t c memo united_states tax_court malcolm i lewin and trina lewin petitioners v commissioner of internal revenue respondent docket no filed date christopher s rizek for petitioners louise r forbes and d sean mcmahon for respondent memorandum findings_of_fact and opinion dawson judge this case was assigned to special_trial_judge norman h wolfe pursuant to the provisions of sec_7443a in effect when these proceedings commenced and rule sec_180 sec_181 and sec_183 unless otherwise indicated section references are to the internal_revenue_code in effect at relevant times and rule references are to the tax_court rules_of_practice and procedure 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 in a so-called affected items notice_of_deficiency respondent determined additions to tax with respect to petitioners’ federal_income_tax of dollar_figure under sec_6659 for valuation_overstatement dollar_figure under sec_6653 for negligence and under sec_6653 in an amount equal to percent of the interest due on dollar_figure the amount of the underpayment attributable to negligence the underpayment was determined pursuant to a partnership-level proceeding see secs after concessions there are two issues remaining for decision the first issue is whether petitioners are liable for the additions to tax under the provisions of sec_6653 and for negligence or intentional disregard of rules or regulations we hold that they are liable for these additions to tax the second issue is whether petitioners are entitled to the benefits of a settlement offer that was made available to some other taxpayers we hold by stipulation petitioners concede the imposition of the valuation_overstatement addition_to_tax under sec_6659 in addition petitioners concede that the limitations_period remains open for assessment and collection of any penalties additions to tax or interest attributable to partnership items for the tax_year that may be held to be due from petitioners petitioners previously raised the statute_of_limitations as a defense in their petition that they are not entitled to the benefits of that settlement offer findings_of_fact some of the facts have been stipulated and are so found the stipulated facts and the attached exhibits are incorporated by this reference petitioners resided in north caldwell new jersey at the time they filed the petition in this case a the plastics recycling transaction this case is part of the plastics recycling group of cases the issues in this group of cases center about a circular multistep transaction involving the sale and lease of machines designed to recycle plastic scrap the additions to tax arise from the disallowance of losses investment credits and energy credits petitioners claimed with respect to a new york limited_partnership called sab foam recycling associates sab foam for a detailed discussion of the transactions involved in the plastics recycling cases see provizer v commissioner tcmemo_1992_177 affd per curiam without published opinion the parties have stipulated that testimony and documentary_evidence admitted in cohen v commissioner tcmemo_2003_303 and in feinberg v commissioner tcmemo_2003_304 shall be admitted in the present case subject_to the parties’ relevance objections if any in addition the parties have agreed to add to the record as exhibits the testimony of elliot miller in provizer v commissioner tcmemo_1992_177 affd per curiam without published opinion 996_f2d_1216 6th cir and of stuart becker in jaroff v commissioner tcmemo_1996_527 f 2d 6th cir the parties have stipulated that the underlying transactions involving the recycling machines recyclers in this case are substantially_similar to the transactions involving the sentinel polyethylene epe recyclers considered in provizer and the sentinel polystyrene eps recyclers considered in gottsegen v commissioner tcmemo_1997_314 in a series of simultaneous transactions that for convenience are referred to herein as the sab foam transactions packaging industries group inc pi of hyannis massachusetts manufactured and sold3 four ep sec_4 recyclers to ethynol cogeneration inc eci for dollar_figure dollar_figure per machine eci agreed to pay pi dollar_figure for the four recyclers at the closing with the balance of dollar_figure financed through a 12-year nonrecourse promissory note eci note each monthly installment on the eci note was dollar_figure 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 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 in provizer v commissioner supra the transaction involved epe recyclers but 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 the eps recyclers simultaneously eci resold the recyclers to f g equipment corp f g for dollar_figure million f g agreed to pay eci dollar_figure at the closing with the balance of dollar_figure financed through a purportedly partial recourse promissory note f g note the f g note was recourse against f g to the extent of percent of its face value however the recourse portion was payable only after f g satisfied the nonrecourse portion of the note each monthly installment on the f g note was dollar_figure in turn f g leased the recyclers to sab foam for a monthly base rent of dollar_figure pursuant to the lease and in accordance with applicable provisions of the internal_revenue_code and the treasury regulations f g elected to treat sab foam as having purchased the recyclers for purposes of the investment and business energy tax_credits simultaneously sab foam entered into a joint_venture with pi and resin recyclers inc rri the joint_venture agreement provided that rri was to assist sab foam with the placement of recyclers with end-users and that pi was to pay a monthly joint_venture fee to sab foam of dollar_figure in connection with the sab foam transactions therefore the arrangement was that pi would pay a monthly joint_venture fee to sab foam in the same amount that sab foam would pay monthly to f g as rent in the same amount that f g would pay monthly to eci on the f g note in the same amount that eci would pay monthly to pi on the eci note in connection with these arrangements by pi eci f g sab foam and rri these monthly payments were offsetting so they could be kept as bookkeeping entries with no money actually changing hands on its form_1065 u s partnership return of income sab foam reported that the four recyclers had an aggregate basis of dollar_figure million or dollar_figure each for purposes of the investment and business energy tax_credits in the present case the undisputed evidence including the stipulation of the parties establishes that the recyclers were not properly valued at dollar_figure but instead had a maximum value of dollar_figure to dollar_figure each sab foam reported a net ordinary_loss of dollar_figure sab foam included the portion of credits and losses attributed to petitioners on the schedule_k-1 shareholder’s share of income credits deductions etc issued to petitioners and filed with sab foam’s partnership tax_return b private offering memorandum the private offering memorandum memorandum that generally was distributed to potential investors contemplated the creation of sab foam sab management ltd sab management a new york corporation was sab foam’s general_partner its tax_matters_partner tmp and a 1-percent_owner the limited partners or investors owned the remaining percent of sab foam the memorandum informed investors that the business of sab foam would be conducted in accordance with the transaction described above the memorandum warned potential investors of significant business and tax risk factors associated with investments in sab foam the memorandum was replete with warnings in bold capital letters the memorandum unequivocally stated this offering involves a high degree of risk specifically the memorandum warned potential investors that there was a substantial likelihood of audit by the internal_revenue_service irs on audit the purchase_price of the sentinel eps recyclers to be paid_by f g to eci may be challenged by the irs as being in excess of the fair_market_value thereof a practice followed by the irs in transactions it deems to be ‘tax shelters’ such purchase_price is the basis for computing the regular investment and energy tax_credits to be claimed by sab foam and ultimately by its partners the partnership had no prior operating history the general_partner 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 was no established market for the sale leasing or licensing of sentinel eps recyclers and certain potential conflicts of interest existed the memorandum projected that in the initial year of investment an investor contributing dollar_figure for one unit would receive total investment tax_credits and business energy credits of dollar_figure plus tax deductions of dollar_figure the memorandum stated that an investor in sab foam was required to have an individual net_worth and or net_worth with a spouse of dollar_figure million inclusive of residences and personal_property or income of dollar_figure per year for each unit of investment the memorandum included a marketing report by stanley ulanoff ulanoff a marketing consultant and professor and a technical opinion by samuel z burstein burstein a mathematics professor the memorandum warned investors not to rely on the statements and opinions contained in the memorandum but to conduct an independent investigation the memorandum included a form of opinion of counsel tax opinion prepared by boylan evans a new york law firm the tax opinion addressed only to the general_partner included in the first paragraph the following disclaimer we have consented to your inclusion of the proposed form of this letter in the memorandum but this letter is intended for your own individual guidance and for the purpose of assisting prospective purchasers and their tax advisors in making their own analysis and no prospective purchaser is entitled to rely upon this letter the tax opinion expressly warned that the investment and energy tax_credits available to limited partners would be reduced or eliminated if the partnership could not demonstrate that the price paid for the recyclers approximated their fair_market_value the tax opinion did not purport to rely on any independent confirmation of the fair_market_value of the recyclers instead the tax opinion clearly relied on ulanoff’s conclusion that the purchase_price to be paid_by f g was fair and reasonable the tax opinion also states pi eci f g and the partnership have represented to us that the prices paid_by eci and by f g and the terms of the lease were negotiated at arm’s length