                          T.C. Memo. 1996-341



                     UNITED STATES TAX COURT



             WILLIAM AND JOAN SPEARS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

        VINCENT AND CLOTILDE FARRELL, JR., Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 27393-89, 28082-89.            Filed July 30, 1996.



     Bernard S. Mark and Richard S. Kestenbaum, for petitioners

in docket No. 27393-89.

     Hugh Janow, for petitioners in docket No. 28082-89.

     Lawrence L. Davidow and Frances Ferrito Regan, for

respondent in docket No. 27393-89.

     Barry J. Laterman, for respondent in docket No. 28082-89.
                               - 2 -


                             CONTENTS

                                                              Page
MEMORANDUM FINDINGS OF FACT AND OPINION........................2
OPINION OF THE SPECIAL TRIAL JUDGE.............................3
FINDINGS OF FACT...............................................7
  A. The Plastics Recycling Transactions......................7
  B. The Partnerships.........................................9
  C. Stuart Becker, Steven Leicht, and Noel Tucker...........12
  D. Petitioners and Their Introduction to the Partnership
      Transactions............................................18
OPINION.......................................................25
  A. Section 6653(a) - Negligence............................28
      1. The So-Called Oil Crisis............................30
      2. Petitioners' Purported Reliance on Becker...........35
          a. The Circumstances Under Which a Taxpayer May
              Avoid Liability Under Section 6653(a)(1) and (2)
              Because of Reasonable Reliance on Competent and
              Fully Informed Professional Advice..............35
          b. Petitioners' Investment Experience,
              Sophistication, and Resources...................38
          c. Becker's Limited Investigation and Technological
              Knowledge and His Emphasis on Disclosure and on
              Protection Against Liability....................40
          d. Conclusion Concerning Petitioners' Alleged
              Reliance on Becker..............................46
      3. The Private Offering Memoranda......................48
      4. Miscellaneous.......................................53
      5. Conclusion As to Negligence.........................57
  B. Section 6659 - Valuation Overstatement..................58
      1. The Grounds for Petitioners' Underpayments..........60
      2. Concession of the Deficiency........................64
      3. Section 6659(e).....................................68

             MEMORANDUM FINDINGS OF FACT AND OPINION

     DAWSON, Judge:   These cases were assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183.1   They were tried and

1
     All section references are to the Internal Revenue Code in
effect for the years in issue, unless otherwise indicated. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                                   (continued...)
                                - 3 -

briefed separately but consolidated for purposes of opinion.       The

Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

                  OPINION OF THE SPECIAL TRIAL JUDGE

     WOLFE, Special Trial Judge:     These cases are part of the

Plastics Recycling group of cases.      For a detailed discussion of

the transactions involved in the Plastics Recycling cases, see

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

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

transactions in these cases are substantially identical to the

transaction considered in the Provizer case.

     In a notice of deficiency dated August 21, 1989, respondent

determined a deficiency in the 1982 joint Federal income tax of

William and Joan Spears in the amount of $66,426 and additions to

tax for that year in the amount of $19,928 under section 6659 for

valuation overstatement, in the amount of $3,321 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

determined that interest on deficiencies accruing after December

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

rate under section 6621(c).



1
 (...continued)
                               - 4 -

     In a notice of deficiency dated August 25, 1989, respondent

determined deficiencies in Vincent and Clotilde Farrell's Federal

income tax for 1980 and 1982 in the respective amounts of $55,242

and $51,236.   Respondent also determined that interest on

deficiencies accruing after December 31, 1984, would be

calculated at 120 percent of the statutory rate under section

6621(c).   On February 24, 1994, respondent filed an amendment to

answer and asserted reduced deficiencies for taxable years 1980

and 1982 in the respective amounts of $29,590 and $51,043.

Respondent also asserted additions to tax for taxable year 1982

in the amount of $12,127 under section 6659 for valuation

overstatement, in the amount of $2,552 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 $50,278.   Finally,

respondent asserted that for taxable years 1980 and 1982,

deficiency amounts of $14,795 and $50,278, respectively, were

subject to the increased rate of interest under section 6621(c).2

     Petitioners Joan Spears and Clotilde Farrell were named in

the respective notices of deficiency and are petitioners herein

because they filed joint Federal income tax returns with their

husbands during the taxable years in issue.   For convenience,

generally hereafter in discussing or mentioning petitioners


2
     We note that respondent had determined in the statutory
notice of deficiency as well that the provision for increased
interest under sec. 6621(c) applied.
                               - 5 -

Spears we refer to William Spears (Spears), and in discussing or

mentioning petitioners Farrell we refer to Vincent Farrell

(Farrell).

     On April 22, 1992, respondent and Farrell filed a

Stipulation of Settled Issues resolving all issues except for

issues relating to his participation in the Plastics Recycling

Program during taxable year 1982.3     On March 31, 1994, respondent

and Farrell filed another Stipulation of Settled Issues

addressing the issues relating to his participation in the

Plastics Recycling Program.   A virtually identical Stipulation of

Settled Issues was filed by respondent and Spears on March 9,

1994.   These stipulations provide:

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

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



3
     Farrell and respondent stipulated: (1) Mr. and Mrs. Farrell
are liable for a deficiency in the amount of $29,589 for taxable
year 1980; (2) $14,795 of that amount is subject to the increased
rate of interest under sec. 6621(c); (3) the loss of $1,906
claimed on Schedule E of their 1982 Federal income tax return,
and the corresponding adjustment in the notice of deficiency,
relate to their investment in SAB Associates; and (4) they are
entitled to deduct $381 with respect to their interest in SAB
Associates for 1982.
                              - 6 -

     3. This stipulation resolves all issues that relate to
     the items claimed on petitioners' tax returns resulting
     from their participation in the Plastics Recycling
     Program, with the exception of petitioners' potential
     liability for additions to the tax for valuation
     overstatements under I.R.C. §6659 and for negligence
     under the applicable provisions of §6653(a).

     4. With respect to the issue of the addition to the
     tax under I.R.C. §6659, petitioners do not intend to
     contest the issue of the value of the Sentinel Recycler
     or the existence of a valuation overstatement on the
     petitioners' return; however, petitioners preserve
     their right to contest the issue of whether I.R.C.
     §6659 is applicable under the facts and circumstances
     of this case.[4]

     The only issues remaining in these consolidated cases are:

(1) Whether petitioners are liable for the additions to tax for

negligence or intentional disregard of rules or regulations under

section 6653(a)(1) and (2); and (2) whether petitioners are

liable for the addition to tax under section 6659 for an

underpayment of tax attributable to valuation overstatement.

     Farrell's motion for decision, based in general upon

circumstances not discussed herein, has been denied for reasons

set forth in Farrell v. Commissioner, T.C. Memo. 1996-295.



4
     The stipulation executed by respondent and Farrell refers
specifically to their 1982 tax returns. Also, the last clause of
the fourth stipulation reads: "however, petitioners preserve
their right to argue that the underpayment in tax is not
attributable to a valuation overstatement within the meaning of
I.R.C. §6659(a)(1), and that the Secretary should have waived the
addition to tax pursuant to the provisions of I.R.C. §6659(e)."
                                - 7 -

                          FINDINGS OF FACT

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

so found.    The stipulated facts and attached exhibits are

incorporated in the respective cases by this reference.

A.   The Plastics Recycling Transactions

     These cases concern petitioners' investments in two limited

partnerships that leased Sentinel expanded polyethylene (EPE)

recyclers:    SAB Resource Recycling Associates (SAB Recycling) and

SAB Resource Reclamation Associates (SAB Reclamation).    Spears is

a limited partner in SAB Recycling and Farrell is a limited

partner in SAB Reclamation.    For convenience we refer to these

partnerships collectively as the Partnerships.

     The transactions involving the Sentinel EPE recyclers leased

by the Partnerships are substantially identical to those in the

Clearwater Group limited partnership (Clearwater), the

partnership considered in Provizer v. Commissioner, T.C. Memo.

1992-177.    Petitioners have stipulated substantially the same

facts concerning the underlying transactions as we found in the

Provizer case.

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

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

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

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

to Clearwater, which licensed the recyclers to FMEC Corp., which
                                - 8 -

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

to ECI Corp. were financed with nonrecourse notes.    Approximately

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

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

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

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

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

     All of the monthly payments required among the entities in

the above transactions offset each other.    These transactions

were done simultaneously.    Although the recyclers were sold and

leased for the above amounts under the structure of simultaneous

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

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

     PI allegedly sublicensed the recyclers to entities that

would use them to recycle plastic scrap.    The sublicense

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

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

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

     Like Clearwater, each of the Partnerships leased Sentinel

EPE recyclers from F & G Corp. and licensed those recyclers to

FMEC Corp.    The transactions of the Partnerships differ from the

underlying transaction in the Provizer case in the following

respects:    (1) The entity that leased the machines from F & G

Corp. and licensed them to FMEC Corp.; and (2) the number of
                               - 9 -

recyclers that the Partnerships leased and licensed.5    For

convenience we refer to the series of transactions among PI, ECI

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

as the Partnership transactions.   In addition to the Partnership

transactions, a number of other limited partnerships entered into

transactions similar to the Partnership transactions, also

involving Sentinel EPE recyclers and Sentinel expanded

polystyrene recyclers.   We refer to these collectively as the

Plastics Recycling transactions.

