                       T.C. Memo. 1996-342



                     UNITED STATES TAX COURT



 ESTATE OF RONALD BUSCH, DECEASED, ROCHELLE BUSCH, EXECUTRIX AND
ROCHELLE BUSCH, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket Nos. 599-89, 1643-89, 618-90.      Filed July 30, 1996.



     Steven E. Plotnick, for petitioners in docket No. 599-89.

     Michael S. Etkin, Jeffrey A. Schantz, and Roger S. Blane,

for petitioner in docket Nos. 1643-89 and 618-90.

     Barry J. Laterman, for respondent in docket No. 599-89.

     Paul Colleran, Mary P. Hamilton, John C. Galluzo Jr., and

Mae J. Lew, for respondent in docket Nos. 1643-89 and 618-90.




1
     Cases of the following petitioner are consolidated herewith:
Richard E. Snyder, docket Nos. 1643-89, 618-90.
                               - 2 -

                             CONTENTS
                                                            Page
MEMORANDUM FINDINGS OF FACT AND OPINION.......................2
OPINION OF THE SPECIAL TRIAL JUDGE............................3
FINDINGS OF FACT..............................................6
  A. The Plastics Recycling Transactions......................6
  B. The Partnerships.........................................9
  C. Stuart Becker...........................................12
  D. Petitioners and Their Introduction to the
     Partnership Transactions................................16
OPINION......................................................20
  A. Section 6653(a)--Negligence.............................23
     1.   The So-Called Oil Crisis...........................25
     2.   Petitioners' Purported Reliance on Becker
          and Miller.........................................29
          a.   The Circumstances Under Which a Taxpayer
               May Avoid Liability Under Section 6653(a)(1)
               and (2) Because of Reasonable Reliance on
               Competent and Fully Informed Professional
               Advice........................................31
          b.   Miller........................................33
          c.   Becker........................................38
          d.   Conclusion as to Petitioners' Alleged
               Reliance on Becker and Miller.................38
     3.   The Private Offering Memoranda.....................42
     4.   Miscellaneous......................................46
     5.   Conclusion as to Negligence........................49
  B. Section 6659--Valuation Overstatement...................50
     1.   Concession of the Deficiency.......................51
     2.   Section 6659(e)....................................55

             MEMORANDUM FINDINGS OF FACT AND OPINION

     DAWSON, Judge:   These cases were assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.   They were tried and

briefed separately but consolidated for purposes of opinion.

Docket Nos. 1643-89 and 618-90, each of which concerns petitioner

Richard E. Snyder, were consolidated for purposes of trial,

briefing, and opinion.   All section references are to the

Internal Revenue Code in effect for the years in issue, unless
                                - 3 -

otherwise indicated.    All Rule references are to the Tax 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:     These cases are part of the

Plastics Recycling group of cases.      For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

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

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

transactions in these cases are substantially identical to the

transaction considered in the Provizer case.

     In two notices of deficiency, one dated October 27, 1988,

and the other dated October 12, 1989, respondent determined

deficiencies in the 1981 and 1982 Federal income taxes of

petitioner Snyder in the respective amounts of $102,459 and

$118,307, plus an addition to tax for 1982 in the amount of

$26,211 under section 6661 for substantial understatement of tax.

In a notice of deficiency dated October 11, 1988, respondent

determined a deficiency in the joint 1982 Federal income tax of

petitioners Busch in the amount of $52,420.      In these three

notices of deficiency, respondent also determined additions to

tax as follows:
                                                 - 4 -
                                                       Additions to Tax
Docket Nos.      Petitioners      Year   Sec. 6653(a)(1)   Sec. 6653(a)(2)   Sec. 6659
                                                                1
     599-89       Busch           1982        $2,621                         $15,726
                                                                1
    1643-89       Snyder          1981         5,123                          30,738
                                                                1
     618-90       Snyder          1982         5,915                          31,453
1
       50 percent of the interest payable with respect to the portion of the underpayment
attributable to negligence.

         In addition, respondent determined in each notice of deficiency

         that interest on deficiencies accruing after December 31, 1984,

         would be calculated at 120 percent of the statutory rate under

         section 6621(c).

              With respect to petitioner Snyder, in her posttrial brief

         respondent asserted a lesser deficiency2 for 1982 and lesser

         additions to tax for 1981 and 1982.              She reduced the 1982

         deficiency to $109,133; the addition to tax under section

         6653(a)(1) for 1982 to $5,242; and the addition to tax under

         section 6659 for both 1981 and 1982 to $24,783 and $25,114,

         respectively.         In addition, respondent conceded that Snyder is

         not liable for the section 6661 addition to tax for taxable year

         1982.   She also noted that the addition to tax under section 6659

         for the years 1981 and 1982 is to be applied only to the portions

         of the deficiencies attributable to the disallowed credits from


         2
              Part of the deficiency determined for 1982 was due to
         respondent's disallowance of a portion of alimony payments and
         $20,147 in farming activity losses claimed by Snyder. The
         parties filed a Stipulation of Settled Issues with respect to
         these items on March 28, 1994. Respondent conceded the alimony
         deduction in full and $11,566 of the farming activity losses,
         while Snyder conceded $8,581 of the farming activity losses.
         Respondent also conceded that no portion of any underpayment
         resulting from the $8,581 of disallowed farming activity losses
         is subject to the additions to tax under secs. 6653(a) and 6659.
                               - 5 -

SAB Resource Recovery Associates and SAB Resource Reclamation

Associates, and that for taxable year 1982 only $104,842 of the

total deficiency is subject to the increased rate of interest

under section 6621(c).   We consider the amounts in dispute in

docket Nos. 1643-89 and 618-90 to be adjusted accordingly.

     Stipulations of Settled Issues with respect to petitioners'

participation in the Plastics Recycling Program were filed in

each of these consolidated cases.   Petitioners each stipulated

the following:3

     1. Petitioners are not entitled to any deductions,
     losses, investment credits, business energy investment
     credits, or any other tax benefits claimed on their tax
     returns as a result of their participation in the
     Plastics Recycling Program.

     2. The underpayments in income tax attributable to
     petitioners' participation in the Plastics Recycling
     Program are substantial underpayments attributable to
     tax motivated transactions, subject to the increased
     rate of interest established under I.R.C. section
     6621(c), formerly section 6621(d).

     3. This stipulation resolves all issues that relate to
     the items claimed on petitioners' tax returns resulting
     from their participation in the Plastics Recycling
     Program, with the exception of petitioners' potential
     liability for additions to tax for negligence under the
     applicable provisions of I.R.C. section 6653(a).




3
     Petitioner Snyder's stipulation of settled issues is written
in the singular, and express reference is made to SAB Resource
Recovery Associates and SAB Resource Reclamation Associates,
instead of "the Plastics Recycling Program". In addition,
respondent agreed not to assert the sec. 6661 addition to tax in
the Snyder cases.
                                 - 6 -

In addition, petitioners Busch conceded their liability for the

section 6659 addition to tax.    With respect to petitioners Busch,

in her trial memorandum respondent reduced the addition to tax

under section 6659 to $12,557.    The Stipulation of Settled Issues

does not indicate the final settled amount.    Petitioner Snyder

agreed not to contest the value of the Sentinel EPE recycler and

conceded the existence of a valuation overstatement on his

returns, but preserved his right to contest the issue of whether

respondent should have waived the addition to tax under the

provisions of section 6659(e).

     The issues in these consolidated cases are:    (1) Whether

petitioners are liable for additions to tax under section

6653(a)(1) and (2); and (2) whether petitioner Snyder is liable

for the addition to tax under section 6659 for underpayments of

tax attributable to valuation overstatements.    Snyder's counsel

raised a statute of limitations issue but specifically conceded

that issue in their reply brief.

                          FINDINGS OF FACT

     Some of the facts have been stipulated in each case and are

so found.    The stipulated facts and attached exhibits are

incorporated in the respective cases by this reference.

A.   The Plastics Recycling Transactions

     These cases concern petitioners' investments in two limited

partnerships that leased Sentinel expanded polyethylene (EPE)

recyclers:    SAB Resource Reclamation Associates (SAB Reclamation)
                               - 7 -

and SAB Resource Recovery Associates (SAB Recovery).   Petitioners

Richard E. Snyder and Ronald Busch were limited partners in both

SAB Reclamation and SAB Recovery.   For convenience we refer to

these partnerships collectively as the Partnerships.

     The transactions involving the Sentinel EPE recyclers leased

by the Partnerships are substantially identical to those in the

Clearwater Group limited partnership (Clearwater), the

partnership considered in Provizer v. Commissioner, supra.

Petitioners have stipulated substantially the same facts

concerning the underlying transactions as we found in the

Provizer case.

     In the Provizer case, Packaging Industries, Inc. (PI)

manufactured and sold six Sentinel EPE recyclers to ECI Corp. for

$981,000 each.   ECI Corp., in turn, resold the recyclers to F & G

Corp. for $1,162,666 each.   F & G Corp. then leased the recyclers

to Clearwater, which licensed the recyclers to FMEC Corp., which

sublicensed them back to PI.   The sales of the recyclers from PI

to ECI Corp. were financed with nonrecourse notes.   Approximately

7 percent of the sales price of the recyclers sold by ECI Corp.

to F & G Corp. was paid in cash with the remainder financed

through notes.   These notes provided that 10 percent of the notes

were recourse but that the recourse portion of the notes was only

due after the nonrecourse portion, 90 percent, was paid in full.

