t c memo united_states tax_court peter and ursula reimann et al petitioners v commissioner of internal revenue respondent docket nos filed date elliot i miller for petitioners in docket nos and bernard s mark and richard s kestenbaum for petitioners in docket nos and cases of the following petitioners are consolidated herewith for opinion edward brodie and estate of alana brodie deceased edward brodie executor docket no marvin and suzanne yarnell docket no and philip and roberta yarnell docket no the cases were tried and briefed separately maureen t o'brien paul t colleran and david n brodsky for respondent in docket no maureen t o'brien paul t colleran mae j lew louise forbes and david n brodsky for respondent in docket no lawrence l davidow and frances ferrito regan for respondent in docket nos and memorandum findings_of_fact and opinion dawson judge these consolidated cases were assigned to special_trial_judge norman h wolfe pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge wolfe special_trial_judge these cases are part of the plastics recycling group of cases for a detailed discussion of the transactions involved in the plastics recycling cases see provizer v commissioner tcmemo_1992_177 affd without published opinion 996_f2d_1216 6th cir the issues in these cases involve the leasing of sentinel expanded polyethylene all section references are to the internal_revenue_code in effect for the year in issue unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure epe recyclers by partnerships in which petitioners held limited_partnership interests the facts of the underlying transactions in these cases are substantially identical to those in the provizer case in notices of deficiency respondent determined the following deficiencies in and additions to petitioners' federal income taxes for taxable_year additions to tax docket no petitioner deficiency sec_6653 sec_6653 sec_6659 peter and ursula reimann dollar_figure --- --- dollar_figure edward brodie and estate of alana brodie dollar_figure --- --- dollar_figure marvin and suzanne yarnell dollar_figure dollar_figure dollar_figure philip and roberta yarnell dollar_figure big_number dollar_figure negligence percent of the interest payable with respect to the portion of the underpayment attributable to respondent also determined in each case that interest on deficiencies accruing after date would be calculated pincite percent of the statutory rate under sec_6621 in docket nos and in amendments to the answers respondent asserted additions to tax for under sec_6653 in the respective amounts of dollar_figure and the notices of deficiency in docket nos and refer to sec_6621 sec_6621 was repealed by sec b of the omnibus budget reconciliation act of obra publaw_101_239 103_stat_2106 effective for tax returns due after date obra sec d 103_stat_2400 the repeal does not affect the instant cases for simplicity we will refer to this section as sec_6621 the annual rate of interest under sec_6621 for interest accruing after date equal sec_120 percent of the interest payable under sec_6601 with respect to any substantial_underpayment attributable to tax-motivated transactions dollar_figure and under sec_6653 in amounts equal to percent of the interest due on the respective underpayments attributable to negligence in docket no respondent also determined deficiencies for taxable years and those deficiencies and a portion of the deficiency determined for taxable_year arose from adjustments relating to the brodies' investment in egar investment partners with respect to the arbitrage tax_shelter management project on date respondent and the brodies filed a stipulation of settlement of tax_shelter adjustment pertaining to all of the adjustments relating to egar investment partners the remaining adjustments in respondent's notice_of_deficiency not so settled and at issue herein pertain exclusively to plymouth equipment associates stipulations of settled issues concerning petitioners' respective investments in the partnerships and filed in each of these consolidated cases provide in part petitioners are not entitled to any deductions losses investment credits business energy investment credits or any other tax benefits claimed on their tax returns as a result of their participation in the plastics recycling program the underpayments in income_tax attributable to petitioners' participation in the plastics recycling program are substantial underpayments attributable to tax_motivated_transactions subject_to the increased the stipulation of settled issues in docket no refers to tax_return in the singular instead of the plural tax returns rate of interest established under sec_6621 formerly sec_6621 this stipulation resolves all issues that relate to the items claimed on petitioners' tax returns resulting from their participation in the plastics recycling program with the exception of petitioners' potential liability for additions to the tax for valuation overstatements under sec_6659 and for negligence under the applicable provisions of sec_6653 see supra note accordingly the only issues remaining for resolution in these consolidated cases are whether petitioners are liable for additions to tax under sec_6653 and for negligence and whether petitioners are liable for additions to tax under sec_6659 for underpayments of tax attributable to valuation overstatements findings_of_fact some of the facts have been stipulated in each case and are so found the stipulated facts and attached exhibits are incorporated in the respective cases by this reference for convenience facts unique to each of the individual cases under consideration are set forth separately at the end of the findings_of_fact petitioners reimann are limited partners in scarborough leasing associates scarborough and petitioners brodie and the yarnells are limited partners in plymouth equipment associates plymouth for convenience we refer to these two partnerships collectively as the partnerships petitioners have stipulated that the transactions involving the sentinel epe recyclers leased by the partnerships are substantially identical to those in the clearwater group limited_partnership clearwater the partnership considered in provizer v commissioner tcmemo_1992_177 in addition petitioners have stipulated substantially the same facts concerning the underlying transactions as we found in the provizer case in the provizer case packaging industries inc pi manufactured and sold six sentinel epe recyclers to eci corp for dollar_figure each eci corp in turn resold the recyclers to f g corp for dollar_figure each f g corp then leased the recyclers to clearwater which licensed the recyclers to fmec corp which sublicensed them to pi the sales of the recyclers from pi to eci corp were financed with nonrecourse notes approximately percent of the sales_price of the recyclers sold by eci corp to f g corp was paid in cash with the remainder financed through notes these notes provided that percent of the notes were recourse but that the recourse portion of the notes would only be due after the nonrecourse portion percent had been paid in full all of the monthly payments required among the entities in the above transactions offset each other these transactions were done simultaneously although the recyclers were sold and leased for the above amounts under the structure of simultaneous transactions the fair_market_value of a sentinel epe recycler in and was not in excess of dollar_figure pi allegedly sublicensed the recyclers to entities that would use them to recycle plastic scrap the sublicense agreements provided that the end-users would transfer to pi percent of the recycled scrap in exchange for a payment from fmec corp based on the quality and amount of recycled scrap like clearwater each of the partnerships herein was formed to lease sentinel epe recyclers from f g corp and license those recyclers to fmec corp the transactions of the partnerships differ from the underlying transactions in the provizer case only as to the number of machines sold leased licensed and sublicensed and the entity that leased the machines from f g corp and licensed them to fmec corp in plymouth and scarborough each leased and licensed seven sentinel epe recyclers for convenience we refer to the series of transactions among pi eci corp f g corp each of the partnerships fmec corp and pi as the partnership transactions in addition to the partnership transactions a number of other limited_partnerships entered into transactions similar to the partnership transactions also involving sentinel epe recyclers and sentinel expanded polystyrene recyclers we refer to these collectively as the plastics recycling transactions with respect to each of the partnerships a private_placement memorandum was distributed to potential limited partners appended to the offering memoranda were reports by f g's evaluators dr stanley m ulanoff ulanoff a marketing consultant and dr samuel z burstein burstein a mathematics professor the offering memoranda list significant business and tax risk factors associated with investments in the partnerships specifically the offering memoranda state that there is a substantial likelihood of audit by the internal_revenue_service irs and that the purchase_price paid_by f g corp to eci corp probably would be challenged as being in excess of fair_market_value that the partnerships have no prior operating history that the general partners have no prior experience in marketing recycling or similar equipment that the limited partners have no control_over the conduct of the partnerships' business that there is no established market for the sentinel epe recyclers that there are no assurances that market prices for virgin resin will remain at their current costs per pound or that the recycled pellets will be as marketable as virgin pellets and that certain potential conflicts of interest exist petitioners in the cases under consideration do not have any education or work experience in plastics recycling or plastic materials they did not independently investigate the sentinel epe recyclers or see a sentinel epe recycler or any other type of plastics recycler prior to participating in the recycling ventures petitioners each learned of their respective partnership transaction from members of the accounting firm bachmann schwartz and abramson bachmann schwartz bachmann schwartz was formed in by donald bachmann bachmann deceased prior to trial a certified_public_accountant c p a william abramson abramson also a c p a richard schwartz and ivan babbitt abramson and bachmann previously had worked together at clarence rainess co certified public accountants joseph greene greene was a partner at bachmann schwartz for a time during the early 1980's bachmann schwartz specialized in accounting for the garment industry the firm performed auditing services reviewed investment opportunities and advised clients in business and estate_planning as well as mergers and acquisitions for time spent researching investment opportunities such as plymouth and scarborough bachmann schwartz generally received a 5-percent commission on sales of investments in these cases bachmann schwartz received a percent commission for placing the partnership shares with petitioners abramson generally was responsible for advising clients on tax matters and for reviewing