                       T.C. Memo. 1995-580



                      UNITED STATES TAX COURT



          ANTHONY J. AND CLAIRE L. PACE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


 ESTATE OF EDGAR P. BERRY, DECEASED, DOROTHY M. BERRY, EXECUTRIX
AND DOROTHY M. BERRY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14454-85, 3918-90.     Filed December 6, 1995.



     James J. Mahon, for petitioners.

     Barry J. Laterman, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   These consolidated cases were assigned to

Special Trial Judge Norman H. Wolfe pursuant to the provisions of
                               - 2 -

section 7443A(b)(4) 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

     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 facts of

the underlying transaction in these cases are substantially

identical to those in the Provizer case.

     In a notice of deficiency dated April 13, 1985, respondent

determined a deficiency in the 1981 joint Federal income tax of

petitioners Pace in the amount of $52,211.    Respondent also

determined that interest on deficiencies accruing after December

31, 1984, should be calculated at 120 percent of the statutory

rate under section 6621(c).2   On January 10, 1994, respondent

1
     All section references are to the Internal Revenue Code, in
effect for the year in issue, unless otherwise indicated. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
2
     The notice of deficiency refers to sec. 6621(d). This
section was redesignated as sec. 6621(c) by sec. 1511(c)(1)(A) of
the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744
and repealed by sec. 7721(b) of the Omnibus Budget Reconciliation
Act of 1989 (OBRA 89), Pub. L. 101-239, 103 Stat. 2106, 2399,
effective for tax returns due after Dec. 31, 1989, OBRA 89 sec.
7721(d), 103 Stat. 2400. The repeal does not affect the instant
case. For simplicity, we will refer to this section as sec.
                                                   (continued...)
                               - 3 -

filed an amendment to answer and asserted additions to tax for

1981 in the amount of $2,611 under section 6653(a)(1) for

negligence and under section 6653(a)(2) in an amount equal to 50

percent of the interest due on the underpayment attributable to

negligence.   Respondent also claimed therein that petitioners had

an underpayment of tax on their 1981 return attributable to a

valuation overstatement and asserted an addition to tax under

section 6659 in an amount equal to 30 percent of the underpayment

attributable to valuation overstatement.

     In a notice of deficiency dated December 14, 1989,

respondent determined a deficiency in the 1981 joint Federal

income tax of petitioners Berry in the amount of $29,978 and

additions to tax for that year in the amount of $11,881 under

section 6659 for valuation overstatement, in the amount of $2,489

under section 6653(a)(1) for negligence, and under section

6653(a)(2) in an amount equal to 50 percent of the interest due

on the underpayment attributable to negligence.   On March 14,

1994, respondent filed an amendment to answer and asserted that

interest on deficiencies accruing after December 31, 1984, should

be calculated at 120 percent of the statutory rate under section

6621(c).


2
 (...continued)
6621(c). The annual rate of interest under sec. 6621(c) for
interest accruing after Dec. 31, 1984, equals 120 percent of the
interest payable under sec. 6601 with respect to any substantial
underpayment attributable to tax-motivated transactions.
                                 - 4 -

     On March 23, 1994, the parties in these cases each filed a

Stipulation of Settled Issues.    In each Stipulation of Settled

Issues, the parties agreed that petitioners were not entitled to

any deductions, investment tax 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.

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

liable for additions to tax for negligence or intentional

disregard of rules or regulations under section 6653(a)(1) and

(2); (2) whether petitioners are liable for the addition to tax

under section 6659 for an underpayment of tax attributable to

valuation overstatement; and (3) whether petitioners are liable

for increased interest under section 6621(c).

                         FINDINGS OF FACT

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

The stipulated facts and attached exhibits are incorporated by

this reference.   Petitioners Anthony J. and Claire L. Pace

(petitioners Pace) resided in Lloyd Harbor, New Jersey, when

their petition was filed.   Petitioners Edgar P. and Dorothy M.

Berry (petitioners Berry) resided in New York, New York, when

their petition was filed.

