F I L E D

United States Court of Appeals

Tenth Circuit

JAN 13 1999

PATRICK FISHER

Clerk

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

GILMORE & WILSON

CONSTRUCTION COMPANY AND

SUBSIDIARY,

Petitioner-Appellant, 

v.

COMMISSIONER OF INTERNAL

REVENUE, 

Respondent-Appellee.

_____________________________

JERRY L. WILSON,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

_____________________________

CHARLES T. GILMORE and

BETTYE GILMORE,

Petitioners-Appellants,

v.

No. 97-9024

Appeal from U.S. Tax Court

(T.C. No. 19780-89)

No. 97-9026

Appeal from U.S. Tax Court

(T.C. No. 27225-89)

No. 97-9027

Appeal from U.S. Tax Court

(T.C. No. 27132-89)
* This order and judgment is not binding precedent, except under the

doctrines of law of the case, res judicata, and collateral estoppel. The court

generally disfavors the citation of orders and judgments; nevertheless, an order

and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3. 

-2-

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

ORDER AND JUDGMENT *

Before BRORBY , BRISCOE , and LUCERO , Circuit Judges.

After examining the briefs and appellate record, this panel has determined

unanimously to grant the parties’ request for a decision on the briefs without oral

argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). These cases are

therefore ordered submitted without oral argument. 

These three appeals challenge the Tax Court’s affirmance of the

Commissioner’s imposition of penalties and interest due to the taxpayersappellants’ negligent underpayment of taxes owed for various tax years from 1979

to 1983. See Estate of Hogard v. Commissioner , 73 T.C.M. (CCH) 2552, 1997
1 The Tax Court consolidated the cases of the Hogard estate and appellants. 

The Hogard estate did not appeal. Although appellants each filed separate briefs,

they raise the same issues, and with only minor variations in facts, the briefs are

virtually identical. We therefore have combined the three appeals for disposition.

-3-

WL 160769 (1997). 1

 We have jurisdiction pursuant to 26 U.S.C. § 7482(a) and

affirm.

I.

These cases are part of what the Commissioner refers to as the “plastics

recycling” group of cases, which involve limited partnership tax shelters that

claimed tax benefits relating to machines designed to recycle plastic scrap. A

detailed discussion of the transactions involved in the plastics recycling cases is

contained in Provizer v. Commissioner , 63 T.C.M. (CCH) 2531, 1992 WL 56983

(1992), aff’d , No. 92-1827, 1993 WL 245799 (6th Cir. 1993). In affirming the

Tax Court’s decision in Provizer , the Sixth Circuit briefly summarized the

circular transactions involved as follows:

In 1981, a corporation called Packaging Industries, Inc.

manufactured and sold six Sentinel EPE Recyclers to ECI 

Corporation for $5,886,000 ($981,000 each) which in turn resold the

recyclers to F & G Corporation for $6,976,000 ($1,162,666 each). 

F & G leased the recyclers to a limited partnership called Clearwater

Group, and Clearwater then licensed the recyclers to FMEC

Corporation, which sublicensed them back to Packaging Industries. 

These transactions were structured in such a way that all of the

payments between the entities offset each other. Packaging 

Industries then allegedly sublicensed the recyclers to entities who

would use them to recycle plastic scrap. 
2 There apparently were a number of different limited partnerships formed to

play roles similar to those of Clearwater and Southeast in other series of

transactions, thus creating more opportunities for investors. Taxpayers invested

in Southeast because Clearwater had already been fully subscribed.

-4-

Provizer , 1993 WL 245799 at **1. 

The underlying transactions in these cases are essentially identical to those

in Provizer except that the limited partnership involved was Southeast Recycling

Associates rather than the Clearwater Group. 2

 The taxpayers-appellants here--

Charles and Bettye Gilmore, Jerry Wilson, and Gilmore & Wilson Construction

Company (G&W), a company owned and managed by Charles Gilmore and

Wilson (collectively, “taxpayers”)--each invested $25,000 in Southeast in 1982. 