the tax opinion concludes that the basis to the partnership upon which the aggregate investment and energy tax_credits are to be computed is the price paid_by f g for the recyclers c individuals involved malcolm i lewin petitioner graduated from the city college of new york and graduated from new york university law school in in petitioner came to work for miller summit a new york law firm as the two-partner partnership’s only associate elliot miller miller was one of the partners petitioner worked primarily on corporate and transactional matters he was employed by miller summit for about years during that time he performed a variety of professional services for pi which was a major client for miller on many occasions he visited the premises of pi which then were located in new jersey and under different ownership than in after his employment by miller summit ended in petitioner joined the new york law firm of lans feinberg cohen lfc thereafter petitioner only rarely spoke with miller miller was one of the key figures in the plastics recycling transactions and an acquaintance of stuart becker becker miller was the corporate counsel to pi for many years and was a 1-percent shareholder of f g he also represented f g burstein and raymond grant who was the sole shareholder of eci miller practiced law from to the present primarily in the area of business and tax transactions and litigation for some years he practiced as a partner in the firm of miller summit robert s cohen cohen received his b a degree from alford university and his j d degree from fordham university after graduating from law school in cohen enlisted in the military and was released from active_duty as a first lieutenant he then worked for a law firm in new york until he formed lfc in in practice he was primarily a commercial litigator until the early eighties when new york passed an equitable distribution law with respect to divorce then he concentrated his practice on family law becker organized and promoted sab foam becker was the sole shareholder of scanbo management ltd scanbo which wholly owned sab management becker served as the president of sab management and principal of stuart becker co p c becker co an accounting firm that emphasized tax matters he does not have an engineering background and he is not an expert in plastics materials or plastics recycling in his practice becker specialized in tax matters generally and particularly in tax-advantaged investments so he had considerable experience involving so-called tax_shelter transactions becker received his b s degree in accounting from new york university in and an m b a in taxation from new york university school of business administration in he passed the certified public accountancy test in and was the winner of the gold medal awarded for achieving the highest score on the examination for the year since early becker has practiced as an accountant in the tax area from until he worked for the accounting firm of touche ross co and in he joined the accounting firm of richard a eisner co eisner co as the partner in charge of the tax department in he was the founder and principal_owner of becker co becker learned of the plastics recycling transactions in when a prospective client presented him with an offering memorandum concerning one of the transactions subsequently he organized limited_partnerships to offer the plastics recycling transaction to his clients and others cohen had met becker through his relationship with richard eisner becker’s partner at eisner co and through his stepbrothers who were becker’s clients cohen retained becker on several occasions as an accounting expert in turn becker retained cohen and lfc on various legal matters including his own divorce h robert feinberg feinberg attended new york university school of commerce accounts finance on a university scholarship and graduated in years he joined the naval reserve while attending harvard law school during the korean war and graduated from the law school in he then attended officer’s candidate school received his commission transferred to the naval supply depot bayonne new jersey for supply corps school and then at the request of the captain of the base was assigned to the naval supply depot at bayonne he served years on active_duty with the navy primarily at that supply depot in charge of purchasing and contracting within weeks of separation_from_service he was hired by the new york law firm of jacobs persinger and he became a partner there in feinberg had some experience in litigation and taxation but later his practice focused on corporate financial and commercial transactions feinberg described himself as a member of the core of the corporate and corporate finance bar within the wall street area that were fairly well known among each other and were constantly working on deals in he formed a new firm with an attorney who specialized in real_estate transactions and later that firm merged with lfc feinberg met becker through cohen and developed a professional relationship with him this relationship included referrals between lfc and becker co as well as personal matters feinberg considered becker a very bright and sophisticated accountant becker retained feinberg to protect his interests as a promoter of sab foam becker did not employ feinberg to represent the partnership but to advise him for his own protection petitioner did not know becker personally but rather knew of him from his relationship with both cohen and feinberg herbert dooskin dooskin received a b a in economics from city college of new york and an m b a from baruch college he began his career as a financial accountant in with alexander grant co alexander grant an accounting firm currently known as grant thornton he became a partner in and when he left the firm in for employment by a client dooskin was the managing partner of the new york office and chairman of the firm’s executive committee dooskin was primarily an auditor and was not a tax accountant dooskin had met petitioner when they were in college and they served together in the army in petitioner brought the memorandum to dooskin for review dooskin passed the memorandum on to ronald sacco sacco a tax professional at alexander grant for review according to dooskin sacco’s view was that the investment and the economics of the deal were dependent upon the valuation of the equipment after dooskin and sacco each spent about hours reviewing the matter dooskin concluded that the proposal looked like a legitimate business compressing plastic and that it was better than most neither dooskin nor sacco performed an independent analysis of the valuation of the recyclers all of dooskin’s and sacco’s information relating to the valuation of the recyclers came from either petitioner or the memorandum dooskin made no separate charge to petitioner for the few hours he and his associate spent examining the memorandum d partnership-level litigation on date respondent issued a notice of proposed adjustments to tax_return to sab foam for and on date robert l steele a tax partner with becker co submitted a protest letter protest letter to respondent on behalf of sab management the protest letter included the following statement we hereby agree to follow the tax court’s decision in the lead cases selected in accordance with the order of date such cases being elliot i miller petitioner v commissioner of internal revenue respondent docket no elliot i miller and myra k miller petitioner v commissioner of internal revenue respondent docket no leo fine and judith h fine petitioners v commissioner of internal revenue respondent docket no new controlling case harold m provizer and joan provizer petitioners v commissioner of internal revenue respondent docket no on date on behalf of sab foam becker submitted the following notice to respondent in our protest dated date we stated that the partnership agreed to be bound by the lead cases fine miller and miller due to various changes in circumstances including but not limited to a settlement of all such then pending lead cases the partnership hereby withdraws its statement to be bound by such cases or any other case becker mailed this notice by certified mail return receipt requested and signed it stuart becker tax_matters_partner on date respondent issued a notice of final_partnership_administrative_adjustment fpaa to sab management for in the fpaa respondent disallowed all items of income losses deductions and credits reported with respect to sab foam’s equipment_leasing activities for accordingly respondent increased ordinary_income by dollar_figure determined that sab foam’s investment and business energy tax_credits with respect to the recycling_equipment were zero instead of the dollar_figure million claimed as the qualified_investment on the partnership tax_return and increased sab foam’s other income by dollar_figure subsequently sab foam’s tmp filed a petition with the court on date the court entered a decision in sab foam recycling associates v commissioner docket no this decision reflected a full concession by sab foam of all items of income loss and credit previously claimed for the partnership e petitioners’ introduction to plastics recycling in and petitioner cohen and feinberg were partners in lfc in feinberg approached petitioner about sab resource recycling associates sab resource a limited_partnership structured substantially like sab foam petitioner explained to feinberg his alleged familiarity with pi and suggested miller as a resource for more information he then talked with miller about the transaction miller reminded petitioner of his experience with pi but never specifically discussed the value of the machines with petitioner instead miller stated to petitioner that valuations were done on the recyclers and that as to the people who did the valuations he knew them they were qualified they appeared to be qualified petitioner next sought the advice of his friend dooskin according to petitioner dooskin and his associate sacco reported favorably on the memorandum petitioner claimed years later that he remembered dooskin’s saying that they had reviewed a lot of deals in this time and this was certainly a lot better than many if not most of those they had looked at they added according to petitioner that the issue of the value that was assigned to the machines was something to look at more carefully after discussing the investment with miller and dooskin and then further with cohen and feinberg petitioner was ready to invest in sab resource when petitioner tried to invest in sab resource however feinberg