attorneys and C.P.A.'s held unreasonable absent a showing that

the taxpayers consulted any experts regarding the bona fides of

the transactions).   Here we have found that neither Tucker nor

Becker, the advisers consulted by petitioner, possessed

sufficient knowledge of the plastics recycling business to render

a competent opinion.   This circumstance has been deemed relevant

by the Court of Appeals for the Second Circuit, the court to

which appeal in these cases lies.   See David v. Commissioner, 43

F.3d at 789-790 (taxpayers' reliance on expert advice not

reasonable where expert lacks knowledge of business in which

taxpayers invested); Goldman v. Commissioner, 39 F.3d at 408

(same).   Accordingly, we shall not relieve petitioners of the

negligence additions to tax based upon the Court of Appeals'
                              - 55 -

decisions in the Durrett and Chamberlain cases.12

     5.   Conclusion as to Negligence

     Under the circumstances of these consolidated cases,

petitioners failed to exercise due care in claiming large

deductions and tax credits with respect to the Partnerships on

their Federal income tax returns.   We hold that petitioner did

not reasonably rely upon the offering memoranda, Tucker and

Becker, or in good faith investigate the underlying viability,

financial structure, and economics of the Partnership

transactions.   We are unconvinced by the claim of petitioner, an

experienced business and science journalist and editor with a

leading national investigative news magazine, that he reasonably

failed to inquire about his investments and simply relied on the

offering circulars and Becker Co., despite warnings in the

offering circulars and explanations by Tucker and Becker about

the limitations of Becker's investigation.   Petitioner knew or

should have known better.   We hold, upon consideration of the

entire record, that petitioners are liable for the negligence

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

years at issue.   Respondent is sustained on this issue.


12
     Other cases cited by petitioners are inapplicable and
distinguishable for the following general, nonexclusive reasons:
(1) They involve far less sophisticated, if not unsophisticated,
taxpayers; (2) the reasonableness of the respective taxpayers'
reliance on expert advice was established in those cases on
grounds that do not exist here; and (3) the advice given was
within the adviser's area of expertise.
                                 - 56 -

B.   Section 6659--Valuation Overstatement

      In notices of deficiency, respondent determined that

petitioners were liable for the section 6659 addition to tax on

the portion of their underpayments attributable to valuation

overstatement.    Petitioners have the burden of proving that

respondent's determinations of the section 6659 additions to tax

are erroneous.    Rule 142(a); Luman v. Commissioner, 79 T.C. at

860-861.   In docket No. 27392-89, in her answer to petition

respondent asserted an increased amount under section 6659.

Respondent has the burden of proof with respect to the increased

addition to tax.    Rule 142(a); Bagby v. Commissioner, 102 T.C.

596, 612 (1994).

      A graduated addition to tax is imposed when an individual

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

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

A valuation overstatement exists if the fair market value (or

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

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

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

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

underpayment.    Sec. 6659(b).

      Petitioners claimed tax benefits, including an investment

tax credit and a business energy credit, based on purported

values of $1,162,666 for each Sentinel EPE recycler.    Petitioners

concede that the fair market value of a Sentinel EPE recycler in
                              - 57 -

1981 was not in excess of $50,000.     Therefore, if disallowance of

petitioners' claimed tax benefits is attributable to such

valuation overstatements, petitioners are liable for the section

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

of their underpayments attributable to such valuation

overstatements.

     Petitioners contend that section 6659 does not apply in

their consolidated cases for the following three reasons:    (1)

Disallowance of the claimed tax benefits was attributable to

other than a valuation overstatement; (2) petitioners' concession

of the claimed tax benefits precludes imposition of the section

6659 additions to tax; and (3) respondent erroneously failed to

waive the section 6659 additions to tax.    We reject each of these

arguments for reasons set forth below.

     1.   The Grounds for Petitioners' Underpayments

     Section 6659 does not apply to underpayments of tax that are

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

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

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

taxpayers claim tax benefits that are disallowed on grounds

separate and independent from alleged valuation overstatements,

the resulting underpayments of tax are not regarded as

attributable to valuation overstatements.     Krause v.

