                        T.C. Memo. 1999-170



                      UNITED STATES TAX COURT



         BERNICE M. AND STANLEY M. ULANOFF, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.   15253-87, 24339-95.          Filed May 19, 1999.



     Stanley M. Ulanoff, pro se.

     Louise R. Forbes, for respondent.


              MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   These consolidated cases were assigned to

Special Trial Judge Robert N. Armen, Jr., pursuant to the

provisions of section 7443A(b)(4) and Rules 180, 181, and 183.1



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 2 -


The Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

                 OPINION OF THE SPECIAL TRIAL JUDGE

       ARMEN, Special Trial Judge:   Respondent determined a

deficiency, additions to tax, and additional interest with

respect to petitioners' Federal income taxes for the years and in

the amounts as shown below:

Docket No. 15253-87
                                                        Additional
                            Additions to Tax             Interest
                      Sec.         Sec.         Sec.      Sec.
Year   Deficiency   6653(a)(1)   6653(a)(2)     6659     6621(c)
                                        1                    2
1981    $7,747         $387                    $2,277


Docket No. 24339-95
                                                        Additional
                            Additions to Tax             Interest
                      Sec.         Sec.         Sec.      Sec.
Year   Deficiency   6653(a)(1)   6653(a)(2)     6659     6621(c)
                                        1
1982       --         1,147                     3,542       --
                                        1
1983       --           321                     1,842       --
                                        1
1984       --           396                     2,229       --
1
  50 percent of the portion of the underpayment that is
attributable to negligence. For 1982 through 1984, the
underpayments ($22,947 for 1982, $6,141 for 1983, and $7,431 for
1984) were determined and assessed pursuant to a partnership-
level proceeding. See secs. 6231-6233. In the present cases,
respondent determined that the entire underpayment for each of
the years in issue is attributable to negligence.
2
  Interest on the entire underpayment to be computed at 120
percent of the rate otherwise applicable under sec. 6621(a).
                               - 3 -


     After a stipulation by the parties,2 the issues remaining

for decision are as follows:

     (1) Whether petitioner Stanley M. Ulanoff (petitioner) is

entitled to (1) a partnership loss and (2) investment and energy

credits for 1981 flowing from the Sentinel EPE recycler leasing

program entered into by Plymouth Equipment Associates.    We hold

that he is not.

     (2) Whether petitioner is liable for additional interest

under section 6621(c) with respect to the underpayment for 1981.

We hold that he is.

     (3) Whether petitioner is liable for additions to tax under

section 6653(a)(1) and (2) for negligence or intentional

disregard of rules or regulations for each of the years in issue.

We hold that he is.

     (4) Whether petitioner is liable for the addition to tax

under section 6659 for an underpayment of tax attributable to a

valuation overstatement for each of the years in issue.    We hold

that he is.




     2
        The parties stipulated that pursuant to the provisions of
sec. 6015(b), petitioner Bernice M. Ulanoff is not liable for the
deficiency, additions to tax, and additional interest as
determined by respondent in the notices of deficiency at issue
herein.
                                  - 4 -


                         FINDINGS OF FACT

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

found.   The stipulated facts and attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Roslyn Estates, New York, at the time that their petitions were

filed with the Court.

A.   The Recycling Transactions

      These consolidated cases are part of the Plastics Recycling

group of cases.   In particular, the deficiency, additions to tax,

and additional interest for 1981 and the additions to tax for

1982 through 1984 arise from the disallowance of losses,

investment credits, and energy credits claimed by petitioner with

respect to the following two partnerships: (1) For 1981, Plymouth

Equipment Associates (Plymouth); and (2) for 1982 through 1984,

Taylor Recycling Associates (Taylor).     For convenience, we refer

to Plymouth and Taylor collectively as the Partnerships.

      For a detailed discussion of the transactions involved in

the Plastics Recycling group of cases, see Provizer v.

Commissioner, T.C. Memo. 1992-177, affd. per curiam without

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

transactions involving the Sentinel recycling machines

(recyclers) in petitioner's cases are substantially identical to

the transactions in Provizer v. Commissioner, supra, and, with

the exception of certain facts that we regard as having minimal

significance, petitioner has stipulated substantially the same
                               - 5 -


facts concerning the underlying transactions that were described

in Provizer v. Commissioner, supra.

     The transactions involving the Sentinel EPE recyclers leased

by Plymouth are substantially identical to the transactions

involving the same type of recyclers leased by

Clearwater Group (Clearwater), the partnership that was involved

in Provizer v. Commissioner, supra.3

     In transactions closely resembling those in the Provizer

case, Packaging Industries of Hyannis, Massachusetts (PI)

manufactured and sold seven Sentinel EPE recyclers to ECI

Corporation (ECI) for $981,000 each.   PI manufactures

thermoplastic and other types of packaging machinery, as well as

energy saving devices.   ECI, in turn, resold the recyclers to F&G

Corporation (F&G) for $1,162,667 each.   F&G then leased the

recyclers to Plymouth, which licensed the recyclers to FMEC

Corporation (FMEC), which sublicensed them back to PI.

     The sales of the recyclers from PI to ECI were financed with

nonrecourse notes.   Approximately 7 percent of the sales price of

the recyclers sold by ECI to F&G 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



     3
        Terms such as lease, sale, license, and their derivatives
are used solely for convenience, and their use in this Opinion
should not be understood to imply that the transactions described
herein constitute leases, sales, or licenses for Federal tax
purposes.
                                - 6 -


of the notes was only due after the nonrecourse portion, 90

percent, was paid in full.    No arm's-length negotiations for the

price of the Sentinel EPE recyclers took place among PI, ECI, and

F&G.    All of the monthly payments required among the entities in

the above transactions offset each other.    These transactions

occurred simultaneously.

