                        T.C. Memo. 2000-389



                      UNITED STATES TAX COURT



          KEITH E. AND MARILYN B. WEST, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

         WARREN S. AND ELIZABETH A. WEST, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 3076-95, 15324-95. Filed December 22, 2000.



     Terrance A. Costello, for petitioners.

     David L. Zoss, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     DAWSON, Judge:   These consolidated cases were assigned to

Special Trial Judge Norman H. Wolfe pursuant to the provisions of

section 7443A(b)(4) in effect when these proceedings commenced,

and Rules 180, 181, and 183.   All section references are to the

Internal Revenue Code, and all Rule references are to the Tax
                                 - 2 -

Court Rules of Practice and Procedure.    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:     In so-called affected items

notices of deficiency, respondent determined additions to tax

with respect to petitioners’ Federal income taxes for the years

and in the amounts as shown below:

                   Keith E. & Marilyn B. West

                                     Additions to Tax
     Year      Sec. 6653(a)(1)        Sec. 6653(a)(2)     Sec. 6659
     1979             $808                 -0-              $4,848
                                            1
     1982            1,607                                   8,467
                                            1
     1983               25                                    -0-
                                            1
     1984               10                                    -0-

                  Warren S. & Elizabeth A. West

                                     Additions to Tax
     Year      Sec. 6653(a)(1)        Sec. 6653(a)(2)     Sec. 6659
     1979             $953                 -0-              $5,717
     1980              204                 -0-               1,191
                                            1
     1982            1,239                                   4,787
1
     Fifty percent of the interest payable with respect to the
portion of the underpayment that is attributable to negligence.
The underpayments were determined and assessed pursuant to a
partnership-level proceeding. See secs. 6231-6233. With regard
to petitioners Keith E. and Marilyn B. West, respondent
determined underpayments attributable to negligence of $32,147,
$498, and $207 for 1982, 1983, and 1984, respectively. With
regard to petitioners Warren S. and Elizabeth A. West, respondent
determined an underpayment attributable to negligence for 1982 of
$24,772.
                               - 3 -

     The issues for decisions1 are:    (1) Whether petitioners are

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

negligence or intentional disregard of rules or regulations, 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 they are so

found.   The stipulated facts and attached exhibits are

incorporated herein by this reference.    Petitioners Keith E. and

Marilyn B. West resided in Edina, Minnesota, at the time they

filed the petition in this case.   Petitioners Warren S. and

Elizabeth A. West resided in Burnsville, Minnesota, at the time

they filed the petition in this case.




1
     It would appear that petitioners have abandoned any
contention regarding the statute of limitations (the so-called
Davenport issue) in view of the affirmance of this Court’s
opinion on that issue by the Court of Appeals for the Eleventh
Circuit. See Davenport Recycling Associates v. Commissioner, 220
F.3d 1255 (11th Cir. 2000), affg. T.C. Memo. 1998-347; see also
Klein v. United States, 86 F. Supp. 2d 690 (E.D. Mich. 1999);
Clark v. United States, 68 F. Supp. 2d 1333, 1342-1346 (N.D. Ga.
1999); Barlow v. Commissioner, T.C. Memo. 2000-339; Kohn v.
Commissioner, T.C. Memo. 1999-150. However, if we are mistaken
in this regard, then we refer the parties to paragraphs 61-63 of
the supplemental stipulation of facts, and we decide the
Davenport issue in respondent’s favor based on the foregoing
precedent.
                                - 4 -

A.   The Masters Transactions

     These consolidated cases are part of the Plastics Recycling

group of cases.    The additions to tax arise from the disallowance

of losses, investment credits, and energy credits claimed by

petitioners with respect to a partnership called Masters

Recycling Associates (Masters or the partnership).

     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 involving the

Sentinel recycling machines (recyclers) in these cases are

substantially identical to the transactions in Provizer v.

Commissioner, supra, and, with the exception of certain facts

that we regard as having minimal significance, petitioners have

stipulated substantially the same facts concerning the underlying

transactions that were described in Provizer v. Commissioner,

supra.

     In a series of simultaneous transactions closely resembling

those in Provizer, that for convenience are referred to herein as

the Masters transactions, Packaging Industries Group (PI) of
                               - 5 -

Hyannis, Massachusetts, manufactured and sold2 four Sentinel EPS3

recyclers to Ethynol Cogeneration, Inc. (ECI) for $1,520,000

each.   The sale of the recyclers from PI to ECI was partially

financed with nonrecourse promissory notes.   For each recycler,

ECI agreed to pay PI $112,750 in cash, with the remaining balance

of $1,407,250 financed through a 12-year nonrecourse promissory

note.

     Simultaneously, ECI resold the recyclers to F & G Equipment

Corp. (F&G) for $1,750,000 per machine.   For each machine, F&G

agreed to pay ECI $128,250 in cash, with the remaining balance of

$1,621,750 financed through a purportedly partial recourse

promissory note.   The note was recourse to the extent of 20

percent of its face value.   However, the recourse portion was

payable only after the nonrecourse portion was satisfied.




