t c memo united_states tax_court james d barber and betty l barber petitioners v commissioner of internal revenue respondent docket nos filed date george w gregory for petitioners alexandra be nicholaides for respondent memorandum findings_of_fact and opinion armen special_trial_judge in so-called affected items notices of deficiency respondent determined additions to tax to petitioners’ federal income taxes for the years and in the amounts as shown below additions to tax sec sec sec_6653 a a year dollar_figure dollar_figure - percent of the interest payable with respect to the portion of the underpayment that is attributable to negligence or intentional disregard of rules or regulations the underpayments for the years in issue were determined and assessed pursuant to a partnership-- level proceeding see secs in the present cases respondent determined that the entire underpayment for each of the years in issue is attributable to negligence or intentional disregard of rules or regulations unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions by petitioners ’ the issues for decision ' petitioners do not contest that the sentinel eps recyclers that are involved in these cases were overvalued see gottsegen v commissioner tcmemo_1997_314 see also ulanoff v commissioner tcmemo_1999_170 petitioners therefore concede in par of the stipulation of facts that they are liable for the addition_to_tax for valuation_overstatement under sec_6659 for to the extent that petitioners’ concession may not extend to sec_6659 and assuming arguendo that petitioners properly raised an issue under that section then we decide such issue in respondent’s favor see eg 205_f3d_54 2d cir affg sann v commissioner tcmemo_1997_259 ulanoff v commissioner supra continued are as follows whether petitioners are liable for additions to tax under sec_6653 and for negligence or intentional disregard of rules or regulations we hold that petitioners are so liable whether petitioners are entitled to the terms of the plastics recycling project settlement offer proffered by respondent in date to the tax_matters_partner of whitman recycling associates we hold that petitioners are not so entitled findings_of_fact some of the facts have been stipulated and they are so found the stipulated facts and attached exhibits are incorporated herein by this reference petitioners resided in plymouth michigan at the time that each of their petitions was filed with the court continued moreover it would appear that petitioners have abandoned their contention regarding the statute_of_limitations the so- called davenport issue in view of the recent affirmance of this court’s opinion on that issue by the court_of_appeals for the bleventh circuit see 220_f3d_1255 11th cir affg tcmemo_1998_347 see also 86_fsupp2d_690 b d mich 68_fsupp2d_1333 n d ga kohn v commissioner tcmemo_1999_ however if we are mistaken in this regard then we refer the parties to paragraph sec_1 and of the stipulation of facts and we decide the davenport issue in respondent’s favor based on the foregoing precedent a the whitman transactions these cases are part of the plastics recycling group of cases in particular the additions to tax arise from the disallowance of losses investment credits and energy credits claimed by petitioners with respect to a partnership known as whitman recycling associates whitman or the partnership for a detailed discussion of the transactions involved in the plastics recycling group of cases see provizer v commissioner tcmemo_1992_177 affd per curiam without published opinion 996_f2d_1216 6th cir the underlying transactions involving the sentinel recycling machines recyclers in petitioners’ cases are substantially identical to the transactions in provizer v commissioner supra and with the exception of certain facts that we regard as having minimal significance petitioners have stipulated substantially the same facts concerning the underlying transactions that were described in provizer v commissioner supra in a 4-step series of simultaneous transactions closely resembling those described in the provizer case and stipulated by the parties herein packaging industries of hyannis massachusetts pi manufactured and sold’ four sentinel terms such as sale and lease as well as their derivatives are used for convenience only and do not imply that the particular transaction was a sale or lease for federal tax purposes similarly terms such as joint_venture and agreement continued eps recyclers to eci corporation eci for dollar_figure each eci simultaneously resold the recyclers to f g corporation f g for dollar_figure each f g simultaneously leased the recyclers to whitman finally whitman simultaneously entered in a joint_venture with pi and resin recyclers inc rri to exploit the recyclers and place them with end-users under this latter arrangement pi was required to pay whitman a monthly joint_venture fee for convenience we refer to the series of transactions between and among pi eci f g whitman and rri as the whitman transactions the sales of the sentinel eps recyclers from pi to eci were financed using 12-year nonrecourse notes the sales of the recyclers from eci to f g were financed using 12-year partial recourse notes however the recourse portion of the notes was payable only after the first percent of the notes the continued are also used for convenience only and do not imply that the particular arrangement was a joint_venture or an agreement for federal tax purposes eps stands for expanded polystyrene the case of provizer v commissioner tcmemo_1992_177 affd per curiam without published opinion 996_f2d_1216 6th cir involved sentinel expanded polyethylene epe recyclers however the eps recycler partnerships and the epe recycler partnerships are essentially identical see davenport recycling associates v commissioner tcmemo_1998_347 affd 220_f3d_1255 11th cir see also gottsegen v commissioner tcmemo_1997_314 involving both the epe and eps recyclers ulanoff v commissioner tcmemo_1999_170 same -- - nonrecourse portion was paid no negotiations for the price of the recyclers took place between or among pi eci and f g at the closing of the whitman partnership pi eci f g whitman and rri entered into arrangements whereby pi would pay a monthly joint_venture fee to whitman in the same amount that whitman would pay as monthly rent to f g in the same amount that f g would pay monthly on its note to eci in the same amount that eci would pay monthly on its note to pi further in connection with the closing of the whitman partnership pi eci f g whitman and rri entered into offset agreements providing that the foregoing payments were bookkeeping entries only and were never in fact paid also in connection with the closing of the whitman partnership pi eci f g whitman and rri also entered into cross-indemnification agreements b individuals involved richard roberts roberts was a businessman and the general_partner in a number of limited_partnerships that leased sentinel epe recyclers roberts was also a 9-percent shareholder in f g the corporation that leased the recyclers to whitman in the whitman transactions raymond grant grant was an investment banker attorney and accountant grant was also the president and sole owner of eci the corporation that sold the recyclers to f g in the whitman transactions - from through roberts and grant were in the business of promoting tax-sheltered investments roberts and grant also served as general partners in other investments before the whitman transactions roberts and grant were clients of the accounting firm h w freedman co freedman co harris w freedman freedman a certified_public_accountant and the named partner in freedman co was the president chairman of the board and percent owner of f g freedman was experienced with leveraged leasing and he owned percent of a sentinel epe recycler freedman co prepared the tax returns for eci f g and clearwater group the partnership that was involved in provizer v commissioner supra although freedman co did not prepare the initial financial projections included in the whitman private_placement offering memorandum freedman co reviewed those financial projections and made suggestions as to format and substance freedman co also provided tax services to john d bambara bambara bambara was the president and sole owner of first massachusetts equipment corp fmec corp another entity that was involved in provizer v commissioner supra bambara was also the president of pi and a member of its board_of directors and with his wife and daughter also owned percent of the stock of pi the corporation that sold the recyclers to eci in the whitman transactions elliot i miller miller a practicing attorney who was experienced in tax matters was the corporate counsel to pi miller represented grant personally and grant’s clients who invested in programs that grant promoted miller met grant in the 1970's when grant was involved in marketing a coal mine miller was also a 1-percent_owner of f g john y taggert taggert was a well-known tax attorney the head of the tax department of the new york law firm of windells marx davis ives and an adjunct professor of tax law at the new york university law school taggert had been acquainted with miller for many years before miller recommended that roberts employ taggert and his firm as counsel to the general_partner in the initial plastics recycling partnership taggert and other members of his firm prepared the offering memorandum tax opinion and other legal documents for the initial plastics recycling partnership for the clearwater partnership and for about other plastics recycling partnerships including whitman taggert owned a 66-percent interest in a second-tier plastics recycling partnership robert gottsegen gottsegen was a businessman active in the plastics industry and a longtime business_associate of bambara gottsegen was the sole owner of rri the corporation that was involved in the joint_venture in the whitman transactions and a --- - 1-percent_owner of f g gottsegen was the owner of several sentinel recyclers and also the petitioner in gottsegen v commissioner tcmemo_1997_314 samuel l winer sam winer or winer was whitman’s general_partner and tax_matters_partner as well as a promoter of the partnership winer purportedly paid dollar_figure for a 