       PI allegedly sublicensed the recyclers to entities that

would use the recyclers to recycle plastic scrap.    These

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

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

based on the quality and amount of recycled scrap.

       Both Clearwater and Plymouth leased Sentinel EPE recyclers

from F&G and licensed those recyclers to FMEC.    For convenience,

we refer to the series of transactions among PI, ECI, F&G,

Plymouth, and FMEC, as the Plymouth transactions.

       In addition to the Plymouth transactions, a number of other

limited partnerships entered into transactions similar to the

Plymouth transactions, some of which involved Sentinel EPE

recyclers and others of which involved Sentinel EPS recyclers.

One such partnership was Taylor, which leased four Sentinel EPS

recyclers.    We refer to the transactions involving Taylor and the

EPS recyclers as the Taylor transactions.

       The Taylor transactions were substantially similar to the

Plymouth transactions described above and the Clearwater

transactions described in Provizer v. Commissioner, supra.
                               - 7 -


     Taylor was a first-tier TEFRA partnership.    In 1988, a

partnership proceeding captioned Taylor Recycling Associates,

DL&K Associates, A Partner Other Than the Tax Matters Partner v.

Commissioner, docket No. 10184-88 (the Taylor case) was commenced

in this Court in respect of the Taylor transactions.    Petitioner

filed a Notice of Election to Participate in the Taylor case in

February 1994.   Subsequently, on July 21, 1994, the Court entered

decision in the Taylor case pursuant to the Commissioner's Motion

for Entry of Decision under Rule 248(b).    All deductions and

credits claimed by Taylor in connection with its plastics

recycling activities were disallowed.   Paragraph 2 of the motion

stated in pertinent part that "Stanley M. Ulanoff agree[s] to the

proposed decision in the [Taylor] case".

B.   Individuals Involved

     Richard Roberts (Roberts) was the general partner of both

Plymouth and Taylor and owned a 1-percent interest in each

partnership.   Roberts was also the general partner in a number of

other limited partnerships that leased and licensed Sentinel

recyclers.   He also was a 9-percent shareholder in F&G, the

corporation that leased the recyclers to Plymouth.    From 1982

through 1985, Roberts and Raymond Grant (Grant) were in the

business of promoting tax sheltered investments.    Grant was the

president and 100-percent owner of ECI.    Roberts and Grant

together were general partners in other partnerships.    Prior to
                                - 8 -


the Plymouth transactions, Roberts and Grant were clients of the

accounting firm H.W. Freedman & Co. (Freedman & Co.).

     Harris W. Freedman (Freedman), a certified public accountant

and the named partner in Freedman & Co., was the president and

chairman of the board of F&G.   Freedman was experienced with

leveraged leasing, and he owned 94 percent of a Sentinel EPE

recycler.

     Freedman & Co. prepared the tax returns for ECI, F&G, and

the Partnerships, as well as for Clearwater Group.    It also

provided tax services to John D. Bambara (Bambara).    Bambara was

the 100-percent owner of FMEC, as well as its president,

treasurer, clerk, and director.   Bambara was also the president

of PI and a member of its board of directors.    He, his wife, and

his daughter also owned directly or indirectly 100 percent of the

stock of PI.

     Anthony Giovannone (Giovannone) was the executive vice

president of PI and a member of its board of directors.

     Elliot I. Miller (Miller) was the corporate counsel to PI.

In 1981, Miller was also a shareholder of F&G.

     John Y. Taggert (Taggert) was a well-known tax attorney and

an adjunct professor at the New York University Law School.

Taggert was acquainted with Miller for about 15 years prior to

1981.   Miller recommended that Roberts employ Taggert and his

firm as counsel.   Taggert and other members of his firm prepared

private offering memoranda, tax opinions, and other legal
                                 - 9 -


documents for the Partnerships.    Taggert owned a 6.66-percent

interest in a second-tier Plastics Recycling partnership.

     Robert Gottsegen (Gottsegen) was a businessman active in the

plastics industry and a long-time business associate of Bambara.

C.   The Private Offering Memoranda

     Plymouth and Taylor each distributed to potential limited

partners a private placement memorandum.    Each offering

memorandum listed significant business and tax risk factors

associated with an investment in the particular partnership.

Specifically, each offering memorandum stated: (1) There was a

substantial likelihood of audit by the Internal Revenue Service

(IRS), and the purchase price paid by F&G to ECI probably would

be challenged as being in excess of fair market value; (2) the

partnership had no prior operating history; (3) the general

partner had no prior experience in marketing recycling or similar

equipment; (4) the limited partners would have no control over

the conduct of the partnership's business; (5) there was no

established market for the Sentinel recyclers; (6) there were no

assurances that market prices for virgin resin would remain at

their current costs per pound or that the recycled pellets would

be as marketable as virgin pellets; and (7) certain potential

conflicts of interest existed.

     The private offering memorandum for Plymouth stated that the

projected tax benefits for the initial year of investment for an

investor contributing $50,000 would be investment credits and
                             - 10 -


energy credits in the aggregate amount of $82,639, plus

deductions in the amount of $40,376.   The private offering

memorandum for Taylor stated that the projected tax benefits for

the initial year of investment for an investor contributing

$50,000 would be investment credits and energy credits in the

aggregate amount of $81,529, plus deductions in the amount of

$39,988.

     The offering memoranda represented that the Sentinel

recyclers were unique machines.   However, they were not.    Several

machines capable of densifying low density materials were already

on the market in 1981 and 1982.   Other plastics recycling

machines available at that time ranged in price from $20,000 to

$200,000, including the Foremost "Densilator", the Nelmor/Weiss

Densification System (Regenolux), the Buss-Condux Plastcompactor,

and the Cumberland Granulator.    See Provizer v. Commissioner,

T.C. Memo. 1992-177, and the discussion regarding expert

testimony, infra.

