*The HONORABLE WILLIAM W SCHWARZER, Senior United States

District Judge for the Northern District of California, sitting by designation. ___________ No. 95-1742

___________ Harold Chakales; * Linda Carol Chakales, *

Appellants, * * v. * Appeal from the United States * Tax Court. Commissioner of Internal * Revenue, *

Appellee. * [PUBLISHED]

___________ Submitted: December 13, 1995 Filed: March 27, 1996

____________ Before, BOWMAN and LOKEN, Circuit Judges, and SCHWARZER District * Judge.

____________ SCHWARZER, District Judge. Taxpayers Harold and Linda Car ol Chakales (“Chakales”) appeal froma decision of the United States Tax Court upholding th e

as sessment of penalty interest by the Commissioner of Interna l
Revenue. Harold Chakales and Linda Carol Chakales v. Commis sioner ,68 T.C.M. (CCH) 479 (1994). We have jurisdiction under 26 U.S.C.

§ 7482(a) and affirm.

BACKGROUND Chakales was among several thousand taxpayers who participat ed in a p rogram operated by First Western Government Securitie s (“First Western”) involving straddle transactions of forwar d

con tracts to buy and sell securities issued by the Governmen t Nation al Mortgage Association and the Federal Home Loan Mortgag e Corporation. The Commissioner’s disallowance of the participants’ resulting tax losses on the gr ound that the program was a sham was upheld in Freytag v. Commissioner , 904 F.2d 1011, 1015-17 (5 th Cir. 1990), aff’d on other grounds , 501 U.S. 868 (1991). As summarized by the Fifth Circuit in that case:

First Western’s absolute authority over the pricing and timi ng of the transactions that occurred in the self

contained market of its own ma king enabled it to achieve th e tax losses desired by its investors with uncann y accuracy. The Tax Court’s recognition that Firs t Wester n’s program made available to its investors a n essentiallyrisk-free opportunity to purchase ta x deductions cannot be labeled clearly erroneous. Id. at 1016 (citation omitted).

Ch akales does not contest the disallowance of the losses , conceding that Freytagcontrol s the treatment of his transactions. He contends, however, that the Tax Court erred in upholding th e Commissioner’s assessment of penalties. The Commissione r determined that Chakales was liable for a penalty under 26 U.S.C. § 6653(a) for negligent underpayment of the tax. In addition,The Commissioner assessed section 6621(c) penalty interest 1 in Freytag . The Tax Court upheld the assessment on the ground that the transactions were a sham. Freytag v. Commissioner , 89 T.C. 849, 886-87 (1987). The court of appeals did not address the issue in its opinion. -3- before the Tax Court, the Commissioner contended that an add itional interest penalty was due under 26 U.S.C. § 6621(c) for a substantial underpayment of tax due to a tax-motivated trans action. The Tax Court upheld both assessments.
THE SECTION 6621(c) PENALTY
Section 6621(c) provides for an interest rate of 120 percent on any “substantial underpayme nt attributable to any tax motivated transactions” (i.e., in excess of $1,000), and states in relevant part: “[T]he term ‘tax motivated transaction’ means . . . a ny sham or fraudulent transaction.” 26 U.S.C. § 6621(c)(3)(A)(v). The Tax Court, basing its determination on the Fifth Circuit’s holding in Fr eytag that these transactions were shams, sustained th e asses sment of the penalty. 68 T.C.M. at 482. It rejecte d 1 Chakales’s argument that the penalty cannot be assessed in th e absence of a finding that the taxpayer lacked a profit motive. It went on, however, to find that Chakales in fact lacked a profi t motive.
We review the Tax Court’s legal conclusions de novo but acce pt its findings of fact unless clearly erroneous. Chase v
. Commissi oner , 926 F.2d 737, 740 (8th Cir. 1991). “‘A finding i s “clearly erroneous” when altho ugh there is evidence to support it,-4-

the reviewing court on the entire evidence is left with th e definite and firm conviction that a mistake has been committed.’” Id. (quoting United States v. United States Gypsum Co. , 333 U.S
. 364, 395 (1948)).

