                        T.C. Memo. 1996-230




                      UNITED STATES TAX COURT



         JEFFREY I. AND ROBERTA H. STONE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

              JOSEPH AND MARY COTE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 11776-88, 322-91.              Filed May 22, 1996



     Bernard S. Mark and Richard S. Kestenbaum, for petitioners.

     Lawrence L. Davidow and Frances Ferrito Regan, for

respondent in docket No. 11776-88.

     Barry J. Laterman, for respondent in docket No. 322-91.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   These cases were assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section
                               - 2 -

7443A(b)(4) and Rules 180, 181, and 183.1    They were tried and

briefed separately but consolidated for purposes of opinion.       The

Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

               OPINION OF THE SPECIAL TRIAL JUDGE

     WOLFE, Special Trial Judge:     These cases are part of the

Plastics Recycling group of cases.     For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without

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

transactions in these cases are substantially identical to the

transaction considered in the Provizer case.

     In a notice of deficiency, respondent determined a

deficiency in the 1981 joint Federal income taxes of petitioners

Stone in the amount of $52,576 and additions to tax for that year

in the amount of $15,773 under section 6659 for valuation

overstatement, in the amount of $2,629 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 underpayment

attributable to negligence.   In another notice of deficiency,

respondent determined deficiencies in the 1980 and 1981 joint

Federal income taxes of petitioners Cote in the respective

1
     All section references are to the Internal Revenue Code in
effect for the years in issue, unless otherwise indicated. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                  - 3 -

amounts of $16,941 and $100,472.2     For those same years,

respondent determined the following additions to tax.

                             Additions to Tax
Year      Sec. 6651   Sec. 6653(a)(1)1 Sec. 6653(a)(2)        Sec. 6659

1980                       $847
1981       $3,619         5,024                 2              $30,141

       1 For 1980, the addition to tax is under sec. 6653(a).

     2 50 percent of the interest payable with respect to the
portion of the underpayment attributable to negligence.

Respondent also determined in each case that interest on

deficiencies accruing after December 31, 1984, would be

calculated at 120 percent of the statutory rate under section

6621(c).

       Stipulations of Settled Issues pertaining to petitioners'

respective participation in the Plastics Recycling Program, and

filed in each of these consolidated cases, provide in part that:

       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

2
     The deficiency in the Cote case for taxable year 1980 is
solely attributable to respondent's disallowance of an investment
credit carryback from taxable year 1981.
                                - 4 -

     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).

Respondent's determination of an addition to tax under section

6651 with respect to petitioners Cote was not specifically

addressed in the stipulation of settled issues nor elsewhere in

the record.   However, given the third stipulation in the

stipulation of settled issues, we consider any issue with respect

to the addition to tax under section 6651 to be settled.     See

also Rule 142(a).

     Accordingly, the only issues remaining in these consolidated

cases are:    (1) Whether petitioners are liable for additions to

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

negligence; 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 by

this reference.   Petitioners Stone resided in Framingham,

Massachusetts, when their petition was filed.   Petitioners Cote

resided in Huntington, New York, when their petition was filed.

     During 1981, petitioner Jeffrey Stone (Stone) was the sole

owner of an electronics distributor, Stone Component Sales Corp.,

for which he worked as a manufacturers' representative.     His
                               - 5 -

spouse, Roberta, was not employed outside the home.   On their

1981 Federal income tax return, petitioners Stone reported gross

income from wages, interest, and dividends in excess of $250,000.

Consequently, in the absence of significant deductions or

credits, they were subject to payment of Federal income taxes in

substantial amounts for taxable year 1981.

     Petitioner Joseph Cote (Cote) was a corporate bond trader

for Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch),

during 1981.   His wife, Mary, was not employed outside the home.

On their 1981 Federal income tax return, petitioners Cote

reported gross income from wages, interest, and dividends in

excess of $320,000.   Consequently, in the absence of significant

deductions or credits, they were subject to payment of Federal

income taxes in substantial amounts for taxable year 1981.

     Stone is a limited partner in Northeast Resource Recovery

Associates (Northeast) and Cote is a limited partner in Hyannis

Recycling Associates (Hyannis).   For convenience, we refer to

these two partnerships collectively as the Partnerships.

     Petitioners have stipulated that 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.   In addition, petitioners

have stipulated substantially the same facts concerning the

underlying transactions as we found in the Provizer case.
                                - 6 -

     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

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 and 1982 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.
                                 - 7 -

     Like Clearwater, each of the Partnerships herein was formed

to lease Sentinel EPE recyclers from F & G Corp. and license

those recyclers to FMEC Corp.3    The transactions of the

Partnerships differ from the underlying transaction 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.; (2) in the Northeast transaction, seven, rather than six,

machines were sold, leased, licensed, and sublicensed; and (3) in

the Hyannis transaction, F & G purchased the recyclers for

$1,066,667 each.4   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 the Partnership transactions, a number of other

limited partnerships entered into transactions similar to the

Partnership transactions, also involving Sentinel EPE recyclers




3
     As the Hyannis transaction was initially structured, Hyannis
purchased the recyclers from ECI Corp. and leased them to FMEC.
This transaction was restructured to take advantage of the safe-
harbor leasing rules of the Economic Recovery Tax Act of 1981
(ERTA), Pub. L. 97-34, 95 Stat. 172. As in all subsequent
Plastics Recycling programs, F & G Corp. was interposed between
ECI and the primary leasing partnership (in this case Hyannis).
4
     There is no explanation in the record as to why the six
recyclers were sold to F & G Corp. for $6,400,000 in the Hyannis
transaction but later sold for $6,975,996 in subsequent Plastics
Recycling transactions. We note that the Hyannis partnership
initially closed at the lower price prior to the enactment of the
safe-harbor legislation, and subsequently the arrangement was
modified in an attempt to take advantage of those rules by
inserting F & G Corp. into the transaction.
                                - 8 -

and Sentinel expanded polystyrene recyclers.   We refer to these

collectively as the Plastics Recycling transactions.