2
     Terms such as sale and lease, as well as their derivatives,
are used for convenience only and do not imply that the
particular transaction was a sale or lease for Federal tax
purposes. Similarly, terms such as joint venture and agreement
are also used for convenience only and do not imply that the
particular arrangement was a joint venture or an agreement for
Federal tax purposes.
3
     EPS stands for expanded polystyrene. The case of Provizer
v. Commissioner, T.C. Memo. 1992-177, affd. per curiam without
published opinion 996 F.2d 1216 (6th Cir. 1993), involved
Sentinel expanded polyethylene (EPE) recyclers. However, the EPS
recycler partnerships and the EPE recycler partnerships are
essentially identical. See Davenport Recycling Associates v.
Commissioner, T.C. Memo. 1998-347, affd. 220 F.3d 1255 (11th Cir.
2000); see also Ulanoff v. Commissioner, T.C. Memo. 1999-170
(same); Gottsegen v. Commissioner, T.C. Memo. 1997-314 (involving
both the EPE and EPS recyclers).
                               - 6 -

     In turn, F&G leased the recyclers to Masters.   Pursuant to

the lease and in accordance with applicable provisions of the

Internal Revenue Code and Treasury regulations, F&G elected to

treat Masters as having purchased the recyclers for purposes of

the investment and business energy tax credits.

     Simultaneously, Masters entered into a joint venture with PI

and Resin Recyclers, Inc. (RRI).   The joint venture agreement

provided that RRI was to assist Masters with the placement of

recyclers with end-users.   At the same time, PI, ECI, F&G,

Masters, and RRI entered into arrangements that provided that PI

would pay a monthly joint venture fee to Masters, in the same

amount that Masters would pay as monthly rent to F&G, in the same

amount as F&G would pay monthly on its note to ECI, in the same

amount that ECI would pay each month on its note to PI.   In

connection with these arrangements, PI, ECI, F&G, Masters, and

RRI entered into offsetting agreements so that these monthly

payments were kept only as bookkeeping entries and no money

actually was transferred.   Consequently, all of the monthly

payments required among the entities in the above transactions

offset each other, and the transactions occurred simultaneously.

     On its 1982 tax return Masters reported that the four

recyclers had an aggregate basis of $7,000,000, or $1,750,000

each, for purposes of the investment and business energy tax

credits.   In the present cases, the parties stipulated that in
                               - 7 -

1982 the recyclers were not properly valued at $1,750,000 each,

but instead had only a maximum value of $30,000 to $50,000 each.

On its 1982, 1983, 1984, and 1985 tax returns, Masters reported

net ordinary losses of $713,291, $36,205, $16,720, and $15,832,

respectively.   Losses and credits were reported by Masters on its

tax returns, and the portions attributable to petitioners,

respectively, were included on Forms K-1 issued to them and filed

with Masters’ tax returns.

B.   The Private Offering Memorandum

     Generally, Masters distributed a private offering memorandum

to potential investors.   The offering memorandum informed

investors that Masters’ business would be conducted in accordance

with the transaction described above.   The offering memorandum

also warned potential investors of significant business and tax

risks associated with investing in Masters.

     Specifically, the offering memorandum warned potential

investors that:   (1) There was a substantial likelihood of an

audit by the Internal Revenue Service (IRS); (2) “On audit, the

purchase price of the Sentinel EPS recyclers to be paid by F&G to

ECI may be challenged by the * * * [IRS] as being in excess of

the fair market value thereof, a practice followed by * * * [the

IRS] in transactions it deems to be tax shelters”; (3) the

partnership had no prior operating history; (4) the limited

partners would have no control over the conduct of the
                               - 8 -

partnership’s business; (5) there was no established market for

the Sentinel EPS recyclers; (6) there were no assurances that

market prices for virgin resin would remain at then current

prices per pound or that the recycled pellets would be as

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

of interest existed.

     The offering memorandum contained a marketing opinion by

Stanley Ulanoff (Ulanoff) and a technical opinion by Samuel

Burstein (Burstein).   Ulanoff owned a 4.37-percent interest in

Taylor Recycling Associates, which purported to lease four

plastic recyclers, and Burstein owned a 5.82-percent interest in

Jefferson Recycling Associates, which also purported to lease

four plastic recyclers.   The offering memorandum disclosed that

Burstein was a client of PI’s corporate counsel.   The offering

memorandum also warned potential investors not to rely on the

statements and opinions contained in the memorandum, but to

conduct an independent investigation.

     The private offering memorandum also projected that in the

initial year of investment an investor contributing $50,000

would receive investment tax credits and business energy credits

of $77,000 and tax deductions of $38,940.   The private offering

memorandum provided that an investor in Masters was required to

have an individual net worth and/or net worth with a spouse of
                               - 9 -

$1,000,000, inclusive of residences and personal property, or

income of $200,000 per year for each unit of investment.

C.   Partnership-Level Litigation

     On June 5, 1989, respondent issued Notices of Final

Partnership Administrative Adjustment (FPAA) to Masters’ tax

matters partner (TMP) for 1982, 1983, 1984, and 1985.