Und er the plain language of the statute, a tax motivate d transaction “means . . . [inte r alia] any sham . . . transaction.” 26 U.S.C. § 6621(c)(3)(A)(v)(emphasis added). The Commissio ner has authority, therefore, to assess the penalty simply upon a finding that a transaction was a sham. See Howard v. Commissioner , 93 1 F.2d578, 582 (9th Cir. 1991) (affirming a penalty under sectio n 66 21(c)(3)(A)(v) where the Tax Court found the underlyin g transa ction“to be a sham.”). Chakales contends that th e taxpayer’s state of mind is always relevant in the determina tion of whether a transaction was tax motivated. He relies principally on Heasleyv. Commissioner , 902 F.2d 380 (5th Cir. 1990). However , Heasle ydid not arise under the “sham transaction” provision o f
se ction6621. In that case the penalty was assessed under th e catch-all provision of section6621(c)(3)(B) and an IRS regulation defining a “tax motivated” transaction as one “not engaged in for profit. ” Id. at 385; 26 C.F.R. § 301.6621-2T, Q-4, A-4 (2)
. Heasley had invested -- and lost -- a substantial sum in a scheme represented by his investment adviser as expected to produce future profits. The court of appeals held that the tax court had e rred in solely considering that the pl an had generated only tax deductions andcredits but no profits. It held that “the tax court als o sho uldhave considered the Heasleys’ intent when determinin g whether the Heasleys did not engage in the transaction for p rofit.” Id. at 386. Heasley , therefore, does not address the issue in thisChakales’ explanation for the lack of withholding on his 2 annual wages in the two years at issue ($300,000 and $400,000, respectively) was that “[h]e borrowed from his firm throughout the year and bonused an appropriate amount at year end, basing his withholding on December 30 or December 31 on the totality of facts then known.” Appellant’s Brief at 37. -5- case nor do the other decisions cited by Chakales. Sectio n 6621(c )(3)(A)(v) by its terms authorizes the assessment of a penalty against a taxpayer participating in any sham transaction. Chakal es does not dispute the Commissioner’s disallowance of th e losses based on the characterization of the transactions as sham. There is no basis for reading a separate state of mind requirement into the application of the sham test for purposes of sectio n 6621(c)(3)(A)(v).
Chakales argues further that “[b]ecause this penalty applies at the investor level, that is the place to examine th e ‘motivation.’ A defrauded investor is not subject to a penalt y beca use he was unsophisticated enough to be victimized. ” Appellant’s Brief at 47. We need not decide the appropriat e application of section 6621(c) (3)(A)(v) to the case of an innocent vi ctimof a fraudulent scheme who entered it in good faith fo r profit. Thi s is not such a case. The Tax Court made specifi c findings rejecting Chakales’ assertion of a profit motive. I t foundthat he was aware of “[t]he raison d’etre of th e program. . . to convert ordinary income into long-term capita l gains and defer the payment of taxes.” 68 T.C.M. at 483. I t found that Chakales had no understanding of the transactions, that he did not follow his account with First Western but submitted a request for a tax loss to First Wester n and had no taxes withheld from his substantial income from wages, and that he could not explain how 2For the taxable year 1981, section 6653(a)(2) provided an 3 addition to tax in the amount of 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence. -6- he expected to make a profit by requesting a loss in one year and an offsetting gain in the next. After reviewing Chakales’ course of conduct with respect to his investment, the court found tha t “[t]he only rational explanation for any of this is that pet itioner enteredinto these transactions with the primary, if not sole , objective of obtaining the tax loss.” Id. at 484. That fin ding is not clearly erroneous. See Lukens v. Commissioner , 945 F.2d 92 , 99-100 (5th Cir. 1991).

THE SECTION 6653 PENALTY
Section 6653 provides that “[i ]f any part of any underpayment . . . is due to negligence . . . there shall be added to the tax an amount equal to 5 percent of the underpayment.” 26 U.S.C. § 3 6653(a )(1). “[T]he determination of a negligence penalty i s presumptively correct, and the taxpayer bears the burden of proving that it was improperly imposed .” Chase , 926 F.2d at 740; see also Freytag , 904 F.2d at 1017. Thus the burden is on the taxpayer to prove t hat he did not fail to exercise due care or do what a reasonable and prudent person would do under similar circums tances. Goldm anv. Commissioner , 39 F.3d 402, 407 (2nd Cir. 1994). “I n addition, because the tax court’s decision involved a factua l determination, it will not be disturbed on appeal unless clearly-7-

erroneous.” Chase , 926 F.2d at 740.

The Tax Court found Chakales t o have admitted that he did not understand these transactions which involved forward contracts to purchase and sell millions of dollars of securities, with ra tios of tax losses to payments from 8: 1 to 16:1. 68 T.C.M. at 483. Given the se facts, Chakales “could not merely rely on the document s suppli edby First Western, and further investigation was clearl y mandated. If there had been any serious examination of the program ‘[n]o reasonable person would have expected * * * [the] scheme to work.’” 68 T.C.M. at 483 (quoting Freytag , 89 T.C. a t 889)(internal quotation omitted).
Chakales contends, however, that he reasonably relied on the adv ice of experts, to wit, Charles Frederick Marshall and Georg e Plastiras. Marshall was a broker employed by a securities firm
. He introduced Chakales to the First Western program, present ing him with the documents which Chakales later completed and sent t o First Wes tern. Chakales knew that Marshall received a commission fro m Fi rst Western for selling the program to him. With respect t o Mar shall, the Tax Court held that reliance on “the promoter’ s statements concerning the bona fides of these transactions . .
. ‘is not the type of activity which will overcome the addition t o taxfor negligence.’” 68 T.C.M. at 483 (quoting Rybak v
. Commissi oner , 91 T.C. 524, 565 (1988)). See Goldman , 39 F.3d a t 408 (reliance on advice from person who signed the limite d pa rtnership agreement at issue as the partnership’s sale s representative was unreasonable).-8-