Commissioner, 99 T.C. at 178 (citing Todd v. Commissioner,

supra).   However, when valuation is an integral factor in
                               - 58 -

disallowing deductions and credits, section 6659 is applicable.

See Illes v. Commissioner, 982 F.2d 163, 167 (6th Cir. 1992),

affg. T.C. Memo. 1991-449; Gilman v. Commissioner, 933 F.2d 143,

151 (2d Cir. 1991) (the section 6659 addition to tax applies if a

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

valuation overstatement), affg. T.C. Memo. 1989-684; Masters v.

Commissioner, T.C. Memo. 1994-197, affd. without published

opinion 70 F.3d 1262 (4th Cir. 1995); Harness v. Commissioner,

T.C. Memo. 1991-321.

     Petitioners argue that the disallowance of the claimed tax

benefits was not "attributable to" a valuation overstatement.

According to petitioners, the tax benefits were disallowed

because the Partnership transactions are sham transactions

lacking economic substance, not because of any valuation

overstatements.    It follows, petitioners reason, that because the

"attributable to" language of section 6659 requires a direct

causative relationship between a valuation overstatement and an

underpayment in tax, section 6659 cannot apply to their

deficiencies.    Petitioners cite the following cases to support

this 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; McCrary v.

Commissioner, supra; and Todd v. Commissioner, supra.

     Petitioners' argument rests on the mistaken premise that our

holding herein that the Partnership transactions lacked economic
                              - 59 -

substance was separate and independent from the overvaluation of

the Sentinel EPE recyclers.   To the contrary, in holding that the

Partnership transactions lacked economic substance, we relied

heavily upon the overvaluation of the recyclers.   Overvaluation

of the recyclers was an integral factor in regard to:    (1) The

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

underpayments of tax; and (3) our finding that the Partnership

transactions lacked economic substance.

     Petitioners argue that in Provizer v. Commissioner, T.C.

Memo. 1992-177, we found that the Clearwater transaction lacked

economic substance for reasons independent of the valuation

reported in that case.   According to petitioners, the purported

value of the recyclers in the Clearwater transaction was

predicated upon a projected stream of royalty income, and this

Court merely rejected the taxpayers' valuation method.

Petitioners misread and distort our Provizer opinion.    In the

Provizer case, overvaluation of the Sentinel EPE recyclers,

irrespective of the technique employed by the taxpayers in their

efforts to justify the overvaluation, was the dominant factor

that led us to hold that the Clearwater transaction lacked

economic substance.   Likewise, overvaluation of the Sentinel

recyclers in these cases is the ground for our holding herein

that the Partnership transactions lacked economic substance.

     Moreover, a virtually identical argument was recently

rejected in Gilman v. Commissioner, supra, by the Court of
                                - 60 -

Appeals for the Second Circuit, the court to which appeal in

these cases lies.   See Golsen v. Commissioner, 54 T.C. 742, 756-

758 (1970), affd. 445 F.2d 985 (10th Cir. 1971).    In the Gilman

case, the taxpayers engaged in a computer equipment sale and

leaseback transaction that this Court held was a sham transaction

lacking economic substance.   The taxpayers therein, citing Todd

v. Commissioner, supra, and Heasley v. Commissioner, supra,

argued that their underpayment of taxes derived from

nonrecognition of the transaction for lack of economic substance,

independent of any overvaluation.    The Court of Appeals for the

Second Circuit sustained imposition of the section 6659 addition

to tax because overvaluation of the computer equipment

contributed directly to this Court's earlier conclusion that the

transaction lacked economic substance and was a sham.     Gilman v.

Commissioner, supra at 151.     In addition, the Court of Appeals

for the Second Circuit agreed with this Court and with the Court

of Appeals for the Eighth Circuit that "'when an underpayment

stems from disallowed * * * investment credits due to lack of

economic substance, the deficiency is * * * subject to the

penalty under section 6659."'     Id. at 151 (quoting Massengill v.