Subsequently, on June 19, 1989, copies of the FPAA’s for 1982,

1983, and 1984 were sent to Keith and Marilyn West.    On the same

date, a copy of the FPAA for 1982 was sent to Warren and

Elizabeth West.   In the FPAA’s, respondent disallowed the losses

that Masters had reported on its 1982, 1983, 1984, and 1985

Federal income tax returns and determined that Masters did not

incur “a loss in a trade or business or in an activity entered

into for profit or with respect to property held for the

production of income.”   Respondent also determined that Masters’

basis in the recycling equipment was zero, rather than

$7,000,000, for purposes of the investment tax and business

energy credits.

     Subsequently, a petition was filed by Masters’ tax matters

partner.   On February 23, 1994, the Court entered a decision in

Masters Recycling Associates, Sam Winer, Tax Matters Partner v.

Commissioner, docket No. 18417-89.     This decision reflects a full

concession by Masters of all items of income, loss, and the

underlying equipment valuation used for tax credit purposes.
                              - 10 -

D.   Keith and Marilyn West

      In 1956, Keith West (Keith) graduated from the University of

Minnesota with a bachelor of science degree.    After graduation,

Keith was employed in the engineering department of Benson

Optical Co. (Benson).   Subsequently, Keith was promoted by Benson

to vice president of operations, then executive vice president,

and then ultimately president.   Keith was the president of Benson

from 1977 to 1985.   Benson had 1,600 employees and had offices

and laboratories in 23 States.   Eight or nine vice presidents

reported directly to Keith, as president.    In 1969, Benson was

acquired by a publicly held company, Frigitronics.    At one time,

Keith also served on Frigitronics’ board of directors.

      Prior to 1982, Keith had only made a small number of

investments.   He had accumulated Benson Optical stock, and he had

Frigitronics stock after the acquisition.    Also, he had made a

limited partnership investment in fourplexes in Minneapolis, at

the suggestion of a friend and neighbor who was a partner in the

selling company.   In 1982, Keith was 51 years old and was

interested in planning for his future retirement.    Upon the

recommendation of a friend, Keith contacted a Cigna

representative named Ernest Mejia (Mejia).    Keith had some

familiarity with Cigna because he understood that Cigna was a

division of Connecticut General Life Insurance Co. (Connecticut

General).   One of the alternative investments offered to
                                - 11 -

employees by Benson’s profit-sharing trust, of which Keith was a

trustee, was a fund sponsored by Connecticut General.

     Sometime during 1982, Keith met with Mejia to review his

income and retirement goals.    During this meeting, Mejia

recommended investing in Hamilton Recycling Associates

(Hamilton).   Keith contends that he was impressed by Hamilton

because Hamilton offered solutions to the United States’ energy

shortage and waste disposal problems.    Keith also noted that

Benson received and used products for packaging similar to the

so-called peanuts produced by the recyclers.    Keith further

asserts that Mejia represented that Hamilton was a Cigna-

researched investment.   Keith did not review any Cigna materials

promoting Hamilton, nor did he make any independent inquiries as

to whether Hamilton was a Cigna-researched investment.

     Keith contends that Mejia told him that he had traveled to

New York and met with Hamilton’s accountants.    Keith also

contends that Mejia told him that he had traveled to a site where

a recycler was being used and had brought back some of the

peanuts the machine produced.    Mejia did not testify at the

trial.

     Keith received a copy of Hamilton’s offering memorandum and

spent 3 or 4 hours reviewing it.    In reviewing the memorandum,

Keith noted and relied upon Ulanoff’s marketing report and

Burstein’s technical opinion, even though he was aware that the
                               - 12 -

memorandum specifically warned potential investors not to rely on

the reports contained in it.

     Subsequently, Keith and Mejia spoke with Gerald Grande

(Grande), a certified public accountant (C.P.A.) who had

previously given tax advice to Keith and had prepared Keith’s

income tax returns.   Pursuant to this conversation, Grande had

one of his firm’s staff members review the offering memorandum.

Based upon the staff person’s review, Grande concluded that the

Hamilton transaction met the criteria for the energy tax credit

and that the offering memorandum was properly prepared.      However,

Grande did not review Hamilton’s nontax business aspects.      At

trial, Keith testified as follows:      “Mr. Grande was not asked,

nor did he give an opinion on the investment.      He was only asked

to review the document to see if it met the criteria for the

energy tax credit.”   Neither Grande nor the staff person who

reviewed the offering memorandum had any experience or education

with plastics or plastics recycling.      Moreover, Grande did not

contact any expert in the plastics or plastics recycling field as

part of his review.   Grande also testified that he probably

referred to Hamilton as a tax shelter during his discussions with

Keith and Mejia.

     Keith does not have any education or experience with the

plastics or plastics recycling industries.      Keith also did not

consult with anyone who had any expertise with plastics or
                               - 13 -

plastics recycling.   However, Keith contends that he decided to

invest in Hamilton based upon Mejia’s and Grande’s advice.

     Ultimately, Keith was unable to invest in Hamilton because

partnership interests in Hamilton were no longer available by the

time he decided to invest.    Then Mejia told Keith that interests

in Masters, another recycling limited partnership identical to

Hamilton, were available.    Keith received the Masters offering

memorandum, but he did not thoroughly review the Masters offering

memorandum because it was duplicative of the Hamilton offering

memorandum.

