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T.C. Memo. 1996-558
UNITED STATES TAX COURT
MARK FRIEDMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
DAVID AND DEBORAH B. ALTER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 24753-88, 6302-89.
Filed December 26, 1996.
Stuart A. Smith and David H. Schnabel, for petitioners in
docket Nos. 24753-88 and 6302-89.
Jennifer J. Kohler, Elizabeth A. Maresca, and Frances
Ferrito Regan, for respondent in docket No. 24753-88.
Donald A. Glasel, Mitchell Hausman, Jennifer J. Kohler, and
Frances Ferrito Regan, for respondent in docket No. 6302-89.
- 2 CONTENTS
Page
MEMORANDUM FINDINGS OF FACT AND OPINION....................... 2
OPINION OF THE SPECIAL TRIAL JUDGE............................ 3
FINDINGS OF FACT.............................................. 6
A. The Plastics Recycling Transactions...................... 6
B. The Partnerships......................................... 8
C. Petitioners and Their Introduction to the Partnership
Transactions.............................................10
1.
Mark Friedman.......................................10
2.
David and Deborah B. Alter..........................14
OPINION.......................................................21
A. Section 6653(a)--Negligence..............................24
1.
The Private Offering Memoranda......................26
2.
The So-Called Oil Crisis............................31
3.
Petitioners' Purported Reliance on Advisers.........35
4.
Miscellaneous.......................................50
5.
Conclusion as to Negligence.........................57
B. Section 6659--Valuation Overstatement....................58
1.
The Grounds for Petitioners' Underpayments..........59
2.
Concession of the Deficiencies......................64
3.
Section 6659(e).....................................68
C. Petitioners' Motions For Leave To File Motion For
Decision Ordering Relief From the Negligence Penalty and
the Penalty Rate of Interest and To File Supporting
Memoranda of Law.........................................73
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge:
These cases were assigned to Special Trial
Judge Norman H. Wolfe pursuant to the provisions of section
7443A(b)(4) and Rules 180, 181, and 183.
They were tried and
briefed separately but consolidated for purposes of opinion.
All
section references are to the Internal Revenue Code in effect for
the tax year in issue, unless otherwise indicated.
All Rule
references are to the Tax Court Rules of Practice and Procedure.
The Court agrees with and adopts the opinion of the Special Trial
Judge, which is set forth below.
- 3 OPINION OF THE SPECIAL TRIAL JUDGE
WOLFE, Special Trial Judge:
Plastics Recycling group of cases.
These cases are part of the
For a detailed discussion of
the transactions involved in the Plastics Recycling cases, see
Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
published opinion 996 F.2d 1216 (6th Cir. 1993).
The facts of
the underlying transactions and the Sentinel recyclers in these
cases are substantially identical to those considered in the
Provizer case.
In a notice of deficiency dated July 7, 1988, respondent
determined a deficiency in petitioner Friedman's 1981 Federal
income tax in the amount of $14,275, plus additions to tax in the
amount of $4,283 under section 6659 for valuation overstatement,
in the amount of $714 under section 6653(a)(1) for negligence,
and under section 6653(a)(2) in the amount of 50 percent of the
interest payable with respect to the portion of the underpayment
attributable to negligence.
Respondent also determined that
interest on the deficiency accruing after December 31, 1984,
would be calculated at 120 percent of the statutory rate under
section 6621(c).
In a notice of deficiency dated January 19, 1989, respondent
determined a deficiency with respect to the joint Federal income
tax return filed by David and Deborah B. Alter (petitioners
Alter) for 1981 in the amount of $27,575, plus additions to tax
in the amount of $8,272.50 under section 6659 for valuation
- 4 overstatement, in the amount of $1,378.75 under section
6653(a)(1) for negligence, and under section 6653(a)(2) in the
amount of 50 percent of the interest payable with respect to the
portion of the underpayment attributable to negligence.
Respondent also determined that interest on the deficiency
accruing after December 31, 1984, would be calculated at 120
percent of the statutory rate under section 6621(c).
In a
stipulation of settled issues filed August 8, 1990, petitioners
Alter conceded the disallowance of a real estate office rent
deduction claimed on their 1981 return in the amount of $3,320.
The parties in each of these consolidated cases filed
Stipulations of Settled Issues concerning the adjustments
relating to petitioners' participation in the Plastics Recycling
Program.
The 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. 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).
- 5 Long after the trials of these cases, petitioners each filed
a Motion For Leave To File Motion For Decision Ordering Relief
From the Negligence Penalty and the Penalty Rate of Interest and
To File Supporting Memorandum of Law under Rule 50.
These
motions were filed with attached exhibits on October 20, 1995, in
the Friedman case, and on November 13, 1995, in the Alter case.
On those same dates, petitioners each also lodged with the Court
a motion for decision ordering relief from the additions to tax
for negligence and the increased rate of interest, with
attachments, and a memorandum in support of the motion.
Subsequently, respondent filed objections, with attachments, and
memoranda in support thereof, and petitioners thereafter filed
reply memoranda.
For reasons discussed in more detail at the end
of this opinion, and also in Farrell v. Commissioner, T.C. Memo.
1996-295, these motions shall be denied.
See also Gollin v.
Commissioner, T.C. Memo. 1996-454; Grelsamer v. Commissioner,
T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C. Memo. 1996-398.
The issues remaining in these consolidated cases are:
(1)
Whether petitioners are liable for the additions to tax for
negligence under section 6653(a)(1) and (2); and (2) whether
petitioners are liable for additions to tax under section 6659
for underpayments of tax attributable to valuation
overstatements.
- 6 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:
Clearwater Group (Clearwater) and Poly Reclamation
Associates (Poly Reclamation).
Petitioner Friedman is a limited
partner in Clearwater, and petitioners Alter are limited partners
in Poly Reclamation.
For convenience, we refer to these
partnerships collectively as the Partnerships.
The Clearwater partnership, and the transactions involving
the Sentinel EPE Recyclers leased by Clearwater, were considered
in Provizer v. Commissioner, supra.
The transactions involving
the Sentinel EPE recyclers leased by Poly Reclamation are
substantially identical to the Clearwater transactions.
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
- 7 Corp. for $1,162,666 each.
F & G Corp. then leased the recyclers
to Clearwater, which licensed the recyclers to FMEC Corp., which
sublicensed them back to PI.
The sales of the recyclers from PI
to ECI Corp. were financed with nonrecourse notes.
Approximately
7 percent of the sales price of the recyclers sold by ECI Corp.
to F & G Corp. was paid in cash with the remainder financed
through notes.
These notes provided that 10 percent of the notes
were recourse but that the recourse portion of the notes was only
due after the nonrecourse portion, 90 percent, was paid in full.
All of the monthly payments required among the entities in
the above transactions offset each other.
were done simultaneously.
These transactions
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 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, Poly Reclamation leased Sentinel EPE
recyclers from F & G Corp. and licensed those recyclers to FMEC
Corp.
Apart from the entity that leased the machines from F & G
- 8 Corp. and licensed them to FMEC Corp., the transactions of the
Partnerships do not differ in any substantive respects.
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 (EPS) recyclers.
We refer to these
collectively as the Plastics Recycling transactions.
B.
The Partnerships
Clearwater and Poly Reclamation are New York limited
partnerships.
Poly Reclamation and Clearwater each closed during
the latter few months of 1981.
Samuel L. Winer (Winer) is the
general partner of both Clearwater and Poly Reclamation.
With respect to each of the Partnerships, a private
placement memorandum was distributed to potential limited
partners.
Reports by F & G Corp.'s evaluators, Dr. Stanley M.
Ulanoff (Ulanoff), a marketing consultant, and Dr. Samuel Z.
Burstein (Burstein), a mathematics professor, were appended to
the offering memoranda.
Ulanoff owns a 1.27-percent interest in
Plymouth Equipment Associates and a 4.37-percent interest in
Taylor Recycling Associates, partnerships that leased Sentinel
- 9 recyclers.
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.
Burstein also was a client and business associate of Elliot I.
Miller (Miller), the corporate counsel to PI.
Each of the offering memoranda for Clearwater and Poly
Reclamation states that the general partner will receive fees
from the partnership in the amount of $60,000.
In addition, each
of the offering memoranda provides that the general partner "may
retain as additional compensation all amounts not paid as sales
commissions or offeree representative fees".
According to the
offering memoranda, 10 percent of the proceeds from each offering
were allocated to the payment of sales commissions and offeree
representative fees.
The offering memoranda list significant business and tax
risk factors associated with investments in the Partnerships.
Specifically, the offering memoranda state:
(1) There is a
substantial likelihood of audit by the Internal Revenue Service
(IRS) and the purchase price paid by F & G Corp. to ECI Corp.
probably will be challenged as being in excess of fair market
value; (2) the Partnerships have no prior operating history; (3)
the general partner has no prior experience in marketing
recycling or similar equipment; (4) the limited partners have no
- 10 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. Petitioners and Their Introduction to the Partnership
Transactions
1.
Mark Friedman
Petitioner Mark Friedman (Friedman) resided in New York, New
York, when his petition was filed.
Friedman was a member of Phi
Betta Kappa and graduated magna cum laude from the University of
Pennsylvania in 1970 with a B.A. degree in history.
He then
attended the University of Pennsylvania Law School and became the
articles editor of its law review.
After his graduation from law
school in 1973, Friedman became employed by the law firm of
Simpson, Thatcher & Bartlett in New York City.
Four years later
he became employed by the law firm of Shea & Gould, also in New
York City, and became a partner of that firm on January 1, 1982.
Friedman specializes in corporate and Federal securities law.
has represented issuers and underwriters in both public and
private offerings of securities.
One of his primary functions
has been drafting prospectuses and offering circulars.
He
- 11 By 1981 Friedman was very familiar with the typical content
of a prospectus or private offering memorandum.
In addition to
his professional experience, Friedman has been an active investor
since 1973.
From 1973 to 1981 Friedman invested in a "great
number" of publicly traded stocks and private placements.
His
approach to those investments was thorough and methodical:
Friedman read the prospectus or private offering memorandum,
spoke to an expert in the pertinent industry, investigated the
risk factors described in the offering materials, consulted
industry reports, and spoke to other active investors or lawyers.
Friedman is "sophisticated enough to know that in any tax
investment the underlying economics have to be legitimate."
In 1981 Friedman acquired a 1.547-percent1 interest in
Clearwater for $12,500.
As a result of his investment in
Clearwater, on his 1981 Federal income tax return Friedman
claimed an operating loss in the amount of $10,002.