The tax effects of these investments were as follows: In 1982, the Gilmores

claimed investment tax credits of $43,042, and carried back credits of $21,176 to

1979, $18,479 to 1980, and $6,332 to 1981. On Wilson’s 1982 return, he claimed

investment tax credits of $43,042. He also carried back credits of $13,054 to

1979 and $881 to 1980. G&W claimed a tax loss on its 1983 return of $20,452

and carried back tax credits of $4,472 to 1980 and $10,514 to 1981. All told, on

the total $75,000 invested, taxpayers took tax credits of $160,992 and losses of

$20,452; they did not report any income from their investments in Southeast.

The Tax Court in Provizer determined that the transactions involving the

Sentinel recyclers were tax shams lacking economic substance and business
-5-

purpose. See Provizer , 1992 WL 56983, at 17-23. The court’s determination was

due in large part to its finding that the recyclers’ fair market value, an amount

critical to the size of any tax benefits, was no more than $50,000 each, rather than

the $1,162,666 on which the tax benefits were based. See id. at 15. As a result of

the decision in Provizer , the Commissioner determined deficiencies, additions to

tax and increased tax pursuant to I.R.C. §§ 6659, 6621(c) and 6653 with respect

to the taxpayers’ claimed tax benefits relating to their investments in Southeast. 

Taxpayers each filed separate suits in the Tax Court challenging the

Commissioner’s determinations. Taxpayers eventually stipulated substantially to

the facts found in Provizer and, as a result, further stipulated that 

1. [Taxpayers] are not entitled to any deductions, losses, investment 

credits, business energy credits or any other tax benefits claimed on

their tax returns for the taxable years in issue as a result of their

participation in the Plastics Recycling Program. 

2. The underpayments in income tax attributable to the investment

credit and business energy investment credit claimed with respect to

[taxpayers’] participation in the Plastics Recycling Program are

subject to the addition to tax for valuation overstatements determined

under I.R.C. section 6659 using an applicable percentage of 30

percent. 

3. The underpayments in income tax attributable to [taxpayers’]

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. section 6621(c)

as set forth in the notice of deficiency.
3 Beginning in 1981, § 6653 also provided for an additional interest penalty

for negligent underpayment. 

-6-

Estate of Hogard , 1997 WL 160769, at 9. The only remaining issue was whether

taxpayers were liable for the additions to tax for negligence under § 6653 for the

years in question. 

Section 6653, as applicable to the period in question, provides for

imposition of an addition to tax of five percent of the underpayment if any part of

the underpayment is due to negligence or intentional disregard of rules or

regulations. 3

 “For purposes of section 6653, ‘negligence’ is lack of due care or

failure to do what a reasonable and prudent person would do under similar

circumstances.” Anderson v. Commissioner , 62 F.3d 1266, 1271 (10th Cir. 1995). 

Because the Commissioner did not assert that their tax treatment of their

investments would have been improper had Southeast’s business not been a sham,

taxpayers’ negligence, if any, must have been due to their failure to discover that

the recycler transactions were a sham. See id. Because the Commissioner’s

determination of negligence is presumed to be correct, taxpayers have the burden

of proving they were not negligent. See id. Following consolidation of the cases

and a trial, the Tax Court concluded that taxpayers had failed to meet their

burden. Its findings in this regard may be summarized as follows.
4 The Tax Court also noted that the individuals providing these opinions had

ownership interests in various related plastics recycling limited partnerships, but

it does not appear that this information was disclosed in the offering

memorandum.

-7-

Charles Gilmore and Wilson organized G&W in 1966. Bill Stewart, a

certified public accountant, provided tax and accounting advice to Gilmore,

Wilson and G&W from at least 1966 to the time of trial. In 1982, Stewart learned

about the Southeast and related plastics recycling limited partnerships and

obtained an offering memorandum. The offering memorandum noted a variety of

business and tax risks associated with investing in the partnership including (1) a

substantial likelihood of an audit by the Commissioner that would include a

challenge to the value of the recyclers as being in excess of fair market value; (2)

Southeast’s lack of an operating history; (3) the general partner’s lack of

experience with recycling or similar equipment; (4) the absence of an established

market for the recyclers; (5) no assurances as to the marketability or market price

for recycled materials; and (6) the existence of potential conflicts of interest. The

offering memorandum included favorable marketing, technical and tax opinions

from people with experience in the relevant fields. 4

Stewart traveled to Packaging Industries’ plant in Hyannis, Massachusetts,

observed a demonstration of the recyclers, and listened to a presentation about

them. Stewart did not have any knowledge or experience in plastics recycling,
-8-

machinery or materials, and he relied on this presentation and the opinions

contained in the offering memorandum for technical expertise in concluding that

the operations looked viable. Stewart was informed that he would be entitled to a

commission if any of his clients invested in Southeast.