informed him that the investment opportunity had closed on date the limited partners of sab resource including cohen and feinberg received a letter from sab management the general_partner of sab resource the letter signed by becker stated that the transaction contemplated by sab resource was complete and distributed a modest initial royalty on date sab management sent a memo to the limited partners purporting to update the status of their investment in sab resource in feinberg again approached petitioner with an investment opportunity this time the proposal related to sab foam petitioner again forwarded the memorandum to dooskin who gave the same response that he had given concerning sab resource petitioner discussed the initial results of the sab resource transactions with feinberg saw the letters of january and june and invested in sab foam according to the schedule_k-1 issued by sab foam to petitioners for and reflected on petitioners’ federal_income_tax return petitioners invested dollar_figure and acquired a 455882-percent limited_partnership_interest in sab foam’s profits losses and capital on their tax_return petitioners claimed an ordinary_loss of dollar_figure from sab foam and an investment and energy tax_credit of dollar_figure petitioners had no experience with the plastics materials or the plastics recycling industry opinion we have decided many plastics recycling cases most of these cases like the present case have presented issues regarding additions to tax for negligence see eg weitzman v commissioner tcmemo_2001_215 thornsjo v commissioner tcmemo_2001_129 west v commissioner tcmemo_2000_389 barber v commissioner tcmemo_2000_372 barlow v commissioner tcmemo_2000_339 affd 301_f3d_714 6th cir ulanoff v commissioner tcmemo_1999_170 merino v commissioner tcmemo_1997_385 affd 196_f3d_147 3d cir greene v commissioner tcmemo_1997_296 kaliban v commissioner tcmemo_1997_271 sann v commissioner tcmemo_1997_259 ndollar_figure and cases cited therein affd sub nom 205_f3d_54 2d cir although we have considered each case on its own particular facts and circumstances in all but two of the plastics recycling case sec_5 we found the taxpayers liable for the additions to tax for negligence in provizer v commissioner tcmemo_1992_177 the test case for the group of cases we resolved the plastics recycling issues as follows we found that each recycler had a fair_market_value of not more than dollar_figure we held that the transaction which was virtually identical to the transaction in the present case was a sham because it lacked economic_substance and a business_purpose we sustained the additions to tax for negligence under sec_6653 and we sustained the addition_to_tax for valuation_overstatement under sec_6659 because the underpayment of taxes related directly to the overvaluation of the recyclers and we held that the partnership losses and tax_credits claimed with respect to the plastics recycling partnership at issue were attributable to tax- motivated transactions within the meaning of sec_6621 we in dyckman v commissioner tcmemo_1999_79 and zidanich v commissioner tcmemo_1995_382 we held the taxpayers were not negligent with respect to their participation in the plastics recycling program both cases involved unusual circumstances not present in this case also found that other recyclers were commercially available during the years in issue see id in reaching the conclusion that the transaction lacked a business_purpose this court relied heavily upon the overvaluation of the recyclers similarly in gottsegen v commissioner tcmemo_1997_314 we found that each eps recycler had a fair_market_value of not more than dollar_figure and relied heavily on the overvaluation of the recyclers in concluding that the taxpayer was negligent and liable for accuracy-related_penalties see addington v commissioner supra issue sec_6653 and additions to tax for negligence sec_6653 provides for an addition_to_tax equal to percent of the underpayment if any part of the underpayment_of_tax is due to negligence or intentional disregard of rules or regulations sec_6653 provides for an addition_to_tax equal to percent of the interest payable with respect to the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations negligence is defined as the failure to exercise the due care that a reasonable 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 see also turner v commissioner tcmemo_1995_363 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 the determination of negligence is highly factual see merino v commissioner f 3d pincite respondent determined that petitioners are liable for negligence under sec_6653 and with respect to the underpayment_of_tax attributable to petitioners’ investment in sab foam respondent’s determination of negligence is presumed correct and petitioners have the burden of proving that they were not negligent see rule a 290_us_111 see also addington v commissioner supra 196_f3d_147 3d cir 39_f3d_402 2d cir affg tcmemo_1993_480 79_tc_846 58_tc_757 cf sec_7491 which places the burden of production on the commissioner with respect to a taxpayer’s liability for penalties and additions to tax sec_7491 is effective for court proceedings arising in connection with examinations commencing after date petitioners do not contend nor is there evidence that their examination commenced after date or that sec_7491 is applicable in this case a taxpayer may avoid liability for negligence under sec_6653 and if he or she reasonably relied on competent professional advice 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 freytag v commissioner supra for reliance on professional advice to excuse a taxpayer from the negligence additions to tax the taxpayer must show that the professional had the expertise and knowledge of the pertinent facts to provide informed advice on the subject matter 43_f3d_788 2d cir affg tcmemo_1993_621 goldman v commissioner supra pincite see freytag v commissioner supra sann v commissioner tcmemo_1997_259 reliance on representations by insiders promoters or offering materials has been held an inadequate defense to negligence goldman v commissioner supra sann v commissioner supra see berry v commissioner tcmemo_2001_ carroll v commissioner tcmemo_2000_184 pleas of reliance have been rejected when neither the taxpayer nor the advisers purportedly relied upon by the taxpayer knew anything about the nontax business aspects of the contemplated venture see david v commissioner supra goldman v commissioner supra petitioners primarily contend that they were not negligent because they reasonably relied on the memorandum and their advisers petitioners had no education or experience in plastics materials or plastics recycling nor had they seen a sentinel eps recycler when they invested in sab foam moreover they did not consult with anyone who had such expertise in plastics or plastics recycling as an associate for miller summit petitioner may have learned about business practices of pi long ago but that in no way establishes him as an authority about pi or the plastics industry when petitioner was employed by miller summit and was assigned work for pi that company was located in new jersey under different ownership and had not yet manufactured any recyclers by the time of the transactions in issue pi had moved to hyannis massachusetts nothing in the record establishes that petitioner had any special knowledge about pi or its business in petitioner’s knowledge of sab foam rather is derived primarily from the memorandum and miller the memorandum was essentially a sales-oriented document and it contained numerous warnings that prospective investors should not rely on it petitioners’ advisers either lacked knowledge about the subject of the proposed investment or were part of the sales group and therefore inherently and obviously unreliable under the circumstances of this case petitioners’ purported reliance on the materials in the memorandum as well as their advisers does not relieve them of liability for the additions to tax for negligence petitioners argue that they are different from the numerous other investors who have negligently speculated on the plastics recycling deal because they or their friends had a special relationship with miller or becker as explained below we consider this argument to be contrary to the facts of this case and wholly unpersuasive a the memorandum and petitioners’ colleague sec_1 the memorandum petitioner contends that before purchasing shares in sab foam he read the memorandum and its accompanying materials the purported value of the recyclers is what generated the deductions and credits the memorandum clearly reflects this circumstance the recyclers which in fact have a value of no more than dollar_figure each were reported by sab foam to have a basis of dollar_figure each as a result of the purported value of the recyclers petitioners’ investment of dollar_figure produced for them on their tax_return claimed tax_credits of dollar_figure and deductions of dollar_figure the direct benefits claimed on petitioners’ tax_return from the tax_credits alone far exceeded their cash investment like the taxpayers in provizer v commissioner tcmemo_1992_ except for a few weeks at the beginning petitioners never had any money in the deal under these circumstances a reasonably prudent person would have asked a qualified adviser whether such a windfall were not too good to be true see 92_tc_827 the memorandum included numerous caveats and warnings regarding the business and tax risks of sab foam it stated that the offering involved a high degree of risk and that each offeree should consult his own professional advisers as to legal tax_accounting and other matters relating to any purchase of any units in the partnership a careful consideration of the memorandum and the discussion of high writeoffs and risk of audit would have alerted a prudent investor to question the nature of the promised tax benefits moreover the tax opinion made clear that there was no independent evaluation of the sab foam transactions the opinion indicated that boylan evans relied on the statements of the general_partner and other statements of fact and opinion furnished to us by persons familiar with the transaction described in the memorandum boylan evans clearly based its conclusion about the fair_market_value of the recyclers on the assumption that the parties to the transactions had negotiated prices at arm’s length in light of the close relationships existing among the parties to the sab foam transactions and the enormous price paid for the recyclers largely with nonrecourse