T.C. Memo. 2000-367

UNITED STATES TAX COURT

PAMELA OSOWSKI, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10801-89. Filed December 4, 2000.

Burton W. Kanter, for petitioner.

Paul L. Darcy, for respondent.

MEMORANDUM OPINION

LARO, Judge: This case was submitted to the Court fully

stipulated under Rule 122. Respondent determined a $5,416

deficiency in petitioner’s 1981 Federal income tax and additions

thereto of $270.80 and $1,624.80 under sections 6653(a)(1) and

6659, respectively. Respondent also determined as to the entire
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deficiency that petitioner was liable for the time sensitive

addition to tax under section 6653(a)(2) and the increased rate

of interest under section 6621(c).

Following concessions by the parties, we must decide: 

1. Whether petitioner is liable for an addition to tax

under section 6659 equal to 30 percent of the deficiency arising

from a disallowed investment tax credit and loss that petitioner

claimed from a partnership named Grade Partners (Grade), and 

2. Whether petitioner is liable for the increased rate of

interest under section 6621(c) on the deficiency.

We hold for respondent as to both issues. Section

references are to the Internal Revenue Code in effect for the

year in issue. Rule references are to the Tax Court Rules of

Practice and Procedure.

Background

The parties have filed with the Court a stipulation of facts

and accompanying exhibits. We find the stipulated facts

accordingly, and we set forth the relevant facts in this

background section. We also set forth in this section facts

which we find from the exhibits and from matters which petitioner

admitted under Rule 90. Petitioner resided in New York, New

York, when she petitioned the Court.

Petitioner timely filed her 1981 Federal income tax return. 

She claimed thereon a $689 loss from Grade, a $9,380 investment
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tax credit from Grade, an income tax liability (exclusive of the

investment tax credit) of $4,646, and an income tax liability

(after applying $4,646 of the investment tax credit to 1981) of

zero. Respondent disallowed the $689 loss and the $4,646

investment tax credit applied to 1981.

Petitioner has a 7-percent limited partnership interest in

the profits and losses of Grade. Grade, in turn, has a 16.6666-

percent limited partnership interest in the profits and losses of

Degree Associates (Degree). Degree is a limited partnership with

1 general partner; namely, Joel Mallin. Degree’s stated purpose

was to lease and exploit energy management systems equipment

which, when installed, would control the use of energy in a

plastics manufacturing plant operated by Milor Corporation. An

investment in Degree carried a very high degree of risk.

Degree’s promoter distributed a private placement 

memorandum (PPM) on Degree to potential investors. The PPM

listed cash-flow and economic projections for 1981 to 2011 (PPM

projections) which were predicated upon the assumption that: (1)

The projected level of energy conservation would be achieved, (2)

the cost of energy would increase 18.5 percent per year between

1981 and 2011, and (3) the energy management systems equipment

would remain useful for that 30-year period. The PPM projections

predicted total pretax receipts by Degree of $4,502,490 between

1981 and 2011, the present value of which equals $181,228, when
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1 The yield on long-term U.S. Treasury bonds was generally

14 percent in 1981.

discounted at 14 percent.1 The PPM projections predicted that

the total up-front investment by Degree in the energy management

systems equipment would be $292,500 in 1981, which means that the

net present value of Degree's net receipts was a negative

$111,272 ($181,228 less $292,500). 

Degree claimed that it placed the energy management systems

equipment in service during 1981 and that the equipment had a tax

basis and fair market value of $8,040,000. Grade's claimed share

of the basis in the equipment was $1,339,464 (16.6666 percent

times $8,040,000), and petitioner’s claimed share of that basis

was $93,800 (7 percent times $1,339,464). The equipment had a

true fair market value of no more than $354,000, and Degree's

claimed fair market value and tax basis of the equipment exceeded

the equipment's true fair market value by approximately 2,271

percent.

Petitioner never read the PPM, and she never discussed the

PPM with Mr. Mallin. Before participating in Degree, petitioner

had no experience in the development, operation, or marketing of

energy management systems, she had no knowledge of the components

and equipment constituting the energy management systems

equipment, and she had no knowledge of whether or not the energy

management systems equipment was installed in Milor Corporation.
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Burton Kanter is a tax attorney, and petitioner was his

executive secretary from March 1962 to June 1970. Mr. Kanter

advised petitioner to participate in Degree, and she relied

solely upon his advice in making her decision to do so. Mr.

Kanter has no experience in the development, operation,

marketing, or appraisal of energy management systems.

Petitioner's participation in Degree was not motivated by a

desire for economic profit. She participated in Degree solely

for tax reasons.