Stewart advised Gilmore and Wilson about investing in Southeast,

indicating that the business appeared to be viable and discussing the tax benefits. 

He told Gilmore and Wilson that he planned to invest in one of the partnerships,

and he eventually did. Gilmore and Wilson read parts of the offering

memorandum but did not seek further information about the investment, recyclers

or transactions before deciding to invest in Southeast. 

The Tax Court concluded that taxpayers’ underpayment of tax was due to

their negligent failure to adequately investigate the validity of the transactions. 

This determination was based primarily on its conclusion that their reliance on

Stewart was unreasonable. The court noted that despite the offering

memorandum’s description of various business and tax risks and Stewart’s lack of

knowledge regarding the technical aspects of the business, he did not contact any

experts in plastics recycling or recommend that taxpayers do so. He did not

investigate the value placed on the recycler, although, the court found, an

adequate investigation would have disclosed the availability of other recyclers on

the market ranging in price from $20,000 to $200,000. It concluded that Stewart,
-9-

in effect, simply relied on the representations made by Southeast’s promoters and

promotional materials. Because the investment was outside his area of

expertise--financial planning and tax advice--the court found that reliance on his

advice was unreasonable. The court also found Stewart’s advice suspect because

he would receive a commission from taxpayers’ investments and therefore was

not an independent advisor.

The court also found that because the front page of the offering

memorandum contained a statement regarding the risks of the investment and

Gilmore and Wilson admitted they reviewed the memorandum to some extent,

they were negligent for failing to heed the warnings and further investigate. The

memorandum explained that it was likely the Commissioner would challenge the

validity of the transactions and the values placed on the recyclers. The court also

found that in light of Gilmore and Wilson’s successful business backgrounds--i.e.,

their profitable construction business and real estate investments--they knew or

should have known that the value of the recyclers were overstated. Further, the

court found 

it more likely than not that they were so interested in the expected

tax benefits that would result from the investment that they failed to

investigate and seek advice on the underlying transactions that were

to generate those tax benefits. Our conclusion on this point is

supported by the fact that the Gilmores’ and Wilson’s investments in

Southeast, which were not consistent with their prior investment

histories, occurred in a year that capital transactions were expected

to, and did, generate large capital gains.
-10-

Estate of Hogard , 1997 WL 160769, at 15. Finally, the court found that while it

had “severe reservations” about the validity of taxpayers’ claims that they

expected to make a profit on the investment, their profit motives, even if true,

would not be dispositive because it would not excuse them from claiming benefits

to which they clearly were not entitled. The court therefore concluded that

taxpayers did not meet their burden of showing that they were not negligent in

failing to discover that the recycler transactions were a sham, and it upheld the

imposition of the negligence penalties. Taxpayers appeal.

II.

The historical facts in this case are largely undisputed. In similar

circumstances involving a challenge to negligence penalties, we have explained

our standard of review as follows:

We review Tax Court decisions “in the same manner and to the

same extent as decisions of the district courts in civil actions tried

without a jury.” I.R.C. § 7482(a)(1). We review the Tax Court’s

factual findings under the clearly erroneous standard and review its

legal conclusions de novo. Worden v. Commissioner , 2 F.3d 359,

361 (10th Cir. 1993). We review mixed questions of law and fact

either under the clearly erroneous standard or de novo, depending on

whether the mixed question is primarily factual or legal. Armstrong

v. Commissioner , 15 F.3d 970, 973 (10th Cir. 1994). Here, the

underlying facts . . . are, for the most part, undisputed. The parties

primarily dispute the conclusions the Tax Court drew from the facts. 