Of a total
of $21,584 in investment tax and business energy credits,
1
The parties stipulated that Friedman owned 25 percent of the
profits, losses, and capital of Clearwater during taxable year
1981. However, Friedman's 1981 Schedule K-1, Partner's Share of
Income, Credits, Deductions, etc., attached to Clearwater's 1981
partnership return, reports that he owned a 1.547-percent
interest in Clearwater.
- 12 Friedman used $9,290 on his 1981 return.2
Respondent disallowed
Friedman's claimed operating loss and investment credit flowing
from Clearwater.3
Friedman was told about the Plastics Recycling transactions
by several partners at Shea & Gould.
Approximately eight
partners contemplated investing in a Plastics Recycling
transaction.
Friedman understood that Stuart Hirshfield
(Hirshfield), a bankruptcy specialist at Shea & Gould, previously
had done business with Winer and thought well of him.
Hirshfield
and two other partners, Dan Carroll (Carroll) and Lonn Trost
(Trost), each made inquiries about some aspects of the Plastics
Recycling transactions.
Friedman also understood that Trost and
Hirshfield visited PI at least once and viewed some Sentinel EPE
recyclers.
Alan Parker (Parker), a tax partner, reviewed the tax
2
Friedman's basis in the Clearwater Sentinel EPE recyclers
was $107,918. He had a basis in other property qualifying for
the investment tax credit in the amount of $3,211. Friedman's
tentative investment tax and business energy credits flowing from
Clearwater each totaled $10,792. However, Friedman's business
energy credit was subject to a limitation in the amount of zero,
and his regular investment credit was subject to a limitation in
the amount of $9,611. Of the total investment credit claimed in
1981 by Friedman, $9,290 was from Clearwater and $321 was from
other qualifying property. The record in docket No. 24753-89
does not disclose whether Friedman carried forward or back his
unused credits.
3
Respondent allowed $321 in investment tax credits related to
other property not at issue herein.
- 13 benefits and indicated that they were supportable, provided "that
from a business point of view this was a good economic
investment".
Friedman decided to invest in Clearwater after
reading the offering memorandum and discussing the investment
with his colleagues at Shea & Gould.
He also provided a copy of
the offering memorandum to his accountant.
The accountant had no
experience in plastics or plastics recycling, and did not
independently investigate the plastics industry or the Sentinel
EPE recycler.
Friedman does not have any education or experience in
engineering, plastics materials, or plastics recycling.
He
understood that Carroll had a background in engineering and that
another partner, Joseph Ferraro (Ferraro), may have had some
experience in his past with plastics.
Friedman did not see a
Sentinel EPE recycler, investigate the uniqueness of the machine,
investigate whether the value placed on the recycler was bona
fide, or investigate whether there were any other machines that
were designed to recycle low density polyethylene.
He did not do
any type of cash flow analysis or check any of the figures in the
offering memorandum.
Friedman did not personally investigate PI.
He did not ask whether the technology for the Sentinel EPE
recycler was patented or inquire whether there were any suitable
end-users for the recyclers.
He did not review any periodicals
- 14 relating to resin prices.
He never made a profit in any year
from his investment in Clearwater.
2.
David and Deborah B. Alter
Petitioners David and Deborah B. Alter resided in New York,
New York, at the time their petition was filed.
David Alter
(Alter) graduated from the Harvard Law School and has been
practicing law since 1950.
law firms since 1954:
Alter has been a member of several
From 1954 to 1966 he was a partner at the
law firm of Squadron, Alter & Weinrib; from 1966 to 1979 he was a
partner of the law firm of Alter, LeFevre, Raphael & Lowry
(Alter, LeFevre);4 and from 1979 to 1989 he was a partner at the
law firm of Shea & Gould.
Alter is a general practitioner with a
concentration in entertainment and labor law.
Among the services
he provided to his clients were the preparation and review of
contracts, general tax advice, estate planning, and administering
and maintaining financial records.
On occasion, Alter's
entertainment clients asked him to review offering materials for
investment opportunities that they had learned of elsewhere.
4
In
Alter, LeFevre underwent several name changes during Alter's
tenure as a partner. Apparently, Alter, LeFevre, Raphael & Lowry
was the name of the firm by 1978. For convenience, references to
"Alter, LeFevre" include its predecessor names while Alter was a
partner.
- 15 the course of his practice, Alter advised his clients whether to
consider such investments.
Alter acquired a 1.547-percent interest in Poly Reclamation
for $12,500 in 1981.
As a result of his investment in Poly
Reclamation, on their joint 1981 Federal income tax return Alter
and his wife Deborah claimed an operating loss in the amount of
$9,976, and investment tax and business energy credits totaling
$21,584.5
Respondent disallowed the Alters' claimed operating
loss and investment tax and business energy credits flowing from
Poly Reclamation.
Alter learned of the Plastics Recycling transactions from
Hirshfield, who in turn had been introduced to the transactions
by Winer.
Alter understood that Hirshfield previously had done
business with Winer and thought well of him.
Alter read the Poly
Reclamation offering memorandum and attended some meetings with
other Shea & Gould partners who were considering an investment in
the Plastics Recycling transactions, including Hirshfield,
Carroll, Ferraro, Trost, and Parker.
He understood that Carroll
had a background in engineering, and that Ferraro, who at the
time represented British Petroleum, had worked at a plastics
5
Alter and his wife claimed an additional $1,046 in regular
investment credits from other qualifying property on their 1981
return.
- 16 company for one or more summers during and prior to law school.
Martin Feinstein (Feinstein), an associate at Shea & Gould, also
reviewed the Plastics Recycling transactions for Alter and some
of Alter's clients.
Feinstein has a B.A. in economics from Brooklyn College and
graduated cum laude from the New York University School of Law.
He is a member of the New York State bar and during 1981 he also
was a certified public accountant (C.P.A.).
Feinstein earned the
credits that enabled him to sit for the C.P.A. exam from New York
University.
During law school, and for a time afterward,
Feinstein worked at an accounting firm.
He then joined a
business management company, Vincent Andrews, Inc. (VAI).
VAI
managed the finances of people primarily in the entertainment and
theatrical industry.
budgeting at VAI.
Feinstein specialized in tax matters and
He and Alter met in 1969 through a VAI client,
Bill Cullen, who at the time also was represented by Alter in a
tax matter.
Feinstein subsequently joined Alter, LeFevre
sometime in 1969.6
Feinstein continued to advise persons regarding financial
and tax matters at Alter, LeFevre.
6
The firm provided a variety
At trial, Feinstein recalled that at the time he joined
Alter, LeFevre, the name of the firm was Pross, Halpern, Smith.
Alter's posttrial brief indicates that the firm's name at that
time was Pross, Smith, Halpern & LeFevre.
- 17 of financial services to its clients.
For some clients, it
maintained checking accounts, paid bills, and prepared weekly
statements showing the client's opening balance, deposits,
withdrawals, and expenditures.
On January 1, 1979, Alter,
LeFevre merged with another law firm, Aranow & Brodsky, but the
resulting firm ceased operations by Labor Day of that year, and
that same month Alter and Feinstein joined Shea & Gould.
In the fall of 1981, Alter asked Feinstein to review the
Plastics Recycling transactions as a potential investment for
Alter and some of his clients.
Feinstein received a copy of the
Poly Reclamation offering memorandum from Winer.
He spent
approximately 4 to 6 hours reviewing it, including the financial
projections and the tax opinion.
Feinstein understood that
Hirshfield and Ferraro had spoken to members of the law firm that
drafted the tax opinion, and that they and Trost were satisfied
with the opinion.
He also understood that "someone asked one of
the tax partners to look at the thing in general", but he did not
know "how much detail * * * [Shea & Gould] did."
Although Alter
claimed that he asked Feinstein "to check with the tax partner in
the firm, Alan Parker", Feinstein did not speak with Parker.
Feinstein relied on the offering memorandum for the value of
the Sentinel EPE recycler.
He understood that the purported
value of the Sentinel EPE recycler was based upon a projected
- 18 stream of future income.
Feinstein did not verify the
manufacturing cost of a Sentinel EPE recycler beyond speaking
with a friend and associate,7 "about pricing and how things are
priced in that industry."
He understood from his friend that the
stream-of-income method of valuation was not an unusual means of
pricing equipment.
Feinstein reviewed the stream of income
projections in the offering memorandum, but did not verify any of
the assumptions upon which they were based.
He did not research
or investigate the market for plastics recyclers or recycled
resin pellets.
Feinstein spoke to a friend, Jerry Lauren (Lauren), who was
a manufacturer's representative in the plastics packaging
industry.
He understood from Lauren that PI was a privately
owned company that made specialized machinery for companies
involved in the packaging industry.
hire or pay Lauren.
Feinstein did not formally
He did not provide Lauren with a copy of the
Poly Reclamation offering memorandum.
written report for Feinstein.
Lauren did not prepare a
Feinstein "never asked * * *
[Lauren] anything about the partnership".
what he knew about PI.
7
He only asked Lauren
Feinstein did not ask Lauren, or anyone
Feinstein did not state who this friend and associate was or
what his or her credentials were.
- 19 else, whether any plastics recycling machines comparable to the
Sentinel machines already were available on the market.
Feinstein has no education or experience in plastics
materials or plastics recycling, and he was not under the
impression that Hirshfield, Trost, or Ferraro had any education
or experience in the plastics industry.
He did not visit PI and
there is no indication in the record in docket No. 6302-89 that
Feinstein ever saw a Sentinel EPE recycler.
Feinstein did not
review any marketing plans or research the market for plastics
recyclers or recycled ground resin pellets.
He was unaware that
the Sentinel EPE recycler was incapable of recycling expanded
polyethylene by itself, and had to be used in connection with
grinders, extruders, and pelletizers.
Feinstein did not know how
many other partnerships would be leasing Sentinel recyclers.
Feinstein told Alter about Lauren and his comments about PI.
Alter knew that Lauren and Feinstein had not visited PI, or
investigated whether competitive machines existed, or made a
judgment as to the value of a Sentinel EPE recycler.
He also
knew that neither Feinstein nor Lauren personally invested in a
Plastics Recycling transaction.
Alter accepted the fair market
value of the Sentinel EPE recycler as set out in the offering
memorandum.
He had "no competence to" confirm the value of the
machines or "to do any comparison", and he did not hire anyone to
- 20 value the machine.
Like Feinstein, Alter did not know that the
Sentinel EPE recycler did not recycle plastic by itself but had
to be used in connection with other machines.