D.   Expert Testimony

     The parties did not agree on the value of either the

Sentinel EPE or EPS recyclers, and petitioner did not stipulate

to be bound by the value of the Sentinel EPE recyclers that we

found in Provizer v. Commissioner, supra, or the value of the EPS

recyclers that we found in Gottsegen v. Commissioner, T.C. Memo.

1997-314.
                               - 11 -


     At trial, petitioner did not offer expert testimony

regarding the value of either the Sentinel EPE or EPS recyclers.

In contrast, respondent offered expert testimony from Steven

Grossman (Grossman) and Richard S. Lindstrom (Lindstrom).

     1.     Grossman

     Grossman is a professor in the Plastics Engineering

Department at the University of Massachusetts at Lowell.    He has

a bachelor of science degree in chemistry from the University of

Connecticut and a doctorate degree in polymer science and

engineering from the University of Massachusetts.    He also has

more than 15 years of experience in the plastics industry,

including more than 4 years of experience as a research and

development scientist at the Upjohn Company in its Polymer

Research Group.

Grossman is also a partner in the law firm of Hayes, Soloway,

Hennessey, Grossman & Hage, P.C., which firm practices in the

area of intellectual property, including patents, trademarks,

copyrights, and trade secret protection.

     Grossman's reports concerning the value of the Sentinel EPE

and EPS recyclers were very similar, and we discuss them

together.    These reports discuss the limited market for the

recycled plastic material.    Grossman concluded that the Sentinel

EPE and EPS recyclers were unlikely to be successful products

because of the absence of any new technology, the absence of a

continuous source of suitable scrap, and the absence of any
                              - 12 -


established market.   Grossman suggested that a reasonable

comparison of the products available in the polyethylene industry

in 1981 and the polystyrene industry in 1982 with the Sentinel

EPE and EPS recyclers, respectively, reveals that the Sentinel

recyclers had very little commercial value and were similar to

comparable products available on the market in component form.

For these reasons, Grossman opined that the Sentinel EPE and EPS

recyclers did not justify the "one-of-a-kind" pricetag that they

carried.

     Specifically, Grossman reported that there were several

machines on the market as early as 1981 that were functionally

equivalent to, and significantly less expensive than, both the

Sentinel EPE and EPS recyclers.   These machines included: (1) The

Japan Repro recycler, available in 1981 for $53,000; (2) the

Buss-Condux Plastcompactor, available before 1981 for $75,000;

(3) Foremost Machine Builders' "Densilator", available from 1978-

1981 for $20,000; and (4) the Midland Ross Extruder, available in

1980 and 1981 for $120,000.   Grossman observed that all of these

machines were "widely available".

     Grossman's opinion regarding the Sentinel EPS recycler was

based on personal examination of such recycler, as well as the

descriptions thereof that were set forth in the writings of other

professionals.   Although Grossman did not observe the Sentinel

EPS recycler in actual operation, he examined both the Sentinel

EPS recycler and the Japan Repro recycler and found that the
                              - 13 -


construction of the two machines was "nearly identical".

Further, Grossman concluded that the recycled polystyrene

produced by both machines would also be nearly identical.    In

Grossman's opinion, neither the Japan Repro recycler nor the

Sentinel EPS recycler represented "a serious effort at recycling"

because the end-product from both machines was not completely

devolatilized and required further processing.   It was also

Grossman's opinion that an individual who seriously wanted to

recycle would not purchase either of these machines.

     Grossman's opinion regarding the Sentinel EPE recycler was

based on the descriptions of such recycler as set forth in the

writings of other professionals.   Grossman neither tested nor

examined the Sentinel EPE recycler.

     Finally, Grossman reported on the relationship between the

plastics industry and the petrochemical industry.   Grossman noted

that although the development of the petrochemical industry is a

contributing factor in the growth of the plastics industry, the

two industries have a "remarkable degree of independence".

Grossman observed that the "oil crisis" in 1973 triggered "dire"

predictions about the future of plastics that had not been

fulfilled in 1981.   Grossman stated that the cost of a plastic

product depends, in large part, on technology and the price of

alternative materials.   Grossman's studies concluded that a 300-

percent increase in oil prices results in a 30-40 percent

increase in the cost of plastic.
                              - 14 -


     Grossman did not specifically value either the Sentinel EPE

Recycler or the Sentinel EPS Recycler.   However, as previously

stated, Grossman concluded that existing technology was available

that provided equivalent capability of recycling polyethylene and

polystyrene.   Specifically regarding the Sentinel EPS recycler,

Grossman also concluded that recycling equipment that achieved

the same result as the Sentinel EPS recycler sold for about

$50,000 during the relevant period.

     2.   Lindstrom

     Lindstrom graduated from the Massachusetts Institute of

Technology with a bachelor's degree in chemical engineering.

From 1956 until 1989, Lindstrom worked for Arthur D. Little, Inc.

in the areas of process and product evaluation and improvement

and new product development, with special emphasis on plastics,

elastomers, and fibers.   At the time of trial, Lindstrom

continued to pursue these areas as a consultant.

     In his report, Lindstrom determined that several different

types of equipment capable of recycling expanded polyethylene

were available and priced at approximately $50,000 in 1981.

Similarly, Lindstrom determined that several different types of

equipment capable of recycling expanded polystyrene were

available and priced between $25,000 and $100,000 in 1982.

Lindstrom found that, based on his research, "there were

available in 1981 commercial units that could be purchased for

$50,000 or less that were totally equal to the Sentinel EPE
                              - 15 -


recycler in function, product quality, and capacity."    With

respect to the Sentinel EPS recycler, Lindstrom stated that

"several machines were available that could reprocess expanded

polystyrene into higher quality, more useful, higher value

product and these machines or processing systems cost $50,000 to

$100,000 in 1982."