     All of the monthly payments required among the entities in

the above transactions offset each other.   These transactions
                                - 8 -

were done simultaneously.    Although the recyclers were sold and

leased for the above amounts under the structure of simultaneous

transactions, the fair market value of a Sentinel EPE recycler in

1981 and 1982 was not in excess of $50,000.

     PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap.    The sublicense

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

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

Corp. based on the quality and amount of recycled scrap.

     Like Clearwater, each of the Partnerships was formed to

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

recyclers to FMEC Corp.4    The transactions of the Partnerships

differ from the underlying transaction in the Provizer case in

the following respects:    (1) The entity that leased the machines

from F & G Corp. and licensed them to FMEC Corp.; and (2) the

number of recyclers the Partnerships were organized to lease and

license.5   For convenience we refer to the series of transactions

4
     In the stipulation of facts for petitioners Busch, the
parties stipulated that in 1982 SAB Recovery was also a partner
in the partnerships known as Scarborough Leasing Associates
(Scarborough) and Plymouth Equipment Associates (Plymouth).
Scarborough and Plymouth purported to lease Sentinel EPE
recyclers in transactions substantially identical to those in the
Clearwater Group limited partnership.
5
     According to the offering memoranda, SAB Reclamation was to
lease and license eight recyclers and SAB Recovery was to lease
and license seven recyclers. However, the SAB Reclamation
partnership tax return for 1982 indicates that it leased and
licensed only four recyclers. The SAB Recovery partnership tax
                                                   (continued...)
                               - 9 -

among PI, ECI Corp., F & G Corp., each of the Partnerships, FMEC

Corp., and PI as the Partnership transactions.   In addition to

the Partnership transactions, a number of other limited

partnerships entered into transactions similar to the Partnership

transactions, also involving Sentinel EPE recyclers and Sentinel

expanded polystyrene recyclers.   We refer to these collectively

as the Plastics Recycling transactions.

B.   The Partnerships

     SAB Recovery and SAB Reclamation are New York limited

partnerships that were organized and promoted in 1981 and 1982,

respectively, by Stuart Becker (Becker), a certified public

accountant (C.P.A) and the founder and principal owner of Stuart

Becker & Co., P.C. (Becker Co.), an accounting firm that

specialized in tax matters.   Becker organized a total of six

recycling partnerships (the SAB Recycling Partnerships).   Two of

the SAB Recycling Partnerships closed in late 1981, two closed in

early 1982, and two more closed in late 1982.

     The general partner of each of the SAB Recycling

Partnerships, including SAB Reclamation and SAB Recovery, is SAB

Management Ltd. (SAB Management).   SAB Management is wholly owned


5
 (...continued)
return for 1981 indicates that it leased and licensed at least
seven recyclers. Two statements attached to the return reference
seven recyclers with a fair market value of $8,138,667, but
another attachment references a basis in recyclers of $9,212,401.
The source of the alleged additional basis is unclear from the
record.
                               - 10 -

by Scanbo Management Ltd. (Scanbo), which is wholly owned by

Becker.   Scanbo is an acronym for three of Becker's children:

Scott, Andy, and Bonnie.   The officers and directors of SAB

Management and Scanbo are as follows:   (1) Becker, president and

director; (2) Noel Tucker (Tucker), vice president, treasurer,

and director; and (3) Steven Leicht (Leicht), vice president,

secretary, and director.   During the years in issue, Tucker and

Leicht also worked at Becker Co.   Tucker was vice president.

Each owned up to 7 percent of the stock of Becker Co.   SAB

Management did not engage in any business before becoming

involved with the SAB Recycling Partnerships.

     With respect to each of the Partnerships, a private

placement memorandum was distributed to potential limited

partners.6   Reports by F & G Corp.'s evaluators, Dr. Stanley M.

Ulanoff (Ulanoff), a marketing consultant, and Dr. Samuel Z.

Burstein (Burstein), a mathematics professor, were appended to

the offering memoranda.    Ulanoff owns a 1.27-percent interest in

Plymouth Equipment Associates and a 4.37-percent interest in

Taylor Recycling Associates, partnerships that leased Sentinel

recyclers.   Burstein owns a 2.605-percent interest in Empire


6
     The offering memoranda for SAB Reclamation and SAB Recovery
were submitted into the records in docket Nos. 1643-89 and 618-
90, the Snyder cases, but not in docket No. 599-89, the Busch
case. Petitioners Busch stipulated to the relevant portions of
the offering memoranda. Those portions not so stipulated, but
referenced herein, have been disregarded for purposes of docket
No. 599-89.
                               - 11 -

Associates and a 5.82-percent interest in Jefferson Recycling

Associates, also partnerships that leased Sentinel recyclers.

Burstein also was a client and business associate of Elliot I.

Miller (Miller), the corporate counsel to PI.

     The offering memoranda of SAB Reclamation and SAB Recovery

provide that SAB Management will receive general partner fees in

the respective amounts of $110,000 and $97,800 from those

partnerships.   SAB Management received fees of approximately

$500,000 as the general partner of the SAB Recycling

Partnerships.   In addition, Becker Co. prepared the partnership

returns and Forms K-1 for all of the SAB Recycling Partnerships

and received fees for those services.

     The offering memoranda of SAB Reclamation and SAB Recovery

state that sales commissions and offeree representative fees will

be paid in amounts equal to 7.5 percent of each investment guided

to the partnerships and that SAB Management, as the general

partner of those partnerships, may retain as additional

compensation all amounts not so paid.   However, neither Becker

nor SAB Management retained or received any sales commissions or

offeree representative fees.   Instead, after the closing of each

SAB Recycling Partnership, Becker rebated to each investor whose

investment was not subject to a sales commission or offeree

representative fee an amount equal to 7.5 percent of such

investor's original investment.
                              - 12 -

     The offering memoranda list significant business and tax

risk factors associated with investments in the Partnerships.

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

substantial likelihood of audit by the Internal Revenue Service

(IRS) and the purchase price paid by F & G Corp. to ECI Corp.

probably will be challenged as being in excess of fair market

value; (2) the Partnerships have no prior operating history; (3)

the general partner has no prior experience in marketing

recycling or similar equipment; (4) the limited partners have no

control over the conduct of the Partnerships' business; (5) there

is no established market for the Sentinel EPE recyclers; (6)

there are no assurances that market prices for virgin resin will

remain at its current costs per pound or that the recycled

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

potential conflicts of interest exist.

C.   Stuart Becker

      Becker does not have an engineering background, and he is

not an expert in plastics materials or plastics recycling.      He

received a B.S. degree in accounting from New York University in

1964 and an M.B.A. in taxation from New York University Graduate

School of Business Administration in 1973.    He passed the

certified public accountancy test in 1967 and was the winner of

the gold medal, awarded for achieving the highest score on the

examination for that year.   Since early 1966, Becker has

practiced as an accountant exclusively in the tax area.     From
                             - 13 -

1964 until 1972 he worked for the accounting firm of Touche, Ross

& Co., and in 1972 he joined the accounting firm of Richard A.

Eisner & Co. as the partner in charge of the tax department.     In

1977, Becker founded Becker Co.

     Becker had considerable experience with tax shelter

transactions before he organized the SAB Recycling Partnerships.

He prepared opinions regarding tax shelters' economic and tax

projections, advised individuals and companies with respect to

investments in tax shelters, lectured extensively about tax

shelter investments generally, and lectured and published with

respect to leveraged tax shelters.    Becker described a leveraged

tax shelter as "a transaction where [the ratio of] the effective

[tax] writeoff, which includes the value of the tax credit, * * *

[to the amount invested] exceeds one to one."   Becker Co.

specialized in tax advantaged investments.   From 1980 to 1982,

approximately 60 percent of the work done by Becker Co. involved

tax sheltered and private investments.   Becker has owned minority

interests in general partners of numerous limited partnerships.

Prior to organizing the SAB Recycling Partnerships, Becker owned

5 percent of the general partner of partnerships involved in

approximately 14 transactions concerning river transportation

(such as barges, tow boats, and grain elevators).

     Although investment counseling was related to his firm's

line of business, Becker did not consider himself in the business

of providing investment advice.   Becker did not normally hire
                              - 14 -

other professionals for consultation or advice.    In circumstances

where he believed there was a need for outside advice, he would

so advise the client.   Between 30 and 40 of Becker's clients

invested in the Plastics Recycling partnerships.

     Becker learned of the Plastics Recycling transactions when a

prospective client presented him with an offering memorandum

concerning the transactions in August or September 1981.    Becker

reviewed the offering memorandum and spoke to Miller, one of the

key figures in the transactions and an acquaintance of Becker's.

Miller was a shareholder of F & G Corp. and, as noted, the

corporate counsel to PI.   Thereafter, Becker recommended the

investment to the prospective client.   Although the prospective

client did not invest in the Plastics Recycling transactions,

Becker became interested in the proposal and organized the SAB

recycling partnerships in order to make similar investments in

Sentinel EPE recyclers conveniently available to appropriate

clients.

     In organizing the SAB Recycling Partnerships, Becker was not

allowed to change the format of the transactions or the purchase,

lease, or licensing prices of the Sentinel EPE recyclers.    He was

allowed only to conduct a limited investigation of the proposed

investments and choose whether or not to organize similar

partnerships.   Becker relied heavily upon the offering materials

and discussions with persons involved in the matter to evaluate

the Plastics Recycling transactions.    He and two other members of
                              - 15 -

Becker Co., Leicht and Tucker, investigated PI and visited their

plant in Hyannis, Massachusetts, where they saw the Sentinel EPE

recyclers.   Tucker and Leicht did not testify at trial.