     For 1979, 1982, 1983, and 1984, Keith and Marilyn West filed

joint Federal income tax returns.    In 1982, Keith invested

$25,000 in Masters.   As a result of his investment in Masters,

Keith claimed net operating loss deductions of $19,616, $995, and

$460 on his 1982, 1983, and 1984 Federal income tax returns,

respectively.   On his 1982 Federal income tax return, Keith also

claimed investment tax and business energy credits totaling

$38,500, which was limited by his 1982 income tax liability (as

reduced by the partnership loss) and the alternative minimum tax.

On April 20, 1983, Keith filed an application for tentative

refund, Form 1045, carrying back investment and business energy

tax credits to 1979 to generate a tax refund of $16,161.

     Keith did not actively monitor his investment in Masters.

At trial, Keith testified:    “[T]here wasn’t a lot you could do to
                                 - 14 -

monitor.   We certainly got the mail from the Internal Revenue

Service as well as from the partnership.    And that’s about all we

could monitor.”   Keith also acknowledged that he did not

undertake any independent investigation regarding the value of

the recyclers and that he was fully aware of the tax benefits

associated with investing in Masters.

E.   Warren and Elizabeth West

      In 1955, Warren West (Warren) received a bachelor of science

degree in civil engineering from the University of Minnesota.

After graduation, Warren was employed by the Center City Co.

(Center City).    Eventually, Warren became the president of Center

City.   At times, Warren also sat on the boards of three publicly

held companies.

      Prior to 1982, Warren invested mostly in shares of publicly

traded companies.    Sometime during 1982, Warren learned about

Hamilton from Mejia, an agent for Cigna who was working with

Warren with regard to his financial and estate planning.    Warren

asserts that Mejia told him that he had traveled east and had

seen the recycling equipment and that Hamilton was a viable

ongoing operation.    As result of his discussions with Mejia,

Warren spent an unspecified number of hours reviewing the

Hamilton offering memorandum.     Warren also asserts that he asked

his C.P.A., Jim Maki (Maki), to review the Hamilton offering

memorandum.   Warren claims that Maki told him that the Hamilton
                                - 15 -

transaction satisfied certain tax regulations concerning the

organization’s qualification as a limited partnership so that it

could pass through tax benefits to limited partners.       Warren

concedes that his conversations with Maki were limited to tax

issues surrounding Hamilton and not Hamilton’s economic or

financial aspects.    Maki did not testify during the trial.

     Warren did not invest in Hamilton because partnership

interests were no longer available when he reached his decision

to invest.   Then Mejia told Warren that partnership interests in

Masters, another recycling partnership substantially identical to

Hamilton, were available.    Accordingly, Warren received the

Masters offering memorandum.    Warren did not review the Masters

offering memorandum because it was substantially identical to the

Hamilton offering memorandum.    Warren did not undertake any

independent investigation concerning Masters’ economic or

financial aspects.    At trial, Warren testified that “the only

thing I had to go on was in the prospectus.       And it looked fairly

good.”   Warren further testified as to why the Masters prospectus

looked good to him.    “Two reasons:     One is the relatively

generous tax benefit up front, and that in the long-run, it was

supposed to turn a profit.”    Warren further testified that he did

“very little” to monitor his investment in Masters.       Warren also

acknowledged that Mejia marketed Masters as a tax shelter.
                              - 16 -

     Warren does not have any experience or education in plastics

or plastics recycling.   He did not consult with any experts in

the plastics or plastics recycling industries.

     For 1979, 1980, and 1982, Warren and Elizabeth West filed

joint Federal income tax returns.   In 1982, Warren invested

$25,000 in Masters.   As a result of his investment in Masters,

Warren claimed a net operating loss deduction of $19,615 on his

1982 Federal income tax return.   On his 1982 Federal income tax

return, Warren also claimed investment tax and business energy

tax credits totaling $38,502, which was limited to his 1982

income tax liability (as reduced by the partnership loss) and the

alternative minimum tax.   On April 18, 1983, Warren filed an

application for tentative refund, Form 1045, carrying back

investment and business energy tax credits to 1979 and 1980 to

generate tax refunds of $19,057, and $3,970, respectively.

                              OPINION

     We have decided many Plastics Recycling cases.   Most of

these cases, like the present cases, raised issues regarding

additions to tax for negligence and valuation overstatement.

See, e.g., Barber v. Commissioner, T.C. Memo. 2000-372; Carroll

v. Commissioner, T.C. Memo. 2000-184; Ulanoff v. Commissioner,

T.C. Memo. 1999-170; Greene v. Commissioner, T.C. Memo. 1997-296;

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

Commissioner, T.C. Memo. 1997-259 n.13 (and cases cited therein),
                               - 17 -

affd. sub nom. Addington v. Commissioner, 205 F.3d 54 (2d Cir.

2000).   In all but a few of those cases, we found the taxpayers

liable for the additions to tax for negligence.   Moreover, in all

of the Plastics Recycling cases in which the issue has been

raised, we have found the taxpayers liable for additions to tax

for valuation overstatement.

