                        T.C. Memo. 2000-339



                      UNITED STATES TAX COURT



         MYRON BARLOW AND ARLENE BARLOW, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 4651-95, 4652-95,        Filed November 3, 2000.
                 6393-95, 6394-95.


     Neal Nusholtz, for petitioners.

     Alexandra E. Nicholaides, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   These consolidated cases were assigned to

Special Trial Judge Robert N. Armen, Jr., pursuant to the

provisions of section 7443A(b)(5) of the Internal Revenue Code in
                                - 2 -

effect at the time of assignment and Rules 180, 181, and 183.1

The Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

                 OPINION OF THE SPECIAL TRIAL JUDGE.

     ARMEN, Special Trial Judge:       In so-called affected items

notices of deficiency, respondent determined additions to tax to

petitioners’ Federal income taxes for the years and in the

amounts as shown below:


                           Additions to tax
                     Sec.         Sec.      Sec.
                  6653(a)(1)   6653(a)(2)   6659
     Year
                                   1
     1982          $4,829                      $23,100
                                   1
     1983              49
                                   1
     1984              22
                                   1
     1985              25

            1
              50 percent of the interest payable with
         respect to the portion of the underpayment
         which is attributable to negligence or
         intentional disregard of rules or regulations.
         The underpayments for the years in issue were
         determined and assessed pursuant to a partnership-
         level proceeding. See secs. 6221-6233. In the
         present cases, respondent determined that the
         entire underpayment for each of the years in
         issue is attributable to negligence or intentional
         disregard of rules or regulations.




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

     After concessions by petitioners,2 the issues remaining for

decision are as follows:

     (1) Whether petitioners are liable for additions to tax

under section 6653(a)(1) and (2) for negligence or intentional

disregard of rules or regulations.    We hold that they are.

     (2) Whether assessment of additional interest under section

6621(c) without prior opportunity to contest such assessment

violates the Due Process Clause of the Fifth Amendment.    We hold

that it does not.




     2
       Petitioners do not contest that the Sentinel EPS recyclers
that are involved in these cases were overvalued. See Gottsegen
v. Commissioner, T.C. Memo. 1997-314; see also Ulanoff v.
Commissioner, T.C. Memo. 1999-170. Petitioners therefore concede
that they are liable for the addition to tax for valuation
overstatement under sec. 6659 for 1982.
     Further, petitioners do not contest (other than on
constitutional grounds) that they are liable for additional
interest under sec. 6621(c) with respect to the underpayment for
1982. See sec. 6621(c)(3)(A)(i), (v); Ulanoff v. Commissioner,
supra.
     Finally, it would appear that petitioners have abandoned
their contention regarding the statute of limitations (the so-
called Davenport issue) in view of the recent affirmance of this
Court’s opinion on that issue by the Court of Appeals for the
Eleventh Circuit. See Davenport Recycling Associates v.
Commissioner, 220 F.3d 1255 (11th Cir. 2000), affg. T.C. Memo.
1998-347; see also Klein v. United States, 86 F. Supp.2d 690
(E.D. Mich. 1999); Clark v. United States, 68 F. Supp.2d 1333,
1342-1346 (N.D. Ga. 1999); Kohn v. Commissioner, T.C. Memo. 1999-
150. However, if we are mistaken in this regard, then we refer
the parties to paragraph 3 of the stipulation of facts, and we
decide the Davenport issue in respondent’s favor based on the
foregoing precedent.
                               - 4 -

                         FINDINGS OF FACT3

     Some of the facts have been stipulated, and they are so

found.   The stipulated facts and attached exhibits are

incorporated herein by this reference.

     Petitioners resided in Grosse Pointe Farms, Michigan, at the

time that each of their petitions was filed with the Court.

A.   The Dickinson Transactions

     These cases are part of the Plastics Recycling group of

cases.   In particular, the additions to tax arise from the

disallowance of losses, investment credits, and energy credits

claimed by petitioners with respect to a partnership known as

Dickinson Recycling Associates (Dickinson or the partnership).

     For a detailed discussion of the transactions involved in

the Plastics Recycling group of cases, see Provizer v.

Commissioner, T.C. Memo. 1992-177, affd. per curiam without

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

transactions involving the Sentinel recycling machines

(recyclers) in petitioners’ cases are substantially identical to

the transactions in Provizer v. Commissioner, supra, and, with

the exception of certain facts that we regard as having minimal



     3
        At trial, we deferred ruling on certain evidentiary
objections made by counsel for both parties. Our findings
reflect our action sustaining petitioners’ relevancy objection to
questions regarding Fillmore Land Development and overruling
respondent’s relevancy objection to matters described in sec.
“K.” of our Findings of Fact, infra.
                               - 5 -

significance, petitioners have stipulated substantially the same

facts concerning the underlying transactions that were described

in Provizer v. Commissioner, supra.

     In a 4-step series of simultaneous transactions closely

resembling those described in Provizer and stipulated by the

parties herein, Packaging Industries of Hyannis, Massachusetts

(PI) manufactured and sold4 four Sentinel EPS5 recyclers to ECI

Corp. (ECI) for $1,520,000 each.   ECI simultaneously resold the

recyclers to F&G Corp. (F&G) for $1,750,000 each.   F&G

simultaneously leased the recyclers to Dickinson.   Finally,

Dickinson simultaneously entered in a joint venture with PI and

Resin Recyclers, Inc. (RRI) to “exploit” the recyclers and place

them with end-users.   Under this latter arrangement, PI was

required to pay Dickinson a monthly joint venture fee.

     For convenience, we refer to the series of transactions


     4
        Terms such as sale and lease, as well as their
derivatives, are used for convenience only and do not imply that
the particular transaction was a sale or lease for Federal tax
purposes. Similarly, terms such as joint venture and agreement
are also used for convenience only and do not imply that the
particular arrangement was a joint venture or an agreement for
Federal tax purposes.
     5
        EPS stands for expanded polystyrene. Provizer v.
Commissioner, T.C. Memo. 1992-177, involved Sentinel expanded
polyethylene (EPE) recyclers. However, the EPS recycler
partnerships and the EPE recycler partnerships are essentially
identical. See Davenport Recycling Associates v. Commissioner,
T.C. Memo. 1998-347, affd. 220 F.3d 1255 (11th Cir. 2000); see
also Gottsegen v. Commissioner, T.C. Memo. 1997-314 (involving
both the EPE and EPS recyclers); Ulanoff v. Commissioner, T.C.
Memo. 1999-170 (same).
                                 - 6 -

between and among PI, ECI, F&G, Dickinson, and RRI as the

Dickinson transactions.

     The sales of the Sentinel EPS recyclers from PI to ECI were

financed using 12-year nonrecourse notes.   The sales of the

recyclers from ECI to F&G were financed using 12-year “partial

recourse” notes; however, the recourse portion of the notes was

payable only after the first 80 percent of the notes, the

nonrecourse portion, was paid.    No arm’s-length negotiations for

the price of the recyclers took place between, or among, PI, ECI

and F&G.

