department of the treasury internal_revenue_service washington d c date cc dom fs it a number release date uilc internal_revenue_service national_office field_service_advice memorandum for associate district_counsel assistant chief_counsel field service from subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend mr a mrs a year year date state x issue whether petitioner is subject_to the flat_tax rate that is applicable to qualified personal_service_corporations as defined in sec_448 conclusion as discussed herein additional factual development is necessary to determine whether petitioner is subject_to the flat_tax rate applicable to qualified personal_service_corporations facts this case involves the year corporate_income_tax liability of petitioner a corporation chartered in state x the service issued a notice_of_deficiency and a tax_court petition has been filed the case is now with the appeals_division petitioner is a c_corporation offering engineering services mr a the president and an engineer acquired of the stock of petitioner in year previously the stock had been owned by several others on date mr a gifted of the stock to his wife mrs a upon questioning you have indicated that we should assume that this gift was a bona_fide gift_for state law purposes enforceable by mrs a against mr a for example in the event of a divorce after the gift of the stock was held by mr a and was held by mrs a although the revenue agent’s report indicates that mrs a was also an employee of petitioner those facts were not developed in the case file and you are not aware of what if any employment activities mrs a performed for petitioner petitioner’s attorney has indicated that mrs a has not been an employee although she may have performed some de_minimis temporary secretarial services in the past for the purpose of answering the main question presented you have asked us to assume that mrs a was not an employee of petitioner petitioner contends that the stock interest held by mrs a prevents petitioner from being considered a qpsc because at least employee stock ownership is required to be considered a qpsc based upon its purported non- qpsc status petitioner contends that its tax_liability should be calculated using the normal graduated corporate rates instead of the flat rate used in the statutory_notice_of_deficiency the flat rate is applicable to qpscs under sec_11 in the notice_of_deficiency the service took the position that the stock gift from mr to mrs a should not permit petitioner to avoid the qpsc flat_tax rate because the transfer was a sham completed with no business_purpose other than tax_avoidance in response to the service’s arguments petitioner has proffered the following reasons for mr a’s gift to mrs a to put mrs a in a stronger position relative to other shareholders should something happen to mr a to make sure mrs a had some direct ownership in the corporation to allow mrs a to have unquestioned access to corporate information to allow mrs a to become more involved in corporate decisions to allow mrs a to become more knowledgeable in the event that she needs to take over the business petitioner contends mr a’s gift was limited to because he sought to give a round number of shares which would approximate but not exceed dollar_figure in value so that no gift_tax_return would be required you note that other than giving the wife a nominal non controlling_interest in the corporation it appears to you that there was no business_purpose for the transfer of the stock the appeals_division has requested your opinion as to whether the government would prevail in litigation questioning the business_purpose of the stock transfer to the wife as to its substance_versus_form you have in turn requested our opinion on the same issue law and analysis the primary issue in this case is whether the graduated_tax rates normally applicable to c corporations apply to petitioner or whether the flat rate applicable to qpscs applies under sec_11 normally under sec_11 c corporations are subject_to a graduated_tax beginning pincite of taxable_income up to dollar_figure the exception to this general_rule occurs when the corporation is a qualified_personal_service_corporation as defined by sec_448 in that case the tax imposed is equal to a flat of taxable_income sec_448 was designed to place limitations on when a taxpayer may use the cash_method_of_accounting the general_rule of sec_448 prohibits c corporations such as petitioner from using the cash_method one exception to the general_rule prohibiting use of the cash_method is when the corporation is a qualified_personal_service_corporation see sec_448 another exception applies to corporations that have average annual gross_receipts that do not exceed dollar_figure see sec_448 a qualified_personal_service_corporation is defined by sec_448 sec_448 establishes two threshold tests to be used to determine if a corporation is a qualified_personal_service_corporation these tests are commonly referred to as the function test and the ownership test 1this purported purpose appears to be based upon ignorance of the law under sec_2523 transfers between spouses will not result in a gift_tax liability furthermore under sec_6019 taxpayers are relieved from the requirement to file gift_tax returns for a transfer between spouses under the function test the issue is whether substantially_all of the activities of the corporation involve the performance of services by certain individuals in the fields of health law engineering architecture accounting actuarial science performing arts or consulting there appears to be little dispute in this case that petitioner satisfies the function test under the ownership test the issue in this case is whether substantially_all of the stock of the corporation by value is held by employee-owners assuming mrs a is not an employee of petitioner the key question is whether mrs a’s ownership of of the stock is sufficient to remove petitioner from the definition of a qualified_personal_service_corporation under temp sec_1_448-1t flush language for purposes of the ownership test ownership of substantially_all of the stock means ownership of an amount equal to or greater than of the stock therefore mr a’s ownership_interest assuming mrs a is treated as owning of the stock for federal_income_tax purposes is less than what is required under the temporary_regulation to constitute ownership of substantially_all of the stock temp sec_1_448-1t provides the attribution_rules applicable in this context it provides that a corporation’s stock is considered held indirectly by a person if and to the extent such person owns a proportionate interest in a partnership s_corporation or qualified_personal_service_corporation that owns such stock no such ownership situation is present in the instant case temp sec_1_448-1t then provides that n o other arrangement or type of ownership shall constitute indirect ownership of a corporation’s stock for purposes of this paragraph e this is good authority for the proposition that no type of family attribution rule should be applied in the qpsc ownership test context see also h_r rep no ii 100th cong 1st sess thus other forms of indirect stock ownership eg as a result of attribution between family members or a holding_company are not considered in determining if the ownership test is satisfied the code and the regulations also contain rules which ignore community_property interests in the qpsc ownership test context specifically sec_2 some other types of ownership not relevant here are also permitted see sec_448 3note the distinction between family_attribution_rules which generally attribute all stock owned by one family_member to another and community_property rules which generally provide that one spouse is treated as owning an undivided one-half interest in d a provides that community_property_laws are to be disregarded this statutory provision is supported by sec_1_448-1t which provides that stock owned by a spouse solely by reason of community_property_laws shall be treated as owned by the other spouse therefore although mr and mrs a live in state x a community_property_state no portion of mrs a’s stock ownership_interest will be regarded as owned by mr a in this context see also sec_1_448-1t example whether the transfer of stock should be respected for tax purposes in order to be respected for federal_income_tax purposes the transfer of stock from mr a to mrs a must have economic_substance see eg 630_f2d_554 7th cir taxpayers’ purported transfer of stock to their children lacked sufficient economic_substance and therefore the taxpayers were deemed to be the beneficial owners for tax purposes economic_substance frequently comes into question when there is a transfer of stock between family members in these cases special scrutiny is necessary lest what is in reality but one economic unit be increased to two or more by devices which though valid under state law are not conclusive for federal_income_tax purposes 309_us_331 in order for the instant transfer to be respected for tax purposes mrs a must be determined to be the true beneficial_owner after the transfer not just the owner in form alone see 164_f2d_870 7th cir cert_denied 334_us_819 as stated in determining the true ownership of corporate stock beneficial_ownership as opposed to holding mere legal_title is decisive 61_tc_268 see also mertens law of federal income_taxation sec_38 ownership of property is determined by command over property or enjoyment of its economic benefits anderson supra pincite the issue of the appropriate standards to be applied in determining true beneficial_ownership is a question of law 560_f2d_687 5th cir however the question of whether an individual meets these standards and qualifies as a true beneficial_owner is a question of fact id in determining true beneficial_ownership courts have employed a four factor analysis see speca madrigrano supra 44_tc_193 52_tc_210 61_tc_268 kirkpatrick v commissioner tcmemo_1977_281 for purposes of this discussion it will help to address the four factor analysis in the context of two specific cases in which opposite results were reached -- the property of the other spouse speca madrigrano and kirkpatrick supra both of these cases involved intra- family transfers of closely-held stock by parents to their children the issue was whether these transfers were to be be respected for tax purposes in speca madrigrano the commissioner prevailed ie the intra-family transfer was not respected by the court for tax purposes in kirkpatrick the taxpayers prevailed ie the intra-family transfer was respected by the court for tax purposes the four factors that have been used by the courts to determine the true beneficial_ownership of corporate stock after a questionable transfer are discussed below whether the transferees within the family are able to effectively exercise ownership rights of their shares in speca madrigrano there were two families involved -- the speca family and the madrigrano family the fathers