     Lindstrom examined the Japan Repro recycler, the Buss-Condux

Plastcompactor, and the Nelmor Regenolux.    Lindstrom found that

these machines were functionally equivalent to the Sentinel EPS

recycler and were available in the years and at the prices

reported by Grossman, detailed supra.     Lindstrom also reported

that various equipment companies, such as the Cumberland

Engineering Division of John Brown Plastics Machinery, were

willing to provide customized recycling programs to companies at

a minimum cost of $50,000.

     Lindstrom found that in "average-use situations", the

Sentinel EPE recycler could process 200 pounds of plastic per

hour and the Sentinel EPS recycler could process between 100 and

200 pounds of plastic per hour.

     Lindstrom observed a Sentinel EPE recycler in operation at

PI, and he was allowed to take photographs of the recycler and

look at its blueprints.   Based on his observations and study,

Lindstrom estimated that the manufacturing cost of the Sentinel

EPE recycler was approximately $20,000.    Lindstrom concluded that
                                - 16 -


the market value of the Sentinel EPE recycler did not exceed

$50,000.

     Lindstrom observed a Sentinel EPS recycler in operation and

was allowed to inspect the machine closely.     Lindstrom estimated

that the manufacturing cost of the Sentinel EPS recycler was

approximately $20,000 and market value of the machine was

approximately $25,000.

E.   Petitioner and His Introduction to Plymouth and Taylor

     Petitioner acquired a 1.27-percent interest in Plymouth in

1981 for $12,500.     Later that year, Plymouth closed its business.

Petitioner acquired a 4.37-percent interest in Taylor in 1982 for

$37,500.

     Petitioner holds a Ph.D. in marketing.     During the years in

issue, petitioner was employed as a marketing professor, author,

and consultant.     At the time of his retirement in 1985,

petitioner had been a professor of marketing for more than 25

years.     Petitioner is also an author and has written more than 30

books.     In addition, he has produced approximately 150

documentary films.

     Petitioner served in World War II and in the U.S. Army

Reserve and has been a consultant to the U.S. Government, the

Postal Service, and certain private entities.

     Since childhood, petitioner has been concerned with

protecting natural resources.     Petitioner makes every effort to

conserve energy and recycle consumer material.
                                - 17 -


     Before his investment in the Partnerships, petitioner had no

education in plastics recycling or plastics material, nor any

work experience in that area.    From 1948 to 1958, petitioner was

a principal in a packaging supply company that had a plastics

material and plastics machinery division.

     Sometime in 1981, petitioner became an evaluator of the

Plastics Recycling transactions.    Petitioner prepared a marketing

opinion report for both the EPE and the EPS recyclers.

Petitioner's report, along with that of Dr. Samuel Z. Burstein

(Burstein), a mathematics professor and a partner in another

recycling partnership that leased Sentinel EPS recyclers, were

appended to the offering memoranda used in conjunction with the

plastic recycling transactions.

     In his marketing opinion regarding the Sentinel EPE

recycler, petitioner opined as follows:

          It is important to note that there are a number of
     machines on the market for processing rigid and other
     forms of plastic. However, to the best of my
     knowledge, the only machine that will process expanded
     polyethylene (foam), reduce its bulk, increase its
     density from 1 pound per cubic foot to 22 pounds per
     cubic foot while maintaining polymer molecular weight
     and weight distribution with a minimal increase in melt
     index, purify it, and vent off gases as well as
     residual steam and transient foreign particulate, is
     the Sentinel Recycler Recovery System.

          From a marketing perspective, I see [partnership
     name]'s project as a very feasible and timely one,
     considering the capability of the Recycler to
     effectively reprocess waste into a viable and
     marketable raw material at a greatly reduced cost.
                                - 18 -


          In my opinion, the marketing strategy worked out
     by FMEC, licensee to [partnership name], is ingenious
     and bound to succeed. [Partnership name]'s license
     with FMEC requires additional royalty payments over and
     above the minimum annual royalty, to be computed as a
     share of profits on the sale (or fair market value if
     used by sublicensees) of the resin pellets resulting
     from further processing the recycled material produced
     by the Recycler.

     Petitioner made similar observations in his marketing report

regarding the Sentinel EPS recycler, concluding that investment

in transactions involving the Sentinel EPS recycler would be

profitable.    At the time that this report was written, petitioner

was aware of difficulties faced by PI in placing the EPE

recyclers with end-users and that only a few such recyclers were

operational at that time.

     Finally, in both marketing opinion reports, petitioner

relied heavily on the assumption that the price of oil would rise

dramatically in the future and that, as a result, the price of

oil resin would also rise.

     Petitioner visited the PI plant in Hyannis, Massachusetts,

on two occasions and spent several hours meeting with PI's

personnel.     At the plant, petitioner observed many types of

machines and consumer energy-saving products manufactured by PI.

Petitioner also visited a plastic manufacturing plant that used a

Sentinel recycler to see it in operation.    He observed a Sentinel

recycler compress a truck load of plastic scrap into a 4-foot

square cube.    He conducted limited research regarding plastics

recycling by visiting the local library for an hour.    Petitioner
                                - 19 -


also read some periodicals discussing the perceived oil shortage.

Finally, petitioner discussed the profitability of the recycling

transactions with promoters such as Bambara, Taggert, and

Giovannone.   These individuals assured petitioner that the

Sentinel recyclers were unique.    Petitioner did not consult an

independent consultant or appraiser with respect to the value of

the Sentinel recyclers.

     Petitioner never made any profit from his investments in the

Partnerships during any year.    The projected tax benefits for the

initial year of investment described in the Partnerships'

offering memoranda greatly exceeded petitioner's investments in

the Partnerships.    In fact, the tax benefits actually claimed by

petitioner on his tax returns for the initial year of investment

in the Partnerships greatly exceeded his investments in the

Partnerships.

     Petitioner's Federal income tax returns for the years in

issue were prepared by accountant who had prepared petitioner's

returns for many years.