all tax returns before they were the plymouth and scarborough offering memoranda both state that the partnerships will pay sales commissions and fees to offeree representatives in amounts equal to percent of the price paid_by the investors represented by such persons the offering memoranda further state that if such fees are not paid they will either be retained by the general_partner as additional compensation if permitted by applicable state law or applied in reduction of the subscription price the k-1's for petitioners indicate that they paid full price for their respective investments in the partnerships nothing in the records in these cases indicates that any portion of the commission or fee was rebated to the petitioners and there is no reason to believe that bachmann schwartz a firm of experienced accountants which was active in the marketing of tax_shelter investments failed to claim any portion of the commission available to them abramson testified that the firm generally charged clients a 5-percent commission greene testified that the commission could have been percent the record as a whole establishes that the commission to bachmann schwartz was percent submitted while bachmann advised clients on financial matters bachmann was a graduate of city college of new york in addition to his work at bachmann schwartz he served as chairman of the board_of a public company applied dna and for a time during the 1980's he chaired two new york state agencies the housing finance agency and the hospital agency abramson earned an undergraduate degree in accounting a law degree and a masters of law degree in taxation greene also a c p a received a b a degree from new york university and a masters of business administration degree from hofstra university in bachmann learned about the sentinel epe recyclers and the plastics recycling transactions from an acquaintance elliot miller miller and abramson learned about them from bachmann miller was corporate counsel to pi and a shareholder of f g in greene learned about the plastics recycling transactions from bachmann and abramson at a firm meeting bachmann and abramson read the offering memoranda for the partnership transactions bachmann reviewed the business aspects and abramson reviewed the tax aspects the two also traveled to hyannis and toured pi's plant and offices and spoke to the principals of pi abramson had the understanding from statements made to him during the tour and from his reading of the offering circular that the recyclers somehow were unique he also discussed tax matters with john taggart the head of the tax department of windels marx davies ives wmdi wmdi prepared the tax opinion letter appended to the offering memoranda neither bachmann or abramson had any expertise in plastics materials or plastics recycling abramson did not subscribe to any professional journals in the field of plastics while at the pi plant in hyannis abramson did not ask how much it cost to manufacture a recycler or whether or for how much the recyclers were insured aside from his one visit to pi abramson has never before or since visited a plant which manufactures plastics recycling machinery abramson did not consult with an independent expert in the field of plastics recycling peter and ursula reimann docket no petitioners peter and ursula reimann resided in new york new york at the time their petition was filed during peter reimann reimann was an executive salesman at r b s fabrics ltd r b s his spouse ursula was not employed outside the home on their federal_income_tax return the reimanns reported gross_income from wages in the amount of dollar_figure and total taxable_income of dollar_figure consequently in the absence of significant deductions or credits in addition to the partnership losses claimed in the computation of total income they were subject_to payment of federal income taxes in substantial amounts in reimann acquired a 538-percent interest in scarborough for his investment of dollar_figure as a result of the passthrough from scarborough on their federal_income_tax return the reimanns deducted an operating loss in the amount of dollar_figure they claimed dollar_figure of a total of dollar_figure of investment tax and business energy credits available to them from scarborough respondent disallowed the reimanns' claimed operating loss and credits related to their investment in scarborough reimann received a textile education at the zurich textile school in zurich switzerland from which he graduated in thereafter he apprenticed in various textile mills in europe upon finishing his apprenticeships reimann returned to the united_states and began working at his father's company bernard reimann a supplier of silk fabrics for the tie or neckwear trade bernard reimann subsequently merged with another fabric company and became r b s which supplied fabrics to neckwear manufacturers reimann worked first as a stylist and eventually as an executive salesman at r b s reimann had no education training or experience in plastics recycling or plastics machinery reimann learned of scarborough and the sentinel epe recyclers from bachmann bachmann schwartz provided accounting and financial services to r b s bachmann typically advised r b s on financial matters investments and major business decisions bachmann and abramson held a meeting at their offices to explain the scarborough partnership transaction and the sentinel epe recyclers they described their visit to pi's plant in hyannis while bachmann never quantified the potential economic profit of the venture he spoke encouragingly about the investment reimann purportedly relied on bachmann because his father's company relied on and trusted bachmann although reimann read the scarborough offering memorandum and the appended evaluations he did not focus on or pay heed to the risks and caveats raised therein reimann noticed the warning that there might be an irs audit but claims that he did not notice the warning that the irs might challenge the value of the recyclers reimann did not conduct an independent valuation of the recyclers nor did he determine if the recyclers had been placed with end-users prior to his making the investment he did nothing more than ask bachmann some questions about the offering memorandum reimann claims he did not know whether bachmann schwartz was being compensated in any manner with respect to the scarborough partnership investment nor did he ask if they were receiving compensation of any sort edward brodie and estate of alana brodie docket no petitioners edward brodie and his wife alana resided in englewood cliffs new jersey at the time their petition was filed during edward brodie brodie was a salesman at his family's business m m luggage co inc m m luggage alana brodie was not employed outside the home on their federal_income_tax return the brodies reported total income from wages interest dividends capital_gains and other sources in the amount of dollar_figure consequently in the absence of significant deductions or credits they were subject_to payment of federal income taxes in substantial amounts in brodie acquired a 361-percent interest in plymouth for his investment of dollar_figure as a result of the passthrough from plymouth on their federal_income_tax return the brodies deducted an operating loss in the amount of dollar_figure and claimed investment tax and business energy credits totaling dollar_figure respondent disallowed the brodies' claimed operating loss and credits related to their investment in plymouth brodie earned a degree in business from new york university in after graduation he worked at his family's luggage manufacturing business m m luggage brodie initially was employed in various activities such as shipping inventory and loading and unloading trucks over time he was promoted to and worked in the sales production and manufacturing departments brodie learned of the sentinel epe recycler and plymouth from greene who was at the time a partner at bachmann schwartz greene provided accounting business and financial services to both m m luggage and brodie individually brodie discussed with greene the plymouth investment including the attendant tax benefits the price of the recyclers and the visit to pi by bachmann and abramson at trial brodie recalled that greene had told him that he thought the machines were fairly priced and that the investment would turn a profit brodie knew greene had no expertise in plastics and was not an engineer he relied on him for tax and investment advice at trial brodie did not recall compensating greene in any manner for his advice regarding plymouth greene learned of the sentinel epe recyclers and plymouth from bachmann and abramson at a firm meeting greene recalls that bachmann was enthusiastic about the investment at the firm meeting bachmann described the recycler and his and abramson's visit to pi's plant in hyannis greene did not discuss valuation with bachmann while greene knew that bachmann did not have any experience in plastics engineering or plastics technology he nonetheless relied on whatever investigation bachmann had made with respect to the sentinel epe recyclers and the plastics recycling transactions greene received his partnership share of the 10-percent commission bachmann schwartz received for arranging the brodies' investment in plymouth greene did not read the entire plymouth offering memorandum and only glanced through the section entitled potential conflicts of interest he could not recall at trial that burstein one of f g's evaluators of the sentinel epe recycler was a business_associate and client of miller who was corporate counsel to pi and a shareholder of f g in greene did not check the figures or underlying assumptions in the offering memorandum or prepare any sort of analysis for brodie even though bachmann schwartz had clients in the plastics business greene did not consult them about plastics recycling brodie read the plymouth offering memorandum including the reports by f g's evaluators he understood that the tax benefits exceeded the amount he invested and that they were generated by the purported value of the sentinel epe recyclers he read the warnings in the offering memorandum that the irs would likely audit plymouth and challenge the value of the machines brodie did nothing to verify the purported value of the sentinel epe recycler and undertook no research into plymouth or plastics recycling aside from reviewing the offering memorandum and speaking with greene although brodie spoke to greene about the investment every few months he never knew for sure whether the recyclers were ever delivered to end-users in fact the recyclers were eventually placed with end-users which did not have sufficient amounts of recyclable plastic scrap material ever to pay off the notes on the recyclers brodie never made an economic profit in any year from plymouth after he received the tax_credits in however brodie was not concerned that he received no dividends or return_of_capital with respect to the plymouth investment marvin and suzanne yarnell docket no and philip and roberta yarnell docket no petitioners marvin and suzanne yarnell resided in old westbury new york when their petition was filed petitioners philip and roberta yarnell resided in manhasset new york when their petition was filed during marvin