                        T.C. Memo. 1998-303



                      UNITED STATES TAX COURT



                  MARCO DEPLANO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13085-95.                 Filed August 20, 1998.



     Bernard Schulman, for petitioner.

     Robert E. Marum, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GALE, Judge:   Respondent determined the following additions

to petitioner's Federal income tax for 1983:

Sec. 6653(a)(1)         Sec. 6653(a)(2)         Sec. 6661(a)
     $477                    *                     $2,387

     * 50 percent of the interest due on $9,549.
                                - 2 -

     Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     The issues for decision are: (1) Whether petitioner is

liable for additions to tax under section 6653(a)(1) and (2).      We

hold that he is. (2) Whether petitioner is liable for an addition

to tax under section 6661(a).   We hold that he is.

                         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.

     At the time the petition was filed, petitioner resided in

New York, New York.

     Petitioner received a bachelor of science degree from

Trinity University of Texas in 1978.     In 1983, petitioner was

employed as an art director by Marsteller Inc. and also did

graphic design and advertising work for Gorman-Glassberg, Inc.

Also during 1983, petitioner ran a sole proprietorship providing

freelance work in the field of graphic design and advertising

from which he reported gross receipts of $49,983 and a net profit

of $23,190.   Petitioner was 26 years old in 1983.

      Petitioner's return was prepared by Nicholas J. Coscia, an

accountant with Coscia and Amsterdam. At this time, Mr. Coscia
                               - 3 -

had been petitioner's accountant for approximately 4 years.    Mr.

Coscia was recommended to petitioner by a friend and coworker,

Herb Karlitz, an entertainment lawyer.    Petitioner relied heavily

on Mr. Coscia with respect to all financial matters and even

consulted him for help in selecting a health insurance plan.

     Prior to 1983, and beginning in or around 1979 or 1980,

petitioner's investments had been exclusively in individual

retirement accounts.   However, at some point in 1983, Mr. Coscia

approached petitioner with the idea of investing in a partnership

known as Ridge Energy Systems (Ridge Energy), which was in the

business of leasing energy management equipment from the Saxon

Energy Corporation (Saxon Energy).     Mr. Coscia recommended the

investment to petitioner, describing it as a "good idea" that

would be "very beneficial" to petitioner. Petitioner did not

independently investigate Ridge Energy, but instead relied on Mr.

Coscia's advice in making the investment.    Mr. Coscia assured him

that "there was a bank involved, a tax consultant involved, tax

specialist that made the whole thing completely kosher."    Mr.

Coscia also indicated to petitioner that there was profit

potential in the investment.   Mr. Coscia advised him that he had

done "this kind of thing before, they were completely legal, and

there were benefits to be had, especially from a profit point of

view."   With respect to the payment schedule, Mr. Coscia

indicated to petitioner that he would most likely receive profits
                               - 4 -

back from his investment even before he paid it in full.     Mr.

Coscia also told petitioner that he was an investor in Ridge

Energy as well as members of his own family.     Mr. Coscia did not

disclose that he was receiving commissions from Saxon Energy for

bringing in Ridge Energy investors.    In late 1983, petitioner

made a capital contribution of $5,391 to Ridge Energy and

received a 5.3-percent interest in the partnership.    Petitioner

knew two of the other partners in Ridge Energy, one of whom was

his coworker, Mr. Karlitz.   Petitioner did not seek any other

professional advice regarding the investment but did speak with

Mr. Karlitz who reinforced what Mr. Coscia told him.

     Petitioner had no prior experience with, or knowledge of,

energy management systems and, with respect Ridge Energy in

particular, he did not know where the equipment was placed, how

it worked, what it looked like, or its function.    Also,

petitioner was not aware that the equipment was leased from Saxon

Energy.   Petitioner received certain written materials upon his

investment in Ridge Energy that coincided with what he had been

told by Mr. Coscia.1   However, petitioner did not receive

appraisals on the equipment and did not ask to see any appraisals

because he felt "ignorant" about such matters.




     1
       These written materials are not a part of the record in
this case.
                               - 5 -

     Ridge Energy filed a Form 1065, U.S. Partnership Return of

Income for calendar year 1983 (partnership return), on August 9,

1984, prepared by Peter J. Amsterdam, a partner of Mr. Coscia.