Alter did not
review any plastics industry trade journals for competing
recyclers or otherwise inquire as to whether there were any
comparable machines already on the market.
Alter told at least four of his clients that he was
investing in a Plastics Recycling transaction and that the
investment was open to them as well.
He told them that he and
other members of Shea & Gould thought that the investment seemed
sound.
Feinstein and Alter met with these clients and explained
the details of the investment.
Alter did not advise his clients
to read the offering memorandum, but it was available for them to
read.
He did not suggest that they consult with any plastics
experts.
At least four of Alter's clients, as well as Alter,
invested in a plastics Recycling transaction in 1981.
Alter and
those same four clients invested in another Plastics Recycling
transaction in 1982.
Alter and his wife Deborah have no education or work
experience in plastics materials or plastics recycling.
Prior to
investing in the Plastics Recycling transactions, Alter did not
know anything about the business of PI and had not seen a
Sentinel EPE or EPS recycler.
His knowledge of PI was limited to
- 21 the information in the offering materials and what Feinstein told
him.
The warnings and caveats in the offering memorandum did not
concern him.
Alter never asked whether there were any comparable
machines already on the market, and he was unaware of any
companies that would be suitable end-users for the recyclers.
He
knew that Feinstein did not have any expertise in plastics
materials or plastics recycling.
Alter and his wife Deborah
never made a profit from their participation in Poly Reclamation.
OPINION
We have decided a large number of the Plastics Recycling
group of cases.8
8
The majority of these cases, like the present
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: Becker v. Commissioner, T.C. Memo. 1996538; Jaroff v. Commissioner, T.C. Memo. 1996-527; Gollin v.
Commissioner, T.C. Memo. 1996-454; Grelsamer v. Commissioner,
T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C. Memo. 1996-398;
Estate of Busch v. Commissioner, T.C. Memo. 1996-342; Spears v.
Commissioner, T.C. Memo. 1996-341; Stone v. Commissioner, T.C.
Memo. 1996-230; Reimann v. Commissioner, T.C. Memo. 1996-84;
Bennett v. Commissioner, T.C. 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;
(continued...)
- 22 cases, raised issues regarding additions to tax for negligence
and valuation overstatement.
We have found the taxpayers liable
for the 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.9
8
(...continued)
Shapiro v. Commissioner, T.C. Memo. 1995-224; Pierce v.
Commissioner, T.C. Memo. 1995-223; Fine v. Commissioner, T.C.
Memo. 1995-222; Pearlman v. Commissioner, T.C. Memo. 1995-182;
Kott v. Commissioner, T.C. Memo. 1995-181; Eisenberg v.
Commissioner, T.C. Memo. 1995-180.
Greene v. Commissioner, 88 T.C. 376 (1987), concerned the
applicability of the safe-harbor leasing provisions of sec.
168(f)(8). Trost v. Commissioner, 95 T.C. 560 (1990), concerned
a jurisdictional issue.
Farrell v. Commissioner, T.C. Memo. 1996-295; Baratelli v.
Commissioner, T.C. Memo. 1994-484; Estate of Satin v.
Commissioner, T.C. Memo. 1994-435; Fisher v. Commissioner, T.C.
Memo. 1994-434; Foam Recycling Associates v. Commissioner, T.C.
Memo. 1992-645; Madison Recycling Associates v. Commissioner,
T.C. Memo. 1992-605, concerned other issues.
9
In Zidanich v. Commissioner, T.C. Memo. 1995-382, we held
the taxpayers liable for the sec. 6659 addition to tax, but not
liable for the negligence additions to tax under sec. 6653(a).
As indicated in our opinion, the Zidanich case, and the Steinberg
case consolidated with it for opinion, involved exceptional
circumstances.
In Estate of Satin v. Commissioner, supra, and Fisher v.
Commissioner, supra, after the decision in Provizer v.
Commissioner, supra, the taxpayers were allowed to elect to
accept a beneficial settlement because of exceptional
circumstances. In Farrell v. Commissioner, supra, we rejected
the taxpayers' claim to a similar belated settlement arrangement
since the circumstances were different and the taxpayers
previously had rejected settlement and elected to litigate the
case. See also Zenkel v. Commissioner, supra; Baratelli v.
Commissioner, supra.
- 23 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 Clearwater transaction
was a sham because it lacked economic substance and a business
purpose, (3) upheld the section 6659 addition to tax for
valuation overstatement since the underpayment of taxes was
directly related to the overstatement of the value of the
Sentinel EPE recyclers, and (4) held that losses and credits
claimed with respect to Clearwater were attributable to taxmotivated 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, the Clearwater transaction was considered in
Provizer v. Commissioner, supra, and the Alters stipulated that
the Poly Reclamation transaction is substantially identical to
the Clearwater transaction.
The underlying transactions in these
cases, and the Sentinel EPE recyclers purportedly leased by the
Partnerships, are the same type of transaction and same type of
machines considered in Provizer v. Commissioner, supra.
- 24 Based on the entire records in these cases, including the
extensive stipulations, testimony of respondent's experts, and
petitioners' testimony, we hold that each of the Partnership
transactions herein was a sham and lacked economic substance.
In
reaching this conclusion, we rely heavily upon the overvaluation
of the Sentinel EPE recyclers.
Respondent is sustained on the
question of the underlying deficiencies.
We note that
petitioners have explicitly conceded this issue in the
stipulations of settled issues filed shortly before trial.
The
records plainly support respondent's determinations regardless of
such concessions.
For a detailed discussion of the facts and the
applicable law in a substantially identical case that also
involved Clearwater, see Provizer v. Commissioner, supra.
A.
Section 6653(a)--Negligence
In notices of deficiency, respondent determined that each of
petitioners was liable for the additions to tax for negligence
under section 6653(a)(1) and (2) for 1981.
Petitioners have the
burden of proving that respondent's determinations of these
additions to tax are erroneous.
Rule 142(a); Luman v.
Commissioner, 79 T.C. 846, 860-861 (1982).
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
- 25 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.
(1985).
Neely v. Commissioner, 85 T.C. 934, 947
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.
Memo. 1996-46.
McPike v. Commissioner, T.C.
Compare Spears v. Commissioner, T.C. Memo. 1996-
341 with Zidanich v. Commissioner, T.C. Memo. 1995-382.
Petitioners argue that they were reasonable in claiming
deductions and credits with respect to the Partnerships.
They
maintain that they carefully read the respective offering
memoranda, expected an economic profit in light of the so-called
oil crisis in the United States in 1981, and that they reasonably
- 26 relied upon their colleagues at Shea & Gould as qualified
advisers on this matter.
1.
The Private Offering Memoranda
Friedman and Alter each testified that they read the
respective offering memoranda.
Their testimony and actions,
however, indicate that they did not give due consideration to all
of the information set out in the offering memoranda, and that
they ultimately did not place a great deal of reliance, if any,
on the representations therein.
The offering memoranda raised numerous caveats and warnings
with respect to the Partnerships, including:
(1) The
Partnerships had no operating history; (2) management of the
Partnerships' business was dependent upon the general partner,
who had no experience in marketing recycling equipment and who
was required to devote only such time to the Partnerships as he
deemed necessary; (3) the limited partners had no right to take
part in, or interfere in any manner with, the management or
conduct of the business of the Partnerships; (4) there was no
established market for the Sentinel recyclers; and (5) although
competitors purportedly were not marketing comparable equipment,
and the Sentinel recyclers purportedly involved "carefully
guarded trade secrets," PI did "not intend to apply for a patent
for protection against appropriation and use by others."
- 27 Friedman testified that he was an active investor from 1973
to 1981, and that it was his established practice to read the
accompanying prospectus or offering memorandum and investigate
the risks that were described therein.
With respect to
Clearwater, however, Friedman did not investigate the risks
described in the offering memorandum or even seek to verify the
purported value or uniqueness of a Sentinel EPE recycler.
Alter
testified that he was not concerned by the risk factors described
in the Poly Reclamation offering memorandum, and commented that
he had "seen similar disclaimers in other red herrings or
offering memoranda."
Asked what he did to confirm the value of
the machine, Alter testified "I had no competence to do that, to
do any comparison."
Alter did not hire an expert to value the
Sentinel EPE recycler, and he knew that Feinstein and Lauren had
not made a judgment as to the value of the machine.
The records
in these cases do not reflect a careful and studied consideration
of the offering memoranda by either petitioner.
The projected tax benefits in the Clearwater and Poly
Reclamation offering memoranda exceeded petitioners' investments.
According to the Clearwater and Poly Reclamation offering
memoranda, for each $50,000 investor, the projected first-year
tax benefits were investment tax credits in the amount of $86,328
for each partnership, plus deductions in the amounts of $39,399
- 28 and $39,162, respectively.
For his $12,500 investment in
Clearwater, Friedman claimed an operating loss in the amount of
$10,002, and investment tax and business energy credits in the
amount of $9,29010 on his 1981 return.
As a result of Alter's
$12,500 investment in Poly Reclamation, on their 1981 return he
and his wife Deborah claimed an operating loss in the amount of
$9,976 and investment tax and business energy credits totaling
$21,584.
The investment tax and business energy credits generated by
the Partnerships and available to petitioners equaled 173 percent
of their cash investments.
Therefore, after adjustments of
withholding, estimated tax, or final payment, and possible
carryback or carryover in Friedman's case, like the taxpayers in
Provizer v. Commissioner, T.C. Memo. 1992-177, "except for a few
weeks at the beginning, petitioners never had any money in the *
* * [Partnership transactions]."
In view of the
disproportionately large tax benefits claimed on petitioners'
Federal income tax returns, relative to the dollar amounts
invested, further investigation of the Partnership transactions
clearly was required.
10
A careful consideration of the materials
As noted, the total amount of investment tax and business
energy credits flowing from Clearwater to Friedman in 1981-$21,584--was subject to limitation.
- 29 in the offering memoranda in these cases, 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 (9th Cir. 1988), affg. Dister
v. Commissioner, T.C. Memo. 1987-217; Sacks v. Commissioner, T.C.
Memo. 1994-217, affd. 82 F.3d 918 (9th Cir. 1996).
Petitioners' reliance upon 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), is misplaced.
In
Osterhout, we found that certain oil and gas partnerships were
not engaged in a trade or business and sustained the
Commissioner's imposition of the negligence additions to tax with
respect to one of the partners therein.11
The Court of Appeals
for the Ninth Circuit reversed our imposition of the negligence
11
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 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 taxpayers.