yarnell was a 75-percent owner and primary operating executive of yarnell fabrics corporation yarnell fabrics and yarnell fabrics international ltd yfil his wife suzanne yarnell was not employed outside the home on their federal_income_tax return marvin and suzanne yarnell reported gross_income from wages of dollar_figure and total income in the amount of dollar_figure consequently in the absence of significant deductions or credits they were subject_to payment of federal income taxes in substantial amounts philip yarnell was a salesman and 25-percent_owner of yarnell fabrics and yfil during his spouse roberta was employed as a travel consultant during that year on their federal_income_tax return philip and roberta yarnell reported gross_income from wages of dollar_figure and total taxable_income in the amount of dollar_figure consequently in the absence of additional deductions or credits they were subject_to payment of federal income taxes in substantial amounts for an investment of dollar_figure marvin yarnell acquired a 62-percent interest in plymouth in as a result of the passthrough from plymouth on their federal_income_tax return marvin and suzanne yarnell deducted an operating loss in the amount of dollar_figure and claimed investment tax and business energy credits totaling dollar_figure respondent disallowed marvin and suzanne yarnell's claimed operating loss and credits related to their investment in plymouth also during philip yarnell acquired a 35-percent interest in plymouth for an investment of dollar_figure as a result of the passthrough from plymouth on their federal_income_tax return philip and roberta yarnell deducted an operating loss in the amount of dollar_figure and claimed investment tax and business energy credits totaling dollar_figure respondent disallowed philip and roberta yarnell's claimed operating loss and credits related to their investment in plymouth marvin yarnell received a b s degree from new york university school of commerce in after college he worked for years as a sales trainee for a textile company then he became a salesman for cameo fabrics and worked for that company for approximately years philip yarnell graduated from north carolina state college with a degree in textile management and manufacturing after college he worked for years for a textile converter company then started and ran his own business for approximately years in philip and marvin yarnell formed yarnell fabrics a textile converter corporation both marvin and philip yarnell learned of the sentinel epe recyclers and plymouth from bachmann and abramson bachmann schwartz had been the accounting firm for yarnell fabrics since the late 1970's marvin and philip yarnell primarily dealt with bachmann who also advised them on personal financial matters bachmann and abramson described their trip to pi's plant in hyannis and gave the yarnells copies of the plymouth offering memorandum according to marvin yarnell bachmann pointed out at the trial abramson could not recall a specific meeting with the yarnells for purposes of discussing the plastics recycling deal marvin yarnell remembered a meeting at bachmann's office whereas philip yarnell recalled that the proposal was introduced when bachmann and abramson came to yarnell fabrics that one of the components of polyethylene was oil and that recycling was good for the environment philip yarnell claims he understood that there was no competition for the sentinel epe recycler in fact information published prior to the plastics recycling transactions indicated that several similar machines already were on the market these included at least four other plastics recycling machines available during ranging in price from dollar_figure to dollar_figure foremost densilator nelmor weiss densification system regenolux buss-condux plastcompactor and cumberland granulators see provizer v commissioner tcmemo_1992_177 philip yarnell purportedly did not know whether bachmann had any expertise in engineering or plastics marvin yarnell on the other hand knew that bachmann did not have any such expertise neither marvin nor philip yarnell asked bachmann to consult anyone with expertise in the field of plastics or plastics recycling both were aware that the amount of the tax benefits flowing from plymouth exceeded their respective investments in the partnership marvin and philip yarnell did not independently investigate plymouth or any of the representations made in the offering memorandum the yarnells did not have any education or work experience in plastics recycling or plastics materials opinion in provizer v commissioner tcmemo_1992_177 a test case for the plastics recycling group of cases this court found that each sentinel epe recycler had a fair_market_value not in excess of dollar_figure held that the transaction which is almost identical to the partnership transactions in these consolidated cases was a sham because it lacked economic_substance and a business_purpose upheld the sec_6659 addition_to_tax for valuation_overstatement since the underpayment of taxes was directly related to the overstatement of the value of the sentinel epe recyclers and held that losses and credits claimed with respect to clearwater were attributable to tax-motivated transactions within the meaning of sec_6621 in reaching the conclusion that the transaction lacked economic_substance and a business_purpose this court relied heavily upon the overvaluation of the sentinel epe recyclers although petitioners have not agreed to be bound by the provizer opinion they have stipulated that the investments in the sentinel epe recyclers in these cases are similar to the investment described in provizer v commissioner supra the underlying transactions in these consolidated cases and the sentinel epe recyclers considered in these cases are the same type of transaction and same type of machine considered in provizer v commissioner supra based on the entire records in these cases including the extensive stipulations testimony of respondent's experts and petitioners' testimony we hold that each of the partnership transactions herein was a sham and lacked economic_substance in reaching this conclusion we rely heavily upon the overvaluation of the sentinel epe recyclers respondent is sustained on the question of the underlying deficiencies we note that petitioners have explicitly conceded this issue in their respective stipulations of settled issues filed shortly before trial the record plainly supports respondent's determinations in these cases regardless of such concessions for a detailed discussion of the facts and the applicable law in a substantially identical case see provizer v commissioner supra issue sec_6653 negligence in notices of deficiency respondent determined that petitioners marvin and suzanne yarnell and philip and roberta yarnell were liable for additions to tax for negligence under sec_6653 and the yarnells have the burden of proving that respondent's determinations of these additions to tax are erroneous rule a 79_tc_846 in amendments to answer respondent asserted that petitioners reimann and brodie were liable for additions to tax for negligence under sec_6653 and because respondent raised these additions to tax for the first time in amendments to answer respondent has the burden_of_proof on these issues rule a 103_tc_170 sec_6653 imposes an addition_to_tax equal to percent of the underpayment if any part of an underpayment_of_tax is due to negligence or intentional disregard of rules or regulations in cases involving negligence an additional_amount is added to the tax under sec_6653 such amount is equal to percent of the interest payable with respect to the portion of the underpayment attributable to negligence negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances 85_tc_934 the question is whether a particular taxpayer's actions in connection with the transactions were reasonable in light of his experience and the nature of the investment or business see 60_tc_728 petitioners in these consolidated cases contend that they were reasonable in claiming deductions and credits with respect to the partnerships to support their contentions they allege in general terms that they relied upon the advice of qualified advisers and that they expected an economic profit in light of the so-called oil crisis in the united_states during in each of the cases before us petitioners' investigation of the partnership transactions and the sentinel epe recyclers was limited to conversations with bachmann and greene respectively and in varying degrees a review of the offering memoranda it is unclear from the records to what extent abramson influenced any of petitioners' decisions to invest in the partnerships while abramson participated in the purported investigation of the partnerships petitioners' testimony indicates that their reliance was placed predominantly on bachmann and greene abramson's generally vague and indefinite testimony in these cases supports the conclusion that he was not continued petitioners essentially argue that their reliance on bachmann schwartz and the offering materials insulates them from the negligence additions to tax under some circumstances a taxpayer may avoid liability for the additions to tax under sec_6653 and if reasonable reliance on a competent professional adviser is shown 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 reliance on professional advice standing alone is not an absolute defense to negligence but rather a factor to be considered id in order for reliance on professional advice to excuse a taxpayer from the negligence additions to tax the reliance must be reasonable in good_faith and based upon full disclosure id see 94_tc_473 91_tc_396 affd without published opinion 940_f2d_1534 9th cir 63_tc_149 reliance on representations by insiders promoters or offering materials has been held an inadequate defense to negligence 94_tc_637 affd without published opinion 956_f2d_274 9th cir affd without published opinion sub nom cowles v continued a primary adviser with respect to petitioners' investment in the partnerships although he was the primary tax specialist at bachmann schwartz commissioner 949_f2d_401 10th cir 92_tc_958 affd without published opinion 921_f2d_280 9th cir 92_tc_827 91_tc_524 we have rejected pleas of reliance when neither the taxpayer nor the advisers purportedly relied upon by the taxpayer had substantial knowledge about the nontax business aspects of the contemplated venture 85_tc_557 80_tc_914 steerman v commissioner tcmemo_1993_447 based upon our review of the entire records in these cases we hold that brodie's purported reliance on greene and reimann's and the yarnells' purported reliance on bachmann was not reasonable not in good_faith nor based upon full disclosure neither bachmann or greene nor petitioners nor anyone affiliated with bachmann schwartz had any education or work experience in plastics materials or plastics recycling none of petitioners and no one at bachmann schwartz consulted any independent experts or conducted anything approaching a meaningful investigation while bachmann and abramson did visit according to abramson bachmann had a cousin who was an engineer and taught at city college of new york abramson testified that he thought bachmann asked his cousin for the cousin's opinion of the