     In November 1983, respondent mailed petitioner a so-called

"no-change letter" regarding the taxable year 1982.    The letter

stated as follows:

          We are pleased to tell you that our examination of
     your tax returns for the above periods shows no change
     is required in the tax reported. Your returns are
     accepted as filed.
                                - 20 -


F.   Ultimate Finding of Fact

     At all relevant times, the fair market value of the Sentinel

EPE recyclers and the Sentinel EPS recyclers did not exceed

$50,000 per machine.

                                OPINION

     We have decided many Plastics Recycling cases.   The majority

of these cases, like the consolidated cases herein, presented

issues regarding additions to tax for negligence and valuation

overstatement.   See Greene v. Commissioner, T.C. Memo. 1997-296;

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

Commissioner, T.C. Memo. 1997-259 n.13 (and cases cited therein).

We found the taxpayers liable for the addition to tax for

valuation overstatement in all of those cases and liable for the

additions to tax for negligence in all but two of those cases.

In a limited number of cases, the taxpayers also contested the

underlying deficiency arising from the disallowance of the losses

and various credits with respect to their plastics recycling

investment.   We sustained the Commissioner on the issue of the

underlying deficiency in every one of those cases.

     In Provizer v. Commissioner, T.C. Memo. 1992-177, (6th Cir.

1993), 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 was almost identical to the transactions in

the present cases, was a sham because it lacked economic
                               - 21 -


substance and a business purpose; (3) sustained the additions to

tax for negligence under section 6653(a)(1) and (2); (4)

sustained the addition to tax for valuation overstatement under

section 6659 because the underpayment of taxes was directly

related to the overvaluation of the Sentinel EPE recyclers; and

(5) held that losses and credits claimed with respect to

Clearwater Group were attributable to tax-motivated transactions

within the meaning of section 6621(c).   In reaching the

conclusion that the transaction lacked business purpose, this

Court relied heavily upon the overvaluation of the Sentinel EPE

recyclers.

     In Gottsegen v. Commissioner, T.C. Memo. 1997-314, this

Court found that each Sentinel EPS recycler had a fair market

value not in excess of $50,000.

Issue (1)    The Underlying Deficiency for 1981

     Petitioner contends that he is not liable for the underlying

deficiency for 1981 with respect to his investment in Plymouth.

As already mentioned, petitioner has stipulated substantially the

same facts concerning the underlying transactions as we found in

Provizer v. Commissioner, supra.

     The record in the present case regarding the Plymouth

transaction plainly supports respondent's determination regarding

the underlying deficiency.   Petitioner has provided no further

evidence nor any novel contention with respect to the underlying
                              - 22 -


deficiency not previously considered in Provizer.4    There is a

complete failure by petitioner to prove that the Plymouth

transaction was in any meaningful manner different from the

circular transaction found to be an economic sham in Provizer.

We will not revisit our decision in Provizer and reconsider

whether the Plastics Recycling leasing program in which Plymouth

participated was an economic sham.     As in Provizer, we rely

heavily on the fact that the Sentinel EPE machines were highly

overvalued.   We therefore sustain respondent's determination

regarding the underlying deficiency for 1981.

Issue (2)   Section 6621(c) Additional Interest for 1981

     Respondent determined that petitioner is liable for

additional interest for 1981 with respect to the underpayment

attributable to petitioner's investment in Plymouth.

     Section 6621(c), formerly section 6621(d), provides for an

increased rate of interest if the underpayment of tax exceeds

$1,000 and is attributable to a tax-motivated transaction as

defined in section 6621(c)(3).   The increased rate of interest is

effective only with respect to interest accruing after December

31, 1984, notwithstanding that the transaction was entered into

before that date.   See Solowiejczyk v. Commissioner, 85 T.C. 552




     4
        As previously mentioned, for a detailed discussion of the
facts and the applicable law in a substantially identical case,
see Provizer v. Commissioner, T.C. Memo. 1992-177, affd. per
curiam without published opinion 996 F.2d 1216 (6th Cir. 1993).
                                - 23 -


(1985), affd. per curiam without published opinion 795 F.2d 1005

(2d Cir. 1986); Provizer v. Commissioner, supra.

         As we held in Provizer, a tax-motivated transaction

includes any sham or fraudulent transaction.     See sec.

6621(c)(3)(A)(v).     We have held that the Plastics Recycling

leasing program to which petitioner's 1981 underpayment is

attributable was a sham transaction.     The tax-motivated increased

rate of interest is therefore clearly applicable.     Accordingly,

we sustain respondent on this issue.5

Issue (3)     Section 6653(a)(1) and (2) Negligence

     Respondent determined that petitioner is liable for

additions to tax under section 6653(a)(1) and (2) with respect to

the underpayment attributable to petitioner's investments in

Plymouth for 1981 and in Taylor for 1982 through 1984.

Petitioner contends that he was not negligent because: (1) Based

on his independent investigation he reasonably expected to make a

profit from his investment in the transactions; (2) he reasonably

relied upon advice from certain individuals; and (3) he acted

reasonably in light of his passion for recycling and his concern

for the environment.



     5
        We note that a tax-motivated transaction also includes
any valuation overstatement within the meaning of sec. 6659(c).
See sec. 6621(c)(3)(A)(i). It is apparent that there were such
valuation overstatements in the present cases. See the
discussion under Issue (4), infra, regarding sec. 6659.
Accordingly, respondent's determination could also be sustained
on this alternative basis.
                              - 24 -


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

part of the underpayment of tax is due to negligence or

intentional disregard of rules or regulations.    Negligence is

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

and ordinarily prudent person would exercise under the

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

(1985).   The pertinent question is whether a particular

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

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

actions in connection with the transactions.    See Henry Schwartz

Corp. v. Commissioner, 60 T.C. 728, 740 (1973).    In this regard,

the determination of negligence is highly factual.    "When

considering the negligence addition, we evaluate the particular

facts of each case, judging the relative sophistication of the

taxpayers as well as the manner in which the taxpayers approached

their investment."   Turner v. Commissioner, T.C. Memo. 1995-363.

