T.C. Memo. 1996-338

UNITED STATES TAX COURT

SHELDON M. SISSON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27098-93. Filed July 24, 1996.

Sheldon M. Sisson, pro se.

Steven M. Roth, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

FOLEY, Judge: By notice of deficiency dated September 23,

1993, respondent determined additions to tax for petitioner's

1983 tax year as follows:
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 Additions to Tax 

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

 $3,351.50 50 percent of the $16,757.50

interest due on 

$67,030

The issue for decision is whether petitioner is liable for these

additions to tax. Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for 1983,

and all Rule references are to the Tax Court Rules of Practice

and Procedure. 

FINDINGS OF FACT

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

Petitioner resided in Tarzana, California, at the time he filed

his petition.

Petitioner is a tax attorney licensed to practice law in

California and Illinois. He received his law degree from the

University of Chicago Law School in 1962 and has been certified

as a specialist in tax law by the California Board of Legal

Specialization. From 1964 to 1974, he was employed by the

Internal Revenue Service (IRS), Office of Chief Counsel, where he

litigated numerous tax shelter cases. Some of these cases

involved tax-motivated transactions promoted by Harry Margolis. 

In 1974, he served briefly as the Staff Assistant to the IRS

Regional Counsel for the Western Region. Following his tenure at

the IRS, he was hired as an attorney at the law firm of Levenfeld

& Kantor. 
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Beginning in 1979, petitioner spent nearly 10 years working

for tax shelter promoters. From 1979 through July of 1980,

petitioner worked for Mr. Margolis, writing opinion letters,

providing tax advice, and regularly meeting with representatives

responsible for the foreign corporations used in Mr. Margolis'

tax shelters. 

In July of 1980, petitioner went to work for the Schulman

Management Co., a company that promoted tax shelters and that was

wholly owned by Gerald Schulman. Petitioner worked for Mr.

Schulman for almost 8 years and became thoroughly familiar with

the tax shelter transactions Mr. Schulman promoted. Petitioner

prepared opinion letters and private placement circulars

concerning these transactions. In addition, petitioner traveled

to the Caribbean and Panama to meet with representatives of

foreign corporations involved in Mr. Schulman's tax shelters.

Mr. Schulman organized, promoted, and syndicated

approximately 478 similarly structured limited partnerships and

served as the general partner of each of them. Two of these

partnerships, Woodchuck, Ltd. (Woodchuck), and Wolverine, Ltd.

(Wolverine), were formed while petitioner was employed by Mr.

Schulman. During 1982 and 1983, Woodchuck sold 33 limited

partnership interests, raising $2,700,000 in capital

contributions. Petitioner contributed $121,010 for a limited

partnership interest in Woodchuck and $96,790 for a limited

partnership interest in Wolverine.
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Mr. Schulman promoted the partnerships by representing that

each limited partnership interest would be entitled to an

interest deduction in the first year equal to the partner's cash

capital contributions. The purported interest deductions for the

first year were generated through a circular transfer of funds

among several entities, including foreign entities in Panama and

the Netherlands Antilles. The transactions occurred between

December of 1982 and December of 1983. 

On August 22, 1983, the IRS and Mr. Schulman executed a

preliminary agreement entitled "SETTLEMENT PLAN AGREEMENT". The

agreement's "RECITALS" section stated: 

 

2.1 IRS is presently auditing

SCHULMAN'S individual tax returns (IRS Form 1040) for

the years 1977 through 1982. Additionally, IRS intends

to audit SCHULMAN'S 1983 individual tax return (IRS

Form 1040).

* * * * * * *

2.4 IRS and SCHULMAN desire to amicably

settle all questions relating to SCHULMAN'S individual

tax returns and the deductions taken by the investors

in connection with their investment in the SCHULMAN

Partnerships. * * *

2.5 This document is intended to be an

agreement in principle establishing the concepts upon

which a formal settlement agreement will be drafted. 

Both the IRS and SCHULMAN shall exercise the utmost

good faith in attempting to achieve the final

settlement of the matters described herein. 

Nevertheless, SCHULMAN and the IRS acknowledge that the

concepts established hereunder may result in unforeseen

consequences which may render settlement impossible.
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2.6 The parties have discussed a

settlement plan which consists of Phase I and Phase II

as follows:

 

(a) Phase I--This phase involves

(i) the execution of this Settlement Plan Agreement

establishing the principles upon which a final

settlement agreement will be achieved and (ii) actual

verification of tax due in accordance with the

principles established under the Settlement Plan

Agreement. Verification shall be conducted on an

expedited basis. 