attempted to transfer stock to their children however speca’s two children were held not to have effective ownership rights after the transfer because they were minors without legal representatives although madigrano’s two children were young adults they were students who never actually exercised their judgment with respect to any corporate decisions therefore madrigrano’s children were also held not to have effective ownership rights after the transfer in kirkpatrick the wife was named custodian for the transferee-children and she was present at all corporate meetings she fully participated in corporate decisions acted independently and exercised considerable influence over corporate affairs therefore the kirkpatrick court in effect found that the transferee-children were able to exercise ownership rights through their custodian- mother with respect to the instant case although mrs a had the ability to effectively exercise her ownership rights because she is an adult you 4although the instant case involves a transfer between husband and wife not between parents and children we see no distinction in this context should determine whether mrs a actually participated in corporate decision-making by virtue of her share holdings we note that one of the reasons cited by mr a for the transfer to mrs a was to allow for mrs a to become more involved in corporate decisions whether the transferor continued to exercise complete dominion and control_over the transferred stock in speca madrigrano the court found that speca retained dominion and control because inter alia speca signed a waiver of notice as to the shareholder’s meeting on behalf of his two minor sons the minutes of the shareholder’s meeting indicated that speca’s minor sons were present only by proxy without stating who the proxy was and speca approved the minutes himself even though he was not a shareholder of record the court also found that madrigrano retained dominion and control because the company’s main supplier insisted upon dealing the elder madrigrano to the exclusion of his sons the elder madrigrano even wrote a letter to the supplier stating that the transfer of shares to his sons was effectuated only for the tax benefits in kirkpatrick the court held that the parents did not exercise complete dominion and control_over the transferred stock the court noted that when a new child was born the parents transferred additional stock from their personal holdings rather than diluting the stock holdings of their other children such a dilution upon the birth of a new child was cited by the tax_court in beirne supra in support of the beirne court’s holding that the parents had retained dominion and control with respect to the instant case you should determine whether any facts and circumstances exist such as those described above which would indicate whether mr a continued to exercise complete dominion and control_over the transferred stock whether the transferor continued to enjoy economic benefits of ownership after conveyance of the stock in speca madrigrano the court held that the parents retained the economic benefits of the transferred stock to the detriment of their children the court held that the cash dividends distributed to the children were in no way commensurate to the profits of the corporation instead these cash dividend distributions were approximately equal to the increase in the children’s tax_liabilities due to the inclusion of the proportionate share of the subchapter_s corporation’s income on the children’s returns also the court found that the parents were the recipients of sizeable unsecured loans from the corporation that remained outstanding long after the parents transferred their stock to their children these loans were then repaid to the corporation through the parent’s use of their children’s non-cash dividends which were taken from their children as payment for the transferred shares in kirkpatrick on the other hand the court held that the father did not retain the economic benefits of the transferred stock even though he received distributions from the subchapter_s_corporation in excess of his pro_rata share with respect to the excess distributions the court stated that the father signed promissory notes to his children for a portion of the debt to evidence his indebtedness to them the court found that the mother as custodian was fully aware of her husband’s debt to her children and adequately protected their interests with respect to the instant case you should analyze the financial relationship between mr and mrs a in order to help determine whether mr a continued to enjoy the economic benefits of the transferred stock whether the transferor dealt at arm’s length with the corporation involved in speca madrigrano the court found that the parents failed to deal at arm’s length in obtaining loans or in paying them back in kirkpatrick the court found that the father dealt at arm’s length in that he took steps to substantiate and secure the indebtedness between him and his children furthermore the court found that the father had actually repaid a significant amount of the indebtedness with respect to the instant case you should examine the relevant facts necessary to determine whether mr a dealt at arm’s length with the corporation or whether for example he used the corporation as his personal pocketbook case development hazards and other considerations the determination of whether an individual meets the standards for qualification as a true beneficial_owner is a question of fact based upon the four- part test discussed above additional factual development is necessary to determine whether mr a’s transfer of stock to his wife should be respected for federal_income_tax purposes you have also asked us to assume that mrs a should not be considered to be an employee if you determine that mrs a should be considered an employee the qpsc ownership test discussed above will have been met and petitioner will be regarded as a qualified_personal_service_corporation subject_to the flat_tax rate of sec_11 james l atkinson acting senior technician reviewer income_tax accounting branch field service division


t c memo united_states tax_court jeffrey i and roberta h stone petitioners v commissioner of internal revenue respondent joseph and mary cote petitioners v commissioner of internal revenue respondent docket nos filed date bernard s mark and richard s kestenbaum for petitioners lawrence l davidow and frances ferrito regan for respondent in docket no barry j laterman for respondent in docket no memorandum findings_of_fact and opinion dawson judge these cases were assigned to special_trial_judge norman h wolfe pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 they were tried and briefed separately but consolidated for purposes of opinion the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge wolfe special_trial_judge these cases are part of the plastics recycling group of cases for a detailed discussion of the transactions involved in the plastics recycling cases see provizer v commissioner tcmemo_1992_177 affd without published opinion 996_f2d_1216 6th cir the underlying transactions in these cases are substantially identical to the transaction considered in the provizer case in a notice_of_deficiency respondent determined a deficiency in the joint federal income taxes of petitioners stone in the amount of dollar_figure and additions to tax for that year in the amount of dollar_figure under sec_6659 for valuation_overstatement in the amount of dollar_figure under sec_6653 for negligence and under sec_6653 in an amount equal to percent of the interest due on the underpayment attributable to negligence in another notice_of_deficiency respondent determined deficiencies in the and joint federal income taxes of petitioners cote in the respective all section references are to the internal_revenue_code in effect for the years in issue unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure amounts of dollar_figure and dollar_figure for those same years respondent determined the following additions to tax additions to tax_year sec_6651 sec_6653 sec_6653 sec_6659 dollar_figure big_number dollar_figure dollar_figure for the addition_to_tax is under sec_6653 percent of the interest payable with respect to the portion of the underpayment attributable to negligence respondent also determined in each case that interest on deficiencies accruing after date would be calculated pincite percent of the statutory rate under sec_6621 stipulations of settled issues pertaining to petitioners' respective participation in the plastics recycling program and filed in each of these consolidated cases provide in part that petitioners are not entitled to any deductions losses investment credits business energy investment credits or any other tax benefits claimed on their tax returns as a result of their participation in the plastics recycling program the underpayments in income_tax attributable to petitioners' participation in the plastics recycling program are substantial underpayments attributable to tax_motivated_transactions subject_to the increased rate of interest established under sec_6621 formerly sec_6621 this stipulation resolves all issues that relate to the items claimed on petitioners' tax returns resulting the deficiency in the cote case for taxable_year i sec_2 solely attributable to respondent's disallowance of an investment_credit carryback from taxable_year from their participation in the plastics recycling program with the exception of petitioners' potential liability for additions to the tax for valuation overstatements under sec_6659 and for negligence under the applicable provisions of sec_6653 respondent's determination of an addition_to_tax under sec_6651 with respect to petitioners cote was not specifically addressed in the stipulation of settled issues nor elsewhere in the record however given the third stipulation in the stipulation of settled issues we consider any issue with respect to the addition_to_tax under sec_6651 to be settled see also rule a accordingly the only issues remaining in these consolidated cases are whether petitioners are liable for additions to tax under sec_6653 and sec_6653 for negligence and whether petitioners are liable for additions to tax under sec_6659 for underpayments of tax attributable to valuation overstatements findings_of_fact some of the facts have been stipulated and are so found the stipulated facts and attached exhibits are incorporated by this reference petitioners stone resided in framingham massachusetts when their petition was filed petitioners cote resided in huntington new york when their petition was filed during petitioner jeffrey stone stone was the sole owner of an electronics distributor stone component sales corp for which he worked as a manufacturers' representative his spouse roberta was not employed outside the home on their federal_income_tax return petitioners stone reported gross_income from wages interest and dividends in excess of dollar_figure