Petitioner has the burden of proving error in respondent's

determination of the additions to tax for negligence.    See Rule

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

v. Commissioner, 58 T.C. 757, 791-792 (1972).

     A.   Independent Investigation

     Petitioner's first contention is that he was not negligent

because he made a thorough independent investigation before he

invested in Plymouth and Taylor.   Petitioner asserts that his

knowledge of certain marketing principles led him to conclude
                                - 25 -


that the prices of the Sentinel recyclers were reasonable.

Petitioner refers to the marketing axiom that a product may be

priced at any amount that the market will bear.   Petitioner

points out that the market will sometimes bear a very high price

for a unique product because the product satisfies a void in the

marketplace.

     Although we do not disagree with these general maxims of

marketing, petitioner has not pointed to any specific facts that

would support the conclusion that the Sentinel EPE and EPS

machines were reasonably priced.    In fact, if petitioner had

conducted an independent investigation, his awareness of these

marketing principles should have led him to conclude that the

Sentinel recyclers were not reasonably priced.

     The Sentinel EPE and EPS recyclers were not offered to the

general public and the traditional principles of supply and

demand pricing were therefore inapplicable.    See Provizer v.

Commissioner, supra.   The transactions were structured in a

manner such that, with the exception of a minimal down payment

for the machines, the majority of the purchase price was in the

form of a series of offsetting payments only realized through

bookkeeping entries.   The purported price tags had nothing to do

with traditional principles of supply and demand pricing because

the Sentinel recyclers never were offered on the open market, and

there is no evidence that anyone ever intended that the recyclers

products would be so offered.    See Gottsegen v. Commissioner,
                              - 26 -


supra; Provizer v. Commissioner, supra.   The exorbitant cost of

the machines, $1,162,667 for the Sentinel EPE recycler and

$1,750,000 for the Sentinel EPS recycler, would therefore have

only been reasonable if there were other factors to justify such

cost.

     However, other factors indicate that the Sentinel recyclers

were highly overvalued.   For instance, the Sentinel recyclers

were not unique.   Respondent's experts identified other machines

that were not only functionally equivalent to the Sentinel

recyclers but were also significantly less expensive.      We have

found that information regarding comparable, less expensive

recyclers was widely available.   If a potential purchaser,

especially an individual sophisticated in marketing and research

techniques, had conducted a due diligence investigation into the

Sentinel recyclers, such potential purchaser should have learned

that comparable, less expensive equipment existed and that the

Sentinel recyclers were overvalued.

     Petitioner claims that in determining the value of the

recyclers he did not discover any machines capable of performing

the functions performed by the Sentinel recyclers.   However,

there is no indication in the record that petitioner surveyed the

then current information regarding recyclers.6   Rather,


     6
        In his marketing reports, petitioner stated that he
independently investigated the value of the recyclers by
discussing the matter with "nonrelated principals in the
                                                   (continued...)
                              - 27 -


petitioner's independent research in this regard was limited to a

very short visit to a local library and a review of certain

articles regarding the so-called oil crisis.   As already

mentioned, a marketing professor should have realized that in

order to identify comparable recyclers and to determine the value

of the Sentinel recyclers, he would need to investigate the

matter further.   It appears that petitioner relied much more on

the representations made by the promoters, such as Taggert and

Bambara, than he did on any independent research.

     At this point we are reminded that petitioner prepared

marketing opinion reports on both the EPE and the EPS recyclers

to promote the Plastics Recycling leasing programs.   Petitioner

represented to potential investors that he had conducted a

detailed independent investigation of the matter and that he

thought investment in the Plastics Recycling programs would be

profitable.   In light of this fact, petitioner's limited

investigation of the alleged uniqueness of the Sentinel recyclers

and petitioner's allegation regarding the anticipated

profitability of the Plastics Recycling programs appear even less

reasonable.




     6
      (...continued)
packaging and plastic industries and editors of plastics trade
journals." Based on the record developed at trial, however, we
are not satisfied that petitioner made such independent inquiry.
                              - 28 -


     Petitioner had a financial stake in promoting the Plastics

Recycling leasing programs.   He was paid $500 each time his

report was used in a private offering memorandum.   This fact

provided petitioner with the incentive to assert, without much

independent investigation, that the Plastics Recycling programs

would be profitable.

     Petitioner next presents us with the so-called oil crisis

argument.   He asserts that after reading a number of articles

discussing the perceived oil crisis of the 1970's and the early

1980's, he reasonably concluded that investment in the Plastics

Recycling leasing programs would be profitable.   He based this

conclusion on the fact that plastic is an oil derivative.    He

indicated that during 1981 and 1982 the prevailing opinion was

that, due to the so-called oil crisis, the price of crude oil was

going to increase significantly.   Finally, he relies on Krause v.

Commissioner, 99 T.C. 132 (1992), affd. sub nom. Hildebrand v.

Commissioner, 28 F.3d 1024 (10th Cir. 1994), and Rousseau v.

United States, 71A AFTR 2d 93-4294, 91-1 USTC par. 50,252 (E.D.

La. 1991), as support for his contention that his investment in

the Plastics Recycling leasing programs was reasonable in light

of rising oil prices.

     Petitioner's so-called oil crisis argument has been made in

more than 20 of the plastics recycling cases.   See, e.g.,

Provizer v. Commissioner, T.C. Memo. 1992-177; Merino v.