- 30 additions to tax.
Petitioners point out that the taxpayer in
that case relied in part upon a tax opinion contained in the
offering materials.
In the consolidated cases before us, however, petitioners'
purported reliance on the tax opinion letter is undermined by
their indifference to the numerous caveats and warnings
highlighted throughout the offering materials.
Moreover, the
offering memoranda for the Partnerships herein warned prospective
investors that the accompanying tax opinion letters were not in
final form and were 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 Partnerships.
The tax opinion letters
accompanying the Clearwater and Poly Reclamation offering
memoranda were addressed solely to the general partner and began
with 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 their
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'
tax advisors in making their own analysis and not to
permit any prospective investor to rely upon our advice
in this matter. [Emphasis added.]
- 31 Accordingly, the tax opinion letters expressly indicate 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 expressed in these
letters was not designed as advice upon which taxpayers might
rely, and the opinion of counsel itself so states.
As
sophisticated attorneys and investors, Friedman and Alter knew or
should have known that the opinion letter had a limited function,
that the caveats and warnings in the letter were to be taken
seriously, and certainly that they could not rely upon the
opinion letter without full investigation of the economic and
other factual assumptions upon which it explicitly was based.
2.
The So-Called Oil Crisis
Petitioners each testified that they reasonably expected to
make an economic profit from the Partnership transactions because
plastic is an oil derivative and the United States was
experiencing a so-called oil crisis during the year 1981.
Based
upon our review of the records, we find petitioners' claims
unconvincing, regardless of the so-called oil crisis.
Moreover,
testimony by one of respondent's experts establishes that the oil
pricing changes during the late 1970's and early 1980's did not
justify petitioners' claiming excessive investment credits and
- 32 purported losses based on vastly exaggerated valuations of
recycling machinery.
Petitioners did not seriously educate themselves in, or
personally investigate, the plastics recycling transactions, nor
did they consult any plastics materials or plastics recycling
experts regarding the business prospects for such a venture.
Alter stipulated that prior to investing in Clearwater:
He knew
nothing about the business of PI; he did not inquire as to
whether there were any other competing machines; he was unaware
of any suitable end-users; and he knew nothing about resin
prices.
Friedman stipulated that prior to investing in Poly
Reclamation:
He did not investigate whether there were any other
competing machines; he did not investigate how the Sentinel EPE
recycler functioned; he did not investigate the uniqueness of the
machine or whether its purported value was bona fide; and he did
not investigate whether there were any suitable end-users for the
recyclers.
Petitioners did not attempt to resolve the numerous
business-related caveats and warnings in the offering memoranda.
We are not convinced that petitioners gave sufficient
consideration to the business aspects of the Partnerships to show
that they intended and reasonably expected to make an economic
profit from the transactions, regardless of the so-called oil
crisis.
- 33 Moreover, petitioners did not adequately explain how the socalled 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."
Furthermore, during
1980 and 1981, in addition to the media coverage of the so-called
oil crisis, there was "extensive continuing press coverage of
questionable tax shelter plans."
Zmuda v. Commissioner, 731 F.2d
1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982).
Petitioners' reliance on Krause v. Commissioner, 99 T.C. 132
(1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024
(10th Cir. 1994), is misplaced.
The facts in Krause v.
Commissioner, supra, are distinctly different from the facts of
these cases.
In Krause v. Commissioner, supra, the taxpayers
invested in limited partnerships whose investment objectives
concerned enhanced oil recovery (EOR) technology.
The Krause
- 34 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 Krause v. Commissioner, supra, were not liable
for the negligence additions to tax, this Court noted that one of
the Government's expert witnesses acknowledged that "investors
may have been significantly and reasonably influenced by the
energy price hysteria that existed in the late 1970's and early
1980's to invest in EOR technology."
Id. at 177.
In the present
cases, however, as explained by respondent's expert Steven
Grossman, 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 energy crisis would provide a
reasonable basis for petitioners' investing in recycling of
polyethylene, particularly in the machinery here in question.
In addition, the taxpayers in the Krause case were
experienced in or investigated the oil industry and EOR
technology specifically.
One of the taxpayers in Krause v.
Commissioner, supra, undertook significant investigation of the
- 35 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 were not
experienced or educated in plastics recycling, and they did not
independently investigate the Sentinel recyclers or hire an
expert in plastics to evaluate the Partnership transactions.
We
consider petitioners' arguments with respect to the Krause case
inapplicable.
3.
Petitioners' Purported Reliance on Advisers
Petitioners claim that they reasonably relied upon the
advice of qualified advisers, specifically several partners at
Shea & Gould.
Alter claims that he relied on Feinstein as well.
None of the Shea & Gould partners purportedly relied upon by
petitioners testified in the trials of these cases.
Feinstein
testified in the Alter case.
The concept of negligence and the argument of reliance on an
expert are highly fact intensive.
Petitioners in these cases are
very well-educated and sophisticated attorneys who at the time of
these investments were members of a leading New York City law
firm.
Friedman specialized in corporate and Federal securities
law.
Alter specialized in entertainment and labor law and also
- 36 consulted on various tax and financial issues for his clients.
These sophisticated attorneys ultimately relied upon other
attorneys to investigate the tax law and the underlying business
circumstances of a proposed investment, the success of which
depended upon a purportedly technologically unique machine.
Neither the attorneys allegedly relied upon by petitioners nor an
accountant who reviewed the Clearwater offering memorandum was
expert in plastics materials or plastics recycling.
A taxpayer may avoid liability for the additions to tax
under section 6653(a)(1) and (2) if he or she reasonably relied
on competent professional advice.
United States v. Boyle, 469
U.S. 241, 250-251 (1985); Freytag v. Commissioner, 89 T.C. 849,
888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.
868 (1991).
Reliance on professional advice, standing alone, is
not an absolute defense to negligence, but rather a factor to be
considered.
Freytag v. Commissioner, supra.
For reliance on
professional advice to excuse a taxpayer from the negligence
additions to tax, the taxpayer must show that the professional
had the expertise and knowledge of the pertinent facts to provide
informed advice on the subject matter.
David v. Commissioner, 43
F.3d 788, 789-790 (2d Cir. 1995), affg. T.C. Memo. 1993-621;
Goldman v. Commissioner, 39 F.3d 402 (2d Cir. 1994), affg. T.C.
Memo. 1993-480; Freytag v. Commissioner, supra; Sacks v.
- 37 Commissioner, T.C. Memo. 1994-217; Kozlowski v. Commissioner,
T.C. Memo. 1993-430, affd. without published opinion 70 F.3d 1279
(9th Cir. 1995); see also Gollin v. Commissioner, T.C. Memo.
1996-454; Stone v. Commissioner, T.C. Memo. 1996-230; Reimann v.
Commissioner, T.C. Memo. 1996-84.
Reliance on representations by insiders, promoters, or
offering materials has been held an inadequate defense to
negligence.
Goldman v. Commissioner, supra; Pasternak v.
Commissioner, 990 F.2d 893 (6th Cir. 1993), affg. Donahue v.
Commissioner, T.C. Memo. 1991-181; LaVerne v. Commissioner, 94
T.C. 637, 652-653 (1990), affd. without published opinion 956
F.2d 274 (9th Cir. 1992), affd. without published opinion sub
nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991);
Marine v. Commissioner, 92 T.C. 958, 992-993 (1989), affd.
without published opinion 921 F.2d 280 (9th Cir. 1991); McCrary
v. Commissioner, 92 T.C. 827, 850 (1989); Rybak v. Commissioner,
91 T.C. 524, 565 (1988).
Pleas of reliance have been rejected
when neither the taxpayer nor the advisers purportedly relied
upon by the taxpayer knew anything about the nontax business
aspects of the contemplated venture.
David v. Commissioner,
supra; 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
- 38 opinion 72 F.3d 123 (3d Cir. 1995); Sacks v. Commissioner, supra;
Steerman v. Commissioner, T.C. Memo. 1993-447; Rogers v.
Commissioner, T.C. Memo. 1990-619; see also the Plastics
Recycling cases cited supra note 8.
In addition to his professional experience as a corporate
and Federal securities lawyer, by 1981 Friedman had made a "great
number" of personal investments.
His approach to these
investments was rigorous and methodical:
he read the prospectus
or private offering memorandum, spoke to an expert in the
pertinent industry, investigated the risk factors described in
the offering materials, consulted industry reports, and spoke to
other active investors or lawyers.
With respect to Clearwater,
however, Friedman's investigation was wanting.
Friedman did not
speak to a plastics materials or plastics recycling expert, or
investigate the risk factors described in the offering
memorandum, or consult plastics industry trade journals or
reports.
His investigation of Clearwater entailed nothing more
than reading the offering memorandum and discussing the
investment with other attorneys at Shea & Gould.
Friedman
testified that he also provided a copy of the offering memorandum
to his accountant and that his accountant did not advise against
the investment.
The accountant, however, had no experience in
plastics or plastics recycling, and did not independently
- 39 investigate the plastics industry or the Sentinel EPE recycler.
Moreover, the accountant did not testify at the trial of
Friedman's case, and the substance of his advice, if any, is not
clear from Friedman's testimony.
See Howard v. Commissioner, 931
F.2d 578, 582 (9th Cir. 1991), affg. T.C. Memo. 1988-531; Patin
v. Commissioner, 88 T.C. 1086, 1131 (1987), affd. without
published opinion 865 F.2d 1264 (5th Cir. 1989), affd. without
published opinion sub nom. Hatheway v. Commissioner, 856 F.2d 186
(4th Cir. 1988), affd. sub nom. Skeen v. Commissioner, 864 F.2d
93 (9th Cir. 1989), affd. sub nom. Gomberg v. Commissioner, 868
F.2d 865 (6th Cir. 1989), rejecting claims to reliance on an
accountant under analogous circumstances.
Friedman recalled that approximately eight other partners at
Shea & Gould either invested in, or to some extent reviewed, the
Plastics Recycling transactions.
Of these, three were litigators
(Carroll, Ferraro, and Leon Gold), one specialized in bankruptcy
law (Hirshfield), two specialized in corporate and/or Federal
securities law (Arnold Jacobs and Thomas Constance), and one
specialized in taxation (Parker).
Friedman did not indicate the
area of practice of the other partner he mentioned, Trost.
Asked
if any of these partners were experts in the plastics industry,
Friedman replied:
"I don't believe any of them were, although I
believe that * * * Dan Carroll had an engineering background and
- 40 I think Joe Ferraro may have had some experience in his past with
plastics, * * * But I am not sure of that at this point."