     During 1981, Anthony J. Pace (petitioner Pace) was an

institutional salesman at Bear Stearns & Co., one of the largest

securities brokerage and investment banking organizations in the
                                - 5 -

country.   His spouse, petitioner Claire L. Pace, was not employed

outside the home during 1981.    Petitioner Edgar P. Berry was a

surgeon during 1981.    His spouse, petitioner Dorothy M. Berry

(petitioner Berry), was employed at Edgar Berry's professional

corporation (Edgar P. Berry, MD PC) and also served as president

of the auxiliary chapter of the American Medical Association

during 1981.

     On their 1981 Federal income tax return, petitioners Pace

reported gross income from wages, interest, dividends, and

farming in the amount of $306,597, less $3,000 in capital losses,

and $53,792 in losses from partnerships, trusts, etc., including

losses here in issue.    Petitioners Berry reported on their 1981

Federal income tax return gross income from wages, interest,

dividends, and other sources in the amount of $206,038, less

$34,637 in losses from rents, partnerships, trusts, etc.,

including losses here in issue.    Consequently, in the absence of

significant deductions or credits, petitioners in each case were

subject to payment of Federal income taxes in substantial amounts

for taxable year 1981.

     During the summer of 1981, petitioners Pace and Berry each

acquired a 3.094-percent limited partnership interest in Hyannis

Recycling Associates (Hyannis) for an investment of $25,000 each.

As a result of the passthrough from Hyannis, on their respective

1981 Federal income tax returns petitioners each deducted an

operating loss in the amount of $20,327 and claimed investment
                                 - 6 -

tax and business energy credits totaling $39,604.    The underlying

deficiencies in these cases result from respondent's disallowance

of petitioners' claimed operating losses and credits related to

Hyannis for taxable year 1981.

     The underlying transaction in these cases was found by this

Court to be the initial Plastics Recycling transaction in

Provizer v. Commissioner, T.C. Memo. 1992-177, and may be

summarized as follows.   In 1981, Packaging Industries, Inc. (PI),

manufactured and sold six Sentinel expanded polyethylene (EPE)

recyclers to ECI Corp. for $5,400,000 ($900,000 each), of which

$340,000 was paid in cash.   ECI Corp., in turn, resold the

recyclers to the Hyannis limited partnership for $6,400,000

($1,066,666 each), of which $440,000 was paid in cash.    Hyannis

then leased the recyclers to FMEC Corp., which subleased them

back to PI.   All of the monthly payments for nonrecourse notes,

leases, and licenses, which were required among the entities in

the above transactions, offset each other.    These transactions

were accomplished simultaneously.

     After the Hyannis offering closed, the safe-harbor leasing

rules were enacted as part of the Economic Recovery Tax Act of

1981 (ERTA), Pub. L. 97-34, 95 Stat. 172.    The underlying

transaction was restructured in a manner designed to take

advantage of the safe-harbor provisions.    F & G Corp. became the

safe-harbor lessor and was interposed between ECI Corp. and the

primary leasing partnership, in this case Hyannis.    Subsequent
                                - 7 -

Plastics Recycling programs were structured in a similar manner

to take advantage of the new statutory safe-harbor opportunities.

See Provizer v. Commissioner, T.C. Memo. 1992-177.     We refer to

the transactions herein collectively as the Hyannis transaction.

     In the Provizer case, we considered such a restructured

Plastics Recycling transaction, the Clearwater transaction.       In

the Clearwater transaction, PI sold six 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 them to FMEC

Corp., which sublicensed them to PI.    The transaction involved

herein differed from the Clearwater transaction in the following

respects:   (1)   F & G Corp. purchased the recyclers for

$6,400,000, rather than the $6,975,996 paid in Clearwater, and

(2) Hyannis, rather than Clearwater, leased the recyclers from F

& G Corp. and then licensed them to FMEC Corp.3    In all other

material respects the transactions are substantively identical.

Hyannis is thus like Clearwater, occupying the same link in the

transactional chain.    In addition, the Sentinel EPE recyclers

considered in these cases are the same type of machine considered

3
     There is no explanation in the record as to why the six
recyclers were sold to F & G Corp. for $6,400,000 in the Hyannis
transaction but later the same number of identical machines sold
for $6,975,996 in subsequent Plastics Recycling transactions. We
note that the Hyannis partnership initially closed at the lower
price prior to the enactment of the safe-harbor legislation and
subsequently was modified in an attempt to take advantage of
those rules by inserting F & G Corp. in the transaction.
                               - 8 -

in Provizer.   The fair market value of a Sentinel EPE recycler in

1981 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.