Commissioner, T.C. Memo. 1997-385; Singer v. Commissioner, T.C.
                               - 29 -


Memo. 1997-325; Sann v. Commissioner, T.C. Memo. 1997-259.     We

have found this argument to be unpersuasive in every one of those

cases.    Petitioner's argument is not different in any substantive

manner, nor has petitioner relied on any legal authority not

previously considered in those cases.   We will not revisit the

oil crisis argument.   We hold that the oil crisis did not provide

a reasonable ground for petitioner to conclude that his

investment in the Plastics Recycling leasing programs would be

profitable.

     B.   Reliance on the Advice of Experts

     Petitioner next contends that he is not liable for the

additions to tax for negligence because he relied on the advice

of experts.

     Under some circumstances, a taxpayer may avoid liability for

negligence based on the taxpayer's reasonable reliance on a

competent professional adviser.   See United States v. Boyle, 469

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

888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd 501 U.S.

868 (1991).   However, reliance on professional advice, standing

alone, is not an absolute defense to negligence; rather it is a

factor to be considered.   See Freytag v. Commissioner, supra.

     Petitioner claims that he relied on representations by

Bambara and Taggert regarding the uniqueness of the Sentinel
                              - 30 -


recyclers.7   Bambara and Taggert were promoters of the Plastics

Recycling leasing programs.   Reliance on representations by

insiders or promoters has been held to be an inadequate defense

to negligence.   See Goldman v. Commissioner, 39 F.3d 402 (2d Cir.

1994), affg. T.C. Memo. 1993-480; LaVerne v. Commissioner, 94

T.C. 637, 652-653 (1990), affd. without published opinion 956

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

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

Further, in general a taxpayer cannot reasonably rely on the

advice of the promoter of a tax shelter with respect to the

substantive merits or the tax treatment of items in connection

with that program.   See Patin v. Commissioner, 88 T.C. 1086, 1131

(1987), affd. without published opinion 865 F.2d 1264 (5th Cir.

1989), affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865 (6th

Cir. 1989), affd. sub nom. Skeen v. Commissioner, 864 F.2d 93

(9th Cir. 1989), affd. per curiam without published opinion sub

nom. Hatheway v. Commissioner, 856 F.2d 186 (4th Cir. 1988);

Kleiger v. Commissioner, T.C. Memo. 1992-734.   Advice from such

individuals "is better classified as sales promotion".   Vojticek


     7
        Petitioner also claims that he discussed his investment
with one of his colleagues, a professor knowledgeable in the
plastics industry, who opined to petitioner that the investment
appeared profitable. Petitioner relied principally on his own
testimony in an effort to establish this matter. However, we do
not find petitioners' self-serving testimony sufficient or
particularly reliable in this regard. See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986); Hawkins v. Commissioner,
T.C. Memo. 1993-517, affd. without published opinion 66 F.3d 325
(6th Cir. 1995).
                              - 31 -


v. Commissioner, T.C. Memo. 1995-444.   Thus, petitioner's

reliance on representations made by Bambara and Taggert was not

reasonable.

     Petitioner also claims that he relied on the advice of his

accountant.   For reliance on professional advice to excuse a

taxpayer from negligence, the taxpayer must show that the

professional had the requisite expertise, as well as knowledge of

the pertinent facts, to provide informed advice on the particular

subject matter.   See David v. Commissioner, 43 F.3d 788, 789-790

(2d Cir. 1995), affg. per curiam T.C. Memo. 1993-621; Goldman v.

Commissioner, supra; Freytag v. Commissioner, supra.     A taxpayer

may not reasonably rely on the advice of an accountant who knows

nothing about the nontax business aspects of the contemplated

venture.   See Freytag v. Commissioner, supra; Beck v.

Commissioner, 85 T.C. 557 (1985).

     In the present cases, there is no indication that

petitioner's accountant had any knowledge of the nontax business

aspects of the Plastics Recycling leasing programs.    Thus,

although   petitioner's accountant prepared the returns for the

years in issue, there is no indication that petitioner ever

discussed the substantive merits of the tax treatment of items in

connection with his investments in Plymouth and Taylor.    We are

not satisfied that petitioner's accountant possessed the complete

and necessary information to advise petitioner on the

deductibility of the losses or the allowability of the credits
                               - 32 -


claimed.   Cf. Hull v. Commissioner, T.C. Memo. 1991-582.    Under

these circumstances, petitioner's alleged reliance on his

accountant does not relieve petitioner of liability for the

additions to tax for negligence.

     C.    Concern for the Environment

     Finally, petitioner directs our attention to his interest in

recycling and his desire to conserve natural resources.     At

trial, petitioner described in detail his efforts to recycle.

For instance, petitioner pointed out:

          As a child of the great depression, * * * I firmly
     believed in eliminating waste, recycling and protecting
     valuable and diminishing natural resources. For
     example, I have used the reverse side of incoming mail
     and of my old manuscripts for years. I reuse incoming
     manila envelops and packaging. I shut off lights,
     heat, water, doors and windows that are not being used.

     We have no reason to doubt petitioner's testimony in this

regard.    Yet, we fail to see how petitioner's concerns regarding

the environment make his investments in two partnerships, both of

which were designed to shelter income from taxation and produce

other tax benefits, any more reasonable.   Although petitioner's

concern for the environment may have provided some motivation to

consider the Plastics Recycling leasing programs, petitioner

should have thereafter reasonably investigated his prospective

investments.    As already noted, independent investigation would

have revealed the true nature of the Sentinel recycling programs

as economic shams.
                              - 33 -


     There is no indication that petitioner took any steps to

ensure that, or even to inquire whether, the recyclers were

actually placed with end-users.   Surely, concern for the

environment would have led him to do so.     Based on the record, we

do not think that petitioner would have invested in the

Partnerships were it not for the prospect of the sizable tax

benefits that the Partnerships offered.    Thus, even if petitioner

were enthusiastic about recycling, petitioner did not act

reasonably by claiming deductions and credits with respect to the

Partnerships.