Commissioner, 876 F.2d 616, 619-620 (8th Cir. 1989), affg. T.C.

Memo. 1988-427); see also Rybak v. Commissioner, 91 T.C. at 566-

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

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

opinion 959 F.2d 234 (6th Cir. 1992), affd. sub nom. Pasternak v.
                                - 61 -

Commissioner, 990 F.2d 893 (6th Cir. 1993).

       Petitioners' reliance on Gainer v. Commissioner, supra;

McCrary v. Commissioner, 92 T.C. 827 (1989), and Todd v.

Commissioner, supra, is misplaced.       In those cases, in contrast

to the consolidated cases herein, it was found that a valuation

overstatement did not contribute to an underpayment of taxes.        In

the Todd and Gainer cases, the underpayments were due exclusively

to the fact that the property in each case had not been placed in

service.    In the McCrary case, the underpayments were deemed to

result from a concession that the agreement at issue was a

license and not a lease.    Although property was overvalued in

each of those cases, the overvaluations were not the ground on

which the taxpayers' liability was 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.    Petitioners' consolidated cases present just such a

"different situation":    overvaluation of the recyclers was

integral to and inseparable from petitioners' claimed tax

benefits and our holding that the Partnership transactions lacked

economic substance.13

13
     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, 89 T.C. 912 (1987), affd.
862 F.2d 540 (5th Cir. 1988), we consider it distinguishable. To
the extent that the reversal in the Heasley case is based on a
concept that where an underpayment derives from the disallowance
                              - 62 -

     2.   Concession of the Deficiencies

     Petitioners argue that their concession of the deficiencies

precludes imposition of the section 6659 additions to tax.

Petitioners contend that their concession renders any inquiry

into the grounds for such deficiencies moot.   Absent such

inquiry, petitioners argue that it cannot be known whether their

underpayments were attributable to a valuation overstatement or

another discrepancy.   Without a finding that a valuation

overstatement contributed to an underpayment, according to

petitioners, section 6659 cannot apply.    In support of this line

of reasoning, petitioners rely heavily upon Heasley v.

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

     Petitioners' open-ended concession does not obviate our

finding that the Partnership transactions lacked economic

substance due to overvaluation of the recyclers.   This is not a

situation where we have "to decide difficult valuation questions

for no reason other than the application of penalties."     See

McCrary v. Commissioner, supra at 854 n.14.    The value of the

Sentinel EPE recycler was established in Provizer v.

Commissioner, supra, and stipulated by the parties.    As a



of a transaction for lack of economic substance, the underpayment
cannot be attributable to an overvaluation, this Court and the
Court of Appeals for the Second Circuit have disagreed. See
Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991) ("The
lack of economic substance was due in part to the overvaluation,
and thus the underpayment was attributable to the valuation
overstatement."), affg. T.C. Memo. 1989-684.
                              - 63 -

consequence of the inflated value assigned to the recyclers by

the Partnerships, petitioners claimed deductions and credits that

resulted in underpayments of tax, and we held that the

Partnership transactions lacked economic substance.   Regardless

of petitioners' concession, 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 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.   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.   Gainer v. Commissioner, 893 F.2d at 228; 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 the present consolidated cases, no argument was made and

no evidence was presented to the Court that disallowance and

concession of the claimed investment tax credits and other tax

benefits related to anything other than a valuation

overstatement.   To the contrary, petitioners stipulated

substantially the same facts concerning the Partnership
                                - 64 -

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

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

liable for the section 6659 addition to tax because the

underpayment of taxes was directly related to the overvaluation

of the Sentinel EPE recyclers.    The overvaluation of the

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

findings in Provizer that the transaction was a sham and lacked

economic substance.   Similarly, the records in these cases

plainly show that the overvaluation of the recyclers is integral

to and is the core of our holding that the underlying

transactions here were shams and lacked economic substance.