     Petitioners Pace and Berry each learned of the Hyannis

transaction from Lawrence Greenstein (Greenstein).     Greenstein is

a certified public accountant (C.P.A.).     Greenstein had been

certified just 2 years earlier, in 1979, the same year he joined

and became a partner at his father's firm, Greenstein & Co., PC.

Greenstein's client services included accounting, tax

preparation, and investment analysis.     The latter entailed

checking figures and determining whether an investment was suited

to a client's economic outlook and station in life.     When

reviewing an investment involving high technology or other field

outside his expertise, Greenstein relied upon the representations

and due diligence of the dealer or promoter of the investment.

     Greenstein learned about Hyannis from a client.     The client

had heard about Hyannis from a member of the New York Stock

Exchange, Cowen & Co., Inc. (CCI).     Greenstein spoke about

Hyannis with representatives of CCI, in particular Peter Zuck

(Zuck).   It was Greenstein's understanding that Zuck was in

charge of marketing the Hyannis investment at CCI.     After
                               - 9 -

reviewing the Hyannis offering memorandum, Greenstein's primary

concern was whether the machines worked.   He expressed this

concern to Zuck and was told that a group of investors would be

touring the Hyannis plant and viewing the recyclers.   Greenstein

then introduced the Hyannis investment to petitioners Pace and

Berry.   Petitioners Pace and Berry were each given a copy of the

Hyannis offering memorandum.   Petitioner Pace wanted verification

of the existence of the Sentinel EPE recycler, so Greenstein

decided to visit the manufacturing plant in Hyannis.

     On July 19th, 1981, Greenstein visited the Hyannis plant

with Zuck, a handful of other potential investors, and the

general partner of Hyannis, Richard Roberts.   Greenstein and the

other visitors were required to sign nondisclosure agreements

before being allowed entry into the plant.   Greenstein and the

others viewed five to six Sentinel EPE recyclers in operation at

the plant.   The group also had lunch during the visit.   Upon his

return from the plant, Greenstein told petitioners Pace and Berry

about the visit and recommended the investment.   Greenstein was

never offered, nor did he receive, compensation from CCI.

     Greenstein does not have any formal training or work

experience related to plastics recycling or plastics materials;

he is not an engineer.   Greenstein is an environmental

enthusiast, but he is not knowledgeable with respect to recycling

or other environmental technology.
                               - 10 -

     Petitioners Berry usually sought professional advice before

making investments.    Their advisers in 1981 were Greenstein and

his father, Charles Greenstein.    The Greensteins provided

accounting services to petitioners Berry, prepared their tax

returns, and gave them investment advice from time to time.

Petitioners Berry learned of the Hyannis investment from

Greenstein and were provided a copy of the Hyannis offering

memorandum.   Petitioners Berry owned property near Hyannis and

while there during the summer they visited a PI office.    They

also looked at the manufacturing plant, but they did not go

inside or view a recycler.    Petitioners Berry decided to invest

in Hyannis after Greenstein gave them a favorable report of his

visit to the plant.    Petitioner Dorothy Berry provided the money

for this investment.

     Petitioners Berry have no education or work experience in

plastics recycling or plastics materials.    Petitioners Berry were

aware of Greenstein's background and knew that he was not an

expert in plastics recycling or plastics materials.    Petitioners

Berry never saw a Sentinel EPE recycler or visited any end-user

locations.

     Petitioners Pace also employed Greenstein and his father for

accounting services.   Greenstein introduced the Hyannis

investment to petitioners Pace and provided them with a copy of

the offering memorandum.    Petitioner Pace wanted verification

that the plant and machines existed before he would invest.
                              - 11 -

Greenstein visited the plant and reported to petitioners Pace

that Hyannis was a legitimate business.   Greenstein recommended

the investment for its front-end tax benefits and potential

residual values.   At that time, petitioners Pace decided to go

ahead with the investment.

     Petitioners Pace have no education or work experience in

plastics recycling or plastics materials.   Petitioners Pace were

aware of Greenstein's background and knew that he was not an

expert in plastics recycling or plastics materials.   There is

nothing in the record indicating that petitioners Pace ever saw a

Sentinel EPE recycler or visited any end-user locations.