Friedman had a vague recollection of the investigation
conducted by the other partners at Shea & Gould.
He recalled
that Hirshfield and Trost visited PI, and that Carroll made
inquiries of people in the plastics business.
indicate what, if anything, Ferraro did.
Friedman did not
He tentatively recalled
receiving reports, perhaps written, that the partners
investigating the Plastics Recycling transactions "had gotten
information that there was a substantial market" for the recycled
pellets.
He also testified that certain "members of * * * [Shea
& Gould spoke] to plastics experts who told * * * [them] that
there was a substantial market for the product of these
machines."
Friedman could not recall, however, which partners
spoke to these purported experts, or whether the experts
consulted were independent of PI.
He testified that the partners
who visited PI (Hirshfield and Trost) "reported to us that they
weren't aware of any other machines that did precisely what this
machine did".
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 recycling
machines available during 1981 ranged in price from $20,000 to
$200,000, including the Foremost Densilator, Nelmor/Weiss
- 41 Densification System (Regenolux), Buss-Condux Plastcompactor, and
Cumberland Granulator.12
Memo. 1992-177.
See Provizer v. Commissioner, T.C.
Friedman did not explain what Hirshfield and
Trost did, if anything, to become aware of competing plastics
recyclers, aside from their visit to PI.
Friedman acknowledged that he is "sophisticated enough to
know that in any tax investment the underlying economics have to
be legitimate", and he stipulated to the effect that he
understood that the purported value of the Sentinel EPE recycler
generated the tax benefits he claimed on his return.
He also
understood from Parker, the partner "primarily responsible" for
reviewing the tax aspects of the Plastics Recycling transactions,
that the tax benefits were supportable provided "that from a
business point of view this was a good economic investment".
Nonetheless, Friedman stipulated that he never saw a Sentinel EPE
recycler, or investigated the uniqueness of the machine, or
investigated whether the value placed on the recycler was bona
fide, or investigated whether there were any other machines that
were designed to recycle low density polyethylene.
Friedman's
testimony about his modest investigation prior to investing in
12
Petitioners Alter and Friedman each stipulated to the
availability of the Foremost Densilator, Nelmor/Weiss
Densification System (Regenolux), Buss-Condux Plastcompactor, and
Cumberland Granulator during 1981.
- 42 the plastics recycling transaction was generally vague,
qualified, and unconvincing.
Friedman sought to establish that he monitored his
investment in Clearwater.
He testified that he spoke to
Hirshfield and Trost on a number of occasions "about the progress
of the partnership".
Friedman stated:
"I believe that within
the first year or so, I received favorable reports that it was
doing well and the machines were doing well."
In Provizer v.
Commissioner, supra, this Court found:
At no time were all six of the Sentinel EPE
Recyclers * * * leased by Clearwater placed with endusers. * * * the recyclers were used infrequently and
they often were not in use at all. PI failed promptly
to pick up either the scrap or machines rejected by
prospective end-users, and at times did not pay the
end-user for the scrap that PI did pick up.
Friedman submitted into the record several updates regarding the
placement of the recyclers and the performance of Clearwater.
A
May 19, 1982, update indicated that end-users had been found for
four recyclers.
Financial statements for the years ended 1981
and 1982 showed that Clearwater was operating at a loss.
In a
preface to the financial statements, the accounting firm that
prepared them, H. W. Freedman & Co., stated as follows:
The financial statements have been prepared on a basis
of accounting other than generally accepted accounting
principles * * *. The compilation is limited to
presenting in the form of financial statements
information that is the representation of the
- 43 Partnership. We have not audited or reviewed the
accompanying financial statements and, accordingly, do
not express an opinion on them.
We are not independent with respect to Clearwater
Group.
H. W. Freedman & Co. prepared the partnership returns for ECI
Corp. and F & G Corp.
The named partner of H. W. Freedman & Co.,
Harris W. Freedman, was the president and chairman of the board
of F & G Corp., and owned 94 percent of a Sentinel EPE recycler.
A June 13, 1983, update submitted into the record by Friedman
contained an April 9, 1983, sales summary showing a first quarter
gross profit of $14.43.
Like Friedman's perfunctory investigation of Clearwater,
Alter's investigation of Poly Reclamation was limited to reading
the offering memorandum and discussing the investment with others
at Shea & Gould.
The colleagues he spoke to included Hirshfield,
Carroll, Parker, and Ferraro, in addition to Feinstein, in whom
Alter claims he reposed "particular confidence" based upon their
long professional association.
Alter recalled the investigation
by his colleagues at Shea & Gould in general terms, and portions
of his testimony were inconsistent with Feinstein's recollection
of events.
For example, Alter testified that he asked Feinstein
to speak with Parker, but Feinstein testified that Parker "didn't
speak to me."
Alter was under the impression that "Feinstein's
- 44 friend" (Lauren) had read the offering memorandum, but Feinstein
was explicit that Lauren had not seen an offering memorandum.
Feinstein's investigation of Poly Reclamation and the
Plastics Recycling transactions was very limited.
He spoke with
Lauren, who may have had some insight into plastics materials,
but Feinstein only asked Lauren about PI's reputation.
Feinstein
did not provide Lauren with a copy of the offering memorandum, or
ask him about the prospects for a Sentinel EPE recycler, or
inquire as to whether there were any competing machines already
on the market.
He accepted the purported value of the Sentinel
EPE recycler after speaking with a friend and associate "about
pricing and how things are priced in * * * [the plastics]
industry."
The friend and associate--unidentified by Feinstein--
only allegedly confirmed that the stream-of-income method of
valuation was used in the industry.
Feinstein did not verify any
of the underlying assumptions upon which the income projections
in the offering memorandum were based.
Neither Feinstein nor
Lauren visited PI to see a Sentinel EPE recycler, or investigated
whether competitive machines existed.
Feinstein testified that
he had telephone conversations with Winer, but he did not explain
whether they discussed Poly Reclamation or the Plastics Recycling
transactions, or the nature of Winer's advice, if any.
See
Howard v. Commissioner, 931 F.2d at 582; Patin v. Commissioner,
- 45 88 T.C. at 1131, rejecting claims to reliance on an adviser where
there is no showing that relevant advice was given.
Alter also recalled speaking to Winer.
He thought he
remembered that Winer had indicated that end-users had been
scheduled for the machines, but that Winer did not name the endusers.
Alter did not mention having any other conversations with
Winer.
Also like Feinstein, Alter accepted at face value all of
the representations made in the offering memorandum.
At trial,
he was asked what made the Sentinel EPE recycler unique.
He
replied:
I believe the representation was that they had a
special fluid cooling process that was not available
elsewhere. They made the representations that it had a
dual set of blades, I believe, rotary blades, exterior
rotary blade[s] as well as the interior blades, that
would crush the plastic material more effectively.
In Provizer v. Commissioner, T.C. Memo. 1992-177, we found that
PI's vice president of manufacturing and a developer of PI's
prototype recycler, William Strlzelewicz,
explained that the coolant used in the process was
plain water and not some "trade secret" chemical
compound. End-users stated that a usual method by
which the water might be "injected" was for a factory
worker to dump it on the heated material. * * *
Among the recycler's component parts were replaceable rotating
and stationary cutting blades.
- 46 Like Friedman, Alter submitted several documents into the
record as evidence that he monitored his investment in Poly
Reclamation.
Of a total of six documents submitted, only one
dealt with Poly Reclamation.
That one, dated September 30, 1982,
indicated that three of Poly Reclamation's Sentinel EPE recyclers
had been placed and were running.
The other five documents dealt
with partnerships that owned Sentinel EPS recyclers.
An August
29, 1985, letter discussed "the impossible pricing situation that
continues in the polystyrene market."
The remaining documents
were two financial statements for Stevens Recycling Associates
(Stevens Recycling) for the years ended 1982, 1983, and 1984, and
two reports regarding the placement of the Sentinel EPS recyclers
owned by Stevens Recycling.
Alter was not sufficiently confident of Poly Reclamation and
the Plastics Recycling transactions to recommend them expressly
to his clients.
On direct examination, he was asked if, "in
connection with the making of this investment yourself, and in
recommending" the investment to his clients, he earned a
commission.
Alter replied:
"No, I did not, and I would like to
correct your use of the word 'recommend.'
I told them I was
going into it and it seemed sound, and if they were interested
they could participate as well."
Alter reiterated this point on
cross-examination in the following exchange:
- 47 Q Did you suggest that your clients consult with
others who were plastics experts?
A No. I told them that I was investing and that it
seemed like a sound investment to me, and if they were
interested they could participate as well.
Q
Did you recommend the investment?
A
To the extent that I just stated.
Feinstein was asked what his recollection was regarding the
nature "of the recommendation and how it was presented by Mr.
Alter".
He replied:
"It is my recollection and based on how I
was and he was with clients, that it was a possible investment.
He thought it would work for them and would work as an investment
with no--no pressure at all.
* * *
Most certainly not
pressure."
Just as Alter mentioned but did not "recommend" the Plastics
Recycling transactions to his clients, there is no showing in
docket No. 6302-89 that any of the Shea & Gould partners
recommended or advised that Alter invest in Poly Reclamation.
Feinstein claimed that he came to a positive conclusion with
respect to the soundness of the Plastics Recycling transactions
and that he communicated this conclusion to Alter.
Yet, as Alter
well knew, Feinstein did not personally invest in a Plastics
Recycling transaction, nor did his friend Lauren.
- 48 We hold that petitioners' purported reliance on the other
partners at Shea & Gould, and in Alter's case Feinstein as well,
was not reasonable, not in good faith, nor based upon full
disclosure.
Petitioners' testimony in these cases was self-
serving, and at times vague and elusive and this Court is not
required to accept it as true.
Wood v. Commissioner, 338 F.2d
602, 605 (9th Cir. 1964), affg. 41 T.C. 593 (1964); Niedringhaus
v. Commissioner, 99 T.C. 202, 212 (1992); Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986); Snyder v. Commissioner, T.C.
Memo. 1995-285; Sacks v. Commissioner, T.C. Memo. 1994-217.
Moreover, petitioners' failure to call any of the Shea & Gould
partners to testify gives rise to the inference that their
testimony would not have been favorable to petitioners.
Mecom v.
Commissioner, 101 T.C. 374, 386 (1993), affd. without published
opinion 40 F.3d 385 (5th Cir. 1994); Pollack v. Commissioner, 47
T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th Cir. 1968); Wichita
Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),
affd. 162 F.2d 513 (10th Cir. 1947); Sacks v. Commissioner,
supra.