B.   The Partnerships

     SAB Recycling and SAB Reclamation are New York limited

partnerships that were organized and promoted in 1982 by Stuart

Becker (Becker), a certified public accountant (C.P.A.) and the

founder and principal owner of Stuart Becker & Co., P.C. (Becker

Co.), an accounting firm that specialized in tax matters.      Becker

organized a total of six recycling partnerships (the SAB

recycling partnerships).   Two of the SAB recycling partnerships

closed in late 1981, two closed in early 1982, and two more

closed in late 1982.




5
     According to the offering memoranda, SAB Reclamation was to
lease and license eight recyclers and SAB Recycling was to lease
and license seven recyclers. However, the SAB Reclamation
partnership tax return for 1982 indicates that it leased and
licensed only four recyclers.
                               - 10 -

       The general partner of each of the SAB recycling

partnerships, including SAB Reclamation and SAB Recycling, is SAB

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

by Scanbo Management Ltd. (Scanbo),6 which is wholly owned by

Becker.    The officers and directors of SAB Management and Scanbo

are:    (1) Becker, president and director; (2) Noel Tucker

(Tucker), vice president, treasurer, and director; and (3) Steven

Leicht (Leicht), vice president, secretary, and director.     During

the years in issue, Tucker and Leicht also worked at Becker Co.

Tucker was vice president.    Each owned approximately 5 to 7

percent of the stock of Becker Co.      SAB Management did not engage

in any business before becoming involved with the SAB recycling

partnerships.

       With respect to each of the Partnerships, a private

placement memorandum was distributed to potential limited

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

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

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

offering memoranda.    In a section highlighting potential

conflicts of interest, each of the memoranda notes that Burstein

was a client and business associate of Elliot I. Miller (Miller),

the corporate counsel to PI.


6
     Scanbo is an acronym for three of Becker's children:     Scott,
Andy, and Bonnie.
                               - 11 -

     The offering memoranda of SAB Reclamation and SAB Recycling

provide that SAB Management will receive general partner fees in

the respective amounts of $110,000 and $97,375 from those

partnerships.   SAB Management received fees of approximately

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

partnerships.   In addition, Becker Co. prepared the partnership

returns and Forms K-1 for all of the SAB recycling partnerships

and received fees for those services.

     The offering memoranda of SAB Reclamation and SAB Recycling

state that sales commissions and offeree representative fees will

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

to the partnerships and that SAB Management, as the general

partner of those partnerships, may retain as additional

compensation all amounts not so paid.   However, neither Becker

nor SAB Management retained or received any sales commissions or

offeree representative fees.   Instead, after the closing of each

SAB recycling partnership, Becker rebated to each investor whose

investment was not subject to a sales commission or offeree

representative fee an amount equal to 7.5 percent of such

investor's original investment.

     The offering memoranda list significant business and tax

risk factors associated with investments in the Partnerships.

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

substantial likelihood of audit by the Internal Revenue Service
                               - 12 -

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

will be challenged as being in excess of fair market value; (2)

the Partnerships have no prior operating history; (3) the general

partner has no prior experience in marketing recycling or similar

equipment; (4) the limited partners have no control over the

conduct of the Partnerships' business; (5) there is no

established market for the Sentinel EPE recyclers; (6) there are

no assurances that market prices for virgin resin will remain at

their current costs per pound or that the recycled pellets will

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

conflicts of interest exist.

C.   Stuart Becker, Steven Leicht, and Noel Tucker

      Becker does not have an engineering background, and he is

not an expert in plastics materials or plastics recycling.     He

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

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

School of Business Administration in 1973.   Becker passed the

certified public accountancy test in 1967 and was the winner of

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

examination for that year.   Since early 1966, Becker has

practiced as an accountant exclusively in the tax area.     From

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

& Co., and in 1972 he joined the accounting firm of Richard A.
                              - 13 -

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

1977, Becker founded Becker Co.

     Becker had considerable experience with tax shelter

transactions before he organized the SAB recycling partnerships.

He prepared opinions regarding tax shelters' economic and tax

projections, advised individuals and companies with respect to

investments in tax shelters, lectured extensively about tax

shelter investments generally, and lectured and published with

respect to leveraged tax shelters.7    Becker Co. specialized in

tax advantaged investments.   From 1980 to 1982, approximately 60

percent of the work done by Becker Co. involved tax sheltered and

private investments.   Becker has owned minority interests in

general partners of numerous limited partnerships.    Prior to

organizing the SAB recycling partnerships, Becker was a 5-percent

owner of the general partner of partnerships involved in

approximately 14 transactions involving river transportation

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




7
     Becker described a leveraged tax shelter as "a transaction
where [the ratio of] the effective [tax] writeoff, which includes
the value of the tax credit, * * * [to the amount invested]
exceeds one to one."
                              - 14 -

     Although investment counseling was related to his firm's

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

of providing investment advice.   Becker did not normally hire

other professionals for consultation or advice.    In circumstances

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

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

invested in the Plastics Recycling partnerships.

     Becker learned of the Plastics Recycling transactions when a

prospective client presented him with an offering memorandum

concerning the transactions in August or September 1981.    Becker

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

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

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

corporate counsel to PI.   Thereafter, Becker recommended the

investment to the prospective client.   Although the prospective

client did not invest in the Plastics Recycling transactions,

Becker became interested in the proposal and organized the SAB

recycling partnerships in order to make similar investments in

Sentinel EPE recyclers conveniently available to appropriate

clients.

     In organizing the SAB recycling partnerships, Becker was not

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

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

allowed only to conduct a limited investigation of the proposed
                              - 15 -

investments and choose whether or not to organize similar

partnerships.   Becker relied heavily upon the offering materials

and discussions with persons involved in the matter to evaluate

the Plastics Recycling transactions.   He and two other members of

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

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

recyclers.

     During his investigation of the Plastics Recycling

transactions Becker did not hire any plastics, engineering, or

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

discussed the transactions with Michael Canno, of the Equitable

Bag Co., a manufacturer of paper and plastic bags.   Canno never

saw the recyclers or the pellets and never wrote any reports

assessing the equipment or the pellets.

     Becker retained a law firm, Rabin & Silverman8, to assist

him with the legal aspects of organizing the SAB recycling

partnerships, such as reviewing and/or preparing documents in

connection with the SAB recycling partnerships.   Michael D.

DiGiovanna9 (DiGiovanna), a partner at Rabin & Silverman and a


8
     Rabin & Silverman has undergone several name changes since
that time. At the time of trial, the successor firm was called
Dornbush, Mensch, Mandelstam & Schaeffer.
9
     The testimony of DiGiovanna was stipulated into the record
in docket No. 28082-89 (the Farrell case), but not docket No.
27393-89 (the Spears case). His testimony has been disregarded
                                                   (continued...)
                              - 16 -

specialist in securities and corporate law, advised Becker

regarding his disclosure obligations under the securities laws

and his protection against liability.   In so advising Becker,

DiGiovanna was not responsible for, and did not get, independent

verification of any of the representations in the offering

materials.   He never visited PI or saw a Sentinel EPE recycler.

DiGiovanna did not have any education or experience in

engineering, plastics materials, or plastics recycling.

     Leicht and Tucker also familiarized themselves with the

Plastics Recycling transactions.10   Leicht has a B.A. degree in

finance and accounting from Penn State University, a J.D. from

SUNY Buffalo, and an LL.M. in Taxation from New York University

School of Law.   Leicht ran a mathematical check on the numbers

contained in the offering materials for Becker, but he did not

test the underlying assumptions upon which they were based.    He

also visited PI in Hyannis and met with Miller and other insiders

to the transactions.   Leicht never communicated an opinion as to

the value of the recyclers other than what was presented in the




9
 (...continued)
with respect to the Spears case.
10
     Leicht testified only in docket No. 28082-89 (the Farrell
case). His testimony has been disregarded with respect to docket
No. 27393-89 (the Spears case).
                              - 17 -

offering memoranda.   He has no education or expertise in plastics

materials or plastics recycling.

     Tucker did not testify at trial.   However, Spears submitted

two memoranda written by Tucker and addressed to Becker relating

to the Plastics Recycling transactions.   One memorandum, dated

November 12, 1981, is an evaluation of the financial projections

for SAB Leasing Associates (SAB Leasing).   Tucker checked all of

the computations in the financial projections prepared by the

management of PI for SAB Leasing, and created several additional

schedules using variable inflation rates and royalty rates.     The

second memorandum, dated September 24, 1982, briefly describes a

visit with Becker to PI and contains two additional schedules

using variable numbers.

     After the 1981 SAB recycling partnerships closed, Becker had

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

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

recycling partnerships was indeed available for use.   Becker

arranged for this verification, independent of PI, because he

understood that the investment tax and business energy credits

would not be available if the qualifying property was not

available for use.
                              - 18 -

D. Petitioners and Their Introduction to the Partnership
Transactions

     Petitioners William and Joan Spears resided in Greenwich,

Connecticut, at the time their petition was filed.   Spears earned

a B.A. in politics and graduated with honors from Princeton

University in 1960.   He then attended the Harvard School of

Business where he graduated with distinction in 1962.   In July

1962 he joined Loeb, Rhoades & Co. (Loeb, Rhoades) as a

securities analyst.   At Loeb, Rhoades, Spears concentrated on the

pharmaceutical and retail industries until 1968, when he acquired

responsibilities in investment management.   Spears became a

general partner at Loeb, Rhoades before leaving in 1971.   In

January 1972, he formed his own investment management firm, W.G.