1-percent interest in all items of income gain deduction loss and credit of the partnership cc the private offering memorandum by a private_placement offering memorandum dated date the offering memorandum subscriptions for limited_partnership units in whitman were offered by the partnership’s promoter to potential limited partners at dollar_figure per partnership unit pursuant to the offering memorandum the limited partners would own percent of whitman and the general_partner sam winer would own the remaining percent al1so pursuant to the offering memorandum each limited_partner was required to have a net_worth including residence and personal_property in excess of dollar_figure million or net_income in excess of dollar_figure for each investment_unit the offering memorandum stated that winer would receive dollar_figure for administrative and other services to be paid from the proceeds of the private_placement offering as management fees the offering memorandum also stated that the partnership would - lo - pay fees of purchaser representatives and selling commissions from the proceeds of the offering in an amount equal to percent of the aggregate price of the units thus winer would earn a 10-percent commission upon selling an interest in the partnership in addition the offering memorandum stated that winer could retain as additional compensation all amounts not paid as purchaser representative fees or sales commissions in connection with the offering the face of the offering memorandum warned in bold capital letters that this offering involves a high degree of risk the offering memorandum also warned that an investment in the partnership involves a high degree of business and tax risks and should therefore be considered only by persons who have a substantial net_worth and substantial present and anticipated income and who can afford to lose all of their cash investment and all or a portion of their anticipated tax benefits the offering memorandum went on to enumerate significant business and tax risks associated with an investment in whitman among those risks the offering memorandum stated there was a substantial likelihood of audit by the internal_revenue_service and the purchase_price paid_by f g to eci might be challenged as being in excess of the fair_market_value the partnership had no prior operating history the management of the partnership’s business would be dependent on the services of the general_partner who had limited experience in marketing recycling or similar equipment the limited partners would have no control_over the conduct of the partnership’s business there were no assurances that market prices for virgin resin would remain at their current costs per pound or that the recycled pellets would be as marketable as virgin pellets and certain potential conflicts of interest existed the offering memorandum informed investors that the whitman transactions would be executed simultaneously the offering memorandum prominently touted the anticipated tax benefits for the initial year of investment for an investor in the partnership in this regard the offering memorandum stated in part as follows the principal tax benefits expected from an investment in the partnership are to be derived from the limited partner’s share of investment and energy tax_credits and tax deductions expected to be generated by the partnership in the tax benefits on a per unit basis are as follows projected regular investment projected tax payment and energy tax_credits deductions dollar_figure dollar_figure dollar_figure the limited partners are not liable for any additional payment beyond their cash investment for their units nor are they subject_to any further assessment the offering memorandum also included a tax opinion prepared by the law firm of boylan evans concerning tax issues involved in the plastics recycling program william a boylan boylan and john d evans evans were formerly partners at windells marx davis ives the law firm that had provided the legal opinion for sentinel epe recycler partnerships such as clearwater before leaving in and forming their own law firm also included in the offering memorandum were the reports of two evaluators samuel z burstein burstein and stanley ulanoff ulanoff burstein was a professor of mathematics at new york university burstein’s report concluded that the sentinel eps recyclers were capable of continuous recycling the report also concluded that the recycling system would yield a material having commercial value at the time ulanoff prepared his report he was a professor of marketing at baruch college and also the author of numerous books on technical and marketing subjects ulanoff’s report concluded that the price paid_by f g for the sentinel eps recyclers the rent paid_by whitman and the joint_venture profits were fair and reasonable burstein owned a 82-percent interest in another plastics recycling partnership that leased sentinel eps recyclers ulanoff owned interests in other plastics recycling partnerships the tax opinion prepared by boylan evans was part of the private offering memoranda of approximately other sentinel eps recycler partnerships that leased both sentinel eps and epe recyclers the offering memorandum represented that sentinel eps recyclers were unique machines however they were not several machines capable of densifying low density materials were already on the market in other plastics machines available at that time ranged in price from dollar_figure to dollar_figure including the foremost densilator the nelmor weiss densification system regenolux the buss-condux plastcompactor and the cumberland granulator see provizer v commissioner tcmemo_1992_177 and the discussion regarding respondent’s experts infra moreover the recyclers were incapable of recycling expanded polystyrene by themselves and had to be used in connection with extruders and pelletizers d respondent’s experts at trial petitioners did not offer expert testimony rather petitioners stipulated that the court may adopt its findings regarding the expert testimony and reports of steven grossman grossman and richard s lindstrom lindstrom as found in ulanoff v commissioner tcmemo_1999_170 gottsegen v commissioner tcmemo_1997_314 and fine v commissioner tcmemo_1995_222 in those cases we found grossman and lindstrom to be experts in the fields of plastics engineering and ulanoff was also the petitioner in ulanoff v commissioner tcmemo_1999_170 technical information and they submitted reports regarding both sentinel eps and epe recyclers grossman grossman is a professor in the plastics engineering department at the university of massachusetts at lowell he has a bachelor of science degree in chemistry from the university of connecticut and a doctorate degree in polymer science and engineering from the university of massachusetts he also has more than years of experience in the plastics industry including more than years of experience as a research_and_development scientist at upjohn company in its polymer research group grossman is also a partner in the law firm of hayes soloway hennessey grossman hage p c the firm practices in the area of intellectual_property including patents trademarks copyrights and trade secret protection grossman's report concerning the value of the sentinel eps recyclers discusses the limited market for the recycled plastic material grossman concluded that these recyclers were unlikely to be successful products because of the absence of any new technology the absence of a continuous source of suitable scrap grossman and lindstrom were also found to be experts in provizer v commissioner tcmemo_1992_177 as well as ina number of other plastics recycling cases see eg carroll v commissioner tcmemo_2000_184 - - and the absence of any established market grossman suggested that a reasonable comparison of the products available in the polystyrene industry in with the sentinel eps recyclers reveals that the recyclers had very little commercial value and were similar to comparable products available on the market in component form for these reasons grossman opined that the sentinel eps recyclers did not justify the one-of-a-kind price tag that they carried specifically grossman reported that there were several machines on the market as early as that were functionally equivalent to and significantly less expensive than the sentinel eps recyclers these machines included the japan repro recycler available in for dollar_figure the buss-- condux plastcompactor available before for dollar_figure foremost machine builders' densilator available from for dollar_figure and the midland ross extruder available in and for dollar_figure grossman observed that all of these machines were widely available grossman examined both the sentinel eps recycler and a japan repro recycler and found that the construction of the two machines was nearly identical further grossman concluded that the recycled polystyrene produced by both machines would also be nearly identical in grossman's opinion neither the japan repro recycler nor the sentinel eps recycler represented a -- - serious effort at recycling because the end product from both machines was not completely devolatized and required further processing it was also grossman's opinion that an individual who seriously wanted to recycle would not purchase either of these machines grossman's opinion regarding the sentinel eps recycler was based on his personal examination of a sentinel eps recycler as well as the descriptions of such recyclers as set forth in the writings of other professionals grossman did not however observe the sentinel eps recycler in actual operation finally grossman reported on the relationship between the plastics industry and the petrochemical industry grossman noted that although the development of the petrochemical industry is a contributing factor in the growth of the plastics industry the two industries have a remarkable degree of independence grossman observed that the oil crisis in triggered dire predictions about the future of plastics that had not been fulfilled in grossman stated that the cost of a plastic product depends in large part on technology and the price of alternative materials grossman's studies concluded that a percent increase in oil prices results in a to 40-percent