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

case for the Plastics Recycling group of cases, this Court:

(1) Found that each recycler had a fair market value of not more

than $50,000; (2) held that the transaction, which was virtually

identical to the transactions in the present cases, was a sham

because it lacked economic substance and a business purpose; (3)

sustained the additions to tax for negligence under section

6653(a)(1) and (2); (4) sustained the addition to tax for

valuation overstatement under section 6659 because the

underpayment of taxes was directly related to the overvaluation

of the recyclers; and (5) held that the partnership losses and

tax credits claimed with respect to the plastics recycling

partnership at issue were attributable to tax-motivated

transactions within the meaning of section 6621(c).   We also

found that other recyclers were commercially available during the

years in issue.   See id.   In reaching the conclusion that the

transaction lacked a business purpose, this Court relied heavily

upon the overvaluation of the recyclers.   Similarly, in Gottsegen
                               - 18 -

v. Commissioner, T.C. Memo. 1997-314, we found that each Sentinel

EPS recycler had a fair market value not in excess of $50,000,

and relied heavily on the overvaluation of the recyclers in

concluding that the taxpayer was negligent and liable for

accuracy-related penalties.

A.   Section 6653(a)(1) and (2) Negligence

     In these cases, respondent determined that petitioners were

liable for additions to tax for negligence under section

6653(a)(1) and (2) with respect to underpayments attributable to

petitioners’ investment in Masters.     In each case, petitioners

contend that they were not negligent because:     (1) They

reasonably relied in good faith upon the advice of advisers,

including a competent and experienced accountant, in deciding to

invest in Masters, and (2) they intended to make a profit from

their investment in Masters.

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

part of the underpayment of tax is due to negligence or

intentional disregard of rules or regulations.     Negligence is

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

and ordinarily prudent person would exercise under the

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

(1985).   The pertinent question is whether a particular

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

experience, the nature of the investment, and the taxpayer’s
                              - 19 -

actions in connection with the transactions.   See Henry Schwartz

Corp. v. Commissioner, 60 T.C. 728, 740 (1973).      When considering

the negligence additions to tax, we evaluate the particular facts

of each case, judging the relative sophistication of the

taxpayers, as well as the manner in which they approached their

investment.   See McPike v. Commissioner, T.C. Memo. 1996-46.

1.   Petitioners’ Purported Reliance on an Adviser

      In these cases, petitioners claim that they reasonably

relied upon the advice of a qualified tax adviser.     A taxpayer

may avoid liability for the additions to tax under section

6653(a)(1) and (2) if he or she reasonably relied on competent

professional advice.   See United States v. Boyle, 469 U.S. 241,

250-251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

See also American Properties, Inc. v. Commissioner, 28 T.C. 1100,

1116-1117 (1957), affd. per curiam 262 F.2d 150 (9th Cir. 1958).

Reliance on professional advice, standing alone, is not an

absolute defense to negligence, but rather a factor to be

considered.   See Freytag v. Commissioner, supra.     For reliance on

professional advice to excuse a taxpayer from the negligence

additions to tax, the taxpayer must show that the professional

had the expertise and knowledge of the pertinent facts to provide

informed advice on the subject matter.   See Chakales v.

Commissioner, 79 F.3d 726 (8th Cir. 1996), affg. T.C. Memo. 1994-
                               - 20 -

408; David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995),

affg. T.C. Memo. 1993-621; Freytag v. Commissioner, supra; Sann

v. Commissioner, T.C. Memo. 1997-259.

     Moreover, reliance on representations by insiders or

promoters, or on offering materials has been held an inadequate

defense to negligence.   See Pasternak v. Commissioner, 990 F.2d

893 (6th Cir. 1993), affg. Donahue v. Commissioner, T.C. Memo.

1991-181; LaVerne v. Commissioner, 94 T.C. 637, 652-653 (1990),

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

Sann v. Commissioner, supra.   Pleas of reliance have been

rejected when neither the taxpayer nor the advisers purportedly

relied upon by the taxpayer knew anything about the nontax

business aspects of the contemplated venture.      See David v.

Commissioner, supra; Freytag v. Commissioner, supra.

     In these cases, petitioners’ purported reliance on Grande

and Maki does not relieve them of liability for the additions to

tax for negligence.   Grande’s and Maki’s expertise was in

taxation, not plastics or plastics recycling.      Moreover, neither

Grande nor Maki consulted with any persons who had such expertise

in plastics or plastics recycling.      At trial, Keith and Warren

testified that Grande’s and Maki’s review was limited to

examining the offering memorandum to ascertain whether the

documents had been properly prepared so that they as limited

partners would be entitled to the tax benefits presented by the
                              - 21 -
offering memorandum.   In effect, the advice provided by Grande

and Maki did not suggest anything beyond the view that, if the

facts and circumstances proved to be as represented by Mejia and

in the offering memorandum, then the tax benefits described in

the offering memorandum should be allowed.   Keith and Warren did

not rely upon Grande or Maki with regard to Masters’ nontax

business aspects.

     Accordingly, petitioners, Grande, and Maki solely relied

upon the offering materials and Mejia’s representations with

regard to the recyclers’ value and Masters’ economic viability.