Spears, Inc., which eventually became Spears, Benzak, Salomon &

Farrell (Spears, Benzak).   From its formation until the time of

trial, Spears, Benzak has managed funds principally for wealthy

individuals, endowment funds, foundations, and pension funds.

     Petitioners Vincent and Clotilde Farrell resided in Katonah,

New York, when their petition was filed.   Farrell earned a B.A.

in history from Princeton University and an M.B.A. from Iona

College Graduate School of Business.   Immediately after college,

in 1969, Farrell was employed as a high school teacher and
                              - 19 -

football coach.   Four years later he joined the investment firm

of Smith, Barney, Harris & Upham (Smith, Barney).   Farrell became

a successful retail salesman for Smith, Barney and eventually

influenced the investment of approximately $50 million.     In 1982

Farrell became a partner at the investment management firm of

Spears, Benzak in midtown Manhattan.   Over the next 12 years

Spears, Benzak increased the amounts it had under management from

approximately $150 million to nearly $3 billion.

     On their joint 1982 Federal Income tax return, William and

Joan Spears reported gross income from wages, interest,

dividends, State and local tax refunds, and capital gains in

excess of $700,000.   On their 1982 return, Vincent and Clotilde

Farrell reported gross income from wages, interest, dividends,

and State and local tax refunds in excess of $250,000.

Consequently, in the absence of significant deductions or

credits, petitioners in these consolidated cases were subject to

payment of Federal income taxes in substantial amounts.

     Spears and Farrell are both partners in SAB Associates, a

limited partnership initially involved in tax straddle

investments.   During 1981, the tax laws changed and as a

consequence SAB Associates was likely to realize substantial

gains.   SAB Associates ceased engaging in tax straddle
                               - 20 -

investments that year and changed its function to leasing

Sentinel EPE recyclers.    Partners were given the option of

withdrawing their capital accounts or continuing with the

partnership.   In December 1981, SAB Associates invested $569,600

in SAB Resource Recovery Associates and $975,000 in SAB Leasing

Associates.    Investment tax credits and business energy credits

with respect to petitioners' shares of these investments are not

reflected in the records in these cases, presumably because the

investments were made in 1981.    Only the operating losses in 1982

are documented in the record in these cases.

     In 1982, Spears acquired a 2.538461-percent interest in SAB

Recycling for $25,000.11   On their 1982 return, he and his wife

Joan claimed an operating loss in the amount of $19,870 and

investment tax and business energy credits totaling $41,32012

with respect to his interest in SAB Recycling.    They also claimed

an operating loss in the amount of $1,145 with respect to their

interest in SAB Associates.    Respondent disallowed all of their



11
     The gross amount Spears invested is $25,000, unreduced by
any sales commission rebate or his share of any advance royalty
distributed to him.
12
     The regular investment tax credit claimed by Spears and his
wife totaled $54,863, but only $20,660 of that amount was
attributable to SAB Recycling.
                               - 21 -

claimed operating losses and credits related to their interests

in SAB Recycling and SAB Associates.

     In 1982, Farrell acquired a 4.5-percent limited partnership

interest in SAB Reclamation for $25,000.13   On their 1982 return,

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

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

totaling $41,856,14 both flowing from his interest in SAB

Reclamation.    The Farrells also claimed an operating loss in the

amount of $1,906 with respect to SAB Associates.15   Respondent

disallowed all but $386 of the Farrell's 1982 claimed operating

losses and credits related to SAB Reclamation and SAB

Associates.16


13
     Farrell testified that he believed he had invested $20,000.
His Form K-1, Partner's Share of Income, Credits, Deductions,
etc., attached to SAB Reclamation's partnership return, indicates
that he invested $25,000. We note that the $25,000 figure is the
gross amount Farrell invested, unreduced by any rebated sales
commission or his share of any advance royalty distributed to
him.
14
     The regular investment tax credit claimed by Farrell and his
wife totaled $21,314, but only $20,928 of that amount was
attributable to SAB Reclamation.
15
     As noted, respondent and Farrell stipulated that for taxable
year 1982, he and his wife are entitled to deduct $381 with
respect to their interest in SAB Associates.
16
     Respondent explained in the notice of deficiency that
                                                   (continued...)
                                - 22 -

     Spears and Farrell both learned of the Partnership

transactions from Becker.   Becker and Spears met in 1974 when

Spears attended board meetings and otherwise represented the

interests of a substantial investor in a company for which Becker

provided accounting services.    Spears was impressed with Becker

and hired him to perform accounting and tax work for Spears

individually and for his company.    During that time Spears was

also a client and friend of Farrell, and he recommended that

Farrell and Becker meet.    Farrell hired Becker Co. to prepare his

returns.   Becker also occasionally presented Farrell with tax-

advantaged investments and eventually provided advice in

connection with Farrell's joining Spears, Benzak.    Farrell did

not rely on Becker with respect to general investment issues

because he did not think that was Becker's area of expertise.      He


16
 (...continued)
Farrell and his wife were not entitled to any investment tax
credit or business energy tax credit from SAB Associates and SAB
Reclamation. In both the notice of deficiency and the amendment
to answer, however, respondent allowed $772 of the total
investment and business energy credits claimed by the Farrells.
The Farrells claimed a total of $42,242 in investment tax and
business energy tax credits. Of that amount, $41,856 derived
from their interest in SAB Reclamation (with a basis of $209,280
in the equipment, the investment tax and business energy tax
credits equal $41,856), and $386 was unrelated to SAB Reclamation
($42,242 - $41,856 = $386). Consequently, it appears that in
allowing $772 of total credits, respondent actually allowed $386
of credits related to SAB Reclamation.
                              - 23 -

considered Becker knowledgeable with respect to the tax code and

tax advantaged investments.   Farrell would not discuss

investments with Becker if they did not have tax benefits.

     The tax benefits associated with the Partnership

transactions were a primary investment consideration for Spears.

He understood that he would have taxable income to report when

SAB Associates discontinued its tax straddle business, and that

the investment tax credits from the recyclers would be available

to those partners who rolled over their investments and remained

with SAB Associates.   Spears reviewed the offering memorandum for

SAB Recycling, and he and Becker discussed the Sentinel EPE

recyclers and the Partnership transactions in general.    Spears

relied upon Becker more than he did the offering materials.

Spears knew he was not able to understand the plastics recycling

technology.   He explained that when Spears, Benzak required

analysis of technology investments, the firm "would rely * * * on

others" who had knowledge of the technology in question.

However, even though Spears was the founder and a senior member

of Spears, Benzak, which was a substantial investment counseling

firm, he did not consider it appropriate to "bring resources from

within [his] firm to bear on a personal investment".
                               - 24 -

     Spears did not know the number of SAB recycling partnerships

in which Becker was the general partner.   Although Spears knew

that Becker was not an expert in plastics recycling, he never

asked Becker if he had sought advice from an expert independent

of the Partnership and insiders to the Partnership transactions.

Spears claims that he believed the price of the recyclers had

been negotiated at arm's length and that he was unaware of

whether there was an established market for the recycling

equipment.   In fact, as Spears stipulated, no negotiations for

the price of the Sentinel EPE recyclers took place between or

among PI, ECI, and F & G, and the offering memoranda clearly

disclosed that there was no established market for leasing or

operating the Sentinel EPE recyclers.

     Becker introduced the Plastics Recycling transactions to

Farrell in mid to late 1980.   The tax benefits interested

Farrell.   He understood that the tax credits would exceed his

investment and thereby eliminate any out-of-pocket investment

expense.   He knew Becker was not a plastics recycling expert, but

believed Becker was capable of judging the tax aspects of the

transactions, if not the technical aspects of them.   Farrell

never asked Becker if he consulted any experts.   Farrell did not
                               - 25 -

know whether Becker had consulted only PI personnel and other

insiders or whether he had spoken with independent experts.

     Petitioners in these consolidated cases never made a profit

in any year from their participation in the Partnership

transactions.   Spears and Farrell did not see a Sentinel EPE

recycler prior to investing in the Partnership transactions.

Petitioners in each case do not have any education or work

experience in plastics recycling or plastics materials.