increase in the cost of plastic grossman did not specifically value the sentinel eps recycler however as previously stated grossman concluded that existing technology was available that provided equivalent capability of recycling polystyrene specifically regarding the sentinel eps recycler grossman also concluded that recycling_equipment that achieved the same result as the sentinel eps recycler sold for about dollar_figure during the relevant period lindstrom lindstrom graduated from the massachusetts institute of technology with a bachelor's degree in chemical engineering from until lindstrom worked for arthur d little inc in the areas of process and product evaluation and improvement and new product development with special emphasis on plastics elastomers and fibers at the time of trial lindstrom continued to pursue these areas as a consultant in his report lindstrom determined that several different types of equipment capable of recycling expanded polystyrene were available and priced between dollar_figure and dollar_figure in with respect to the sentinel eps recycler in lindstrom stated several machines were available that could reprocess eps into higher quality more useful higher value product and these machines or processing systems cost dollar_figure to dollar_figure lindstrom examined the buss-condux plastcompactor and the regenolux lindstrom found that these machines were functionally equivalent to the sentinel eps recycler and were available in the years and at the prices reported by grossman detailed supra -- - lindstrom also reported that various equipment companies such as the cumberland engineering division of john brown plastics machinery were willing to provide customized recycling programs to companies at a minimum cost of dollar_figure lindstrom found that the sentinel eps recycler could process between and pounds of plastic per hour lindstrom observed a sentinel eps recycler in operation and was allowed to inspect the machine closely lindstrom estimated the manufacturing cost of the sentinel eps recycler to be approximately dollar_figure and the market_value of the machine to be approximately dollar_figure eb fair_market_value of the recyclers at all relevant times the fair_market_value of the sentinel eps recycler did not exceed dollar_figure per machine ’ f petitioners and their introduction to whitman jim barber petitioner is a well-educated individual having graduated from the university of michigan in with a bachelor of science degree in mechanical engineering for most of his career petitioner has worked in the field of industrial automation in petitioner was employed by the bendix corp and he was about years old ’ our finding is based on the expert reports and testimony of grossman and lindstrom as stipulated by the parties we note that petitioners independently stipulated that the sentinel eps recycler had a maximum value of between dollar_figure to dollar_figure per machine that latter stipulation is consistent with our finding petitioner betty l barber is also a well-educated individual during the years in issue she was a college professor at eastern michigan university petitioners are financially successful during the years in issue they received both compensation_for services and income from other sources in the total amount exclusive of partnership losses as follows dollar_figure dollar_figure petitioner is a relatively sophisticated investor and he generally made the investment decisions for his family prior to purchasing a partnership_interest in whitman petitioner’s investment portfolio included a variety of interests for example in petitioner invested in university associates a real_estate partnership that owned an apartment complex in san diego california in through petitioner invested in several oil_and_gas partnerships including winer development co in addition petitioner maintained an account with a national brokerage firm and invested in publicly held securities he also owned a receivable in the form of a land_contract petitioner has a younger brother john barber petitioner’s brother who like petitioner graduated from the university of michigan with a degree in engineering since the mid-1970's petitioner’s brother has been enrolled to practice before the - - internal_revenue_service an enrolled_agent and has prepared tax returns although petitioner has occasionally consulted with his brother by telephone on complex tax matters petitioner has never asked his brother to prepare petitioners’ tax returns also petitioner has never disclosed details regarding his own personal financial status to his brother however petitioner has asked his brother for investment advice and his brother has offered such advice for example it was petitioner’s brother who recommended that petitioner invest in university associates in and it was petitioner’s brother who put petitioner in touch with sam winer in contact with winer led petitioner to invest in winer-promoted oil_and_gas partnerships including winer development co from through these various winer-promoter partnerships produced tax benefits in date petitioner contacted winer and expressed an interest in investing in another oil_and_gas partnership winer recommended instead that petitioner invest in the plastics recycling industry and winer provided petitioner with a copy of the offering memorandum for the whitman partnership see supra c in promoting the investment winer stated that petitioner would receive tax benefits petitioner looked at the offering memorandum petitioner understood that if he invested in whitman then winer as promoter would receive a commission based on petitioner’s --- - purchase of an interest in the partnership before making a decision petitioner asked winer to send a copy of the offering memorandum to petitioner’s brother subsequently petitioner telephoned his brother and assuming that his brother had read the offering memorandum asked some guestions about making the investment after petitioner’s brother didn’t raise any objections to it petitioner decided to invest in or about date petitioner signed a subscription agreement and purchased three-tenths of a limited_partnership unit a dollar_figure percent interest in whitman for dollar_figure petitioner did not before signing the subscription agreement and investing in whitman seek the advice of any expert in the plastics recycling industry nor did he talk to anyone involved in the plastics recycling industry likewise petitioner did not make any independent investigation of the fair_market_value of the sentinel eps recycler rather he accepted and did not question the dollar_figure per machine value as represented in the offering memorandum petitioner was influenced to sign the subscription agreement by winer and petitioner’s brother however winer did not have an engineering background and he was not an expert in either plastics materials or plastics recycling moreover winer did not represent that he possessed specialized knowledge of the -- - plastics recycling industry and he had at most only limited experience in marketing recycling or similar equipment petitioner’s brother had no specialized knowledge of the plastics recycling industry and he had no expertise in appraising either the value of property in general or plastics recycling machines in particular petitioner did not know whether his brother had any knowledge regarding the value of the sentinel eps recyclers nor did petitioner know whether his brother talked to anyone in the plastics industry before giving him advice petitioner also did not know whether his brother read the offering memorandum at the time that petitioner signed the subscription agreement and invested in whitman petitioner did not have any education or work experience in either plastics materials or plastics recycling nor did petitioner have any specialized knowledge about either the plastics industry in general or the sentinel eps recycler in particular in contrast at the time that he signed the subscription agreement petitioner knew that his investment in whitman offered immediate tax benefits in excess of his dollar_figure investment petitioner had not previously made any investment that offered immediate tax benefits in excess of his investment petitioner was influenced to invest in whitman by the tax benefits described in the offering memorandum and the statements made by winer regarding such benefits g ultimate finding regarding petitioner’s motivation petitioner invested in whitman principally because the investment offered immediate tax benefits in excess of his investment h events leading to the filing of petitioners’ return barly in petitioner received from sam winer a schedule_k-1 partner’s share of income credits deductions etc for the whitman partnership for the taxable_year the schedule_k-1 disclosed that petitioner’s share of whitman’s loss for was dollar_figure and that petitioner’s share of the partnership’s basis in the eps recyclers for investment_credit purposes was dollar_figure although these amounts were actually consistent with the tax benefits promised in the offering memorandum petitioner was sensitive to their magnitude and mindful of the fact that they might flag his investment as a tax_shelter petitioner was also uncertain how to convert his share of the partnership’s basis in the recyclers into the regular investment_tax_credit and the energy tax_credit on his individual return accordingly petitioner contacted a certified_public_accountant for assistance the accountant that petitioner contacted was unable to help petitioner did not contact his brother because petitioner did not disclose personal financial information to him -- - and suggested instead that petitioner consult a tax attorney accordingly petitioner sought out gerald thompson thompson a young attorney who was affiliated with krandle thompson mier p c kt m a small law firm in livonia michigan ’ the firm’s brochure indicated that the firm specialized in all areas of business and corporation law and taxation neither kt m nor thompson had any relationship with either winer or whitman petitioner provided thompson with copies of the whitman offering memorandum and his schedule_k-1 thompson did not have any specialized knowledge regarding the plastics recycling industry and he did not have any specialized