 

(b) Phase II--Phase II shall

involve (i) drafting and execution of a final

settlement agreement, (ii) communication to investors

of the settlement proposal by SCHULMAN, (iii)

implementation of the Partnership adjustments upon

acceptance by the investors, (iv) final determination

of SCHULMAN promoter income, and (v) formation of * * *

[a specified] Trust * * *. 

 

The "SETTLEMENT PLAN" section of the agreement stated:

3.1 IRS shall allow each investor to

deduct seventy percent (70%) of the claimed Investor

First Year Deduction. * * * The disallowed portion of

the Investor First Year Deduction [thirty percent

(30%)] shall be deducted by each investor ratably over

the term of the Schulman Partnership Long Term Notes *

* *.

The "CONDITIONS" section of the agreement added:

4.2 * * * This Settlement Plan Agreement

is intended to be used for settlement purposes only and

both IRS and SCHULMAN agree that the Agreement,

discussions held prior to and in connection with the

Agreement, and all schedules and materials previously

submitted by SCHULMAN to the Appeals Office (before the

date of the execution of this Agreement) in connection

with the settlement discussions shall not be used in

any manner whatsoever in any administrative or court

proceeding. * * *

Petitioner reviewed the agreement during the negotiation process

and was thoroughly familiar with its terms and conditions.
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The agreement was intended to constitute a preliminary

understanding of the parties. To summarize, it stated that

(1) in Phase II the parties would draft a final and binding

settlement agreement and (2) the investors would then be entitled

to deduct, in the first year of the partnerships' operation, 70

percent of the expenses generated by the partnerships'

transactions. The remaining 30 percent would be disallowed in

the first year, but investors would be entitled to deduct this

amount ratably in subsequent years. Mr. Schulman and the IRS,

however, never executed a final and binding settlement agreement.

On October 12, 1984, petitioner filed his 1983 Federal

income tax return. The return claimed $162,460 of loss

deductions from Schedule E (Supplemental Income Schedule)

attributable to petitioner's allocable share of income and loss

from investments in Wolverine and Woodchuck.

In Wolverine, Ltd. v. Commissioner, T.C. Memo. 1992-669,

affd. without published opinion 39 F.3d 1190 (9th Cir. 1994), we

disallowed Wolverine and Woodchuck's claims to interest

deductions on their 1983 returns, on the grounds that the

partnerships' transactions were tax motivated and lacked economic

substance. Petitioner litigated that case on behalf of the

partnerships as a partner other than the tax matters partner.

On September 23, 1993, respondent issued a notice of

deficiency to petitioner. In the notice, respondent determined
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that a deficiency of $67,030 in petitioner's income tax for 1983,

resulting from an adjustment of petitioner's share of the

disallowed partnership items of Woodchuck and Wolverine, was

subject to an addition to tax for negligence of $3,351.50 (plus

50 percent of the interest due on $67,030). Respondent further

determined that the deficiency was subject to a $16,757.50

addition to tax for substantial understatement of tax liability.

OPINION

I. Addition to Tax for Negligence Under Section 6653(a)(1)

Section 6653(a) imposes an addition to tax for underpayments

attributable to negligence or disregard of rules or regulations.

The term "negligence" is defined as the failure to exercise the

due care that a reasonable and ordinarily prudent person would

exercise under the circumstances. Zmuda v. Commissioner, 731

F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely

v. Commissioner, 85 T.C. 934, 947 (1985). Respondent's

determination of negligence is presumed to be correct, and

petitioner has the burden of proving that it is erroneous. Rule

142(a); Goldman v. Commissioner, 39 F.3d 402, 406 (2d Cir. 1994),

affg. T.C. Memo. 1993-480.

In essence, we must decide whether petitioner was reasonable

in taking deductions relating to his investment in Wolverine and

Woodchuck. We conclude that he was not.

This Court has held that a taxpayer who is a tax attorney

will be held to a higher standard of reasonableness than a person
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without such expertise. Tippin v. Commissioner, 104 T.C. 518,

534 (1995). Petitioner in this case specialized in tax shelter

planning and litigation and had over 20 years of experience. In

addition, he had litigated tax shelter cases for the IRS and

possessed extensive knowledge of tax shelters similar to those at

issue in this case.