     With respect to each of the Partnerships, a private

placement memorandum was distributed to potential limited

partners.    Appended to the offering memoranda were reports by F &

G's evaluators, Dr. Stanley M. Ulanoff (Ulanoff), a marketing

consultant, and Dr. Samuel Z. Burstein (Burstein), a mathematics

professor.   The offering memoranda list significant business and

tax risk factors associated with investments in the Partnerships.

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

substantial likelihood of audit by the Internal Revenue Service

(IRS) and that the purchase price paid to ECI Corp. probably

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

that the Partnerships have no prior operating history; (3) that

the general partners have no prior experience in marketing

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

have no control over the conduct of the Partnerships' business;

(5) that there is no established market for the Sentinel EPE

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

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

that the recycled pellets will be as marketable as virgin

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

exist.

     During 1981, Stone acquired a 2.60525-percent interest in

Northeast for his investment of $25,000.   As a result of the
                                 - 9 -

passthrough from Northeast, on their 1981 Federal income tax

return the Stones deducted an operating loss in the amount of

$20,340 and claimed investment tax and business energy credits

totaling $42,406.    The underlying deficiency in the Stone case

results from respondent's disallowance of the Stones' claimed

operating losses and credits related to Northeast.

     Also during 1981, Cote acquired a 6.187-percent interest in

Hyannis for his investment of $50,000.5    As a result of the

passthrough from Hyannis, on their 1981 Federal income tax return

the Cotes deducted an operating loss in the amount of $40,646 and

claimed investment tax and business energy credits totaling

$74,611.   An additional $4,583 of the 1981 business energy credit

was carried back to 1980.     The Cotes' underlying deficiencies for

taxable years 1980 and 1981 result from respondent's disallowance

of their claimed operating losses and credits related to Hyannis.

     Cote and Stone are both well educated and very successful

and sophisticated businessmen.    Stone holds a B.S. in electrical

engineering from Northeastern University and an M.B.A. from

Babson College.     After college he worked for the Raytheon and

Hewlett-Packard companies, and in 1975 he started his own

electronic components company, Stone Component Sales Corp.      Cote

5
     The parties stipulated that Cote owned a 3.094-percent
interest in Hyannis. However, Cote's 1981 Form K-1, Partner's
Share of Income, Credits, Deductions, etc., attached to the
Hyannis partnership return, indicates that he acquired a 6.187-
percent interest in Hyannis. The reason for this discrepancy is
not explained in the record.
                               - 10 -

graduated from high school in 1959, married and had a family, and

drove a taxi until he got a job as a conductor on the Long Island

railroad in 1964.   In 1969 he began working for Merrill Lynch as

an order clerk, and he worked for both the railroad and Merrill

Lynch until he made a living in the securities business.      After

becoming a senior trader at Merrill Lynch, Cote left for Loeb,

Rhodes in 1972 and eventually ran their trading desk.    In 1978 he

returned to Merrill Lynch and co-managed their high yield

securities department.   From 1978 to 1988 Cote also served as one

of five voting members of the Merrill Lynch High Yield Commitment

Committee.    During the time he served as a member, the committee

made decisions for the underwriting of more than $12 billion in

securities.

     Stone learned about the Sentinel EPE recyclers and Northeast

from Donald F. Tomasetti (Tomasetti), an accountant married to a

cousin of his.   The two have known each other on a personal level

since the 1960's.   Tomasetti has a B.B.A. in accounting from the

University of Massachusetts.    He worked at Peat, Marwick,

Mitchell for 13 years (5-1/2 as an auditor and 7-1/2 as a tax

specialist).   In 1975 he established his own full service

accounting practice, Romito & Tomasetti.    Two or 3 years later,

Stone Component Sales Corp. became a client of Romito &

Tomasetti, with Tomasetti acting as the principal adviser to both

the corporation and Stone individually.    Tomasetti has no

expertise in plastics.
                                - 11 -

     Tomasetti learned about the Sentinel EPE recyclers from John

Frabotta (Frabotta) and Dick Omohundro (Omohundro).6   Together

they paid Tomasetti a fee for his services in reviewing the

private placement memorandum concerning the Sentinel recyclers

and also going to Hyannis to look at the equipment they were

considering as an investment.    Frabotta has a B.A. in economics

and accounting from San Diego State University and an M.B.A. from

Suffolk University.   From 1964 to 1973 he worked in the

commercial and investment departments of First National Bank of

San Diego, from 1973 to 1978 he and Omohundro managed a Boston

mutual fund, for which Tomasetti was the auditor, from 1979 to

1987 he and Cote managed the research and high yield securities

group at Merrill Lynch, and since 1988 he has worked for a

registered investment adviser, Prospect Street Investment

Management, another fund for which Tomasetti is the auditor.

Frabotta is not an expert in plastics or plastics recycling.