In the partnership return, Ridge Energy claimed a loss of

$98,900, which consisted of $96,000 in leasing expenses, $2,800

in management fees, and $100 in attorney fees.   Ridge Energy also

claimed a basis of $1,485,000 for investment tax credit purposes

in the energy management system leased from Saxon Energy.

Petitioner's allocable shares of losses and investment tax credit

basis flowing from Ridge Energy for 1983 were $5,219 and $78,370,

respectively, as reported on Schedule K-1, Partner's Share of

Income, Credits, Deductions, etc.

     On August 6, 1987, respondent issued a Notice of Final

Partnership Administrative Adjustment (FPAA) to the tax matters

partner for Ridge Energy in which respondent disallowed the

losses and investment tax credit basis claimed by Ridge Energy on

the partnership return.   Ridge Energy and two of its partners

filed a petition with this Court contesting the adjustments made

by the FPAA in Ridge Energy Systems, Nicholas J. and Sandra

Coscia, Partners Other Than the Tax Matters Partner v.

Commissioner, docket No. 413-88.    On March 11, 1994, this Court

entered a decision under Rule 248(b) sustaining respondent's

disallowance of the losses and investment tax credit basis

reported by the Ridge Energy for its 1983 taxable year.
                               - 6 -

     On May 7, 1995, respondent issued a notice of deficiency in

which he determined that petitioner was liable for additions to

tax for negligence or intentional disregard of rules or

regulations under section 6653(a)(1) and (2) and for substantial

understatement of tax under section 6661(a) with respect to his

1983 taxable year.

                              OPINION

Negligence

     It is respondent's position that petitioner was negligent in

claiming a loss and investment tax credit from his investment in

Ridge Energy.2   Petitioner claims that he is not liable for the

additions to tax for negligence because he reasonably relied on

Mr. Coscia's advice when he invested in Ridge Energy and when he

claimed a loss and credit with respect to the same.     To support

his contention that his reliance was reasonably based, petitioner

points to his age and limited investment experience and to the

fact that Mr. Coscia had been his accountant for 4 years at the

time of his investment.

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

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

underpayment is due to negligence.     In addition, section

6653(a)(2) adds to the tax an amount equal to 50 percent of the


     2
       Respondent does not argue that petitioner is liable for
the additions to tax under sec. 6653(a) due to intentional
disregard of rules or regulations.
                                 - 7 -

interest payable with respect to that portion of the underpayment

attributable to negligence.

     "Negligence" is defined as a lack of due care or a failure

to act in a reasonable and prudent manner under the

circumstances.     Freytag v. Commissioner, 89 T.C. 849, 887 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. on another issue 501

U.S. 868 (1991).    Petitioner bears the burden of proving that his

actions in claiming the loss and credit were not negligent.      Rule

142(a); Freytag v. Commissioner, supra at 887.     "When considering

the negligence addition, we evaluate the particular facts of each

case, judging the relative sophistication of the taxpayers as

well as the manner in which the taxpayers approached their

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

certain circumstances, reliance on professional advice may

provide an adequate excuse for a taxpayer's actions under section

6653(a); however "standing alone, [it] is not an absolute defense

to negligence, but rather a factor to be considered."      Freytag v.

Commissioner, supra at 888.    The taxpayer must show that his

expert had the relevant expertise and knowledge of pertinent

facts to give competent advice.     Goldman v. Commissioner, 39 F.3d

402, 408 (2d Cir. 1994), affg. T.C. Memo. 1993-480; Freytag v.

Commissioner, supra at 888.    "Reliance on expert advice is not

reasonable where the 'expert' relied on knows nothing about the

business in which the taxpayer invested."     Goldman v.

Commissioner, supra at 408.    In addition, the taxpayer must not
                               - 8 -

have any reason to suspect that the expert's advice may not be

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

     Under the standard applied by the Court of Appeals for the

Second Circuit in Goldman, it was negligent for petitioner to

rely on Mr. Coscia, his accountant, for advice on investments or

energy management systems absent evidence that Mr. Coscia held

some degree of expertise or specialized knowledge in these areas.

Petitioner failed to present any evidence that Mr. Coscia had

expertise in investments or knowledge of energy management

systems, and nothing in the record indicates that petitioner made

any attempt to ascertain the extent to which Mr. Coscia possessed

these skills before acting on his advice.   In addition, although

petitioner was not aware that Mr. Coscia was being compensated by

Saxon Energy for bringing in Ridge Energy investors, petitioner

did know that Mr. Coscia himself and members of his family had

invested in Ridge Energy, which arguably affected Mr. Coscia's

ability to give disinterested advice on the investment.