The offering memorandum contained reports by Ulanoff and

Burstein.   Petitioners, Grande, and Maki never investigated

whether Ulanoff or Burstein had an interest in plastics recycling

transactions.   In fact, Ulanoff and Burstein each invested in

plastics recycling partnerships.   The offering memorandum also

disclosed that Burstein was a client and business associate of

PI’s corporate counsel.   Moreover, the offering memorandum

specifically warned potential investors not to rely on the

statements or opinions contained in it.   Lastly, as a broker,

Mejia clearly had a financial interest in selling the partnership

interests to petitioners.   In this transaction, Mejia was engaged

in a selling function rather than an advisory function, and

petitioners, as experienced businessmen and educated persons,
                              - 22 -
knew or should have known to exercise caution in relying upon the

seller’s representative for advice as to whether they should buy.

     On this record, we hold that it was not reasonable for

petitioners to claim substantial tax credits and partnership

losses on the basis of Mejia’s, Grande’s, or Maki’s advice.

Neither Grande nor Maki had the requisite expertise or knowledge

of the pertinent facts to provide informed advice regarding the

claimed partnership losses and tax credits.   A taxpayer may rely

upon his adviser’s expertise, but it is not reasonable or prudent

to rely upon an adviser regarding matters outside of his field of

expertise or with respect to facts that he does not verify.    See

David v. Commissioner, supra at 789-790; Goldman v. Commissioner,

39 F.3d 402, 408 (2d Cir. 1994); Freytag v. Commissioner, 89 T.C.

849 (1991); Sann v. Commissioner, supra.   Moreover, as indicated

above, in these cases there is no credible evidence that either

of them offered advice beyond his limited area of knowledge

relating to the technical tax aspects of the transaction.

Petitioners’ purported reliance on Mejia’s advice was also

unreasonable.   We have consistently held that advice from such

persons is better classified as sales promotion.    See Singer v.

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

Vojticek v. Commissioner, T.C. Memo. 1995-444.     We note that in

these cases, Mejia did not testify, and that circumstance

suggests that if he had testified, that testimony would have been
                                - 23 -
unfavorable to petitioners.    See Wichita Terminal Elevator Co. v.

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

Cir. 1947).

2.   Petitioners’ Purported Profit Motive

      In these cases, petitioners also contend that they were not

negligent because they invested in Masters for economic profits

and as a source of income for retirement.    Keith and Warren each

had an extensive business background and had enjoyed a successful

career in his respective field.    Moreover, Keith and Warren each

had been the head of a large company and each had experience with

complex financial decisions.    Keith and Warren read Hamilton’s

offering memorandum, which was substantially identical to

Masters’ offering memorandum.    The offering memorandum

specifically warned potential investors of significant business

and tax risks associated with investing in these types of

partnerships.   The offering memorandum also warned potential

investors that the value of the recyclers might be challenged by

the IRS, a practice often followed by the IRS in transactions it

deems to be tax shelters.   Nevertheless, petitioners disregarded

these warnings and failed to consult any independent advisers

with expertise in plastics or plastics recycling.    Petitioners

also failed to conduct a reasonable independent investigation

into the market value of the recyclers or any of the other

economics of the Masters’ transaction.    Moreover, Grande
                              - 24 -
testified that he probably referred to Hamilton as a tax shelter.

Warren also testified that he knew that Masters was a tax

shelter.

     Petitioners’ reliance on Krause v. Commissioner, 99 T.C. 132

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

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

distinguishable from the facts in these cases.   In Krause, the

taxpayers invested in limited partnerships whose investment

objectives concerned enhanced oil recovery (EOR) technology.   The

Krause opinion states that during the late 1970’s and early

1980’s, the Federal Government adopted specific programs to aid

research and development of EOR technology.   See id. at 135-136.

In holding that the taxpayers in Krause were not liable for the

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

Government’s expert witnesses acknowledged that “investors may

have been significantly and reasonably influenced by the energy

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

invest in EOR technology.”   Id. at 177.   While EOR was, according

to our opinion in Krause, at the forefront of national policy and

the media during the late 1970’s and early 1980’s, petitioners

have failed to demonstrate that the so-called energy crisis

provided a reasonable basis for them to invest in Masters.

     In addition, the taxpayers in Krause were either experienced

in or investigated the oil industry and EOR specifically.    One of
                               - 25 -
the taxpayers in Krause undertook a significant investigation of

the proposed investment, including researching EOR.    The other

taxpayer was a geological and mining engineer who hired an

independent expert to review the offering materials.    See id. at

166.    In contrast, petitioners did not have any experience or

education in plastics recycling.    Moreover, neither Keith nor

Warren undertook an independent investigation of Masters.

Petitioners failed to hire an independent expert in plastics to

evaluate the transaction.

       Keith and Warren were both sophisticated and well educated

businessmen.    There were many factors that should have alerted

petitioners to conduct independent investigations of Masters.

The offering memorandum warned each prospective purchaser that he

should consult with his own professional adviser as to the legal,

tax, and business aspects of investing in Masters.    Moreover, the

offering memorandum also warned potential investors about

numerous business and tax risks.    Nevertheless, petitioners

disregarded these warnings and failed to undertake an appropriate

independent investigation.

3.   Conclusion as to Negligence

       Under the circumstances of these cases, petitioners failed

to exercise due care in claiming large deductions and tax credits

with respect to Masters on their Federal income tax returns.      It

was not reasonable for petitioners to rely as they did on the
                               - 26 -
offering memorandum, promoters, or insiders to the transaction.