feasibility of the sentinel epe recycling machinery and process however abramson did not elaborate on the cousin's response he testified only that he was certain bachmann and he discussed the results of bachmann's investigation we consider abramson's testimony on this matter of no probative value we are not convinced that bachmann spoke continued pi's hyannis plant neither of them was qualified to analyze or assess the machines on display in each of these cases petitioners' argument is that they put complete faith in bachmann or greene given the technical nature of these investment ventures it was unreasonable for them to do so reimann did little more than speak with the accountants at bachmann schwartz before investing in scarborough he received a copy of the offering memorandum and attended an introductory meeting at the offices of bachmann schwartz reimann recalled that at the meeting bachmann explained the scarborough transaction and described his and abramson's visit to pi reimann described his impressions as follows i remember i was quite in awe of this huge office huge conference room the facilities were extremely impressive to say the least i had never been in that kind of situation before there's this huge conference table and a lot of people -- i presume most of them were partners and they were all basically giving me this wonderful advice the wonderful advice to which reimann refers of course was the suggestion that he invest in the unsuccessful plastics recycling deal reimann testified that he read the offering memorandum but did not focus on the warnings or caveats contained therein at trial he could not recall the warning that the irs might challenge the value of the recycler reimann spent only enough time reading the offering memorandum to get the gist continued to a cousin about the recycler or that the cousin was qualified to evaluate it moreover the record does not disclose the cousin's opinion of the recycler of it he explained that as to review of the offering memorandum he really left it to bachmann reimann testified that his primary consideration for investing in scarborough was profit and that bachmann never told him that the tax_credits would exceed the amount of his investment he could not or would not recall or state at trial the amount of the credits he and his former wife claimed on their return or whether they paid any taxes that year although this information was on the face of the return he had come from california to testify about on their tax_return for the reimanns claimed a tax_refund in the amount of dollar_figure reimann claims he never asked anyone at bachmann schwartz whether the firm was receiving a commission on the plastics recycling investment he testified that he never made a determination that any of the recyclers would be placed with end-users prior to the time he made his investment but that he knew only that they were planned to be placed according to reimann these things i left to bachmann schwartz and abramson marvin and philip yarnell likewise claim that they relied on the now-deceased bachmann in deciding to invest in plymouth philip yarnell says he did not know whether bachmann had any expertise in engineering or plastics marvin yarnell knew bachmann was not a specialist in plastics recycling but he asserted confidence that bachmann would have investigated the matter before recommending investment philip yarnell testified that his primary reason for making the investment was the fact that there would be a good return on the capital both marvin and philip yarnell were aware that the tax benefits flowing from plymouth exceeded the amount of their respective investments philip yarnell testified that he read the plymouth offering memorandum and that with the exception of the technical aspects he understood the substance of what was set forth therein however in describing how plymouth was supposed to generate an economic profit he testified that he was informed that plymouth would manufacture the recyclers place them with end-users and oversee their operation all facets of the plymouth transaction which were supposed to be performed by pi not plymouth marvin yarnell testified that he and philip briefly read the offering memorandum and that quite frankly speaking it was very lengthy it was very detailed and such he could not recall having read the reports of the evaluators and explained that he and his brother were very busy at the time working on their new company in lieu of a thorough reading of the offering memorandum or an independent investigation the yarnells met with bachmann to get his opinion as to whether plymouth was worth investing in marvin yarnell testified that he and philip invested in plymouth based upon what had been told to them he also testified that if the details were mentioned to them they really were not paid that much attention to because they had their own business to take care of bachmann never represented that he had contacted an independent expert and neither marvin or philip yarnell ever asked him to seek an expert opinion marvin yarnell did not investigate plymouth and never asked bachmann any questions about the underlying transaction philip yarnell did not investigate any of the representations set forth in the offering memorandum the yarnells' position is that they simply acted blindly on bachmann's advice as marvin yarnell put it bachmann was such an overwhelming personality we almost felt it would be an affront if in any way at all we would not go along with his suggestions he reiterated we really had blind faith in don bachmann philip yarnell testified that he relied almost entirely and solely on bachmann's expertise whatever he said i basically took as gospel the yarnells placed into the records of their cases several documents ostensibly submitted as evidence that they monitored their investments in plymouth these were unaudited financial statements of plymouth for and a report describing pi's accounting procedures and controls and a update from pi noting that market prices for polyethelene resin have remained relatively low and the sentinel recyclers have not been profitable neither marvin or philip yarnell testified that they examined these documents given their admitted inattention to the details of the investment we decline to infer from these documents that the yarnells actively monitored their investments in plymouth brodie claims reliance on greene who in turn relied on bachmann with respect to brodie's decision to acquire an interest in plymouth greene knew that bachmann had no education or work experience in plastics or plastics recycling greene's review of the offering memorandum was fairly perfunctory when asked at trial if he had read it greene replied i did read it but i can't say that i read it cover-to-cover greene testified that although he did not discuss valuation with bachmann he did read and rely upon the reports by ulanoff and burstein however greene only glanced at the section relating potential conflicts of interest and he could not recall at trial that burstein was a business_associate and legal client of miller's greene did not check any of the underlying assumptions or figures set out in the offering memorandum he did not prepare any kind of report or analysis for brodie he sought no independent verifications of the representations in the offering memorandum even though bachmann schwartz had clients who were in the plastics business he relied exclusively on bachmann greene reluctantly admitted that he received a commission as a result of brodie's investment and that the amount of the commission paid could have been percent greene purportedly explained to brodie the environmental and economic benefits of the plastics recycling transaction as well as the tax benefits brodie understood that the tax benefits exceeded the amount of his investment and that they were generated by the purported value of the recyclers however he did nothing to verify the purported value of the sentinel epe recycler brodie undertook no research or investigation beyond speaking with greene and reviewing the offering memorandum although greene believed his commission was disclosed to brodie by notice or letter brodie could not recall compensating greene for as he put it the service of submitting a prospectus for me to read and telling me that it was a good investment for me greene considered the plastics recycling deal a tax_shelter with tax benefits for investors approximately four times the investment he obtained his information from bachmann and there is no reason to think he did not pass on this same information to his client brodie it was petitioners' reliance upon the purported value of the sentinel epe recycler that generated the deductions and credits in these cases yet the purported value of the sentinel epe recyclers is the very thing that petitioners and the accountants bachmann schwartz did not verify a taxpayer may rely upon his adviser's expertise in these cases accounting financial planning and tax_advice but it is not reasonable or prudent for petitioners to rely upon an adviser regarding matters outside of his field of expertise or with respect to facts which he does not verify see 864_f2d_93 9th cir affg 88_tc_1086 lax v commissioner tcmemo_1994_329 affd without published opinion 72_f3d_123 3d cir moreover a careful consideration of the materials in the respective offering memoranda especially the discussions in the prospectuses of high writeoffs and risk of audit should have alerted a prudent and reasonable investor to the questionable nature of the promised deductions and credits see 857_f2d_1383 9th cir affg dister v commissioner tcmemo_1987_217 the preface to each memorandum contained the following no offeree should consider the contents of this memorandum as expert advice each offeree should consult his own professional advisers as to legal tax_accounting and other matters relating to any purchase by him of units each of the memoranda also clearly stated that the respective partnership transactions involved significant tax risks and that in all likelihood the irs would challenge the transactions in a business risks section each warned that there was no history for the subject partnership and no established market for the recyclers or the pellets it is clear from the records that none of petitioners carefully considered the offering memoranda on their face the partnership transactions should have raised serious questions in the minds of ordinarily prudent investors according to the offering memoranda the projected benefits for taxable_year were for each dollar_figure investor investment tax_credits of dollar_figure plus deductions of dollar_figure for investors in scarborough or dollar_figure for investors in plymouth all in the initial year of investment in the first year of the investments alone petitioners claimed the following operating losses and investment tax and business energy credits related to the partnerships petitioners investment operating loss it ec credits reimann dollar_figure dollar_figure dollar_figure brodie big_number big_number big_number m yarnell big_number big_number big_number p yarnell big_number big_number big_number therefore like the taxpayers in provizer v commissioner tcmemo_1992_177 except for a few weeks at the beginning none of petitioners ever