T.C. Memo. 2002-39

UNITED STATES TAX COURT

ANDREW J. AND MARILYN WELCH, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16459-99. Filed February 11, 2002.

Douglas M. Edwards, for petitioners.

Rodney J. Bartlett, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Relating to Federal income tax deficiencies

that respondent determined against petitioners, respondent

determined against petitioners additions to tax for 1980, 1982,

and 1983 as follows: 
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 Additions to Tax 

 Year Sec. 6653(a) Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661

 1980 $60* –-- -–- —--

 1982 --- $1,936 ** $9,682

 1983 --- 40 *** -–-

 * Based upon a claimed investment tax credit carryback from 

 1983.

 ** 50 percent of interest due on $38,726. 

*** 50 percent of interest due on $805.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

After concessions, the remaining issue for decision is

whether petitioners are liable for the above additions to tax for

negligence under section 6653(a), (a)(1), and (a)(2), for 1980,

1982, and 1983. 

FINDINGS OF FACT

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

The stipulated facts and attached exhibits are incorporated

herein by this reference. 

At the time the petition was filed, petitioners resided in

Las Vegas, Nevada. Hereinafter, references to petitioner in the

singular are to Andrew J. Welch.

During the years in issue, petitioner was a successful

orthopedic surgeon practicing in Las Vegas, Nevada. During 1982

and 1983, petitioner’s medical practice was particularly

successful. Petitioner earned from his orthopedic practice

$649,177 in 1982 and $1,027,000 in 1983. 
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In the late summer or early fall of 1982, petitioner’s

medical partner introduced petitioner to Gary Sheets (Sheets), an

aggressive tax shelter promoter from Salt Lake City, Utah, who

had induced a number of physicians practicing in the Las Vegas

area to purchase interests in tax-sheltered limited partnerships. 

In late 1982 and in 1983, petitioners purchased interests in

a number of tax-sheltered limited partnerships that were being

promoted by Sheets. On the basis of those investments, on

petitioners’ 1982 and 1983 joint Federal income tax returns

petitioners claimed large paper tax losses that offset

significantly the reported income from petitioner’s medical

practice. 

The particular investment that is relevant to the negligence

additions to tax at issue herein is Blythe Jojoba II Research,

Ltd. (Blythe II), a jojoba research and development partnership

promoted by Sheets. 

In connection with their decision to invest in Blythe II,

petitioners obtained from Sheets a prospectus describing

Blythe II and containing the typical risk caveats associated with

tax-sheltered limited partnership investments of the early 1980s. 

The prospectus alerted petitioners, as of 1982, to the lack of an

established market for jojoba, to the lack of processing

facilities for jojoba, to the high degree of risk associated with

investments in the partnership, and to the fact that investors
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should not invest unless they could “afford the total loss

of their investment”. 

The prospectus contained five pages of warnings of material

tax risks associated with investments in Blythe II, and the

prospectus urged investors to consult a tax adviser, as well as

independent counsel.

In spite of the risks identified in the prospectus,

petitioners did not consult, in any diligent way, with an

independent, professional tax or legal adviser. Petitioner spoke

over the telephone with W. Larry Swecker (Swecker), his tax

accountant, with relatives, and with friends. Swecker made

nothing more than a cursory review of the Blythe II prospectus

and the tax law. 

Petitioners did not make any meaningful study of the

proposed investment. Petitioners never visited the Blythe II

jojoba farm before making an investment decision, even though

petitioners acknowledged visiting on a number of occasions the

locale in which the farm was located. 

In spite of the many risks and warnings, in December of

1982, petitioners invested $40,000 in cash in Blythe II, and

petitioners signed a $95,680 promissory note associated

therewith.
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In 1982 and 1983, petitioners paid a total of only $39,170

and $50,000, respectively, in estimated and withheld Federal

income taxes. 