Where, as here, “‘the sole issue is whether the law applied to the

facts satisfied the statutory standard,’” we review the Tax Court’s

application of the law to the facts de novo, since we “‘are equally as

able as the tax court to draw conclusions from the undisputed facts
-11-

presented.’” See National Collegiate Athletic Ass’n v.

Commissioner , 914 F.2d 1417, 1420 (10th Cir.1990) (citations

omitted). See also First Nat’l Bank v. Commissioner , 921 F.2d

1081, 1086 (10th Cir.1990) (findings of ultimate fact derived from

applying legal principles to subsidiary facts are subject to de novo

review).

Anderson , 62 F.3d at 1270 (footnote omitted). We note that this standard seems

to differ from the one used by other circuits in analyzing a challenge to a

negligence penalty. Other circuits appear to apply a clearly erroneous standard of

review to the ultimate question of negligence regardless of whether the underlying

facts are disputed. See, e.g. , Sacks v. Commissioner , 82 F.3d 918, 920 (9th Cir.

1996); Durrett v. Commissioner , 71 F.3d 515, 517 (5th Cir. 1996); Goldman v.

Commissioner , 39 F.3d 402, 406 (2d Cir. 1994); Illes v. Commissioner , 982 F.2d

163, 166 (6th Cir. 1992). Although in his response briefs, the Commissioner

notes that the general rule is that a finding of negligence under § 6653 is

reviewed for clear error, he does acknowledge the above holding from Anderson . 

The Commissioner does not argue that Anderson is wrong or ask that it be

overruled, which would require en banc consideration, see Starzynski v. Sequoia

Forest Indus. , 72 F.3d 816, 819 (10th Cir. 1995). We therefore apply the de novo

standard required by Anderson to the generally undisputed facts in this case.

Taxpayers first argue that the Tax Court misinterpreted the burden of proof

and the effect of the presumption that the Commissioner’s determination of

negligence is correct. They acknowledge that they have the burden of proving
-12-

that they were not negligent. They contend, however, that because they put on

evidence indicating that they were not negligent, the presumption disappeared,

and the Commissioner was obligated to present evidence showing that a

reasonable investor in 1982 would have discovered that the Southeast transactions

were a sham. Because they contend that the Commissioner failed to do so, they

argue that the Tax Court effectively upheld the Commissioner’s decision by

relying improperly on the presumption. 

The cases on which taxpayers rely involve situations in which the matters at

issue were questions of historical fact on which the taxpayers presented evidence

in their favor but which the Commissioner failed to rebut with any evidence of his

own. See Moretti v. Commissioner , 77 F.3d 637, 643-44 (2d Cir. 1996); Estate of

DeNiro v. Commissioner , 795 F.2d 582, 584-85 (6th Cir. 1986); Demkowicz v.

Commissioner , 551 F.2d 929, 931-32 (3d Cir. 1977). The courts thus held that it

was improper for the Tax Court to have concluded that the taxpayers failed to

overcome the presumption in light of the uncontradicted, competent and relevant

evidence they presented. That is not the situation the Tax Court faced here. The

evidence introduced, both at trial and through stipulation, presents a close

question regarding whether taxpayers were negligent. We see no indication in the

Tax Court’s decision that it relied on any presumption. It simply evaluated the

evidence and concluded that taxpayers had not met their burden. We thus
-13-

conclude the court did not err procedurally in its assessment of the evidence and

turn to its substantive determination that taxpayers were negligent.

Whether taxpayers were negligent depends on whether they exercised due

care and performed a reasonable investigation into the validity of the recycler

transactions before investing in Southeast. See Anderson , 62 F.3d at 1271. They

contend that they exercised due care by relying on the reasonable investigation

performed by Stewart, and alternatively, because even if Stewart’s investigation

was not reasonable, they were not negligent in relying on his advice. 