     At the closing of the Dickinson transaction, PI, ECI, F&G,

Dickinson, and RRI entered into arrangements whereby PI would pay

a monthly joint venture fee to Dickinson, in the same amount that

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

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

that ECI would pay monthly on its note to PI.    Further, in

connection with the closing of the Dickinson transaction, PI,

ECI, F&G, Dickinson, and RRI entered into offset agreements so

that the foregoing payments were bookkeeping entries only and

were never in fact paid.   Also in connection with the closing of

the Dickinson transaction, PI, ECI, F&G, Dickinson, and RRI also

entered into cross-indemnification agreements.
                                 - 7 -

B.   Individuals Involved

     Richard Roberts (Roberts) was a businessman and the general

partner in a number of limited partnerships that leased Sentinel

EPE recyclers.    Roberts was also a 9-percent shareholder in F&G,

the corporation that leased the recyclers to Dickinson in the

Dickinson transactions.

     Raymond Grant (Grant) was an investment banker, attorney,

and accountant.   Grant was also the president and sole owner of

ECI, the corporation that sold the recyclers to F&G in the

Dickinson transactions.

     From 1982 through 1985, Roberts and Grant were in the

business of promoting tax-sheltered investments.    Roberts and

Grant also served as general partners in other investments.

Before the Dickinson transactions, Roberts and Grant were clients

of the accounting firm H.W. Freedman & Co. (Freedman & Co.).

     Harris W. Freedman (Freedman), a certified public accountant

and the named partner in Freedman & Co., was the president,

chairman of the board, and 9.1 percent owner of F&G.    Freedman

was experienced with leveraged leasing, and he owned 94 percent

of a Sentinel EPE recycler.

     Freedman & Co. prepared the tax returns for ECI, F&G, and

Clearwater Group, the partnership that was involved in Provizer

v. Commissioner, supra.     Although Freedman & Co. did not prepare

the initial financial projections included in the Dickinson
                               - 8 -

private placement offering memorandum, Freedman & Co. reviewed

those financial projections and made suggestions as to format and

substance.

     Freedman & Co. also provided tax services to John D. Bambara

(Bambara).   Bambara was the president and sole owner of First

Massachusetts Equipment Corp. (FMEC Corp.), another entity that

was involved in Provizer v. Commissioner, T.C. Memo. 1992-177.

Bambara was also the president of PI and a member of its board of

directors and with his wife and daughter owned 100 percent of the

stock of PI, the corporation that sold the recyclers to ECI in

the Dickinson transactions.

     Elliot I. Miller (Miller), a practicing attorney who was

experienced in tax matters, was the corporate counsel to PI.

Miller represented Grant personally and Grant’s clients who

invested in programs that Grant promoted.     Miller met Grant in

the 1970's when Grant was involved in marketing a coal mine.

Miller was also a 9.1-percent owner of F&G.

     John Y. Taggert (Taggert) was a well-known tax attorney, the

head of the tax department of the New York law firm of Windells,

Marx, Davis & Ives, and an adjunct professor of tax law at the

New York University Law School.   Taggert had been acquainted with

Miller for many years before 1982.     Miller recommended that

Roberts employ Taggert and his firm as counsel to the general

partner in the initial Plastics Recycling partnership.     Taggert
                               - 9 -

and other members of his firm prepared the offering memorandum,

tax opinion, and other legal documents for Dickinson.   Taggert

owned a 6.66-percent interest in a second-tier Plastics Recycling

partnership.

     Robert Gottsegen (Gottsegen) was a businessman active in the

plastics industry and a long-time business associate of Bambara.

Gottsegen was the sole owner of RRI, the corporation that was

involved in the joint venture in the Dickinson transactions, and

a 9.1-percent owner of F&G.   Gottsegen was the owner of several

Sentinel recyclers and also the petitioner in Gottsegen v.

Commissioner, T.C. Memo. 1997-314.

     Samuel L. Winer (Sam Winer or Winer) was Dickinson’s general

partner and tax matters partner.   Winer purportedly paid $1,000

for a 1-percent interest in all items of income, gain, deduction,

loss, and credit of the partnership.   For his services, Winer

received $62,000 from the proceeds of the private placement

offering.

C.   The Private Offering Memorandum

     By a private placement offering memorandum dated October 26,

1982 (the offering memorandum), subscriptions for 18 limited

partnership units in Dickinson were offered by the partnership’s

promoter to potential limited partners at $50,000 per partnership

unit.   Pursuant to the offering memorandum, the limited partners

would own 99 percent of Dickinson and the general partner, Winer,
                                - 10 -

would own the remaining 1 percent.       Pursuant to the offering

memorandum, each limited partner was required to have a net worth

(including residence and personal property) in excess of $1

million, or net income in excess of $200,000, for each investment

unit.

     The offering memorandum stated that Dickinson would pay

“fees of purchaser representatives and selling commissions” from

the proceeds of the offering in an amount equal to 10 percent of

the aggregate price of the units.

     The offering memorandum also stated that Dickinson could pay

professional fees to “Fred Gordon, Esq., Special Counsel to the

General Partner”, in an amount equal to 5 percent of the

aggregate price of the units.    Gordon provided legal services to

the partnership for which he was compensated.

     The face of the offering memorandum warned, in bold capital

letters, that “THIS OFFERING INVOLVES A HIGH DEGREE OF RISK”.

The offering memorandum also warned that “An investment in the

partnership involves a high degree of business and tax risks and

should, therefore, be considered only by persons who have a

substantial net worth and substantial present and anticipated

income and who can afford to lose all of their cash investment

and all or a portion of their anticipated tax benefits.”       The

offering memorandum went on to enumerate significant business and

tax risks associated with an investment in Dickinson.       Among
                               - 11 -

those risks, the offering memorandum stated: (1) There was a

substantial likelihood of audit by the Internal Revenue Service,

and the purchase price paid by F&G to ECI might be challenged as

being in excess of the fair market value; (2) the partnership had

no prior operating history; (3) the general partner had no prior

experience in marketing recycling or similar equipment; (4) the

limited partners would have no control over the conduct of the

partnership’s business; (5) there were no assurances that market

prices for virgin resin would remain at their current costs per

pound or that the recycled pellets would be as marketable as

virgin pellets; and (6) certain potential conflicts of interest

existed.

     The offering memorandum informed investors that the

Dickinson transactions would be executed simultaneously.

     The offering memorandum prominently touted the anticipated

tax benefits for the initial year of investment for an investor

in the partnership.   In this regard, the offering memorandum

stated, in part, as follows:

          The principal tax benefits expected from an
     investment in the Partnership are to be derived from the
     Limited Partner’s share of investment and energy tax
     credits and tax deductions expected to be generated by the
     Partnership in 1982. The tax benefits on a per Unit basis
     are as follows:

                           Projected
                       Regular Investment      Projected Tax
            Payment   and Energy Tax Credits     Deductions
     1982   $50,000           $77,000              $38,940

     The Limited Partners are not liable for any additional
     payment beyond their cash investment for their Units, nor
                               - 12 -

     are they subject to any further assessment.

     The offering memorandum also included a tax opinion prepared

by the law firm of Boylan & Evans concerning the tax issues

involved in the Plastics Recycling program.    William A. Boylan

and John D. Evans were formerly partners at Windells, Marx, Davis

& Ives before leaving in 1982 and forming their own law firm.