     During his investigation of the Plastics Recycling

transactions, Becker did not hire any plastics, engineering, or

technical experts, or recommend that his clients do so.    Becker

discussed the transactions with Michael Canno (Canno), of the

Equitable Bag Co., a manufacturer of paper and plastic bags.

Canno never saw the recyclers or the pellets and never wrote any

reports assessing the equipment or the pellets.   In addition,

Becker retained a law firm, Rabin & Silverman, to assist him in

organizing the SAB Recycling Partnerships.   See Spears v.

Commissioner, T.C. Memo. 1996-341, to the effect that in

employing the law firm, Becker particularly sought to protect

himself against liability.

     After the 1981 SAB Recycling Partnerships closed, Becker had

an accountant sent to PI to confirm, by serial number, that as of

December 31, 1981, the equipment that was leased to the 1981 SAB

Recycling Partnerships was indeed available for use.   Becker

arranged for this verification, independent of PI, because he

understood that the investment tax and business energy credits

would not be available if the qualifying property was not

available for use.
                               - 16 -

D. Petitioners and Their Introduction to the Partnership
Transactions

     Petitioner Richard E. Snyder (Snyder) resided in Cross

River, New York, when his petition was filed.      He is a graduate

of Tufts University with a B.A. in economics.      Snyder has enjoyed

a very successful career with the publishing company Simon &

Schuster, Inc. (Simon & Schuster).      He worked for Simon &

Schuster for 33 years, up until the midpoint of 1994.      For about

the latter 20 of those years, including the taxable years in

issue, he was chairman and chief executive officer (CEO) of Simon

& Schuster.   As chairman and CEO, he was responsible for all of

the policies and practices of the corporation, all of its mergers

and acquisitions, and all personnel policies and strategic

planning.   Snyder oversaw roughly 75 acquisitions on behalf of

Simon & Schuster, involving sums ranging from less than $1

million to $800 million.

     Petitioner Ronald Busch (Busch) died prior to trial.       He and

his wife Rochelle resided in New York, New York, at the time

their petition was filed.    During 1982 Busch was the president

and publisher of Pocket Books, the paperback division of Simon &

Schuster.

     On his 1981 and 1982 Federal income tax returns, Snyder

reported gross income from wages, interest, dividends, State and

local tax refunds, and capital gains in excess of $700,000 and

$800,000, respectively.    During the years in issue, petitioner
                               - 17 -

Snyder filed joint Federal income tax returns with his former

wife, Joni Evans Snyder.    She is not a party to these cases.   On

their joint 1982 Federal income tax return, Ronald and Rochelle

Busch reported gross income from wages, interest, dividends, and

State and local tax refunds in excess of $370,000.    Consequently,

in the absence of significant deductions or credits, petitioners

in these consolidated cases were subject to payment of Federal

income taxes in substantial amounts.

     In 1981, Snyder acquired a 4.479638-percent limited

partnership interest in SAB Recovery for $50,000.    This amount is

the gross amount Snyder invested, unreduced by any sales

commission rebates or his share of any advance royalty

distributed to him.   On his 1981 return, Snyder claimed an

operating loss in the amount of $39,698 and investment tax and

business energy credits totaling $82,536,7 both flowing from his

interest in SAB Recovery.    In 1982, Snyder acquired a 9-percent

interest in SAB Reclamation, also for $50,000.    On his 1982

return, he claimed an operating loss in the amount of $40,100 and

investment tax and business energy credits totaling $83,712, both

as a result of his investment in SAB Reclamation.    Snyder also

claimed an operating loss in the amount of $2,291 with respect to

SAB Recovery in 1982.   Respondent disallowed Snyder's claimed


7
     The regular investment tax credit claimed by Snyder totaled
$41,342, but only $41,268 of that amount was attributable to SAB
Recovery.
                              - 18 -

1981 and 1982 operating losses and credits related to his

investments in SAB Recovery and SAB Reclamation.8

     During 1982, Busch acquired a 4.5-percent interest in SAB

Reclamation for $25,000.   This amount is the gross amount Busch

invested, unreduced by any sales commission rebate or his share

of any advance royalty distributed to him.    On their 1982 return,

he and his wife claimed an operating loss in the amount of

$20,050 and investment tax and business energy credits totaling

$41,856 with respect to his investment in SAB Reclamation.    They

also claimed an operating loss in the amount of $1,145 with

respect to a 2.239819-percent interest Busch owned in SAB

Recovery.   Respondent disallowed all but $65.60 of their claimed

operating losses and all of their credits related to the

investments in SAB Reclamation and SAB Recovery.

     Sometime in the late 1970's, Snyder hired Becker to be his

accounting and financial adviser.   During that time Snyder

introduced Becker to Busch, who soon thereafter also became a

client of Becker's firm.   In 1981 Becker introduced the

Partnership transactions to Snyder.    Becker believed that the

Partnership transactions would appeal to Snyder because Snyder


8
     Snyder reported a total loss in 1982 from his partnership
interests in the amount of $124,012. In an attached statement
itemizing those losses, Snyder reported a loss from SAB Recovery
in the amount of $2,291. In the notice of deficiency, however,
respondent indicates that Snyder reported an operating loss of
$2,160 from SAB Recovery and disallowed that amount in full. The
reason for this discrepancy is unclear from the record.
                               - 19 -

had significant income.   Busch learned about the Partnership

transactions from Tucker.    After reviewing the offering

materials, Snyder arranged a meeting with Becker in his office at

Simon & Schuster.   Busch also attended this meeting.   Snyder knew

that Becker was not an expert in plastics recycling or

engineering.

     At the meeting in Snyder's office, Snyder and Busch asked

Becker about the economic and tax aspects of the Partnership

transactions.    Becker provided them with all of the information

that was available to him.    He told them that he had spoken to

Canno, that he had visited PI's plant in Hyannis, that the

Sentinel EPE recycler did in fact exist, and that he had seen it

in operation.    Becker also told them that he had checked the

price of pellets in plastics industry trade journals.    He told

Busch that he believed that there was a market for the recycler.

Becker also indicated that he agreed with the tax opinion

included in the offering materials.

     Snyder also spoke with Miller.     Miller and Snyder are former

college classmates and fraternity brothers.     Although the two had

not spoken to each other since 1955, Snyder recognized Miller's

name in the offering materials and decided to contact him about

the recyclers.   Snyder claimed that Miller spoke approvingly of

the Partnership transactions and, with respect to PI, said "that

he invested his future in this company".     Miller also indicated
                              - 20 -

that his family had invested in Plastics Recycling transactions.

Snyder did not seek advice from anyone other than Becker and

Miller.   The tax and business risks detailed in the offering

materials did not concern Snyder.   His position is that he

believed that any investigation on his part would be redundant

and a waste of money.

     As for Busch, the record is devoid of any indication that he

made any effort independently to investigate the Partnership

transactions beyond attending the meeting with Snyder and Becker.

     Petitioners in these consolidated cases never made a profit

in any year from their participation in the Partnership

transactions.   Snyder did not see a Sentinel EPE recycler prior

to investing in the Partnership transactions, and there is

nothing in the record to indicate that Busch ever saw one.

Petitioners in each case do not have any education or work

experience in plastics recycling or plastics materials.

                              OPINION

     We have decided more than two dozen of the Plastics

Recycling group of cases.9   The majority of these cases, like the


9
     Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993), concerned the
substance of the partnership transaction and also the additions
to tax.
     The following cases concerned the addition to tax for
negligence, inter alia: Spears v. Commissioner, T.C. Memo. 1996-
341; Stone v. Commissioner, T.C. Memo. 1996-230; Reimann v.
Commissioner, T.C. Memo. 1996-84; Bennett v. Commissioner, T.C.
                                                   (continued...)
                             - 21 -

consolidated cases herein, raised issues regarding additions to

tax for negligence and valuation overstatement.   We have found

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

the opinions to date on these issues, although procedural rulings

have involved many more favorable results for taxpayers.10


9
 (...continued)
Memo. 1996-14; Atkind v. Commissioner, T.C. Memo. 1995-582;
Triemstra v. Commissioner, T.C. Memo. 1995-581; Pace v.
Commissioner, T.C. Memo. 1995-580; Dworkin v. Commissioner, T.C.
Memo. 1995-533; Wilson v Commissioner, T.C. Memo. 1995-525;
Avellini v. Commissioner, T.C. Memo. 1995-489; Paulson v.
Commissioner, T.C. Memo. 1995-387; Zidanich v. Commissioner, T.C.
Memo. 1995-382; Ramesh v. Commissioner, T.C. Memo. 1995-346;
Reister v. Commissioner, T.C. Memo. 1995-305; Fralich v.
Commissioner, T.C. Memo. 1995-257; Shapiro v. Commissioner, T.C.
Memo. 1995-224; Pierce v. Commissioner, T.C. Memo. 1995-223; Fine
v. Commissioner, T.C. Memo. 1995-222; Pearlman v. Commissioner,
T.C. Memo. 1995-182; Kott v. Commissioner, T.C. Memo. 1995-181;
Eisenberg v. Commissioner, T.C. Memo. 1995-180.
     Greene v. Commissioner, 88 T.C. 376 (1987), concerned the
applicability of the safe-harbor leasing provisions of sec.
168(f)(8). Trost v. Commissioner, 95 T.C. 560 (1990), concerned
a jurisdictional issue.
     Farrell v. Commissioner, T.C. Memo. 1996-295; Baratelli v.
Commissioner, T.C. Memo. 1994-484; Estate of Satin v.
Commissioner, T.C. Memo. 1994-435; Fisher v. Commissioner, T.C.
Memo. 1994-434; Foam Recycling Associates v. Commissioner, T.C.
Memo. 1992-645; and Madison Recycling Associates v. Commissioner,
T.C. Memo. 1992-605, concerned other issues.
10
     In Zidanich v. Commissioner, T.C. Memo. 1995-382, we held
the taxpayers liable for the sec. 6659 addition to tax, but not
liable for the negligence additions to tax under sec. 6653(a).
As indicated in our opinion in that case, the Zidanich case, and
the Steinberg case consolidated with it for opinion, involved
exceptional circumstances.
     In Estate of Satin v. Commissioner, supra, and Fisher v.
Commissioner, supra, after the decision in Provizer v.
Commissioner, supra, the taxpayers were allowed to elect to
accept a beneficial settlement because of exceptional
circumstances. In Farrell v. Commissioner, supra, we rejected
                                                   (continued...)
                              - 22 -