Moderate-income investors, such as taxpayers here, do not have to

investigate their investments themselves, but may rely on the appropriate advice

of financial advisors and accountants. See Anderson , 62 F.3d at 1271; Mauerman

v. Commissioner , 22 F.3d 1001, 1006 (10th Cir. 1994); Heasley v. Commissioner ,

902 F.2d 380, 383 (5th Cir. 1990). Reliance on such advisors, however, must be

objectively reasonable and justifiable; that is, the advice must fall at least

generally within the advisors’ areas of expertise, and the advisors must be

independent of the investment. See, e.g. , United States v. Boyle , 469 U.S. 241,

251 (1985) (noting taxpayer’s reliance on advice of accountant or attorney on

matter of tax law reasonable, as “[m]ost taxpayers are not competent to discern

error in the substantive advice of an accountant or attorney”); Freytag v.

Commissioner , 904 F.2d 1011, 1016 (5th Cir. 1990) (finding reliance on advice of
-14-

lawyers, accountants, and financial consultants referred to as “finders”

unreasonable where finders had no expertise in financial aspects of investments

involved); Goldman , 39 F.3d at 408 (finding taxpayers’ reliance on accountant

who was also sales representative for investment unreasonable because of

inherent conflict of interest); Pasternak v. Commissioner , 990 F.2d 893, 903 (6th

Cir. 1993) (finding reliance on promoters or their agents unreasonable, as

“[a]dvice of such persons can hardly be described as that of ‘independent

professionals’”). The relative sophistication of the taxpayers is also a

consideration in determining whether their reliance was reasonable. See, e.g.,

Heasley , 902 F.2d at 384.

Had Stewart performed a reasonable investigation, taxpayers would have

been able to rely on his advice. But we agree with the Tax Court that he did not. 

To his credit, he did visit the plant where the recyclers were manufactured and

observed a several minute demonstration of a prototype. In this respect, he did

more than the negligent taxpayer in Anderson , who failed to verify the existence

of the cargo containers he was supposedly purchasing. See Anderson , 62 F.3d at

1272-73. Yet beyond that, as the Tax Court found, Stewart did virtually nothing

more than rely on the representations of the promoters and offering materials. 

Critically, the offering memorandum warned that the Commissioner would likely

challenge the value placed on the recyclers in the transactions, which lacked any
-15-

market controls. Even though the tax benefits were directly tied to this value,

Stewart did nothing to determine whether it was reasonable. Additionally,

although Stewart testified that he expected the investments to return a profit, he

did nothing to investigate the likelihood of a profit despite the offering

memorandum’s warnings regarding Southeast’s lack of an operating history and

absence of an established market for recyclers and recycled materials. Taxpayers

therefore cannot rely on Stewart’s investigation to show they exercised due care

before investing in Southeast.

Alternatively, taxpayers argue that regardless of whether Stewart in fact

performed a reasonable investigation here, they were entitled to rely on his advice

regarding the investment in Southeast and the economic validity of the

transactions because he was their long-time, trusted advisor. Considering their

relatively modest investments of $25,000 each, taxpayers contend they should not

be expected to have extensively or independently investigated the validity of the

Southeast transactions. In support of this position, they point to the Fifth

Circuit’s concern that “[i]f we require moderate-income investors to

independently investigate their investments, the start-up investigation costs may

prevent them from investing at all. If the costs do not prohibit entry, these

investors still may not invest because the investigation costs may far exceed their

potential profit.” Heasley , 902 F.2d at 383-84. Further, they contend that the Tax
5 The statement in Anderson that advisors do not have to be experts in

particular industries was in response to the Commissioner’s argument that

reliance on the advisor in that case was unreasonable because the advisor lacked

knowledge and experience in the particular industry in which the investment was

made. The Tax Court here cited cases from the Second Circuit consistent with the

argument we rejected in Anderson . See David v. Commissioner , 43 F.3d 788,

789-90 (2d Cir. 1995); Goldman , 39 F.3d at 408. 

We also reject another of the reasons the Tax Court gave for finding

taxpayers’ reliance on Stewart’s advice to be unreasonable--the fact that he was

entitled to receive compensation from Southeast for taxpayers’ investments, thus

making his advice not independent. We agree with taxpayers that this fact does

not make their reliance on that advice per se unreasonable. Taxpayers had long

relied on Stewart for tax and accounting advice, and he had a good reputation in

the community. Moreover, he was not affiliated with Southeast or any of the

other recycling partnerships other than through his personal investment in one of

them. As we found in Anderson in similar circumstances, 62 F.3d at 1271, the

mere fact that Stewart received compensation for taxpayers’ reliance on his

advice does not turn him into a promoter whose advice cannot be considered

independent.