had any money in the partnerships a reasonably prudent person would not conclude without substantial investigation that the government was providing significant tax benefits to taxpayers who made no investment of their own capital 92_tc_827 the parties in these consolidated cases stipulated that the fair_market_value of a sentinel epe recycler in and was not in excess of dollar_figure notwithstanding this concession petitioners contend that they were reasonable in claiming credits on their federal_income_tax returns based upon each recycler having a value of dollar_figure in support of this position petitioners submitted into evidence preliminary reports prepared for respondent by ernest d carmagnola carmagnola the president of professional plastic associates carmagnola had been retained by the irs in to evaluate the sentinel epe and eps recyclers in light of what he described as the fantastic values placed on the recyclers by the owners based on limited information available to him at that time carmagnola preliminarily estimated that the value of the sentinel epe recycler was dollar_figure however after additional information became available to him carmagnola concluded in a signed affidavit dated date that the machines actually had a fair_market_value of not more than dollar_figure each in the fall of and we accord no weight to the carmagnola reports submitted by petitioners the projected valuations therein were based on inadequate information research and investigation and were subsequently rejected and discredited by their author respondent likewise rejected the reports and considered them unsatisfactory for any purpose and there is no indication in the records that respondent used them as a basis for any determinations in the notices of deficiency even so petitioners' counsel obtained copies of these reports and urge that they support the reasonableness of the values reported on petitioners' returns not surprisingly petitioners did not call carmagnola to testify in these cases but preferred instead to rely solely upon his preliminary ill-founded valuation estimates the carmagnola reports were a part of the record considered by this court and reviewed by the sixth circuit_court in one preliminary report carmagnola states that he has a serious concern of actual profit-level of a sentinel epe recycler and that to determine whether the machines actually could be profitable he required additional information from pi carmagnola also indicates that in preparing the report he did not have information available concerning research_and_development costs of the machines and that he estimated those costs in his valuations of the machines carmagnola has not been called to testify in any of the plastics recycling cases before us of appeals in the provizer case where we held the taxpayers negligent consistent therewith we find in these cases as we have found previously that the reports prepared by carmagnola are unreliable and of no consequence petitioners are not relieved of the negligence additions to tax based on the preliminary reports prepared by carmagnola petitioners' reliance on mollen v united_states aftr2d ustc par big_number d ariz is misplaced the taxpayer in mollen was a medical doctor who specialized in diabetes and who on behalf of the arizona medical association led a continuing medical education cme accreditation program for local hospitals the underlying tax matter involved the taxpayer's investment in diabetics cme group ltd a limited_partnership which invested in the production marketing and distribution of medical educational video tapes the taxpayer's personal expertise and insight in the underlying investment gave him reason to believe it would be economically profitable although the taxpayer was not experienced in business or tax matters he did consult with an accountant and a tax lawyer regarding those matters moreover as the district_court noted the propriety of the taxpayer's disallowed deduction therein was reasonably debatable the records in these cases on the other hand show that neither petitioners nor their advisers bachmann and greene had any formal education expertise or experience in plastics or plastics recycling none of them had any personal insight or industry know-how in plastics recycling which would reasonably lead them to believe that the partnership transactions would be economically profitable the extent of the bachmann schwartz investigation was a tour of pi's plant in hyannis and a discussion with the principals of pi no independent experts in the field of plastics or plastics recycling were consulted by petitioners or bachmann schwartz the facts of these cases are distinctly different from those in the mollen case we consider petitioners' arguments with respect to the mollen case inapplicable petitioners' arguments are not supported by 62_f3d_1266 10th cir affg tcmemo_1993_607 where the taxpayers were found liable for negligence additions to tax in anderson the taxpayers claimed tax benefits based upon their acquisition of property listed at dollar_figure for which they actually paid dollar_figure in a cash downpayment percent of the purchase_price plus a 5-year financing_arrangement had the acquisition been nothing more than a dollar_figure passive investment noted the court_of_appeals it would have been reasonable for the taxpayers to rely on the advice of a good friend who had thoroughly investigated the investmentdollar_figure however because the transaction was structured the adviser had his accountant and attorney review and check out the structure of the investment he spoke with the investment principal he looked into the principal's background and checked out his references banks other business connections and the better business bureau and he spoke with competitors to make continued and represented as a purchase in the amount of dollar_figure the court_of_appeals held that something more was required in the cases before us petitioners claimed tax benefits based on the assumption that they owned and leased through the partnerships an interest in dollar_figure worth of recycling machines based on investments ranging from dollar_figure to dollar_figure petitioners each claimed a qualified_investment in new investment_credit_property with bases ranging from dollar_figure to dollar_figure these inflated bases generated claims to first-year tax_credits ranging from dollar_figure to dollar_figure and claims to deductible losses ranging from dollar_figure to dollar_figure clearly these were substantial transactions requiring careful investigation under the anderson case of petitioners' respective advisers bachmann did nothing more than tour pi's plant in hyannis speaking only with insiders and greene did nothing relying exclusively on bachmann unlike the adviser in anderson no one at bachmann schwartz thoroughly investigated or educated himself in the industry of the proposed investment in view of the substantial basis claimed for the interest of each petitioner in the machinery a substantial amount and in each case more than eight times greater than the cash invested from which the investment credits stemmed plainly something more was required accordingly we consider petitioners' reliance on the anderson case inappropriate continued sure the venture was viable petitioners also argue in general terms that they were reasonable in claiming the deductions and credits related to the partnerships because of rising oil prices in the united_states in in support of this argument petitioners placed into the record several articles from modern plastics and an energy projections report from the u s department of energy doe all published in the years and petitioners also cite 99_tc_132 affd sub nom 28_f3d_1024 10th cir and rousseau v united_states ustc par big_number e d la the articles from modern plastics and the report by the doe speculated on the price of oil among other matters the preface to the doe report cautioned about the tremendous uncertainties underlying energy projections and warned that their projections do not constitute any sort of blueprint for the future reflective of such uncertainties an date article in modern plastics contemplated resin price hikes while a date article predicted a leveling off of prices market disruptions and an industrywide shakeout petitioners do not purport to have read or in any way relied upon the doe report or the modern plastics articles and have not otherwise explained the connection between these speculative materials and their investments in the partnerships petitioners' vague general claims concerning the so-called oil crisis are without merit petitioners' reliance on krause v commissioner supra is misplaced the facts in the krause case are distinctly different from the facts of these cases in the krause case the taxpayers invested in limited_partnerships whose investment objectives concerned enhanced oil recovery eor technology the krause opinion states that during the late 1970's and early 1980's the federal government adopted specific programs to aid research_and_development of eor technology id pincite in holding that the taxpayers in the krause case were not liable for the negligence additions to tax this court noted that one of the government's expert witnesses acknowledged that investors may have been significantly and reasonably influenced by the energy price hysteria that existed in the late 1970's and early 1980's to invest in eor technology id pincite in the present cases however one of respondent's experts steven grossman explained that the price of plastics materials is not directly proportional to the price of oil that less than percent of crude_oil is utilized for making plastics materials and that studies have shown that a increase in crude_oil prices results in only a to increase in the cost of plastics products while eor was according to our krause opinion in the forefront of national policy and the media during the late 1970's and 1980's there is no showing in these records that the so-called energy crisis would provide a reasonable basis for petitioners investing in recycling of polyethylene particularly in the machinery here in question moreover the taxpayers in the krause opinion were experienced in or investigated the oil industry and eor technology specifically one of the taxpayers in the krause case undertook significant investigation of the proposed investment including researching eor technology the other taxpayer was a geological and mining engineer whose work included research of oil recovery methods and who hired an independent geologic engineer to review the offering materials id pincite in the present cases none of petitioners has any education or work experience with respect to plastics or plastics recycling petitioners did not independently investigate the sentinel epe recyclers nor did they hire an expert in plastics to evaluate the partnership transactions petitioners' arguments with respect to the krause case are inapplicable here petitioners' reliance on rousseau v united_states supra is similarly misplaced in rousseau the property underlying the investment ethanol producing equipment was widely considered at that time to be a viable fuel alternative to oil and its potential for profit was apparent in addition the taxpayer therein conducted an independent investigation