     Frabotta learned about the Sentinel EPE recyclers from Cote,

who in turn had learned about them from an accounting firm,

Finkle & Co.   Finkle & Co. performed accounting functions for

Northeast or its general partner, Richard Roberts (Roberts), in

1983.7   Cote, Omohundro, and Frabotta all worked at Merrill Lynch

6
     Omohundro did not testify at the trial.
7
     In 1983 Finkle & Co. prepared a report on the polyethylene
operations at Hyannis. Roberts forwarded this report to limited
partners in the Plastics Recycling transactions. In a cover
letter, Roberts refers to Finkle & Co. as "our accounting firm".
                               - 12 -

during the years at issue and they often discussed investment

opportunities with each other.    Each reviewed the offering

materials for the Partnership transactions, and Omohundro,

Frabotta, and Tomasetti together visited the PI plant in Hyannis,

Massachusetts.   At the PI plant, they saw a Sentinel EPE recycler

in operation and discussed the nature of the business with the

promoters of the partnerships and PI personnel.

     During Tomasetti's tour at PI, there was an inquiry about

the cost of the Sentinel EPE recycler but PI representatives

declined to discuss that subject because, as Tomasetti understood

it, the machine was proprietary in nature and had not been

patented.   (Although PI claimed that its information was a trade

secret and that it never obtained patents on its machines, in

fact, PI had obtained numerous patents prior to the Partnership

transactions and had also applied for a trademark for the

Sentinel EPE recyclers).    PI indicated that there was no other

comparable machine on the market and Tomasetti made no

independent inquiries or investigation regarding the uniqueness

or value of the recycler.    Tomasetti read the reports of Ulanoff

and Burstein, but did not fully understand them and did not

attach much weight to them.    No other members of Tomasetti's

accounting firm performed any due diligence or investigation of



It is not clear whether Finkle & Co. prepared the report for
Northeast or Roberts' consulting firm.
                                - 13 -

the Partnership transactions.    An attorney representing one of

Tomasetti's client's supposedly did speak with some acquaintances

at PI.

     Tomasetti did not attempt to market the Partnership

transactions himself.    He thought they were very aggressive.   He

fully expected an IRS challenge "because of the obvious tax

benefits in excess of the investment that were being achieved in

the first year".    Tomasetti understood that the tax benefits

stemmed from the purported value of the Sentinel EPE recyclers,

and he did not believe it was prudent to invest in the

partnerships while relying upon the value of the recyclers as

represented in the offering materials.    Tomasetti believed that

before investing, an interested party should have a strong

inclination that the Partnership transactions were economically

viable.    Tomasetti thought that a substantial value for the

recyclers might be established in the future if the machines

performed well.

     Frabotta understood that Omohundro questioned a few Boston

area law firms about PI and was told nothing that gave him

concern.    Frabotta did not pursue an independent investigation of

the value of the Sentinel EPE recycler, nor did he ask anyone

else to investigate it.    Frabotta discussed the value of the

recycler with Tomasetti and Omohundro only in passing.     Frabotta

did not verify the price of resin; he did not inquire whether
                              - 14 -

there were other comparable machines on the market; and he did

not ask anyone about the market for the Sentinel EPE recycler.

     Stone reviewed the Northeast offering memorandum and spoke

with Tomasetti about the visit to Hyannis.   Stone knew that

Tomasetti had no expertise in plastics, and Tomasetti never told

Stone that he had consulted with, or intended to consult, anyone

who was not associated with PI or the Partnerships.   Stone knew

that Tomasetti was unsure about the value of the Sentinel EPE

recycler, but the value of the machine did not concern Stone.     He

also knew that Tomasetti received a commission for sales of

partnership interests.   Stone did not investigate the existence

of competing suppliers or manufacturers, or the existence of a

market for the recyclers.   Except for two or three discussions

with Tomasetti, Stone did not independently, or through any third

parties, investigate PI or the plastics recycling industry.

     Cote spoke with people at Merrill Lynch about leasing

transactions in general, recycling, and speculation about the

price of oil.   He did not supply anyone with the Hyannis offering

memorandum or pay for an evaluation of Hyannis, nor did anyone

prepare any kind of report for him.    Cote and Frabotta understood

from a client, Global Marine, Inc., an offshore drilling company,

that there was speculation that the price of oil could rise.

Cote spoke to a representative of Finkle & Co. about Hyannis' tax

benefits.   He was aware that Burstein had a potential conflict of

interest, that there was no established market for the recyclers,
                              - 15 -

and that Finkle & Co. received a sales commission on his

investment in the Partnerships.   Cote also knew that Frabotta and

Omohundro were not plastics recycling experts.   Cote knew of

Tomasetti because he was Omohundro's accountant, but Cote never

had any direct conversations with Tomasetti.

     None of petitioners have any education or work experience in

plastics recycling or plastics materials.   They did not

independently investigate the Sentinel EPE recyclers or see a

Sentinel EPE recycler or any other type of plastics recycler

prior to participating in the recycling ventures.

                              OPINION

     We have decided more than two dozen of the Plastics

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

8
     Provizer v. Commissioner, T.C. Memo. 1992-177, concerned the
substance of the partnership transaction and also the additions
to tax. The following cases concern additions to tax for
negligence, inter alia: 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; and Eisenberg v.
Commissioner, T.C. Memo. 1995-180. Also, 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; and Madison Recycling Associates v. Commissioner,
T.C. Memo. 1992-605, concern other issues.
                                - 16 -

consolidated cases herein, raised issues regarding additions to

tax for negligence and valuation overstatement.   We have found

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

the opinions issued to date.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 the Clearwater

partnership were attributable to tax-motivated transactions

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

conclusion that the transaction lacked economic substance and a

business purpose, this Court relied heavily upon the

overvaluation of the Sentinel EPE recyclers.