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

case for the Plastics Recycling group of cases, this Court (1)

found that each Sentinel EPE recycler had a fair market value not

in excess of $50,000, (2) held that the transaction, which is

almost identical to the Partnership transactions in these

consolidated cases, was a sham because it lacked economic

substance and a business purpose, (3) upheld the section 6659

addition to tax for valuation overstatement since the

underpayment of taxes was directly related to the overstatement

of the value of the Sentinel EPE recyclers, and (4) held that

losses and credits claimed with respect to Clearwater were

attributable to tax-motivated transactions within the meaning of

section 6621(c).   In reaching the conclusion that the transaction

lacked economic substance and a business purpose, this Court

relied heavily upon the overvaluation of the Sentinel EPE

recyclers.

     Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that the investments in

the Sentinel EPE recyclers in these cases are similar to the

investment described in Provizer v. Commissioner, supra.     The



10
 (...continued)
taxpayers' claim to a similar belated settlement arrangement
since the circumstances were different and taxpayers previously
had rejected settlement and elected to litigate the case. See
also Baratelli v. Commissioner, supra.
                              - 23 -

underlying transactions in these consolidated cases, and the

Sentinel EPE recyclers considered in these cases, are the same

type of transaction and same type of machine considered in

Provizer v. Commissioner, supra.

     Based on the entire records in these cases, including the

extensive stipulations, testimony of respondent's experts, and

petitioners' testimony, we hold that each of the Partnership

transactions herein was a sham and lacked economic substance.       In

reaching this conclusion, we rely heavily upon the overvaluation

of the Sentinel EPE recyclers.     Respondent is sustained on the

question of the underlying deficiencies.     We note that

petitioners have explicitly conceded this issue in the respective

stipulations of settled issues filed shortly before trial.     The

record plainly supports respondent's determination regardless of

such concessions.   For a detailed discussion of the facts and the

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

Commissioner, supra.

A.   Section 6653(a)--Negligence

     In each of the notices of deficiency, respondent determined

that petitioners are liable for the negligence additions to tax

under section 6653(a)(1) and (2) for the respective taxable years

in issue.   Petitioners have the burden of proving that

respondent's determination is erroneous.     Rule 142(a); Luman v.

Commissioner, 79 T.C. 846, 860-861 (1982).
                              - 24 -

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

to 50 percent of the interest payable with respect to the portion

of the underpayment attributable 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 employ

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

(1985).   The question is whether a particular taxpayer's actions

in connection with the transactions were reasonable in light of

his experience and the nature of the investment or business.    See

Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740 (1973).

When considering the negligence addition 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.    McPike v. Commissioner, T.C.

Memo. 1996-46.   Compare Spears v. Commissioner, T.C. Memo. 1996-

341, with Zidanich v. Commissioner, T.C. Memo. 1995-382.

     When petitioners invested in the Partnerships, they had no

education or experience in plastics materials or plastics

recycling, nor had any of them seen a Sentinel EPE recycler.

Petitioners contend that they were reasonable in claiming
                              - 25 -

deductions and investment credits with respect to their

investments in the Partnerships.     In support of such contentions,

petitioners argue, in general terms:     (1) That claiming the

deductions and credits with respect to the Partnerships was

reasonable in light of the so-called oil crisis during the years

in issue; and (2) that they reasonably relied upon the offering

materials and a qualified adviser.     Busch's estate claims that

Busch relied exclusively on Becker, while Snyder claims to have

relied on both Becker and Miller.

     1.   The So-Called Oil Crisis

     Petitioners argue that they reasonably believed that the

Partnership transactions had good economic potential because of

the alleged oil crisis in the United States during 1981.      Snyder

contends that he knew that plastics were oil derivatives and that

his decision to invest was influenced by the media coverage of

the supposed oil crisis and the Federal Government's energy

conservation policy at the time.     In his posttrial brief, counsel

for Busch's estate also refers to the so-called oil crisis as a

factor influencing Busch's decision to invest.

     Petitioners fail to explain, however, exactly how the so-

called oil crisis, or the media coverage thereof, provided a

reasonable basis for them to invest in the Partnerships and claim

the associated tax deductions and credits.     The offering

materials warned that there could be no assurances that prices
                              - 26 -

for new resin pellets would remain at their then current level.

Both petitioners stipulated that information published prior to

the Sentinel EPE Recycling transactions indicated that the price

of polyethylene was declining during the fourth quarter of 1981.

One of respondent's experts, Steven Grossman, explained that the

price of plastics materials is not directly proportional to the

price of oil.   In his report, he testified that less than 10

percent of crude oil is utilized for making plastics materials,

and that studies have shown that "a 300% increase in crude oil

prices results in only a 30 to 40% increase in the cost of

plastics products."   Moreover, during 1980 and 1981, in addition

to the media coverage of the so-called oil crisis, there was

"extensive continuing press coverage of questionable tax shelter

plans."   Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th Cir.

1984), affg. 79 T.C. 714 (1982).

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

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

(10th Cir. 1994), and Rousseau v. United States, 71A AFTR 2d 93-

4294, 91-1 USTC par. 50,252 (E.D. La. 1991), is misplaced.   The

facts in Krause v. Commissioner, supra, are distinctly different

from the facts of these cases.   In the Krause case, the taxpayers

invested in limited partnerships whose investment objectives

concerned enhanced oil recovery (EOR) technology.   The Krause

opinion states that during the late 1970's and early 1980's, the
                                - 27 -

Federal Government adopted specific programs to aid research and

development of EOR technology.    Id. at 135-136.    In holding that

the taxpayers in the Krause case were not liable for the

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

Government's expert witnesses acknowledged that "investors may

have been significantly and reasonably influenced by the energy

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

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

however, as explained by respondent's expert Steven Grossman,

supra, the price of plastics materials was not directly

proportional to the price of oil, and there is no persuasive

evidence that the so-called oil crisis had a substantial bearing

on petitioners' decision to invest.      While EOR was, according to

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

media during the late 1970's and 1980's, there is no showing in

these records that the so-called energy crisis would provide a

reasonable basis for petitioners' investing in recycling of

polyethylene, particularly in the machinery here in question.

     Moreover, the taxpayers in the Krause opinion were

experienced in or investigated the oil industry and EOR

technology specifically.   One of the taxpayers in Krause v.

Commissioner, supra, undertook significant investigation of the

proposed investment including researching EOR technology.     The

other taxpayer was a geological and mining engineer whose work
                                - 28 -

included research of oil recovery methods and who hired an

independent geologic engineer to review the offering materials.

Id. at 166.    In the present cases, petitioners had no education

or work experience with respect to plastics or plastics

recycling.    Petitioners did not independently investigate the

Sentinel EPE recyclers, nor did they hire an expert in plastics

to evaluate the Partnership transactions.

     In Rousseau v. United States, supra, the property underlying

the investment, ethanol producing equipment, was widely

considered at that time to be a viable fuel alternative to oil,

and its potential for profit was apparent.     In addition, the

taxpayer therein conducted an independent investigation of the

investment and researched the market for the sale of ethanol in

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

the Krause case, there is no showing in these records that the

so-called oil crisis would provide a reasonable basis for

petitioners' investing in the polyethylene recyclers here in

question.     Petitioners did not independently investigate the

Sentinel EPE recyclers or hire an expert in plastics to evaluate

the Partnership transactions.     The facts of petitioners' cases

are distinctly different from the Rousseau case.     We hold that

petitioners' vague, general claims concerning the so-called oil

crisis are without merit, and that the Krause and Rousseau cases

are inapplicable.
                              - 29 -

     2.   Petitioners' Purported Reliance on Becker and Miller

     Petitioners also maintain that they reasonably relied upon

the advice of a qualified adviser.     Busch's estate contends that

he reasonably relied on Becker, while Snyder contends that he

reasonably relied on Becker and Miller.    In each of these cases,

petitioners' investigation was limited to speaking to Becker, and

in Snyder's case, Miller as well, in addition to reviewing the

offering memoranda.

     The concept of negligence and the argument of reliance on an

expert are highly fact intensive.    In these cases, two corporate

leaders, experienced and able in finance and at investigating

business proposals, assert that they relied upon their accountant

to investigate the tax law and the underlying business

circumstances of a proposed investment.    The accountant,

experienced in tax matters, explains that he made an

investigation within the limits of his resources and abilities

and fully disclosed what he had done.    The question here is

whether petitioners actually and reasonably relied on the

accountant with respect to valuation problems requiring expertise

in engineering and plastics technology or whether the accountant

gave the tax advice and facilitated the transaction, but did not

make a full and independent investigation of the relevant

business and technology and did clearly inform his clients of the

limits of his knowledge and investigation of the transaction.
                              - 30 -

For reasons set forth below, we believe the latter statement more

accurately describes what happened here.

          a. The Circumstances Under Which a Taxpayer
          May Avoid Liability Under Section 6653(a)(1)
          and (2) Because of Reasonable Reliance on
          Competent and Fully Informed Professional
          Advice

     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.   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).   Reliance on professional advice, standing alone, is

not an absolute defense to negligence, but rather a factor to be

considered.   In order for reliance on professional advice to

excuse a taxpayer from the negligence additions to tax, the

taxpayer must show that such professional had the expertise and

knowledge of the pertinent facts to provide valuable and

dependable advice on the subject matter.   Goldman v.