                              OPINION

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

case involving the Clearwater transaction and another tier

partnership, this Court (1) found that each Sentinel EPE recycler

had a fair market value not in excess of $50,000, (2) held that

the Clearwater transaction 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 Clearwater

transaction lacked economic substance and a business purpose,
                                - 12 -

this Court relied heavily upon the overvaluation of the Sentinel

EPE recyclers.

     The underlying transaction in these cases (the Hyannis

transaction) is in all material respects identical to the

transaction considered in the Provizer case.     The Sentinel EPE

recyclers considered in these cases are the same type of machines

considered in the Provizer case.

     Based on the entire records in these cases, including the

extensive stipulations, testimony of respondent's experts, and

petitioners' testimony, we hold that the Hyannis transaction 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 their respective Stipulations

of Settled Issues filed shortly before trial.     The record plainly

supports respondent's determinations 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.

Issue 1.   Sec. 6653(a) Negligence

     In a notice of deficiency, respondent determined that

petitioners Berry were liable for the negligence additions to tax

under section 6653(a)(1) and (2) for 1981.     Petitioners have the
                               - 13 -

burden of proving that respondent's determination is erroneous.

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

     In an amendment to answer, respondent asserted that

petitioners Pace were liable for the negligence additions to tax

under section 6653(a)(1) and (2).   Because these additions to tax

were raised for the first time in respondent's amendment to

answer, respondent bears the burden of proof on this issue.    Rule

142(a); Vecchio v. Commissioner, 103 T.C. 170, 196 (1994).

     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.   In cases involving negligence, an additional amount

is added to the tax under section 6653(a)(2); such amount is

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

portion of the underpayment attributable to negligence.

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 petitioners claimed the disallowed deductions and tax

credits, they had no knowledge of the plastics or recycling

industries.    Petitioners contend that they reasonably relied on
                              - 14 -

the advice and due diligence of their accountant Greenstein, and

to some extent upon the representations in the Hyannis offering

memorandum.

     Under some circumstances a taxpayer may avoid liability for

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

reasonable reliance on a competent professional adviser is shown.

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.     Id.   In

order for reliance on professional advice to excuse a taxpayer

from the negligence additions to tax, the reliance must be

reasonable, in good faith, and based upon full disclosure.      Id.;

see Weis v. Commissioner, 94 T.C. 473, 487 (1990); Ewing v.

Commissioner, 91 T.C. 396, 423-424 (1988), affd. without

published opinion 940 F.2d 1534 (9th Cir. 1991); Pritchett v.

Commissioner, 63 T.C. 149, 174-175 (1974).

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

negligence.   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.
                               - 15 -

Commissioner, 92 T.C. 827, 850 (1989); Rybak v. Commissioner, 91

T.C. 524, 565 (1988).    We have rejected pleas of reliance when

neither the taxpayer nor the advisers purportedly relied upon by

the taxpayer knew anything about the nontax business aspects of

the contemplated venture.    Beck v. Commissioner, 85 T.C. 557

(1985); Flowers v. Commissioner, 80 T.C. 914 (1983); Steerman v.

Commissioner, T.C. Memo. 1993-447.

      These cases do not present a situation such as that found in

Heasley v. Commissioner, 902 F.2d 380, 385 (5th Cir. 1990), revg.

T.C. Memo. 1988-408, where the Fifth Circuit Court of Appeals

held that taxpayers, who were unsophisticated investors not

educated beyond high school, were not liable for the negligence

additions to tax.    The facts in the present cases are

distinguishable.    Petitioners herein are all well-educated.    The

late Edgar Berry was a surgeon in 1981 and his wife, petitioner

Dorothy Berry, graduated from Radcliffe College.    Petitioner Pace

graduated from St. Bonaventure in 1958.    He has been working in

the brokerage business since the late 1960's and during 1981 he

was a highly compensated institutional salesman at Bear Stearns &

Co.   Petitioners Pace reported income or losses from nine

different partnerships on their 1981 Federal income tax return,

while petitioners Berry reported income or losses from four

different partnerships, estates or trusts, or small business

corporations.   Accordingly, the record indicates that unlike the

taxpayers in Heasley, petitioners in these cases were not
                              - 16 -

uneducated, unsophisticated investors in 1981.   Not only were

petitioners well-educated and financially successful in their

professions and businesses, but also they were accustomed to

considering tax-oriented investments, since they had made such

investments in the past.