     Petitioners' reliance on McCrary v. Commissioner, 92 T.C.

827 (1989), is misplaced.   In that case, the taxpayers conceded

disentitlement to their claimed tax benefits, and the section

6659 additions to tax were held inapplicable.    However, the

concessions of the claimed tax benefits, in and of themselves,

did not preclude imposition of the section 6659 additions 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, the records in

petitioners' cases plainly show that petitioners' underpayments

were attributable to overvaluation of the Sentinel recyclers.      We

hold that petitioners' reliance on McCrary v. Commissioner,
                               - 65 -

supra, is inappropriate.14

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

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

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

recyclers had been overvalued was integral to and inseparable

from our holding of a lack of economic substance.   Petitioners

stipulated that the Partnership transactions were similar to the

Clearwater transaction described in the Provizer case, and that

the fair market value of a Sentinel EPE recycler in 1981 was not

in excess of $50,000.    Given those concessions, and the fact that

the record here plainly shows that the overvaluations of the

recyclers was the only reason for the disallowance of the claimed

tax benefits, we conclude that the deficiencies were attributable

to overvaluation of the Sentinel EPE recyclers.

     3.    Section 6659(e)

     Petitioners argue that respondent erroneously failed to

waive the section 6659 additions to tax.   Section 6659(e)

authorizes the Commissioner to waive all or part of the addition

to tax for valuation overstatements if taxpayers establish that

there was a reasonable basis for the adjusted bases or valuations


14
     Petitioners' citation of Heasley v. Commissioner, supra, in
support of the concession argument is also inappropriate. That
case was not decided by the Court of Appeals for the Fifth
Circuit on the basis of a concession. Moreover, see supra note
13, to the effect that the Court of Appeals for the Second
Circuit and this Court have not followed the Heasley opinion with
respect to the application of sec. 6659.
                              - 66 -

claimed on the returns and that such claims were made in good

faith.   The Commissioner's refusal to waive a section 6659

addition to tax is reviewable by this Court for abuse of

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

discretion has been found in situations where the Commissioner's

refusal to exercise her discretion is arbitrary, capricious, or

unreasonable.   See Mailman v. Commissioner, 91 T.C. 1079 (1988);

Estate of Gardner v. Commissioner, 82 T.C. 989 (1984); Haught v.

Commissioner, T.C. Memo. 1993-58.

     We note initially that petitioners did not request

respondent to waive the section 6659 additions to tax until well

after the trial of these consolidated cases.   Petitioners made

their request more than 6 months after the trial of these

consolidated cases.   We are reluctant to find that respondent

abused her discretion in these consolidated cases when she was

not timely requested to exercise it and there is no direct

evidence of any abuse of administrative discretion.     Haught v.

Commissioner, supra; cf. Wynn v. Commissioner, T.C. Memo. 1995-

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

     However, we do not decide this issue solely on petitioners'

failure timely to request waivers, but instead, we have

considered the issue on its merits.    Petitioners urge that they

relied on the respective offering materials and Tucker in

deciding on the valuation claimed on their tax returns.

Petitioners contend that such reliance was reasonable and,
                               - 67 -

therefore, that respondent should have waived the section 6659

additions to tax.15   However, as we explained above in finding

petitioners liable for the negligence additions to tax,

petitioners' purported reliance on the offering materials and

Tucker was not reasonable.

     Petitioners did not carefully read the offering memoranda.

To the extent that they reviewed either of them, they did not

give due consideration to the numerous warnings and caveats

contained therein.    We found petitioner's recollection of events

to be unreliable and his testimony suspect.   Becker possessed no

special qualifications or professional skills in the recycling or

plastics industries, and the record indicates the same was true

of Tucker.   Despite these obvious limitations, Tucker, Becker,

and petitioners never hired or consulted any plastics engineering

or technical experts with respect to the Plastics Recycling

transactions.   Becker spoke with Canno, who apparently had some

knowledge of the plastics industry, but the substance of Canno's

purported comments is doubtful and he had only minimal

information about the transaction anyway.   At trial, Becker

confirmed that in the end he relied exclusively on PI, its

personnel, and the offering materials as to the value and


15
     In their posttrial brief, petitioners referenced the reports
prepared by Carmagnola in support of the reasonableness of the
claimed valuation. For reasons discussed supra, we consider the
reports prepared by Carmagnola to be unreliable and of no
consequence.
                                - 68 -

purported uniqueness of the machines.