consequently in the absence of significant deductions or credits they were subject_to payment of federal income taxes in substantial amounts for taxable_year petitioner joseph cote cote was a corporate bond trader for merrill lynch pierce fenner smith inc merrill lynch during his wife mary was not employed outside the home on their federal_income_tax return petitioners cote reported gross_income from wages interest and dividends in excess of dollar_figure consequently in the absence of significant deductions or credits they were subject_to payment of federal income taxes in substantial amounts for taxable_year stone is a limited_partner in northeast resource recovery associates northeast and cote is a limited_partner in hyannis recycling associates hyannis for convenience we refer to these two partnerships collectively as the partnerships petitioners have stipulated that the transactions involving the sentinel epe recyclers leased by the partnerships are substantially identical to those in the clearwater group limited_partnership clearwater the partnership considered in provizer v commissioner tcmemo_1992_177 in addition petitioners have stipulated substantially the same facts concerning the underlying transactions as we found in the provizer case in the provizer case packaging industries inc pi manufactured and sold six sentinel epe recyclers to eci corp for dollar_figure each eci corp in turn resold the recyclers to f g corp for dollar_figure each f g corp then leased the recyclers to clearwater which licensed the recyclers to fmec corp which sublicensed them back to pi the sales of the recyclers from pi to eci corp were financed with nonrecourse notes approximately percent of the sales_price of the recyclers sold by eci corp to f g corp was paid in cash with the remainder financed through notes these notes provided that percent of the notes were recourse but that the recourse portion of the notes was only due after the nonrecourse portion percent was paid in full all of the monthly payments required among the entities in the above transactions offset each other these transactions were done simultaneously although the recyclers were sold and leased for the above amounts under the structure of simultaneous transactions the fair_market_value of a sentinel epe recycler in and was not in excess of dollar_figure pi allegedly sublicensed the recyclers to entities that would use them to recycle plastic scrap the sublicense agreements provided that the end-users would transfer to pi percent of the recycled scrap in exchange for a payment from fmec corp based on the quality and amount of recycled scrap like clearwater each of the partnerships herein was formed to lease sentinel epe recyclers from f g corp and license those recyclers to fmec corp the transactions of the partnerships differ from the underlying transaction in the provizer case in the following respects the entity that leased the machines from f g corp and licensed them to fmec corp in the northeast transaction seven rather than six machines were sold leased licensed and sublicensed and in the hyannis transaction f g purchased the recyclers for dollar_figure each for convenience we refer to the series of transactions among pi eci corp f g corp each of the partnerships fmec corp and pi as the partnership transactions in addition to the partnership transactions a number of other limited_partnerships entered into transactions similar to the partnership transactions also involving sentinel epe recyclers as the hyannis transaction was initially structured hyanni sec_3 purchased the recyclers from eci corp and leased them to fmec this transaction was restructured to take advantage of the safe- harbor leasing rules of the economic_recovery_tax_act_of_1981 erta publaw_97_34 95_stat_172 as in all subsequent plastics recycling programs f g corp was interposed between eci and the primary leasing partnership in this case hyannis there is no explanation in the record as to why the six recyclers were sold to f g corp for dollar_figure in the hyannis transaction but later sold for dollar_figure in subsequent plastics recycling transactions we note that the hyannis partnership initially closed at the lower price prior to the enactment of the safe-harbor legislation and subsequently the arrangement was modified in an attempt to take advantage of those rules by inserting f g corp into the transaction and sentinel expanded polystyrene recyclers we refer to these collectively as the plastics recycling transactions with respect to each of the partnerships a private_placement memorandum was distributed to potential limited partners appended to the offering memoranda were reports by f g's evaluators dr stanley m ulanoff ulanoff a marketing consultant and dr samuel z burstein burstein a mathematics professor the offering memoranda list significant business and tax risk factors associated with investments in the partnerships specifically the offering memoranda state that there is a substantial likelihood of audit by the internal_revenue_service irs and that the purchase_price paid to eci corp probably would be challenged as being in excess of fair_market_value that the partnerships have no prior operating history that the general partners have no prior experience in marketing recycling or similar equipment that the limited partners have no control_over the conduct of the partnerships' business that there is no established market for the sentinel epe recyclers that there are no assurances that market prices for virgin resin will remain at their current costs per pound or that the recycled pellets will be as marketable as virgin pellets and that certain potential conflicts of interest exist during stone acquired a 60525-percent interest in northeast for his investment of dollar_figure as a result of the passthrough from northeast on their federal_income_tax return the stones deducted an operating loss in the amount of dollar_figure and claimed investment tax and business energy credits totaling dollar_figure the underlying deficiency in the stone case results from respondent's disallowance of the stones' claimed operating losses and credits related to northeast also during cote acquired a 187-percent interest in hyannis for his investment of dollar_figure as a result of the passthrough from hyannis on their federal_income_tax return the cotes deducted an operating loss in the amount of dollar_figure and claimed investment tax and business energy credits totaling dollar_figure an additional dollar_figure of the business_energy_credit was carried back to the cotes' underlying deficiencies for taxable years and result from respondent's disallowance of their claimed operating losses and credits related to hyannis cote and stone are both well educated and very successful and sophisticated businessmen stone holds a b s in electrical engineering from northeastern university and an m b a from babson college after college he worked for the raytheon and hewlett-packard companies and in he started his own electronic components company stone component sales corp cote the parties stipulated that cote owned a 094-percent interest in hyannis however cote's form k-1 partner's share of income credits deductions etc attached to the hyannis partnership return indicates that he acquired a percent interest in hyannis the reason for this discrepancy is not explained in the record graduated from high school in married and had a family and drove a taxi until he got a job as a conductor on the long island railroad in in he began working for merrill lynch as an order clerk and he worked for both the railroad and merrill lynch until he made a living in the securities business after becoming a senior trader at merrill lynch cote left for loeb rhodes in and eventually ran their trading desk in he returned to merrill lynch and co-managed their high yield securities department from to cote also served as one of five voting members of the merrill lynch high yield commitment committee during the time he served as a member the committee made decisions for the underwriting of more than dollar_figure billion in securities stone learned about the sentinel epe recyclers and northeast from donald f tomasetti tomasetti an accountant married to a cousin of his the two have known each other on a personal level since the 1960's tomasetti has a b b a in accounting from the university of massachusetts he worked at peat marwick mitchell for years as an auditor and as a tax specialist in he established his own full service accounting practice romito tomasetti two or years later stone component sales corp became a client of romito tomasetti with tomasetti acting as the principal adviser to both the corporation and stone individually tomasetti has no expertise in plastics tomasetti learned about the sentinel epe recyclers from john frabotta frabotta and dick omohundro omohundro together they paid tomasetti a fee for his services in reviewing the private_placement memorandum concerning the sentinel recyclers and also going to hyannis to look at the equipment they were considering as an investment frabotta has a b a in economics and accounting from san diego state university and an m b a from suffolk university from to he worked in the commercial and investment departments of first national bank of san diego from to he and omohundro managed a boston mutual_fund for which tomasetti was the auditor from to he and cote managed the research and high yield securities group at merrill lynch and since he has worked for a registered investment adviser prospect street investment management another fund for which tomasetti is the auditor frabotta is not an expert in plastics or plastics recycling frabotta learned about the sentinel epe recyclers from cote who in turn had learned about them from an accounting firm finkle co finkle co performed accounting functions for northeast or its general_partner richard roberts roberts in cote omohundro and frabotta all worked at merrill lynch omohundro did not testify at the trial in finkle co prepared a report on the polyethylene operations at hyannis roberts forwarded this report to limited partners in the plastics recycling transactions in a cover letter roberts refers to finkle co as our accounting firm during the years at issue and they often discussed investment opportunities with each other each reviewed the offering materials for the partnership transactions and omohundro frabotta and tomasetti together visited the pi plant in hyannis massachusetts at the pi plant they saw a sentinel epe recycler in operation and discussed the nature of the business with the promoters of the partnerships and pi personnel during tomasetti's tour at pi there was an inquiry about the cost of the sentinel epe recycler but pi representatives declined to discuss that subject because as tomasetti understood it the machine was proprietary in nature and had not been patented although pi claimed that its information was a trade secret and that it never obtained patents on its machines