notes exchanged in a plainly circular transaction petitioners should have questioned whether the prices were in fact negotiated at arm’s length under these circumstances petitioners’ claim that they reasonably and in good_faith relied on the tax opinion is unconvincing a sophisticated experienced and intelligent lawyer like petitioner would know or at least should know better than to rely blindly upon a document with the warnings and defects of the memorandum petitioners’ contention that they reasonably relied on the expert opinions of ulanoff and burstein is unjustified neither ulanoff nor burstein was an expert in plastics or plastics recycling and both relied on information provided by pi and other parties related to the transaction in providing their reports in addition ulanoff and burstein each owned an interest in at least one partnership that owned recyclers as part of the plastics recycling program see eg jaroff v commissioner tcmemo_1996_527 petitioners did not independently obtain these individuals’ advice but rather received their reports as part of the promotional material received from sab foam reliance on the memorandum and the reports therein is simply an inadequate defense for petitioners given the well-disclosed fact that the investment and energy tax_credits generated by sab foam depended on the fair_market_value of the recyclers petitioner should have made inquiries about the value of the recyclers rather than merely relying on the promotional reports of ulanoff and burstein and any discussions he may have had with miller or dooskin miller petitioner also contends that he reasonably relied on miller when approached by petitioner with respect to the offering memorandum for sab resource and later as to the memorandum for sab foam miller was supportive of the investment with regard to the value of the recyclers miller was supportive of the expert reports by ulanoff and burstein the memorandum disclosed that miller was a 1-percent shareholder of f g was corporate counsel to pi and represented raymond grant the sole shareholder of eci the memorandum also noted that miller would receive substantial additional compensation_for representing pi in connection with this transaction not surprisingly miller was supportive of sab foam nothing in the record suggests that miller had any expertise or knowledge with respect to plastics or plastics recycling or that petitioners believed he had any such knowledge or expertise there is also no showing that petitioner had any special or enduring friendship with miller despite petitioner’s contrary argument miller’s testimony indicates that during the time in issue he had only a tenuous acquaintance with petitioner miller specifically stated that after petitioner ceased working for him years before the investment in issue miller saw petitioner only rarely given the extent to which miller was immersed in the plastics recycling partnerships how much he stood to benefit financially and his lack of expertise regarding plastics materials and plastics recycling we do not consider petitioners’ purported reliance on miller reasonable or in good_faith it is unreasonable for taxpayers to rely on the advice of someone who they should know has a conflict of interest addington v commissioner f 3d pincite see vojticek v commissioner tcmemo_1995_444 to the effect that advice from such persons is better classified as sales promotion becker petitioner also contends that through his partners cohen and feinberg he had a special relationship with becker and therefore was entitled to rely upon becker as the accountant’s other clients were not most of petitioner’s interaction with becker was indirect and through his partners at the outset the court noted that becker was on petitioner’s witness list but that petitioners’ counsel had decided not to call him the court questioned counsel in this matter because of petitioner’s specific reliance on his relationship with becker however petitioners’ obviously well- prepared and capable counsel adhered to his decision not to call upon becker concerning the supposedly special relationship but instead to rely upon becker’s extensive testimony in the jaroff case see 65_tc_182 47_tc_92 affd 392_f2d_409 5th cir and 6_tc_1158 affd 162_f2d_513 10th cir to the effect that the failure of a party to offer available testimony gives rise to the inference that it would have been unfavorable to his contention accordingly we review becker’s testimony in the jaroff case below and consider the extent of his expertise and the likelihood that he gave special assurances or guarantees to petitioner or petitioner’s partners the colloquy concerning petitioner’s counsel’s failure to provide becker’s testimony about his close relationship with cohen and feinberg is as follows the court i didn’t hear you mention mr becker’s name as a witness mr rizek we are not going to call mr becker as an additional witness i think the pages or so that we stipulated to in the supplemental stipulation are more than adequate to cover any points we wanted to establish with mr becker the court well that may be but you’re going to talk a lot about how these parties all had a relationship with mr becker and all that sort of thing and you’re not calling mr becker mr rizek we are not calling mr becker we don’t think it’s necessary your honor i don’t think there’s going to be any doubt at the conclusion of the evidence that’s presented here that these petitioners had fairly long standing relationships independent of this particular transaction with mr becker becker had no education special qualifications or professional skills in plastics engineering plastics recycling or plastics materials in evaluating the plastics recycling transactions and organizing the sab recycling partnerships becker supposedly relied upon the memorandum and the accompanying materials a tour of the pi facility in hyannis discussions with insiders to the transactions michael canno canno a client of becker co and his investigation of the reputation and background of pi and persons involved in the transactions despite his lack of knowledge regarding the product the target market and the technical aspects at the heart of the plastics recycling transactions becker did not hire an expert in plastics materials or plastics recycling the only independent person having any connection with the plastics industry with whom becker spoke was canno canno was part owner and the production manager of equitable bag co a manufacturer of paper and plastic bags becker spoke to canno about the recyclers and pi but he did not hire or pay him for any advice canno did not visit the pi plant in hyannis see or test a recycler or see or test any of the output from a recycler or the recycled resin pellets after further processing according to becker canno endorsed the plastics recycling transactions after reviewing the memorandum when asked whether canno had performed any type of comparables analysis becker replied i don’t know what mr canno did becker visited the pi plant in hyannis toured the facility viewed a recycler in operation and saw products that were produced from recycled plastic becker claims that pi personnel told him that the recycler was the only machine of its type in fact the recycler was not unique instead as we have found in many cases involving substantially_similar machines several comparable machines were available in and ranging in price from dollar_figure to dollar_figure see eg provizer v commissioner tcmemo_1992_177 becker was also told that pi had put an enormous amount of research_and_development ie to years’ worth into the creation and production of the recyclers when he asked to see the cost records for some kind of independent verification however his request was denied becker was informed that such information was proprietary and secret and that he would just have to take pi’s representations as true becker decided to accept pi’s representations after speaking with miller corporate counsel to pi canno who had never been to pi’s plant or seen a recycler and a surrogate judge from rhode island who did business in the boston-cape cod area and who had no experience in engineering or plastics materials becker testified that he was allowed to see pi’s internal accounting controls regarding the allocation of royalty payments and pi’s record-keeping system in general in provizer v commissioner supra though this court found that pi had no cost accounting system or records becker confirmed in his testimony that he relied on the memorandum and discussions with pi personnel to establish the value and purported uniqueness of the recyclers becker testified that he relied upon the reports of ulanoff and burstein contained in the offering materials despite the fact that ulanoff’s report did not contain any hard data to support his opinion ulanoff was not an economics or plastics expert becker did not know whether burstein was an engineer and burstein was a client of miller’s and was not an independent expert becker further explained in his testimony that in the course of his practice when evaluating prospective investments for clients he focuses on the economics of the transaction and investigates whether there is a need or market for the product or service the records indicate though that becker overlooked several red flags regarding the economic viability of and market for the recyclers the memorandum warned that there was no established market for the recyclers becker never saw any marketing plans for selling the pellets the product of the recyclers or leasing the recyclers he accepted representations by pi personnel that they would be marketing the recyclers to clients and that there was a sufficient base of end-users for the machines yet he never saw pi’s client list at the time of the closing of the various partnerships becker did not know who the end-users were or whether there were any end-users actually committed to the transaction becker purportedly checked the price of the pellets by reading trade journals of the plastics industry he did not however use those same journals to investigate the recyclers’ purported value in concluding that the sab partnerships would be economically profitable becker made two assumptions that he concedes were unsupported by any hard data that there was a market for the pellets and that market demand for them would increase becker had a financial interest in the sab recycling partnerships generally directly or indirectly he received fees of more than dollar_figure with respect to the sab recycling partnerships becker also received fees for