Commissioner, 39 F.3d 402 (2d Cir. 1994), affg. T.C. Memo. 1993-

480; Freytag v. Commissioner, supra; Sacks v. Commissioner, T.C.

Memo. 1994-217, affd. 82 F.3d 918, (9th Cir. 1996); Kozlowski v.

Commissioner, T.C. Memo. 1993-430, affd. without published

opinion 70 F.3d 1279 (9th Cir. 1995); see also Stone v.

Commissioner, T.C. Memo. 1996-230; Reimann v. Commissioner, T.C.

Memo. 1996-84.
                               - 31 -

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

negligence.    Goldman v. Commissioner, supra; Pasternak v.

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

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

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

Goldman v. Commissioner, supra; Freytag v. Commissioner, supra;

Beck v. Commissioner, 85 T.C. 557 (1985); Lax v. Commissioner,

T.C. Memo. 1994-329, affd. without published opinion 72 F.3d 123

(3d Cir. 1995); Sacks v. Commissioner, supra; Steerman v.

Commissioner, T.C. Memo. 1993-447; Rogers v. Commissioner, T.C.

Memo. 1990-619; see also the Plastics Recycling cases cited supra

note 8.

          b.   Miller

     Snyder and Miller are former college classmates and

fraternity brothers who had not spoken to each other for nearly
                              - 32 -

25 years before discussing the Partnership transactions in 1981.

Snyder claims that Miller told him that his future was invested

in PI.   The offering memoranda for SAB Recovery and SAB

Reclamation disclosed that Miller was a 9.1-percent shareholder

of F & G Corp., was employed as corporate counsel to PI, and

represented Raymond Grant, the sole shareholder of ECI Corp.

Each memorandum also noted that "Miller [would] receive

substantial additional compensation for representing PI and FMEC

in connection with" the Partnership transactions.   Not

surprisingly, Miller recommended SAB Recovery to Snyder.

     Nothing in the records indicates that Miller had any

expertise or knowledge with respect to plastics or plastics

recycling, or that Snyder believed he had any such knowledge or

expertise.   There is no showing in the records that Snyder and

Miller had any special or enduring friendship during college or

afterwards; indeed, they had not spoken to each other in nearly

25 years before discussing the Partnership transactions.    Given

the extent to which Miller was immersed in the Partnership

transactions, how much he stood to benefit financially, and his

lack of expertise regarding plastics materials and plastics

recycling, we do not find Snyder's purported reliance on Miller

to be reasonable, in good faith, or based upon full disclosure.

See Vojticek v. Commissioner, T.C. Memo. 1995-444, to the effect

that advice from such persons "is better classified as sales
                               - 33 -

promotion;" see also Marine v. Commissioner, supra; McCrary v.

Commissioner, supra; Rybak v. Commissioner, supra; Freytag v.

Commissioner, supra; Lax v. Commissioner, supra; Steerman v.

Commissioner, supra; Rogers v. Commissioner, supra.

           c.   Becker

     Becker possessed no education, special qualifications, or

professional skills in plastics engineering, plastics recycling,

or plastics materials.   In evaluating the Plastics Recycling

transactions and organizing the SAB Recycling Partnerships,

Becker supposedly relied upon:   (1) The offering materials; (2) a

tour of the PI facility in Hyannis; (3) discussions with insiders

to the transactions; (4) Canno; and (5) his investigation of the

reputation and background of PI and persons involved in the

transactions.

     Despite his lack of knowledge regarding the product, the

target market, and the technical aspects at the heart of the

Plastics Recycling transactions, Becker did not hire an expert in

plastics materials or plastics recycling, or recommend that his

clients do so.    The only independent person having any connection

with the plastics industry that Becker spoke to was Canno.    A

client of Becker Co., Canno was a part owner and the production

manager of Equitable Bag Co., a manufacturer of paper and plastic

bags.   Becker spoke to Canno about the recyclers and PI, but did

not hire or pay him for any advice.     Canno did not visit the PI
                              - 34 -

plant in Hyannis, see or test a Sentinel EPE recycler, or see or

test any of the output from a Sentinel EPE recycler or the

recycled resin pellets after they were further processed by PI.

According to Becker, Canno endorsed the Partnership transactions

after reviewing the offering materials.   Asked at trial if Canno

had done any type of comparables analysis, Becker replied, "I

don't know what Mr. Canno did."

     Becker visited the PI plant in Hyannis, toured the facility,

viewed a Sentinel EPE recycler in operation, and saw products

that were produced from recycled plastic.   He claims that during

his visit he was told that the recycler was unique and that it

was the only machine of its type.   In fact, the Sentinel EPE

recycler was not unique, and information published prior to the

Sentinel EPE recycling transactions indicated that several

machines capable of densifying low density materials already were

on the market.   Other plastics recycling machines available

during 1981 ranged in price from $20,000 to $200,000, including

the Foremost Densilator, Nelmor/Weiss Densification System

(Regenolux), Buss-Condux Plastcompactor, and Cumberland

Granulator.   See Provizer v. Commissioner, T.C. Memo. 1992-177.

     Becker was also told that PI had put an enormous amount of

research and development--10 to 12 years' worth--into the

creation and production of the Sentinel EPE recycler.   When he

asked to see the cost records for some kind of independent
                              - 35 -

verification, however, his request was denied.   Becker was

informed that such information was proprietary and secret, and

that he would just have to take PI's representations as true.

Although PI claimed that all of its information was a trade

secret, and that it never obtained patents on any of its

machines, PI had in fact obtained numerous patents prior to the

recycling transactions and had also applied for a trademark for

the Sentinel recyclers.   Becker decided to accept PI's

representations after speaking with Miller (the corporate counsel

to PI), Canno (who had never been to PI's plant or seen a

Sentinel EPE recycler), and a surrogate judge from Rhode Island

who did business in the Boston-Cape Cod area (and who had no

expertise in engineering or plastics materials).   Becker

testified that he was allowed to see PI's internal accounting

controls regarding the allocation of royalty payments and PI's

recordkeeping system in general.   In Provizer v. Commissioner,

supra, this Court found that "PI had no cost accounting system or

records."

     Becker confirmed at trial that he relied on the offering

materials and discussions with PI personnel to establish the

value and purported uniqueness of the recyclers.   Becker

testified that he relied upon the reports of Ulanoff and Burstein

contained in the offering materials, despite the fact:    (1)

Ulanoff's report did not contain any hard data to support his
                              - 36 -

opinion; (2) Ulanoff was not an economics or plastics expert; (3)

Becker did not know whether Burstein was an engineer; and (4)

Burstein was a client of Miller's and was not an independent

expert.   In addition, Ulanoff and Burstein each owned an interest

in more than one partnership which owned Sentinel Recyclers as

part of the Plastics Recycling Program.

     At trial, Becker explained that in the course of his

practice when evaluating prospective investments for clients, he

focuses on the economics of the transaction and investigates

whether there is a need or market for the product or service.

With respect to the Partnership transactions, the record

indicates that Becker overlooked several red flags regarding the

economic viability and market for the Sentinel EPE recyclers.

The offering memoranda for the Partnership transactions warned

that there was no established market for the Sentinel EPE

recyclers.   Becker never saw any marketing plans for selling the

pellets or leasing the recyclers.   He accepted representations by

PI personnel that they would be marketing the recyclers to

clients and that there was a sufficient base of end-users for the

machines, yet he never saw PI's client list.   At the time of the

closing of the Partnerships, Becker did not know who the end-

users were or whether there were any end-users actually committed

to the transaction.
                               - 37 -

       Becker purportedly checked the price of the pellets by

reading trade journals of the plastics industry.    However, he did

not use those same journals to investigate the recyclers'

purported value or to see whether there were any advertisements

for comparable machines.    The records in these cases do not

indicate that either Snyder or Busch asked to see those journals

for their own perusal.    In concluding that the Partnerships would

be economically profitable, Becker made two assumptions that he

concedes were unsupported by any hard data:    (1) That there was a

market for the pellets; and (2) that market demand for them would

increase.    In fact, as each petitioner stipulated, information

published prior to the Sentinel EPE Recycling transactions

indicated that the price of polyethylene was actually going down,

not up, during the final quarter of 1981.

       Becker also had a financial interest in SAB Reclamation and

SAB Recovery.    He received fees in excess of $500,000 with

respect to the SAB Recycling Partnerships, more than $200,000 of

which derived from SAB Reclamation and SAB Recovery.    Becker also

received fees from individual investors for investment advice.

In addition, Becker Co. received fees from the SAB Recycling

Partnerships for preparing their partnership returns.    As Becker

himself testified, petitioners could not have read the offering

materials and been ignorant of the financial benefits accruing to

him.
                              - 38 -

           d. Conclusion as to Petitioners' Alleged Reliance
           on Becker and Miller

     Petitioners in these cases are both very well educated and

highly accomplished, sophisticated businessmen.   Within 15 years

after starting with Simon & Schuster, Snyder was in charge of all

aspects of the large publishing company as its chairman and chief

executive officer.   He held that position for approximately 20

years.   Snyder was involved in and responsible for approximately

75 acquisitions by Simon & Schuster involving sums up to $800

million.   Busch was the president and publisher of Pocket Books,

the paperback division of Simon & Schuster.   Certainly

petitioners possessed the intellect, skills, experience, and

resources to have the viability of the Plastics Recycling

transactions thoroughly investigated.

     Petitioners claim that they relied upon Becker for the bona

fides and viability of the Partnership transactions.    Yet

Becker's expertise was in taxation, not plastics materials or

plastics recycling, and his investigation and analysis of the

Plastics Recycling transactions reflected this circumstance.

Snyder knew Becker was not expert in plastics materials or

plastics recycling, and there is no indication in the records

that Busch believed otherwise.   Moreover, Becker testified that

he was very careful not to mislead any of his clients regarding

the particulars of his investigation.   As he put it:   "I don't

recall saying to a client I did due diligence * * * [Rather,] I
                              - 39 -

told [my clients] precisely what I had done to investigate or

analyze the transaction.   I didn't just say I did due diligence,

and leave it open for them to define what I might or might not

have done."   Becker testified:   "I provided every piece of

information I had available to me to Mr. Snyder and Mr. Busch."

     The purported value of the Sentinel EPE recycler generated

the deductions and credits in these cases, and that circumstance

was clearly reflected in the offering memoranda.    Certainly

Becker recognized the nature of the tax benefits and, given their

education and business experience, petitioners should have

recognized it as well.   Yet neither petitioners nor Becker

verified the purported value of the Sentinel EPE recycler.

Becker confirmed at trial that he relied on PI for the value of

the Sentinel EPE recyclers.

     At the meeting held in Snyder's office, Becker answered

petitioners' questions and described his investigation.    Snyder

testified that he and Busch "took [Becker] through the same drill

we would have if it was a Simon & Schuster acquisition."    Snyder

explained that from his questioning of Becker "I had to find out

if there was a market, is the market sustainable, was this

machine viable, was it technologically vulnerable, was the market

price satisfactory to sustaining the financial projections".

(Emphasis added.)   Plainly, if Snyder and Busch truly had pursued

these questions vigorously, as talented and experienced
                               - 40 -

businessmen and acquisition specialists, they would or should

have learned that the Plastics Recycling deal was a sham.    If

they had persisted in inquiring whether the recycling machines

were "technologically vulnerable", the expert testimony in these

cases leads to the conclusion that they would have learned that

the machinery in question was not unique but that similar or

better products were readily available in the market for a

fraction of the cost built into the Plastics Recycling

transactions.

     Corporate executives as sophisticated and experienced as

petitioners either learned or should have learned the source of

Becker's valuation information when they put him "through the

drill" and he reported to them "precisely what [he] had done to

investigate or analyze the transaction."    There was a glaring gap

in the valuation information Becker claims to have furnished to

petitioners.    Petitioners were peculiarly well qualified to

understand that they were buying into an investment credit tax

shelter and claiming tax benefits based on the underlying value

of machinery, but neither they nor the accountant who brought the

deal to them had checked out the value of that machinery with a

reliable, qualified, independent source.    We recognize that

Snyder, as the senior person, may have been more experienced in

acquisitions and in investigation than Busch.    Nevertheless, both

were experienced corporate executives.   We do not think they were
                               - 41 -

gulled by Becker.   On this record, we believe petitioners were

imprudent in their investigation, in going forward with the

transaction, and in claiming the tax benefits in issue.

     We hold that petitioners did not reasonably or in good faith

rely on Becker as an expert or a qualified professional working

in the area of his expertise to establish the fair market value

of the Sentinel EPE recycler and the economic viability of the

Partnership transactions.   Becker never assumed such

responsibility, and when he reported to his clients exactly what

he had done he took care not to overgeneralize his investigation

as "due diligence."   Petitioners and Becker claim they relied on

Miller and other PI personnel with respect to the value of the

recycler and the economic viability of the Partnership

transactions.   See Vojticek v. Commissioner, T.C. Memo. 1995-444.

Neither Becker or Miller possessed any education, special

qualifications, or professional skills in plastics materials or

plastics recycling.   A taxpayer may rely upon his adviser's

expertise (in these cases, accounting and tax advice), but it is

not reasonable or prudent to rely upon a tax adviser regarding

matters outside his field of expertise or with respect to facts

that he does not verify.    See Goldman v. Commissioner, 39 F.3d at

408; Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989), affg.

Patin v. Commissioner, 88 T.C. 1086 (1987); Lax v. Commissioner,
                              - 42 -

T.C. Memo. 1994-329; Sacks v. Commissioner, T.C. Memo. 1994-217;

Rogers v. Commissioner, T.C. Memo. 1990-619.

     3.   The Private Offering Memoranda

     In addition to purportedly relying on Becker and Miller,

petitioners maintain that they reasonably relied upon the

offering memoranda distributed by the Partnerships.

     The offering memoranda included numerous caveats and

warnings with respect to the Partnerships, including:    (1) The

substantial likelihood of audit by the IRS and a likely challenge

of the purported value of the recyclers; (2) the general

partner's lack of experience in marketing recycling or similar

equipment; (3) the lack of an established market for the

recyclers; and (4) uncertainties regarding the market prices for

virgin resin and the possibility that recycled pellets would not

be as marketable as virgin pellets.    In addition, the offering

memoranda noted a number of conflicts of interest, including

Miller's interest in F & G Corp. and his representation of

Burstein, PI, and Raymond Grant, who was the sole shareholder of

ECI Corp.   A careful consideration of the materials in the

respective offering memoranda, especially the discussions of high

writeoffs and risk of audit, should have alerted a prudent and

reasonable investor to the questionable nature of the promised

deductions and credits.   See Collins v. Commissioner, 857 F.2d
                                - 43 -

1383, 1386 (9th Cir. 1988), affg. Dister v. Commissioner, T.C.

Memo. 1987-217; Sacks v. Commissioner, supra.

        According to the offering memoranda, for each $50,000

investor, the projected first-year tax benefits were investment

tax credits in excess of $82,500, plus deductions in excess of

$40,000.11    In the case of SAB Recovery, which closed December

21, 1981, these tax benefits accrued in less than 2 weeks.      As a

result of his $25,00012 investment in SAB Reclamation in 1982,

Busch claimed an operating loss in the amount of $20,050 and

investment tax and business energy credits in the amount of

$41,856.     For his $50,000 investment in SAB Recovery in 1981,

Snyder claimed an operating loss in the amount of $39,698 and

investment tax and business energy credits totaling $82,536.       In

1982 Snyder claimed an operating loss in the amount of $40,100

and investment tax and business energy credits totaling $83,712,

both flowing from his $50,000 investment in SAB Reclamation that

year.

     The direct reductions claimed on petitioners' Federal income

tax returns, from the investment tax credits alone, equaled 167


11
     The projected tax benefits for the Partnerships in the first
year of the investment, for each $50,000 investor, were as
follows: Investment tax credits of $82,639, plus deductions of
$40,003 for SAB Recovery in 1981, and investment tax credits of
$83,712 and deductions of $40,234 for SAB Reclamation in 1982.
12
     The amounts invested by petitioners as set forth above are
the gross amounts invested, unreduced by any rebated commissions
or advance royalty payments.
                              - 44 -

percent of their cash investments, without taking into

consideration any rebated commissions and advance royalty

payments.   Therefore, after adjustments of withholding, estimated

tax, or final payment, like the taxpayers in Provizer v.

Commissioner, T.C. Memo. 1992-177, "except for a few weeks at the

beginning, petitioners [Snyder and Busch] never had any money in

the [Partnership transactions]."   In view of the

disproportionately large tax benefits claimed on petitioners'

1981 and 1982 Federal income tax returns, relative to the dollar

amounts invested, further investigation of the Partnership

transactions clearly was required.     A reasonably prudent person

would have asked a qualified independent tax adviser if this

windfall were not too good to be true.     McCrary v. Commissioner,

92 T.C. 827, 850 (1989).   A reasonably prudent person would not

conclude without substantial investigation that the Government

was providing tax benefits so disproportionate to the taxpayers'

investment of their own capital.

     Petitioners' arguments are not supported by the Ninth

Circuit Court of Appeals' partial reversal of our decision in

Osterhout v. Commissioner, T.C. Memo. 1993-251, affd. in part and

revd. in part without published opinion sub nom. Balboa Energy

Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir. 1996).     In

Osterhout, on which petitioners rely, we found that certain oil

and gas partnerships were not engaged in a trade or business and
                              - 45 -

sustained respondent's imposition of the negligence additions to

tax with respect to one of the partners therein.13   The taxpayer

had relied in part upon a tax opinion contained in the offering

materials.   The Court of Appeals for the Ninth Circuit reversed

our imposition of the negligence additions to tax.   However, the

prefaces to the offering memoranda14 for the Partnerships herein

warned prospective investors that the tax opinion letter was not

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

prospective investors should consult their own professional

advisers with respect to the tax benefits and tax risks

associated with the respective Partnerships.   The tax opinion

letter was addressed solely to the general partner and contained

the following opening disclaimer:

     This opinion is provided to you for your individual
     guidance. We expect that prospective investors will
     rely upon their own professional advisors with respect
     to all tax issues arising in connection with an
     investment in the Partnership and the operations
     thereof. We recognize that you intend to include this
     letter with your offering materials and we have
     consented to that with the understanding that the


13
     Osterhout v. Commissioner, T.C. Memo. 1993-251, involved a
group of consolidated cases. The parties therein agreed to be
bound by the Court's opinion regarding the application of the
additions to tax provided for under sec. 6653(a), inter alia.
Accordingly, although the Court's analysis focused on one
taxpayer, the additions to tax were sustained with respect to all
of the parties.
14
     As noted, the offering memoranda for SAB Reclamation and SAB
Recovery were submitted into the records in docket Nos. 1643-89
and 618-90, the Snyder cases, but not in docket No. 599-89, the
Busch case.
                               - 46 -

     purpose in distributing it is to assist your offerees'
     and their tax advisors in making their own analysis and
     not to permit any prospective investor to rely upon our
     advice in this matter. [Emphasis added.]

Accordingly, both the offering memoranda and the tax opinion

letter expressly and unambiguously indicated that prospective

investors such as petitioners were not to rely upon the tax

opinion letter.   See Collins v. Commissioner, supra.   The

limited, technical opinion of tax counsel in these cases was not

designed as advice upon which taxpayers might rely and the

opinion of counsel itself so states.

     4.   Miscellaneous

     Petitioners' reliance on Reile v. Commissioner, T.C. Memo.

1992-488, and Davis v. Commissioner, T.C. Memo. 1989-607, is

misplaced.   This Court declined to sustain the negligence

additions to tax in those cases for reasons inapposite to the

facts herein.   In the Davis case, the taxpayers reasonably relied

upon a "trusted and long-term adviser" who was independent of the

investment venture, and the offering materials reviewed by the

taxpayers did not reflect the inexperience of those who were

responsible for the venture.   In the Reile case, the taxpayers, a

married couple, had only one year of college between them and

characterized themselves as financial "dummies."   In contrast to

those cases, petitioners herein are well educated and remarkably

sophisticated and successful corporate executives.   Becker and

Miller were not long-term advisers of petitioners, nor were they
                              - 47 -

independent of the Partnerships.   In addition, the offering

memoranda disclosed that the Partnerships had no prior operating

history and the general partner had no prior experience in

marketing recycling or similar equipment.

     Petitioners' position also is not supported by Evatt v.

Commissioner, T.C. Memo. 1992-368, Borrell v. Commissioner, T.C.

Memo. 1989-251, or Mollen v. United States, 72 AFTR 2d 93-6443,

93-2 USTC par. 50,585 (D. Ariz. 1993), cases in which the

negligence addition to tax was denied.   In the Borrell case, the

taxpayer had nurtured and developed a trust in her adviser

through social activities with him and his family, and she knew

that the adviser's three daughters were partners in the venture

(the other two partners were the taxpayer and a hospital

administrator).   No such relationship existed between petitioners

and Becker, and Snyder had not spoken to Miller in roughly 25

years.   In the Evatt case, the taxpayer relied upon an attorney

and an accountant to convert his business to corporate form and

prepare his and the corporation's tax returns, matters well

within their areas of expertise.   Here, petitioners relied on

Becker and Miller for matters beyond their area of expertise.

Accordingly, petitioners' reliance on the Borrell and Evatt cases

is misplaced.

     In Mollen, the taxpayer was a medical doctor who specialized

in diabetes and who, on behalf of the Arizona Medical
                              - 48 -

Association, led a continuing medical education (CME)

accreditation program for local hospitals.   The underlying tax

matter involved the taxpayer's investment in Diabetics CME Group,

Ltd., a limited partnership that invested in the production,

marketing, and distribution of medical educational video tapes.

The District Court found that the taxpayer's personal expertise

and insight in the underlying investment gave him reason to

believe it would be economically profitable.   Although the

taxpayer was not experienced in business or tax matters, he did

consult with an accountant and a tax lawyer regarding those

matters.   Moreover, the District Court noted that the propriety

of the taxpayer's disallowed deduction therein was "reasonably

debatable."   Id.; see Zfass v. Commissioner, T.C. Memo. 1996-167.

     The records in these cases show that neither petitioners nor

Becker had any formal education, expertise, or experience in

plastics materials or plastics recycling.    None of them had any

personal insight or industry know-how in plastics recycling that

would reasonably lead them to believe that the Plastics Recycling

transactions would be economically profitable.   Petitioners and

Becker relied upon representations by insiders of the ventures;

neither hired any independent experts in the field of plastic

materials or plastics recycling.   Becker discussed the

transactions with Canno, who apparently was familiar with the

plastics industry, but did not hire Canno to investigate PI and
                              - 49 -

the Sentinel EPE recycler.   Canno never saw a Sentinel EPE

recycler and never prepared any kind of formal, written analysis

of the venture.   The facts of these cases are distinctly

different from those in the Mollen case.    Therefore, we consider

petitioners' arguments with respect to the Mollen case

inapplicable here.

     5.   Conclusion as to Negligence

     Under the circumstances of these cases, these highly

sophisticated petitioners failed to exercise due care in claiming

large deductions and tax credits with respect to the Partnerships

on their respective Federal income tax returns.    Petitioners did

not reasonably rely upon the offering materials.   Becker

disclosed the extent, nature, and limitations of his

investigation of the transaction.   He did not possess any

education, special qualifications, or professional skills in the

plastics or recycling industries.   Nor did Miller, an insider to

the Plastics Recycling transactions upon whom petitioners and

Becker allegedly relied for the value of the recycler and the

economic viability of the transactions.    See Goldman v.

Commissioner, 39 F.3d at 408; Marine v. Commissioner, 92 T.C. 958

(1989); McCrary v. Commissioner, 92 T.C. 827 (1989); Rybak v.

Commissioner, 91 T.C. 524 (1988).   For these reasons and others

discussed above, we conclude that petitioners were negligent in

claiming the deductions and credits with respect to the
                                - 50 -

Partnerships on their Federal income tax returns for 1982.   We

hold, upon consideration of the entire records, that petitioners

are liable for the negligence related additions to tax under the

provisions of section 6653(a)(1) and (2).    Respondent is

sustained on this issue.

B.   Section 6659--Valuation Overstatement

      Respondent determined that petitioners are each liable for

the section 6659 addition to tax on the portion of their

respective underpayments attributable to valuation overstatement.

Petitioners Busch conceded the section 6659 addition to tax in

their stipulation of settled issues; Snyder did not.    Snyder has

the burden of proving that respondent's determinations of the

section 6659 additions to tax for 1981 and 1982 are erroneous.

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

      A graduated addition to tax is imposed when an individual

has an underpayment of tax that equals or exceeds $1,000 and "is

attributable to" a valuation overstatement.    Sec. 6659(a), (d).

A valuation overstatement exists if the fair market value (or

adjusted basis) of property claimed on a return equals or exceeds

150 percent of the amount determined to be the correct amount.

Sec. 6659(c).   If the claimed valuation exceeds 250 percent of

the correct value, the addition is equal to 30 percent of the

underpayment.   Sec. 6659(b).
                               - 51 -

     Snyder claimed investment tax and business energy credits

based on a purported value for the Sentinel EPE recycler in

excess of $1,162,000.15   Snyder concedes that the fair market

value of a Sentinel EPE recycler during 1981 and 1982 was not in

excess of $50,000.   Therefore, if disallowance of the claimed

credits is attributable to the valuation overstatement, Snyder is

liable for the section 6659 addition to tax at the rate of 30

percent of the respective underpayments of tax attributable to

the credits claimed with respect to the Partnerships.

     1.   Concession of the Deficiency

     Section 6659 does not apply to underpayments of tax that are

not "attributable to" valuation overstatements.      See McCrary v.

Commissioner, supra; Todd v. Commissioner, 89 T.C. 912 (1987),

affd. 862 F.2d 540 (5th Cir. 1988).      To the extent taxpayers

claim tax benefits that are disallowed on grounds separate and

independent from alleged valuation overstatements, the resulting

underpayments of tax are not regarded as attributable to



15
     In a Statement of Supplemental Information Pursuant to sec.
1.48-4(g)(4), Income Tax Regs., attached to SAB Recovery's 1981
partnership return, the fair market value of the seven recyclers
is listed as $8,138,667. Seven divided into $8,138,667 equals
$1,162,666. However, in two other statements attached to the
return, the partnership reports that its basis in qualifying
recycling equipment is $9,212,401. As reported on line 21 of his
Form K-1, Snyder's share of the basis is $412,683 (4.479638% x
9,212,401 = 412,682). The figure on the Form K-1 results from
round up and is the amount Snyder used to compute his tax
credits. The source of the additional basis is not clear from
the records.
                              - 52 -

valuation overstatements.   Krause v. Commissioner, 99 T.C. 132,

178 (1992) (citing Todd v. Commissioner, supra), affd. sub nom.

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

However, when valuation is an integral factor in disallowing

deductions and credits, section 6659 is applicable.   See Illes v.

Commissioner, 982 F.2d 163, 167 (6th Cir. 1992), affg. T.C. Memo.

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

1991) (section 6659 addition to tax applies if a finding of lack

of economic substance is "due in part" to a valuation

overstatement), affg. T.C. Memo. 1989-684; Masters v.

Commissioner, T.C. Memo. 1994-197, affd. without published

opinion 70 F.3d 1262 (4th Cir. 1995); Harness v. Commissioner,

T.C. Memo. 1991-321.

     In the stipulation of settled issues, Snyder concedes that

he is not entitled to any deductions, losses, investment credits,

business energy investment credits, or any other tax benefits

claimed on his tax returns as a result of his being a partner in

SAB Recovery and SAB Reclamation.   In Todd v. Commissioner,

supra, and McCrary v. Commissioner, supra, we denied application

of section 6659, even though the subject property was overvalued,

because the related deductions and credits had been conceded or

denied in their entirety on other grounds.   In Todd, we found

that an underpayment was not attributable to a valuation

overstatement because the subject property was not placed in
                              - 53 -

service during the years in issue.     In McCrary, we found the

taxpayers were not liable for the section 6659 addition to tax

when, prior to the trial of the case, the taxpayers conceded that

they were not entitled to the investment tax credit because the

agreement in question was a license and not a lease.    In both

cases the underpayment was attributable to something other than a

valuation overstatement.

     Concession of the investment tax credit in and of itself

does not relieve a taxpayer of liability for the section 6659

addition to tax.   See Dybsand v. Commissioner, T.C. Memo. 1994-

56; Chiechi v. Commissioner, T.C. Memo. 1993-630.    Instead, the

ground upon which the investment tax credit is disallowed or

conceded is significant.   Chiechi v. Commissioner, supra.    Even

in situations in which there are arguably two grounds to support

a deficiency and one supports a section 6659 addition to tax and

the other does not, the taxpayer may still be liable for the

addition to tax.   Gainer v. Commissioner, 893 F.2d 225, 228 (9th

Cir. 1990), affg. T.C. Memo. 1988-416; Irom v. Commissioner, 866

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

Memo. 1988-211; Harness v. Commissioner, supra.

     Snyder made no argument and presented no evidence to the

Court to prove that disallowance and concession of the investment

tax credits related to anything other than a valuation

overstatement.   To the contrary, Snyder stipulated substantially
                              - 54 -

the same facts concerning the underlying transactions as we found

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

Provizer case, we held that the taxpayers were liable for the

section 6659 addition to tax because the underpayment of taxes

was directly related to the overvaluation of the Sentinel EPE

recyclers.   The overvaluation of the recyclers, exceeding 2325

percent, was an integral part of our findings in Provizer that

the transaction was a sham and lacked economic substance.

Similarly, the records in these cases plainly show that the

overvaluation of the recyclers is integral to and is the core of

our holding that the underlying transactions here are shams and

lack economic substance.   When a transaction lacks economic

substance, section 6659 will apply because the correct basis is

zero, and any basis claimed in excess of that is a valuation

overstatement.   Gilman v. Commissioner, supra; Rybak v.

Commissioner, 91 T.C. 524, 566-567 (1988); Zirker v.

Commissioner, 87 T.C. 970, 978-979 (1986); Donahue v.

Commissioner, T.C. Memo. 1991-181, affd. without published

opinion 959 F.2d 234 (6th Cir. 1992), affd. sub nom. Pasternak v.

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

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

Sentinel EPE recycler had a fair market value not in excess of

$50,000.   Our finding in the Provizer case that the Sentinel EPE

recyclers had been overvalued was integral to and inseparable
                                - 55 -

from our finding of a lack of economic substance.    Snyder

conceded that the Partnership transactions were similar to the

Clearwater transaction described in Provizer v. Commissioner,

supra, and we have found that the Partnership transactions lacked

economic substance.   Given his concession, and our finding of a

lack of economic substance, and the fact that the records here

plainly show that the overvaluation of the recyclers was the

reason for the disallowance of the tax benefits, we conclude that

the deficiencies caused by the disallowance of the claimed tax

benefits were attributable to the overvaluation of the Sentinel

EPE recyclers.

     2.   Section 6659(e)

     Snyder also contests the imposition of the section 6659

addition to tax on the ground that respondent erroneously failed

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

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

valuation overstatement if taxpayers establish that there was a

reasonable basis for the adjusted bases or valuations claimed on

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

Respondent's refusal to waive a section 6659 addition to tax is

reviewable by this Court for abuse of discretion.    Krause v.

Commissioner, 99 T.C. at 179.

     Snyder urges that he relied on the offering memoranda,

Becker, and Miller in deciding on the valuation claimed on his
                                - 56 -

tax returns.   Snyder contends that such reliance was reasonable,

and, therefore, respondent should have waived the section 6659

addition to tax.    Snyder cites Mauerman v. Commissioner, 22 F.3d

1001 (10th Cir. 1994), revg. T.C. Memo. 1993-23; Krause v.

Commissioner, 99 T.C. 132 (1992); and Rousseau v. United States,

71A AFTR 2d 93-4294, 91-1 USTC par. 50,252 (E.D. La. 1991), in

support of his argument.

     We have held that Snyder's purported reliance on the

offering materials, Becker, and Miller was not reasonable.

Becker had no education or experience in plastics or plastics

recycling and fully disclosed the limitations of his

investigation.     Miller was an insider to the Plastics Recycling

transaction, and there is no indication in the records that he

had any expertise in plastics materials or plastics recycling.

The evaluators whose reports were appended to each of the

offering memoranda, Ulanoff and Burstein, each owned interests in

partnerships which leased Sentinel EPE recyclers, and Burstein

was also a client of Miller's.    The offering memoranda contained

numerous caveats, including the following:    NO OFFEREE SHOULD

CONSIDER THE CONTENTS OF THIS MEMORANDUM *** AS *** EXPERT

ADVICE.   Snyder did not see a Sentinel EPE recycler prior to

investing in the Partnerships, and he did not independently

investigate the recyclers.
                                - 57 -

     Snyder's reliance on Mauerman v. Commissioner, supra, Krause

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

support of his contention that he acted reasonably, is misplaced.

In the Krause and Rousseau cases, the section 6659 addition to

tax was held inapplicable in view of the respective holdings that

the taxpayers were not subject to the negligence additions to

tax; the taxpayers had a reasonable basis for the valuations

claimed on the tax returns or had reasonable cause for the

understatements on the returns.    In contrast, we have held that

Snyder did not act reasonably in claiming deductions and

investment tax credits related to the Partnerships, that the

errors on his tax returns were caused by the excessive valuations

of the underlying machinery in the Partnership transactions, that

he lacked reasonable cause for such overvaluation, and that he is

therefore liable for the negligence additions to tax under

section 6653(a).   Accordingly, Snyder's reliance on the Krause

and Rousseau cases is misplaced.

     In Mauerman, the Tenth Circuit Court of Appeals held that

the Commissioner had abused her discretion by not waiving a

section 6661 addition to tax.    Like section 6659, a section 6661

addition to tax may be waived by the Commissioner if the taxpayer

demonstrates that there was reasonable cause for his underpayment

and that he acted in good faith.    Sec. 6661(c).   The taxpayer in

Mauerman relied upon independent attorneys and accountants for
                               - 58 -

advice as to whether payments were properly deductible or

capitalized.   The advice relied upon by the taxpayer in Mauerman

was within the scope of the advisers' expertise, the

interpretation of the tax laws as applied to undisputed facts.

In Snyder's cases, particularly with respect to valuation, he

relied upon advice which was outside the scope of expertise and

experience of his supposed advisers.    Consequently, we consider

Snyder's reliance on the Mauerman case inapplicable.

     Snyder also submitted into evidence preliminary reports

prepared for respondent by Ernest D. Carmagnola (Carmagnola), the

president of Professional Plastic Associates, in support of his

position that the valuation he claimed on his returns was

reasonable.    Carmagnola had been retained by the IRS in 1984 to

evaluate the Sentinel EPE and EPS recyclers in light of what he

described as "the fantastic values placed on the [recyclers] by

the owners."   Based on limited information available to him at

that time, Carmagnola preliminarily estimated that the value of

the Sentinel EPE recycler was $250,000.    However, after

additional information became available to him, Carmagnola

concluded in a signed affidavit, dated March 16, 1993, that the

machines actually had a fair market value of not more than

$50,000 each in the fall of 1981 and 1982.

     We accord no weight to the Carmagnola reports submitted by

petitioners.   The projected valuations therein were based on
                                - 59 -

inadequate information,16 research, and investigation, and were

subsequently rejected and discredited by their author.

Respondent likewise rejected the reports and considered them

unsatisfactory for any purpose, and there is no indication in the

records that respondent used them as a basis for any

determinations in the notices of deficiency.   Even so, Snyder's

counsel obtained copies of these reports and urges that they

support the reasonableness of the values reported on Snyder's

returns.   Not surprisingly, Snyder's counsel did not call

Carmagnola to testify in these cases,17 but preferred instead to

rely solely upon his preliminary ill-founded valuation estimates.

The Carmagnola reports were a part of the record considered by

this Court and reviewed by the Sixth Circuit Court of Appeals in

the Provizer case, where we held the taxpayers liable for the

section 6659 addition to tax.    Consistent therewith, we find in

these cases, as we have found previously, that the reports

prepared by Carmagnola are unreliable and of no consequence.




16
     In one preliminary report, Carmagnola states that he has "a
serious concern of actual profit" from a Sentinel EPE recycler
and that to determine whether the machines actually could be
profitable, he required additional information from PI.
Carmagnola also indicates that in preparing the report, he did
not have information available concerning research and
development costs of the machines and that he estimated those
costs in his valuations of the machines.
17
     Carmagnola has not been called to testify in any of the
Plastics Recycling cases before us.
                             - 60 -

Snyder will not be relieved of the section 6659 additions to tax

based on the preliminary reports prepared by Carmagnola.

     We hold that Snyder did not have a reasonable basis for the

adjusted bases or valuations reflected on his returns with

respect to his investments in the Partnerships.    Respondent

properly could find herein that Snyder's reliance on the offering

materials, Becker, and Miller was unreasonable.    The records in

Snyder's cases do not establish an abuse of discretion on the

part of respondent but support respondent's position.    We hold

that respondent's refusal to waive the section 6659 addition to

tax is not an abuse of discretion.    Respondent is sustained on

this issue.

                                     Decisions will be entered

                              under Rule 155.