in fact pi had obtained numerous patents prior to the partnership transactions and had also applied for a trademark for the sentinel epe recyclers pi indicated that there was no other comparable machine on the market and tomasetti made no independent inquiries or investigation regarding the uniqueness or value of the recycler tomasetti read the reports of ulanoff and burstein but did not fully understand them and did not attach much weight to them no other members of tomasetti's accounting firm performed any due diligence or investigation of it is not clear whether finkle co prepared the report for northeast or roberts' consulting firm the partnership transactions an attorney representing one of tomasetti's client's supposedly did speak with some acquaintances at pi tomasetti did not attempt to market the partnership transactions himself he thought they were very aggressive he fully expected an irs challenge because of the obvious tax benefits in excess of the investment that were being achieved in the first year tomasetti understood that the tax benefits stemmed from the purported value of the sentinel epe recyclers and he did not believe it was prudent to invest in the partnerships while relying upon the value of the recyclers as represented in the offering materials tomasetti believed that before investing an interested_party should have a strong inclination that the partnership transactions were economically viable tomasetti thought that a substantial value for the recyclers might be established in the future if the machines performed well frabotta understood that omohundro questioned a few boston area law firms about pi and was told nothing that gave him concern frabotta did not pursue an independent investigation of the value of the sentinel epe recycler nor did he ask anyone else to investigate it frabotta discussed the value of the recycler with tomasetti and omohundro only in passing frabotta did not verify the price of resin he did not inquire whether there were other comparable machines on the market and he did not ask anyone about the market for the sentinel epe recycler stone reviewed the northeast offering memorandum and spoke with tomasetti about the visit to hyannis stone knew that tomasetti had no expertise in plastics and tomasetti never told stone that he had consulted with or intended to consult anyone who was not associated with pi or the partnerships stone knew that tomasetti was unsure about the value of the sentinel epe recycler but the value of the machine did not concern stone he also knew that tomasetti received a commission for sales of partnership interests stone did not investigate the existence of competing suppliers or manufacturers or the existence of a market for the recyclers except for two or three discussions with tomasetti stone did not independently or through any third parties investigate pi or the plastics recycling industry cote spoke with people at merrill lynch about leasing transactions in general recycling and speculation about the price of oil he did not supply anyone with the hyannis offering memorandum or pay for an evaluation of hyannis nor did anyone prepare any kind of report for him cote and frabotta understood from a client global marine inc an offshore drilling company that there was speculation that the price of oil could rise cote spoke to a representative of finkle co about hyannis' tax benefits he was aware that burstein had a potential conflict of interest that there was no established market for the recyclers and that finkle co received a sales commission on his investment in the partnerships cote also knew that frabotta and omohundro were not plastics recycling experts cote knew of tomasetti because he was omohundro's accountant but cote never had any direct conversations with tomasetti none of petitioners have any education or work experience in plastics recycling or plastics materials they did not independently investigate the sentinel epe recyclers or see a sentinel epe recycler or any other type of plastics recycler prior to participating in the recycling ventures opinion we have decided more than two dozen of the plastics recycling group of cases the majority of these cases like the provizer v commissioner tcmemo_1992_177 concerned the substance of the partnership transaction and also the additions to tax the following cases concern additions to tax for negligence inter alia reimann v commissioner tcmemo_1996_84 bennett v commissioner tcmemo_1996_14 atkind v commissioner tcmemo_1995_582 triemstra v commissioner tcmemo_1995_581 pace v commissioner tcmemo_1995_580 dworkin v commissioner tcmemo_1995_533 wilson v commissioner tcmemo_1995_525 avellini v commissioner tcmemo_1995_489 paulson v commissioner tcmemo_1995_387 zidanich v commissioner tcmemo_1995_382 ramesh v commissioner tcmemo_1995_346 reister v commissioner tcmemo_1995_305 fralich v commissioner tcmemo_1995_257 shapiro v commissioner tcmemo_1995_224 pierce v commissioner tcmemo_1995_223 fine v commissioner tcmemo_1995_222 pearlman v commissioner tcmemo_1995_182 kott v commissioner tcmemo_1995_181 and eisenberg v commissioner tcmemo_1995_180 also baratelli v commissioner tcmemo_1994_484 estate of satin v commissioner tcmemo_1994_435 fisher v commissioner tcmemo_1994_434 foam recycling associates v commissioner tcmemo_1992_645 and madison recycling associates v commissioner tcmemo_1992_605 concern other issues consolidated cases herein raised issues regarding additions to tax for negligence and valuation_overstatement we have found the taxpayers liable for such additions to tax in all but one of the opinions issued to date in provizer v commissioner tcmemo_1992_177 a test case for the plastics recycling group of cases this court found that each sentinel epe recycler had a fair_market_value not in excess of dollar_figure held that the transaction which is almost identical to the partnership transactions in these consolidated cases was a sham because it lacked economic_substance and a business_purpose upheld the sec_6659 addition_to_tax for valuation_overstatement since the underpayment of taxes was directly related to the overstatement of the value of the sentinel epe recyclers and held that losses and credits claimed with respect to the clearwater partnership were attributable to tax-motivated transactions within the meaning of sec_6621 in reaching the conclusion that the transaction lacked economic_substance and a business_purpose this court relied heavily upon the overvaluation of the sentinel epe recyclers in zidanich v commissioner tcmemo_1995_382 we found the taxpayers liable for the sec_6659 addition_to_tax but not liable for the negligence additions to tax under sec_6653 as indicated in our opinion the zidanich case and the steinberg case consolidated with it for opinion involved exceptional circumstances although petitioners have not agreed to be bound by the provizer opinion they have stipulated that the investments in the sentinel epe recyclers in these cases are similar to the investment described in provizer v commissioner supra the underlying transactions in these consolidated cases and the sentinel epe recyclers considered in these cases are the same type of transaction and same type of machine considered in provizer v commissioner supra based on the entire records in these cases including the extensive stipulations testimony of respondent's experts and petitioners' testimony we hold that each of the partnership transactions herein was a sham and lacked economic_substance in reaching this conclusion we rely heavily upon the overvaluation of the sentinel epe recyclers respondent is sustained on the question of the underlying deficiencies we note that petitioners have explicitly conceded this issue in their respective stipulations of fact and stipulations of settled issues filed shortly before trial the record plainly supports respondent's determinations in these cases regardless of such concessions for a detailed discussion of the facts and the applicable law in a substantially identical case see provizer v commissioner supra issue sec_6653 negligence in notices of deficiency respondent determined that petitioners were liable for additions to tax for negligence under sec_6653 for and a and for each of petitioners has the burden of proving that respondent's determinations of these additions to tax are erroneous rule a 79_tc_846 sec_6653 for and sec_6653 for impose an addition_to_tax equal to percent of the underpayment if any part of an underpayment_of_tax is due to negligence or intentional disregard of rules or regulations in cases involving negligence for an additional_amount is added to the tax under sec_6653 such amount is equal to percent of the interest payable with respect to the portion of the underpayment attributable to negligence negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances 85_tc_934 the question is whether a particular taxpayer's actions in connection with the transactions were reasonable in light of his experience and the nature of the investment or business see 60_tc_728 petitioners in these consolidated cases contend that they were reasonable in claiming deductions and credits with respect to the partnerships petitioners each allege that they reasonably relied upon the advice of qualified advisers and that they reasonably expected an economic profit in light of the so- called oil crisis in the united_states during in each case petitioners' investigation of the partnership transactions and the sentinel epe recyclers was essentially limited to conversations with tomasetti frabotta or omohundro in addition to a review of the respective offering memoranda petitioners argue that such investigation insulates them from the negligence additions to tax under some circumstances a taxpayer may avoid liability for the additions to tax under sec_6653 if reasonable reliance on a competent professional adviser is shown 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 reliance on professional advice standing alone is not an absolute defense to negligence but rather a factor to be considered id in order for reliance on professional advice to excuse a taxpayer from the negligence additions to tax the reliance must be reasonable in good_faith and based upon full disclosure id see 94_tc_473 91_tc_396 affd without published opinion 940_f2d_1534 9th cir 63_tc_149 reliance on representations by insiders promoters or offering materials has been held an inadequate defense to negligence 94_tc_637 affd without published opinion 956_f2d_274 9th cir affd without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir 92_tc_958 affd without published opinion 921_f2d_280 9th cir 92_tc_827 91_tc_524 we have rejected pleas of reliance when neither the taxpayer nor the advisers purportedly relied upon by the taxpayer knew anything about the nontax business aspects of the contemplated venture 85_tc_557 80_tc_914 steerman v commissioner tcmemo_1993_447 based upon our review of the entire records in these cases we hold that stone's purported