-16-

Court’s conclusion that their reliance on Stewart’s advice was unreasonable

because he was advising on matters outside his area of expertise is inconsistent

with the law of this circuit, because in Anderson , we held that “one does not have

to be an expert in an industry before he can invest in the industry himself or

recommend an investment to another.” 62 F.3d at 1271. 

We agree with taxpayers that, to the extent the Tax Court found their

reliance on Stewart’s advice unreasonable because he was not an expert in the

plastics recycling industry, that finding is inconsistent with Anderson .

5

 And we

also agree that taxpayers generally need not monitor the efforts of their advisors
-17-

when their advisors are acting within their areas of expertise. But we disagree

that Anderson supports taxpayers’ reliance on Stewart here. The advisor in

Anderson was the taxpayer’s investment advisor, and he advised the taxpayer

regarding the soundness of his investment. See 62 F.3d at 1268. In contrast,

Stewart was not the taxpayers’ investment advisor, but their tax accountant who

had also provided some accounting advice. There is no indication in the record

that he had previously provided taxpayers advice on investments generally or

investments designed to shelter income from taxes, nor that he had experience and

knowledge in such areas as assessing the economic substance of tax shelters. 

Southeast’s offering memorandum advertised tax credits of $77,000 and

deductions of $38,940, all in the first year of an investment of $50,000. It

explained the circularity of the sale, leasing and licensing transactions that

involved virtually no net cash outlays by any of the parties to the transactions. 

The memorandum was replete with warnings regarding the risks involved. 

Anyone reading the offering memorandum would be placed on guard that the deal

might just be too good to be true. 

The due care that taxpayers were obliged to exercise here was not to inquire

into the reasonableness of the tax aspects of the investment per se, but to inquire

into the economic substance of the investment. As we noted, the red flags raised

by the offering memorandum were obvious to anyone--especially college-
6 We also disagree with taxpayers’ contention that an investigation into the

economic substance of the transactions would have been prohibitively expensive. 

One of the critical risks identified by the offering memorandum was the possible

overvaluation of the recyclers, and a reasonable investigation here could have

checked into the value placed on them without undue cost. Taxpayers have

stipulated that trade publications at the time advertised other plastics recyclers for

less than one-fifth the cost. 

-18-

educated, successful businessmen like Gilmore and Wilson. In this regard,

Stewart’s position as their tax advisor did not sufficiently differentiate him from

Gilmore and Wilson on a knowledge and experience basis such that taxpayers

could rely on his advice without further inquiry. See Leuhsler v. Commissioner ,

963 F.2d 907, 910 (6th Cir. 1992) (finding taxpayer’s reliance on advisors, who

were fellow accountants, lacking knowledge and experience significantly greater

than taxpayer’s unreasonable); Illes, 982 F.2d at 166 (noting importance of

taxpayer’s education and business experience in determining whether reliance on

advisor reasonable); Heasley , 902 F.2d at 383-84. Thus, Stewart’s lack of

experience in the plastics recycling industry, the Tax Court’s reason for finding

his advice suspect, is not itself dispositive. But that fact combines with his

general lack of knowledge and experience in the area of inquiry to convince us

that taxpayers’ reliance on Stewart’s advice merely because of his position as

their long-time tax advisor was not justified in this situation. 6
-19-

As we noted, Gilmore and Wilson were successful businessmen. Prior to

investing in Southeast, they had only conservatively invested in stocks and real

estate. In 1982, the year they invested in Southeast, their adjusted gross income

more than doubled over prior years due to their disposal of a capital asset. 

Southeast’s offering memorandum advertised tax benefits that allowed them to

recoup more than their total investment in the first year. Though not all

comparable investments may be too good to be true, such lucrative benefits must

place any potential investor on guard. We conclude that taxpayers were not

adequately on guard and did not undertake a reasonable investigation before 
-20-

investing in what turned out to be a tax sham. The Commissioner correctly

assessed the negligence penalties.

AFFIRMED.

Entered for the Court

Wade Brorby 

Circuit Judge