investment advice from some individual investors and from the sab recycling partnerships for preparing their partnership returns as becker himself indicated in his testimony potential investors could not have read the memorandum and remained ignorant of the financial benefits accruing to him petitioner is a very well-educated and highly accomplished and sophisticated attorney without question he possessed the intellect skills experience and resources to have the viability of the sab foam transactions thoroughly investigated either by himself or by an independent qualified expert petitioners claim that they relied on becker known through cohen and feinberg for the bona fides and viability of the sab foam transactions yet becker’s expertise was in taxation not plastics materials or plastics recycling and his investigation and analysis of the plastics recycling transactions reflected this circumstance moreover becker indicated that he was careful not to mislead any of his clients regarding the particulars of his limited investigation as he put it i don’t recall saying to a client i did due diligence rather i told my clients precisely what i had done to investigate or analyze the transaction i didn’t just say i did due diligence and leave it open for them to define what i might or might not have done the purported value of the recyclers generated the deductions and credits in this case and that circumstance was clearly reflected in the memorandum certainly becker recognized the nature of the tax benefits and given his education and experience petitioner should have recognized it as well yet petitioner cohen feinberg and becker neglected to verify the purported value of the recyclers becker confirmed in his testimony incorporated in this record by stipulation that he relied on pi for the value of the recyclers an investor as sophisticated as petitioner either learned or should have learned the source and shortcomings of becker’s valuation information when he reported to them and precisely disclosed what he had done to investigate or analyze the transaction accordingly we hold that petitioners did not in good_faith or reasonably rely on becker as an expert or qualified professional working in the area of his expertise to establish the fair_market_value of the recyclers and the viability or bona fides of the sab foam transactions becker never assumed such responsibility and he fully described the particulars of his investigation taking care not to mischaracterize it as due diligence in the end petitioners indirectly and becker directly relied upon pi personnel for the value of the recyclers and the economic viability of the sab foam transactions see vojticek v commissioner tcmemo_1995_444 to the effect that advice from such persons is better classified as sales promotion as explained above becker did not have any education special qualifications or professional skills in plastics materials or plastics recycling a taxpayer may rely upon his adviser’s advice and expertise in this case accounting and tax_advice only where such reliance is objectively reasonable but it is not reasonable or prudent to rely upon a tax adviser regarding matters outside his field of expertise or with respect to facts that he does not verify see addington v commissioner f 3d pincite goldman v commissioner f 3d pincite 864_f2d_93 9th cir affg 88_tc_1086 lax v commissioner tcmemo_1994_329 affd 72_f3d_123 3d cir rogers v commissioner tcmemo_1990_619 cohen and feinberg petitioner also relied upon his partners cohen and feinberg cohen’s knowledge of the sab foam transactions was derived from his review of the memorandum and his discussions with becker cohen testified that becker told him he could rely on the valuations attached to the memorandum feinberg’s knowledge of the sab foam transactions was also derived from his review of the memorandum and his discussions with becker after becker retained feinberg to protect becker’s interests as general_partner of sab foam feinberg instructed becker to verify the information in the memorandum including the valuations and feinberg testified that there was a very very close professional as well as a personal and social relationship among us and that they shared information on a daily basis we note that cohen testified i remember we talked about the valuations that were obtained and i remember him telling me in words or in substance that i could rely on those valuations we consider cohen’s testimony inconsistent with becker’s testimony and as to this matter we consider becker’s testimony reliable and cohen’s alleged recollection unreliable see supra note to the effect that this problem was known to petitioner and his counsel who chose not to call upon becker for clarifying testimony according to feinberg becker complieddollar_figure we already have established though that petitioners may not reasonably rely on becker’s advice since cohen and feinberg themselves lacked the expertise and knowledge of the pertinent facts to provide informed advice to petitioner any advice they gave petitioner about sab foam plainly was of very limited value see 43_f3d_788 2d cir cohen and feinberg were partners and coinvestors rather than advisers on whom petitioners could rely with respect to the sab foam transactions we hold that it was not reasonable for petitioner to rely upon the advice received from either cohen or feinberg we note that feinberg testified that the expert opinions of ulanoff and burstein had passed petitioner’s review partly because of becker’s representation with regard to sab resource petitioner claims that he had instructed becker to go up to hyannis and make sure that there were machines there that there were orders for machines there that the machines were producing product of the type that were described in the expert opinions as to what the machines were supposed to generate or at least appeared to do that and to see if there was some reasonable relationship to justify the price of the machine emphasis added according to feinberg becker confirmed that he had performed the suggested tasks with regard to sab foam feinberg testified that he discussed the valuation with becker on the same basis as with the previous transaction ie sab resource we consider feinberg’s testimony inconsistent with becker’s testimony and as to this matter we consider becker’s testimony reliable and feinberg’s alleged recollection unreliable see supra note to the effect that this problem was known to petitioner and his counsel who chose not to call upon becker for clarifying testimony b alleged experts petitioners contend that dooskin and sacco provided the requisite independent analysis of the investment we disagree dooskin and sacco neither of whom had any knowledge of the plastics recycling industry reviewed the memorandum for at most hours combined their only knowledge of sab foam came from the memorandum ie promotional material and from what petitioner told them dooskin testified that he informed petitioner the investment passed muster but that the economics of the investment was dependent upon the valuation of the equipment petitioners however failed to undertake the necessary due diligence and seek a thorough and independent analysis of the value of the recyclers despite dooskin’s warning we are not convinced that dooskin’s and sacco’s review of the memorandum was any more than a very limited inquiry neither petitioner nor his partners made any separate payment for professional services by dooskin and sacco and consequently they could not expect the accountants to do more than read the memorandum for form and apparent professionalism potential benefits and obvious dangers c petitioners’ relationship with miller and becker regardless of the foregoing petitioners contend that petitioner’s alleged deep and longstanding professional relationship with his advisers justified his reliance on them we disagree see barlow v commissioner tcmemo_2000_339 cf dyckman v commissioner tcmemo_1999_79 zidanich v commissioner tcmemo_1995_382 petitioner was sufficiently experienced and sophisticated to know that sab foam was a tax_shelter and that the value of the transaction depended on the value of the underlying assets and he failed to consult either an independent_appraiser or anyone with expertise in plastics recycling in addition the evidence does not support petitioner’s claims that he had a unique and special relationship with his advisers miller and becker cf dyckman v commissioner supra absolving taxpayers from the negligence_penalty in part because of the long-term special relationship of trust and friendship between the taxpayers and their adviser first petitioner contends that he kept in touch with miller over the years after he left miller summit at trial however miller testified that after petitioner left the firm they rarely kept in touch on this matter we consider miller a more reliable witness than petitioner miller’s testimony clearly shows that he had no special and close relationship with petitioner during the years in issue petitioner asserts that he also had an especially close relationship with pi petitioner testified however that he did not do any work for pi after he left miller summit and that was years before the years in issue as noted above by the time in issue pi was under new ownership in a new location and there is no reason to believe petitioner had any great knowledge about the company or its business in second cohen and feinberg claim to have a particularly close relationship with becker becker however testified that he had a very close relationship with the majority of his clients cohen and feinberg were not singled out and nothing in the evidence demonstrates that becker treated cohen and feinberg any differently from any other clientdollar_figure becker offered the investments in sab foam and other similar partnerships to many of his clients d miscellaneous we dismiss petitioners’ contention that the allegedly successful investment enjoyed by cohen and feinberg in sab resource evidenced the reasonableness of the investment in sab foam sab resource limited partners received a royalty payment within months of their investment in addition to the becker testified there is nothing different that i told to one client about the same issue than i told to another client there may have been things i said to one client that might not have been said to another but if i spoke about one issue while i might not have used precisely the same words in substance what was said to one client on one matter was said to every other client when that matter was discussed