                              OPINION

     We have decided more than two dozen of the Plastics

Recycling group of cases.17   The majority of these cases, like


17
     Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993), concerned the
substance of the partnership transaction and also the additions
to tax.
     The following cases concerned the addition to tax for
negligence, inter alia: Stone v. Commissioner, T.C. Memo. 1996-
230; Reimann v. Commissioner, T.C. Memo. 1996-84; Bennett v.
Commissioner, T.C. Memo. 1996-14; Atkind v. Commissioner, T.C.
Memo. 1995-582; Triemstra v. Commissioner, T.C. Memo. 1995-581;
Pace v. Commissioner, T.C. Memo. 1995-580; Dworkin v.
Commissioner, T.C. Memo. 1995-533; Wilson v Commissioner, T.C.
Memo. 1995-525; Avellini v. Commissioner, T.C. Memo. 1995-489;
Paulson v. Commissioner, T.C. Memo. 1995-387; Zidanich v.
Commissioner, T.C. Memo. 1995-382; Ramesh v. Commissioner, T.C.
Memo. 1995-346; Reister v. Commissioner, T.C. Memo. 1995-305;
Fralich v. Commissioner, T.C. Memo. 1995-257; Shapiro v.
Commissioner, T.C. Memo. 1995-224; Pierce v. Commissioner, T.C.
Memo. 1995-223; Fine v. Commissioner, T.C. Memo. 1995-222;
Pearlman v. Commissioner, T.C. Memo. 1995-182; Kott v.
                                                   (continued...)
                             - 26 -

the consolidated cases herein, raised issues regarding additions

to tax for negligence and valuation overstatement.   We have found

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

the opinions to date on these issues, although procedural rulings

have involved many more favorable results for taxpayers.18

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

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

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

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


17
 (...continued)
Commissioner, T.C. Memo. 1995-181; Eisenberg v. Commissioner,
T.C. Memo. 1995-180.
     Greene v. Commissioner, 88 T.C. 376 (1987), concerned the
applicability of the safe-harbor leasing provisions of sec.
168(f)(8). Trost v. Commissioner, 95 T.C. 560 (1990), concerned
a jurisdictional issue. Baratelli v. Commissioner, T.C. Memo.
1994-484; Estate of Satin v. Commissioner, T.C. Memo. 1994-435;
Fisher v. Commissioner, T.C. Memo. 1994-434; Foam Recycling
Associates v. Commissioner, T.C. Memo. 1992-645; Madison
Recycling Associates v. Commissioner, T.C. Memo. 1992-605,
concerned other issues.
18
     In Zidanich v. Commissioner, T.C. Memo. 1995-382, we held
the taxpayers liable for the section 6659 addition to tax, but
not liable for the negligence additions to tax under section
6653(a). As indicated in our opinion, the Zidanich case, and the
Steinberg case consolidated with it for opinion, involved
exceptional circumstances.
     In Estate of Satin v. Commissioner, supra, and Fisher v.
Commissioner, supra, after the decision in Provizer v.
Commissioner, supra, the taxpayers were allowed to elect to
accept a beneficial settlement because of exceptional
circumstances.
                              - 27 -

almost identical to the Partnership transactions in these

consolidated cases, was a sham because it lacked economic

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

addition to tax for valuation overstatement since the

underpayment of taxes was directly related to the overstatement

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

losses and credits claimed with respect to Clearwater were

attributable to tax-motivated transactions within the meaning of

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

lacked economic substance and a business purpose, this Court

relied heavily upon the overvaluation of the Sentinel EPE

recyclers.

     Although petitioners have not agreed to be bound by the

Provizer opinion, they have stipulated that the investments in

the Sentinel EPE recyclers in these cases are similar to the

investment described in Provizer v. Commissioner, supra.     The

underlying transactions in these consolidated cases, and the

Sentinel EPE recyclers considered in these cases, are the same

type of transaction and same type of machine considered in

Provizer v. Commissioner, supra.

     Based on the entire records in these cases, including the

extensive stipulations, testimony of respondent's experts, and
                               - 28 -

petitioner's testimony, we hold that each of the Partnership

transactions herein was a sham and lacked economic substance.     In

reaching this conclusion, we rely heavily upon the overvaluation

of the Sentinel EPE recyclers.   Respondent is sustained on the

question of the underlying deficiencies.   We note that

petitioners have explicitly conceded this issue in the respective

stipulations of settled issues filed shortly before trial.   The

record plainly supports respondent's determination regardless of

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

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

Commissioner, supra.

A.   Section 6653(a) - Negligence

     In a notice of deficiency, respondent determined that

petitioners William and Joan Spears are liable for the negligence

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

the 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 Vincent and Clotilde Farrell are liable for additions

to tax for negligence under section 6653(a)(1) and (2).    Because

respondent raised these additions to tax for the first time in an
                              - 29 -

amendment to answer, respondent has the burden of proof on these

issues.   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.   Section 6653(a)(2) imposes an addition to tax equal

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

of the underpayment attributable to negligence or intentional

disregard of rules or regulations.

     Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would employ

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

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

in connection with the transactions were reasonable in light of

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

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

When considering the negligence addition to tax, we evaluate the

particular facts of each case, judging the relative

sophistication of the taxpayers, as well as the manner in which

they approached their investment.    McPike v. Commissioner, T.C.

Memo. 1996-46.
                              - 30 -

     Petitioners each contend that they were reasonable in

claiming deductions and investment credits with respect to their

investments in the Partnerships.     In support of such contentions,

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

deductions and credits with respect to the Partnerships was

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

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

materials and a qualified adviser.

     In the cases before us, expert testimony by report

establishes that the oil pricing changes during the late 1970's

and early 1980's did not justify petitioners' claiming excessive

investment credits and purported losses based on vastly

exaggerated valuations of recycling machinery.    Also, we are

unconvinced by the claim of these highly sophisticated, able, and

successful investors that they acted reasonably in failing to

inquire about their investment and simply relying on the offering

circulars and on Becker, despite warnings in the offering

circulars and explanations by Becker about the limitations of his

investigation.   In each case these taxpayers knew or should have

known better.

     1.   The So-Called Oil Crisis
                              - 31 -

     Petitioners each argue that because plastics materials are

oil derivatives, they reasonably believed that the Partnership

transactions had good economic potential in light of the alleged

oil crisis in the United States during 1981.    However,

petitioners failed to explain exactly how such supposed oil

crisis provided a reasonable basis for them to invest in the

Partnerships and claim the associated tax deductions and credits.

     The offering materials warned that there could be no

assurances that prices for new resin pellets would remain at

their then current level.   One of respondent's experts, Steven

Grossman, explained that the price of plastics materials is not

directly proportional to the price of oil.    In his report, he

stated that less than 10 percent of crude oil is utilized for

making plastics materials, and that studies have shown that "a

300% increase in crude oil prices results in only a 30 to 40%

increase in the cost of plastics products."    Moreover, during

1980 and 1981, in addition to the media coverage of the so-called

oil crisis, there was "extensive continuing press coverage of

questionable tax shelter plans."   Zmuda v. Commissioner, 731 F.2d

1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982).

     Spears placed into the record several articles from Modern

Plastics and an energy projections report from the U.S.
                              - 32 -

Department of Energy (DOE), all published in the years 1980 and

1981.   Both the articles from Modern Plastics and the report by

the DOE speculated on the price of oil, among other things.    The

preface to the DOE report cautioned about "the tremendous

uncertainties underlying energy projections" and warned "that

[their] projections do not constitute any sort of blueprint for

the future."   Reflective of such uncertainties, an April 1980

article in Modern Plastics contemplated resin price hikes, while

a May 1981 article predicted a leveling off of prices, market

disruptions, and an industrywide shakeout.   Spears does not

purport to have read, or in any way relied upon, the DOE report

or the Modern Plastics articles, and has not otherwise explained

the connection between these speculative materials and his

investing in the Partnerships.

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

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

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

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

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

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

invested in limited partnerships whose investment objectives

concerned enhanced oil recovery (EOR) technology.   The Krause
                                - 33 -

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

Federal Government adopted specific programs to aid research and

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

the taxpayers in the Krause case were not liable for the

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

Government's expert witnesses acknowledged that "investors may

have been significantly and reasonably influenced by the energy

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

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

however, as explained by respondent's expert Grossman, supra, the

price of plastics materials was not directly proportional to the

price of oil, and there is no persuasive evidence that the so-

called oil crisis had a substantial bearing on petitioners'

decisions to invest.   While EOR was, according to our Krause

opinion, in the forefront of national policy and the media during

the late 1970's and 1980's, there is no showing in these records

that the so-called oil crisis would provide a reasonable basis

for petitioners' investing in recycling of polyethylene,

particularly in the machinery here in question.

     Moreover, the taxpayers in the Krause opinion were

experienced in or investigated the oil industry and EOR

technology specifically.   One of the taxpayers in the Krause case
                              - 34 -

undertook significant investigation of the proposed investment

including researching EOR technology.   The other taxpayer was a

geological and mining engineer whose work included research of

oil recovery methods and who hired an independent geologic

engineer to review the offering materials.   Id. at 166.    In the

present cases, petitioners had no education or work experience

with respect to plastics or plastics recycling.   There is no

indication in the records that either of petitioners

independently investigated the Sentinel EPE recyclers or hired an

expert in plastics to evaluate the Partnership transactions.

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

the investment, ethanol producing equipment, was widely

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

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

taxpayer therein conducted an independent investigation of the

investment and researched the market for the sale of ethanol in

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

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

so-called oil crisis would provide a reasonable basis for

petitioners' investing in the polyethylene recyclers here in

question.   There is no indication in the records that petitioners

independently investigated the Sentinel EPE recyclers or hired an
                              - 35 -

expert in plastics to evaluate the Partnership transactions.    The

facts of petitioners' cases are distinctly different from the

Rousseau case.   Accordingly, we do not consider petitioners'

arguments with respect to the Krause and Rousseau cases

applicable.