     In support of their contention that they acted reasonably,

petitioners cite Mauerman v. Commissioner, 22 F.3d 1001 (10th

Cir. 1994), revg. T.C. Memo. 1993-23.    However, the facts in the

Mauerman case are distinctly different from the facts of these

cases.    In Mauerman, the Tenth Circuit Court of Appeals held that

the Commissioner had abused her discretion for not waiving a

section 6661 addition to tax.    Like the section 6659 addition, a

section 6661 addition to tax may be waived by the Commissioner if

the taxpayer demonstrates that there was reasonable cause for his

underpayment and that he acted in good faith.    Sec. 6661(c).   The

taxpayer in Mauerman relied upon independent attorneys and

accountants for advice as to whether payments were properly

deductible or capitalized.    The advice relied upon by the

taxpayer in Mauerman was within the scope of the advisers'

expertise, the interpretation of the tax laws as applied to

undisputed facts.   In these consolidated cases, particularly with

respect to valuation, petitioners relied upon advice that was

outside the scope of expertise and experience of Tucker and

Becker.   Consequently, we consider petitioners' reliance on the

Mauerman case inapplicable.

     We hold that petitioners did not have a reasonable basis for

the adjusted bases or valuations claimed on their tax returns

with respect to their investments in the Partnerships.    In these

consolidated cases, respondent could find that petitioner's
                              - 69 -

purported reliance on the offering materials, Tucker, and Becker

was unreasonable.   The record in these consolidated cases does

not establish an abuse of discretion on the part of respondent

but supports respondent's position.    We hold that respondent's

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

of discretion.   Petitioners are liable for the respective section

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

of their underpayments attributable to valuation overstatements.

Respondent is sustained on this issue.

C. Petitioners' Motion For Leave To File Motion For Decision
Ordering Relief From the Negligence Penalty and the Penalty Rate
of Interest and To File Supporting Memorandum of Law

      Long after the trial of these consolidated cases,

petitioners filed a Motion For Leave To File Motion For Decision

Ordering Relief From the Negligence Penalty and the Penalty Rate

of Interest and To File Supporting Memorandum of Law under Rule

50.   Petitioners also lodged with the Court a motion for decision

seeking relief from the additions to tax for negligence and from

the increased rate of interest, with attachments, and a

memorandum in support of the motion.    Respondent filed an

objection, with attachments, and a memorandum in support thereof,

and petitioners thereafter filed a reply memorandum.    Petitioners

argue that they should be afforded the same settlement that was

reached between other taxpayers and the IRS in docket Nos. 10382-

86 and 10383-86, each of which was styled Miller v. Commissioner.

See Farrell v. Commissioner, T.C. Memo. 1996-295 (denying a
                              - 70 -

motion similar to petitioners' motion); see also Gollin v.

Commissioner, T.C. Memo. 1996-454; Grelsamer v. Commissioner,

T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C. Memo. 1996-398.

     Counsel for petitioners seek to raise a new issue long after

the trial of these consolidated cases.   Resolution of such issue

might well require a new trial.   Such a further trial "would be

contrary to the established policy of this Court to try all

issues raised in a case in one proceeding and to avoid piecemeal

and protracted litigation."   Markwardt v. Commissioner, 64 T.C.

989, 998 (1975); see also Robin Haft Trust v. Commissioner, 62

T.C. 145, 147 (1974).   Consequently, under the circumstances

here, at this late date in the litigation proceedings, long after

trial and briefing and after the issuance of numerous opinions on

issues and facts closely analogous to those in these consolidated

cases, petitioners' motion for leave is not well founded.