Plastiras was an experienced tax attorney and accountant who had represented Chakales since 1964 in various business and estate matter s, including their tax aspects. At Chakales’ request , Plastiras met with him and Marshall late one afternoon to discuss the First Western program, including the risks involved and whether it had economic reality. He testified that he received Firs t Western’s materials, had lawyers in his firm research them an d arrive at their own opinion, a nd received from one of his partners a hand-written office memorandum respecting the securities aspect of the investment. Plastiras made no investigation of Firs t Western; a s he put it, “I am just totally unaware about Firs t Western. Forgive me.”

Chak ales’ testimony described the advice he received fro m Plastiras as follows:

Q. [D]id you retain his firm t o render those opinions or that advice? A. Yes. Q. And what did he tell you t he advice of his firm was? A. That it sounded like this was a very legitimate firm , and that there was an opportunity to make some money. Q. And what did he tell you about the tax opinion that [Marshall gave to you]? . . . A. He thought that the tax op inion from Arthur Andersen was reasonable. Q. The tax opinion from Arthur Andersen? A. Well, whatever it was. I am not sure. That h e thought that this was a reason able investment, as a taxpayer.-9- Q. Did he give you an opinion about the tax treatment o f the transactions? A. What do you mean by tax -- an opinion as to ta x treatment? Q. You gave him three documents . . . A. One was . . . a legal opinion from a law firm. Q. What was the legal opinion from the law firm about? A. Maybe that was the tax - - that was about th e securities, I thought. I may be a little confused. Q. A nd what did he tell you about that legal opinio n from the law firm? A. Th at he didn’t know the law firm, and that his la w firm looked over it and though t that it was reasonable . . . [and that it] [c]oncurred with their opinion.
(Joint Appendix 182-84.)
The relevant testimony of Plastiras was as follows:
Q. And what did you advise him or did you give him any advice as to whether or not this transaction had economi c substance in reality? . . . A. Yes. In our judgment, it had economic risk, and tha t he could lose considerable amount of money. I was very much concerned more about the loss of money than the gain. I didn’t want him to lose any money.Plastiras did not prepare Chakales’ tax returns, and there 4 is no evidence that Chakales received or relied on advice from his tax accountants in claiming the disallowed losses. -10- (Joint Appendix 161-62.) 4

The Tax Court found that Chakales did not hire Plastiras t o invest igate First Western, that when Plastiras’ partner raise d
concer ns they were not followed up, and that Plastiras, lik e Chakales, simply relied on Marshall. 68 T.C.M. at 483.

In United States v. Boyle , 469 U.S. 241, 251 (1985), th e Supreme Court laid down the controlling principle:

Whe nan accountant or attorney advises a taxpayer on a matt er of tax law, . . . it is reasonable for th e taxpayer to rely on that advic e. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer t o challenge the attorney, to seek a “second opinion,” or t o tryto monitor counsel on the provisions of the Cod e hims elf would nullify the very purpose of seeking th e advice of a presumed expert in the first place. The underlying premise is that a taxpayer may reasonably rely o n advice when that advice involv es the application of the attorney’s or accountant’s relevant expertise. That is not what occurred in this case. The “advice” Plastiras gave, on which Chakales no w claims to have relied, was little more than a generalized st atement that he could lose money on th e transaction. Chakales himself was vague at best about just what “advice” he had received fro m Plastiras. See Howard , 931 F.2d at 582 (“Where no reliabl e evidence exists in the record suggesting the nature of any advice-11-

given, a finding of negligence is not erroneous.”). There is , moreover, no evidence that Pla stiras researched the tax aspects of the transaction, much less that he investigated First Western o r the manner in which the program operated. See Leonhart v
. Commissioner , 414 F.2d 749, 750 (4th Cir. 1969)(“[T]o escape th e penalty [on the ground of good faith reliance on the advice of an accountant] taxpayers must be able to show that the accountan t reached his decisions independently after being fully apprised of the circumstances of the transactions.”) Cf. Chamberlain v
. Commis sioner , 66 F.3d 729, 733 (5th Cir. 1995)(reversing penalt y assessment where “[t]he [tax] expert advised that there was ‘a good fa ith, supportable position’ concerning the deductibility of th e loss.”), reh’g denied
. The Tax Court’s factual findings are not clearly erroneous a nd its conclusion that Chakales f ailed to carry his burden of proving that he exercised due care was not error.

Affirmed.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.