     Neither did petitioner independently investigate the bona

fides of the investment.   At the time he made his initial capital

contribution, petitioner did not know the nature or function of

the equipment being marketed, the value of the equipment, the

identity of the lessor, the specifics of any leasing arrangement,

or how a profit was to be derived from such arrangement.

Petitioner did not request an appraisal of the equipment even

though it was the sole income-producing asset of Ridge Energy.
                               - 9 -

Indeed, according to his testimony, petitioner had only a vague,

and in fact incorrect, understanding of the investment, namely,

that it had something to do with "drilling".    The failure to make

even minimal inquiries regarding the investment is a strong

indication of negligence.   See Goldman v. Commissioner, supra at

407-408; Lucas v. Commissioner, T.C. Memo. 1995-341.     Moreover,

there is no evidence that petitioner monitored his investment or

the activities of Ridge Energy after investing.

     Petitioner points to his age and lack of sophistication as

an excuse for failing to make an effort to ascertain Mr. Coscia's

expertise or the merits of the investment being proposed.    We

disagree.   Petitioner held a college degree and was successfully

operating his own business at the time.

     We have previously sustained respondent's determination

imposing additions to tax for negligence and substantial

understatement relating to a loss and investment tax credit

claimed with respect to another 1983 Ridge Energy partner in Buck

v. Commissioner, T.C. Memo. 1997-191.     Likewise, we have upheld

respondent's negligence determinations in numerous cases

involving taxpayers who invested in energy management systems

leased from Saxon Energy and argued that their reliance on

professional advice precluded the negligence addition.    See

Turner v. Commissioner, T.C. Memo. 1995-363; Levine v.

Commissioner, T.C. Memo. 1995-362; Maminga v. Commissioner, T.C.

Memo. 1995-361; Lucas v. Commissioner, T.C. Memo. 1995-341;
                              - 10 -

Poplar v. Commissioner, T.C. Memo. 1995-337; Schillinger v.

Commissioner, T.C. Memo. 1990-640, affd. without published

opinion 1 F.3d 954 (9th Cir. 1993).    In all these cases we

required a showing of reasonable effort by the taxpayer to ensure

that the investment was a viable, profit-motivated transaction in

order for the taxpayer to avoid imposition of the negligence

additions.

     In an attempt to distinguish himself from the taxpayers in

Buck, and other cases where negligence additions have been

sustained, petitioner cites Heasley v. Commissioner, 902 F.2d 380

(5th Cir. 1990), revg. T.C. Memo. 1988-408; Durrett v.

Commissioner, 71 F.3d 515 (5th Cir. 1996), affg. in part and

revg. in part T.C. Memo. 1994-179; Chamberlain v. Commissioner,

66 F.3d 729 (5th Cir. 1995), affg. in part and revg. in part T.C.

Memo. 1994-228; Mauerman v. Commissioner, 22 F.3d 1001 (10th Cir.

1994), revg. T.C. Memo. 1993-23.   Petitioner cites these cases as

support for his contention that it was reasonable and not

negligent for him to rely on the advice of a professional adviser

without second-guessing or independently verifying the adviser.

To require otherwise, petitioner argues, would nullify the

purpose for seeking advice in the first place.    See Heasley v.

Commissioner, supra.   However, these cases are distinguishable

because they involve taxpayers who performed significantly more

investigation into the merits of the investment and/or sought out
                              - 11 -

the advice of a professional who was qualified to give advice on

the matter involved.

     Heasley involved taxpayers who were not high school

graduates.   Despite substantially less education than petitioner,

they nonetheless read at least part of the prospectus, reviewed

it with their financial adviser, and subsequently monitored their

investment after investing.   In these circumstances, the Court of

Appeals declined to sustain the Commissioner's negligence

determination.   In Mauerman v. Commissioner, supra, which

concerned the question of whether the Commissioner's refusal to

waive additions for a substantial understatement was an abuse of

discretion, the Commissioner's deficiency determination involved

only the timing of the deduction.   The Court of Appeals concluded

that the taxpayer's reliance on a tax professional's advice as to

the appropriate timing of a deduction was reasonable and

therefore the Commissioner's refusal to waive the understatement

penalty was an abuse of discretion.    The situation in the instant

case involves reliance on a professional without any demonstrated

capacity in the area with which the advice was concerned.