Farrell v. Commissioner, supra.

     Even if petitioners' motion for leave were granted, the

arguments set forth in the motion and the attached memorandum

lodged with this Court are invalid, and the motion would be

denied.   Therefore, and for reasons set forth in more detail

below, petitioners' motion for leave shall be denied.

     Some of our discussion of background and circumstances

underlying petitioners' motion is drawn from documents submitted

by the parties and findings of this Court in two earlier

decisions.   See Estate of Satin v. Commissioner, T.C. Memo. 1994-
                              - 71 -

435; Fisher v. Commissioner, T.C. Memo. 1994-434.     Such matters

are not disputed by the parties.   We discuss the background

matters for the sake of completeness.    As we have noted, granting

petitioners' motion for leave would require further proceedings.

     The Estate of Satin and Fisher cases involved Stipulation of

Settlement agreements (piggyback agreements) made available to

taxpayers in the Plastics Recycling project, whereby taxpayers

could agree to be bound by the results of three test cases:

Provizer v. Commissioner, T.C. Memo. 1992-177, and the two Miller

cases.   We held in Estate of Satin and Fisher that the terms of

the piggyback agreement bound the parties to the results in all

three lead cases, not just the Provizer case.     Petitioners assert

that the piggyback agreement was extended to them, but they do

not claim to have accepted the offer timely, so they effectively

rejected it.16

     In or about February 1988, a settlement offer (the Plastics

Recycling project settlement offer or the offer) was made

available by respondent in all docketed Plastics Recycling cases

and subsequently, in all nondocketed cases.     Baratelli v.

Commissioner, T.C. Memo. 1994-484.     Pursuant to the offer,

taxpayers had 30 days to accept the following terms:    (1)


16
     In their motion for decision, petitioners state: "After the
lead counsel for taxpayers and Respondent had agreed upon the
designation of the lead cases, Respondent's counsel prepared
piggyback agreements and offered them to counsel for the
taxpayers in this case and to other taxpayers." (Emphasis added.)
                               - 72 -

Allowance of a deduction for 50 percent of the amount of the cash

investment in the venture in the year(s) of investment to the

extent of loss claimed; (2) Government concession of the

substantial understatement of tax penalties under section 6661

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

(2); (3) taxpayer concession of the section 6659 addition to tax

for valuation overstatement and the increased rate of interest

under section 6621; and (4) execution of a closing agreement

(Form 906) stating the settlement and resolving the entire matter

for all years.17   Petitioners assert that the Plastics Recycling

project settlement offer was extended to them, but they did not

accept the offer timely, so they effectively rejected it.18

     In December 1988, the Miller cases were disposed of by

settlement agreement between the taxpayers and respondent.19



17
     Although the record does not include a settlement offer to
petitioners, petitioners have attached to their motion for
decision a copy of a settlement offer to another taxpayer with
respect to a plastics recycling case, and respondent has not
disputed the accuracy of the statement of the plastics recycling
settlement offer.
18
     In their motion for decision, petitioners state:
"Respondent formulated a standard settlement position which was
extended to all taxpayers having docketed or non-docketed cases
in the plastics recycling group, including Petitioner." (Emphasis
added.)

19
     Although it is not otherwise a part of the record in these
consolidated cases, respondent attached copies of the Miller
closing agreement and disclosure waiver to her objection to
petitioners' motion for leave, and petitioners do not dispute the
accuracy of the document.
                               - 73 -

This Court entered decisions based upon those settlements on

December 22, 1988.   The settlement provided that the taxpayers in

the Miller cases were liable for the addition to tax under

section 6659 for valuation overstatement, but not for the

additions to tax under the provisions of section 6661 and section

6653(a).   The increased interest under section 6621(c), premised

solely upon Miller's interest in the recyclers for the taxable

years at issue, was not applicable because Miller made payments

prior to December 31, 1984, so no interest accrued after that

time.   Respondent did not notify petitioners or any other

taxpayers of the disposition of the Miller cases.   Estate of

Satin v. Commissioner, supra; Fisher v. Commissioner, supra.