     2.   Petitioners' Purported Reliance on Becker

     Petitioners also maintain that they reasonably relied upon

the advice of a qualified adviser, Becker.19

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

     A taxpayer may avoid liability for the additions to tax

under section 6653(a)(1) and (2) if he or she reasonably relied

on competent professional advice.   United States v. Boyle, 469

U.S. 241, 250-251 (1985); Freytag v. Commissioner, 89 T.C. 849,

888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991).   Reliance on professional advice, standing alone, is


19
     We note that Farrell extensively argues this point in his
posttrial brief. In general, some of Farrell's factual positions
conflict with the record of his case, and the principal cases
that he cites are inapplicable and distinguishable for the
following general, nonexclusive reasons: (1) They involve far
less sophisticated taxpayers; (2) the reasonableness of the
respective taxpayers' reliance on expert advice was established
in those cases on grounds that do not exist here; and (3) the
advice given was within the adviser's area of expertise.
                              - 36 -

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

considered.   In order for reliance on professional advice to

excuse a taxpayer from the negligence additions to tax, the

taxpayer must show that such professional had the expertise and

knowledge of the pertinent facts to provide valuable and

dependable advice on the subject matter.   Goldman v.

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

480; Freytag v. Commissioner, supra; Kozlowski v. Commissioner,

T.C. Memo. 1993-430, affd. without published opinion 70 F.3d 1279

(9th Cir. 1995).

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

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

Commissioner, 990 F.2d 893, 903 (6th Cir. 1993), affg. T.C. Memo.

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

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

affd. without published opinion sub nom. Cowles v. Commissioner,

949 F.2d 401 (10th Cir. 1991); Marine v. Commissioner, 92 T.C.

958, 992-993 (1989), affd. without published opinion 921 F.2d 280

(9th Cir. 1991); McCrary v. Commissioner, 92 T.C. 827, 850

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

reliance have been rejected when neither the taxpayer nor the
                              - 37 -

advisers purportedly relied upon by the taxpayer knew anything

about the nontax business aspects of the contemplated venture.

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

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

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

(3d Cir. 1995); Steerman v. Commissioner, T.C. Memo. 1993-447;

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

     The concept of negligence and the argument of reliance on an

expert is highly fact intensive.   In these cases two remarkably

capable and successful investment advisers, experienced and able

at investigating investment proposals, assert that they relied

upon their accountant to investigate the tax law and the

underlying business circumstances of a proposed investment.    The

accountant explains that he made an investigation within the

limits of his resources and abilities and fully disclosed what he

had done.   The question here is whether petitioners actually and

reasonably relied on the accountant with respect to valuation

problems requiring expertise in engineering and plastics

technology or whether the accountant gave the tax advice and

facilitated the transaction, but did not make a full and

independent investigation of the relevant business and

technology, and did clearly inform his clients of the limits of
                                - 38 -

his knowledge and investigation of the transaction.    For reasons

set forth below, we believe the latter statement more accurately

describes what happened here.

         b. Petitioners' Investment Experience, Sophistication,
        and Resources

     Petitioners claim that they reasonably relied upon Becker

when they knew that:   (1) His forte was the tax analysis aspect

of so-called tax shelter transactions and (2) he had no

experience or expertise in plastics materials or plastics

recycling.   Yet petitioners' education and professional

experience, and portions of their own testimony in these cases,

indicate that they clearly knew better than to rely upon a person

for advice on matters beyond his or her expertise.

     Petitioners Spears and Farrell are very well educated and

exceptionally sophisticated in investment and financial matters.

The two have had outstanding careers investing and managing funds

for wealthy individuals and institutions; without question they

are highly proficient and knowledgeable investors.    During

Farrell's employment at Smith, Barney, approximately $50 million

of client funds were Farrell's responsibility.   Spears became a

partner at Loeb, Rhoades & Co. less than 10 years after his

initial employment there.   At the time of trial Spears, Benzak
                              - 39 -

was investing and managing nearly $3 billion of client funds.    In

view of their impressive investment experience and skill, there

is little doubt that if petitioners themselves had thoroughly

investigated the Plastics Recycling transactions before

investing, they surely would have learned that the recyclers were

overvalued and therefore the tax benefits flowing from the

Partnerships were illusory.

     Spears testified that his firm's policy for investigating

investment opportunities was to rely heavily on people who had

studied the subject industry in depth.   Yet Becker was not an

expert in plastics materials or plastics recycling, and he did

not study the plastics recycling industry in depth.   Becker's

"investigation" did not even uncover that competing, less

expensive recyclers were already on the market.   Even though

Spears knew that Becker had no expertise in plastics materials or

plastics recycling, he never asked Becker if he had consulted any

plastics experts who were independent of the transactions.

Spears testified that he simply assumed Becker had consulted the

appropriate experts.

     While Farrell was at Smith, Barney, he did not perform any

due diligence for any proposed investments because such work was

done by the department or committee proposing or sponsoring the
                               - 40 -

investment, such as the tax shelter department.    Even though

Farrell was comfortable with the due diligence efforts at Smith,

Barney, he testified that he "very rarely offered" the tax

shelter investments to his clients because he "did not consider

himself knowledgeable enough" in the subject areas of the

investments.    Similarly, Farrell testified that he did not rely

on Becker for general investment issues because he did not think

that was Becker's area of expertise.    Farrell knew that Becker's

area of expertise was taxation, and he explained that he would

not discuss investments with Becker if they did not have tax

benefits.

         c. Becker's Limited Investigation and Technological
         Knowledge and His Emphasis on Disclosure and on
         Protection Against Liability

     In evaluating the Plastics Recycling transactions and

organizing the SAB recycling partnerships, Becker supposedly

relied upon:    (1) The offering materials; (2) a tour of the PI

facility in Hyannis; (3) discussions with insiders to the

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

reputation and background of PI and persons involved in the

transactions.

     Becker possessed no education, special qualifications, or

professional skills in plastics engineering, plastics recycling,
                              - 41 -

or plastics materials.   Despite his lack of knowledge regarding

the product, the target market, and the technical aspects at the

heart of the Plastics Recycling transactions, Becker did not hire

an expert in plastics materials or plastics recycling, or

recommend that his clients do so.   He retained the law firm Rabin

& Silverman to assist him with the legal aspects of organizing

the SAB recycling partnerships.   In addition, one of the

partners, DiGiovanna, advised Becker with respect to his

disclosure obligations under the applicable securities laws.

     Becker testified that DiGiovanna told him that he had

fulfilled the fiduciary responsibilities associated with his

position and function as a general partner.   A specialist in

securities and corporate law, DiGiovanna testified that "Becker

wanted to be covered from the securities law standpoint in terms

of full disclosure."   Digiovanna explained that the extent of his

advice encompassed compliance with securities laws.   At trial

DiGiovanna could not recall specific discussions he had with

Becker or whether Becker or anyone else at Becker Co. visited PI.

DiGiovanna was not responsible for, and did not get, independent

verification of any of the representations in the offering

materials.   He never visited PI or saw a Sentinel EPE recycler.
                              - 42 -

DiGiovanna did not have any education or experience in

engineering, plastics materials, or plastics recycling.

     The only independent person having any connection with the

plastics industry with whom Becker spoke was Canno.   A client of

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

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

Becker spoke to Canno about the recyclers and PI, but did not

hire or pay him for any advice.   Canno did not visit PI's plant

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

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

resin pellets after they were further processed by PI.    According

to Becker, Canno endorsed the Plastics Recycling transactions

after reviewing the offering materials.   Asked at trial if Canno

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

don't know what Mr. Canno did."

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

viewed a Sentinel EPE recycler in operation, and saw products

that were produced from recycled plastic.   During his visit he

was told that the recycler was unique and that it was the only

machine of its type.   In fact, the Sentinel EPE recycler was not

unique; instead, several machines capable of densifying low

density materials were already on the market.   Other plastics
                             - 43 -

recycling machines available during 1981 ranged in price from

$20,000 to $200,000, including the Foremost Densilator,

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

Plastcompactor, and Cumberland Granulator.   See Provizer v.

Commissioner, T.C. Memo. 1992-177.

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

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

and production of the Sentinel EPE recycler.   When he asked to

see the cost records for some kind of independent verification,

however, his request was denied.   Becker was informed that such

information was proprietary and secret,20 and that he would just

have to take PI's representations as true.   Becker decided to

accept PI's representations after speaking with Miller (the

corporate counsel to PI), Canno (who had never been to PI's plant

or seen a Sentinel EPE recycler), and a surrogate judge from

Rhode Island who did business in the Boston-Cape Cod area (and

who had no experience in engineering or plastics materials).

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



20
     Although PI claimed that all of its information was a trade
secret, and that it never obtained patents on any of its
machines, PI had in fact obtained numerous patents prior to the
recycling transactions and had also applied for a trademark for
the Sentinel recyclers.
                               - 44 -

accounting controls regarding the allocation of royalty payments

and PI's recordkeeping system in general.   In Provizer v.

Commissioner, supra, this Court found that "PI had no cost

accounting system or records."

     Becker confirmed at trial that he relied on the offering

materials and discussions with PI personnel to establish the

value and purported uniqueness of the recyclers.   Becker

testified that he relied upon the reports of Ulanoff and Burstein

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

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

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

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

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

expert.   In addition, as we found in the Provizer case, "Ulanoff

and Burstein each owned an interest in more than one partnership

which owned Sentinel Recyclers as part of the Plastics Recycling

Program."21   Provizer v. Commissioner, supra.



21
     Spears stipulated that Ulanoff owned a 1.27-percent interest
in Plymouth Equipment Associates and a 4.37-percent interest in
Taylor Recycling Associates, both partnerships that leased
Sentinel Recyclers. Spears also stipulated that Burstein owns a
2.605-percent interest in Empire Associates and a 5.82-percent
interest in Jefferson Recycling Associates, also partnerships
that leased Sentinel Recyclers.
                               - 45 -

     Becker explained at trial that when he evaluates prospective

investments for clients, he focuses on the economics of the

transaction and investigates whether there is a need or market

for the product or service.    With respect to the Partnership

transactions, the records indicate that Becker overlooked several

red flags regarding the economic viability and market for the

Sentinel EPE recyclers.    The offering memoranda for the

Partnership transactions warned that there was no established

market for the Sentinel EPE recyclers.    Becker never saw any

marketing plans for selling the pellets or leasing the recyclers.

He accepted representations by PI personnel that they would be

marketing the recyclers to clients and that there was a

sufficient base of end-users for the machines, yet he never saw

PI's client list.   At the time of the closing of the

Partnerships, Becker did not know who the end-users were or

whether there were any end-users actually committed to the

transaction.

     Becker purportedly checked the price of the pellets by

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

not use those same journals to investigate the recyclers'

purported value or to see whether there were any advertisements

for comparable machines.    In concluding that the Partnerships
                              - 46 -

would be economically profitable, Becker made two assumptions

that he concedes were unsupported by any hard data:    (1) That

there was a market for the pellets; and (2) that market demand

for them would increase.

          d. Conclusion Concerning Petitioners' Alleged
          Reliance on Becker

     Petitioners in these cases are very well educated and highly

accomplished, sophisticated investors.   Without question they

possessed the intellect, skills, experience, and resources to

have the viability of the Plastics Recycling transactions

thoroughly investigated.

     Petitioners claim to have relied upon Becker for the bona

fides and viability of the Partnership transactions.    Yet

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

plastics recycling, and Spears and Farrell knew this.    Moreover,

Becker indicated that he was careful not to mislead any of his

clients regarding the particulars of his limited investigation.

As he put it:   "I don't recall saying to a client I did due

diligence * * * [Rather,] I told [my clients] precisely what I

had done to investigate or analyze the transaction.    I didn't

just say I did due diligence, and leave it open for them to

define what I might or might not have done."
                              - 47 -

     The purported value of the Sentinel EPE recycler generated

the deductions and credits in these cases, and that circumstance

was clearly reflected in the offering memoranda.   Certainly

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

education and investment experience, petitioners should have

recognized it as well.   Yet neither petitioners nor Becker

verified the purported value of the Sentinel EPE recycler.

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

the Sentinel EPE recyclers.   Investors as sophisticated as

petitioners either learned or should have learned the source and

shortcomings of Becker's valuation information when he reported

to them and "precisely" disclosed "what [he] had done to

investigate or analyze the transaction."   Accordingly, we hold

that petitioners did not in good faith or reasonably rely on

Becker as an expert or a qualified professional working in the

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

Sentinel EPE recycler and the viability or bona fides of the

Partnership transactions.   Becker never assumed such

responsibility, and he fully described the particulars of his

investigation, taking care not to mischaracterize it as "due

diligence."
                              - 48 -

     In the end, petitioners and Becker relied upon Miller and

other PI personnel for the value of the Sentinel EPE recycler and

the economic viability of the Partnership transactions.   See

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

advice from such persons "is better classified as sales

promotion."   Becker did not possess any education, special

qualifications, or professional skills in plastics materials or

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

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

not reasonable or prudent to rely upon a tax adviser regarding

matters outside his field of expertise or with respect to facts

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

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

sub nom. Patin v. Commissioner, 88 T.C. 1086 (1987); Lax v.

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

Memo. 1990-619.

     3.   The Private Offering Memoranda

     In addition to purportedly relying on Becker, petitioners

maintain that they reasonably relied upon the offering memoranda

and the tax opinion letter appended thereto.   However,

petitioners' testimony and actions indicate that they did not

thoroughly review or study all of the information set out in the
                               - 49 -

offering memoranda and that they ultimately did not place a great

deal of reliance, if any, on the representations therein.

       On their face, the Partnership transactions should have

raised serious questions in the minds of ordinarily prudent

investors.    The offering memoranda included numerous caveats and

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

substantial likelihood of audit by the IRS and a likely challenge

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

partner's lack of experience in marketing recycling or similar

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

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

virgin resin and the possibility that recycled pellets would not

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

memoranda noted a number of conflicts of interest, including

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

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

ECI.

       A careful consideration of the materials in the respective

offering memoranda, especially the discussions of high writeoffs

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

investor to the questionable nature of the promised deductions

and credits.    See Collins v. Commissioner, 857 F.2d 1383, 1386
                               - 50 -

(9th Cir. 1988), affg. Dister v. Commissioner, T.C. Memo. 1987-

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

investor, the projected first-year tax benefits were investment

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

$40,000.22   For Farrell's $25,000 investment in SAB Reclamation

in 1982,23 he and his wife Clotilde claimed an operating loss in

the amount of $20,050 and investment tax and business energy

credits in the amount of $41,856.    As a result of Spears' $25,000

investment in SAB Recycling, he and his wife Joan claimed an

operating loss in the amount of $19,870 and investment tax and

business energy credits totaling $41,320.

       The direct reductions claimed on Spears' and Farrell's

Federal income tax returns, from the investment tax credits

alone, ranged from 165 to 167 percent of their cash investments,

respectively, without taking into consideration any rebated

commissions and advance royalty payments.    Therefore, after

adjustments of withholding, estimated tax, or final payment, like

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

"except for a few weeks at the beginning, petitioners [Spears and

Farrell] never had any money in the * * * [Partnership

22
     The projected tax benefits for the Partnerships in the first
year of the investment, for each $50,000 investor, were as
follows: Investment tax credits of $82,639 plus deductions of
$40,037 for SAB Recycling in 1982, and investment tax credits of
$83,712 and deductions of $40,234 for SAB Reclamation in 1982.
23
     The amounts set forth above as invested by petitioners are
the gross amounts invested, unreduced by any rebated commissions
or advance royalty payments.
                              - 51 -

transactions]."   In view of the disproportionately large tax

benefits claimed on petitioners' 1982 Federal income tax returns,

relative to the dollar amounts invested, further investigation of

the Partnership transactions clearly was required.   A reasonably

prudent person would have asked a qualified independent tax

adviser if this windfall were not too good to be true.    McCrary

v. Commissioner, 92 T.C. 827, 850 (1989).   A reasonably prudent

person would not conclude without substantial investigation that

the Government was providing tax benefits so disproportionate to

the taxpayers' investment of their own capital.

     Petitioners' arguments are not supported by the Court of

Appeals for the Ninth Circuit's partial reversal of our decision

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

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

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

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

oil and gas partnerships were not engaged in a trade or business

and sustained respondent's imposition of the negligence additions

to tax with respect to one of the partners therein.24    The

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

24
     Osterhout v. Commissioner, T.C. Memo. 1993-251, affd. in
part and revd. in part without published opinion sub nom. Balboa
Energy Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir. 1996),
involved a group of consolidated cases. The parties therein
agreed to be bound by the Court's opinion regarding the
application of the additions to tax provided for under sec.
6653(a), inter alia. Accordingly, although the Court's analysis
focused on one taxpayer, the additions to tax were sustained with
respect to all of the parties.
                              - 52 -

offering materials.   The Court of Appeals for the Ninth Circuit

reversed our imposition of the negligence additions to tax.

However, the prefaces to the offering memoranda for the

Partnerships herein warned prospective investors that the tax

opinion letter was not in final form, and was prepared for the

general partner, and that prospective investors should consult

their own professional advisers with respect to the tax benefits

and tax risks associated with the Partnership.   The tax opinion

letter was addressed solely to the general partner and contained

the following opening disclaimer:

     This opinion is provided to you for your individual
     guidance. We expect that prospective investors will
     rely upon their own professional advisors with respect
     to all tax issues arising in connection with an
     investment in the Partnership and the operations
     thereof. We recognize that you intend to include this
     letter with your offering materials and we have
     consented to that with the understanding that the
     purpose in distributing it is to assist your offerees'
     and their tax advisors in making their own analysis and
     not to permit any prospective investor to rely upon our
     advice in this matter. [Emphasis added.]

Accordingly, both the offering memoranda and the tax opinion

letter expressly and unambiguously indicated that prospective

investors such as petitioners were not to rely upon the tax

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

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

designed as advice upon which taxpayers might rely and the

opinion of counsel itself so states.
                                - 53 -

     Moreover, the records indicate that petitioners did not

thoroughly review the offering memoranda, which included the tax

opinion letter, or place much reliance on them.    Spears testified

that he relied more on Becker than the offering materials.

Farrell described private placement memoranda as "the legal

documentation necessary to cover one in case things go bad" and

finds that they do not "lead * * * to an understanding of the

merits of [an] investment".    He also testified that he does not

place undue influence on them and has never made a decision to

invest based upon one.    Petitioners will not be relieved of the

negligence additions to tax based upon the Ninth Circuit Court of

Appeals' partial reversal in the Balboa Energy Fund 1981 case.

     4.   Miscellaneous

     The parties in these consolidated cases stipulated that the

fair market value of a Sentinel EPE recycler in 1981 and 1982 was

not in excess of $50,000.    Notwithstanding this concession,

petitioners contend that they were reasonable in claiming credits

on their Federal income tax returns based upon each recycler

having a value of $1,162,666.    In support of this position,

Spears submitted into evidence preliminary reports prepared for

respondent by Ernest D. Carmagnola (Carmagnola), the president of

Professional Plastic Associates.    Carmagnola had been retained by

the IRS in 1984 to evaluate the Sentinel EPE and EPS recyclers in

light of what he described as "the fantastic values placed on the

[recyclers] by the owners."    Based on limited information
                              - 54 -

available to him at that time, Carmagnola preliminarily estimated

that the value of the Sentinel EPE recycler was $250,000.

However, after additional information became available to him,

Carmagnola concluded in a signed affidavit, dated March 16, 1993,

that the machines actually had a fair market value of not more

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

     We accord no weight to the Carmagnola reports submitted by

Spears.   The projected valuations therein were based on

inadequate information,25 research, and investigation, and were

subsequently rejected and discredited by their author.

Respondent likewise rejected the reports and considered them

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

records that respondent used them as a basis for any

determinations in the notices of deficiency.   Even so, Spears'

counsel obtained copies of these reports and urges that they

support the reasonableness of the values reported on Spears' 1982

joint return.   Not surprisingly, Spears' counsel did not call

Carmagnola to testify in these cases,26 but preferred instead to


25
     In one preliminary report, Carmagnola states that he has "a
serious concern of actual profit" from a Sentinel EPE recycler
and that to determine whether the machines actually could be
profitable, he required additional information from PI.
(Emphasis in original.) Carmagnola also indicates that in
preparing the report, he did not have information available
concerning research and development costs of the machines and
that he estimated those costs in his valuations of the machines.
26
     Carmagnola has not been called to testify in any of the
Plastics Recycling cases before us.
                               - 55 -

rely solely upon his preliminary, ill-founded valuation

estimates.    The Carmagnola reports were a part of the record

considered by this Court and reviewed by the Sixth Circuit Court

of Appeals in the Provizer case, where we held the taxpayers

negligent.    Consistent therewith, we find in these cases, as we

have found previously, that the reports prepared by Carmagnola

are unreliable and of no consequence.    Spears will not be

relieved of the negligence additions to tax based on the

preliminary reports prepared by Carmagnola.

     Spears also placed into the record of his case several

documents, ostensibly submitted as evidence that he monitored his

investments in the Plastics Recycling transactions.    These

included unaudited, unreviewed financial statements of SAB

Leasing Associates for 1982, a 1982 update regarding placement of

the recyclers, financial statements of SAB Associates for 1979

and 1980, and introductory information regarding SAB Leasing

Associates.    Spears did not testify or otherwise indicate that he

ever examined these documents.    At trial, Spears could not recall

having received and read a confidential memorandum, addressed to

all limited partners, that discussed SAB Associates' change of

business from tax straddle investments to leasing plastics

recyclers.    Spears could not recall the conversations he had with

Becker; he did not know how many SAB recycling partnerships

Becker was involved in; and he did not know whether there was an

established market for the Sentinel EPE recyclers.    The offering
                              - 56 -

materials clearly stated that there was no established market for

the recyclers.   We decline to infer from these documents or the

balance of the record that Spears actively monitored his

investments in the Plastics Recycling transactions.

     Petitioners' reliance on Mollen v. United States, 72 AFTR 2d

93-6443, 93-2 USTC par. 50,585 (D. Ariz. 1993) is misplaced.    The

taxpayer in Mollen was a medical doctor who specialized in

diabetes and who, on behalf of the Arizona Medical Association,

led a continuing medical education (CME) accreditation program

for local hospitals.   The underlying tax matter involved the

taxpayer's investment in Diabetics CME Group, Ltd., a limited

partnership that invested in the production, marketing and

distribution of medical educational video tapes.   District Court

found that the taxpayer's personal expertise and insight in the

underlying investment gave him reason to believe it would be

economically profitable.   Although the taxpayer was not

experienced in business or tax matters, he did consult with an

accountant and a tax lawyer regarding those matters.   Moreover,

the District Court noted that the propriety of the taxpayer's

disallowed deduction therein was "reasonably debatable."     Id.;

see Zfass v. Commissioner, T.C. Memo. 1996-167.

     The records in these cases show that neither petitioners nor

Becker had any formal education, expertise, or experience in

plastics materials or plastics recycling.   None of them had any

personal insight or industry know-how in plastics recycling that
                                - 57 -

would reasonably lead them to believe that the Plastics Recycling

transactions would be economically profitable.    Becker relied

heavily upon representations by insiders to the Plastics

Recycling transactions, and neither he nor petitioners hired any

independent experts in the field of plastic materials or plastics

recycling.    Becker did discuss the transactions with Canno, who

apparently was familiar with the plastics industry, but Canno was

not hired by Becker to investigate PI and the Sentinel EPE

recycler, never saw a Sentinel EPE recycler, and never prepared

any kind of formal, written analysis of the venture.    The facts

of these cases are distinctly different from those in the Mollen

case.     Therefore, we consider petitioners' arguments with respect

to the Mollen case inapplicable under the circumstances of these

cases.

     5.    Conclusion As to Negligence

     Under the circumstances of these cases, petitioners failed

to exercise due care in claiming large deductions and tax credits

with respect to the Partnerships on their respective Federal

income tax returns.    Petitioners did not reasonably rely upon the

offering memoranda or the materials appended thereto.    Becker did

not possess any education, special qualifications, or

professional skills in the plastics or recycling industries; he

did not employ any experts in those fields; and he disclosed to

petitioners the limits of his investigation.    See Goldman v.

Commissioner, 39 F.3d at 408; Marine v. Commissioner, 92 T.C.
                              - 58 -

958, 992-993 (1989), affd. without published opinion 921 F.2d 280

(9th Cir. 1991); McCrary v. Commissioner, 92 T.C. 827 (1989);

Rybak v. Commissioner, 91 T.C. 524, 565 (1988).   We conclude that

petitioners were negligent in claiming the deductions and credits

with respect to the Partnerships on their Federal income tax

returns for 1982.   We hold, upon consideration of the entire

records, 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.

B.   Section 6659 - Valuation Overstatement

     In the notice of deficiency, respondent determined that

William and Joan Spears were liable for the section 6659 addition

to tax on the portion of their underpayment attributable to

valuation overstatement.   Spears has the 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 Vincent

and Clotilde Farrell were liable for the section 6659 addition to

tax on the portion of their underpayment attributable to

valuation overstatement.   Because this addition to tax was 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).

     A graduated addition to tax is imposed when an individual

has an underpayment of tax that equals or exceeds $1,000 and "is
                                - 59 -

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

A valuation overstatement exists if the fair market value (or

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

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

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

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

underpayment.   Sec. 6659(b).

     Petitioners claimed tax benefits, including an investment

tax credit and a business energy credit, based on purported

values of $1,162,666 for each Sentinel EPE recycler.   Petitioners

each concede that the fair market value of a Sentinel EPE

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

Therefore, if disallowance of petitioners' claimed tax benefits

is attributable to such valuation overstatements, 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 the Partnerships.

     Both petitioners argue that respondent erroneously failed to

waive the section 6659 addition to tax.   Farrell also expressly

contends that the section 6659 addition to tax is inapplicable

because:   (1) Disallowance of the claimed tax benefits was

attributable to other than a valuation overstatement; and (2)

concession of the claimed tax benefits precludes imposition of

the section 6659 additions to tax.
                              - 60 -

     1.   The Grounds for Petitioners' Underpayments

     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.

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

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

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

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

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

T.C. Memo. 1991-321.

     Farrell argues that the disallowance of the claimed tax

benefits was not "attributable to" a valuation overstatement.

According to Farrell, the tax benefits were disallowed because
                                - 61 -

the Partnership transactions lacked economic substance, not

because of any valuation overstatements.      It follows, he reasons,

that because the "attributable to" language of section 6659

requires a direct causative relationship between a valuation

overstatement and an underpayment in tax, section 6659 cannot

apply to the deficiency.    Farrell cites the following cases to

support this argument:     Heasley v. Commissioner, 902 F.2d 380

(5th Cir. 1990), revg. T.C. Memo. 1988-408; Gainer v.

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

1988-416; McCrary v. Commissioner, supra; Todd v. Commissioner,

supra.

     This argument rests on the mistaken premise that our holding

that the Partnership transactions lacked economic substance was

separate and independent from the overvaluation of the Sentinel

EPE recyclers.   To the contrary, in holding that the Partnership

transactions lacked economic substance, we relied heavily upon

the overvaluation of the recyclers.      Overvaluation of the

recyclers was an integral factor in regard to:      (1) The

disallowed tax credits and other benefits in these cases; (2) the

underpayments of tax; and (3) our finding that the Partnership

transactions lacked economic substance.

     Moreover, a virtually identical argument was rejected in

Gilman v. Commissioner, supra, by the Second Circuit Court of

Appeals, the court to which appeal in these cases lies.       See
                              - 62 -

Golsen v. Commissioner, 54 T.C. 742, 756-758 (1970) affd. 445

F.2d 985 (10th Cir. 1971).   In the Gilman case, the taxpayers

engaged in a computer equipment sale and leaseback transaction

that this Court held was a sham transaction lacking economic

substance.   The taxpayers therein, citing Heasley v.