On petitioners’ jointly filed Federal income tax returns for

1982 and 1983, petitioners reported $649,177 and $1,027,000 in

income from petitioner’s medical practice, and petitioners

claimed net losses of $575,171 and $671,937, respectively,

relating to petitioners’ various tax-sheltered partnership

investments, including losses relating to Blythe II of $83,732

and $4,024, respectively, for those years. 

On audit, respondent disallowed the claimed losses relating

to petitioners’ investment in Blythe II. William G. Kellen, the

tax matters partner of Blythe II, initiated a proceeding under

the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.

97-248, 96 Stat. 324, 648, and signed a stipulation to be bound

by the decision entered in Utah Jojoba I Research v.

Commissioner, T.C. Memo. 1998-6 (Utah I). 

As a result of the final resolution of Utah I (wherein

claimed section 174 research and experimental expenses and losses 

similar to those claimed by Blythe II were disallowed), the tax

deficiencies relating to petitioners’ investment in Blythe II are

conceded by petitioners.
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OPINION

Under section 6653(a), (a)(1), and (a)(2), an addition to

tax is imposed on the portion of an underpayment of tax

attributable to a taxpayer’s negligence equal to 5 percent of the

underpayment plus 50 percent of the interest due thereon under

section 6601.

Negligence is generally described as the failure to use due

care or to do what a reasonable and ordinarily prudent person

would do under the circumstances. Allen v. Commissioner, 925

F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1 (1989); Laverne v.

Commissioner, 94 T.C. 637, 652 (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). 

Good faith reliance on the advice of a tax professional may

indicate that a taxpayer was not negligent. Allen v.

Commissioner, supra at 353-354; Collins v. Commissioner, 857 F.2d

1383, 1386 (9th Cir. 1988), affg. T.C. Memo. 1987-217. Reliance

on the advice of a tax professional may not be reasonable where

the professional had no firsthand knowledge of the proposed

investment and where the professional only made a cursory review

of the proposed investment. Sacks v. Commissioner, 82 F.3d 918,

920 (9th Cir. 1996), affg. T.C. Memo. 1994-217; Collins v.

Commissioner, supra at 1386. 
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The Court of Appeals for the Ninth Circuit has stated that

whether a taxpayer is to be treated as negligent under section

6653(a), (a)(1), and (a)(2), may be affected by “the legitimacy

of the underlying investment”. Sacks v. Commissioner, supra at

920.

Respondent’s determination of the negligence addition to tax

is presumptively correct, and the burden is on the taxpayer to

prove that the taxpayer’s underpayment of tax was not due to

negligence. Allen v. Commissioner, supra at 353; Laverne v.

Commissioner, supra at 652. 

On the facts of this case, we conclude that petitioners did

not exercise due care and were negligent in making an investment

in Blythe II. Petitioners did not adequately consider the risks

associated with an investment in Blythe II. Petitioners did not

inspect the land which was to be used by the partnership. 

Petitioners did not confer with experts in any credible manner

with regard to the investment. The review of the investment by

petitioners’ tax accountant was so superficial as to be

worthless. 

Aspects of petitioner’s testimony are suspect. Dates are

missing from documents. Third parties who purportedly advised

petitioner did not testify.

The lack of legitimacy of the underlying activity relating

to the Blythe II partnership is indicated by our opinion in
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Utah I, supra, the test case, and by our opinions in Christensen

v. Commissioner, T.C. Memo. 2001-185, Serfustini v. Commissioner,

T.C. Memo. 2001-183, and Nilsen v. Commissioner, T.C. Memo. 2001-

163, in each of which we upheld negligence additions to tax

relating to investments in Blythe II. No credible evidence in

this case provides any legitimacy to petitioners’ investment in

the Blythe II partnership.

In light of the above, for each year in issue petitioners

are liable for the negligence addition to tax under section

6653(a), (a)(1), and (a)(2).

To reflect the foregoing,

Decision will be entered

for respondent.