     Petitioners argue that they are similarly situated to

Miller, the taxpayer in the Miller cases, and that pursuant to

the principle of "equality" they are therefore entitled to the

same settlement agreement executed by respondent and Miller in

those cases.   In effect, petitioners seek to resurrect the

piggyback agreement offer and/or the settlement offer they

previously failed to accept.

     Petitioners contend that under the principle of equality,

the Commissioner has a duty of consistency toward similarly

situated taxpayers and cannot tax one and not tax another without

some rational basis for the difference.   United States v. Kaiser,

363 U.S. 299, 308 (1960) (Frankfurter, J., concurring); see Baker

v. United States, 748 F.2d 1465 (11th Cir. 1984); Farmers' &
                               - 74 -

Merchants' Bank v. United States, 476 F.2d 406 (4th Cir. 1973).

According to petitioners, the principle of equality precludes the

Commissioner from making arbitrary distinctions between like

cases.   See Baker v. Commissioner, 787 F.2d 637, 643 (D.C. Cir.

1986), vacating 83 T.C. 822 (1984).

     The different tax treatment accorded petitioners and Miller

was not arbitrary or irrational.   While petitioners and Miller

both invested in the Plastics Recycling project, their actions

with respect to such investments provide a rational basis for

treating them differently.   Miller foreclosed any potential

liability for increased interest in his cases by making payments

prior to December 31, 1984; no interest accrued after that date.

In contrast, petitioners made no such payment, and they conceded

that the increased rate of interest under section 6621(c) applies

in their consolidated cases.   Liability for the increased rate of

interest is the principal difference between the settlement in

the Miller cases, which petitioners declined when they failed to

accept the piggyback agreement offer, and the settlement offer

that petitioners also failed to accept.

     Petitioners argue that section 6621(c) must have been an

issue in the Miller cases since each of the decisions in Miller

recites "That there is no increased interest due from the

petitioner[s] for the taxable years [at issue] under the

provisions of IRC section 6621(c)."     According to petitioners,

"Surely, if the Millers were not otherwise subject to the penalty
                              - 75 -

interest provisions because of the particular timing of their tax

payments, there would have been no need for the Court to include

such a recital in its decisions."   (Emphasis added.)   This

argument by petitioners is entirely conjectural and is not

supported by the documentation on which counsel relies.    In fact,

the recital that no increased interest under section 6621(c) was

due in the Miller cases was an express term of the settlement

documents in those cases and apparently included in the decisions

for completeness and accuracy.   There is nothing on the record in

the present consolidated cases, or in the Court's opinions in

Estate of Satin v. Commissioner, T.C. Memo. 1994-435, or Fisher

v. Commissioner, T.C. Memo. 1994-434, or in any of the material

submitted to us in these consolidated cases that would indicate

that the Millers were "otherwise subject to the penalty interest

provisions".   Petitioners' argument is based on a false premise.

     We find that petitioners and Miller were treated equally to

the extent they were similarly situated, and differently to the

extent they were not.   Miller foreclosed the applicability of the

section 6621(c) increased rate of interest in his cases, while

petitioners concede it applies in their cases.   Petitioners

failed to accept a piggyback settlement offer that would have

entitled them to the settlement reached in the Miller cases, and

also rejected a settlement offer made to them prior to trial of a

test case.   In contrast, Miller negotiated for himself and

accepted an offer that was essentially the same as the Plastics
                              - 76 -

Recycling project settlement offer rejected by petitioners prior

to trial.   Accordingly, petitioners' motion is not supported by

the principle of equality on which they rely.   Cf. Baratelli v.

Commissioner, T.C. Memo. 1994-484.

     In order to reflect the foregoing,


                                          An appropriate order will

                                     be issued denying petitioners'

                                     motion, and decisions will be

                                     entered under Rule 155.