Petitioners’ accountants were asked to make only a limited

technical examination of the documents presented to them as a tax

shelter, and that is all they did.      Petitioners, Grande, and Maki

did not undertake a good faith investigation of the fair market

value of the recyclers or the underlying economic viability or

financial structure of Masters.

     Upon consideration of this record, we hold that petitioners

are liable for the negligence additions to tax under section

6653(a)(1) and (2).

B.   Section 6659 Valuation Overstatement

      In the notices of deficiency in these cases, respondent

determined that petitioners were liable for section 6659

additions to tax on the portions of their respective

underpayments attributable to valuation overstatements.      Under

section 6659, 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.      See

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.   See sec. 6659(c).     If the claimed valuation

exceeds 250 percent of the correct value, the addition is equal

to 30 percent of the underpayment.      See sec. 6659(b).
                              - 27 -
      Petitioners claimed tax benefits, including investment tax

credits and business energy credits, based on a purported value

of $1,750,000 for each recycler.    Petitioners have conceded that

the fair market value of a recycler in 1982 was not in excess of

$50,000.   Accordingly, if disallowance of petitioners’ claimed

benefits is attributable to such valuation overstatements,

petitioners are liable for section 6659 additions to tax at the

rate of 30 percent of the underpayments of tax attributable to

tax benefits claimed with respect to Masters.

      Petitioners contend that section 6659 does not apply in

their cases because (1) disallowance of the claimed tax benefits

was attributable to other than a valuation overstatement, and (2)

Masters’ concession in the underlying partnership case precludes

imposition of the section 6659 additions to tax.

1.   The Grounds for Petitioners’ Underpayments

      Petitioners argue that where, as here, the Commissioner

completely disallows a tax benefit, the tax underpayment cannot

be attributable to a valuation overstatement.     Petitioners cite

the following cases to support their argument:     Heasley v.

Commissioner, 902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo.

1988-408; Gainer v. Commissioner, 893 F.2d 225 (9th Cir 1990),

affg. T.C. Memo. 1988-416; Todd v. Commissioner, 862 F.2d 540

(5th Cir. 1988), affg. 89 T.C. 912 (1987); McCrary v.

Commissioner, 92 T.C. 827 (1980).
                              - 28 -
     Section 6659 does not apply to underpayments of tax that are

not “attributable to” valuation overstatements.   Todd v.

Commissioner, supra; McCrary v. Commissioner, supra.     “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).   However, when valuation is an integral

factor in disallowing deductions and credits, section 6659 is

applicable.   See Merino v. Commissioner, 196 F.3d 147 (3d Cir.

1999), affg. T.C. Memo. 1997-385; Zfass v. Commissioner, 118 F.3d

184 (4th Cir. 1997), affg. T.C. Memo. 1996-167; Illes v.

Commissioner, 982 F.2d 163 (6th Cir. 1992), affg. T.C. Memo.

1991-449; Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir.

1991), affg. T.C. Memo. 1989-684; Massengill v. Commissioner, 876

F.2d 616 (8th Cir. 1989), affg. T.C. Memo. 1988-427.

     Petitioners’ reliance on Gainer v. Commissioner, supra, and

Todd v. Commissioner, supra, ignores that this Court as well as

the Court of Appeals for the Eighth Circuit, the court to which

appeals in these cases would lie, has held that “when an

underpayment stems from disallowed depreciation deductions or

investment credits due to lack of economic substance, the

deficiency is attributable to overstatement of value, and subject
                               - 29 -
to the penalty under section 6659.”     Massengill v. Commissioner,

supra at 619-620; see also Zirker v. Commissioner, 87 T.C. 970

(1986).

     We also find that the facts in these cases are

distinguishable from the facts in Gainer v. Commissioner, supra,

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

In Gainer and Todd, it was found that a valuation overstatement

did not contribute to an underpayment of taxes.    In those cases,

the underpayments were due exclusively to the fact that the

property in each case had not been placed in service.    In

McCrary, the underpayments were deemed to result from a

concession that the agreement at issue was a license and not a

lease.    Although property was overvalued in each of those cases,

the overvaluation was not the grounds on which the taxpayers’

liabilities were sustained.   In contrast, a “different situation

exists where a valuation overstatement * * * is an integral part

of or is inseparable from the ground found for disallowance of an

item.”    McCrary v. Commissioner, supra at 859.   In the present

cases, we find that the overvaluation of the recyclers was

integral to and inseparable from petitioners’ claimed tax

benefits and the determination that Masters lacked economic

substance.4


4
     To the extent that Heasley v. Commissioner, 902 F.2d 380
(5th Cir. 1990), revg. T.C. Memo. 1988-408, merely represents an
                                                   (continued...)
                              - 30 -
     In the present cases, petitioners have conceded that the

recyclers’ fair market value in 1982 did not exceed $50,000.

Petitioners have also conceded that the Masters transaction and

the recyclers in these cases are substantially identical to the

transactions and recyclers considered in Provizer v.

Commissioner, T.C. Memo. 1992-177.     In Provizer, our finding that

the recyclers were overvalued was the dominant factor that led us

to hold that the transaction lacked economic substance.    See Sann

v. Commissioner, T.C. Memo. 1997-259.    Based on this record, we

find that the recyclers overvaluation was a dominant factor in

regard to:   (1) The disallowed tax credits, and other benefits in

these cases; (2) the underpayments of tax; and (3) the

determination that the Masters transaction lacked economic

substance.