knowledge regarding the nontax business aspects of petitioner’s sentinel eps recycler investment further thompson did not make any independent attempt to evaluate the whitman partnership or to value the eps recycler rather he confined himself to the offering memorandum and petitioner’s schedule_k-1 as an attorney thompson did not consider himself qualified to provide investment advice and his practice was not to provide such advice thompson did not provide petitioner with any investment advice rather thompson provided petitioner with a 2-page letter dated date thompson’s letter together with a completed form_3468 computation of investment_credit and a copy of an article on partnership_audits thompson was the son of one of the firm’s named partners - - the opening paragraph of thompson’s letter read as follows you have retained us to review the confidential private offering memorandum memorandum of whitman recycling associates for the purpose of preparing and advising you with regard to form_3468 to be filed with your tax_return based upon our review of the memorandum we have prepared a form_3468 as enclosed with lines yet to be completed showing a full crediting of the amounts shown on your k-1 from the partnership it is our belief that the tax treatment of such items is more_likely_than_not the proper treatment however we do not opine as to any other matters which may or may not be covered in the memorandum or the opinion of the counsel therein thompson did not consider his letter to be a rousing endorsement of the investment rather he considered the investment to be aggressive and his letter was replete with areas of concern and various disclaimers one area of concern focused on the value of the eps recyclers obviously the fair_market_value fmv of the sentinel eps recyclers recyclers is important because it is the starting point for determining the amount of credits available to the partnership although i am not in a position to judge the fmv of the recyclers the valuation made in the memorandum is challengeable first of all with regard to ex f burstein’s and ulanoff’s reports neither evaluator appears to be primarily a property appraiser and neither engages in an economic analysis of cost of production of the recyclers reasonable profit comparables capitalization of income or other factors normally used in equipment appraisals other areas of concern focused on the step-up in purchase_price from eci to f g potential conflicts of interest possible lack of arm’s-length negotiations f g’s purported dollar_figure million basis in the recyclers use of nonrecourse_financing and the circular nature of the transactions - - thompson’s letter concluded with the following paragraph notwithstanding the foregoing risks however the items on your partnership k-1 may be used as is for the reason that both the valuation_overstatement_penalty and the substantial_understatement_of_income_tax_penalty are waived whenever the taxpayer e you can show there was a reasonable basis for the claims made and that such claims were made in good_faith the offering memorandum as well prepared as it is should be an adequate reasonable basis upon which to base the filing of your form_3468 additionally i believe you may rely upon it in good_faith notwithstanding this letter for this letter is no more legally enforceable than the memorandum after petitioner received thompson’s letter petitioner prepared form_3468 in his own hand using the partially completed copy prepared by thompson as a model petitioner then completed petitioners’ federal_income_tax return form_1040 which petitioners signed on date in preparing petitioners’ tax_return for petitioner followed his custom of preparing petitioners’ returns himself without the assistance of a return preparer ’ i petitioners’ tax_return sec_1 the whitman partnership the tax benefits claimed by petitioners on their federal_income_tax return for the initial year of investment in whitman exceeded their dollar_figure investment in the partnership thus on their return petitioners claimed a regular petitioner also prepared petitioners’ tax_return for without the assistance of a return preparer o7 - investment_tax_credit and energy tax_credit in the aggregate amount of dollar_figure petitioners also claimed a loss in the amount of dollar_figure for their distributive_share of the partnership’s reported loss for the investment credits and the partnership loss served to reduce petitioners’ liability for federal_income_tax as reported on their return by dollar_figure ' other partnerships petitioners reported losses from partnerships other than whitman on their income_tax returns for and as follows partnership university associates dollar_figure sec_554 winer development - columbian oil gas ---- big_number enterprise energy --- big_number petitioners did not report any income or gain in respect of any partnership on either their or tax_return j the partnership-level proceeding whitman is a so-called tefra partnership subject_to the unified partnership audit and litigation procedures set forth in sec_6221 through see tax equity and fiscal petitioners also claimed a loss on their return in the amount of dollar_figure for their distributive_share of whitman’s reported loss for that year the partnership loss served to reduce petitioners’ tax_liability for by dollar_figure the record does not reveal whether petitioners claimed losses from whitman on their returns for years after however the record does establish that petitioner never made a profit in any year from his investment in whitman - responsibility act of tefra publaw_97_248 96_stat_648 on date respondent mailed a notice of final_partnership_administrative_adjustment fpaa to sam winer the tax_matters_partner of the whitman partnership for each of the taxable years and ' a copy of each fpaa was also mailed to petitioners the fpaa’s advised petitioners of adjustments respondent proposed to make to the partnership returns forms filed by whitman specifically the fpaa’s disallowed all deductions and credits claimed by whitman in connection with its plastics recycling activities for and on date a case was commenced in this court at docket no and captioned whitman recycling associates sam winer tax_matters_partner petitioner v commissioner of the ‘2 respondent also mailed fpaa’s to winer for the taxable years and which years were also in issue as part of the partnership action described infra in the text in date some months before respondent mailed the fpaa’s respondent made the so-called plastics recycling project settlement offer the settlement offer the settlement offer was made in writing to winer as whitman’s tax_matters_partner the terms of the settlement offer are described in detail in section i of the background portion of davenport recycling associates v commissioner tcmemo_1998_347 affd 220_f3d_1255 11th cir suffice it to say that the transmittal letter stated that the settlement offer would not be repeated and that the offer would expire days from the date of the letter winer did not accept the settlement offer on behalf of the partnership accordingly respondent mailed the fpaa’s that are described above in the text - - internal revenue respondent subsegquently on date the court entered decision in the whitman case pursuant to the commissioner’s motion for entry of decision under rule b the court’s decision which reflected the full concession by whitman of all items of income loss and the underlying valuation used for the sentinel eps recyclers for tax_credit purposes for and completely sustained the commissioner’s fpaa determinations for those years at no time during the pendency of the proceedings in docket no did petitioners file with the court a notice of election to participate in the partnership action pursuant to rule b opinion we have decided many plastics recycling cases most of those cases have presented issues regarding additions to tax for negligence see eg barlow v commissioner tcmemo_2000_ carroll v commissioner tcmemo_2000_184 ulanoff v commissioner tcmemo_1999_170 gottsegen v commissioner tcmemo_1997_314 greene v commissioner tcmemo_1997_296 ‘all of the limited partners of whitman who had an interest in the outcome of the partnership proceeding were treated as parties to the proceeding see sec_6226 and d see also title xxiv tax_court rules_of_practice and procedure regarding partnership actions 's similarly the court’s decision completely sustained the commissioner’s fpaa determinations for and -- - kaliban v commissioner tcmemo_1997_271 sann v commissioner tcmemo_1997_259 ndollar_figure and cases cited therein affd 205_f3d_54 2d cir we found the taxpayers liable for the additions to tax for negligence in nearly all of those cases i sec_6653 and negligence respondent determined that petitioners are liable for additions to tax under sec_6653 and with respect to the underpayment attributable to petitioners’ investment in whitman petitioners have the burden_of_proof to show that they are not liable for the additions to tax see addington v commissioner supra 39_f3d_402 2d cir affg tcmemo_1993_480 79_tc_846 bixby v commissioner t c tj757 see generally rule a 503_us_79 290_us_111 sec_6653 and imposes additions to tax if any part of the underpayment_of_tax is due to negligence or intentional disregard of rules or regulations negligence is defined as the failure to exercise the due care that a reasonable cf sec_7491 effective for court proceedings arising in connection with examinations commencing after date in the present cases the examination of petitioners’ income_tax returns for and commenced well before date --- - and ordinarily prudent person would exercise under the circumstances see 85_tc_934 the pertinent question is whether a particular taxpayer's actions are reasonable in light of the taxpayer's experience the nature of the investment and the taxpayer's actions in connection with the transactions see 60_tc_728 in this regard the determination of negligence is highly factual when considering the negligence addition we evaluate the particular facts of each case judging the relative sophistication of the taxpayers as well as the manner in which the taxpayers approached their investment turner v commissioner tcmemo_1995_363 under some circumstances a taxpayer may avoid