of the investment and researched the market for the sale of ethanol in the united_states in contrast as we noted in distinguishing the krause case there is no showing in these records that the so-called oil crisis would provide a reasonable basis for petitioners' investing in the polyethylene recyclers here in question see supra pp petitioners did not independently investigate the sentinel epe recyclers or hire an expert in plastics to evaluate the partnership transactions the facts of petitioners' cases are distinctly different from the rousseau case accordingly we do not find petitioners' arguments with respect to the rousseau case applicable under the circumstances of these cases petitioners failed to exercise due care in claiming large deductions and tax_credits with respect to the partnerships on their respective federal_income_tax returns petitioners claim that they relied blindly upon their accountants one of whom bachmann they uniformly describe as a financial genius bachmann is deceased so we are unable to inquire whether he would claim full credit for what reimann describes as this wonderful advice to invest in the partnerships abramson the primary tax partner at bachmann schwartz plainly made only a cursory investigation of the transaction and was not a central figure in these investments greene a bachmann schwartz partner who presented the deal to brodie described it as a to tax_shelter on which the firm received a 10-percent commission petitioners described themselves as innocents who simply followed the advice of their accountants whose instructions they would not even presume to question but the record indicates that petitioners were educated experienced successful and prosperous businessmen capable of making their own decisions certainly the accountants who testified indicated that interests in the plastics recycling partnership were offered only to clients with income available for high risk tax_shelter deals which the firm made available and on which it received a commission petitioners invested what marvin yarnell described as funds in excess of case money that is he explained excess amounts they did not need for present or anticipated business purposes or living_expenses the records in these cases show that the accountants offered their clients an admittedly high risk transaction involving an industry and machinery about which neither the accountants nor petitioners had any expertise or significant understanding these petitioners knowing the substantial tax benefits and little more about the transaction and knowing that their advisers had no expertise in the area of the investment took the risk however they did not in good_faith directly or indirectly investigate the underlying viability financial structure and economics of the partnership transactions we hold upon consideration of the entire records that petitioners are liable for the negligence additions to tax under the provisions of sec_6653 and for respondent is sustained on this issue issue sec_6659 valuation_overstatement respondent determined that petitioners were each liable for the sec_6659 addition_to_tax on the portion of their respective underpayments attributable to valuation_overstatement petitioners have the burden of proving that respondent's determinations of these sec_6659 additions to tax are erroneous rule a 79_tc_846 a graduated addition_to_tax is imposed when an individual has an underpayment_of_tax that equals or exceeds dollar_figure and is attributable to a valuation_overstatement sec_6659 d a valuation_overstatement exists if the fair_market_value or adjusted_basis of property claimed on a return equals or exceed sec_150 percent of the amount determined to be the correct amount sec_6659 if the claimed valuation exceed sec_250 percent of the correct value the addition is equal to percent of the underpayment sec_6659 petitioners each claimed an investment_tax_credit and a business_energy_credit based on purported values of dollar_figure for each sentinel epe recycler each of petitioners concedes that the fair_market_value of each recycler was not in excess of dollar_figure therefore if disallowance of petitioners' claimed credits is attributable to the valuation overstatements petitioners are liable for the sec_6659 addition_to_tax at the rate of percent of the respective underpayments of tax attributable to the credits claimed with respect to the partnerships sec_6659 does not apply to underpayments of tax that are not attributable to valuation overstatements see 92_tc_827 89_tc_912 affd 862_f2d_540 5th cir to the extent taxpayers claim tax benefits that are disallowed on grounds separate and independent from alleged valuation overstatements the resulting underpayments of tax are not regarded as attributable to valuation overstatements 99_tc_132 citing todd v commissioner supra affd sub nom 28_f3d_1024 10th cir however when valuation is an integral factor in disallowing deductions and credits sec_6659 is applicable see 982_f2d_163 6th cir affg tcmemo_1991_449 933_f2d_143 2d cir sec_6659 addition_to_tax applies if a finding of lack of economic_substance is due in part to a valuation_overstatement affg tcmemo_1989_684 masters v commissioner tcmemo_1994_ affd without published opinion 70_f3d_1262 4th cir harness v commissioner tcmemo_1991_321 in the respective stipulations of settled issues petitioners concede that they are not entitled to any deductions losses investment credits business energy investment credits or any other tax benefits claimed on their tax returns as a result of their participation in the plastics recycling program in todd v commissioner supra and mccrary v commissioner supra we denied application of sec_6659 even though the subject property was overvalued because the related deductions and credits had been conceded or denied in their entirety on other grounds in todd we found that an underpayment was not attributable to a valuation_overstatement because property was not placed_in_service during the years in issue in mccrary we found the taxpayers were not liable for the sec_6659 addition_to_tax when prior to the trial of the case the taxpayers conceded that they were not entitled to the investment_tax_credit because the agreement in question was a license and not a lease in both cases the underpayment was deemed attributable to something other than a valuation_overstatement this court has held that concession of the investment_tax_credit in and of itself does not relieve taxpayers of liability for the sec_6659 addition_to_tax dybsand v commissioner tcmemo_1994_56 chiechi v commissioner tcmemo_1993_630 instead what is significant is the ground upon which the investment_tax_credit is disallowed or conceded chiechi v commissioner supra even in situations in which there are arguably two grounds to support a deficiency and one supports a sec_6659 addition_to_tax and the other does not the taxpayer may still be liable for the addition_to_tax 893_f2d_225 9th cir affg tcmemo_1988_416 866_f2d_545 2d cir vacating in part and remanding tcmemo_1988_211 harness v commissioner supra no argument was made and no evidence was presented to the court in the present cases to prove that disallowance and concession of the investment tax_credits related to anything other than a valuation_overstatement to the contrary petitioners stipulated substantially the same facts concerning the underlying transactions as we found in provizer v commissioner tcmemo_1992_177 in the provizer case we held that the taxpayers were liable for the sec_6659 addition_to_tax because the underpayment of taxes was directly related to the overvaluation of the sentinel epe recyclers the overvaluation of the recyclers exceeding percent was an integral part of our findings in provizer that the transaction was a sham and lacked economic_substance similarly the records in these cases plainly show that the overvaluation of the recyclers is integral to and is the core of our holding that the underlying transactions here were shams and lacked economic_substance consistent with our findings in provizer petitioners respectively stipulated that the scarborough and plymouth transactions had no net equity value that the sole activity of the scarborough and plymouth partnerships lacked any potential for profit and that the scarborough and plymouth partnership transactions therefore lacked economic_substance when a transaction lacks economic_substance sec_6659 will apply because the correct basis is zero and any basis claimed in excess of that is a valuation_overstatement gilman v commissioner supra 91_tc_524 87_tc_970 donahue v commissioner tcmemo_1991_181 affd without published opinion 959_f2d_234 6th cir affd sub nom 990_f2d_893 6th cir we held in provizer v commissioner supra that each sentinel epe recycler had a fair_market_value not in excess of dollar_figure our finding in the provizer case that the sentinel epe recyclers had been overvalued was integral to and inseparable from our finding of a lack of economic_substance petitioners conceded that the scarborough and plymouth transactions were similar to the clearwater transaction described in provizer v commissioner supra and that the scarborough and plymouth transactions lacked economic_substance given those concessions and the fact that the records here plainly show that the overvaluation of the recyclers was the reason for the disallowance of the tax benefits and the fact that no argument was made and no evidence was presented to the court to prove that disallowance and concession of the tax benefits related to anything other than a valuation_overstatement we conclude that the deficiencies caused by the disallowance of the claimed tax benefits were attributable to the overvaluation of the sentinel epe recyclers finally we consider petitioners' express arguments as to waiver of the addition_to_tax under sec_6659 on brief petitioners each contested imposition of the sec_6659 addition_to_tax on the grounds that respondent erroneously failed to waive the addition_to_tax sec_6659 authorizes respondent to waive all or part of the addition_to_tax for valuation_overstatement if taxpayers establish that there was a reasonable basis for the adjusted bases or valuations claimed on the returns and that such claims were made in good_faith respondent's refusal to waive a sec_6659 addition_to_tax is reviewable by this court for abuse_of_discretion krause v commissioner t c pincite petitioners urge that they relied on bachmann and greene respectively and in varying degrees the offering memoranda in deciding on the valuation claimed on their tax returns petitioners each contend that such reliance was reasonable and therefore respondent should have waived the sec_6659 addition_to_tax petitioners cite krause v commissioner supra 22_f3d_1001 10th cir revg tcmemo_1993_23 rousseau v united_states ustc par big_number e d la in support of their argument we have found that petitioners' purported reliance on bachmann and greene and the offering memoranda was not reasonable neither bachmann nor greene nor petitioners nor anyone affiliated with bachmann schwartz was educated or experienced in plastics or plastics recycling the evaluators whose reports were appended to each of the offering memoranda each owned interests in partnerships which leased sentinel epe recyclers the offering memoranda contained