reliance on tomasetti and cote's purported reliance on frabotta and omohundro and through them tomasetti was not reasonable not in good_faith nor based upon full disclosure neither petitioners nor their supposed advisers nor anyone affiliated with them had any education or work experience in plastics materials or plastics recycling neither petitioners nor their supposed advisers consulted any independent experts or conducted anything approaching a meaningful investigation in addition it is clear that tomasetti had serious concerns regarding the recycler's purported value and nothing in the records indicates that his concerns were not communicated to petitioners frabotta's purported investigation entailed speaking to a client contact at global marine about the price of oil a review of the offering memorandum and a visit to hyannis with tomasetti and omohundro tomasetti became involved at the behest of frabotta and omohundro they paid him to review the offering materials and visit pi with them omohundro did not testify at the trial aside from visiting the pi plant in hyannis he purportedly phoned some legal contacts in boston who knew of no reason to be concerned about pi as for finkle co nothing in the records indicates that they performed any due diligence and in they were providing services to either northeast or roberts see supra note consequently we must consider this accounting firm part of the offering or promoting group none of petitioners' supposed advisers had any background in plastics or plastics recycling to help them analyze or assess the recyclers and the only persons they spoke to were insiders of the partnerships or pi personnel neither tomasetti nor frabotta made any inquiries regarding the value of the machine or sought any independent investigation or third party appraisal the pi personnel insiders and promoters they spoke to in hyannis were the ones petitioners ultimately relied upon for the value of the sentinel epe recycler and the economic viability of the partnership transactions see vojticek v commissioner tcmemo_1995_444 to the effect that advice from such persons is better classified as sales promotion tomasetti understood that the tax benefits were generated by the purported value of the recyclers and thought that nobody should go into this deal at all based on the valuations established he did not market the partnerships in his view the deal was very aggressive and sure to be challenged by the irs he knew that the recyclers were insured for only a nominal amount in relation to their purported value the parties have stipulated that the recyclers had a manufacturing cost of only dollar_figure each consequently tomasetti believed their purported value could only be supported by the success of the partnerships ie as a function of market demand and that an investor should therefore have a strong inclination that this was a viable economic deal both tomasetti and frabotta testified that they believed the purported value of the sentinel epe recycler was supported by the economic projections in the offering materials neither tomasetti nor frabotta nor anyone associated with them investigated the merits of those projections frabotta did not investigate the market for the sentinel epe recycler or inquire as to whether the recycler had any competition tomasetti made no independent inquiries or investigation of the recycler or any of the individuals involved he thought that there was a ready market for the recyclers as he put it i did some due diligence to the extent that i was asked to accompany these individuals to hyannis but it wasn't my objective to go down and to try and shake this out and spend six months of my life trying to learn about the industry the offering materials clearly stated that there was no established market for leasing or operating the recyclers information published prior to the plastics recycling transactions indicated that several machines capable of densifying low density materials already were on the market other plastics recycling machines available during ranged in price from dollar_figure to dollar_figure including the foremost densilator nelmor weiss densification system regenolux buss- condux plastcompactor and cumberland granulator see provizer v commissioner tcmemo_1992_177 petitioners have failed to show that tomasetti frabotta omohundro or finkle co was qualified to evaluate the sentinel epe recyclers and the partnership transactions tomasetti was skeptical of the recycler's inflated value and he communicated the results of his investigation and review to his clients frabotta's and tomasetti's testimony that they believed the purported value of the recycler was supported by the economic projections in the offering materials is without merit and not credible petitioners knew that tomasetti and frabotta had no education or expertise in plastics or plastics recycling and there is no reason to doubt that tomasetti's reservations and disclaimers were communicated to petitioners a taxpayer may rely upon his adviser's expertise in these cases accounting financial planning and tax_advice but it is not reasonable or prudent to rely upon an adviser regarding matters outside of his field of expertise or with respect to facts which he does not verify see 864_f2d_93 9th cir affg 88_tc_1086 lax v commissioner tcmemo_1994_329 affd without published opinion 72_f3d_123 3d cir because of the technical nature of these investment ventures it was unreasonable for petitioners to rely on tomasetti frabotta or omohundro moreover a careful consideration of the materials in the respective offering memoranda especially the discussions in the prospectuses of high writeoffs and risk of audit should have alerted a prudent and reasonable investor to the questionable nature of the promised deductions and credits see 857_f2d_1383 9th cir affg dister v commissioner tcmemo_1987_217 the preface to each memorandum contained the following no offeree should consider the contents of this memorandum as expert advice each offeree should consult his own professional advisers as to legal tax_accounting and other matters relating to any purchase by him of units each of the memoranda also clearly stated that the respective partnership transactions involved significant tax risks and that in all likelihood the irs would challenge the transactions in a business risks section each warned that there was no history for the subject partnership no established market for the recyclers and that there could be no assurance that recycled pellets would be as marketable as virgin pellets it is clear from the records that none of petitioners carefully considered the risk factors mentioned in the offering memoranda on their face the partnership transactions should have raised serious questions in the minds of ordinarily prudent investors according to the northeast and hyannis offering memoranda the projected benefits for taxable_year were for each dollar_figure investor investment tax_credits of dollar_figure and dollar_figure respectively plus deductions of dollar_figure and dollar_figure respectively all in the initial year of investmentdollar_figure in the first year of the investments alone the stones and cotes claimed operating losses in the respective amounts of dollar_figure and dollar_figure plus investment tax and business energy credits in the respective amounts of dollar_figure and dollar_figure dollar_figure of which was carried back to therefore like the taxpayers in provizer v commissioner supra except for a few weeks at the beginning none of petitioners ever had any money in the partnerships a reasonably prudent person would not conclude without substantial investigation that the government was providing significant tax benefits to taxpayers who took no business risk and made no investment of their own capital 92_tc_827 in both cases the parties stipulated that the offering memoranda projected tax benefits of dollar_figure in investment tax_credits and dollar_figure in deductions there is no explanation for this discrepancy in the record the stones placed into the record of their case several documents ostensibly submitted as evidence that they monitored their investments in northeast these included unaudited financial statements of northeast prepared by nonindependent accountants from to forms k-1 from and a report prepared by finkle co describing the accounting procedures and controls for the recycling operations at pi and a update from pi noting that market prices for polyethylene resin have remained relatively low and the sentinel recyclers have not been profitable stone did not testify or otherwise indicate that he ever examined these documents he spoke to roberts once about the performance of the northeast partnership and learned that it was experiencing difficulty placing the machines we decline to infer from these documents that he actively monitored his investment in northeast the parties in these consolidated cases stipulated that the fair_market_value of a sentinel epe recycler in and was not in excess of dollar_figure notwithstanding this concession petitioners contend that they were reasonable in claiming credits on their federal_income_tax returns based upon each recycler's having a value of dollar_figure in the hyannis partnership and dollar_figure in the northeast partnershipdollar_figure in support of this the hyannis partnership involved machines on which the partnership set a value of dollar_figure the northeast partnership involved machines on which the partnership set a value of dollar_figure position petitioners submitted into evidence preliminary reports prepared for respondent by ernest d carmagnola carmagnola the president of professional plastic associates carmagnola had been retained by the irs in to evaluate the sentinel epe and eps recyclers in light of what he described as the fantastic values placed on the recyclers by the owners based on limited information available to him at that time carmagnola preliminarily estimated that the value of the sentinel epe recycler was dollar_figure however after additional information became available to him carmagnola concluded in a signed affidavit dated date that the machines actually had a fair_market_value of not more than dollar_figure each in the fall of and we accord no weight to the carmagnola reports submitted by petitioners the projected valuations therein were based on inadequate information research and investigation and were subsequently rejected and discredited by their author respondent likewise rejected the reports and considered them unsatisfactory for any purpose and there is no indication in the records that respondent used them as a basis for any in one preliminary report carmagnola states that he has a serious concern of actual profit-level of a sentinel epe recycler and that to determine whether the machines actually could be profitable he required additional information from pi carmagnola also indicates that in preparing the report he did not have information available concerning