The purported value of the Sentinel EPE recycler generated
the deductions and credits in these cases, and that circumstance
was reflected in the offering memoranda.
Certainly Parker and
Feinstein recognized the nature of the tax benefits and, given
- 49 their education and professional experiences, petitioners should
have recognized it as well.
Friedman acknowledged that he
recognized the nature of the tax benefits, and undoubtedly they
were made clear to Alter by Feinstein.
Yet, neither Friedman,
Alter, nor their colleagues at Shea & Gould confirmed the value
of the Sentinel EPE recycler.
The records in these cases show
that in the end, petitioners and their colleagues relied on PI
personnel for the value of the Sentinel EPE recyclers 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."
Neither Feinstein nor the participating partners at Shea &
Gould had any expertise in plastics materials or plastics
recycling.
Although Ferraro apparently worked many years ago for
one or more summers at a plastics company, and Carroll had an
engineering background, they did not testify in these cases, and
the records fail to establish that Ferraro's summer job
experience, or Carroll's engineering background, adequately
enabled them to assess the Plastics Recycling transactions.
A
taxpayer may rely upon his advisers' expertise, but it is not
reasonable or prudent to rely upon an adviser regarding matters
outside of his field of expertise or with respect to facts that
he does not verify.
See David v. Commissioner, 43 F.3d at 789-
- 50 790; Goldman v. Commissioner, 39 F.3d at 408; Skeen v.
Commissioner, 864 F.2d 93 (9th Cir. 1989), affg. Patin v.
Commissioner, 88 T.C. 1086 (1987); Lax v. Commissioner, T.C.
Memo. 1994-329; Sacks v. Commissioner, supra; Rogers v.
Commissioner, T.C. Memo. 1990-619.
4.
Miscellaneous
The parties in these consolidated cases stipulated that the
fair market value of a Sentinel EPE recycler in 1981 was not in
excess of $50,000.
Regardless of this concession, petitioners
contend that they were reasonable in claiming credits on their
Federal income tax returns based upon each recycler's having a
value of $1,162,666.
In support of this position, petitioners
rely upon 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
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,
- 51 that the machines actually had a fair market value of not more
than $50,000 each in the fall of 1981.13
We accord no weight to the Carmagnola reports submitted by
petitioners.
The projected valuations therein were based on
inadequate information, research, and investigation, and were
subsequently rejected and discredited by their author.
In one
preliminary report, Carmagnola states that he has "a serious
concern of actual profit" of a Sentinel EPE recycler and that to
determine whether the machines actually could be profitable, he
required additional information from PI.
Carmagnola also
indicates that in preparing the report, he did not have
information available concerning research and development costs
of the machines and that he estimated those costs in his
valuations of the machines.
Respondent rejected the Carmagnola 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.
13
Even so, counsel
The parties stipulated as to the authenticity of the
Carmagnola reports, but respondent objected on grounds of
relevance, materiality and hearsay. Since these reports have
been included in the record in many other plastics recycling
cases, we admitted them into evidence with the caveat that if Mr.
Carmagnola was not called to testify, we expected to give minimal
weight to the reports.
- 52 for petitioners obtained copies of these reports and urge that
they support the reasonableness of the values reported on
petitioners' returns.
Not surprisingly, counsel in these cases
did not call Carmagnola to testify, but preferred instead to rely
solely upon his preliminary ill-founded valuation estimates.
Carmagnola has not been called to testify in any of the Plastics
Recycling cases before us.
The Carmagnola reports were a part of
the record considered by this Court and reviewed by the Court of
Appeals for the Sixth Circuit 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.
Petitioners are
not relieved of the negligence additions to tax based on the
preliminary reports prepared by Carmagnola.
Petitioners cite a number of cases in support of their
positions, but primarily rely on Durrett v. Commissioner, 71 F.3d
515 (5th Cir. 1996), affg. in part and revg. in part T.C. Memo.
1994-179; Chamberlain v. Commissioner, 6 F.3d 729 (5th Cir.
1995), affg. in part and revg. in part T.C. Memo. 1994-228;
Mollen v. United States, 72 AFTR 2d 93-6443, 93-2 USTC par.
50,585 (D. Ariz. 1993); Reile v. Commissioner, T.C. Memo. 1992488; and Davis v. Commissioner, T.C. Memo. 1989-607.
- 53 This Court declined to sustain the negligence additions to
tax in the Reile and Davis cases for reasons inapposite to the
facts herein.
In the Davis case, the taxpayers reasonably relied
upon a "trusted and long-term adviser" who was independent of the
investment venture, and the offering materials reviewed by the
taxpayers did not reflect that the principals in the venture
lacked experience in the pertinent line of business.
In the
Reile case, the taxpayers, a married couple, had only 1 year of
college between them and characterized themselves as financial
"dummies."
In contrast to those cases, petitioners herein are
well-educated and experienced professionals.
Friedman is a
corporate and Federal securities lawyer intimately familiar with
public and private placements, while Alter is an entertainment
and labor lawyer who also assists a number of his clients in
financial matters.
Feinstein and the participating partners at
Shea & Gould were colleagues contemplating a similar investment,
not long-term advisers to petitioners.
In addition, the offering
memoranda warned that the Partnerships had no prior operating
history and that the general partner had no prior experience in
marketing recycling or similar equipment.
Accordingly,
petitioners' reliance on the Reile and Davis cases is misplaced.
In Mollen v. United States, supra, the taxpayer was a
medical doctor who specialized in diabetes and who, on behalf of
- 54 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.
The District Court found that the
taxpayer's personal expertise and insight in the underlying
investment gave him reason to believe it would be economically
profitable.
Although the taxpayer was not experienced in
business or tax matters, he did consult with an accountant and a
tax lawyer regarding those matters.
Moreover, the District Court
noted that the propriety of the taxpayer's disallowed deduction
therein was "reasonably debatable."
Id. at 93-6447, 93-2 USTC
par. 50,585, at 89,895; see Zfass v. Commissioner, T.C. Memo.
1996-167.
In contrast, there is no showing in these cases that
petitioners or their colleagues had any personal insight or
industry know-how in plastics recycling that would reasonably
lead them to believe that the Plastics Recycling transactions
would be economically profitable.14
14
Feinstein spoke to Lauren,
Ferraro apparently worked for one or more summers at a
plastics company, and Carroll had an engineering background, but
neither Ferraro nor Carroll testified in these cases, and the
(continued...)
- 55 but their discussion was limited to Lauren's impression of PI.
Lauren did not read the Poly Reclamation offering memorandum, see
a Sentinel EPE recycler, or do any type of investigation into the
plastics recycling market.
Petitioners and their colleagues did
not hire any independent experts in the field of plastic
materials or plastics recycling.
They relied upon
representations by insiders to the Plastics Recycling
transactions.
Accordingly, we consider petitioners' arguments
with respect to the Mollen case inapplicable under the
circumstances of these cases.
Petitioners' reliance on the Durrett and Chamberlain cases
is also misplaced.
In those cases, the Court of Appeals for the
Fifth Circuit reversed this Court's imposition of the negligence
additions to tax in two nonplastics recycling cases.
The
taxpayers in the Durrett and Chamberlain cases were among
thousands who invested in the First Western tax shelter program
involving alleged straddle transactions of forward contracts.
In
the Durrett and Chamberlain cases, the Court of Appeals for the
Fifth Circuit concluded that the taxpayers reasonably relied upon
professional advice concerning tax matters.
14
In other First
(...continued)
records fail to establish that they were qualified to analyze the
Sentinel EPE recycler or the Plastics Recycling transactions.
- 56 Western cases, however, the Courts of Appeals have affirmed
decisions of the Tax Court imposing negligence additions to tax.
See Foulds v. Commissioner, T.C. Memo. 1994-489 (the welleducated taxpayer failed to establish the substance of advice,
and the purported adviser lacked tax expertise), affd. without
published opinion 94 F.3d 651 (9th Cir. 1996); Chakales v.
Commissioner, T.C. Memo. 1994-408 (reliance on a long-term
adviser, who was a tax attorney and accountant, and who in turn
relied on a promoter of the venture, held unreasonable), affd. 79
F.3d 726 (8th Cir. 1996); Kozlowski v. Commissioner, T.C. Memo.
1993-430 (reliance on adviser held unreasonable absent a showing
that the adviser understood the transaction and was qualified to
give an opinion whether it was bona fide), affd. without
published opinion 70 F.3d 1279 (9th Cir. 1995); Freytag v.
Commissioner, 89 T.C. at 849 (reliance on tax advice given by
attorneys and C.P.A.'s held unreasonable absent a showing that
the taxpayers consulted any experts regarding the bona fides of
the transactions).
Here we have found that none of petitioners'
colleagues at Shea & Gould, including Ferraro, Carroll, and
Feinstein, possessed sufficient knowledge of the plastics or
recycling industries to render a competent opinion.
This fact
has been deemed relevant by the Court of Appeals for the Second
Circuit, the court to which appeal in these cases lies.
See
- 57 David v. Commissioner, 43 F.3d at 789-790 (taxpayers' reliance on
expert advice not reasonable where expert lacks knowledge of
business in which taxpayers invested); Goldman v. Commissioner,
39 F.3d at 408 (same).
Accordingly, petitioners shall not be
relieved of the negligence additions to tax based upon the
decisions in the Durrett and Chamberlain cases by the Court of
Appeals for the Fifth Circuit.15
5.
Conclusion as to Negligence
Under the circumstances of these consolidated cases,
petitioners failed to exercise due care in claiming large
deductions and tax credits with respect to the Partnerships on
their Federal income tax returns.
We hold that petitioners did
not reasonably rely upon the offering memoranda and their
colleagues at Shea & Gould.
Friedman knew that the tax benefits
were contingent upon the purported value of the Sentinel EPE
recycler, and certainly Alter understood this circumstance or
learned as much from Feinstein.
Yet, neither petitioners nor
their purported advisers in good faith investigated the fair
15
Other cases cited by petitioners are inapplicable and
distinguishable for the following general, nonexclusive reasons:
(1) They involve far less sophisticated, if not unsophisticated,
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.
- 58 market value of a Sentinel EPE recycler, or the underlying
viability, financial structure, and economics of the Partnership
transactions.
These sophisticated, able, and successful
taxpayers knew or should have known better.