     As to Durrett v. Commissioner, supra, and Chamberlain v.

Commissioner, supra, to the extent the holdings in these two

cases suggest a relaxation of the requirement that advisers must

be knowledgeable if reliance on their advice is to be considered

reasonable, cf. Freytag v. Commissioner, supra, we note that both

are decisions of the Court of Appeals for the Fifth Circuit.
                              - 12 -

Appeal of this case is to the Court of Appeals for the Second

Circuit, which requires a knowledgeable expert before reliance on

his advice is deemed reasonable.   Goldman v. Commissioner, 39

F.3d at 408.

     The record in this case demonstrates that petitioner knew

virtually nothing about the Ridge Energy investment either before

or after making it.   He chose instead to rely on an adviser with

no demonstrated knowledge or experience with respect to energy

management systems.   In the circumstances, such reliance was not

reasonable and does not bar a finding of negligence.    Goldman v.

Commissioner, supra; Freytag v. Commissioner, supra.

Accordingly, we sustain respondent's determination imposing

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

petitioner's 1983 taxable year.

Section 6661(a)

     Section 6661(a) imposes an addition to tax equal to

10 percent of the amount of any underpayment attributable to a

substantial understatement of income tax.   For a noncorporate

taxpayer, an understatement is "substantial" if it exceeds the

greater of $5,000 or 10 percent of the amount of tax required to

be shown on the return.   Sec. 6661(b)(1)(A).   Generally, the

understatement is the amount of tax required to be shown on the

return over the amount of tax imposed which is shown on the

return, reduced by that portion of the understatement

attributable to the treatment of an item for which there is or
                              - 13 -

was substantial authority, or with respect to which the relevant

facts affecting its treatment were adequately disclosed on the

return or in a statement attached thereto.    Sec. 6661(b)(2)(A)

and (B).

     Petitioner makes no argument that there was adequate

disclosure.   Likewise, petitioner has not produced substantial

authority for the treatment of these items.    Petitioner's claim

that he reasonably and in good faith relied on the advice of his

accountant in claiming such items, without evidence of what

authority Mr. Coscia relied upon in determining the treatment of

such items, is insufficient to show substantial authority.     See

Buck v. Commissioner, T.C. Memo. 1997-191.     "Authority" for this

purpose includes statutes or regulatory provisions, court

decisions, administrative pronouncements, tax treaties, or

legislative history.   Sec. 1.6661-3(b)(2), Income Tax Regs.

Opinions rendered by tax professionals are not substantial

authority.3   Id.

     In the instant case the deficiency upon which the additions

to tax were imposed equals $9,549.     The amount of tax required to

be shown on the return pursuant to the previous partnership

proceedings is $13,735.   Thus, the understatement ($9,549) is


     3
       Because we conclude that petitioner has not made adequate
disclosure or produced substantial authority, it is unnecessary
for us to consider whether petitioner's investment in Ridge
Energy is a "tax shelter" within the meaning of sec.
6661(b)(2)(C).
                                - 14 -

substantial because it exceeds the greater of $5,000 or 10

percent of the amount required to be shown on the return

($1,373.50).   Petitioner has not shown that the understatement is

reduced under section 6661(b)(2).     We, accordingly, sustain

respondent's determination of this addition.

     Section 6661(c) provides that respondent "may" waive all or

any part of the addition to tax under section 6661(a) upon a

showing by petitioner that there was reasonable cause for the

understatement (or a part thereof) and that petitioner acted in

good faith.    There is no evidence that a waiver was requested or

denied in this case.    Even if we were to assume that a waiver had

been requested, respondent's refusal to grant one is reviewable

only for abuse of discretion.     Mailman v. Commissioner, 91 T.C.

1079, 1084 (1988).     Based upon our holding that petitioner's

reliance on his accountant in claiming the deduction and credit

with respect to the Ridge Energy investment was not reasonable,

we likewise hold that any failure by respondent to grant a waiver

based on petitioner's reliance would not constitute an abuse of

discretion.

     To reflect the foregoing,

                                         Decision will be entered

                                   for respondent.