credits and deductions petitioners argue that this makes the case different from other similar cases and makes their subsequent investment in sab foam reasonable the modest royalty was not sufficient to change the character of the deal petitioners’ assertion that the amount invested was relatively small is irrelevant when considering the amount of tax benefits quickly claimed the tax benefits and risks of the transaction were substantial and they were set forth in the memorandum for anyone to see undoubtedly investors as sophisticated as petitioner and his partners knew the size of the potential benefits and risks here or should have known them if they had been properly careful e conclusion as to negligence under the circumstances of this case petitioners failed to exercise due care in claiming large deductions and tax_credits with respect to sab foam on their federal_income_tax return in view of petitioner’s sophistication experience and education it was not reasonable for petitioners to rely as they did on an interconnected group of advisers promoters and insiders none of whom had any expertise in plastics recycling petitioner should have been able to determine that the recyclers were not unique that they were not worth the amount ascribed to them and that sab foam lacked economic_substance and had no potential for profit none of the so-called advisers undertook a good_faith investigation of the fair_market_value of the recyclers or of the underlying economic viability or financial structure of sab foam further most of petitioner’s professional advisers had a financial interest in either sab foam or another similar partnership the plastics recycling transaction was a sham and as a sophisticated attorney petitioner should have been able to figure this out if he really had tried upon consideration of the entire record respondent’s determinations that petitioners are subject_to negligence penalties under sec_6653 and with respect to their tax_return for are sustained issue piggyback_agreement petitioners argue that they are entitled to the benefits of the stipulation of settlement for tax_shelter adjustments piggyback_agreement applicable to plastics recycling cases petitioners claim they are in essentially the same position as the taxpayers in fisher v commissioner tcmemo_1994_434 and estate of satin v commissioner tcmemo_1994_435 additionally petitioners argue that in the stipulation of facts in the present case the parties unequivocally stipulated that petitioner agreed to be bound to the lead cases under the piggyback_agreement supp stip pars respondent disagrees with these arguments and we agree with respondent in fisher and estate of satin this court summarized the background of the piggyback_agreement in the plastics recycling group of cases on date this court ordered that the lead counsel for the taxpayers in the plastics recycling cases and respondent designate test or lead cases which would present all issues involved in the plastics recycling cases in a letter dated date respondent notified the court that lead counsel for the taxpayers and respondent had selected the following docketed cases as the lead cases in the plastics recycling group fine v commissioner docket no miller v commissioner docket no and miller v commissioner docket no in early the fine case concluded without trial the parties thereafter selected and the court designated the case of provizer v commissioner docket no as a lead case along with the two miller cases after the lead counsel for the taxpayers and respondent agreed upon the test cases respondent prepared a piggyback_agreement with respect to the plastics recycling project so that taxpayers who did not wish to litigate their cases individually could agree to be bound by the results of the test cases fisher v commissioner supra estate of satin v commissioner supra the piggyback_agreement as set forth in the fisher and estate of satin cases provides as follows with respect to all adjustments in respondent’s notice_of_deficiency relating to the plastics recycling tax_shelter the parties stipulate the following terms of settlement the above adjustment is the only issue in this case the above adjustment s as specified in the preamble shall be determined by application of the same formula as that which resolved the same tax_shelter adjustments with respect to the following taxpayer s names s harold m provizer and joan provizer v commissioner of internal revenue tax_court docket no names s elliot i miller v commissioner of internal revenue tax_court docket no names s elliot i miller and myra k miller v commissioner of internal revenue tax_court docket no hereinafter the controlling case all issues involving the above adjustment s shall be resolved as if the petitioner s in this case was were the same as the taxpayer s in the controlling case a if the court finds that any additions to tax or the sec_6621 interest are applicable to the underpayment attributable to the above-designated tax_shelter adjustment s the resolution of the tax_shelter issue and the applicability of such addition_to_tax or interest to that tax_shelter issue in the controlling case whether by litigation or settlement shall apply to petitioner s as if the petitioner s in this case was were the same as the taxpayer s in the controlling case if the adjustment is resolved in the controlling case in a manner which affects the same issue in other years eg losses in later years or affects depreciation schedules the resolution will apply to petitioners’ later years as if the petitioners in this case was were the same as the taxpayer s in the controlling case a decision shall be submitted in this case when the decision in the controlling case whether litigated or settled becomes final under sec_7481 if the controlling case is appealed the petitioner s consent s to the assessment and collection of the deficiency ies attributable to the adjustment s formulated by reference to the tax court’s opinion notwithstanding the restrictions under sec_6213 the petitioner s in this case will testify or provide information in any case involving the same tax_shelter adjustment if requested and the petitioner s in this case consent s to the disclosure of all tax returns and tax_return information for the purpose of respondent’s discovering or submitting evidence in any case involving the same shelter adjustment s the piggyback_agreement was signed by counsel for the taxpayers and respondent in the fisher and estate of satin cases and filed with the court on date thereafter the two miller cases were settled and agreed decision documents in those cases were entered by the court on date the settlement provided that the taxpayers were not liable for the additions to tax under sec_6653 or increased interest for tax-motivated transactions under sec_6621 miller settlement fisher v commissioner supra estate of satin v commissioner supra this court decided provizer v commissioner tcmemo_1992_177 on date in our provizer opinion and in the affirmance all of the plastics recycling issues were decided for respondent including the additions to tax under sec_6653 and increased interest under sec_6621 respondent did not notify the taxpayers in the fisher and estate of satin cases or notify any other taxpayers of the settlement of the miller cases respondent ultimately attempted collection from the fisher and estate of satin taxpayers pursuant to our decision in the provizer case and paragraph of the piggyback_agreement set forth above for reasons explained more fully in our above-cited opinions we held that the taxpayers in the fisher and estate of satin cases were entitled to be bound by the miller settlement petitioners contend that the protest letter is the equivalent of a piggyback_agreement that would entitle them to the miller settlement we disagree the piggyback_agreement is an intricately developed contract with specific provisions tailored to the plastics recycling group of cases only the execution of a piggyback_agreement by both petitioners and respondent could reflect the parties’ mutual assent to settle the instant case based on the disposition of the lead case see fisher v commissioner supra and estate of satin v commissioner supra in which counsel for the taxpayers and respondent’s counsel signed the piggyback_agreement neither petitioners’ counsel or counsel for the general_partner in this case nor respondent’s counsel executed a piggyback_agreement petitioners’ contention that the protest letter approximates a piggyback_agreement is mistaken at best the protest letter indicates an intention that petitioners might be willing to enter into a formal piggyback_agreement but nothing in the record indicates that petitioners followed up on any such intent the protest letter itself indicates an intention to follow the tax court’s decision in the lead cases but omits any mention of following a settlement of the lead cases although that possibility is specifically mentioned in paragraph of the piggyback_agreement moreover within a month after the miller settlement was executed becker as tmp having become aware of that settlement submitted to respondent a clarification that sab foam did not wish to be bound by the settlement and therefore withdrew any statement of intention to be bound by any other case the facts of this case are that petitioners’ tmp did not execute the piggyback_agreement instead he made it clear that he did not wish to settle the case but to rely upon the results of litigation petitioners’ unpersuasive argument is that now that the litigation of the lead case and many others has been decided unfavorably to their position they should be considered to have accepted the piggyback_agreement that their tmp explicitly rejected additionally petitioners argue that a portion of the stipulation of facts amounts to a concession by respondent’s counsel that petitioners are entitled to the miller settlement the stipulation paragraphs are as follows on date robert l steele on behalf of the tax_matters_partner of sab foam recycling associates filed a protest against the adjustments to the and tax years proposed by the internal_revenue_service resulting from an examination of sab foam recycling associates in such protest the tax_matters_partner of sab foam recycling associates agreed to follow the tax court’s decision in the following lead cases miller v commissioner docket no miller v commissioner docket no and provizer v commissioner docket no a copy of the protest of the tax_matters_partner of sab foam recycling associates dated date is attached hereto and marked as exhibit 10-j see supra pp on date stuart becker as the tax_matters_partner of sab foam recycling associates sent a letter to the district_director of the internal_revenue_service withdrawing the date agreement to be bound by the lead cases a copy of the date letter is attached hereto as exhibit 11-j see supra p the stipulation paragraphs quoted above merely summarize the language of the protest letter and the withdrawal letter and refer to attached exhibits for the specific language the language of the stipulation does not support the conclusion that respondent agreed that the protest letter was equivalent to an executed piggyback_agreement petitioners’ counsel essentially argues that by stipulation respondent’s counsel has agreed to concede the issues in dispute in this case the language of the stipulation does not support this startling conclusion nothing else in the record supports it and respondent’s counsel clearly and explicitly has denied it we disagree with petitioners’ counsel’s interpretation of the stipulation of facts accordingly we hold that petitioners are not entitled to the benefits of the miller settlement or the piggyback_agreement concerning plastics recycling cases to reflect the foregoing decision will be entered under rule