     In evaluating the Hyannis transaction, petitioners purport

to have relied on Greenstein and to some extent the offering

memorandum.   With respect to petitioners Berry, they did little

beyond discussing the Hyannis transaction with Greenstein.     While

on vacation near Hyannis during the summer of 1981, they visited

the plant site but did not enter it.   When asked at trial whether

she had read the offering memorandum, petitioner Berry testified,

"I leafed through it," and "I don't know whether you would call

it reading it."   Petitioner Berry testified that she did not have

any idea of the value of the recyclers.   When asked if their

value was important to her, she replied, "I guess I didn't think

much about that."   Petitioner Berry testified that she and her

husband basically relied on Greenstein.

     As for petitioners Pace, Anthony Pace was familiar with

offering memoranda from his work at Bear Stearns & Co.   He stated

that he "relied on the offering memorandum" in evaluating

Hyannis, yet when asked at trial how much time he spent reviewing

it, he too replied, "I leafed through it."   Petitioner Pace

testified that his first impression of Hyannis was "it sounds

awfully good, sounds too good in a sense."   Nonetheless, all that
                              - 17 -

concerned petitioner Pace was whether the plant and recyclers

actually existed.   He had recently read about some executives of

"Wall Street companies" who had invested in an oil and gas

venture which turned out to be nothing more than wooden pipes

painted different colors, and he did not want to blunder into an

investment in a nonexistent physical plant.   Greenstein's

facilities tour verified the existence of the plant and

recyclers.   With the existence of PI and the recyclers confirmed,

petitioner Pace thought he had no reason to believe Hyannis was

not a "bona fide deal" and went forth with the investment.

     Petitioners' alleged reliance on Greenstein does not satisfy

the requirement that it be reasonable, in good faith, and based

upon full disclosure.   The purported values of the Sentinel EPE

recyclers generated the deductions and credits in these cases.

Yet the purported value of the Sentinel EPE recyclers is the very

thing that petitioners and Greenstein did not verify.   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

an adviser regarding matters outside of his field of expertise or

with respect to facts which he does not verify.   See Skeen v.

Commissioner, 864 F.2d 93 (9th Cir. 1989), affg. without

published opinion Patin v. Commissioner, 88 T.C. 1086 (1987); Lax

v. Commissioner, T.C. Memo. 1994-329.

     Greenstein had just 2 years' experience as a C.P.A.     He was

not an engineer and had no education or work experience in
                               - 18 -

plastics materials or plastics recycling.    Greenstein relied upon

CCI and the offering materials for the value of the Sentinel EPE

recyclers.   Greenstein testified that he assumed that CCI had

"done all of the due diligence that was necessary", and that the

representations in the offering materials were therefore

reliable.    Nevertheless, petitioners claim that they relied on

Greenstein regarding the value of the recyclers and the economic

viability of the Plastics Recycling transactions.    In these

cases, recyclers purportedly worth $1,066,666 each were being

sold, resold, leased, and subleased.    Petitioners were not

reasonable in relying upon Greenstein in claiming the deductions

and credits related to their investments in Hyannis.    In 1981 he

was a relatively inexperienced C.P.A. who had no knowledge of the

industry in which petitioners were considering investing.      On

behalf of his clients, Greenstein accepted the selling broker's

offer of a plane trip to Hyannis, took the guided tour of the PI

plant to ascertain that there really were recycling machines, and

returned to tell his clients that if everything were exactly as

represented in the seller's offering circular, there were good

tax benefits up front so the deal was attractive.    He did not

obtain full disclosure of the Hyannis transaction, or raise any

question concerning any aspect of the offering circular.

     Moreover, on its face, the Hyannis transaction should have

raised serious questions in the minds of ordinarily prudent

investors.   According to the offering memorandum, the projected
                              - 19 -

benefits for each $50,000 invested were investment tax credits in

1981 of $79,200 plus deductions in 1981 of $42,491.   On their

1981 tax returns, petitioners each indicated ownership of

investment credit property valued at $198,016 as a result of

their participation in the Hyannis deal.   In the first year of

the investment alone, petitioners each claimed an operating loss

in the amount of $20,327 and investment tax and business energy

credits related to Hyannis totaling $39,604, while petitioners'

each invested only $25,000 in Hyannis.   The direct reductions in

petitioners' respective Federal income tax, from just the tax

credits, equaled 158 percent of their cash investment.