Discussion

We review respondent’s determination that petitioner is

subject to sections 6621(c) and 6659. Petitioner, as the

taxpayer, bears the burden of disproving that determination. See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In

order to meet her burden of proof, petitioner must introduce

sufficient evidence to: (1) Make a prima facie case establishing

that respondent committed the errors alleged in the petition and

(2) overcome the evidence submitted by (or otherwise favorable

to) respondent. See Lyon v. Commissioner, 1 B.T.A. 378, 379

(1925). The fact that the case was submitted to the Court fully

stipulated under Rule 122 does not change or otherwise lessen

petitioner’s burden. See Borchers v. Commissioner, 95 T.C. 82,

91 (1990), affd. on other issues 943 F.2d 22 (8th Cir. 1991).
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Section 6659 provides for an addition to tax for

underpayments attributable to valuation overstatements. A

valuation overstatement exists if, among other conditions, the

adjusted basis of property claimed on the return equals or

exceeds 150 percent of the correct basis. See sec. 6659(a), (c). 

As to the year at issue, the addition to tax equals 30 percent of

an underpayment attributable to a valuation overstatement of 250

percent or more, unless the underpayment in tax is less than

$1,000 in which case the addition to tax does not apply. See

sec. 6659(b), (d). An addition to tax under section 6659 may

apply to an underpayment by an individual partner, where the

overvaluation is made on the partnership return. See Weis v.

Commissioner, 94 T.C. 473, 489 (1990).

Petitioner does not deny that respondent correctly

determined that she had an understatement of tax attributable to

a valuation overstatement within the meaning of section 6659. 

Petitioner asserts that respondent should waive the resulting

addition to tax pursuant to section 6659(e). Section 6659(e)

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

for valuation overstatement if a taxpayer establishes that he or

she had a reasonable basis for the adjusted bases or valuations

claimed on a return and that the claim was made in good faith. 

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

is reviewable by this Court for abuse of discretion. See Krause
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v. Commissioner, 99 T.C. 132, 179 (1992). On the record before

us, we are unable to conclude that respondent abused his

discretion. First, we are unable to find that petitioner ever

asked respondent to exercise his discretion before he issued the

notice of deficiency to her. Absent a timely request for a

waiver, which we do not find was present here, we cannot hold

that respondent abused his discretion in not waiving an addition

to tax under section 6659. See Martin Ice Cream Co. v.

Commissioner, 110 T.C. 189, 234-235 (1998); Haught v.

Commissioner, T.C. Memo. 1993-58; cf. Lapin v. Commissioner, T.C.

Memo. 1990-343, affd. without published opinion 956 F.2d 1167

(9th Cir. 1992). 

Even if petitioner had made such a timely request, we find

nothing in the record to establish that she had the requisite

reasonable basis for the overstated valuation to overcome

respondent’s determination. The mere fact that she relied on Mr.

Kanter, a tax professional, in choosing to participate in Degree

does not mean that she reasonably reported the overstated

valuation on her income tax return. Indeed, the facts of this

case, including the facts that petitioner was aware of Mr.

Kanter’s qualifications from their longtime close business

relationship, that Mr. Kanter was not professionally qualified to

evaluate or appraise the energy management systems equipment,

that petitioner never read the PPM, and that petitioner never
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made an attempt independently to evaluate or appraise the energy

management systems equipment, point to the conclusion that any

reliance that petitioner placed on Mr. Kanter as to the valuation

was unreasonable. See Addington v. Commissioner, 205 F.3d 54, 62

(2d Cir. 2000), affg. Sann v. Commissioner, T.C. Memo. 1997-259;

Gilman v. Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), affg.

T.C. Memo. 1989-684; Singer v. Commissioner, T.C. Memo. 1997-325. 

In light of the strict standard for abuse of discretion, we

conclude that respondent did not err by not exercising his

discretion under section 6659(e) to waive the addition to tax for

valuation overstatement.

Nor do we conclude that respondent erred as to the increased

rate of interest under section 6621(c). Section 6621(c) provides

that increased interest is due if a "substantial underpayment" is

attributable to a "tax motivated transaction". A substantial

underpayment is an underpayment of more than $1,000. See sec.

6621(c)(2). A tax-motivated transaction includes any valuation

overstatement under section 6659. See sec. 6621(c)(3)(A)(i). 

Because we have determined that petitioner had a valuation

overstatement under section 6659, we hold that petitioner is

liable under section 6621(c) for an increased rate of interest on

the underpayment attributable thereto. See Barlow v.

Commissioner, T.C. Memo. 2000-339 (“once we decide that there is

a tax-motivated transaction such as a valuation overstatement * *
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*, the determination of additional interest is largely

mechanical.”).

We have considered all arguments in this case, and those

arguments not discussed herein are irrelevant or without merit. 

Accordingly,

Decision will be entered

under Rule 155.