9
     In Zidanich v. Commissioner, T.C. Memo. 1995-382, we found
the taxpayers liable for the section 6659 addition to tax, but
not liable for the negligence additions to tax under section
6653(a). As indicated in our opinion, the Zidanich case, and the
Steinberg case consolidated with it for opinion, involved
exceptional circumstances.
                              - 17 -

     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 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 cases, are the same

type of transaction and same type of machine considered in

Provizer v. Commissioner, supra.

     Based on the entire records in these cases, including the

extensive stipulations, testimony of respondent's experts, and

petitioners' 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 their

respective stipulations of fact and stipulations of settled

issues filed shortly before trial.     The record plainly supports

respondent's determinations in these cases regardless of such

concessions.   For a detailed discussion of the facts and the

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

Commissioner, supra.

Issue 1.   Section 6653(a) Negligence

     In notices of deficiency, respondent determined that

petitioners were liable for additions to tax for negligence under
                              - 18 -

section 6653(a) for 1980 and 6653(a)(1) and (2) for 1981.     Each

of petitioners has 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) for 1980 and section 6653(a)(1) for 1981

impose 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.   In cases

involving negligence for 1981, an additional amount is added to

the tax under section 6653(a)(2); such amount is equal to 50

percent of the interest payable with respect to the portion of

the underpayment attributable to negligence.   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).

     Petitioners in these consolidated cases contend that they

were reasonable in claiming deductions and credits with respect

to the Partnerships.   Petitioners each allege that they

reasonably relied upon the advice of qualified advisers, and that

they reasonably expected an economic profit in light of the so-

called oil crisis in the United States during 1981.    In each
                              - 19 -

case, petitioners' investigation of the Partnership transactions

and the Sentinel EPE recyclers was essentially limited to

conversations with Tomasetti, Frabotta, or Omohundro, in addition

to a review of the respective offering memoranda.    Petitioners

argue that such investigation insulates them from the negligence

additions to tax.

     Under some circumstances a taxpayer may avoid liability for

the additions to tax under section 6653(a) if reasonable reliance

on a competent professional adviser is shown.     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.    Id.   In order for reliance

on professional advice to excuse a taxpayer from the negligence

additions to tax, the reliance must be reasonable, in good faith,

and based upon full disclosure.   Id.; see Weis v. Commissioner,

94 T.C. 473, 487 (1990); Ewing v. Commissioner, 91 T.C. 396, 423-

424 (1988), affd. without published opinion 940 F.2d 1534 (9th

Cir. 1991); Pritchett v. Commissioner, 63 T.C. 149, 174-175

(1974).

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

negligence.   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.
                              - 20 -

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).   We have rejected pleas of reliance when

neither the taxpayer nor the advisers purportedly relied upon by

the taxpayer knew anything about the nontax business aspects of

the contemplated venture.   Beck v. Commissioner, 85 T.C. 557

(1985); Flowers v. Commissioner, 80 T.C. 914 (1983); Steerman v.

Commissioner, T.C. Memo. 1993-447.

     Based upon our review of the entire records in these cases,

we hold that Stone's purported reliance on Tomasetti, and Cote's

purported reliance on Frabotta and Omohundro, and through them

Tomasetti, was not reasonable, not in good faith, nor based upon

full disclosure.   Neither petitioners, nor their supposed

advisers, nor anyone affiliated with them had any education or

work experience in plastics materials or plastics recycling.

Neither petitioners nor their supposed advisers consulted any

independent experts or conducted anything approaching a

meaningful investigation.   In addition, it is clear that

Tomasetti had serious concerns regarding the recycler's purported

value, and nothing in the records indicates that his concerns

were not communicated to petitioners.

     Frabotta's purported investigation entailed speaking to a

client contact at Global Marine about the price of oil, a review
                               - 21 -

of the offering memorandum, and a visit to Hyannis with Tomasetti

and Omohundro.   Tomasetti became involved at the behest of

Frabotta and Omohundro; they paid him to review the offering

materials and visit PI with them.   Omohundro did not testify at

the trial; aside from visiting the PI plant in Hyannis, he

purportedly phoned some legal contacts in Boston who knew of no

reason to be concerned about PI.    As for Finkle & Co., nothing in

the records indicates that they performed any due diligence, and

in 1983 they were providing services to either Northeast or

Roberts.   See supra note 7.   Consequently, we must consider this

accounting firm part of the offering or promoting group.

     None of petitioners' supposed advisers had any background in

plastics or plastics recycling to help them analyze or assess the

recyclers, and the only persons they spoke to were insiders of

the Partnerships or PI personnel.   Neither Tomasetti nor Frabotta

made any inquiries regarding the value of the machine or sought

any independent investigation or third party appraisal.    The PI

personnel, insiders, and promoters they spoke to in Hyannis were

the ones petitioners ultimately relied upon for the value of the

Sentinel EPE recycler 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."

     Tomasetti understood that the tax benefits were generated by

the purported value of the recyclers and thought that "nobody
                               - 22 -

should go into this deal at all based on the valuations

established."    He did not market the Partnerships; in his view

the deal "was very aggressive" and "sure to be challenged" by the

IRS.    He knew that the recyclers were insured for only a "nominal

amount" in relation to their purported value.    (The parties have

stipulated that the recyclers had a manufacturing cost of only

$18,000 each.)    Consequently, Tomasetti believed their purported

value could only be supported by the success of the Partnerships,

i.e., as a function of market demand, and that an investor should

therefore have "a strong inclination that this was a viable

economic deal."    Both Tomasetti and Frabotta testified that they

believed the purported value of the Sentinel EPE recycler was

supported by the economic projections in the offering materials.

       Neither Tomasetti nor Frabotta, nor anyone associated with

them investigated the merits of those projections.    Frabotta did

not investigate the market for the Sentinel EPE recycler or

inquire as to whether the recycler had any competition.

Tomasetti made no independent inquiries or investigation of the

recycler or any of the individuals involved.    He thought that

there was a ready market for the recyclers.    As he put it, "I did

some due diligence to the extent that I was asked to accompany

these individuals to Hyannis, but it wasn't my objective to go

down and to try and shake this out, and spend six months of my

life trying to learn about the industry".
                              - 23 -

     The offering materials clearly stated that there was no

established market for leasing or operating the recyclers.

Information published prior to the Plastics Recycling

transactions indicated that several machines capable of

densifying low density materials already were on the market.

Other plastics recycling machines available during 1981 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.

     Petitioners have failed to show that Tomasetti, Frabotta,

Omohundro, or Finkle & Co. was qualified to evaluate the Sentinel

EPE recyclers and the Partnership transactions.   Tomasetti was

skeptical of the recycler's inflated value, and he communicated

the results of his investigation and review to his clients.

Frabotta's and Tomasetti's testimony that they believed the

purported value of the recycler was supported by the economic

projections in the offering materials is without merit and not

credible.   Petitioners knew that Tomasetti and Frabotta had no

education or expertise in plastics or plastics recycling, and

there is no reason to doubt that Tomasetti's reservations and

disclaimers were communicated to petitioners.   A taxpayer may

rely upon his adviser's expertise (in these cases, accounting,

financial planning, and tax advice), but it is not reasonable or

prudent to rely upon an adviser regarding matters outside of his
                              - 24 -

field of expertise or with respect to facts which he does not

verify.   See Skeen 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, affd. without published

opinion 72 F.3d 123 (3d Cir. 1995).    Because of the technical

nature of these investment ventures, it was unreasonable for

petitioners to rely on Tomasetti, Frabotta, or Omohundro.

     Moreover, a careful consideration of the materials in the

respective offering memoranda, especially the discussions in the

prospectuses 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.    The preface to each

memorandum contained the following:    NO OFFEREE SHOULD CONSIDER

THE CONTENTS OF THIS MEMORANDUM *** AS *** EXPERT ADVICE.      ***

EACH OFFEREE SHOULD CONSULT HIS OWN PROFESSIONAL ADVISERS AS TO

LEGAL, TAX, ACCOUNTING AND OTHER MATTERS RELATING TO ANY PURCHASE

BY HIM OF UNITS.   Each of the memoranda also clearly stated that

the respective Partnership transactions involved significant tax

risks and that in all likelihood the IRS would challenge the

transactions.   In a "business risks" section, each warned that

there was no history for the subject partnership, no established

market for the recyclers, and that there could be no assurance

that recycled pellets would be as marketable as virgin pellets.
                              - 25 -

It is clear from the records that none of petitioners carefully

considered the risk factors mentioned in the offering memoranda.

     On their face, the Partnership transactions should have

raised serious questions in the minds of ordinarily prudent

investors.   According to the Northeast and Hyannis offering

memoranda, the projected benefits for taxable year 1981 were, for

each $50,000 investor, investment tax credits of $84,813 and

$79,200, respectively, plus deductions of $40,174 and $42,491,

respectively, all in the initial year of investment.10   In the

first year of the investments alone, the Stones and Cotes claimed

operating losses in the respective amounts of $20,340 and

$40,646, plus investment tax and business energy credits in the

respective amounts of $42,406 and $79,194 ($4,583 of which was

carried back to 1980).   Therefore, like the taxpayers in Provizer

v. Commissioner, supra, except for a few weeks at the beginning,

none of petitioners ever had any money in the Partnerships.    A

reasonably prudent person would not conclude without substantial

investigation that the Government was providing significant tax

benefits to taxpayers who took no business risk and made no

investment of their own capital.   McCrary v. Commissioner, 92

T.C. 827, 850 (1989).




10
     In both cases the parties stipulated that the offering
memoranda projected tax benefits of $86,328 in investment tax
credits and $39,399 in deductions. There is no explanation for
this discrepancy in the record.
                              - 26 -

     The Stones placed into the record of their case several

documents, ostensibly submitted as evidence that they monitored

their investments in Northeast.   These included unaudited

financial statements of Northeast prepared by nonindependent

accountants from 1981 to 1985, Forms K-1 from 1984 and 1986, a

1983 report prepared by Finkle & Co. describing the accounting

procedures and controls for the recycling operations at PI, and a

1983 update from PI noting that "market prices for polyethylene

resin have remained relatively low * * * [and] the Sentinel

recyclers * * * have not been profitable."   Stone did not testify

or otherwise indicate that he ever examined these documents.      He

spoke to Roberts once about the performance of the Northeast

partnership and learned that it was experiencing difficulty

placing the machines.   We decline to infer from these documents

that he actively monitored his investment in Northeast.

     The parties in these consolidated cases stipulated that the

fair market value of a Sentinel EPE recycler in 1981 and 1982 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's

having a value of $1,066,666 in the Hyannis partnership and

$1,162,666 in the Northeast partnership.11   In support of this


11
     The Hyannis partnership involved 6 machines on which the
partnership set a value of $6,400,000. The Northeast partnership
involved 7 machines on which the partnership set a value of
$8,138,667.
                              - 27 -

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, 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,12 research, and investigation, and were

subsequently rejected and discredited by their author.

Respondent likewise rejected the 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


12
     In one preliminary report, Carmagnola states that he has "a
serious concern of actual profit-level" 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.
                               - 28 -

determinations in the notices of deficiency.    Even so,

petitioners' counsel obtained copies of these reports and urge

that they support the reasonableness of the values reported on

petitioners' returns.    Not surprisingly, petitioners did not call

Carmagnola to testify in these cases,13 but preferred instead to

rely solely upon his preliminary, ill-founded valuation

estimates.   The Carmagnola reports were a part of the record

considered by this Court and reviewed by the Sixth Circuit Court

of Appeals in the Provizer case, where we held the taxpayers

negligent.   Consistent therewith, we find in these 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' reliance on Mollen v. United States, 72 AFTR 2d

93-6443, 93-2 USTC par. 50,585 (D. Ariz. 1993) is misplaced.     The

taxpayer in Mollen was a medical doctor who specialized in

diabetes and who, on behalf of the Arizona Medical Association,

led a continuing medical education (CME) accreditation program

for local hospitals.    The underlying tax matter involved the

taxpayer's investment in Diabetics CME Group, Ltd., a limited

partnership which invested in the production, marketing, and

distribution of medical educational video tapes.    The District


13
     Carmagnola has not been called to testify in any of the
Plastics Recycling cases before us.
                               - 29 -

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."    See

Zfass v. Commissioner, T.C. Memo. 1996-167.

     The records in these cases show that none of petitioners or

their supposed advisers had any formal education, expertise, or

experience in plastics or plastics recycling.    None of them had

any personal insight or industry know-how in plastics recycling

that would reasonably lead them to believe that the Partnership

transactions would be economically profitable.    The extent of

Tomasetti's, Frabotta's, and Omohundro's "investigation" was a

tour of PI's plant in Hyannis and a discussion with PI personnel

and insiders to the Partnership transactions.    No independent

experts in the field of plastics or plastics recycling were

consulted by any of petitioners or their advisers.    The facts of

these cases are distinctly different from those in the Mollen

case.    Thus, we consider petitioners' arguments with respect to

the Mollen case inapplicable under the circumstances of these

cases.

     Petitioner's arguments are not supported by the Ninth

Circuit Court of Appeals' partial reversal of our decision in
                               - 30 -

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,      F.3d     (9th Cir. 1996).   In

Osterhout, we found that certain oil and gas partnerships were

not engaged in a trade or business and sustained respondent's

imposition of the negligence additions to tax with respect to one

of the partners therein.14   The taxpayer had relied in part upon

a tax opinion contained in the offering materials.   The Ninth

Circuit Court of Appeals reversed our imposition of the

negligence additions to tax.   Based on the Court of Appeals for

the Ninth Circuit's partial reversal of our decision in Balboa

Energy Fund 1981, petitioners argue that their reliance upon the

offering materials concerning their investments in Northeast and

Hyannis was reasonable and therefore sufficient to overcome the

additions to tax for negligence.   The Court of Appeals for the

Ninth Circuit's opinion is unpublished, however.   Moreover, the

prefaces to the offering memoranda for Northeast and Hyannis

warned prospective investors that the tax opinion letter was not

in final form, and was prepared for the general partner, and that

prospective investors should consult their own professional

advisers with respect to the tax benefits and tax risks

14
     Osterhout v. Commissioner, T.C. Memo. 1993-251, 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 provided for 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 parties.
                                - 31 -

associated with the Partnership.    The tax opinion letter was

addressed solely to the general partner and contained 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 their
     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'
     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, both the offering memoranda and the tax opinion

letter expressly and unambiguously indicated that prospective

investors such as petitioners were not to rely upon the tax

opinion letter.   The limited, technical opinion of tax counsel in

these cases was not designed as advice upon which taxpayers might

rely and the opinion of counsel itself so states.

     Petitioners also argue, in general terms, that they were

reasonable in claiming the deductions and credits related to the

Partnerships because of rising oil prices in the United States in

1981.   In support of this argument, petitioners testified that

the conventional wisdom at the time was that oil prices would

rise; petitioners also placed into the record several articles

from Modern Plastics and an energy projections report from the

U.S. Department of Energy (DOE), all published in the years 1980

and 1981.   Petitioners also cite Krause v. Commissioner, 99 T.C.

132 (1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d
                               - 32 -

1024 (10th Cir. 1994), and Rousseau v. United States, 91-1 USTC

par. 50,252 (E.D. La. 1991).

     The articles from Modern Plastics and the report by the DOE

speculated on the price of oil, among other matters.   The preface

to the DOE report cautioned about "the tremendous uncertainties

underlying energy projections" and warned "that [their]

projections do not constitute any sort of blueprint for the

future."   Reflective of such uncertainties, an April 1980 article

in Modern Plastics contemplated resin price hikes, while a May

1981 article predicted a leveling off of prices, market

disruptions, and an industrywide shakeout.   Petitioners do not

purport to have read, or in any way relied upon, the DOE report

or the Modern Plastics articles, and have not otherwise explained

the connection between these speculative materials and their

investments in the Partnerships.   Indeed, while Cote testified

that he saw a correlation between resin pellets, an oil-based

product, and the price of oil, he could not "recall ever making a

direct connection between those two".   Petitioners' vague,

general claims concerning the so-called oil crisis are without

merit.

     Petitioners' reliance on Krause v. Commissioner, supra, is

misplaced.   The facts in the Krause case 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
                                - 33 -

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 1970's and early 1980's

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

however, one of respondent's experts, Steven Grossman, explained

that the price of plastics materials is not directly proportional

to the price of oil, 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."    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 petitioners'

investing in recycling of polyethylene, particularly in the

machinery here in question.

     Moreover, the taxpayers in the Krause opinion were

experienced in or investigated the oil industry and EOR

technology specifically.   One of the taxpayers in the Krause case

undertook significant investigation of the proposed investment
                                - 34 -

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, none of petitioners has any education or work

experience with respect to plastics or plastics recycling.

Petitioners did not independently investigate the Sentinel EPE

recyclers, nor did they hire an expert in plastics to evaluate

the Partnership transactions.    Petitioners' arguments with

respect to the Krause case are inapplicable here.

     Petitioners' reliance on Rousseau v. United States, supra,

is similarly misplaced.   In Rousseau, the property underlying the

investment, ethanol producing equipment, was widely considered at

that time to be a viable fuel alternative to oil and its

potential for profit was apparent.       In addition, the taxpayer

therein conducted an independent investigation of the investment

and researched the market for the sale of ethanol in the United

States.   In contrast, as we noted in distinguishing the Krause

case, there is no showing in these records that the so-called oil

crisis would provide a reasonable basis for petitioners'

investing in the polyethylene recyclers here in question.

Petitioners did not independently investigate the Sentinel EPE

recyclers or hire an expert in plastics to evaluate the

Partnership transactions.   The facts of petitioners' cases are

distinctly different from the Rousseau case.       Accordingly, we do
                               - 35 -

not find petitioners' arguments with respect to the Rousseau case

applicable.

     Under the circumstances of these cases, petitioners failed

to exercise due care in claiming large deductions and tax credits

with respect to the Partnerships on their respective Federal

income tax returns.    We hold that petitioners did not reasonably

rely upon Tomasetti, Frabotta, or Omohundro and the offering

memoranda, or in good faith investigate the underlying viability,

financial structure, and economics of the Partnership

transactions herein.   It is clear from Tomasetti's testimony that

he was concerned with the inflated values placed on the

recyclers, that he communicated his concerns to his clients, and

that all petitioners were made aware of his views with respect to

the Plastics Recycling deal.   We hold, upon consideration of the

entire records, that petitioners are liable for the negligence

additions to tax under the provisions of section 6653(a) for 1980

and section 6653(a)(1) and (2) for 1981.   Respondent is sustained

on this issue.

Issue 2.   Section 6659 Valuation Overstatement

     Respondent determined that petitioners were each liable for

the section 6659 addition to tax on the portion of their

respective underpayments attributable to valuation overstatement.

Petitioners have the burden of proving that respondent's

determinations of these section 6659 additions to tax are
                                - 36 -

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

861 (1982).

     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 each claimed an investment tax credit and a

business energy credit based on the following purported values

for each Sentinel EPE recycler:    $1,162,666 in the Northeast

transaction and $1,066,666 in the Hyannis transaction.

Petitioners each concede that the fair market value of each

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

disallowance of petitioners' claimed credits is attributable to

the valuation overstatements, petitioners are liable for the

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

respective underpayments of tax attributable to the credits

claimed with respect to the Partnerships.

     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.
                              - 37 -

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. 132, 178 (1992) (citing Todd v.

Commissioner, supra), affd. sub nom. Hildebrand v. Commissioner,

28 F.3d 1024 (10th Cir. 1994).   However, when valuation is an

integral factor in 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) (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.

     In the respective stipulations of settled issues,

petitioners concede that they "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."   In Todd v. Commissioner, supra, and McCrary

v. Commissioner, supra, we denied application of section 6659,

even though the subject property was overvalued, because the
                              - 38 -

related deductions and credits had been conceded or denied in

their entirety on other grounds.   In Todd, we found that an

underpayment was not attributable to a valuation overstatement

because property was not placed in service during the years in

issue.   In McCrary, we found the taxpayers were not liable for

the section 6659 addition to tax when, prior to the trial of the

case, the taxpayers conceded that they were not entitled to the

investment tax credit because the agreement in question was a

license and not a lease.   In both cases, the underpayment was

attributable to something other than a valuation overstatement.

     This Court has held that concession of the investment tax

credit in and of itself does not relieve taxpayers of liability

for the section 6659 addition to tax.    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.   Chiechi 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

225, 228 (9th Cir. 1990), affg. T.C. Memo. 1988-416; Irom v.

Commissioner, 866 F.2d 545, 547 (2d Cir. 1989), vacating in part

and remanding T.C. Memo. 1988-211; Harness v. Commissioner,

supra.
                              - 39 -

     In the present cases, no argument was made and no evidence

was presented to the Court to prove that disallowance and

concession of the investment tax credits related to anything

other than a valuation overstatement.    To the contrary,

petitioners stipulated substantially the same facts concerning

the underlying 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 2325 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.

     Consistent with our findings in Provizer, petitioners

respectively stipulated that the Northeast and Hyannis

transactions had no net equity value, that the sole activity of

the Northeast and Hyannis partnerships lacked any potential for

profit, and that the Northeast and Hyannis partnership

transactions therefore lacked economic substance.    When a

transaction lacks economic substance, section 6659 will apply

because the correct basis is zero, and any basis claimed in

excess of that is a valuation overstatement.     Gilman v.
                              - 40 -

Commissioner, supra; Rybak v. Commissioner, 91 T.C. 524, 566-567

(1988); 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. Commissioner, 990 F.2d 893 (6th Cir. 1993).

     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 finding of a lack of economic substance.   Petitioners

conceded that the Northeast and Hyannis transactions were similar

to the Clearwater transaction described in Provizer v.

Commissioner, supra, and that the Northeast and Hyannis

transactions lacked economic substance.   Given those concessions,

and the fact that the records here plainly show that the

overvaluation of the recyclers was the reason for the

disallowance of the tax benefits, and the fact that no argument

was made and no evidence was presented to the Court to prove that

disallowance and concession of the tax benefits related to

anything other than a valuation overstatement, we conclude that

the deficiencies caused by the disallowance of the claimed tax

benefits were attributable to the overvaluation of the Sentinel

EPE recyclers.

     Finally, we consider petitioners' express arguments as to

waiver of the addition to tax under section 6659.   On brief,
                                - 41 -

petitioners each contested imposition of the section 6659

addition to tax on the grounds that respondent erroneously failed

to waive the addition to tax.    Section 6659(e) authorizes

respondent to waive all or part of the addition to tax for

valuation overstatement if taxpayers establish that there was a

reasonable basis for the adjusted bases or valuations claimed on

the returns and that such claims were made in good faith.

Respondent'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.

     Petitioners urge that they relied on the offering memoranda

and, in varying degrees, Tomasetti, Frabotta, and Omohundro in

deciding on the valuation claimed on their tax returns.

Petitioners each contend that such reliance was reasonable and,

therefore, respondent should have waived the section 6659

addition to tax.   Petitioners cite Krause v. Commissioner, supra;

Mauerman v. Commissioner, 22 F.3d 1001 (10th Cir. 1994), revg.

T.C. Memo. 1993-23; and Rousseau v. United States, 71A AFTR 2d

93-4294, 91-1 USTC par. 50,252 (E.D. La. 1991), in support of

their argument.

     We have found that petitioners' purported reliance on

Tomasetti, Frabotta, and Omohundro, in addition to the offering

memoranda, was not reasonable.    None of petitioners, their

supposed advisers, nor anyone affiliated with them was educated

or experienced in plastics or plastics recycling.    The evaluators
                               - 42 -

whose reports were appended to each of the offering memoranda

each owned interests in partnerships which leased Sentinel EPE

recyclers.   The offering memoranda contained numerous caveats,

including the following:    NO OFFEREE SHOULD CONSIDER THE CONTENTS

OF THIS MEMORANDUM *** AS *** EXPERT ADVICE.    *** EACH OFFEREE

SHOULD CONSULT HIS OWN PROFESSIONAL ADVISERS.    Petitioners did

not see a Sentinel EPE recycler prior to investing in Northeast

or Hyannis, nor did they independently investigate the recyclers.

They only went so far as to have an accountant and two bond

dealers, all lacking any training or experience in plastics or

recycling, look at the machines and the factory which produced

them.   In effect, petitioners went so far as to find out whether

some sort of machine existed and not much farther.

     Petitioners' reliance on Krause v. Commissioner, supra,

Rousseau v. United States, supra, and Mauerman v. Commissioner,

supra, in support of their contentions that they acted

reasonably, is misplaced.   In the Krause and Rousseau cases, the

section 6659 addition to tax was disallowed in light of the

respective holdings that the taxpayers in each case had a

reasonable basis for the valuations claimed on the tax returns or

had reasonable cause for the understatements on the returns and

were not subject to negligence additions to tax.    In contrast, we

have held that petitioners herein did not act reasonably in

claiming deductions and investment tax credits related to the

Partnerships, that the errors on petitioners' tax returns were
                                - 43 -

caused by the excessive valuations of the underlying machinery in

the Partnership transactions, that petitioners lacked reasonable

cause for such overvaluation, and that each petitioner is

therefore liable for the negligence additions to tax under

section 6653(a).   Accordingly, petitioners' reliance on the

Krause and Rousseau cases is misplaced.

     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 section 6659, 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 cases, particularly with respect to valuation,

petitioners relied upon advice that was outside the scope of

expertise and experience of their supposed advisers.

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 reflected on their tax returns

with respect to their investments in Northeast and Hyannis.    In
                              - 44 -

these cases respondent properly could find that petitioners'

reliance on Tomasetti, Frabotta, and Omohundro, in addition to

the offering materials, was unreasonable.   The records in these

cases do not establish an abuse of discretion on the part of

respondent but support 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

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

underpayment of tax attributable to the disallowed tax benefits.

Respondent is sustained on this issue.




                                    Decisions will be entered

                               under Rule 155.