     Also included in the offering memorandum were the reports of

two “evaluators”, Samuel Z. Burstein (Burstein) and Stanley

Ulanoff (Ulanoff).   Burstein was a professor of mathematics at

New York University.   Burstein’s report concluded that the

Sentinel EPS recyclers were capable of continuous recycling.     The

report also concluded that the recycling system would yield a

material having commercial value.

     At the time Ulanoff prepared his report, he was a professor

of marketing at Baruch College and also the author of numerous

books on technical and marketing subjects.    Ulanoff’s report

concluded that the price paid by F&G for the Sentinel EPS

recyclers, the rent paid by Dickinson, and the joint venture

profits were all fair and reasonable.

     Burstein owned a 5.82-percent interest in another Plastics

Recycling partnership that leased Sentinel EPS recyclers.

Ulanoff owned interests in other Plastics Recycling partnerships
                               - 13 -

that leased both Sentinel EPS and EPE recyclers.6

     The offering memorandum represented that Sentinel EPS

recyclers were unique machines.   However, they were not.     Several

machines capable of densifying low density materials were already

on the market in 1982.   Other plastics machines available at that

time ranged in price from $20,000 to $200,000, including the

Foremost “Densilator”, the Nelmor/Weiss Densification System

(Regenolux), the Buss-Condux Plastcompactor and the Cumberland

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

and the discussion regarding expert reports, infra.     Moreover,

the recyclers were incapable of recycling expanded polystyrene by

themselves and had to be used in connection with extruders and

pelletizers.

D.   Expert Reports

     At trial, petitioners did not offer expert testimony

regarding the value of the recyclers.   Rather, petitioners

stipulated to the expert reports prepared by respondent’s experts

Steven Grossman (Grossman) and Richard S. Lindstrom (Lindstrom).

Grossman and Lindstrom testified in Provizer v. Commissioner,

supra, and a number of other Plastics Recycling cases.

     1. Grossman

     Grossman is a professor in the Plastics Engineering



     6
        Ulanoff was also the petitioner in Ulanoff v.
Commissioner, T.C. Memo. 1999-170.
                              - 14 -

Department at the University of Massachusetts at Lowell.    He has

a bachelor of science degree in chemistry from the University of

Connecticut and a doctorate degree in polymer science and

engineering from the University of Massachusetts.   He also has

more than 15 years of experience in the plastics industry,

including more than 4 years of experience as a research and

development scientist at the Upjohn Co. in its Polymer Research

Group.

     Grossman is also a partner in the law firm of Hayes,

Soloway, Hennessey, Grossman & Hage, P.C.    The firm practices in

the area of intellectual property, including patents, trademarks,

copyrights, and trade secret protection.

     Grossman's report concerning the value of the Sentinel EPS

recyclers discusses the limited market for the recycled plastic

material.   Grossman concluded that these recyclers were unlikely

to be successful products because of the absence of any new

technology, the absence of a continuous source of suitable scrap,

and the absence of any established market.   Grossman suggested

that a reasonable comparison of the products available in the

polystyrene industry in 1982 with the Sentinel EPS recyclers

reveals that the recyclers had very little commercial value and

were similar to comparable products available on the market in

component form.   For these reasons, Grossman opined that the

Sentinel EPS recyclers did not justify the "one-of-a-kind" price
                               - 15 -

tag that they carried.

     Specifically, Grossman reported that there were several

machines on the market as early as 1981 that were functionally

equivalent to, and significantly less expensive than the Sentinel

EPS recyclers.    These machines included: (1) The Japan Repro

recycler, available in 1981 for $53,000; (2) the Buss-Condux

Plastcompactor, available before 1981 for $75,000; (3) Foremost

Machine Builders' "Densilator", available from 1978-1981 for

$20,000; and (4) the Midland Ross Extruder, available in 1980 and

1981 for $120,000.    Grossman observed that all of these machines

were "widely available".

     Grossman examined both the Sentinel EPS recycler and a Japan

Repro recycler and found that the construction of the two

machines was "nearly identical".    Further, Grossman concluded

that the recycled polystyrene produced by both machines would

also be nearly identical.    In Grossman's opinion, neither the

Japan Repro recycler nor the Sentinel EPS recycler represented "a

serious effort at recycling" because the end-product from both

machines was not completely devolatized and required further

processing.   It was also Grossman's opinion that an individual

who seriously wanted to recycle would not purchase either of

these machines.

     Grossman's opinion regarding the Sentinel EPS recycler was

based on his personal examination of a Sentinel EPS recycler, as
                              - 16 -

well as the descriptions of such recyclers as set forth in the

writings of other professionals.   Grossman did not, however,

observe the Sentinel EPS recycler in actual operation.

     Finally, Grossman reported on the relationship between the

plastics industry and the petrochemical industry.   Grossman noted

that although the development of the petrochemical industry is a

contributing factor in the growth of the plastics industry, the

two industries have a "remarkable degree of independence".

Grossman observed that the "oil crisis" in 1973 triggered "dire"

predictions about the future of plastics that had not been

fulfilled in 1981.   Grossman stated that the cost of a plastic

product depends, in large part, on technology and the price of

alternative materials.   Grossman's studies concluded that a 300

percent increase in oil prices results in a 30 to 40 percent

increase in the cost of plastic.

     Grossman did not specifically value the Sentinel EPS

recycler.   However, as previously stated, Grossman concluded that

existing technology was available that provided equivalent

capability of recycling polystyrene.   Specifically regarding the

Sentinel EPS recycler, Grossman also concluded that recycling

equipment that achieved the same result as the Sentinel EPS

recycler sold for about $50,000 during the relevant period.

     2. Lindstrom

     Lindstrom graduated from the Massachusetts Institute of
                              - 17 -

Technology with a bachelor's degree in chemical engineering.

From 1956 until 1989, Lindstrom worked for Arthur D. Little,

Inc., in the areas of process and product evaluation and

improvement and new product development, with special emphasis on

plastics, elastomers, and fibers.   At the time of trial,

Lindstrom continued to pursue these areas as a consultant.

     In his report, Lindstrom determined that several different

types of equipment capable of recycling expanded polystyrene were

available and priced between $25,000 and $100,000 in 1982.    With

respect to the Sentinel EPS recycler in 1982, Lindstrom stated:

“Several machines were available that could reprocess EPS into

higher quality, more useful, higher value product and these

machines or processing systems cost $50,000 to $100,000.”

     Lindstrom examined the Buss-Condux Plastcompactor and the

Regenolux.   Lindstrom found that these machines were functionally

equivalent to the Sentinel EPS recycler and were available in the

years and at the prices reported by Grossman, detailed supra.

Lindstrom also reported that various equipment companies, such as

the Cumberland Engineering Division of John Brown Plastics

Machinery, were willing to provide customized recycling programs

to companies at a minimum cost of $50,000.

     Lindstrom found that the Sentinel EPS recycler could process

between 100 and 200 pounds of plastic per hour.

     Lindstrom observed a Sentinel EPS recycler in operation and
                              - 18 -

was allowed to inspect the machine closely.    Lindstrom estimated

the manufacturing cost of the Sentinel EPS recycler to be

approximately $20,000 and the market value of the machine to be

approximately $25,000.

E.   Fair Market Value of the Recyclers

      At all relevant times, the fair market value of the Sentinel

EPS recyclers did not exceed $50,000 per machine.