     D.   Conclusion Regarding Negligence.

     In view of his sophistication and educational background,

petitioner learned or should have learned that the Sentinel

recyclers were not unique, that they were not worth in excess of

$50,000 each, and that Plymouth and Taylor lacked economic

substance and had no potential for profit.    Therefore, under the

circumstances of these cases, petitioner failed to exercise due

care in claiming loss deductions and tax credits with respect to

the Partnerships on his Federal income tax returns for 1981

through 1984.   Taking all of the above factors into

consideration, we think it is more likely than not that

petitioner invested in the Partnerships in an effort to generate

tax benefits, rather than to make a profit.

     Upon consideration of the entire record, we hold that

petitioner is liable for the additions to tax for negligence
                              - 34 -


under section 6653(a)(1) and (2) for the years in issue.

Respondent is sustained on this issue.

Issue (4)   Section 6659 Valuation Overstatement

     Petitioner also contests the addition to tax for valuation

overstatement under section 6659 for the years in issue.

     A value claimed on a return that exceeds the correct value

by 150 percent or more constitutes a valuation overstatement.

See sec. 6659(c).   With respect to the Plymouth investment, we

have found that Sentinel EPE recyclers valued at $1,162,667 each

did not have a value exceeding $50,000 per machine.   With respect

to the Taylor investment, we have found that Sentinel EPS

recyclers valued at $1,750,000 each did not have a value

exceeding $50,000 per machine.

     Although petitioner declined to stipulate the value of the

Sentinel recyclers at issue, petitioner presented no evidence by

way of expert testimony to contradict the conclusions reached by

respondent's experts.   The record is devoid of any evidence

indicating that petitioner conducted a meaningful investigation

to value the Sentinel recyclers.   We have extensively considered

the value of the Sentinel EPE recycler and the value of the

Sentinel EPS recycler and have concluded as an ultimate fact that

the Sentinel EPE and EPS recyclers did not have a fair market

value at that time in excess of $50,000 each.   See also Gottsegen

v. Commissioner, T.C. Memo. 1997-314; Provizer v. Commissioner,
                               - 35 -


T.C. Memo. 1992-177.   Having so concluded, it follows that there

was a valuation overstatement under section 6659.

     Finally, petitioner contends that respondent abused his

discretion in failing to exercise the authority under section

6659(e) to waive the addition to tax for valuation overstatement.

     Under section 6659(e), the Commissioner may waive all or any

part of the addition to tax for valuation overstatement based on

a showing by the taxpayer that there was a "reasonable basis for

the valuation * * * claimed on the return and that such claim was

in good faith."    The Commissioner's waiver is discretionary and

subject to review for an abuse of discretion.   See Krause v.

Commissioner, 99 T.C. 132 (1992); Hildebrand v. Commissioner, 28

F.3d 1024 (10th Cir. 1994).

     On the record before us, there is no indication that

petitioner requested a waiver from respondent at any time prior

to the filing of his posttrial brief.   Given that petitioner

failed to establish a timely request for a waiver, we cannot hold

that respondent abused his discretion in failing to waive the

addition to tax.    See Haught v. Commissioner, T.C. Memo. 1993-58.

In any event, there is nothing in the record to establish that

there was a reasonable basis for the valuation as required by

section 6659(e).    In light of the stringent standard for abuse of

discretion, we cannot conclude that respondent abused his

discretion in failing to exercise the authority under section

6659(e) to waive the addition to tax for valuation overstatement.
                               - 36 -


     In view of the foregoing, we sustain respondent's

determination that petitioner is liable for the addition to tax

for valuation overstatement under section 6659 for each of the

years in issue.

Other Matters

     Petitioner's final contention to be considered is that

respondent is precluded from making an assessment for the taxable

year 1982 because respondent initially issued a no-change letter

for that year.

     Petitioner cites no cases in support of his position.    We

observe that petitioner's position is clearly contrary to well-

established law that issuance of a no-change letter generally

does not preclude respondent from subsequently issuing a notice

of deficiency.    See Opine Timber Co. v. Commissioner, 64 T.C. 700

(1975), affd. without published opinion 552 F.2d 368 (5th Cir.

1977); Lawton v. Commissioner, 16 T.C. 725, 727 (1951); see also

Collins v. Commissioner, 61 T.C. 693, 700-701 (1974); Fitzpatrick

v. Commissioner, T.C. Memo. 1995-548.

     For respondent's no-change letter to be binding, petitioner

must show the elements of estoppel.     See Fitzpatrick

v. Commissioner, supra.    However, petitioner does not allege or

argue estoppel, nor does the record provide any basis for such a

claim.   Further, the no-change letter does not in any manner

constitute a closing agreement.   See sec. 7121; sec. 301.7121-

1(d), Proced. & Admin. Regs.
                                - 37 -


     Accordingly, respondent is not precluded from making an

assessment for the taxable year 1982 after having issued a no-

change letter for that year.8

     Petitioner has made other arguments that we have considered

in reaching our decision.   To the extent that we have not

discussed these arguments, we find them to be without merit.

     To reflect our disposition of the disputed issues, as well

as the parties' stipulation of settled issues,



                                     Decisions will be entered

                                for petitioner Bernice M. Ulanoff

                                and for respondent as to petitioner

                                Stanley M. Ulanoff.




     8
        In addition, we note that at issue for 1982 are so-called
affected items consisting of additions to tax for negligence and
overvaluation. See N.C.F. Energy Partners v. Commissioner, 89
T.C. 741, 744-746 (1987). The TEFRA procedures, codified at
secs. 6221 through 6233, segregate adjustments attributable to an
individual's interest in a partnership from all other adjustments
to the individual's return. See Maxwell v. Commissioner, 87 T.C.
783, 787-788 (1986). Respondent's examination of petitioner's
individual return for 1982 would therefore not have focused on
affected items.