liability for negligence if reasonable reliance on a competent professional adviser is shown see 469_us_241 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 see freytag v commissioner supra for reliance on professional advice to excuse a taxpayer from negligence the taxpayer must show that the professional had the requisite expertise as well as knowledge of the pertinent facts to provide informed advice on the subject matter see 43_f3d_788 2d cir affg tcmemo_1993_621 goldman v commissioner supra freytag v commissioner supra in making the investment in whitman petitioner contends that he reasonably relied on the advice of two individuals namely his brother and winer a petitioner’s reliance on winer petitioner contends that before he invested in whitman he had a history of investing with winer and that such investments were financially successful therefore petitioner argues he was justified on relying on winer’s advice in deciding to invest in whitman we disagree although the record demonstrates that petitioner did invest in several winer-promoted investments from to there is no evidence other than petitioner’s unsupported allegation that such investments were financially successful in this regard it is well established that the court is not required to accept the self-serving testimony of petitioner as gospel 87_tc_74 see 99_tc_202 it should have been a simple matter for petitioner to produce documentary_evidence eg investment reports prior years’ tax returns to support his allegation however he did not in this regard it is also well established that a party’s failure to introduce documentary - - evidence that is within his possession or control and that he implies would be favorable to him gives rise to the presumption that if produced such evidence would be unfavorable see 6_tc_1158 affd 162_f2d_513 10th cir furthermore the documentary_evidence introduced at trial suggests that petitioner’s winer-promoted investments may have been successful only in producing tax benefits thus on petitioners’ return petitioners claimed a partnership loss from winer development co on petitioners’ return petitioners claimed partnership losses from two other oil_and_gas partnerships it is at least noteworthy that petitioners did not report any income or gain from any partnership on either their or tax_return in addition reliance on representations by insiders or promoters has been held to be an inadequate defense to negligence see 990_f2d_893 6th cir reliance on promoter of tax_shelter is not a defense to the negligence addition affg tcmemo_1991_181 963_f2d_907 6th cir even an unsophisticated taxpayer may not reasonably rely on advice from a promoter of a tax_shelter goldman v commissioner supra 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 advice from such individuals is better classified as sales promotion vojticek v commissioner tcmemo_1995_444 the rationale for this view is based on the insider’s or promoter’s self-interest which makes such advice inherently suspect see addington v commissioner f 3d pincite it is unreasonable for taxpayers to rely on the advice of someone who they should know has a conflict of interest goldman v commissioner f 3d pincite laverne v commissioner supra pincite in the present cases winer’s self-interest is clearly demonstrated by the offering memorandum thus the offering memorandum stated winer would receive a 1-percent interest in all items of income gain deduction loss or credit arising from the operations of the partnership winer would receive dollar_figure for administrative and other services to be paid from the proceeds of the private_placement offering as management fees whitman would pay fees of purchaser representatives and selling commissions from the proceeds of the offering in an amount equal to percent of the aggregate price of the units and winer could retain as additional compensation all amounts not paid as purchaser representative fees or sales commissions in connection with the offering the incentives to winer to tout the investment were therefore readily apparent -- - at trial petitioner admitted understanding that if he invested in whitman then winer as promoter would receive a commission based on petitioner’s purchase of an interest in the partnership petitioner also admitted that he looked at the offering memorandum and therefore should have known if he did not know in fact that winer stood to benefit financially in the other ways enumerated above see addington v commissioner f 3d pincite pleas of reliance have also been rejected when neither the taxpayer nor the adviser knew anything about the nontax business aspects of the contemplated venture see id pincite in general it 1s unreasonable to rely on an adviser who lacks knowledge about the industry in which the taxpayer is investing freytag v commissioner supra 85_tc_557 see also 88_tc_1086 affd without published opinion 865_f2d_1264 5th cir affd sub nom 868_f2d_865 6th cir affd sub nom 864_f2d_93 9th cir affd per curiam without published opinion sub nom hatheway v commissioner 856_f2d_186 4th cir klieger v commissioner tcmemo_1992_734 insofar as winer is concerned winer did not have an engineering background and he was not an expert in either plastics materials or plastics recycling moreover winer never represented that he possessed - - specialized knowledge of the plastics recycling industry and he had at most only limited experience in marketing recycling or similar equipment indeed winer’s limited experience at best in marketing recycling or similar equipment was one of the business risks that the offering memorandum specifically identified in sum we do not think that petitioner’s professed reliance on winer’s advice was reasonable b petitioner’s reliance on his brother petitioner also contends that he relied on his brother’s advice in deciding to invest in whitman and that such reliance was reasonable although the record demonstrates that petitioner relied on his brother we do not think that such reliance was reasonable as previously stated pleas of reliance have been rejected when neither the taxpayer nor the adviser knew anything about the nontax business aspects of the contemplated venture e g addington v commissioner supra freytag v commissioner supra beck v commissioner supra see also patin v commissioner supra kleiger v commissioner supra in the present cases petitioner’s brother had no specialized knowledge of the plastics recycling industry and had no expertise in appraising either the value of property in general or plastics recycling machines in particular in fact the record suggests that petitioner knew -- - that his brother had no knowledge regarding the value of the sentinel eps recyclers moreover petitioner did not know whether his brother even talked to anyone in the plastics industry before giving him advice in addition petitioner did not know whether but rather merely assumed that his brother read the offering memorandum before giving him advice it is noteworthy that petitioner did not call his brother to testify at trial petitioner’s failure to do so gives rise to the inference that his brother’s testimony would not have been favorable to petitioner see 101_tc_374 affd without published opinion 40_f3d_385 5th cir 47_tc_92 affd 392_f2d_409 5th cir 6_tc_1158 affd 162_f2d_513 10th cir petitioners rely on dyckman v commissioner tcmemo_1999_79 for the proposition that reliance on a trusted friend or adviser such as petitioner’s brother relieves a taxpayer from liability for negligence that case however is clearly distinguishable from the present ones in dyckman v commissioner supra we held for the taxpayers on the issue of negligence based on special and unusual circumstances including the taxpayers’ complete lack of sophistication in investment matters and the long-term -- - relationship of trust and friendship that existed between the taxpayers and their c p a also determinative was the fact that the taxpayers did not invest as a means of obtaining tax benefits rather their sole motivation was to provide for their retirement and they were not even aware that their investment was in a partnership designed to produce tax benefits further the taxpayers were not provided with any literature such as an offering letter or prospectus regarding their investment in contrast petitioner is a relatively sophisticated investor and possessed investment experience at the time that he invested in whitman moreover petitioner was also provided with a copy of the offering memorandum furthermore petitioner was aware that his investment in whitman produced immediate tax benefits in excess of his investment indeed the promise of such benefits was the principal factor that motivated petitioner to invest in whitman for the foregoing reasons petitioners’ reliance on dyckman v commissioner supra is misplaced likewise petitioners’ reliance on zidanich v commissioner tcmemo_1995_382 is misplaced for essentially the same reasons in addition to the foregoing we are not convinced that petitioner regarded his brother as a trusted adviser first the contacts between petitioner and his brother on financial matters appear to have been casual in nature and those contacts were -- -- invariably over the telephone second petitioner has never disclosed details regarding his own personal financial status to his brother petitioner’s reticence in making disclosures to his brother is illustrated by the following passage from the trial transcript qo mr barber we’ve heard a lot about your brother you rely on him almost exclusively for investment advice a i rely on him as a major source of advice as i indicated earlier i also have an olde brokerage firm stockbroker that’s done pretty good too but my brother’s support goes back a long time because he’s been an enrolled_agent and tax preparer for a long time and certainly whenever i have a complex tax guestion or things like that i do go to him q okay did you ask your brother about how to prepare the form to attach to your return a no i did not it only ask him questions over the phone i don’t show him my own personal financial data i do keep that separate from him qo okay so he doesn’t have a full picture of your financial status so to speak a probably not qo so he doesn’t know how much money you earn a right qo he doesn’t know all the