F.    Petitioners and Their Introduction to Dickinson

      Petitioner Myron Barlow (petitioner) is a highly educated

individual.   Petitioner received a bachelor’s degree from John

Hopkins University in Baltimore, Maryland, and a medical degree

from the University of Michigan School of Medicine in Ann Arbor,

Michigan.   He then completed a 3-year residency program in

dermatology at Wayne State University in Detroit, Michigan.

Thereafter he began the private practice of medicine as a Board-

certified dermatologist.   He practiced his profession during the

years in issue and until he retired in 1997.

      Petitioner is also a financially successful individual.

During the years in issue, petitioner received compensation from

his professional corporation, Gross Pointe Dermatology

Associates, as follows:
                              - 19 -

               Year             Compensation
               1982               $294,263
               1983                348,630
               1984                250,000
               1985                356,590

     During the years in issue, petitioner Arlene Barlow was not

generally employed outside the home.   She did receive some

minimal compensation in 1984 and 1985 working for petitioner’s

professional corporation.

     Petitioner is also a sophisticated investor.   Prior to

purchasing a partnership interest in Dickinson, petitioner’s

investment portfolio included a variety of interests.   For

example, petitioner owned stock in a closely held corporation,

DOTT Manufacturing Co., that formed plastic products for the

automobile industry.7   Petitioner also owned partnership

interests in Wilmington Associates, a “land type of investment”

in North Carolina; 16-75 Land Co., “an investment in an office

building” in Michigan; and Stonebridge Manor Properties, a

partnership whose business is not described in the record.

Petitioner also owned an interest in Greater Mary, an operating

coal mine in Pennsylvania.   In addition, petitioner owned stocks

and bonds, including municipal bonds, as well as a communications

system that he rented to a medical clinic.



     7
        On their income tax return for 1985, petitioners reported
gain from the sale of stock in Dott in the amount of $222,349,
based on a gross sales price of $287,034 and cost or other basis,
plus expense of sale, in the amount of $64,685.
                              - 20 -

     In December 1982, at or about the time he invested in

Dickinson, petitioner also invested $50,000 in a business known

as Real Estate Financial Corp.

     Petitioner was introduced to Dickinson in November 1982 by

Herbert Krickstein (Krickstein), a friend and medical colleague,

and Fred Gordon (Gordon), an attorney, while on a golf vacation

in Florida.   At the time, Gordon was Krickstein’s attorney;

Gordon was also actively engaged in selling interests in

partnerships such as Dickinson and was the “Fred Gordon, Esq.”

who was identified in the Dickinson offering memorandum as

“Special Counsel to the General Partner”.   Gordon never

represented that he had any specialized knowledge about plastics

recycling.

     After his return from Florida, petitioner received a letter

from Gordon dated November 30, 1982, enclosing a copy of the

offering memorandum.   Petitioner “browsed” through portions of

the offering memorandum, but he did not read it.     Rather, he

consulted with Philip Nusholtz (Nusholtz), an attorney with whom

he had a long-standing professional relationship and whose

judgment he respected and whose advice he valued.8    Nusholtz also

did not read the offering memorandum; however, he advised

petitioner not to invest in any promotion marketed by Gordon but



     8
        Philip Nusholtz was the father of petitioners’ counsel
Neal Nusholtz.
                              - 21 -

instead to focus on more conservative investments.

     Petitioner then took the offering memorandum to his

accountant and return preparer, Gerald Kabeck (Kabeck), a C.P.A.,

who read it and thought that the investment was reasonable.    At

the time, Kabeck had no specialized knowledge or experience in

plastics materials or plastics recycling and no specialized

knowledge in valuing plastics recycling machines such as the

Sentinel EPS recycler.   Petitioner did not pay Kabeck for his

advice.

      In December 1982, petitioner signed a subscription

agreement and purchased one limited partnership unit (a 5.5-

percent interest) in Dickinson for $50,000.   In signing the

subscription agreement, petitioner assumed that the purchaser

representative was Gordon.

     Petitioner did not, before signing the subscription

agreement and investing in Dickinson, make any independent

investigation of the fair market value of the Sentinel EPS

recycler, nor did he seek the advice of any expert in the

plastics industry.   Petitioner was influenced to sign the

subscription agreement because he assumed that Krickstein and

other medical colleagues were investing in Dickinson.   However,

petitioner did not have any specific conversations with his

colleagues about either Dickinson or plastics recycling before

making the investment.   Petitioner did not think that his medical
                                - 22 -

colleagues had any specialized knowledge in plastics recycling or

in plastics recycling machines such as the Sentinel EPS

recycler.9

      At the time that he signed the subscription agreement and

invested in Dickinson, petitioner did not have any education or

work experience in either plastics materials or plastics

recycling, nor did petitioner have any specialized knowledge

about either the plastics industry in general or the EPS recycler

in particular.

      In contrast, at the time that he signed the subscription

agreement, petitioner knew that his investment in Dickinson

offered immediate tax benefits in excess of his $50,000

investment.   Petitioner had not previously made any investment

that offered immediate tax benefits in excess of his investment.

Petitioner was influenced to invest in Dickinson by the tax

benefits described in the offering memorandum.

G.   Ultimate Finding Regarding Petitioner’s Motivation

      Petitioner invested in Dickinson principally because the

investment offered immediate tax benefits in excess of his

investment.

H.   Petitioners’ Tax Returns

      The tax benefits claimed by petitioners on their Federal



      9
        There is nothing in the record to suggest that
petitioner’s medical colleagues had any specialized knowledge.
                                - 23 -

income tax return for 1982, the initial year of investment in

Dickinson, exceeded their $50,000 investment in the partnership.

Thus, on their 1982 return, petitioners claimed a regular

investment credit and an energy investment credit in the

aggregate amount of $77,001 in respect of the recyclers.

Petitioners also claimed a loss in the amount of $39,155 for

their distributive share of the partnership’s reported loss for

1982.     The investment credits and the partnership loss served to

reduce petitioners’ liability for Federal income tax as reported

on their 1982 return by $96,583.

     Petitioners also claimed losses on their Federal income tax

returns for 1983 through 1985 for their distributive share of

Dickinson’s reported losses for those years as follows:

                  Year        Loss Claimed
                  1983          $1,961
                  1984             866
                  1985           1,014

        Petitioner never made a profit in any year from his

investment in Dickinson.

I.   The Partnership-level Proceeding

        Dickinson was a so-called TEFRA partnership subject to the

unified partnership audit and litigation procedures set forth in

sections 6221 through 6233.     See Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a),

96 Stat. 648.     On May 15, 1989, respondent mailed a Notice of

Final Partnership Administrative Adjustment (FPAA) to Sam Winer,
                                - 24 -

the tax matters partner of the Dickinson partnership, for each of

the taxable years 1982 through 1985.     A copy of each FPAA was

also mailed to petitioners.

     The FPAA’s advised petitioners of adjustments that

respondent proposed to make to the partnership returns (Forms

1065) filed by Dickinson.   Specifically, the FPAA’s disallowed

all deductions and credits claimed by Dickinson in connection

with its plastics recycling activities for 1982 through 1985.