Therefore, like the taxpayers in Provizer v. Commissioner, T.C.

Memo. 1992-177, "except for a few weeks at the beginning,

petitioners never had any money in the [Hyannis] deal."   A

reasonably prudent person would not conclude without substantial

investigation that the Government was providing massive tax

benefits to taxpayers in these circumstances.   McCrary v.

Commissioner, 92 T.C. 827, 850 (1989).

     We think petitioners Pace and Berry failed to exercise due

care in claiming large deductions and tax credits with respect to

Hyannis on their respective 1981 Federal income tax returns.

They did not reasonably rely upon Greenstein and the offering

memorandum, or in good faith investigate the underlying

viability, financial structure, and economics of the Hyannis

transaction.   We hold, upon consideration of the entire records,
                                - 20 -

that petitioners are liable for the negligence additions to tax

under the provisions of section 6653(a)(1) and (2) for 1981.

Respondent is sustained on this issue.

Issue 2.    Sec. 6659 Valuation Overstatement

     In a notice of deficiency, respondent determined that

petitioners Berry are liable for the section 6659 addition to tax

for valuation overstatement on the portion of their 1981

underpayment attributable to the investment tax and business

energy credits claimed with respect to Hyannis.    Petitioners

Berry have the burden of proving that respondent's determination

is erroneous.    Rule 142(a); Luman v. Commissioner, 79 T.C. 846,

860-861 (1982).    In the case of petitioners Pace, respondent

asserted an addition to tax under section 6659 in an amendment to

answer.    Because it was raised for the first time in her

amendment to answer, respondent bears the burden of proof on this

issue.     Rule 142(a); Vecchio v. Commissioner, 103 T.C. 170, 196

(1994).

     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
                                - 21 -

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

underpayment.   Sec. 6659(b).

     Petitioners each claimed an investment tax credit and a

business energy credit based on purported values of $1,066,666

for each Sentinel EPE recycler.    Petitioners stipulated that the

fair market value of each recycler was not in excess of $50,000.

Therefore, if disallowance of petitioners' claimed credits is

attributable to the valuation overstatement, petitioners are

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

percent of the underpayment of tax attributable to the credits

claimed with respect to Hyannis.

     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

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.
                              - 22 -

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

Memo. 1994-197; Harness v. Commissioner, T.C. Memo. 1991-321.

     In their respective Stipulation of Settled Issues,

petitioners each conceded that they "are not entitled to any

deductions, 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."   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 property was not placed in 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.

     A concession of the investment tax credit in and of itself

does not relieve taxpayers 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, what

is significant is the ground upon which the investment tax credit
                              - 23 -

is disallowed or conceded.   See 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.

     In petitioners' cases, no arguments were made and no

evidence was presented to the Court to prove that disallowance

and concession of the investment tax credits related to anything

other than valuation overstatements.    To the contrary,

petitioners stipulated substantially the same facts concerning

the underlying transactions as we found in Provizer v.

Commissioner, supra.   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 transaction

in these cases was a sham and lacked 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
                              - 24 -

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, T.C. Memo. 1992-177,

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 from our finding of a lack of economic substance.

Petitioners stipulated substantially the same facts regarding the

Hyannis transaction as we found with respect to the Clearwater

transaction described in the Provizer case, and that the

recyclers each had a fair market value not in excess of $50,000.

Given those stipulations, and the fact that the records here

plainly show that the overvaluation of the recyclers was the

primary reason for the respective disallowances of the claimed

tax benefits, and the fact that no argument was made and no

evidence was presented to the Court to prove that the

disallowances and concessions of the investment tax credits

related to anything other than a valuation overstatement, we

conclude that the respective deficiencies caused by the

disallowances of the claimed tax benefits were attributable to

overvaluation of the Sentinel EPE recyclers.

     Finally, we consider the express arguments of petitioners as

to waiver of the section 6659 additions to tax.   On brief,

petitioners each contested imposition of the section 6659

addition to tax on the grounds that respondent erroneously failed
                                - 25 -

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

waive all or part of the addition to tax for valuation

overstatements 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,

supra at 179.