Petitioner makes two arguments in support of his contention

that he was reasonable in taking the deductions. First, 

petitioner argues that we should conclude he was not negligent,

because he researched and wrote an opinion letter analyzing the

transactions. Petitioner concluded in his opinion letter that

the deductions relating to the transactions would be permissible

under the Code. The transactions involved the circular transfer

of funds among related entities (both domestic and foreign) for

the sole purpose of generating tax deductions. In Wolverine,

Ltd. v. Commissioner, supra, we concluded that the transactions

lacked economic substance. At the time petitioner claimed the

deductions, case law uniformly indicated that transactions

lacking economic substance would not be respected for tax

purposes. See, e.g., Gregory v. Helvering, 293 U.S. 465, 469

(1935); Bercy Indus., Inc. v. Commissioner, 640 F.2d 1058, 1062

(9th Cir. 1981), revg. 70 T.C. 29 (1978). Petitioner has failed

to establish that he, as an experienced tax practitioner, was

reasonable in claiming a distributive share of the deductions
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this Court disallowed in Wolverine. As a result, his first

argument is without merit. 

Second, petitioner contends that he was reasonable in taking

the deductions because he was duly diligent in determining

whether the agreement was binding. In essence, petitioner asks

us to believe that it was reasonable to ignore the transactions'

lack of economic substance and to rely on a conditional,

precursory agreement that was not applicable to the year in

issue. We decline to do so. While petitioner contends that he

believed and continues to believe that the agreement was binding,

his opinion letter indicates that he was fully aware that the

agreement by its terms was not binding and did not apply to 1983,

the year in issue. Petitioner's opinion letter stated:

Even though as a matter of law each taxable year stands

by itself and the Internal Revenue Service is entitled

to change its position, since you have reached an

agreement in principle with the Internal Revenue

Service for the years 1977-1982 for your partnerships

and since the planning for the years 1978-1982 is

substantially similar to the planning for 1983 and

since it is anticipated that the Internal Revenue

Service will apply the principles of the settlement by

1983, my opinion that the significant tax benefits of

the investment are likely to be realized is

substantially strengthened. [Emphasis added.]

Petitioner also claims to have been duly diligent in that he

obtained outside counsel who advised him that the agreement was

binding. Petitioner did not, however, produce any documentation

in support of this contention. We are not required to, and in

this case do not, accept the taxpayer's uncorroborated testimony. 

See, e.g., Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
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1 This rule is applicable to returns due in 1984 where an

assessment is made after Oct. 21, 1986. Pallottini v.

Commissioner, 90 T.C. 498 (1988).

Consequently, we conclude that petitioner did not exercise

the care of a reasonably prudent tax lawyer and is therefore

liable for the addition to tax for negligence.

II. Addition to Tax for Substantial Understatement Under Section

6661(a)

In the case of a substantial understatement, section 6661(a)

provides for an addition to tax in the amount of 25 percent of

the amount of any underpayment attributable to such

understatement.1 An "understatement" is the excess of the amount

of tax required to be shown on the return over the amount

actually shown on the return. Sec. 6661(b)(2)(A). An

understatement is "substantial" (in the case of a noncorporate

taxpayer) if the amount of the understatement exceeds the greater

of (1) 10 percent of the tax required to be shown on the return,

or (2) $5,000. The amount of the understatement generally is

reduced by the portion of the understatement attributable to 

(1) the tax treatment of an item if there was substantial

authority for such treatment, or (2) any item with respect to

which the relevant facts affecting the item's tax treatment are

adequately disclosed in the return or in a statement attached to

the return. Sec. 6661(b)(2)(B). 

To prove that substantial authority exists in the case of a

tax shelter, section 6661(b)(2)(C)(i)(II) provides that the

taxpayer must establish that he reasonably believed that the
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chosen tax treatment was more likely than not the proper one. 

Petitioner bears the burden of establishing that respondent's

determination was erroneous. Cluck v. Commissioner, 105 T.C.

324, 340 (1995).

Respondent determined that the understatement was

substantial. Petitioner does not dispute this point. Thus,

petitioner must establish that the understatement should be

reduced if he is to avoid imposition of the addition to tax for

substantial understatement. 

Petitioner's sole argument is that he reasonably relied on

the agreement, which he implies constitutes substantial

authority. Petitioner, however, has not cited, nor have we

found, any authority that suggests that this agreement

constitutes substantial authority. Petitioner was not reasonable

in relying on the agreement for purposes of the addition to tax

for negligence, nor has he established that he reasonably

believed that taking the deductions relating to his 1983 tax

shelter investment was more likely than not correct. 

Consequently, we conclude that petitioner is liable for the

addition to tax for substantial understatement.

We have considered petitioner's other arguments and found

them to be without merit.

To reflect the foregoing,

Decision will be entered

for respondent.