research_and_development costs of the machines and that he estimated those costs in his valuations of the machines determinations in the notices of deficiency even so petitioners' counsel obtained copies of these reports and urge that they support the reasonableness of the values reported on petitioners' returns not surprisingly petitioners did not call carmagnola to testify in these cases but preferred instead to rely solely upon his preliminary ill-founded valuation estimates the carmagnola reports were a part of the record considered by this court and reviewed by the sixth circuit_court of appeals in the provizer case where we held the taxpayers negligent consistent therewith we find in these cases as we have found previously that the reports prepared by carmagnola are unreliable and of no consequence petitioners are not relieved of the negligence additions to tax based on the preliminary reports prepared by carmagnola petitioners' reliance on mollen v united_states aftr 2d ustc par big_number d ariz is misplaced the taxpayer in mollen was a medical doctor who specialized in diabetes and who on behalf of the arizona medical association led a continuing medical education cme accreditation program for local hospitals the underlying tax matter involved the taxpayer's investment in diabetics cme group ltd a limited_partnership which invested in the production marketing and distribution of medical educational video tapes the district carmagnola has not been called to testify in any of the plastics recycling cases before us court found that the taxpayer's personal expertise and insight in the underlying investment gave him reason to believe it would be economically profitable although the taxpayer was not experienced in business or tax matters he did consult with an accountant and a tax lawyer regarding those matters moreover the district_court noted that the propriety of the taxpayer's disallowed deduction therein was reasonably debatable see zfass v commissioner tcmemo_1996_167 the records in these cases show that none of petitioners or their supposed advisers had any formal education expertise or experience in plastics or plastics recycling none of them had any personal insight or industry know-how in plastics recycling that would reasonably lead them to believe that the partnership transactions would be economically profitable the extent of tomasetti's frabotta's and omohundro's investigation was a tour of pi's plant in hyannis and a discussion with pi personnel and insiders to the partnership transactions no independent experts in the field of plastics or plastics recycling were consulted by any of petitioners or their advisers the facts of these cases are distinctly different from those in the mollen case thus we consider petitioners' arguments with respect to the mollen case inapplicable under the circumstances of these cases petitioner's arguments are not supported by the ninth circuit_court of appeals' partial reversal of our decision in osterhout v commissioner tcmemo_1993_251 affd in part and revd in part without published opinion sub nom balboa energy fund v commissioner f 3d 9th cir in osterhout we found that certain oil_and_gas partnerships were not engaged in a trade_or_business and sustained respondent's imposition of the negligence additions to tax with respect to one of the partners thereindollar_figure the taxpayer had relied in part upon a tax opinion contained in the offering materials the ninth circuit_court of appeals reversed our imposition of the negligence additions to tax based on the court_of_appeals for the ninth circuit's partial reversal of our decision in balboa energy fund petitioners argue that their reliance upon the offering materials concerning their investments in northeast and hyannis was reasonable and therefore sufficient to overcome the additions to tax for negligence the court_of_appeals for the ninth circuit's opinion is unpublished however moreover the prefaces to the offering memoranda for northeast and hyannis warned prospective investors that the tax opinion letter was not in final form and was prepared for the general_partner and that prospective investors should consult their own professional advisers with respect to the tax benefits and tax risks osterhout v commissioner tcmemo_1993_251 involved a group of consolidated cases the parties therein agreed to be bound by the court's opinion regarding the application of the additions to tax provided for under sec_6653 inter alia accordingly although the court's analysis focused on one taxpayer the additions to tax were sustained with respect to all of the parties associated with the partnership the tax opinion letter was addressed solely to the general_partner and contained the following opening disclaimer this opinion is provided to you for your individual guidance we expect that prospective investors will rely upon their own professional advisors with respect to all tax issues arising in connection with their investment in the partnership and the operations thereof we recognize that you intend to include this letter with your offering materials and we have consented to that with the understanding that the purpose in distributing it is to assist your offerees' tax advisors in making their own analysis and not to permit any prospective investor to rely upon our advice in this matter emphasis added accordingly both the offering memoranda and the tax opinion letter expressly and unambiguously indicated that prospective investors such as petitioners were not to rely upon the tax opinion letter the limited technical opinion of tax counsel in these cases was not designed as advice upon which taxpayers might rely and the opinion of counsel itself so states petitioners also argue in general terms that they were reasonable in claiming the deductions and credits related to the partnerships because of rising oil prices in the united_states in in support of this argument petitioners testified that the conventional wisdom at the time was that oil prices would rise petitioners also placed into the record several articles from modern plastics and an energy projections report from the u s department of energy doe all published in the years and petitioners also cite 99_tc_132 affd sub nom 28_f3d_1024 10th cir and rousseau v united_states ustc par big_number e d la the articles from modern plastics and the report by the doe speculated on the price of oil among other matters the preface to the doe report cautioned about the tremendous uncertainties underlying energy projections and warned that their projections do not constitute any sort of blueprint for the future reflective of such uncertainties an date article in modern plastics contemplated resin price hikes while a date article predicted a leveling off of prices market disruptions and an industrywide shakeout petitioners do not purport to have read or in any way relied upon the doe report or the modern plastics articles and have not otherwise explained the connection between these speculative materials and their investments in the partnerships indeed while cote testified that he saw a correlation between resin pellets an oil-based product and the price of oil he could not recall ever making a direct connection between those two petitioners' vague general claims concerning the so-called oil crisis are without merit petitioners' reliance on krause v commissioner supra is misplaced the facts in the krause case are distinctly different from the facts of these cases in the krause case the taxpayers invested in limited_partnerships whose investment objectives concerned enhanced oil recovery eor technology the krause opinion states that during the late 1970's and early 1980's the federal government adopted specific programs to aid research_and_development of eor technology id pincite in holding that the taxpayers in the krause case were not liable for the negligence additions to tax this court noted that one of the government's expert witnesses acknowledged that investors may have been significantly and reasonably influenced by the energy price hysteria that existed in the late 1970's and early 1980's to invest in eor technology id pincite in the present cases however one of respondent's experts steven grossman explained that the price of plastics materials is not directly proportional to the price of oil that less than percent of crude_oil is utilized for making plastics materials and that studies have shown that a increase in crude_oil prices results in only a to increase in the cost of plastics products while eor was according to our krause opinion in the forefront of national policy and the media during the late 1970's and 1980's there is no showing in these records that the so-called energy crisis would provide a reasonable basis for petitioners' investing in recycling of polyethylene particularly in the machinery here in question moreover the taxpayers in the krause opinion were experienced in or investigated the oil industry and eor technology specifically one of the taxpayers in the krause case undertook significant investigation of the proposed investment including researching eor technology the other taxpayer was a geological and mining engineer whose work included research of oil recovery methods and who hired an independent geologic engineer to review the offering materials id pincite in the present cases none of petitioners has any education or work experience with respect to plastics or plastics recycling petitioners did not independently investigate the sentinel epe recyclers nor did they hire an expert in plastics to evaluate the partnership transactions petitioners' arguments with respect to the krause case are inapplicable here petitioners' reliance on rousseau v united_states supra is similarly misplaced in rousseau the property underlying the investment ethanol producing equipment was widely considered at that time to be a viable fuel alternative to oil and its potential for profit was apparent in addition the taxpayer therein conducted an independent investigation of the investment and researched the market for the sale of ethanol in the united_states in contrast as we noted in distinguishing the krause case there is no showing in these records that the so-called oil crisis would provide a reasonable basis for petitioners' investing in the polyethylene recyclers here in question petitioners did not independently investigate the sentinel epe recyclers or hire an expert in plastics to evaluate the partnership transactions the facts of petitioners' cases are distinctly different from the rousseau case accordingly we do not find petitioners' arguments with respect to the rousseau case applicable under the circumstances of these cases petitioners failed to exercise due care in claiming large deductions and tax_credits with respect to the partnerships on their respective federal_income_tax returns we hold that petitioners did not reasonably rely upon tomasetti frabotta or omohundro and the offering memoranda or in good_faith investigate the