     Lastly, we note that petitioners’ argument is similar to the

arguments that were raised in other plastics recycling cases.

See Merino v. Commissioner, 196 F.3d 147 (3d Cir. 1999); Singer

v. Commissioner, T.C. Memo. 1997-325; Kaliban v. Commissioner,



4
 (...continued)
application of Todd v. Commissioner, 862 F.2d 540 (5th Cir.
1988), affg. 89 T.C. 912 (1987), we consider Heasley
distinguishable. To the extent that Heasley is based on a
concept that where an underpayment derives from the disallowance
of a transaction for lack of economic substance, the underpayment
cannot be attributable to an overvaluation, this Court, as well
as the Court of Appeals for the Eighth Circuit have disagreed.
See Massengill v. Commissioner, 876 F.2d 616 (8th Cir. 1989),
affg. T.C. Memo. 1988-427.
                              - 31 -
T.C. Memo. 1997-271; Sann v. Commissioner, supra.   In all of

those cases, we rejected this argument.

2.   Concession of the Deficiency

      Petitioners also argue that Masters’ concession in the

underlying partnership case precludes imposition of the section

6659 additions to tax.   Petitioners contend that Masters’

concession renders any inquiry into the grounds for such

deficiencies moot.   Petitioners argue that absent such inquiry it

cannot be known if their underpayments were attributable to a

valuation overstatement or other discrepancy and that without a

finding that a valuation overstatement contributed to an

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

of reasoning, petitioners rely heavily upon Heasley v.

Commissioner, 902 F.2d 380 (5th Cir. 1990), and McCrary v.

Commissioner, 92 T.C. 827 (1980).

      Masters’ concession does not obviate our finding that

Masters lacked economic substance due to overvaluation of the

recyclers.   The value of the recyclers was established in

Provizer v. Commissioner, supra, and stipulated by the parties.

As a consequence of the inflated value assigned to the recyclers

by Masters, petitioners claimed deductions and credits that

resulted in underpayments of tax.   Regardless of Masters’

concession in the underlying partnership case, in these cases the
                              - 32 -
underpayments of tax were attributable to the valuation

overstatements.

     Moreover, concession of the investment tax credit in and of

itself does not relieve taxpayers of liability for the section

6659 addition to tax.   See Singer v. Commissioner, supra; Kaliban

v. Commissioner, supra; Sann v. Commissioner, supra; 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.    See Dybsand

v. Commissioner, supra.   Even in situations in which there are

arguably two grounds to support a deficiency and one supports a

section 6659 addition to tax and the other does not, the taxpayer

may still be liable for the addition to tax.    See Gainer v.

Commissioner, 893 F.2d 225 (9th Cir. 1990); Irom v. Commissioner,

866 F.2d 545, 547 (2d Cir. 1989), vacating in part T.C. Memo.

1988-211; Harness v. Commissioner, T.C. Memo. 1991-321.

     In these cases, petitioners each stipulated substantially

the same facts concerning the Masters transaction as we found in

Provizer v. Commissioner, supra.    In Provizer, 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 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
                               - 33 -
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 Masters was a sham and

lacked economic substance.

     Petitioners’ reliance on McCrary v. Commissioner, supra, is

misplaced.   In that case, the taxpayers conceded entitlement to

their claimed tax benefits, and the section 6659 addition to tax

was held inapplicable.   However, the taxpayers’ concession of the

claimed tax benefits, in and of itself, did not preclude

imposition of the section 6659 addition to tax.    In McCrary v.

Commissioner, supra, the section 6659 addition to tax was

disallowed because the agreement at issue was conceded to be a

license and not a lease.    In contrast, the records in

petitioners’ cases plainly show that petitioners’ underpayments

were attributable to overvaluation of the recyclers.

Accordingly, petitioners’ reliance on McCrary v. Commissioner,

supra, is inappropriate.5

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

recycler had a fair market value not in excess of $50,000.    Our



5
     Petitioners’ citation of Heasley v. Commissioner, supra, in
support of the concession argument is also inappropriate. The
Heasley case was not decided by the Court of Appeals for the
Fifth Circuit on the basis of a concession. Moreover, see supra
note 4 to the effect that the Court of Appeals for the Eighth
Circuit and this Court have not followed the Court of Appeals for
the Fifth Circuit’s rationale with respect to the application of
sec. 6659.
                              - 34 -
finding in Provizer that the recyclers had been overvalued was

integral to and inseparable from our holding of a lack of

economic substance.   Petitioners stipulated that the transaction

in Masters was substantially similar to the transaction described

in Provizer, and that the fair market value of the recyclers in

1982 was not in excess of $50,000.     Given those concessions, and

the fact that the records here plainly show that the

overvaluation of the recyclers was integral to and inseparable

from the determination that Masters lacked economic substance, we

conclude that the deficiencies were attributable to the

overvaluation of the recyclers.

     For the foregoing reasons, we hold that petitioners are

liable for the section 6659 additions to tax for valuation

overstatement.

     To reflect the foregoing,

                                      Decisions will be entered

                                 for respondent.