different investments that you end up making a i don’t talk to him about my olde stock because that’s through my stockbroker i do that q okay so you call upon him when you want some advice from him -- - a right complex tax questions things like that in sum we do not think that petitioner’s professed reliance on his brother’s advice was reasonable c petitioner’s reliance on thompson petitioner does not contend that he relied on thompson in making the investment in whitman however after having made the investment petitioner contends that he relied on thompson in claiming the associated tax benefits on his income_tax returns petitioner also contends that such reliance was reasonable we acknowledge that neither thompson nor his firm had any relationship with either winer or whitman however for the following reasons we disagree that petitioner’s professed reliance on thompson was reasonable first thompson was not an investment adviser indeed he did not consider himself qualified to provide investment advice and his practice was not to provide such advice thompson did not purport to nor did he provide petitioner with investment advice cf 62_f3d_1266 10th cir wherein the taxpayers relied on their own investment adviser regarding the soundness of their investment affg tcmemo_1993_607 second thompson did not have any specialized knowledge regarding the plastics recycling industry in addition thompson did not have any specialized knowledge regarding the nontax - al --- business aspects of petitioner’s sentinel eps recycler investment thompson was therefore in no position himself to evaluate either the technology of the sentinel eps recyclers or whether the whitman partnership was a viable economic enterprise see eg addington v commissioner f 3d pincite in general it 1s unreasonable to rely on an adviser who lacks knowledge about the industry in which the taxpayer is investing third thompson did not make any independent attempt to evaluate either the technology of the eps recyclers or whether the whitman partnership was a viable economic enterprise he was therefore in no position to opine on either of these matters fourth thompson had no knowledge of the value of the sentinel eps recyclers and he made no independent attempt to determine their value yet thompson recognized and he so advised petitioner that the fair_market_value of the sentinel eps recyclers is the starting point for determining the amount of credits available to the partnership fifth thompson based his advice solely on the materials furnished to him by petitioner namely the offering memorandum and the schedule_k-1 sixth thompson regarded the whitman investment to be aggressive and he so advised petitioner at trial thompson described what aggressive meant - -- a so yes they whitman and its promoter were making maximum use pushing the limit right to the edge it was very aggressive or i wouldn’t have said it was you know you have to know how to deal with aggressive investments doesn’t mean it’s wrong just means you take your chance qo i’m sorry you said you must take your chance a you just take your chance qo and this is the kind of investment that you thought--- a how close can you walk to the line without getting caught or tripped finally thompson’s letter expressed so many misgivings and was filled with so many qualifications reservations and disclaimers as to undermine any contention that the letter justified petitioner’s reporting position thus numerous areas of concern were identified in the letter first and foremost among such areas of concern was the value of the recyclers which thompson identified as the starting point for determining the amount of credits available to the partnership thompson expressly advised petitioner that i am not in a position to judge the fmv of the recyclers yet thompson even with his lack of appraisal skills was able to conclude that the valuation made in the memorandum is challengeable he then went on to explain why first of all with regard to burstein’s and ulanoff’s reports neither evaluator appears to be primarily a property appraiser and neither engages in an economic analysis of cost of production of the -- - recyclers reasonable profit comparables capitalization of income or other factors normally used in equipment appraisals in other words no rational basis existed for the exorbitant value assigned to the recyclers in the offering memorandum at trial thompson testified that i don’t consider my letter to be a rousing endorsement of the investment an assertion that can only be described as an understatement when one considers the conclusion expressed in the letter i believe you may rely upon the offering memorandum notwithstanding this letter for this letter is no more legally enforceable than the memorandum emphasis added we regard this conclusion as tantamount to a total disclaimer a view that is supported by thompson’s testimony at trial qo is there any reservation that you have on this conclusion of the letter a do i have a reservation you mean would i take anything back of what i said qo sure a no i don’t think i gave very much away there’s nothing to take back petitioner’s contention that he regarded thompson’s letter as positive justification for claiming the tax_credits and loss deductions is of course self-serving see tokarski v commissioner t c pincite niedringhaus v commissioner t c pincite to accept petitioner’s contention would require us to ignore the clear tenor of the letter and take several - statements out of context we are unwilling to do that as the trier of fact it is our duty to listen to the testimony observe the demeanor of the witnesses weigh the evidence and determine what we believe kropp v commissioner tcmemo_2000_148 cf 58_tc_560 in the present cases we are convinced that petitioner invested in whitman principally because the investment offered immediate tax benefits in excess of his investment we are convinced that petitioner was determined to reap those benefits if at all possible petitioner consulted with thompson for two reasons first petitioner was uncertain how to convert his share of the partnership’s basis in the recyclers as reported on the schedule_k-1 into tax_credits on his individual return this is borne out by the opening sentence of thompson’s letter which states that petitioner retained the firm to review the offering memorandum for the purpose of preparing and advising you with respect to form_3468 to be filed with your tax_return emphasis added this statement suggests that the filing of form_3468 with the sought-after tax_credits was virtually a foregone conclusion petitioner also consulted thompson because petitioner was sensitive to the magnitude of the tax benefits shown on his schedule_k-1 and he was concerned that the magnitude of those - - benefits might expose his investment to be the tax_shelter it clearly was in this regard we are convinced that petitioner consulted thompson in order to provide cover and plausibility likewise we are convinced that petitioner was determined to interpret whatever advice that he received as justification for the tax benefits that he had purchased in sum we do not think that petitioner’s professed reliance on thompson was reasonable see eg 205_f3d_54 2d cir affg sann v commissioner tcmemo_1997_259 d other matters petitioners contend that investors such as themselves should not be burdened with the obligation of performing independent investigations of the ventures in which they invest in petitioners’ view such a requirement would impose an economic burden and prevent taxpayers such as themselves from investing as applicable to the present cases however this argument is flawed in that it virtually presumes among other things that petitioner should not have been expected to carefully read the offering memorandum petitioner should not have been expected to consider the numerous caveats and warnings regarding the business and tax risks inherent in the whitman investment petitioner was not principally motivated by the prospect of receiving immediate tax benefits in excess of his investment and petitioner was -- - justified in relying on an individual whom he knew had a conflict of interest as applied to the present cases petitioners’ argument is also flawed in that it ignores the various red flags that should have alerted petitioner a relatively sophisticated investor with a technical background that the sentinel eps recyclers were overvalued and independent expert advice was therefore required obvious red flags included the exorbitant cost of the recyclers e dollar_figure million and the fact that the whitman transactions as described in the offering memorandum were to be executed simultaneously in what was nothing other than a circular flow of apparent payments made only through bookkeeping entries finally mention should be made of two plastics recycling cases that were decided after petitioners’ briefs were filed namely 223_f3d_1206 10th cir and 94_fsupp2d_838 e d mich in thompson v united_states supra the court_of_appeals for the tenth circuit held that the district_court did not abuse its discretion in instructing the jury that reasonable good- faith reliance on the advice of a professional adviser constitutes a defense to negligence within the meaning of sec_6653 this holding served to uphold the jury’s verdict in favor of the taxpayers on the issue of negligence at - in thompson v united_states supra the government relied heavily on the unpublished opinion of the court_of_appeals for the tenth circuit in a similar plastics recycling case gilmore wilson constr co v commissioner 166_f3d_1221 10th cir affg estate of hogard v commissioner tcmemo_1997_ the court_of_appeals dismissed the government’s assertion that its holding in that case was dispositive of the issue before it in that case we reviewed the tax court’s factual determination made after a bench trial that the taxpayers were negligent here we consider the more limited question of whether a reliance instruction was warranted had we been presented with such a question in gilmore wilson we would likely have upheld the instruction see id at the evidence introduced both at trial and through stipulation presents a close question regarding whether taxpayers were negligent for this reason the government’s reliance on gilmore wilson is misplaced ithompson v united_states supra pincite fn ref omitted in the present cases we have considered petitioners’ contention regarding reliance however we have concluded based on the totality of the facts and circumstances presented at trial that petitioners’ professed reliance on winer petitioner’s brother and thompson was not reasonable accordingly we regard thompson v commissioner supra as distinguishable from the present cases in klein v united_states supra the district_court denied the government’s motion for summary_judgment on the issue of the taxpayers’ liability for additions to tax for negligence the -- - district_court held that on the record before it the issue of negligence could not be decided as a matter of law but rather was an issue to be decided by the trier of fact in the present cases we have addressed the issue of negligence as an issue of fact which we have decided based on the totality of the facts and circumstances presented at trial thus klein v united_states supra is distinguishable from the present cases be conclusion upon consideration of the entire record we hold that petitioners are liable for the additions to tax for negligence under sec_6653 and respondent is therefore sustained on this issue il the plastics recycling project settlement offer petitioners contend that they are entitled to the terms of the plastics recycling project settlement offer see davenport recycling associates v commissioner tcmemo_1998_347 affd 220_f3d_1255 11th cir it should be recalled that in date respondent made the settlement offer in writing to winer as the tax_matters_partner of the whitman partnership respondent’s transmittal letter stated that the settlement offer would not be repeated and that the offer would expire days from the date of the letter winer did not accept the settlement offer on behalf of the --- - partnership respondent then mailed the notices of final_partnership_administrative_adjustment winer commenced the partnership action at docket no and ultimately the court entered decision pursuant to the commissioner’s motion under rule b which completely sustained the commissioner’s fpaa determinations petitioners allege that they were never informed of the settlement offer by respondent at the time that the offer was made respondent counters that the settlement offer was made to winer as whitman’s tax_matters_partner and that any failure by winer to inform all of the limited partners of the existence of the offer does not require respondent to renew the offer we agree with respondent there is no statutory or regulatory provision that obligates respondent when making a settlement offer to the tax_matters_partner of a tefra partnership to provide notice to the partnership’s limited partners of the fact of such offer to the contrary sec_6223 provides in part that the tax_matters_partner of a partnership shall keep each partner informed of all administrative and judicial proceedings for the adjustment at the partnership level of partnership items in other words to the extent that whitman’s limited partners were entitled to notice regarding respondent’s making of the date settlement offer the duty to provide such notice lay with winer - - and not with respondent see also sec_301 g -1t b iv temporary proced admin regs fed reg date which specifically obligates the tax_matters_partner to furnish to the partners information with regard to the acceptance by the commissioner of any settlement offer cf 90_tc_1124 regarding the central role played by and the duties imposed on the tax_matters_partner during litigation at the partnership level further the fact that winer may have failed in his duty to provide notice regarding the fact of respondent’s settlement offer does not serve to revive the offer insofar as petitioners are concerned in this regard section f expressly states the failure of the tax_matters_partner or any other representative of a partner to provide any notice or perform any act required under this subchapter sections or under regulations prescribed under this subchapter on behalf of such partner does not affect the applicability of any proceeding or adjustment under this subchapter to such partner conclusion petitioners have made other arguments that we have considered in reaching our decision to the extent that we have not discussed those arguments we find them to be irrelevant or ‘7 petitioners also appear to mistakenly place on the commissioner the duty to serve copies of a rule b motion in a partnership action however rule b squarely places this duty on the tax_matters_partner see also sec without merit ’ to reflect our disposition of the disputed issues as well as petitioners’ concessions see supra note decisions will be entered for respondent we also decline to consider arguments for which there is no factual predicate in the evidentiary record see rule b statements in briefs do not constitute evidence further insofar as additional interest under sec_6621 may be concerned we refer petitioners to sec_6621 a v as well as barlow v commissioner tcmemo_2000_339


internal_revenue_service number release date index number ------------------------ ----------------------------- ----------------------------------- -------------------------------------- -------------------------------- 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 corp plr-106140-07 date date legend legend f1 f6 f7 f37 acquiror business a date newco ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------ ----------------------------------------- ------------------------------------------------------------------------------------ -------------------- ------------------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------ plr-106140-07 newco newco parent mm nn oo pp qq rr ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ----------------------- ------------------- ----------------- --------------- ---- -- --------------- dear ------------- this letter responds to a date request that we supplement our letter_ruling dated date plr-143542-06 the original letter_ruling capitalized terms not defined in this ruling retain the meanings assigned them in the original letter_ruling the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party although this office has not verified any of the material submitted in support of the requested ruling it is subject_to verification on examination facts the original letter_ruling concerned a series of transaction steps relating to the restructuring and disposition of business a by parent its direct and indirect subsidiaries and certain joint ventures with third parties the disposition of business a to affiliates of acquiror as described in the original letter_ruling the sale was completed on date plr-106140-07 at the time of the sale and at all times thereafter until the date hereof f1 has held all of the stock of newco through disregarded entities f6 and f7 and f37 has held all of the stock of newco and newco in the sale newco received proceeds of approximately dollar_figuremm newco received approximately dollar_figurenn and newco received approximately dollar_figureoo each newco lent its proceeds to other direct and indirect subsidiaries of parent for a pp-month term in the case of newco and for a qq-month term in the case of newco and newco parent has determined that certain costs other than u s federal income taxes may be reduced if each newco distributes rather than lends a portion of its proceeds to its shareholders newco distributions parent proposes that at the end of the term of the outstanding loans to parent affiliates each newco will distribute to its shareholders a portion of the proceeds of the sale to the extent such proceeds exceed approximately dollar_figurerr the newco distributions and together with the transaction described in the original letter_ruling the proposed transaction representations in connection with its request for supplemental rulings the taxpayer reaffirms as of the date of the sale the representations made in connection with the original letter_ruling rulings based solely on the information and representations submitted we rule as follows with respect to the proposed transaction the newco distributions will not affect any ruling contained in the original letter_ruling the f reorganizations will continue to constitute reorganizations within the meaning of sec_368 of the internal_revenue_code code and the original letter_ruling will remain in full force and effect each newco distribution will be governed by sec_301 treas regulation sec_1_301-1 regulations accordingly i f1 and f37 will treat the newco distributions received as dividends with respect to each outstanding share of newco and newco and newco respectively to the extent of their respective earnings_and_profits sec_301 and sec_316 ii any portion of the newco distributions that is not a dividend shall be applied to reduce the basis of each share of stock of newco newco and newco as appropriate sec_301 and iii any portion of the newco plr-106140-07 distributions that is not a dividend to the extent it exceeds the adjusted_basis of such stock shall be treated as gain from the sale_or_exchange of property sec_301 caveats no opinion is expressed about the federal_income_tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the original ruling letter or the above rulings procedural statements the original ruling letter and this supplemental ruling are directed only to the taxpayer who requested them sec_6110 of the code provides that they may not be used or cited as precedent a copy of the original ruling letter and this supplemental ruling must be attached to any income_tax return to which they are relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date and control numbers of the letter rulings in accordance with the power_of_attorney on file in this office a copy of this supplemental ruling will be sent to your authorized representative sincerely ____________________ lewis k brickates chief branch office of associate chief_counsel corporate -


department of the treasury internal_revenue_service te_ge eo examinations commerce street mc dal dallas tx tax_exempt_and_government_entities_division date number release date legend org - organization name xx - date address - address org address certified mail dear taxpayer_identification_number person to contact identification_number contact telephone number this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated july 20xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s you are not operating exclusively for any charitable purpose educational purpose or any other exempt_purpose our examination reveals that you are not engaged primarily in activities which accomplish charitable educational or other exempt purposes as required by sec_1_501_c_3_-1 your activities including your financial transactions more than insubstantially furthered non-exempt purposes contributions to your organization are no longer deductible under sec_170 after january 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to these courts at the following addresses you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely nanette m downing director eo examinations letter catalog number 34198j publication enclosure internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations fulton st room brooklyn ny department of the treasury date date org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if we issue a determination_letter to you based on technical_advice no further you may also request that we refer this matter for technical_advice as explained in publication administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any letter rev catalog number 34809f proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely nanette m downing director eo examinations enclosures publication publication report of examination form_6018 form 4621-a letter rev catalog number 34809f ev date schedule number or exhibit form 886-a name of taxpayer org explanations of items tax identification_number ein year period ended 20xx legend org - organizationname companies issue xx---date state-state co-1 through co-12 through whether revocation of the org’s tax-exempt status is necessary because the organization is not operating for exempt purposes facts org org incorporated on november 20xx in the state of state per its certificate of incorporation the purpose for which the organization was formed was to create form and establish a center to aid and assist emerging artists to promote foster and encourage the artistic development of individuals to provide education and training in a variety of art forms to assist emerging artists by providing a forum for the free exchange of information to own operate and maintain real_property to serve as a permanent home for the center to stimulate community interest in the purposes of this corporation to raise funds and solicit donations from interested individuals charitable educational and scientific organizations and foundations and other interested organizations and foundations agencies institutions associations and corporations and to administer and expend such funds in furtherance of the corporate goals and purposes to aid assist cooperate co-sponsor and otherwise engage in concerted action with private governmental and other agencies and organizations with the same or similar objectives to solicit collect and otherwise raise money for the charitable and benevolent purposes of this corporation and to expend such monies and generally to aid and assist emerging artists by all available means and methods org filed an application_for recognition of exemption form_1023 with the internal_revenue_service on february 20xx per its application_for recognition of exemption the org is a program and service_organization for artists and arts organizations the four areas of concentration include development of projects audiences careers and organizations per letter dated july 20xx the internal_revenue_service granted the org exempt status under sec_501 the ruling letter held that the organization was a public supported_organization described in sec_509 and sec_170 of the irc the activities of org are providing fee based consulting services at or above cost for management marketing and fundraising to artists and arts organizations the organization is not supported by contributions from the public government or private_foundations or grants the table on the following page is a breakdown of org’s revenues for the examination period by client form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer org tax identification_number ein year period ended 20xx explanations of items co-2 co-3 co-4 co-5 co-6 co-7 co-8 coo-9 client consulting fees description co-1 dollar_figure dance theater school internship print center school dance company ballet company choreographer empowerment_zone dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure co-10 public charity for playwrights lyricists dollar_figure for the american stage _ dollar_figure dollar_figure total consulting income total org income and composers writing co-11 co-12 contribution dollar_figure dollar_figure dollar_figure dollar_figure the organization receives the majority of income from consulting fees and very limited public support forms filed by org for the year ending december 20xx reported on form_990 schedule a part ii public support schedule the following tax_year ending public support other income total income income public support of income december 20xx december 20xx december 20xx december 20xx december 20xx_ per examination dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure law sec_501 exempts from federal_income_tax organizations organized and operated exclusively for charitable educational and other purposes provided that no part of the organization’s net_earnings inures to the benefit of any private_shareholder_or_individual form 886-a catalog number 20810w - page_-2 publish no irs gov department of the treasury-interna l revenue service schedule number or exhibit 886-a explanations of items form rev tanuary name of taxpayer org sec_1_501_c_3_-1 of the income_tax regulations treas reg provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in sec_501 if an organization fails to meet either the organizational or operational_test it is not exempt tax identification_number ein year period ended 20xx sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 provides that the operational_test is not satisfied where any part of the organization’s earnings inure to the benefit of private shareholders or individuals and where the organization serves a private rather than a public interest sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more of the purposes specified in sec_501 unless it services a public rather than a private interest sec_1_501_c_3_-1 holds that an organization that is primarily formed to operate an unrelated_trade_or_business is not exempt under sec_1 c the presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes 326_us_279 90_led_67 66s ct 92_tc_1053 see also old dominion box co operating for the benefit of private parties who are not members of a charitable_class constitutes a substantial nonexempt purpose when an organization operates for the benefit of private interests such as designated individuals the creator or his family or persons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes american campaign academy v commissioner supra pincite6 inc v united_states f2d cir cert_denied 413_us_910 in 70_tc_352 the court found that a corporation formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that was ordinarily carried on by commercial ventures organized for profit its primary purpose was not charitable educational nor scientific but rather commercial in addition the court found that the organization's financing did not resemble that of the typical c organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations in revrul_72_369 1972_2_cb_245 an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations does not qualify for exemption under sec_501 of the form 886-a catalog number 20810w -page__ publish no irs gov department of the treasury-internal revenue service schedule number or exhibit 886-a form rev date explanations of items name of taxpayer org code the organization enters into agreements with unrelated sec_501 organizations to furnish managerial stated _ that tax identification_number ein year period ended 20xx consulting services revenue_ruling basis this cost and on a an organization is not exempt merely because its operations are not conducted for the purpose of producing a profit to satisfy the ‘operational test ’ the organization's resources must be devoted to purposes that qualify as exclusively charitable within the meaning of sec_501 of the code and the applicable regulations providing managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fact that the services in this case are provided at cost and solely for exempt_organizations is not sufficient to characterize this activity as charitable within the meaning of sec_501 of the code furnishing the services at cost lacks the donative element necessary to establish this activity as charitable taxpayer’s position org has indicated that they will agree to revocation of the c exempt status government ’s position the government concludes that the org does not satisfy the requirements for continued exemption under sec_501 the organization is not operated exclusively for exempt purposes since it fails the operational_test the organization’s primary activity is consulting and management services for a fee which does not promote exempt purposes and is a substantial commercial purpose the organization promotes the private interests of its clients and not the public interest the organization’s primary activities consulting work does not promote exempt purposes as required by sec_1_501_c_3_-1 which states an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business as stated in sec_1_501_c_3_-1 org does not meet these requirements since the primary purpose is operating a consulting and management business like the revoked organizations described in revrul_72_369 1972_2_cb_245 and 70_tc_352 org primarily provides consulting and management services income is exclusively from consulting service fees and operating the same as a commercial businesses organized for profit conclusions the service proposes to revoke the exempt status of org effective january 20xx the first day of the tax_year under examination form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service