Each of the FPAA’s also advised petitioners that they could agree

to the adjustments or, if they did not agree, how review could be

obtained by the tax matters partner, or by notice partners such

as petitioner, in this Court.    Each of the FPAA’s also included a

page entitled “For Information Purposes Only”, which provided as

follows:

          It has been determined that the partnership has
     improperly taken deductions or credits based on the
     overvaluation of assets and based on positions taken
     for which substantial authority was lacking. It has
     also been determined that the transactions were entered
     into for tax motivated reasons and adjustments to the
     partnership items were due to negligence or intentional
     disregard of rules and regulations. Penalties based on
     the above transactions, including but not limited to
     Internal Revenue Code sections 6659, 6661, 6621(c), and
     6653(a)(1)&(2), are applicable at the individual
     partner level and will be raised in separate
     proceedings at the partner level following the present
     partnership proceedings.

          A Court will not have jurisdiction to consider
     these partner penalties raised in a petition with
     respect to this Notice of Final Partnership
     Administrative Adjustment (FPAA) pursuant to Internal
     Revenue Code sections 6226(f) and 6231(a)(3). Thus,
                              - 25 -

      you should not raise any penalty issues should you
      decide to petition the Tax Court with respect to this
      FPAA.

      On June 12, 1989, a case was commenced in this Court at

docket No. 13191-89 and captioned “Dickinson Recycling

Associates, Sam Winer, Tax Matters Partner, Petitioner v.

Commissioner of Internal Revenue, Respondent”.10     Subsequently,

on February 23, 1994, the Court entered decision in the Dickinson

case pursuant to the Commissioner’s Motion for Entry of Decision

under Rule 248(b).   The Court’s decision, which reflected the

full concession by Dickinson of all items of income, loss, and

the underlying valuation for the recyclers for 1982 through 1985,

completely sustained the Commissioner’s FPAA determinations for

those years.

J.   Payment of Additional Interest by Petitioners

      In November 1994, after the Court’s decision in the

partnership action at docket No. 13191-89 became final,

respondent mailed a letter to petitioners advising them that

their amended return related to Dickinson for the taxable year

1982 had been accepted as filed11 and that the provisions of


      10
        All of the limited partners of Dickinson who had an
interest in the outcome of the partnership proceeding were
treated as parties to the proceeding. See sec. 6226(c) and (d).
See also Title XXIV, Tax Court Rules of Practice and Procedure,
regarding partnership actions.
      11
        In September 1988, petitioners amended their income tax
returns for 1982 through 1985. Copies of those returns are not
                                                   (continued...)
                                  - 26 -

section 6621 regarding additional interest would apply to that

taxable year.    The letter went on to state as follows:

      Section 6621(c) IRC
      Since the underpayment of tax is attributable to a tax
      motivated transaction, the interest to be applied to
      any underpayment after 12-31-84 is 120% of the adjusted
      rate of interest established under IRC Section 6621(c).
      The amount of the underpayment attributable to the tax
      motivated transactions is $96,583.00.

      Thereafter, by Notice dated December 12, 1994, respondent

billed petitioners for additional interest under section 6621(c)

for the taxable year 1982 in the amount of $27,914.     Petitioners

protested the assessment of additional interest without having

prior opportunity to contest the assessment; nevertheless, they

paid the $27,914 amount on December 27, 1994.

K.   Collateral Litigation

      In December 1988, a few months after petitioners amended

their income tax returns for 1982 through 1985, petitioner and

several of his medical colleagues commenced a civil action for

damages against Gordon, as well as Boylan & Evans, the law firm

that authored the tax opinion in the offering memorandum,12 in

respect of Dickinson and two other Plastics Recycling

partnerships.    This action was settled by the parties thereto


      11
      (...continued)
part of the record. Apparently, petitioners foresaw an adverse
outcome of a likely TEFRA partnership action and amended their
returns in order to satisfy anticipated underpayments of tax
attributable to the Dickinson investment.
      12
           See supra sec. “C.”.
                                - 27 -

prior to trial.   Neither the date on which the action was settled

nor the amount for which it was settled is disclosed in the

record before us.

                                OPINION

     We have decided many Plastics Recycling cases.   Most of

these cases have presented issues regarding additions to tax for

negligence and valuation overstatement.   See, e.g., Carroll v.

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

Memo. 1999-170; Gottsegen v. Commissioner, T.C. Memo. 1997-314;

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

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

Memo. 1997-259 n.13 (and cases cited therein), affd. Addington v.

Commissioner, 205 F.3d 54 (2d Cir. 2000).    We found the taxpayers

liable for the addition to tax for valuation overstatement in all

of those cases and liable for the additions to tax for negligence

in nearly all of those cases.

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

     Respondent determined that petitioners are liable for

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

the underpayment attributable to petitioners’ investment in

Dickinson.   Petitioners have the burden of proof to show that

they are not liable for the additions to tax.   See Addington v.

Commissioner, supra; Goldman v. Commissioner, 39 F.3d 402, 407

(2d Cir. 1994), affg. T.C. Memo. 1993-480; Luman v. Commissioner,
                                - 28 -

79 T.C. 846, 860-861 (1982); Bixby v. Commissioner, 58 T.C. 757,

791-792 (1972); see Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115

(1933).13

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

part of the underpayment of tax is due to negligence or

intentional disregard of rules or regulations.     Negligence is

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

and ordinarily prudent person would exercise under the

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

(1985).     The pertinent question is whether a particular

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

experience, the nature of the investment, and the taxpayer's

actions in connection with the transactions.     See Henry Schwartz

Corp. v. Commissioner, 60 T.C. 728, 740 (1973).     In this regard,

the determination of negligence is highly factual.     "When

considering the negligence addition, we evaluate the particular

facts of each case, judging the relative sophistication of the

taxpayers as well as the manner in which the taxpayers approached

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

     Under some circumstances, a taxpayer may avoid liability for


     13
        Cf. sec. 7491(c), effective for court proceedings
arising in connection with examinations commencing after July 22,
1998. In the present cases, the examination of petitioners’
income tax returns for 1982 through 1985 commenced well before
July 22, 1998.
                               - 29 -

negligence if reasonable reliance on a competent professional

adviser is shown.   See United States v. Boyle, 469 U.S. 241, 250-

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

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

Reliance on professional advice, standing alone, is not an

absolute defense to negligence, but rather a factor to be

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

professional advice to excuse a taxpayer from negligence, the

taxpayer must show that the professional had the requisite

expertise, as well as knowledge of the pertinent facts, to

provide informed advice on the subject matter.    See David v.

Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995), affg. T.C.

Memo. 1993-621; Goldman v. Commissioner, supra; Freytag v.

Commissioner, supra.

     Petitioner contends that he reasonably relied on the advice

of Gordon.    However, Gordon never represented that he had any

specialized knowledge about plastics recycling.     Morever, the

record indicates that Gordon received a 10-percent commission in

connection with promoting the Dickinson investment and also

provided legal services for which he was compensated.     Reliance

on representations by insiders or promoters has been held to be

an inadequate defense to negligence.    See Goldman v.

Commissioner, supra; LaVerne v. Commissioner, 94 T.C. 637, 652-

653 (1990), affd. without published opinion 956 F.2d 274 (9th
                              - 30 -

Cir. 1992), affd. without published opinion sub nom. Cowles v.

Commissioner, 949 F.2d 401 (10th Cir. 1991).    Advice from such

individuals "is better classified as sales promotion".       Vojticek

v. Commissioner, T.C. Memo. 1995-444.

     Pleas of reliance have also been rejected when neither the

taxpayer nor the advisers purportedly relied on by the taxpayer

knew anything about the nontax business aspects of the

contemplated venture.   See Freytag v. Commissioner, supra; Beck

v. Commissioner, 85 T.C. 557 (1985).    Thus, petitioner’s

professed reliance on Gordon’s advice was not reasonable.      See

Patin v. Commissioner, 88 T.C. 1086, 1131 (1987), affd. without

published opinion 865 F.2d 1264 (5th Cir. 1989), affd. sub nom.

Gomberg v. Commissioner, 868 F.2d 865 (6th Cir. 1989), affd. sub

nom. Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989), affd.

per curiam without published opinion sub nom. Hatheway v.

Commissioner, 856 F.2d 186 (4th Cir. 1988); Klieger v.

Commissioner, T.C. Memo. 1992-734.

     Petitioner claims that he did not know that Gordon was

financially interested in Dickinson.    Yet in signing the

subscription agreement, petitioner assumed that Gordon was the

purchaser representative, and the offering memorandum clearly

stated that Dickinson would pay “fees of purchaser

representatives and selling commissions” from the proceeds of the

offering in an amount equal to 10 percent of the aggregate price
                               - 31 -

of the units.   The offering memorandum also identified Gordon as

“Special Counsel to the General Partner” and stated that

Dickinson could pay professional fees to Gordon in an amount

equal to 5 percent of the aggregate price of the units.

     At trial, petitioner admitted that he did not pay Gordon for

investment advice, and he described Gordon as “an attorney who

put together investment deals of this sort”.   Under these

circumstances, we are unable to accept uncritically petitioner’s

assertion that he did not realize that Gordon was being

compensated by Dickinson.   At the very least, petitioner should

have known that Gordon had a conflict of interest.   See Addington

v. Commissioner, 205 F.3d at 59.

     Petitioner also contends that he reasonably relied on the

advice of Kabeck, his accountant and return preparer.    For

reliance on professional advice to excuse a taxpayer from

negligence, the taxpayer must show that the professional had the

requisite expertise, as well as the knowledge of the pertinent

facts, to provide informed advice on the particular subject

matter.    See David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir.

1995), affg. per curiam T.C. Memo. 1993-621; Goldman v.

Commissioner, supra; Freytag v. Commissioner, supra.     A taxpayer

may not reasonably rely on the advice of an accountant who knows

nothing about the nontax business aspects of the contemplated

venture.   See Freytag v. Commissioner, supra; Beck v.
                               - 32 -

Commissioner, 85 T.C. 557 (1985).

     In the present cases, Kabeck read the offering memorandum.

However, Kabeck had no specialized knowledge or experience in

plastics materials or plastics recycling and no specialized

knowledge in valuing plastics recycling machines such as the

Sentinel EPS recycler.   In view of Kabeck’s lack of knowledge

regarding either the nontax or business aspects of the Dickinson

investment, petitioner’s alleged reliance on his accountant does

not relieve petitioner of liability for the additions to tax for

negligence.   See Addington v. Commissioner, 205 F.3d 54 (2d Cir.

2000).

     Petitioner also contends that he reasonably relied on his

medical colleagues, particularly Krickstein.   However, petitioner

did not have any specific conversations with his colleagues about

either Dickinson or plastics recycling before making the

investment.   Indeed, petitioner did not even think that his

medical colleagues had any specialized knowledge in plastics

recycling or in plastics recycling machines such as the Sentinel

EPS recycler.14   See Addington v. Commissioner, supra.   Rather,

petitioner merely assumed that Krickstein and other medical

colleagues were investing in Dickinson.   In short, the perception

that his colleagues were investing made petitioner want to


     14
        It would appear that any knowledge that Krickstein may
have had about the Dickinson transactions came from Gordon. See
Vojticek v. Commissioner, T.C. Memo. 1995-444.
                              - 33 -

invest, also.

     Petitioners rely on Dyckman v. Commissioner, T.C. Memo.

1999-79, for the proposition that reliance on a trusted friend or

adviser (such as Krickstein) relieves a taxpayer from liability

for negligence.   That case, however, is distinguishable from the

present ones.

     In Dyckman, we held for the taxpayers on the issue of

negligence based on special and unusual circumstances, including

the taxpayers’ complete lack of sophistication in investment

matters and the long-term special relationship of trust and

friendship that existed between the taxpayers’ and their C.P.A.

Also determinative was the fact that the taxpayers did not invest

in order to obtain tax benefits; rather, their sole motivation

was to provide for their retirement, and they were not even aware

that their investment was in a partnership designed to produce

tax benefits.   Further, the taxpayers were not provided with any

literature, such as an offering letter or prospectus, regarding

their investment.

     In contrast, petitioner is a sophisticated investor and he

possessed considerable investment experience at the time that he

invested in Dickinson.   Moreover, petitioner was aware that his

investment in Dickinson offered immediate tax benefits in excess

of his investment.   Indeed, petitioner was not only influenced to

invest in Dickinson in order to obtain the promised tax benefits,
                               - 34 -

he invested principally for that reason.    Petitioner was also

provided with a copy of the offering memorandum but chose not to

read it.

     In addition, the trusted adviser in the present cases was

Nusholtz, the attorney with whom petitioner had a long-standing

professional relationship and whose judgment he respected and

whose advice he valued.    Although Nusholtz did not read the

offering memorandum, he advised petitioner in no uncertain terms

not to invest in any promotion offered by Gordon.

     For the foregoing reasons, petitioners’ reliance on Dyckman

v. Commissioner, supra, is misplaced.    Likewise, petitioners’

reliance on Zidanich v. Commissioner, T.C. Memo. 1995-382, is

misplaced for essentially the same reasons.

     Petitioner also contends that he reasonably relied on the

offering memorandum and the attachments thereto.    The short

answer to this contention is that petitioner did not read all of

the offering memorandum.

     The record demonstrates that petitioner did not read all of

the offering memorandum but only “browsed” through portions,

apparently choosing to ignore other portions.    The offering

memorandum contained numerous caveats and warnings regarding the

business and tax risks of the Dickinson transactions.    A careful

review of the offering memorandum, especially the portion

discussing the tax risks, would have caused a prudent investor to
                               - 35 -

question the promised tax benefits.     We would certainly expect no

less from a well-educated and sophisticated individual such as

petitioner.

     At the time that he invested in Dickinson, petitioner did

not have any education or work experience in either plastics

materials or plastics recycling, nor did petitioner have any

specialized knowledge about either the plastics industry in

general or the Sentinel EPS recycler in particular.

Nevertheless, petitioner did not make any independent

investigation of the fair market value of the recycler, nor did

he seek the advice of any expert in the plastics industry.

Rather, petitioner was content to rely on the offering

memorandum.    However, “It is unreasonable for taxpayers to rely

on the advice of someone who they should know has a conflict of

interest.”    Addington v. Commissioner, supra at 59; see Goldman

v. Commissioner, 39 F.3d at 406; LaVerne v. Commissioner, 94 T.C.

637, 652-653 (1990), affd. without published opinion 956 F.2d 274

(9th Cir. 1992), affd. in part without published opinion sub nom.

Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991).

     Aside from the cautionary language of the offering

memorandum, there were several factors that should have alerted

petitioner to the fact that the Sentinel EPS recyclers were

overvalued and that independent expert advice was therefore

required.    Thus, for example, the exorbitant cost of the
                              - 36 -

recyclers (i.e., $7,000,000 for four recyclers ) should have made

petitioner question their value.   Furthermore, as the offering

memorandum advised, the Dickinson transactions would be executed

simultaneously, in what was essentially nothing other than a

circular flow of payments made only through bookkeeping entries.

     We are also convinced that petitioner invested in Dickinson

principally because the investment offered immediate tax benefits

in excess of his $50,000 investment.   Thus, the offering

memorandum promised an investor who purchased a single

partnership unit, tax benefits in 1982 in the form of investment

credits in the aggregate amount of $77,000 and tax deductions

(i.e., a partnership loss) in the amount of $38,940.   On their

1982 return, petitioners actually claimed investment credits in

the aggregate amount of $77,001 and a partnership loss in the

amount of $39,155.   These tax benefits served to reduce

petitioners’ income tax as reported on their 1982 return by

$96,583.   Through this reduction in tax petitioners realized a

sum approximating 200 percent of their investment in about 4

months.

     Finally, mention should be made of two Plastics Recycling

cases that were decided after petitioners’ briefs were filed;

namely, Thompson v. United States, 223 F.3d 1206 (10th Cir.

2000), and Klein v. United States, 94 F. Supp. 2d 838 (E.D. Mich.

2000).
                               - 37 -

       In Thompson v. United States, supra, the Court of Appeals

for the Tenth Circuit held that the District Court did not abuse

its discretion in instructing the jury that reasonable, good-

faith reliance on the advice of a professional adviser

constitutes a defense to negligence within the meaning of section

6653.    This holding served to uphold the jury’s verdict in favor

of the taxpayers on the issue of negligence.

       In Thompson v. United States, supra, the Government relied

heavily on the unpublished opinion of the Court of Appeals for

the Tenth Circuit in a similar Plastics Recycling case, Gilmore &

Wilson Constr. Co. v. Commissioner, 166 F.3d 1221 (10th Cir.

1999), affg. Estate of Hogard v. Commissioner, T.C. Memo. 1997-

174.    The Court of Appeals dismissed the Government’s   assertion

that its holding in that case was dispositive of the issue before

it:

       In that case we reviewed the tax court’s factual
       determination, made after a bench trial, that the
       taxpayers were negligent. Here we consider the more
       limited question of whether a reliance instruction was
       warranted. Had we been presented with such a question
       in Gilmore & Wilson, we would likely have upheld the
       instruction. See id. at *5 (“The evidence introduced,
       both at trial and through stipulation, presents a close
       question regarding whether taxpayers were negligent.”)
       For this reason, the government’s reliance on Gilmore &
       Wilson is misplaced. [Thompson v. United States, supra
       at 1210; fn. ref. omitted.]

       In the present cases, we have considered petitioner’s

contention regarding reliance.    However, we have concluded, based

on the totality of the facts and circumstances presented at
                              - 38 -

trial, that petitioners’ professed reliance on Gordon, Kabeck,

Krickstein, and petitioner’s other medical colleagues was not

reasonable.   Accordingly, we regard Thompson v. Commissioner,

supra, as distinguishable from the present cases.

     In Klein v. United States, supra, the District Court denied

the Government’s motion for summary judgment on the issue of the

taxpayers’ liability for additions to tax for negligence.     The

District Court held that on the record before it, the issue of

negligence could not be decided as a matter of law but rather was

an issue to be decided by the trier of fact.

     In the present cases, we have addressed the issue of

negligence as an issue of fact, which we have decided based on

the totality of the facts and circumstances presented at trial.

Thus, Klein v. United States, supra, is distinguishable from the

present cases.

     Upon consideration of the entire record, we hold that

petitioners are liable for the additions to tax for negligence

under section 6653(a)(1) and (2).   Respondent is therefore

sustained on this issue.

II. Section 6621(c) Additional Interest

     Section 6621(c), formerly section 6621(d), provides for

additional interest in the form of an increased rate of interest

(i.e., 120 percent of the normal rate under section 6601) on an

underpayment of tax, but only if such underpayment exceeds $1,000
                              - 39 -

and is attributable to a tax-motivated transaction.    The

increased rate of interest is effective with respect to interest

accruing after December 31, 1984, even though the transaction was

entered into before that date.   See Solowiejczyk v. Commissioner,

85 T.C. 552 (1985), affd. without published opinion 795 F.2d 1005

(2d Cir. 1986).   Section 6621(c) was repealed by section 7721(b)

of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-

239, 103 Stat. 2399, effective with respect to returns the due

date for which is after December 31, 1989.

     As indicated, additional interest applies only if an

underpayment of tax is attributable to a tax-motivated

transaction.   The term “tax-motivated transaction” is defined in

section 6621(c)(3) to include any valuation overstatement within

the meaning of section 6659(c), see sec. 6621(c)(3)(A)(i), or any

sham or fraudulent transaction, sec. 6621(c)(3)(A)(v).

     There is no dispute in these cases that petitioners’

underpayment of tax for 1982 is attributable to tax-motivated

transactions within the meaning of section 6621(c)(3)(A).

Likewise, there is no dispute that petitioners paid

the additional interest under section 6621 that was assessed by

respondent and that petitioners have the opportunity in the

present cases to contest their liability for such interest

pursuant to the Court’s overpayment jurisdiction.   See sec.

6512(b); Barton v. Commissioner, 97 T.C. 548 (1991).     It is in
                               - 40 -

this context that petitioners contend that they are not liable

for additional interest because assessment of additional interest

under section 6621(c) without prior opportunity to contest such

assessment violates the Due Process Clause of the Fifth

Amendment.

     In order to address petitioners’ contention, we need to step

back and briefly review the unified audit and litigation

procedures that apply to TEFRA partnerships (the TEFRA

procedures).

     In general, the tax treatment of any partnership item is

determined at the partnership level pursuant to the TEFRA

procedures.    The TEFRA procedures apply with respect to a

partnership's taxable years beginning after September 3, 1982.

See Sparks v. Commissioner, 87 T.C. 1279, 1284 (1986); Maxwell v.

Commissioner, 87 T.C. 783, 789 (1986).    Partnership items include

the partnership aggregate and each partner's share of (1) items

of income, gain, loss, deduction, or credit of the partnership

and (2) other amounts determinable at the partnership level with

respect to partnership assets, investments, transactions and

operations necessary to enable the partnership or the partners to

determine the allowable investment credit.    See sec. 6231(a)(3);

sec. 301.6231(a)(3)-1(a)(1)(i), (vi)(A), Proced. & Admin. Regs.

     An affected item is defined in section 6231(a)(5) as any

item to the extent such item is affected by a partnership item.
                               - 41 -

See White v. Commissioner, 95 T.C. 209, 211 (1990).   The first

type of affected item is a computational adjustment made to

record the change in a partner's tax liability resulting from the

proper treatment of a partnership item.   Sec. 6231(a)(6); White

v. Commissioner, supra.   Once partnership level proceedings are

completed, respondent is permitted to assess a computational

adjustment against a partner without issuing a notice of

deficiency.   Sec. 6230(a)(1); N.C.F. Energy Partners v.

Commissioner, 89 T.C. 741, 744 (1987); Maxwell v. Commissioner,

supra at 792 n.9.15

     The second type of affected item is one that is dependent on

factual determinations to be made at the individual partner

level.    See N.C.F. Energy Partners v. Commissioner, supra at 744.

Section 6230(a)(2)(A)(i) provides that the normal deficiency

procedures apply to those affected items which require partner

level determinations.   Additions to tax for negligence and for

valuation overstatement are affected items requiring factual

determinations at the individual partner level.   See N.C.F.

Energy Partners v. Commissioner, supra at 744-745.

     Additional interest under section 6621 is an affected item



     15
        See also sec. 301.6231(a)(6)-1T(b), Temporary Proced. &
Admin. Regs., 52 Fed. Reg. 6791 (Mar. 5, 1987), which provides
that “A computational adjustment includes any interest due with
respect to any underpayment or overpayment of tax attributable to
adjustments to reflect properly the treatment of partnership
items.”
                              - 42 -

because the determination of a taxpayer’s liability for such

interest may require findings of fact peculiar to the particular

taxpayer, namely, the amount of the taxpayer’s underpayment that

is attributable to a tax-motivated transaction.   See N.C.F.

Energy Partners v. Commissioner, supra at 745-746.    Because the

application of section 6621(c) turns on matters that are specific

to individual partners, it follows that such interest constitutes

an affected item that cannot be reviewed in a partnership level

proceeding.   See Affiliated Equipment Leasing II v. Commissioner,

97 T.C. 575, 577-578 (1991); N.C.F. Energy Partners v.

Commissioner, supra at 745-746.

     Ironically, however, a specific partner's liability for

additional interest under section 6621(c) normally cannot be

raised in an affected items proceeding.   This rule, first

articulated in White v. Commissioner, supra, follows from a

combined reading of sections 6211(a), 6230(a), and 6601(e)(1),

which together provide that interest computed under the increased

rate under section 6621(c) is not a "deficiency" within the

meaning of section 6211.   Because our authority in affected items

proceedings derives from our jurisdiction to redetermine a

deficiency under subchapter B of chapter 63, see sec. 6230(a)(2),

we generally have no authority to consider additional interest

under section 6621 in affected items proceedings.    See Odend'hal

v. Commissioner, 95 T.C. 617 (1990).   A narrow exception to this
                             - 43 -

rule applies if a taxpayer pays the additional interest and

invokes our overpayment jurisdiction.   See sec. 6512(b); Barton

v. Commissioner, 97 T.C. 548 (1991).

     From the foregoing, it is apparent that, for taxable years

governed by the TEFRA partnership procedures, taxpayers do not

have a prepayment forum within which to contest their liability

for additional interest under section 6621 where such interest

has accrued on a tax deficiency assessed as a computational

adjustment following a partnership level proceeding.16   See

Affiliated Equipment Leasing II v. Commissioner, supra at 579.

It is this lack of a prepayment forum that petitioners view as

violative of the Due Process Clause of the Fifth Amendment.

     We begin by observing that once we decide that there is a

tax-motivated transaction such as a valuation overstatement or a

sham or fraudulent transaction, the determination of additional

interest is largely mechanical.   See Copeland v. Commissioner,

T.C. Memo. 2000-181; see also Thomas v. United States, 166 F.3d

825, 834 (6th Cir. 1999), holding that if a transaction is tax-

motivated within the meaning of section 6621(c), the individual

taxpayer-investor’s motive is irrelevant.


     16
        By contrast, where a tax deficiency falls within our
deficiency jurisdiction, taxpayers may contest their liability
for additional interest under sec. 6621 before this Court in the
context of a deficiency action without first paying the interest.
See e.g., sec. 6621(c)(4); Carroll v. Commissioner, T.C. Memo.
2000-184, finding the taxpayers liable for additional interest
for the taxable year 1981.
                              - 44 -

     We think petitioners’ contention has been essentially

answered by the Court of Appeals for the Sixth Circuit, the

circuit to which these cases are appealable, see sec.

7482(b)(1)(A), in Johnston v. Commissioner, 429 F.2d 804 (6th

Cir. 1970), affg. 52 T.C. 792 (1969).   In that case, the taxpayer

filed a petition with this Court contesting the assessment,

without the prior issuance of a notice of deficiency, of an

addition to tax under section 6654(a) for failure to pay

estimated tax.   We granted the Commissioner’s motion to dismiss

for lack of jurisdiction, holding that section 6659(b)17 did not

require the issuance of a notice of deficiency for the particular

addition involved.   In so holding, we stated:

     We are not aware of any case that holds that the
     assessment of a tax before the taxpayer is given his
     day in Court is a denial of due process. To the
     contrary, see Phillips v. Commissioner, 283 U.S. 589
     (1931). Prior to the establishment of the Board of Tax
     Appeals (now the Tax Court) prepayment of the tax was a
     prerequisite to the right to test in court all taxes
     determined to be due by the Commissioner of Internal
     Revenue. [Johnston v. Commissioner, 52 T.C. at 793.]

     In affirming our action, the Court of Appeals acknowledged

that “the payment of taxes as a precondition to sue for their

return places a burden on the taxpayer”.   Id. at 806.   However,

the Court of Appeals went on to hold that given the availability

of a refund action, such burden “does not so deprive him of an



     17
        Sec. 6659 has been renumbered several times. In the
current Internal Revenue Code, it appears as sec. 6665.
                               - 45 -

effective determination and adjudication of his final tax

liability as to violate his Fifth Amendment rights to

‘fundamental due process.’”    Id.

       Similarly, in Fendler v. Commissioner, 441 F.2d 1101 (9th

Cir. 1971), the Court of Appeals for the Ninth Circuit held that

there was no denial of due process in requiring a taxpayer first

to pay certain additions to tax and then to seek review of his

liability in a refund proceeding.

       Further, it is well settled that

            The right of the United States to collect its
       internal revenue by summary administrative proceedings
       has long been settled. Where, as here, adequate
       opportunity is afforded for a later judicial
       determination of the legal rights, summary proceedings
       to secure prompt performance of pecuniary obligations
       to the government have been consistently sustained.
       [Phillips v. Commissioner, 283 U.S. 589, 595 (1931);
       fn. ref. omitted.]

and that

       the right of the United States to exact immediate
       payment and to relegate the taxpayer to a suit for
       recovery is paramount. [Id. at 599.]

       In view of the foregoing, we reject petitioners’ contention,

and we hold that there is no overpayment in petitioners’ income

tax for 1982 insofar as additional interest under section 6621(c)

is concerned.    See sec. 6601(e)(1).

III.    Conclusion

       Petitioners have made other arguments that we have

considered in reaching our decision.      To the extent that we have
                             - 46 -

not discussed those arguments, we find them to be without merit.

     To reflect our disposition of the disputed issues, as well

as petitioners’ concessions, see supra note 2,



                                        Decisions will be entered

                                   for respondent.