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 -------------------------------- ------------- telephone number --------------------- refer reply to cc psi b01 plr-131283-16 date date legend x a_trust --------------------------------------------------------------------------------------------------------- ----------------------- ------------------ --------------------------------------------------------------------------------------------------------- -------------------------- state ------------- date ------------------------- date --------------------- date ---------------------- date ----------------------- date ----------------------- dear-------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting inadvertent termination relief pursuant to sec_1362 of the internal_revenue_code the code plr-131283-16 facts the information submitted states that x was incorporated on date under the laws of state effective date x elected to be taxed as an s_corporation on date a a shareholder of x died on date a’s estate transferred shares of x to trust pursuant to the terms of a’s will trust qualified under sec_1361 as an eligible s_corporation shareholder for a two-year period beginning on the day x stock was transferred to it x represents that trust has at all times since the transfer of x stock to trust met the requirements of a qualified_subchapter_s_trust qsst within the meaning of sec_1361 however the beneficiary of trust failed to timely file an election under sec_1361 for trust to be a qsst x represents that the failure_to_file the qsst election for trust and the resulting termination of x’s s_corporation_election was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the commissioner with respect to the period specified by sec_1362 law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that for purposes of sec_1361 a_trust with respect to stock transferred to it pursuant to the terms of a will is a permitted shareholder but only for the 2-year period beginning on the day on which such stock is transferred to it sec_1361 provides that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the qsst’s plr-131283-16 beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst’s s_corporation stock to which the election under sec_1362 applies sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income with the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election by signing and filing with the service_center with which the corporation files its income_tax the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation ceases to be a small_business_corporation sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the termination the corporation will be treated as continuing to be an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election was terminated on date and that the termination was inadvertent plr-131283-16 within the meaning of sec_1362 consequently we rule that x will be treated as an s_corporation from date and thereafter provided that x’s s_corporation_election was otherwise valid and not otherwise terminated under sec_1362 this ruling is contingent on the beneficiary of trust filing a qsst election for trust effective date with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the qsst election except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code including whether trust is a valid qsst this ruling is directed only to the taxpayer who requested it sec_6110 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 x’s authorized representative sincerely david r haglund david r haglund branch chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury washington dc third party communication none person to contact --------------------- id no ----------------- telephone number --------------------- refer reply to cc ita b01 plr-127556-11 date date internal_revenue_service number release date index number --------------------------------- -------------------- ---------------------------------- -------------------------------------------------- ein --------------- legend trust ------------------------------------------- year ------- firm ----------------------- date ----------------- dollar_figurea -------------- dollar_figureb ---------------- dollar_figurec ------------ dollar_figured ------------ dear -------------- this is in response to your letter requesting permission to revoke an election made by trust pursuant to sec_1_163_d_-1 of the income_tax regulations to treat qualified_dividend_income and net_capital_gain income as investment_income under sec_163 and sec_163 of the internal_revenue_code for year facts plr-127556-11 for year trust hired an accounting firm firm to prepare its form_1041 u s income_tax return for estates and trusts return the firm prepared the return by entering the relevant data into a tax software computer_program software but a keying error was made on line 4g of form_4952 investment_interest expense deduction that resulted in an inadvertent election to include the entire amount of qualified_dividend_income and net_capital_gain dollar_figurea and dollar_figureb respectively as investment_income for purposes of the deduction for investment_interest expense the actual amount of investment_interest was dollar_figurec an amount significantly less than the sum of dollar_figurea and dollar_figureb the firm manually reviewed the return in accordance with the firm's quality control policies and procedures because all of the investment_interest expense of dollar_figureb was allowed on form_4952 there was an oversight in discovering that an excessive election amount had been made on line 4g of form_4952 which affected the calculation the firm uses the software to prepare many form sec_1040 during filing season for form sec_1040 the software automatically limits an election to include qualified_dividend_income and net_capital_gain as investment_income for purposes of calculating the deduction for investment_interest expense to the amount of investment_interest the firm relied on the software to calculate investment_interest expense in the same manner for the taxpayer’s return however the software does not do this automatically for a form_1041 the firm was unaware of the differences in the computer tax software in identifying this type of error the error was discovered by the beneficiary’s business manager the firm was contacted by the business manager on date and was advised of the form_4952 election law analysis sec_163 provides that in the case of a taxpayer other than a corporation the amount allowed as a deduction for investment_interest shall not exceed the net_investment_income of the taxpayer for the taxable_year sec_163 defines the term investment_income in general as the sum of i gross_income from property_held_for_investment other than gain taken into account under clause ii i ii the excess if any of i the net gain attributable to the disposition of property_held_for_investment over ii the net_capital_gain determined by only taking into account gains and losses from dispositions of property_held_for_investment plus iii so much of the net_capital_gain referred to in clause ii ii or if lesser the net gain referred to in clause ii i as the taxpayer elects to take into account under this clause plr-127556-11 sec_163 also provides that the term includes qualified_dividend_income as defined in h b only to the extent the taxpayer elects to treat such income as investment_income for purposes of this subsection sec_1_163_d_-1 provides that the elections for net_capital_gain and qualified_dividend_income under sec_163 must be made on or before the due_date including extensions of the income_tax return for the taxable_year in which net_capital_gain is recognized or the qualified_dividend_income is received sec_1_163_d_-1 provides that the election under sec_163 is revocable with the consent of the commissioner the trust is requesting permission to revoke an election to treat qualified_dividend_income and net_capital_gain income as investment_income this situation is analogous to those situations concerning taxpayers who have not made a particular election provided in the regulations because of inadequate or incorrect advice from knowledgeable tax professionals and are subsequently seeking extensions of time under of the regulations on procedure and administration see revrul_83_74 1983_1_cb_112 sec_301_9100-3 generally provides extensions of time for making regulatory elections for this purpose sec_301_9100-1 defines the term regulatory election to include an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer - i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election plr-127556-11 iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election in this case trust may be considered to have acted reasonably and in good_faith because trust relied on the firm a qualified_tax professional to prepare the return the firm used a software program that made an erroneous election that was not discovered by the firm despite reasonable efforts under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account any qualified_amended_return filed within the meaning of sec_1 c and the new position requires a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief in this case trust is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time relief is requested trust was not informed in all material respects of the