     Petitioners urged that they relied on Greenstein, and to

some extent upon the representations and evaluations contained in

the offering memorandum, in deciding on the valuation claimed on

their tax returns.   Petitioners contend that such reliance was

reasonable, and, therefore, respondent should have waived the

section 6659 addition to tax.

     We have found that petitioners' purported reliance on

Greenstein and the offering memorandum was not reasonable.       At

the time of the investment, petitioners knew that Greenstein was

not an engineer and had no education or experience in plastics

materials or plastics recycling.    He made a very limited

investigation about the recyclers, and there is no evidence or

indication that petitioners were willing to finance a more

thorough inquiry.    Nevertheless, petitioners relied exclusively

on Greenstein for the underlying viability, financial structure,

and economics of the Hyannis transaction.     The investment credits

were directly dependent upon the value of the recyclers, and the
                                - 26 -

offering memorandum warned that the Internal Revenue Service

would likely challenge their purported value.    Yet the record

indicates that petitioners' sought no verification of the value

of the recyclers; their only concern was whether the recyclers

actually existed.

     Petitioners did not have a reasonable basis for the adjusted

bases or valuations claimed on their 1981 returns with respect to

their investments in Hyannis.    Accordingly, in these cases

respondent could find that petitioners' purported reliance on

Greenstein and the promotional materials was unreasonable.     The

records here 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 additions to tax

is not an abuse of discretion.    Petitioners are liable for the

respective section 6659 additions to tax at the rate of 30

percent of the underpayment of tax attributable to the disallowed

credits for 1981.   Respondent is sustained on this issue.

Issue 3.   Sec. 6621(c) Tax-Motivated Transactions

     With respect to petitioners Pace, respondent determined that

interest on deficiencies accruing after December 31, 1984, would

be calculated under section 6621(c).     Petitioners Pace have the

burden of proving that respondent's determination is erroneous.

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

respect to petitioners Berry, respondent asserted the section

6621(c) interest calculation in an amendment to answer.     Because
                                - 27 -

it was raised for the first time in an amendment to answer,

respondent bears the burden of proof.      Rule 142(a); Vecchio v.

Commissioner, 103 T.C. 170 (1994).

     The annual rate of interest under section 6621(c) equals 120

percent of the interest payable under section 6601 with respect

to any substantial underpayment attributable to tax-motivated

transactions.    An underpayment is substantial if it exceeds

$1,000.   Sec. 6621(c)(2).

     The term "tax motivated transaction" includes "any sham or

fraudulent transaction."     Sec. 6621(c)(3)(A)(v).   Transactions

devoid of economic substance are sham transactions for purposes

of section 6621(c)(3)(A)(v).     Friendship Dairies, Inc. v.

Commissioner, 90 T.C. 1054, 1068 (1988); Cherin v. Commissioner,

89 T.C. 986, 1000 (1987).     We have found that the Hyannis

transaction was a sham transaction lacking economic substance.

Therefore, by definition the Hyannis transaction is tax-motivated

under section 6621(c)(3)(A)(v).     Moreover, the term "tax

motivated transaction" includes any section 6659(c) valuation

overstatement.    Sec. 6621(c)(3)(A)(i).   In 1981, petitioners

claimed a value for the recyclers in excess of 150 percent of the

true value of the recyclers.     Therefore, petitioners had a

valuation overstatement as defined in section 6659(c).

     For section 6621(c) interest to apply, the underpayment of

taxes must be "attributable to" a tax-motivated transaction.

Where a valuation overstatement or other category of tax-
                              - 28 -

motivated transaction is an integral part of, or inseparable

from, the ground for disallowance of an item, section 6621(c)

increased interest applies.   See McCrary v. Commissioner, 92 T.C.

at 859.   Petitioners stipulated substantially the same facts

regarding the underlying transaction in these cases as we found

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

cases we have likewise found that overvaluation of the recyclers

was an integral part of the ground for disallowance of the items

related to Hyannis.   Accordingly, respondent's determination as

to the applicable interest rate for deficiencies attributable to

tax-motivated transactions is sustained, and the increased rate

of interest applies for the taxable year in issue.

     To reflect the foregoing,



                                      Decision will be entered

                                 under Rule 155.