underlying viability financial structure and economics of the partnership transactions herein it is clear from tomasetti's testimony that he was concerned with the inflated values placed on the recyclers that he communicated his concerns to his clients and that all petitioners were made aware of his views with respect to the plastics recycling deal we hold upon consideration of the entire records that petitioners are liable for the negligence additions to tax under the provisions of sec_6653 for and sec_6653 and for respondent is sustained on this issue issue sec_6659 valuation_overstatement respondent determined that petitioners were each liable for the sec_6659 addition_to_tax on the portion of their respective underpayments attributable to valuation_overstatement petitioners have the burden of proving that respondent's determinations of these sec_6659 additions to tax are erroneous rule a 79_tc_846 a graduated addition_to_tax is imposed when an individual has an underpayment_of_tax that equals or exceeds dollar_figure and is attributable to a valuation_overstatement sec_6659 d a valuation_overstatement exists if the fair_market_value or adjusted_basis of property claimed on a return equals or exceed sec_150 percent of the amount determined to be the correct amount sec_6659 if the claimed valuation exceed sec_250 percent of the correct value the addition is equal to percent of the underpayment sec_6659 petitioners each claimed an investment_tax_credit and a business_energy_credit based on the following purported values for each sentinel epe recycler dollar_figure in the northeast transaction and dollar_figure in the hyannis transaction petitioners each concede that the fair_market_value of each recycler was not in excess of dollar_figure therefore if disallowance of petitioners' claimed credits is attributable to the valuation overstatements petitioners are liable for the sec_6659 addition_to_tax at the rate of percent of the respective underpayments of tax attributable to the credits claimed with respect to the partnerships sec_6659 does not apply to underpayments of tax that are not attributable to valuation overstatements see 92_tc_827 89_tc_912 affd 862_f2d_540 5th cir to the extent taxpayers claim tax benefits that are disallowed on grounds separate and independent from alleged valuation overstatements the resulting underpayments of tax are not regarded as attributable to valuation overstatements 99_tc_132 citing todd v commissioner supra affd sub nom 28_f3d_1024 10th cir however when valuation is an integral factor in disallowing deductions and credits sec_6659 is applicable see 982_f2d_163 6th cir affg tcmemo_1991_449 933_f2d_143 2d cir sec_6659 addition_to_tax applies if a finding of lack of economic_substance is due in part to a valuation_overstatement affg tcmemo_1989_684 masters v commissioner tcmemo_1994_ affd without published opinion 70_f3d_1262 4th cir harness v commissioner tcmemo_1991_321 in the respective stipulations of settled issues petitioners concede that they are not entitled to any deductions losses investment credits business energy investment credits or any other tax benefits claimed on their tax returns as a result of their participation in the plastics recycling program in todd v commissioner supra and mccrary v commissioner supra we denied application of sec_6659 even though the subject property was overvalued because the related deductions and credits had been conceded or denied in their entirety on other grounds in todd we found that an underpayment was not attributable to a valuation_overstatement because property was not placed_in_service during the years in issue in mccrary we found the taxpayers were not liable for the sec_6659 addition_to_tax when prior to the trial of the case the taxpayers conceded that they were not entitled to the investment_tax_credit because the agreement in question was a license and not a lease in both cases the underpayment was attributable to something other than a valuation_overstatement this court has held that concession of the investment_tax_credit in and of itself does not relieve taxpayers of liability for the sec_6659 addition_to_tax dybsand v commissioner tcmemo_1994_56 chiechi v commissioner tcmemo_1993_630 instead the ground upon which the investment_tax_credit is disallowed or conceded is significant chiechi v commissioner supra even in situations in which there are arguably two grounds to support a deficiency and one supports a sec_6659 addition_to_tax and the other does not the taxpayer may still be liable for the addition_to_tax 893_f2d_225 9th cir affg tcmemo_1988_416 866_f2d_545 2d cir vacating in part and remanding tcmemo_1988_211 harness v commissioner supra in the present cases no argument was made and no evidence was presented to the court to prove that disallowance and concession of the investment tax_credits related to anything other than a valuation_overstatement to the contrary petitioners stipulated substantially the same facts concerning the underlying transactions as we found in provizer v commissioner tcmemo_1992_177 in the provizer case we held that the taxpayers were liable for the sec_6659 addition_to_tax because the underpayment of taxes was directly related to the overvaluation of the sentinel epe recyclers the overvaluation of the recyclers exceeding percent was an integral part of our findings in provizer that the transaction was a sham and lacked economic_substance similarly the records in these cases plainly show that the overvaluation of the recyclers is integral to and is the core of our holding that the underlying transactions here were shams and lacked economic_substance consistent with our findings in provizer petitioners respectively stipulated that the northeast and hyannis transactions had no net equity value that the sole activity of the northeast and hyannis partnerships lacked any potential for profit and that the northeast and hyannis partnership transactions therefore lacked economic_substance when a transaction lacks economic_substance sec_6659 will apply because the correct basis is zero and any basis claimed in excess of that is a valuation_overstatement gilman v commissioner supra 91_tc_524 87_tc_970 donahue v commissioner tcmemo_1991_181 affd without published opinion 959_f2d_234 6th cir affd sub nom 990_f2d_893 6th cir we held in provizer v commissioner supra that each sentinel epe recycler had a fair_market_value not in excess of dollar_figure our finding in the provizer case that the sentinel epe recyclers had been overvalued was integral to and inseparable from our finding of a lack of economic_substance petitioners conceded that the northeast and hyannis transactions were similar to the clearwater transaction described in provizer v commissioner supra and that the northeast and hyannis transactions lacked economic_substance given those concessions and the fact that the records here plainly show that the overvaluation of the recyclers was the reason for the disallowance of the tax benefits and the fact that no argument was made and no evidence was presented to the court to prove that disallowance and concession of the tax benefits related to anything other than a valuation_overstatement we conclude that the deficiencies caused by the disallowance of the claimed tax benefits were attributable to the overvaluation of the sentinel epe recyclers finally we consider petitioners' express arguments as to waiver of the addition_to_tax under sec_6659 on brief petitioners each contested imposition of the sec_6659 addition_to_tax on the grounds that respondent erroneously failed to waive the addition_to_tax sec_6659 authorizes respondent to waive all or part of the addition_to_tax for valuation_overstatement if taxpayers establish that there was a reasonable basis for the adjusted bases or valuations claimed on the returns and that such claims were made in good_faith respondent's refusal to waive a sec_6659 addition_to_tax is reviewable by this court for abuse_of_discretion krause v commissioner t c pincite petitioners urge that they relied on the offering memoranda and in varying degrees tomasetti frabotta and omohundro in deciding on the valuation claimed on their tax returns petitioners each contend that such reliance was reasonable and therefore respondent should have waived the sec_6659 addition_to_tax petitioners cite krause v commissioner supra 22_f3d_1001 10th cir revg tcmemo_1993_23 and rousseau v united_states 71a aftr 2d ustc par big_number e d la in support of their argument we have found that petitioners' purported reliance on tomasetti frabotta and omohundro in addition to the offering memoranda was not reasonable none of petitioners their supposed advisers nor anyone affiliated with them was educated or experienced in plastics or plastics recycling the evaluators whose reports were appended to each of the offering memoranda each owned interests in partnerships which leased sentinel epe recyclers the offering memoranda contained numerous caveats including the following no offeree should consider the contents of this memorandum as expert advice each offeree should consult his own professional advisers petitioners did not see a sentinel epe recycler prior to investing in northeast or hyannis nor did they independently investigate the recyclers they only went so far as to have an accountant and two bond dealers all lacking any training or experience in plastics or recycling look at the machines and the factory which produced them in effect petitioners went so far as to find out whether some sort of machine existed and not much farther petitioners' reliance on krause v commissioner supra rousseau v united_states supra and mauerman v commissioner supra in support of their contentions that they acted reasonably is misplaced in the krause and rousseau cases the sec_6659 addition_to_tax was disallowed in light of the respective holdings that the taxpayers in each case had a reasonable basis for the valuations claimed on the tax returns or had reasonable_cause for the understatements on the returns and were not subject_to negligence additions to tax in contrast we have held that petitioners herein did not act reasonably in claiming deductions and investment tax_credits related to the partnerships that the errors on petitioners' tax returns were caused by the excessive valuations of the underlying machinery in the partnership transactions that petitioners lacked reasonable_cause for such overvaluation and that each petitioner is therefore liable for the negligence additions to tax under sec_6653 accordingly petitioners' reliance on the krause and rousseau cases is misplaced in mauerman the tenth circuit_court of appeals held that the commissioner had abused her discretion for not waiving a sec_6661 addition_to_tax like sec_6659 a sec_6661 addition_to_tax may be waived by the commissioner if the taxpayer demonstrates that there was reasonable_cause for his underpayment and that he acted in good_faith sec_6661 the taxpayer in mauerman relied upon independent attorneys and accountants for advice as to whether payments were properly deductible or capitalized the advice relied upon by the taxpayer in mauerman was within the scope of the advisers' expertise the interpretation of the tax laws as applied to undisputed facts in these cases particularly with respect to valuation petitioners relied upon advice that was outside the scope of expertise and experience of their supposed advisers consequently we consider petitioners' reliance on the mauerman case inapplicable we hold that petitioners did not have a reasonable basis for the adjusted bases or valuations reflected on their tax returns with respect to their investments in northeast and hyannis in these cases respondent properly could find that petitioners' reliance on tomasetti frabotta and omohundro in addition to the offering materials was unreasonable the records in these cases do not establish an abuse_of_discretion on the part of respondent but support respondent's position we hold that respondent's refusal to waive the sec_6659 addition_to_tax is not an abuse_of_discretion petitioners are liable for the sec_6659 addition_to_tax at the rate of percent of the underpayment_of_tax attributable to the disallowed tax benefits respondent is sustained on this issue decisions will be entered under rule