related tax consequences of making the election because trust was unaware an election had been made furthermore trust is not using hindsight in requesting relief specific facts have not changed since the filing of the return and making of the original election that made the election disadvantageous to the trust sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been timely made are closed by the period of limitations on assessment under these criteria the interests of the government are not prejudiced in this case allowing the revocation of the election would not result in a lower tax_liability in the aggregate for all plr-127556-11 taxable years affected by the election than would have been the case if the election had been timely made taking into account the time_value_of_money furthermore when the request was filed the taxable_year in which the regulatory election that is sought to be revoked here and any taxable_year affected by it was not closed by the period of limitations on assessment in addition granting the revocation in the present situation would not cause undue administrative burden nor would it be inconsistent with the objectives of the underlying statute and the regulatory election conclusion the consent of the commissioner is hereby granted to revoke in part the election under sec_163 to include dollar_figurea and dollar_figureb as investment_income for year and to include no dollar_figure qualified_dividend_income and only amount dollar_figured of net_capital_gain as investment_income for year except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely john p moriarty chief branch income_tax accounting


internal_revenue_service uniform issue list department of the treasury washington dc person to contact telephone number refer reply to t ep ra t3 date jun mn legend organization a company b percentage c percentage d plan x plan y dear this is in response to your request for a ruling dated date supplemented by letters dated date and date submitted by your authorized representative concerning proposed contributions to plan x and plan y ‘the plans under sec_401 sec_401 sec_404 sec_415 sec_4972 and sec_4979 of the internal_revenue_code the code your authorized representative submitted the following facts and representations in support of the requested ruling organization a is an exempt_organization under sec_501 of the code it has established plan x and plan y the plans for the benefit of its employees plan x is a defined_contribution_plan qualified under sec_401 of the code and plan y is a defined_contribution_plan operated in compliance with sec_403 of the code ‘organization a as plan_administrator of the plans invested a substantial portion of the assets of both plans in three group annuity_contracts issued by company b contracts these contracts maintain separate_accounts for each participant in the b sec_2 page s001l37064 plans and guarantee a minimum rate of return of four percent actual returns are based on investment options contained in the contracts which are selected by the individual participants invéstment options include pooled equity and fixed income accounts stock market options including an indexed fund bonds and money market accounts during the past several years the investment return earned by the participants through the contracts while meeting or exceeding the terms of the contracts has been significantly less than the return on other possible investments you have represented that some participants in the plans have expressed their concern about the disappointing performance of the plans’ investments in order to increase the investment selections and hopefully to improve their corresponding rate of return on investment organization a commenced the process of surrendering the contracts it intends to reinvest the plans’ funds in other investment vehicles in accordance with the terms of the plans organization a’s actions have triggered withdrawal charges as provided for in the contracts generally the contracts with the exception of certain amounts that are transferred into the contracts provide for withdrawal charges equal to eight percent of the account value during the first five participant account years four percent for the participant account years six through ten and zero percent thereafter a participant account year begins when an individual_account is established and an initial contribution is credited to the account a participant account year ends on the day immediately preceding the next anniversary of such date the withdrawal charges are assessed directly against individual accounts these charges reduce the overall rate of return however under the contracts the charges do not affect the minimum rate of return you have represented that in two of the contracts the withdrawal charges are c and d of the respective contract values the plan_administrator has expressed concern over its liability for breach of fiduciary duty relating to its selection of the three group annuity_contracts as a result organization a proposes to make payments to restore the amounts lost due to the surrender of the contracts organization a intends to deposit these payments in an escrow account this account will be allocated to individual participant account balances which were reduced by the withdrawal charges the payments and any income earned thereon will be transferred to the plans leaving each plan participant in the same position that would have existed but for the imposition of the withdrawal charges your authorized representative has requested the following rulings that the proposed payments will not constitute a contribution for purposes of sec_401 of the code that the proposed payments will not constitute a contribution for purposes of sec_404 of the code that the proposed payments will not constitute a contribution for purposes of sec_401 of the code that the proposed payments will not constitute a contribution and will not be treated as giving rise to an annual_addition for purposes of sec_415 of the code pages that the proposed payments will not constitute a contribution for purposes of sec_4972 or sec_4979 of the code and that the proposed payments will not result in taxable_income to the pian participants or beneficiaries - sec_404 of the code generally provides that contributions paid_by an employer to or under a plan if otherwise deductible are deductible under sec_404 subject-to various limitations under sec_404 sec_401 of the code generally provides that the contributions or benefits provided under a qualified_plan may not discriminate in favor of highly compensated employees whether or not contributions under a defined_contribution_plan are discriminatory is generally determined by comparing the amount of contributions allocated to accounts of highly compensated employees with the amount of contributions allocated to the accounts of nonhighly compensated employees sec_401 of the code applicable to tax deferred_annuity plans generally provides that matching_contributions by an employer cannot discriminate in favor of highly compensated employees - sec_415 of the code generally limits the amount of contributions and other additions under a qualified defined_contribution_plan or tax deferred_annuity plan with respect to a participant for any year sec_4972 of the code imposes a ten percent excise_tax on the amount of the nondeductible_contributions made to any qualified_employer plan’ including a plan qualified under sec_401 a a or k sec_4979 of the code imposes a similar tax on excess_contributions to tax deferred_annuity plans sec_402 of the code generally provides that any amount actually distributed to any distributee by an employees’ trust described in sec_401 which is exempt from tax under sec_501 shall not be taxable to a participant until actually distributed to the participant generally amounts contributed to a qualified_retirement_plan are subject_to code sec_401 sec_404 sec_415 and sec_4972 however payments to a defined_contribution_plan are not so subject if they are made by the employer in order to restore value to the plan that was lost due to actions which place the employer under a reasonable risk of liability for breach of fiduciary duty payments to a plan made by an employer pursuant to a department of labor order or to a court-approved settlement to restore lost value would generally be treated as restorative payments and not subject_to the code sections cited above however in general payments made by an employer to a plan to make up for lost value due to general market fluctuations would not be treated as restorative payments also payments made by an employer to a plan which result in different treatment for similarly situated plan participants would not be treated as restorative payments a determination as to whether plan payments in other circumstances may be treated as restorative payments would be based on all the facts presented 3s page egagli3g7eé4 in this case each of the contracts referenced above exceeded the rate of return guaranteed undey its terms each participant's account was invested according to the direction of the participant with limited exceptions the contractual withdrawal charges ranged from no more than ten percent of the contract value during the first four years to zero percent after ten years the actual surrender charges were approximately five percent furthermore no evidence was presented that the proposed payments to plans x and y wilt be made pursuant to an order or judgment of the department of labor an arbitration proceeding or a court of competent jurisdiction finally the documentation presented in support of this ruling_request shows that some plan participants are dissatisfied that the contracts were surrendered and the surrender charges incurred solely because other investments not provided for under the contracts became more attractive over time such facts without more are not sufficient to demonstrate a reasonable risk of liability to the employer for breach of fiduciary duty accordingly in response to ruling requests through we conclude that the proposed payments to the plans will be subject_to code sec_401 sec_401 sec_404 sec_415 sec_4972 and sec_4979 as applicable requested rulings we find the sixth ruling_request moot based on our determination in the first five this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent the original of this ruling has been sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yours cae som manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of letter notice of intention to disclose copy of letter to authorized representative ce