We hold, upon
consideration of the entire records, that petitioners are liable
for the negligence additions to tax under section 6653(a)(1) and
(2) for the taxable year at issue.
Respondent is sustained on
this issue.
B.
Section 6659--Valuation Overstatement
In notices of deficiency, respondent determined that
petitioners were liable for the section 6659 addition to tax on
the portion of their respective underpayments attributable to
valuation overstatement.
Petitioners have the burden of proving
that respondent's determinations of the section 6659 additions to
tax in their cases are erroneous.
Rule 142(a); Luman v.
Commissioner, 79 T.C. at 860-861.
A graduated addition to tax is imposed when an individual
has an underpayment of tax that equals or exceeds $1,000 and "is
attributable to" a valuation overstatement.
Sec. 6659(a), (d).
A valuation overstatement exists if the fair market value (or
adjusted basis) of property claimed on a return equals or exceeds
150 percent of the amount determined to be the correct amount.
Sec. 6659(c).
If the claimed valuation exceeds 250 percent of
- 59 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
concede that the fair market value of a Sentinel EPE recycler in
1981 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 additions to tax at the rate of 30 percent of the
underpayments of tax attributable to the tax benefits claimed
with respect to the Partnerships.
Petitioners contend that section 6659 does not apply in
their cases for the following three reasons:
(1) Disallowance of
the claimed tax benefits was attributable to other than a
valuation overstatement; (2) petitioners' concessions of the
claimed tax benefits preclude imposition of the section 6659
additions to tax; and (3) respondent erroneously failed to waive
the section 6659 additions to tax.
We reject each of these
arguments for reasons set forth below.
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.
- 60 Commissioner, 92 T.C. at 827; 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. at 178 (citing Todd v. Commissioner,
supra).
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) (the 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.
Petitioners argue that the disallowance of the claimed tax
benefits was not "attributable to" a valuation overstatement.
According to petitioners, the tax benefits were disallowed
because the Partnership transactions lacked economic substance,
not because of any valuation overstatements.
It follows,
petitioners reason, that because the "attributable to" language
- 61 of section 6659 requires a direct causative relationship between
a valuation overstatement and an underpayment in tax, section
6659 cannot apply to their deficiencies.
Petitioners cite 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, and
Todd v. Commissioner, supra.
Petitioners' argument rests on the mistaken premise that our
holding herein 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.
Petitioners argue that in Provizer v. Commissioner, T.C.
Memo. 1992-177, we found that the Clearwater transaction lacked
economic substance for reasons independent of the valuation
reported in that case.
According to petitioners, the purported
value of the recyclers in the Clearwater transaction was
- 62 predicated upon a projected stream of royalty income, and this
Court merely rejected the taxpayers' valuation method.
Petitioners misread and distort our Provizer opinion.
In the
Provizer case, overvaluation of the Sentinel EPE recyclers,
irrespective of the technique employed by the taxpayers in their
efforts to justify the overvaluation, was the dominant factor
that led us to hold that the Clearwater transaction lacked
economic substance.
Likewise, overvaluation of the Sentinel EPE
recyclers in these cases is the ground for our holding herein
that the Partnership transactions lacked economic substance.
Moreover, a virtually identical argument was recently
rejected in Gilman v. Commissioner, supra, by the Court of
Appeals for the Second Circuit, the court to which appeal in
these cases lies.
See 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 Todd
v. Commissioner, supra, and Heasley 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 Court of Appeals for the
Second Circuit sustained imposition of the section 6659 addition
- 63 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.
Commissioner, supra at 151.
Gilman v.
In addition, the Court of Appeals
for the Second Circuit agreed with this Court and with the Court
of Appeals for the Eighth Circuit 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. at 566-567; Zirker v. Commissioner, 87 T.C.
970, 978-979 (1986); Donahue v. Commissioner, T.C. Memo. 1991181, affd. without published opinion 959 F.2d 234 (6th Cir.
1992), affd. sub nom. Pasternak v. Commissioner, 990 F.2d 893
(6th Cir. 1993).
Petitioners' reliance on Gainer v. Commissioner, supra, Todd
v. Commissioner, supra, and McCrary v. Commissioner, 92 T.C. at
827, is misplaced.
In those cases, in contrast to the
consolidated cases herein, it was found that a valuation
overstatement did not contribute to an underpayment of taxes.
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
- 64 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 grounds 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."
859.
McCrary v. Commissioner, supra at
Petitioners' cases present just such a "different
situation":
overvaluation of the recyclers was integral to and
inseparable from petitioners' claimed tax benefits and our
holding that the Partnership transactions lacked economic
substance.16
2.
16
Concession of the Deficiencies
To the extent that Heasley v. Commissioner, 902 F.2d 380
(5th Cir. 1990), revg. T.C. Memo. 1988-408, merely represents an
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) ("The
lack of economic substance was due in part to the overvaluation,
and thus the underpayment was attributable to the valuation
overstatement"), affg. T.C. Memo. 1989-684.
- 65 Petitioners argue that their concessions of the deficiencies
preclude imposition of the section 6659 additions to tax.
Petitioners contend that their concessions render any inquiry
into the grounds for such deficiencies moot.
Absent such
inquiry, petitioners argue that it cannot be known whether their
underpayments were attributable to a valuation overstatement or
another discrepancy.
Without a finding that a valuation
overstatement contributed to an underpayment, according to
petitioners, section 6659 cannot apply.
In support of this line
of reasoning, petitioners rely heavily upon Heasley v.
Commissioner, 902 F.2d 380 (5th Cir. 1990) and McCrary v.
Commissioner, supra.
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."
McCrary v. Commissioner, supra at 854 n.14.
See
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
- 66 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.
Dybsand v. Commissioner, supra.
Even
in situations in which there are arguably two grounds to support
a deficiency and one supports a section 6659 addition to tax and
the other does not, the taxpayer may still be liable for the
addition to tax.
Gainer v. Commissioner, 893 F.2d at 228; Irom
v. Commissioner, 866 F.2d 545, 547 (2d Cir. 1989), vacating in
part T.C. Memo. 1988-211; Harness v. Commissioner, T.C. Memo.
1991-321.
In the present cases, no argument was made and no evidence
was presented to the Court to prove that disallowance and
concession of the claimed investment tax credits and other tax
benefits 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
- 67 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 2,325
percent, was an integral part of our findings in Provizer that
the transaction was a sham and lacked economic substance.
Similarly, the records in these cases plainly show that the
overvaluation of the recyclers is integral to and is the core of
our holding that the underlying transactions here 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 addition to
tax was held inapplicable.
However, the taxpayers' concession of
the claimed tax benefits, in and of itself, did not preclude
imposition of the section 6659 addition to tax.
In McCrary v.
Commissioner, supra, the section 6659 addition to tax was
disallowed because the agreement at issue was conceded to be 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.
- 68 Petitioners' reliance on McCrary v. Commissioner, supra, is
rejected.17
We held in Provizer v. Commissioner, supra, that each
Sentinel EPE recycler had a fair market value not in excess of
$50,000.
Our finding in the Provizer case that the Sentinel EPE
recyclers had been overvalued was integral to and inseparable
from our holding of a lack of economic substance.
The Clearwater
transaction was considered in the Provizer case, and Alter
stipulated that the Poly Reclamation transaction is substantially
identical to the Clearwater transaction.
In addition,
petitioners each stipulated that the fair market value of a
Sentinel EPE recycler in 1981 was not in excess of $50,000.
Given those concessions, and the fact that the records here
plainly show that the overvaluations of the recyclers were the
only reason for the disallowance of the claimed tax benefits, we
conclude that the deficiencies were attributable to overvaluation
of the Sentinel EPE recyclers.
3.
17
Section 6659(e)
Petitioners' citation of Heasley v. Commissioner, supra, in
support of the concession argument is also rejected. That case
was not decided by the Court of Appeals for the Fifth Circuit on
the basis of a concession. Moreover, see supra note 15 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.
- 69 Petitioners argue that respondent erroneously failed to
waive the section 6659 additions to tax.
Section 6659(e)
authorizes the Commissioner 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.
The Commissioner's refusal to waive a section 6659
addition to tax is reviewable by this Court for abuse of
Krause v. Commissioner, 99 T.C. at 179.
discretion.
Abuse of
discretion has been found in situations where the Commissioner's
refusal to exercise her discretion is arbitrary, capricious, or
unreasonable.
See Mailman v. Commissioner, 91 T.C. 1079 (1988);
Estate of Gardner v. Commissioner, 82 T.C. 989 (1984); Haught v.
Commissioner, T.C. Memo. 1993-58.
We note initially that petitioners did not request
respondent to waive the section 6659 additions to tax until well
after the trials of these cases.
Petitioners each made their
requests approximately 4 months after the trials of their cases.
We are reluctant to find that respondent abused her discretion in
these cases when she was not timely requested to exercise it and
there is no direct evidence of any abuse of administrative
discretion.
Haught v. Commissioner, supra; cf. Wynn v.
- 70 Commissioner, T.C. Memo. 1995-609; Klieger v. Commissioner, T.C.
Memo. 1992-734.
However, we do not decide this issue solely on petitioners'
failure timely to request waivers, but instead, we have
considered the issue on its merits.
Petitioners urge that they
relied on the respective offering materials and their colleagues
at Shea & Gould in deciding on the valuation claimed on their tax
returns.
Petitioners contend that such reliance was reasonable
and, therefore, that respondent should have waived the section
6659 additions to tax.
However, as we explained above in finding
petitioners liable for the negligence additions to tax,
petitioners' purported reliance on the offering materials and
their colleagues was not reasonable.
Each petitioner read the offering memoranda for the
Partnerships, which contained numerous warnings and caveats,
including the likelihood that the value placed on the recyclers
would be challenged by the IRS as being in excess of fair market
value.
Friedman recognized that the purported value of the
Sentinel EPE recycler was intrinsic to the tax benefits, and
Alter undoubtedly learned as much on his own or from one of his
colleagues.
Even so, there is no showing in the records in these
cases that petitioners or the persons they purportedly relied
upon--including Ferraro and Carroll--were qualified to assess or
- 71 analyze the technical aspects of the Plastics Recycling
transactions.
Nor do the records show that petitioners or their
colleagues ever hired any plastics engineering or technical
experts with respect to the Plastics Recycling transactions.
Feinstein spoke with Lauren, who may have had some knowledge of
the plastics industry, but their discussion was limited to PI's
reputation; Feinstein refrained from asking Lauren anything about
plastics recycling, competitive machines, or these particular
Plastics Recycling transactions.