numerous caveats including the following no offeree should consider the contents of this memorandum as expert advice each offeree should consult his own professional advisers petitioners did not see a sentinel epe recycler prior to investing in scarborough or plymouth nor did they independently investigate the recyclers petitioners' reliance on krause v commissioner supra mauerman v commissioner supra and rousseau v united_states supra in support of their contentions that they acted reasonably is misplaced in the krause and rousseau cases the sec_6659 addition_to_tax was disallowed in light of the respective holdings that the taxpayers in each case had a reasonable basis for the valuations claimed on the tax returns or had reasonable_cause for the understatements on the returns and were not subject_to negligence additions to tax in contrast we have held that petitioners herein did not act reasonably in claiming deductions and investment tax_credits related to the partnerships that the errors on petitioners' tax returns were caused by the excessive valuations of the underlying machinery in the partnership transactions that petitioners lacked reasonable_cause for such overvaluation and that each petitioner is therefore liable for the negligence additions to tax under sec_6653 see supra pp accordingly petitioners' reliance on the krause and rousseau cases is misplaced in mauerman the tenth circuit_court of appeals held that the commissioner had abused her discretion for not waiving a sec_6661 addition_to_tax like sec_6659 a sec_6661 addition_to_tax may be waived by the commissioner if the taxpayer demonstrates that there was reasonable_cause for his underpayment and that he acted in good_faith sec_6661 the taxpayer in mauerman relied upon independent attorneys and accountants for advice as to whether payments were properly deductible or capitalized the advice relied upon by the taxpayer in mauerman was within the scope of the advisers' expertise the interpretation of the tax laws as applied to undisputed facts in these cases particularly with respect to valuation petitioners relied upon advice which was outside the scope of expertise and experience of their advisers consequently we consider petitioners' reliance on the mauerman case inapplicable we hold that petitioners did not have a reasonable basis for the adjusted bases or valuations reflected on their tax returns with respect to their investments in scarborough and plymouth in these cases respondent properly could find that petitioners' respective reliance on bachmann and greene and in varying degrees the offering materials was unreasonable the records in these cases do not establish an abuse_of_discretion on the part of respondent but support respondent's position we hold that respondent's refusal to waive the sec_6659 addition_to_tax is not an abuse_of_discretion petitioners are liable for the sec_6659 addition_to_tax at the rate of percent of the underpayment_of_tax attributable to the disallowed tax benefits respondent is sustained on this issue decisions will be entered under rule


internal_revenue_service number release date index number ----------------------- ------------------- ------------------------------------------- -------------------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-133454-08 date october legend distributing ---------------------------------------------- --------------------------------------------------------------- ------------------------------------------------------ controlled ----------------------------------- ---------------------------------------------------------------- ------------------------------------------------------------------------------------------------- sub1 --------------------------------- ---------------------------------------------------------------- ------------------------------------------------------ sub2 -------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------------------------------------------- sub3 ------------------------------------------------ -------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- llc1 ---------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ----------------------------------- llc2 ---------------------------------------------------------------- plr-133454-08 ------------------------------------------------------ llc3 ------------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------ llc4 ----------------------------------------------------------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------- llc5 ----------------------------------------------------------------------------------------------------------- ------------------------------------------------------ -------------------------------------------------- llc6 -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- --------------------- p1 ------------------------------------------------------------------------------- ------------------------------------------------------ -------------------------------------------------- businessa --------------------------------------------------------------- businessb ------------------------------------------ businessc ------------------------------------------------------------- date1 -------------------------- date2 ---------------------- date3 ------------------ year1 ------- year2 ------- statea -------------- stateb --------- shareholdera ----------------------- plr-133454-08 shareholderb ----------------------- shareholderc ------------------------ shareholderd -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- shareholdere ------------------------------------------------------------------- partya a b c d e f g h i ------------------- ----------------- --------------- -------------- ---------------- ------- ------- --------------- -------- ----- dear --------------- this letter responds to your date request for rulings on certain federal_income_tax consequences of the series of proposed transactions described below the proposed transaction additional information was submitted in letters dated september and date the material information submitted for consideration is substantially as set forth below the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in plr-133454-08 particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution described below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code the code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing was formed on date1 as a statea corporation and on date2 elected under sec_1362 to be treated as a subchapter_s_corporation an s_corporation for federal_income_tax purposes at the time of the proposed transaction distributing will have approximately a dollars of accumulated c_corporation earnings_and_profits from its pre-s corporation years distributing has only common_stock outstanding the shares of which are held b- percent by shareholdera b-percent by shareholderb b-percent by shareholderc c- percent by shareholderd and d-percent by shareholdere shareholdera shareholderb and shareholderc are siblings and partya is their father distributing wholly owns sub1 a qualified_subchapter_s_subsidiary disregarded as separate from its owner for federal_income_tax purposes under sec_1_1361-4 a q-sub sub1 wholly owns sub2 also a q-sub and llc1 a limited_liability_company disregarded as a separate_entity from its owner for federal tax purposes under sec_301_7701-3 of the procedure and administration regulations a disregarded_entity sub1 also owns e-percent of the stock in sub3 a corporation for federal_income_tax purposes and f-percent of the membership interests in p1 a partnership for federal_income_tax purposes the distributing group has two lines of business businessa which is conducted by sub1 sub2 llc1 and sub3 and businessb which is conducted by distributing and its direct and indirect subsidiaries other than sub1 and the entities owned by sub1 the financial information submitted by distributing indicates that businessa and businessb each have had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years llc2 a statea partnership indirectly owned by shareholdera shareholderb shareholderc and partya conducts businessc a business that complements businessa on date3 in a transaction unrelated to the proposed transaction the shareholders of distributing made pro_rata cash contributions of approximately g dollars to distributing in exchange for additional stock the cash infusion plr-133454-08 distributing management has determined that the proposed transaction will serve the following corporate business purposes i remove regulatory restrictions that prevent businessa from offering its customers the same broad range of services currently being provided by its major competitors and ii permit businessa to combine with businessc conducted by llc2 in a joint_venture that will facilitate the expansion of businessa’s customer services proposed transaction to achieve the business purposes described above the following series of steps is proposed sub1 currently a statea q-sub will convert to a statea disregarded_entity the sub1 conversion and sub2 will convert to a stateb disregarded_entity the sub2 conversion in the sub1 conversion and the sub2 conversion all of the issued and outstanding shares of sub1 and sub2 will be cancelled and exchanged for membership units distributing will transfer all of its membership interests in sub1 to newly formed wholly owned controlled in exchange for all of the controlled stock and the assumption by controlled of related liabilities as well as some debt of businessb the contribution distributing will immediately elect to treat controlled as a q-sub distributing will distribute all of the controlled stock to its shareholders pro_rata the distribution controlled will elect to be an s_corporation under sec_1362 immediately after the distribution the s election after the distribution controlled and llc2 will enter into a joint_venture the sub1 joint_venture using newly formed llc6 a statea llc as the joint_venture vehicle the joint_venture formation in the joint_venture formation controlled will transfer all of its membership interests in sub1 to llc6 in exchange for a h-percent capital and profits interest and llc2 will cause llc4 and llc5 which are disregarded entities owned by llc3 a disregarded_entity wholly owned by llc2 to be contributed to llc6 in exchange for the remaining i-percent capital and profits interest llc6 will not elect to be classified as a corporation for federal tax purposes under reg sec_301_7701-2 and therefore will be treated as a partnership in connection with the proposed transaction distributing and controlled will enter into agreements for support and transitional services the transitional services and operational and business services the ongoing business services the transitional services and ongoing business services are collectively referred to as the continuing transactions the transitional services will consist of administrative support and corporate services eg accounting payroll tax compliance distributing plr-133454-08 will provide to controlled for no more than months while controlled establishes its own support and service arrangements in general payment for these services will be based on the cost incurred by distributing in making the services available the ongoing business services will relate to operational and business services that distributing has chosen to obtain from controlled or that controlled has chosen to obtain from distributing in each case as its third party vendor the terms and conditions of these services will vary greatly and will be arrived at by the parties bargaining at arm’s length or will reflect terms and conditions comparable to those that would be arrived at by the parties bargaining at arm’s length payment for the services will be based on their fair_market_value representations distributing makes the following representations regarding the proposed transaction a b c d e f distributing controlled and each of the distributing shareholders will pay his her or its own expenses if any incurred in connection with the proposed transaction any indebtedness owed by controlled or any entity controlled directly or indirectly by controlled to distributing or any entity controlled directly or indirectly by distributing after the distribution will not constitute stock_or_securities no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of businessb conducted by distributing is representative of its present operations and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of businessa that will be conducted by controlled immediately after the distribution is representative of its present operations and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted neither businessb conducted by distributing nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized in whole or in part except for transactions that expanded businessb throughout the five-year period ending on plr-133454-08 g h i j k l the date of the distribution distributing will have been the principal_owner of the goodwill and significant assets of businessb and will continue to be the principal_owner following the distribution neither businessa that will be contributed to controlled in the contribution nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized in whole or in part except for transactions that expanded businessa from the time of its formation in year1 until the contribution sub1 will have been the principal_owner of the goodwill and significant assets of businessa following the contribution controlled will be the principal_owner of the goodwill and significant assets of businessa apart from the continuing transactions distributing will continue the active_conduct of businessb independently and with its separate employees following the distribution apart from the continuing transactions controlled through llc4 a partnership controlled by controlled will continue the active_conduct of businessa independently and with its separate employees following the distribution the distribution will be carried out to i remove regulatory restrictions that prevent businessa from offering its customers the same broad range of services currently being provided by its major competitors and ii permit businessa to combine with businessc in a joint_venture that will facilitate the expansion of businessa’s customer services the distribution is motivated in whole or substantial part by these corporate business purposes the distribution will not be used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both there is no plan or intention to liquidate distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the distribution except in the ordinary course of business or as described above as part of the proposed transaction m the total adjusted_basis and fair_market_value of the assets transferred to controlled in the contribution will equal or exceed the sum of i the total liabilities assumed as determined under sec_357 by controlled and ii the total amount of any money and the fair_market_value of any plr-133454-08 n o p q r s other_property within the meaning of sec_361 received by distributing and transferred to its creditors in connection with the reorganization any liabilities assumed as determined under sec_357 by controlled in the contribution will have been incurred in the ordinary course of business and will be associated with the assets transferred except for some debt relating to businessb that may be assumed by controlled in an amount necessary to satisfy regulatory requirements the total fair_market_value of the assets transferred to controlled in the contribution will exceed the sum of i the amount of any liabilities assumed as determined under sec_357 by controlled in connection with the exchange ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of any cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange the aggregate fair_market_value of the assets distributing transfers to controlled in the contribution will equal or exceed the aggregate adjusted_basis of these assets distributing will neither accumulate its receivables nor make extraordinary payment of its payables in anticipation of the contribution and distribution no intercorporate debt will exist between distributing or any entity controlled directly or indirectly by distributing and controlled or any entity controlled directly or indirectly by controlled at the time of or after the distribution other than intercompany loans or obligations that have arisen or will arise between the parties in the ordinary course of business or as a result of the continuing transactions except for payments made in connection with the transitional services payments made in connection with all other transactions if any between distributing or any entity controlled directly or indirectly by distributing and controlled or any entity controlled directly or indirectly by controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length or terms and conditions comparable to those that would be arrived at by the parties bargaining at arm’s length plr-133454-08 t u v w x y no two parties to the distribution are investment companies as defined in sec_368 and iv for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or 50-percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or 50-percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation immediately after the transaction as defined in sec_355 either no person will hold a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled if any person holds a percent or greater interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 such person will have held such interest in such corporation immediately before the transaction or neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 although the cash infusion occurred at a time when the proposed transaction was under consideration by distributing and its shareholders the contribution was made with respect to the needs of businessb and was unrelated to and would have occurred regardless of the proposed transaction plr-133454-08 z aa bb cc effective date2 distributing made an election under sec_1362 to be an s_corporation within the meaning of sec_1361 and distributing has continued to be an s_corporation since year2 within the meaning of sec_1361 immediately after the distribution controlled will be eligible to elect s_corporation status pursuant to sec_1362 effective immediately after the distribution controlled will elect to be treated as an s_corporation effective immediately after the distribution see sec_1_1361-3 none of the persons holding stock membership interests or any equity_interest in either distributing or controlled is or will be a nonresident_alien_individual a foreign_corporation or a_trust except for trusts meeting the requirements of sec_1361 dd there is no plan or intention to revoke or otherwise terminate the s_corporation_election of either distributing or controlled rulings based solely on the information submitted and the representations set forth above we rule as follows the contribution followed by the distribution will be a reorganization under sec_368 distributing and controlled will each be a party to the reorganization under sec_368 no gain_or_loss will be recognized by distributing on the contribution sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the contribution sec_1032 the basis of each asset received by controlled in the contribution will equal the basis of that asset in the hands of distributing immediately before the contribution sec_362 the holding_period of each asset received by controlled in the contribution will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by distributing on the distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the shareholders of distributing on the distribution sec_355 plr-133454-08 the aggregate basis of the distributing stock and the controlled stock in the hands of each shareholder of distributing immediately after the distribution will equal the aggregate basis of the distributing stock held by each shareholder of distributing immediately before the distribution allocated between the stock of distributing and controlled in proportion to the fair_market_value of each immediately following the distribution in accordance with sec_1_358-2 sec_358 and c the holding_period of the controlled stock received by each shareholder of distributing in the distribution will include the holding_period of the distributing stock on which the distribution is made provided the distributing stock was held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 the momentary ownership by distributing of the stock of controlled as part of the reorganization under sec_368 will not cause controlled to have an ineligible shareholder for any portion of its first taxable_year under sec_1361 if controlled otherwise meets the requirements of a small_business_corporation under sec_1361 controlled will be eligible to make a subchapter_s_election under sec_1362 for its first taxable_year provided such election is made effective immediately after the distribution controlled will be subject_to sec_1374 with respect to any asset transferred from distributing to controlled to the same extent that distributing is subject_to sec_1374 with respect to such asset for purposes of sec_1374 controlled’s recognition_period will be reduced by the portion of distributing’s recognition_period that expires prior to distributing’s transfer of these assets to controlled sec_1374 and announcement i r b distributing’s accumulated_adjustments_account immediately before the transaction will be allocated between distributing and controlled in a manner similar to the manner in which distributing’s earnings_and_profits will be allocated under sec_312 see sec_1_312-10 and sec_1_1368-2 caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of plr-133454-08 sec_1_355-2 ii whether the distribution is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both iii whether the distribution and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 iv whether distributing is a valid s_corporation and v whether controlled is otherwise eligible to be an s_corporation procedural matters this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter must be attached to the federal_income_tax return of each party involved in the proposed transaction for the taxable_year in which the proposed transactions are completed alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their returns that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely alfred c bishop branch chief branch office of associate chief_counsel corporate cc