                       T.C. Memo. 1995-582



                      UNITED STATES TAX COURT



              LEON AND BELLE ATKIND, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20539-89.            Filed December 6, 1995.



     Neil L. Prupis, for petitioners.

     Louise Forbes and William T. Hayes, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.1    The Court agrees with

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
                                                   (continued...)
                                - 2 -

and adopts the opinion of the Special Trial Judge, which is set

forth below.

                  OPINION OF THE SPECIAL TRIAL JUDGE

     WOLFE, Special Trial Judge:     This case is 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 this case are substantially

identical to those in the Provizer case.

     In a notice of deficiency dated May 31, 1989, respondent

determined a deficiency in petitioners' joint 1981 Federal income

tax in the amount of $109,168.19 (in addition to $29,995

previously assessed as a deficiency) and additions to tax for

that year in the amount of $41,748.95 under section 6659 for

valuation overstatement, in the amount of $6,958 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.2     Respondent also

1
 (...continued)
Procedure.
2
     In the May 31, 1989, notice of deficiency, respondent also
determined a deficiency in and additions to petitioners' Federal
income tax for taxable year 1982. The deficiency and additions
to tax determined for 1982 have been settled by the parties and
are no longer at issue. Petitioners have conceded that the
statute of limitations on the assessment of income tax due from
                                                   (continued...)
                                - 3 -

determined that interest on deficiencies accruing after December

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

rate under section 6621(c) with respect to part of petitioners'

underpayment of tax for 1981.

     Prior to issuance of the May 31, 1989, notice of deficiency,

petitioners agreed to an adjustment of losses relating to a

partnership not at issue herein, Ethynol Cogeneration Associates.

On November 1, 1990, the parties filed a Stipulation settling

adjustments contained in the May 31, 1989, notice of deficiency

regarding petitioners' interest in Gainesville Associates

(Gainesville), a limited partnership.3   On March 7, 1994, the

parties filed a Stipulation of Settled Issues with respect to

items claimed on petitioners' Federal income tax returns

resulting from their participation in the Plastics Recycling

Program.   The parties stipulated that petitioners are not

entitled to any deductions, losses, investment credits, business

energy investment credits, or any other tax benefits claimed on



2
 (...continued)
petitioners for the taxable years 1981 and 1982 had not expired
on May 31, 1989, the date when respondent mailed the notice of
deficiency.
3
      Petitioners conceded disallowance of losses claimed in 1981
in the amount of $91,367 and in 1982 in the amount of $89,710,
and the additional interest under sec. 6621(c) on the
deficiencies arising from the disallowed losses. Respondent
conceded all penalties asserted relating to petitioners'
investment in Gainesville in 1981 and 1982, except for the sec.
6621(c) additional interest.
                               - 4 -

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 resided in Clifton, New Jersey, when

their petition was filed.

     During 1981, Leon Atkind (petitioner) was an executive with

NBO Stores Inc. (NBO), a discount store chain founded and owned

by him.   His spouse, petitioner Belle Atkind, was also employed

as an executive at NBO during that year.    On their 1981 Federal

income tax return, petitioners reported gross income from wages,

interest, dividends, capital gains, and other sources in the

amount of $363,705.   Consequently, in the absence of significant

deductions or credits, they were subject to payment of Federal

income taxes in substantial amounts for 1981.

     In 1981, petitioner acquired a 3.094-percent limited

partnership interest in Hyannis Recycling Associates (Hyannis)
                                 - 5 -

for his investment of $25,000.    As a result of the passthrough

from Hyannis, petitioners deducted on their 1981 Federal income

tax return an operating loss in the amount of $20,326 and claimed

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

underlying deficiency in this case results from respondent's

disallowance of petitioners' claimed operating loss and credits

related to Hyannis for 1981.

     The underlying transaction in this case was found by this

Court to be the initial Plastics Recycling transaction in

Provizer v. Commissioner, supra, 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

to be 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, 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
                                - 6 -

advantage of the safe-harbor provisions.   F & G corporation

became the safe-harbor lessor and was interposed between ECI and

the primary leasing partnership, in this case Hyannis.

Subsequent Plastics Recycling programs were structured in a

similar manner to take advantage of the new statutory safe-harbor

opportunities.   See Provizer v. Commissioner, supra.    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 then leased

the recyclers to Clearwater, which licensed them to FMEC, which

sublicensed them to PI.    The transaction involved herein differed

from the Clearwater transaction in the following respects:     (1)

F & G 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 and then licensed

them to FMEC.4   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,


4
     There is no explanation in the record as to why the six
recyclers were sold to F & G 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 the arrangement was modified in an attempt to take
advantage of those rules by inserting F & G in the transaction.
                                - 7 -

the Sentinel EPE recyclers considered in this case are the same

type of machines considered 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.

     Petitioner is a sophisticated and very successful

businessman, entrepreneur, and investor.   After graduating from

high school, petitioner attended Patterson Junior College for 1

year, and then the City College of New York for approximately 3

years at night.   Petitioner pursued a major in philosophy and

received 2 years' worth of credits for the night classes.

Petitioner started working at age 9, delivering newspapers out of

his father's general store.    Petitioner later employed others to

deliver newspapers and also sold food and merchandise from his

father's general store to his newspaper customers.   Petitioner

continued his newspaper delivery and merchandising business until

he married at age 18.   Then he started a business selling hosiery

by telephone.

     Petitioner prospered in the hosiery telemarketing business

and soon began manufacturing hosiery as well.   That business was

expanded to include manufacturing knitwear, as well as hosiery.

Eventually, this business involved importing, manufacturing, and

selling on a national basis.   In time, petitioner sold that
                                 - 8 -

business and started a new business known as NBO.    NBO was a

discount retail store chain which sold menswear.    Petitioner sold

half of NBO to a Canadian business conglomerate in 1984, but he

continued to run the business.    In 1988, petitioner sold his

remaining interest in NBO for $25,000,000.

       Petitioner was an active investor in the 1980's.    Between

1980 and the date of trial, petitioner estimated that he invested

approximately $16,000,000 in somewhere between 65 and 70

different enterprises.    Petitioner generally relied on his own

judgment in evaluating proposed investments under $100,000; for

larger investments he sought out professional guidance or

counsel.

       Petitioner learned of the Hyannis investment through an

acquaintance, Elliot I. Miller (Miller).    At that time, Miller

was a practicing attorney who was experienced in tax matters and

was employed as corporate counsel to PI.    Miller was a

shareholder in F & G in 1981.    He shared office space with

Raymond Grant (Grant) and Richard Roberts (Roberts) from 1982

through 1984.    Grant was the 100-percent owner of the stock of

ECI.    Miller represented Grant personally and Grant's clients who

invested in other programs that Grant promoted.    Miller

recommended that petitioner speak with Roberts about proposed

investments.

       Roberts was a businessman and the general partner in a

number of limited partnerships that leased Sentinel EPE

recyclers, including Hyannis.    Roberts was also a 9-percent
                                - 9 -

shareholder in F & G.    Grant and Roberts have been general

partners together in other investments.    The Hyannis offering

memorandum disclosed that Roberts and Grant could each be deemed

promoters of Hyannis and that Miller represented Grant.    Roberts

mailed petitioner a copy of the Hyannis offering memorandum.

Petitioner reviewed the offering memorandum and directed his

questions to Roberts.    Based on the information provided by these

sources, and his personal judgment, petitioner invested in

Hyannis.

     Petitioners do not have any education or work experience in

plastics recycling or plastics materials.    Petitioner did not

investigate PI.    Petitioners did not see a Sentinel recycler

before investing in Hyannis.

                               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
                                - 10 -

transaction lacked economic substance and a business purpose,

this Court relied heavily upon the overvaluation of the Sentinel

EPE recyclers.

     The underlying transaction in this case (the Hyannis

transaction) is in all material respects identical to the

transaction considered in the Provizer case.    The Sentinel EPE

recyclers considered in this case are the same type of machines

considered in the Provizer case.

     Based on the entire record in this case, including the

extensive stipulations, testimony of respondent's experts, and

petitioner's 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 deficiency.    We note that petitioner has

conceded this issue in a Stipulation of Settled Issues filed

shortly before trial.   The record plainly supports respondent's

determination regardless of this concession.    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

     Respondent determined that petitioners were liable for the

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

have the burden of proving that respondent's determination of an

addition to tax is erroneous.    Rule 142(a); Luman v.

Commissioner, 79 T.C. 846, 860-861 (1982).
                              - 11 -

     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).

     Petitioners contend that they were reasonable in claiming

deductions and credits with respect to their investment in

Hyannis and attempt to distinguish the instant case from Provizer

v. Commissioner, supra, by arguing:    (1) Petitioner acted

reasonably in relying upon the offering memorandum and the advice

and representations of Miller and Roberts; and (2) petitioner is

not a well-educated, sophisticated investor and was not seeking

to shelter income through Hyannis.

     When petitioners claimed the disallowed deductions and tax

credits, they had no knowledge of the plastics or recycling

industries and no engineering or technical background.    There is

nothing in the record indicating that petitioners independently
                               - 12 -

investigated the Sentinel EPE recyclers or knew anything about

their value.   Petitioner essentially argues that he reasonably

relied on the purported value of the Sentinel EPE recyclers set

out in the offering memorandum and on the statements made by or

on behalf of the promoters.

     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
                              - 13 -

published opinion 921 F.2d 280 (9th Cir. 1991); McCrary v.

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

T.C. 524, 565 (1988).   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.

     Petitioner's investigation of the Hyannis transaction did

not extend beyond discussions with Miller and Roberts and a

review of the offering memorandum.     Petitioner had met Miller,

and Miller had urged him to consider Roberts' proposals.

Petitioner had taken no action on several deals proposed by

Roberts, but the plastics recycling idea interested him.

Moreover, petitioner testified that because he knew Miller

personally and had a lot of confidence in him, petitioner decided

to look into the plastics recycling proposal.     Petitioner did not

explain exactly why he had any confidence in Miller.     The record

is devoid of any history of past dealings between petitioner and

Miller on either a personal or professional basis.     Nonetheless,

petitioner's purported confidence in Miller is petitioner's only

explanation of his reason for considering the recycling proposal

and for failing to make any investigation of Roberts.

     Petitioner indicated some interest when Roberts called about

the plastics recycling deal, and a copy of the Hyannis offering

memorandum was sent to petitioner.     Petitioner testified that he
                              - 14 -

did not read the entire opinion letter included in the offering

memorandum.   At trial petitioner could not recall the name of the

equipment involved, the value of the equipment, or that the

offering memorandum disclosed Miller's relationship with PI.

Petitioner was invited to see the Sentinel EPE recycler but

declined because he "wasn't disposed to do that."    Petitioner

testified that he had some conversations with Roberts after

reviewing the offering memorandum, but he could not recall the

particulars of those conversations.    Petitioner could only

surmise that because he proceeded with the investment, he must

have received "answers that apparently satisfied" him.

     We find petitioner's purported reliance on Miller and

Roberts was not reasonable, not in good faith, nor based upon

full disclosure.   The record does not show that either Miller or

Roberts possessed any special qualifications or professional

skills in the recycling or plastics industries.    Miller was

corporate counsel to PI and Roberts was general partner and a

promoter of Hyannis.   See Vojticek v. Commissioner, T.C. Memo.

1995-444, to the effect that advice from such persons "is better

classified as sales promotion".   Moreover, petitioner's testimony

indicates that he relied more on his personal judgment or

instincts in making the investment than any conversations he may

have had with Miller and Roberts.   A self-described risk taker

and marketing person, petitioner testified that when he first

heard of the plastics recycling transaction, "it struck a chord

for whatever reason" and sounded like a viable idea.    Petitioner
                               - 15 -

testified that he typically relied on his own judgment for

investments under $100,000; his investment in Hyannis was in the

amount of $25,000.    When asked who he relied upon in making the

Hyannis investment, petitioner replied, "My own judgment."

     Petitioner attempts to distinguish himself from the

taxpayers in Provizer v. Commissioner, T.C. Memo. 1992-177, by

arguing that he was not an educated, sophisticated investor and

attorney seeking to shelter income.     However, while petitioner

did not receive a college degree, he did receive some higher

education and he was anything but unsophisticated in business and

investing.   Petitioner's entrepreneurial spirit, energy, and

business acumen led to the creation and prosperity of various

apparel businesses.    Petitioner's business ventures culminated in

the founding of NBO, a business which became so successful

petitioner was able to sell half of it for $25,000,000 in 1988.

In addition, from 1980 to the time of trial, petitioner invested

approximately $16,000,000 in upwards of 70 ventures.     In light of

petitioner's remarkable and impressive business success and

extensive investing activity, the fact that he never received a

college degree does not persuade us that he was an

unsophisticated businessman or investor.

     Similarly, we are not persuaded that petitioner lacked

interest in the tax benefits generated by Hyannis.     According to

the Hyannis offering memorandum, the projected benefits for each

$50,000 investor were investment tax credits in 1981 of $79,200

plus deductions in 1981 of $42,491.     In the first year of the
                               - 16 -

investment alone, petitioners claimed an operating loss in the

amount of $20,326 and investment tax and business energy credits

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

investment in Hyannis was $25,000.      The direct reductions in

petitioners' Federal income tax, from just the tax credits,

equaled 158 percent of their cash investment.      Given petitioners'

combined gross income of $363,705 for 1981, we find petitioner's

alleged lack of interest in the tax benefits generated by Hyannis

unconvincing.

     Also, we are unpersuaded by petitioners' efforts to

trivialize this case.    The argument is that because of

petitioner's heavy business responsibilities, his great wealth,

and his substantial income, he could not be expected to spend

much time on a mere $25,000 investment.      In petitioner's words

"because of the comparatively minimal amount, it did not get the

diligence or the discretion that probably should have been given

to it".   In our view, despite petitioner's numerous and

significant responsibilities, he is required to exercise due care

with respect to his Federal income taxes.      Obviously, there is no

rule permitting wealthy people to be negligent with respect to

claims of tax benefits but imposing penalties on those with less

income who claim the same benefits.      Moreover, the record here

demonstrates that the tax benefits of the Hyannis deal were not

trivial to petitioner.    While petitioner paid $25,000 for his

share of Hyannis, on his 1981 tax return he indicated ownership

of investment property of $198,016 related to Hyannis, and that
                                - 17 -

amount is significant, even on petitioners' tax return.

Moreover, petitioner reported total tax of $97,751 for 1981, but

reached that figure by claiming $39,604 in investment tax and

business energy credits related to Hyannis and an operating loss

of $20,326.     Consequently, we consider the trivialization

argument inappropriate and inaccurate.     Petitioners' tax benefits

claimed with respect to Hyannis were not negligible--even for

them.

     Petitioners have not distinguished their situation from that

of the taxpayers in Provizer v. Commissioner, supra, where the

negligence additions to tax were upheld.     We hold, upon

consideration of the entire record, that petitioners are liable

for the negligence additions to tax under the provisions of

section 6653(a)(1) and (2).     Respondent is sustained on this

issue.

Issue 2.     Sec. 6659 Valuation Overstatement

        Respondent determined that petitioners are liable for the

section 6659 addition to tax for valuation overstatement on the

portion of their 1981 underpayment attributable to the tax

benefits claimed with respect to Hyannis.     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).
                              - 18 -

If the claimed valuation exceeds 250 percent of the correct

value, the addition is equal to 30 percent of the underpayment.

Sec. 6659(b).

     Petitioners claimed an operating loss and investment tax

credits 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 tax benefits 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 tax benefits 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, 92 T.C. 827 (1989); 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) (section 6659 addition to tax applies if a
                              - 19 -

finding of lack of economic substance is "due in part" to a

valuation overstatement), affg. T.C. Memo. 1991-449; Gilman v.

Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), affg. T.C. Memo.

1989-684; Masters v. Commissioner, T.C. Memo. 1994-197; Harness

v. Commissioner, T.C. Memo. 1991-321.

     In the Stipulation of Settled Issues, petitioners conceded

that they "are not entitled to any deductions, losses, investment

credits, business energy investment credits or any other tax

benefits claimed on their tax returns as a result of their

participation in the Plastics Recycling Program".   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.

     This Court has held that concession of the investment tax

credit in and of itself does not relieve taxpayers of liability

for the section 6659 addition to tax.   Dybsand v. Commissioner,
                              - 20 -

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 is disallowed or conceded.   Chiechi v.

Commissioner, supra.   Even in situations in which there are

arguably two grounds to support a deficiency and one supports a

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

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

Commissioner, 893 F.2d 225, 228 (9th Cir. 1990), affg. T.C. Memo.

1988-416; Irom v. Commissioner, 866 F.2d 545, 547 (2d Cir. 1989),

vacating in part and remanding T.C. Memo. 1988-211; Harness v.

Commissioner, supra.

     In petitioner's case, there was no argument made and no

evidence presented showing that disallowance and concession of

the claimed tax benefits, including the investment tax credits,

related to anything other than a valuation overstatement.    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 record in this case

plainly shows that the overvaluation of the recyclers was
                              - 21 -

integral to and was the core of our holding that the underlying

transaction herein was a sham and lacked economic substance.

     Consistent with our findings in Provizer, petitioners

stipulated that the Hyannis partnership had no net equity value,

that Hyannis' sole activity lacked any potential for profit, and

that the Hyannis transaction therefore 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 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 conceded that the Hyannis transaction was similar to

the Clearwater transaction described in Provizer v. Commissioner,

supra, and that the Hyannis transaction lacked economic

substance.   Given those concessions, and the fact that the record

here plainly shows that the overvaluation of the recyclers was

the primary reason for the disallowance of the claimed tax

benefits, and the fact that no argument was made and no evidence
                              - 22 -

was presented to the Court to prove that disallowance and

concession of the claimed tax benefits related to anything other

than a valuation overstatement, we conclude that the deficiency

caused by the disallowance of the claimed tax benefits was

attributable to the overvaluation of the Sentinel EPE recyclers.

     Finally, we consider petitioners' express argument as to

waiver of the addition to tax.   On brief, petitioners contested

imposition of the section 6659 addition to tax on the grounds

that respondent erroneously failed to waive the penalty.    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, 99 T.C. at 179.

     Petitioner arrived at the claimed valuation by virtue of his

purported reliance on Miller and Roberts, in addition to the

representations and evaluations contained in the offering

memorandum.   He contends that such reliance was reasonable and,

therefore, respondent should have waived the section 6659

addition to tax.

     We have found that petitioner's purported reliance on

Miller, Roberts, and the offering memorandum was not reasonable.

Miller was corporate counsel to PI, and Roberts was a promoter of

Hyannis.   See Vojticek v. Commissioner, T.C. Memo. 1995-144,
                               - 23 -

rejecting advice from such persons.     Neither Miller or Roberts

knew anything about plastics or plastics recycling.     The

evaluators whose reports were appended to the offering memorandum

each owned interests in partnerships which leased Sentinel EPE

recyclers.   The offering memorandum contained numerous caveats,

including the following:   NO OFFEREE SHOULD CONSIDER THE CONTENTS

OF THIS MEMORANDUM *** AS *** EXPERT ADVICE.     EACH OFFEREE SHOULD

CONSULT HIS OWN PROFESSIONAL ADVISERS.     Petitioner did not see a

Sentinel EPE recycler prior to investing in Hyannis, and he

presented no evidence that he independently investigated the

recyclers.

     Petitioner also contends that he did not know and could not

know of any comparable product by which to compare prices because

one did not exist.   In fact, there were at least four other

plastics recycling machines available during 1981, ranging in

price from $20,000 to $200,000:   Foremost Densilator,

Nelmor/Weiss Densification System (Regenolux), Buss-Condux

Plastcompactor, and Cumberland Granulators.     See Provizer v.

Commissioner, supra.   Moreover, petitioners stipulated that

information published prior to the plastics recycling

transactions indicated that several similar machines were already

on the market.

     Petitioners did not have a reasonable basis for the adjusted

bases or valuations claimed on their 1981 return with respect to

their investment in Hyannis.   Accordingly, respondent properly

found that petitioner's purported reliance on Miller, Roberts,
                                - 24 -

and the appraisal in the promotional materials was unreasonable.

The record does not establish an abuse of discretion on the part

of respondent but supports respondent's position.      We hold that

respondent's refusal to waive the section 6659 addition to tax is

not an abuse of discretion.     Petitioners are liable for the

section 6659 addition 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

        Respondent determined that interest on deficiencies accruing

after December 31, 1984, would be calculated under section

6621(c).     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).    In this case,

petitioners stipulated that the Hyannis transaction lacked

economic substance.     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).

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
                               - 25 -

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-

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 that the Hyannis transaction

lacked economic substance and conceded respondent's disallowance

of their claimed deductions and credits related to Hyannis.      By

virtue of its lack of economic substance and the overvaluation of

the Sentinel EPE recyclers, the Hyannis transaction is by

definition a sham transaction.    Moreover, we have already found

that the valuation overstatement 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 concessions and our conclusions,

                                      Decision will be entered

                                 under Rule 155.