In the end, petitioners and
their colleagues relied exclusively on PI, its personnel, and the
offering materials as to the value and purported uniqueness of
the machines.
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 Court of Appeals for the Tenth Circuit
held that the Commissioner had abused her discretion for not
waiving a section 6661 addition to tax.
Like the section 6659
addition to tax, 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
- 72 independent attorneys and accountants for advice as to whether
payments were properly deductible or capitalized.
The advice
relied upon by the taxpayer in Mauerman was within the scope of
the advisers' expertise, the interpretation of the tax laws as
applied to undisputed facts.
In these cases, particularly with
respect to valuation, petitioners relied upon advice that was
outside the scope of expertise and experience of their purported
advisers.
Consequently, petitioners' reliance on the Mauerman
case is rejected.
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 could find that petitioners' respective
reliance on the offering materials and their colleagues 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 additions to tax in these cases 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.
- 73 C. Petitioners' Motions For Leave To File Motion For Decision
Ordering Relief From the Negligence Penalty and the Penalty Rate
of Interest and To File Supporting Memoranda of Law
Long after the trials of these cases, petitioners each filed
a Motion For Leave To File Motion For Decision Ordering Relief
From the Negligence Penalty and the Penalty Rate of Interest and
To File Supporting Memorandum of Law under Rule 50.
Petitioners
also lodged with the Court motions for decision ordering relief
from the additions to tax for negligence and from the increased
rate of interest, with attachments, and memoranda in support of
the motions.
Respondent filed objections, with attachments, and
memoranda in support thereof, and petitioners thereafter filed
reply memoranda.
Petitioners argue that they should be afforded
the same settlement that was reached between other taxpayers and
the IRS in docket Nos. 10382-86 and 10383-86, each of which was
styled Miller v. Commissioner.
See Farrell v. Commissioner, T.C.
Memo. 1996-295 (denying a motion similar to petitioners'
motions); see also Jaroff v. Commissioner, T.C. Memo. 1996-527;
Gollin v. Commissioner, T.C. Memo. 1996-454; Grelsamer v.
Commissioner, T.C. Memo. 1996-399; Zenkel v. Commissioner, T.C.
Memo. 1996-398.
Counsel for petitioners seek to raise a new issue long after
the trials in these cases.
require new trials.
Resolution of such issue might well
Such further trials "would be contrary to
- 74 the established policy of this Court to try all issues raised in
a case in one proceeding and to avoid piecemeal and protracted
litigation."
Markwardt v. Commissioner, 64 T.C. 989, 998 (1975);
see also Haft Trust v. Commissioner, 62 T.C. 145, 147 (1974).
Consequently, under the circumstances here, at this late date in
the litigation proceedings, long after trial and briefing and
after the issuance of numerous opinions on issues and facts
closely analogous to those in these cases, petitioners' motions
Farrell v. Commissioner, supra.
for leave are not well founded.
Even if petitioners' motions for leave were granted, the
arguments set forth in each of petitioners' motions for decision
and attached memoranda, lodged with this Court, are invalid, and
such motions would be denied.
Therefore, and for reasons set
forth in more detail below, petitioners' motions for leave shall
be denied.
Some of our discussion of background and circumstances
underlying petitioners' motions is drawn from documents submitted
by the parties and findings of this Court in two earlier
decisions.
See Estate of Satin v. Commissioner, T.C. Memo. 1994-
435; Fisher v. Commissioner, T.C. Memo. 1994-434.
are not disputed by the parties.
These matters
We discuss the background
matters for the sake of completeness.
As we have noted, granting
petitioners' motions for leave would require further proceedings.
- 75 The Estate of Satin and Fisher cases involved Stipulation of
Settlement agreements (piggyback agreements) made available to
taxpayers in the Plastics Recycling project, whereby taxpayers
could agree to be bound by the results of three test cases:
Provizer v. Commissioner, T.C. Memo. 1992-177, and the two Miller
cases.
We held in Estate of Satin and Fisher that the terms of
the piggyback agreement bound the parties to the results in all
three lead cases, not just the Provizer case.
Petitioners assert
that the piggyback agreement was extended to them, but they do
not claim to have accepted the offer timely, so they effectively
rejected it.18
In or about February of 1988, a settlement offer (the
Plastics Recycling project settlement offer or the offer) was
made available by respondent in all docketed Plastics Recycling
cases, and subsequently in all nondocketed cases.
Commissioner, T.C. Memo. 1994-484.
Baratelli v.
Pursuant to the offer,
taxpayers had 30 days to accept the following terms:
(1)
Allowance of a deduction for 50 percent of the amount of the cash
investment in the venture in the year(s) of investment to the
18
In each of their motions for decision, petitioners state,
"After the lead counsel for taxpayers and Respondent had agreed
upon the designation of the lead cases, Respondent's counsel
prepared piggyback agreements and offered them to counsel for the
taxpayers in this case and to other taxpayers." (Emphasis
added.)
- 76 extent of loss claimed; (2) Government concession of the
substantial understatement of tax penalties under section 6661
and the negligence additions to tax under section 6653(a)(1) and
(2); (3) taxpayer concession of the section 6659 addition to tax
for valuation overstatement and the increased rate of interest
under section 6621; and (4) execution of a closing agreement
(Form 906) stating the settlement and resolving the entire matter
for all years.19
Petitioners assert that the Plastics Recycling
project settlement offer was extended to them, but they do not
claim to have accepted the offer timely, so they effectively
rejected it.20
In December 1988, the Miller cases were disposed of by
settlement agreement between the taxpayers and respondent.21
19
Although the records do not include a settlement offer to
petitioners, petitioners have attached to their motions for
decision a copy of a settlement offer to another taxpayer with
respect to a plastics recycling case, and respondent has not
disputed the accuracy of the statement of the plastics recycling
settlement offer.
20
In each of their motions for decision, petitioners state,
"Respondent formulated a standard settlement position which was
extended to all taxpayers having docketed or non-docketed cases
in the plastics recycling group, including Petitioner."
(Emphasis added.)
21
Although it is not otherwise a part of the records in these
cases, respondent attached copies of the Miller closing agreement
and disclosure waiver to her objections to petitioners' motions
(continued...)
- 77 This Court entered decisions based upon those settlements on
December 22, 1988.
The settlement provided that the taxpayers in
the Miller cases were liable for the addition to tax under
section 6659 for valuation overstatement, but not for the
additions to tax under the provisions of section 6661 and section
6653(a).
The increased interest under section 6621(c), premised
solely upon Miller's interest in the recyclers for the taxable
years at issue, was not applicable because Miller made payments
prior to December 31, 1984, so no interest accrued after that
time.
Respondent did not notify petitioners or any other
taxpayers of the disposition of the Miller cases.
Estate of
Satin v. Commissioner, supra; Fisher v. Commissioner, supra.
Petitioners argue that they are similarly situated to
Miller, the taxpayer in the Miller cases, and that pursuant to
the principle of "equality" they are therefore entitled to the
same settlement agreement executed by respondent and Miller in
those cases.
In effect, petitioners seek to resurrect the
piggyback agreement offer and/or the settlement offer they
previously failed to accept.
21
(...continued)
for leave, and petitioners do not dispute the accuracy of the
document.
- 78 Petitioners contend that under the principle of "equality,"
the Commissioner has a duty of consistency toward similarly
situated taxpayers and cannot tax one and not tax another without
some rational basis for the difference.
United States v. Kaiser,
363 U.S. 299, 308 (1960) (Frankfurter, J., concurring); see Baker
v. United States, 748 F.2d 1465 (11th Cir. 1984); Farmers' &
Merchants' Bank v. United States, 476 F.2d 406 (4th Cir. 1973).
According to petitioners, the principle of equality
precludes the Commissioner from making arbitrary distinctions
between like cases.
See Baker v. Commissioner, 787 F.2d 637, 643
(D.C. Cir. 1986), vacating 83 T.C. 822 (1984).
The different tax treatment accorded petitioners and Miller
was not arbitrary or irrational.
While petitioners and Miller
both invested in the Plastics Recycling project, their actions
with respect to such investments provide a rational basis for
treating them differently.
Miller foreclosed any potential
liability for increased interest in his cases by making payments
prior to December 31, 1984.
No interest accrued after that date.
In contrast, petitioners made no such payment, and they conceded
that the increased rate of interest under section 6621(c) applies
in their cases.
Liability for the increased rate of interest is
the principal difference between the settlement in the Miller
cases, which petitioners declined when they-failed to accept the
- 79 piggyback agreement offer, and the settlement offer that
petitioners also failed to accept.
Petitioners argue that section 6621(c) must have been an
issue in the Miller cases since each of the decisions in Miller
recites "That there is no increased interest due from the
petitioner[s] for the taxable years * * * [at issue] under the
provisions of IRC section 6621(c)."
According to petitioners,
"if the Millers were not otherwise subject to the penalty
interest provisions because of the particular timing of their tax
payments, there would have been no need for the Court to include
such a recital in its decisions."
This argument by petitioners
is entirely conjectural and is not supported by the documentation
on which counsel relies.
In fact, the recital that no increased
interest under section 6621(c) was due in the Miller cases was an
express term of the settlement documents in those cases and
apparently included in the decisions for completeness and
accuracy.
There is nothing on the record in the present cases,
or in the Court's opinions in Estate of Satin v. Commissioner,
T.C. Memo. 1994-435, or Fisher v. Commissioner, T.C. Memo. 1994434, or in any of the material submitted to us in these cases
that would indicate that the Millers were "otherwise subject to
the penalty interest provisions".
on a false premise.
Petitioners' argument is based
- 80 We find that petitioners and Miller were treated equally to
the extent they were similarly situated and differently to the
extent they were not.
Miller foreclosed the applicability of the
section 6621(c) increased rate of interest in his cases, while
petitioners concede it applies in their cases.
Petitioners
failed to accept a piggyback settlement offer that would have
entitled them to the settlement reached in the Miller cases, and
they also rejected a settlement offer made to them prior to trial
of a test case.
In contrast, prior to trial Miller negotiated
for himself and accepted an offer that was essentially the same
as the Plastics Recycling project settlement offer that
petitioners failed to accept prior to trial.
Accordingly,
petitioners' motions are not supported by the principle of
equality on which they rely.
Cf. Baratelli v. Commissioner, T.C.
Memo. 1994-484.
In order to reflect the foregoing,
Appropriate orders will be
issued denying petitioners'
motions, and decisions will be
entered for respondent.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.