internal_revenue_service number release date index number 2056a ------------------------------------- -------------------------------------- ---------------------------------- re ------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ---------------- telephone number -------------------- refer reply to cc psi plr-138887-15 date date legend decedent spouse trust a date date date date date date dear ---------------- --------------------------------- ------------------------------------------- ------------------ ------------------------------------------------------------------------- ------------------------- ------------------- --------------------- ---------------------- ---------------------- ------------- -------------------- this letter responds to your authorized representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file form 706-qdt u s estate_tax_return for qualified domestic trusts to notify and certify to the internal_revenue_service service that spouse who is the beneficiary of trust has become a united_states citizen the facts and representations submitted are as follows decedent died on date survived by spouse at the time of decedent’s death spouse was not a united_states citizen on date spouse established a qualified_domestic_trust qdot trust pursuant to sec_2056a and funded trust with assets that would have passed outright to spouse from decedent’s estate on date spouse as executrix of decedent’s estate timely filed decedent’s form_706 united_states estate and generation-skipping_transfer_tax return and elected on schedule m to treat plr-138887-15 trust as a qdot decedent’s estate received a closing letter from the service the initial co-trustees of trust were spouse and a a is an attorney and a citizen_of_the_united_states on date spouse became a united_states citizen spouse did not advise a that she had become a united_states citizen until date accordingly a as co-trustee did not file a form 706-qdt and make notification and certification of spouse’s united_states citizenship during the required time period spouse died on date it is represented that spouse continuously resided in the united_states from the date of decedent’s death until the time spouse became a united_states citizen it is represented further that no taxable_distributions were made from trust to spouse or any other person after the death of decedent and before spouse became a united_states citizen law and analysis sec_2001 of the internal_revenue_code imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides that except as provided in paragraph if the surviving_spouse is not a citizen_of_the_united_states no deduction shall be allowed under sec_2056 sec_2056 provides that paragraph shall not apply to any property passing to the surviving_spouse in a qdot there are three main requirements under sec_2056a that must be satisfied in order for a_trust to be a qdot the trust instrument must require that at least one trustee of the trust be an individual citizen_of_the_united_states or a domestic_corporation and provides that no distribution other than a distribution of income may be made from the trust unless a trustee who is an individual citizen_of_the_united_states or a domestic_corporation has the right to withhold from the distribution the tax imposed by sec_2056a on the distribution in addition the trust must meet the requirements of the regulations under sec_2056a finally the executor must make an election under this section on the federal estate_tax_return to qualify the property for the federal estate_tax_marital_deduction sec_2056a provides that an estate_tax is imposed on - a any distribution before the date of death of the surviving_spouse from a qualified_domestic_trust and plr-138887-15 b the value of the property remaining in a qualified_domestic_trust on the date of the death of the surviving_spouse sec_2056a provides in part that if the surviving_spouse of the decedent becomes a citizen_of_the_united_states and if such spouse was a resident_of_the_united_states at all times after the date of death of the decedent and before such spouse becomes a citizen_of_the_united_states then the tax imposed by sec_2056a shall not apply to any distributions before such spouse becomes a citizen and the tax imposed by sec_2056a shall not apply sec_20_2056a-10 and of the estate_tax regulations provide in part that a qdot is no longer subject_to the sec_2056a estate_tax if the surviving_spouse becomes a citizen_of_the_united_states and the spouse was a resident_of_the_united_states at all times after the death of the decedent and before becoming a united_states citizen and the united_states trustee of the qdot notifies the service and certifies in writing that the surviving_spouse has become a united_states citizen notice is to be made by filing a final form 706-qdt on or before april 15th of the calendar_year following the year in which the surviving_spouse becomes a united_states citizen unless an extension of time for filing is granted under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i sec_301_9100-3 sets forth the standards that the commissioner uses to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute these standards indicate that the commissioner should grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore a is granted an extension of time of days from the date of this letter to file with the service the required notice and certification that spouse became a united_states citizen the required notice and certification should be made on a form 706-qdt the form 706-qdt should be filed plr-138887-15 with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the form 706-qdt this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by lorraine e gardner lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter cc


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jan uniform issue list legend taxpayer a plan irac amount d amount e financial_institution f financial advisor g ira x dear this is in response to your request dated date as supplemented by correspondence dated date in which your authorized representative on your behalf requested a waiver of the 60-day requirements contained in sec_402 and sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that on date a direct_rollover of amount d from plan was deposited into ira x on date a direct_rollover of amount e from ira c was deposited into ira x taxpayer a asserts that her intent was to roll over amounts d and e into a traditional_ira and that her failure to accomplish the rollover into the correct ira within the 60-day period prescribed by sec_402 and sec_408 of the code was due to an administrative error made by financial_institution f taxpayer a further asserts that amount d and amount e have not been used for any other purpose taxpayer a requested that financial_institution f transfer assets from plan and ira c into a traditional_ira to be established in her name taxpayer has provided a letter from financial advisor g verifying financial_institution f's mistake based on the facts and representations you request a ruling that the internal_revenue_service the service waive the 60-day rollover requirement contained in sec_402 of the code and sec_408 of the code with respect to the distribution of amount d from plan and amount e from ira c sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be includible in gross_income for the taxable_year in which paid sec_402 states that such rollover must be accomplished within days following the day on which the distributee received the property an individual_retirement_account ira constitutes one form of eligible_retirement_plan sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 sec_402 of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code sec_401 a provides the rules for governing direct transfers of eligible rollover distributions sec_1_401_a_31_-1 of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities sec_408 d of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of d do not apply to any amount required to be distributed under sec_401 a sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 i r s date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 or sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information and documentation provided by taxpayer a is consistent with her assertion that the failure to accomplish a rollover of amount d and amount e into a traditional_ira in taxpayer a's name within the 60-day period prescribed by sec_402 and sec_408 of the code was due to an administrative error made by financial_institution f therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from plan b taxpayer is granted a period of days from the issuance of this ruling letter to contribute amount d into a rollover ira or another qualified_plan provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contribution the amount transferred up to amount d will be considered a rollover_contribution within the meaning of sec_402 of the code pursuant to sec_408 of the code the service hereby waives the day rollover requirement with respect to the distribution of amount e from ira c taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount e into a rollover ira or another qualified_plan provided all other requirements of sec_408 except the 60-day requirement are met with respect to such contribution the amount transferred up to amount e will be considered a rollover_contribution within the meaning of sec_408 this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 a of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact i d no at please address all correspondence to se t ep ra t2 sincerely yours dyi r edelman manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc