                         T.C. Memo. 1996-335



                       UNITED STATES TAX COURT



               LAWRENCE R. ROBERSON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1595-89.                         Filed July 24, 1996.



     Joseph Falcone, for petitioner.

     Timothy S. Murphy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined deficiencies in

petitioner's Federal income taxes and additions to tax as

follows:
                                        - 2 -

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

1979       $1,476       $74            ---            ---             $443.00
1980        3,402       170            ---            ---            1,021.00
                                                       1
1981        3,532       ---          $177.00                         1,060.00
                                                       1
1982        7,975       ---           398.75                         1,766.10
                                                       1
1983        9,428       ---           471.40                         1,677.60
                                                       1
1984        2,472       ---           123.60                           741.60
       1
        50 percent of the interest due on the portion of the underpayment
attributable to negligence.



       After concessions, the sole issue for decision is whether

petitioner is liable for the applicable additions to tax under

section 6653(a) and under section 6653(a)(1) and (2) in the

years at issue.

       All section references are to the Internal Revenue Code as

in effect for the years under consideration.                All Rule

references are to the Tax Court Rules of Practice and Procedure.

                               FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.               Petitioner resided in

Detroit, Michigan, at the time the petition was filed in this

case.

       Petitioner received a bachelor of arts degree from Alabama

A & M University in 1967 and a master's of business

administration (M.B.A.) with concentrations in finance and

management from Indiana University in 1970.                 After receiving his

M.B.A. degree, petitioner was employed by the Ford Motor Co.,
                                 - 3 -


where he held various positions in the corporate finance area,

including cost analyst, financial analyst, and eventually,

supervisor of profit analysis.    In those positions, petitioner's

duties included analyzing the profitability of cars and looking

at the fixed costs to produce a new car.   Petitioner left the

Ford Motor Co. in 1983 to start a financial planning firm.

Thereafter, petitioner became a certified financial planner and

has worked in the financial planning and investment advisory

business through the date of trial.

     In 1978 or 1979, petitioner became acquainted with Louis

Cunningham, a financial planner and securities broker.   Shortly

thereafter, petitioner began to invest in various mutual funds,

stocks, bonds, and variable annuities based on Cunningham's

suggestions and advice.   Petitioner believed that all

investments presented to him by Cunningham had been reviewed and

placed on an approved list of investments by Cunningham's

brokerage firm, Mutual Service Corp. (MSC).   In 1982, Cunningham

informed petitioner of an investment opportunity in the music

industry, specifically, the purchase of leasehold interests in

master recordings from the Southampton Music Co. (Southampton).

Cunningham earned a commission if petitioner decided to invest

in Southampton, and he encouraged petitioner to do so.

Petitioner could not recall whether Cunningham had indicated to
                               - 4 -


him that the Southampton investment had been investigated by

MSC, and in fact no such investigation had been done.

     At the time he learned of the Southampton investment,

petitioner was not familiar with the music industry or master

recordings.   Petitioner claims that he familiarized himself with

the music industry by spending numerous hours at the library

doing research, talking to some musicians from his church,

attending several seminars about investing in the music

industry, and on one or two occasions, speaking on the phone

with someone from Motown Records.    There is no indication,

however, that these efforts included an investigation of the

Southampton master recording investment presented to petitioner

by Cunningham.1   When asked at trial what he had learned from

his research, petitioner stated:    "I learned that it was an

industry where you could make a lot of money if you got a good

album--a good person that became popular."    Petitioner provided

no evidence, however, that he had researched the profitability


1
   Petitioner introduced into evidence two brochures he allegedly
received at a seminar on investing in the music industry. One of
the brochures is a quarterly report prepared by another master
recording leasing company, Audio Leasing Corp., and includes
information about the activities of that company as well as news
about the music industry generally. The brochure also emphasizes
the alleged tax incentives in investing in master recording
leases. The second brochure is a glossary of terms used in the
music industry. Neither brochure contains a discussion of the
nontax economic benefits to be expected from a master recording
lease, nor do they discuss the Southampton investment program at
issue in this case.
                               - 5 -


of a master recording or the likelihood of success of a

recording artist.

      In November 1982, Cunningham provided petitioner with a

promotional booklet entitled "Southampton Music Company: 1982-

1983 Program".   The promotional booklet emphasizes the tax

benefits of investing in a master recording rather than any

economic benefits that could be expected.   The booklet includes

a 36-page tax opinion by Joseph Wetzel, an attorney in Portland,

Oregon.   The tax opinion discusses the tax benefits of the

investment and potential tax problems that could be raised by

the Internal Revenue Service and ways to avoid them.    The

promotional booklet also contains a chart entitled "Table of

Advance Lease Payments and First Year Tax Benefits" with four

levels of escalating investments with escalating tax benefits.

For example, according to the chart, a cash investment of

$31,000 in a master recording valued at $400,000 would yield in

the first year an investment tax credit of $40,000 and a tax

deduction of $26,000.

      Petitioner asked William Parnell, an acquaintance who was a

return preparer and an enrolled agent before the Internal

Revenue Service, to review the Southampton promotional booklet.

According to petitioner,2 Parnell's assessment of the



2
    Parnell did not testify in this case.
                                - 6 -


Southampton investment was that "If they would do everything

that they said in the booklet, it looked okay to him."

     Based on his discussions with Cunningham and Parnell, and

on his own research of the music industry, petitioner decided to

invest in Southampton and signed a master recording lease

agreement on December 22, 1982.    Petitioner was aware of the tax

benefits expected from the investment.    The availability of

those benefits for the 1982 taxable year had an impact on

petitioner's decision to sign the lease agreement prior to the

end of the year.    Pursuant to the agreement, petitioner was to

pay Southampton a total of $10,5003 for a one-fourth leasehold

interest in a master recording featuring Ray Pillow, a country-

western singer.    The lease was for a term of 5 years and 10

months.   Petitioner had not listened to or received a copy of

the Ray Pillow master recording prior to investing in

Southampton.

     Petitioner's master recording was to be distributed as a

phonograph album by Indigo Music Co. (Indigo), a distributor

recommended to petitioner by Southampton.    Petitioner did not

meet or negotiate with anyone from Indigo prior to investing in

Southampton.   Pursuant to his agreements with Indigo and

3
   Petitioner paid $8,400 on or about the date the lease was
signed and reported that amount as rental expense on his 1982 tax
return. The remaining $2,100 was paid approximately 1 year
thereafter and reported as rental expense on petitioner's 1983
return.
                                - 7 -


Southampton, petitioner was to receive royalty payments from

Indigo on album sales, and in turn, petitioner was to make

additional rental payments to Southampton based on a percentage

of net profits earned.    There is no evidence in the record that

petitioner has ever received royalty payments from Indigo or

that any additional rental payments have been made to

Southampton.4

     Pursuant to the lease agreement, Southampton agreed to pass

to petitioner his one-fourth share of any investment tax credit

generated by the Ray Pillow master recording.   On his 1982 tax

return, petitioner reported a tentative regular investment

credit from his Southampton investment of $21,250.   This amount

was determined based on a value for the Ray Pillow master

recording reported to petitioner by Southampton of $850,000.5

Petitioner never obtained an independent appraisal of the Ray

Pillow master recording but relied solely on the value reported

to him by Southampton.6   Of the total investment tax credit of

4
   On his 1984 tax return, however, petitioner reported $15 in
"Other Income" from his Southampton investment.
5
   Petitioner's tentative regular investment tax credit was
determined by multiplying the regular investment tax credit
percentage (10 percent) by petitioner's one-fourth share of the
total value of the master recording reported by Southampton (10
percent x ($850,000 x ¼) = $21,250).
6
   Petitioner introduced into evidence two documents that he
received from Southampton purporting to be appraisals of the Ray
Pillow master recording. Petitioner's reliance on these
                                                   (continued...)
                               - 8 -


$21,250, petitioner used $2,776.45 of the credit in 1982,

carried back unused credit in the amounts of $1,476, $3,402, and

$3,532 to 1979, 1980, and 1981, respectively, and carried

forward additional unused credit in the amounts of $3,693 and

$3,191.28 to 1983 and 1984, respectively.   Petitioner had

$3,179.27 of unused investment tax credit to carry over into

later years.   Additionally, on his 1983 tax return petitioner

deducted $2,750 in distribution costs relating to the

Southampton investment.

     Petitioner's 1982 tax return was prepared by an accounting

firm, Chaness and Simon, and signed by a representative of that

firm on April 10, 1983.   Petitioner provided the accounting firm

with the Southampton promotional booklet and an investment tax

credit election statement that he had received from Southampton

for use in preparing his 1982 return.   Petitioner presumably

provided the same documents to Ramona Henderson, a C.P.A. who

petitioner claims prepared his 1983 tax return after petitioner

provided "receipts and information on all investments to her and




6
 (...continued)
documents as independent appraisals or as indications of his
expected economic benefit from the investment is misplaced as the
appraisals were commissioned by and addressed to Southampton and
were furnished to petitioner several months after petitioner made
his investment in Southampton and after his 1982 tax return was
filed.
                                 - 9 -


discussed them all with her".7    There is no evidence in the

record that either return preparer relied on anything other than

the materials provided to petitioner by Southampton or that they

investigated the bona fides of the master recording investment

at the time they completed petitioner's 1982 and 1983 tax

returns.

     Subsequent to investing in Southampton, and after his 1982

tax return was filed, petitioner wrote to Indigo requesting a

sample copy of the Ray Pillow album and information about when

he could expect to receive royalty payments from album sales.

Petitioner also wrote to Southampton seeking clarification of

the percentage of profits to be paid to Southampton as

additional rent pursuant to the master recording lease.    The

letters from petitioner to Indigo and Southampton do not request

information about the sales potential of the Ray Pillow master

recording.   In addition to a copy of the album, petitioner

received correspondence from Southampton explaining the revenue

distribution clause of the lease agreement and two letters sent

by Indigo to all Southampton investors regarding proposed

distribution outlets and marketing techniques.    Additionally, in

early 1985, petitioner claims to have learned from Southampton

that other investors had been successfully represented before


7
   We note, however, that petitioner's 1983 tax return does not
bear a preparer's signature.
                                - 10 -


the Internal Revenue Service by an attorney, Mark Vogel.

Although Vogel did not testify in this case, petitioner claims

to have spoken with him and relied on that conversation as

additional support for his belief that the Southampton master

recordings were bona fide investments.

                               OPINION

     Petitioner has conceded that he is liable for the full

amount of the deficiencies determined by respondent relating to

his Southampton master recording investment.    The only issue for

consideration is whether petitioner is liable for the additions

to tax for negligence under section 6653(a).

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

for 1981 through 1984 provide for an addition to tax equal to 5

percent of the underpayment if any part of an underpayment of

tax is due to negligence or intentional disregard of rules or

regulations.    Section 6653(a)(2) for 1981 through 1984 provides

for an addition to tax of 50 percent of the interest on the

portion of the underpayment attributable to negligence.

Negligence is defined as a lack of due care or a failure to do

what a reasonable and ordinarily prudent person would do under

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

(1985).   Respondent's determination of negligence is presumed to

be correct, and petitioner has the burden of proving that it is

erroneous.     Rule 142(a); Bixby v. Commissioner, 58 T.C. 757,
                              - 11 -


791-792 (1972).   The addition to tax for negligence under

section 6653 may be correctly assessed in cases where claimed

deductions are not supported by the facts.   Sandvall v.

Commissioner, 898 F.2d 455, 459 (5th Cir. 1990), affg. T.C.

Memo. 1989-56 and T.C. Memo. 1989-189; Marcello v. Commissioner,

380 F.2d 499 (5th Cir. 1967), affg. in part and remanding in

part 43 T.C. 168 (1964).

     Petitioner maintains that he acted reasonably and with due

care in claiming deductions and credits with respect to his

investment in Southampton.   In support thereof, petitioner

argues that:   (1) He relied on promotional materials and

appraisals furnished by Southampton; (2) he relied on his

investment adviser and an enrolled agent who reviewed the

promotional materials; (3) he conducted his own investigation of

the music industry; (4) he monitored his investment through

correspondence with Indigo and Southampton; (5) he relied on

accountants who prepared his 1982 and 1983 tax returns; and (6)

he believed other investors had been successfully represented by

an attorney regarding the propriety of the tax treatment of

their Southampton investments.

     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
                              - 12 -


(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).     Taxpayers

must be able to show that the adviser reached his or her

decisions independently.   See Leonhart v. Commissioner, 414 F.2d

749, 750 (4th Cir. 1969), affg. T.C. Memo. 1968-98.    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).   Reliance on representations

by insiders, promoters, or offering materials has been held an

inadequate defense to negligence.   Illes v. Commissioner, 982

F.2d 163, 166 (6th Cir. 1992), affg. per curiam T.C. Memo. 1991-

449; LaVerne v. Commissioner, 94 T.C. 637, 652-653 (1990), affd.

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

without published opinion sub nom. Cowles v. Commissioner, 949

F.2d 401 (10th Cir. 1991); Marine v. Commissioner, 92 T.C. 958,

992-993 (1989), affd. without published opinion 921 F.2d 280

(9th Cir. 1991); McCrary v. Commissioner, 92 T.C. 827, 850
                              - 13 -


(1989); Rybak v. Commissioner, 91 T.C. 524, 565 (1988).

Additionally, when an investment has such obviously suspect tax

claims as to put a reasonable taxpayer under a duty of inquiry,

a good faith investigation of the underlying viability,

financial structure, and economics of the investment is

required.   LaVerne v. Commissioner, supra at 652-653; Horn v.

Commissioner, 90 T.C. 908, 942 (1988).

     In the instant case, petitioner claims that he relied on

several professional advisers with respect to his investment in

Southampton.   Petitioner learned about the Southampton

investment program from Cunningham, a financial adviser who

encouraged petitioner to invest in a master recording lease.

Petitioner was aware, however, that Cunningham received a

commission if petitioner decided to invest in Southampton and

that Cunningham was serving as a salesman rather than an

independent adviser acting solely on petitioner's behalf.

Petitioner also argues that he relied on statements made by

Parnell, an enrolled agent who had reviewed the Southampton

promotional booklet.   There is no evidence in the record that

Parnell relied on anything other than the materials furnished by

Southampton or that either Parnell or Cunningham had otherwise

investigated the bona fides of the master recording investment.

Similarly, there has been no showing that the accountants who

prepared petitioner's 1982 and 1983 tax returns evaluated the
                              - 14 -


merits of the claimed deductions and investment tax credits

rather than simply preparing the tax returns based on

information supplied to petitioner by Southampton.   Finally,

petitioner's alleged conversation with Vogel in early 1985

regarding the tax treatment of other Southampton investors

provides no support for petitioner's argument that an adequate

independent investigation of the Southampton program was

performed prior to his investment or that petitioner had an

objective to earn an economic profit at the time the transaction

was entered into.

     In light of the suspect tax benefits offered by the

Southampton investment and noting petitioner's education and

work experience in the area of financial and profit analysis, we

do not find petitioner's reliance on his alleged advisers to be

reasonable or in keeping with the standard of an ordinarily

prudent person.   We note that none of the advisers purportedly

relied on by petitioner had any special qualifications or

experience in the music industry or with master recording leases

that would reasonably lead them to believe that the Southampton

investment program would be economically profitable.    It is not

reasonable or prudent to rely upon an adviser regarding matters

outside of his 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).
                               - 15 -


       Petitioner also argues that his own investigation of the

music industry constituted sufficient inquiry into the

Southampton investment to preclude imposition of section 6653(a)

negligence additions.    Negligence additions may be imposed if a

taxpayer fails to exercise due diligence in an investigation

into the bona fides of an obviously suspect transaction.

Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

affg. T.C. Memo. 1991-179; LaVerne v. Commissioner, supra at

652-653.    Petitioner's education and experience as a financial

analyst should be considered in determining whether he was

negligent in failing to conduct a good faith investigation of

the Southampton master recording program.    Leuhsler v.

Commissioner, supra; Freytag v. Commissioner, 89 T.C. at 887-

889.

       On its face, the Southampton investment should have raised

serious questions in the minds of ordinarily prudent investors.

The fact that Southampton leased petitioner a one-fourth

interest in a master recording purportedly worth $850,000 for a

total of $10,500 which immediately generated an investment tax

credit of $21,250 as well as deductions equal to the amount of

all lease payments made should have prompted petitioner to look

beyond the promotional materials and to investigate the economic

viability of the venture.    See Allen v. Commissioner, 925 F.2d

348, 353 (9th Cir. 1991), affg. 92 T.C. 1 (1989) (taxpayers
                               - 16 -


negligent where tax savings were almost double the amount of

their cash outlay).   Petitioner's alleged investigation of the

music industry was superficial at best and does not represent a

due diligence inquiry into the specifics of the Southampton

investment.   In addition, petitioner's limited correspondence

with Indigo and Southampton does not demonstrate a concern for

the economic viability of the master recording investment.

There is no evidence that petitioner investigated the bona fides

of the Southampton program or that he was concerned with

anything other than the tax benefits involved.   If petitioner

had conducted his own good faith investigation, he would have

discerned strong reasons to conclude that the Southampton

investment program was not bona fide and was designed primarily

for tax-avoidance purposes.

     Finally, petitioner's reliance on Heasley v. Commissioner,

902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408, as

authority for his position that his actions were reasonable is

misplaced.    The taxpayers in Heasley were uneducated and had

extremely limited investment experience.   Moreover, the U.S.

Court of Appeals for the Fifth Circuit indicated that the

taxpayers in Heasley both intended to earn an economic profit on

the investment in issue and actively monitored that investment.

We cannot reach similar conclusions in the present case.

Petitioner herein was highly educated, had worked in the area of
                              - 17 -


financial and profit analysis, and had previous investment

experience.   The evidence in this case is that petitioner

anticipated benefits primarily from tax savings.   Petitioner has

failed to provide evidence of serious efforts to monitor the

Southampton investment or reliable evidence of any profit

objective independent of tax savings.   We consider petitioner's

argument with respect to the Heasley case inapplicable.

     Under the circumstances of this case, we find that

petitioner's actions were not reasonable and prudent and that

the underpayments attributable to the Southampton claims were

due to negligence.   Accordingly, the additions to tax under

sections 6653(a) and 6653(a)(1) are sustained in full and the

additions to tax under section 6653(a)(2) are sustained as to

the underpayments due to the Southampton investment.

     To reflect the foregoing and the concessions of the

parties,


                                    Decision will be entered

                               under Rule 155.