Commissioner, supra, and Todd v. Commissioner, supra, argued that

their underpayment of taxes derived from nonrecognition of the

transaction for lack of economic substance, independent of any

overvaluation.   The Second Circuit Court of Appeals sustained

imposition of the section 6659 addition to tax because

overvaluation of the computer equipment contributed directly to

this Court's earlier conclusion that the transaction lacked

economic substance and was a sham.     Gilman v. Commissioner, supra

at 151.   In addition, the Second Circuit Court of Appeals agreed

with this Court and the Eighth Circuit Court of Appeals that

"'when an underpayment stems from disallowed * * * investment

credits due to lack of economic substance, the deficiency is * *

* subject to the penalty under section 6659.'"    Gilman v.

Commissioner, supra at 151 (quoting Massengill v. Commissioner,

876 F.2d 616, 619-620 (8th Cir. 1989), affg. T.C. Memo. 1988-

427); see also 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
                               - 63 -

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

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

     Farrell's reliance on Gainer v. Commissioner, supra, McCrary

v. Commissioner, 92 T.C. 827 (1989), and Todd v. Commissioner,

supra, is misplaced.    In contrast to the consolidated cases

herein, it was found that a valuation overstatement did not

contribute to an underpayment of taxes in any of the cited cases.

In the Todd and Gainer cases, the underpayments were due

exclusively to the fact that the property in each case had not

been placed in service.    In the McCrary case, the underpayments

were deemed to result from a concession that the agreement at

issue was a license and not a lease.      Although property was

overvalued in each of those cases, the overvaluations were not

the ground on which the taxpayers' liability was sustained.       In

contrast, "a different situation exists where a valuation

overstatement * * * is an integral part of or is inseparable from

the ground found for disallowance of an item."      McCrary v.

Commissioner, supra at 859.    Each of petitioners' cases present

just such a "different situation":      overvaluation of the

recyclers was integral to and inseparable from the claimed tax

benefits and our finding that the Partnership transactions lacked

economic substance.27


27
     To the extent that Heasley v. Commissioner, 902 F.2d 380
(5th Cir. 1990), revg. T.C. Memo. 1988-408, merely represents an
                                                   (continued...)
                               - 64 -

     2.   Concession of the Deficiency

     Farrell argues that his concession of the deficiency

precludes imposition of the section 6659 addition to tax.

Farrell contends that his concession renders any inquiry into the

grounds for such deficiency moot.   Absent such inquiry, Farrell

argues that it cannot be known if the underpayments were

attributable to a valuation overstatement or other discrepancy.

According to Farrell, "once the taxpayer concedes the underlying

adjustment, there is no basis upon which the necessary

correlation between understatement in tax and overvaluation can

be established."   In support of this line of reasoning, Farrell

relies heavily upon Heasley v. Commissioner, supra, and McCrary

v. Commissioner, supra.   Although Spears did not expressly make

this argument, we include the Spears case in our discussion

because he similarly conceded disallowance of the tax benefits

claimed by him and his wife.




27
 (...continued)
application of Todd v. Commissioner, 89 T.C. 912 (1987), affd.
862 F.2d 540 (5th Cir. 1988), we consider it distinguishable. To
the extent that the reversal in the Heasley case is based on a
concept that where an underpayment derives from the disallowance
of a transaction for lack of economic substance, the underpayment
cannot be attributable to an overvaluation, this Court and the
Court of Appeals for the Second Circuit have disagreed. See
Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), affg.
T.C. Memo. 1989-684: "The lack of economic substance was due in
part to the overvaluation, and thus the underpayment was
attributable to the valuation overstatement."
                                 - 65 -

     Petitioners' open-ended concessions do not obviate our

finding that the Partnership transactions lacked economic

substance due to overvaluation of the recyclers.    This is not a

situation where we have "to decide difficult valuation questions

for no reason other than the application of penalties."    See

McCrary v. Commissioner, supra at 854.    The value of the Sentinel

EPE recycler was established in Provizer v. Commissioner, T.C.

Memo. 1992-177, and stipulated by the parties.    As a consequence

of the inflated value assigned to the recyclers by the

Partnerships, petitioners claimed deductions and credits that

resulted in underpayments of tax, and we held that the

Partnership transactions lacked economic substance.    Regardless

of petitioners' concessions, in these cases the underpayments of

tax were attributable to the valuation overstatements.

     Moreover, concession of the investment tax credit in and of

itself does not relieve taxpayers of liability for the section

6659 addition to tax.   See Dybsand v. Commissioner, T.C. Memo.

1994-56; Chiechi v. Commissioner, T.C. Memo. 1993-630.    Instead,

the ground upon which the investment tax credit is disallowed or

conceded is significant.   Id.    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 at 228; Irom v. Commissioner, 866 F.2d
                              - 66 -

545, 547 (2d Cir. 1989), vacating in part T.C. Memo. 1988-211;

Harness v. Commissioner, supra.

     In the present cases, no argument was 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 a valuation overstatement.   To the contrary,

petitioners each stipulated substantially the same facts

concerning the Partnership 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 was integral

to and was the core of our holding that the underlying

transactions here were shams and lacked economic substance.

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

misplaced.   In that case the taxpayers conceded disentitlement to

their claimed tax benefits and the section 6659 additions to tax

were held inapplicable.   However, the concessions of the claimed

tax benefits, in and of themselves, did not preclude imposition

of the section 6659 additions to tax.   In McCrary v.
                                - 67 -

Commissioner, supra, the section 6659 addition to tax was

disallowed because the agreement at issue was a license and not a

lease.   In contrast, the records in petitioners' cases plainly

show that petitioners' underpayments were attributable to

overvaluation of the Sentinel EPE recyclers.   We hold that

petitioners' reliance on McCrary v. Commissioner, supra, is

inappropriate.28

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

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

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

recyclers had been overvalued was integral to and inseparable

from our holding of a lack of economic substance.   Petitioners

stipulated that the Partnership transactions were similar to the

Clearwater transaction described in the Provizer case, and that

the fair market value of a Sentinel EPE recycler in 1981 and 1982

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

fact that the records here plainly show that the overvaluation of

the recyclers was the underlying reason for disallowance of the

claimed tax benefits, we conclude that the deficiencies were

attributable to overvaluation of the Sentinel EPE recyclers.


28
     Petitioners' reliance on Heasley v. Commissioner, supra, in
support of the concession argument is also inappropriate. That
case was not decided by the Court of Appeals for the Fifth
Circuit on the basis of a concession. Moreover, see supra note
27, to the effect that the Court of Appeals for the Second
Circuit and this Court have not followed the Heasley opinion with
respect to the application of sec. 6659.
                                - 68 -

     3.    Section 6659(e)

     Both petitioners argue that respondent erroneously failed to

waive the section 6659 additions to tax.   Section 6659(e)

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

for valuation overstatement if taxpayers establish that there was

a reasonable basis for the adjusted bases or valuations claimed

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

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

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

Commissioner, 99 T.C. 132, 179 (1992).

     Petitioners urge that they relied on Becker and 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

additions to tax.29   However, as we explained above in finding

petitioners liable for the negligence additions to tax,

petitioners' purported reliance on Becker and the offering

materials was not reasonable.

     Becker possessed no special qualifications or professional

skills in the recycling or plastics industries.   He relied

exclusively on PI and its personnel and on the offering materials


29
     In his posttrial brief, Farrell referenced the reports
prepared by Carmagnola in support of the reasonableness of the
claimed valuation. For reasons discussed supra, we consider the
reports prepared by Carmagnola to be unreliable and of no
consequence.
                                - 69 -

as to the value and purported uniqueness of the machines.       The

offering memoranda for the Partnerships warned that the value

placed on the recyclers would probably be challenged by the IRS

as being in excess of fair market value.       Nonetheless, Becker

never hired or consulted any plastics engineering or technical

experts with respect to the Plastics Recycling transactions.

Becker did speak to his client Canno, who apparently had some

knowledge of the plastics industry, but the substance of Canno's

purported comments is doubtful and he had only minimal

information about the transaction.       Petitioners' reliance on

Becker and the offering materials was not reasonable.

     In support of their contention that they acted reasonably,

petitioners cite Mauerman v. Commissioner, 22 F.3d 1001 (10th

Cir. 1994), revg. T.C. Memo. 1993-23.       However, the facts in the

Mauerman case are distinctly different from the facts of these

cases.   In Mauerman, the Tenth Circuit Court of Appeals held that

the Commissioner had abused her discretion for not waiving a

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

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

demonstrates that there was reasonable cause for his underpayment

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

Mauerman relied upon independent attorneys and accountants for

advice as to whether payments were properly deductible or

capitalized.   The advice relied upon by the taxpayer in Mauerman
                              - 70 -

was within the scope of the advisers' expertise, the

interpretation of the tax laws as applied to undisputed facts.

In these cases, particularly with respect to valuation,

petitioners relied upon advice that was outside the scope of

expertise and experience of their advisers.   Consequently, we

consider petitioners' reliance on the Mauerman case inapplicable.

     We hold that petitioners did not have a reasonable basis for

the adjusted bases or valuations claimed on their tax returns

with respect to their investments in the Partnerships.    In these

cases respondent properly could find that petitioners' reliance

on Becker and the offering materials was unreasonable.    The

records in these cases do not establish an abuse of discretion on

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

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

to tax is not an abuse of discretion.   Petitioners are liable for

the respective section 6659 additions to tax at the rate of 30

percent of the underpayments of tax attributable to the

disallowed tax benefits.   Respondent is sustained on this issue.


                                    Decisions will be entered

                               under Rule 155.
