1996 Tax Ct. Memo LEXIS 418">*418 Appropriate orders will be issued denying petitioners' motions, and decisions will be entered under Rule 155.
CONTENTS
MEMORANDUM FINDINGS OF FACT AND OPINION
OPINION OF THE SPECIAL TRIAL JUDGE
FINDINGS OF FACT A. The Plastics Recycling Transactions B. The Partnerships C. Richard Roberts D. Stuart Becker and Steven Leicht E. Petitioners and Their Introduction to the Partnership Transactions 1. Bruce and Lois Zenkel 2. Robert G. Blount 3. Morton and Carol David 4. Ira and Helen Selvin
B. Section 6653(a)--Negligence 1. The So-Called Oil 1996 Tax Ct. Memo LEXIS 418">*419 Crisis 2. Petitioners' Purported Reliance on Tax Advisers a. The Circumstances Under Which a Taxpayer May Avoid Liability Under Section 6653(a)(1) and (2) Because of Reasonable Reliance on Competent and Fully Informed Professional Advice b. Becker c. Steele and Sprague 3. The Private Offering Memoranda 4. Miscellaneous 5. Conclusion as to Negligence
1. The Grounds for Petitioners' Underpayments
2. Concession of the Deficiency
3. D. Petitioners' Motions For Leave To File Motion For Decision Ordering Relief From the Negligence Penalty and the Penalty Rate of Interest and To File Supporting Memorandum of Law
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON,
OPINION OF THE SPECIAL TRIAL JUDGE
WOLFE,
In notices of deficiency, respondent determined the following deficiencies in and additions to petitioners' Federal income taxes:
Penalty | ||||
Docket No. | Petitioner | Year | Deficiency | Sec. 6621(c) |
12091-89 | Bruce and Lois Zenkel | 1979 | 1 $ 26,330.00 | 2 |
1980 | -- | |||
1982 | 72,349.00 | |||
19760-89 | Robert G. Blount | 1981 | 52,662.49 | |
24512-89 | Morton and Carol David | 1982 | 51,356.00 | |
10147-91 | Ira and Helen Selvin | 1981 | 44,626.00 |
Additions to Tax | |||
Docket No. | Sec. 6653(a)(1) | Sec. 6653(a)(2) | Sec. 6659 |
12091-89 | -- | -- | 4 $ 7,899.00 |
-- | -- | -- | |
$ 3,617.00 | 3 | ||
19760-89 | 2,633.12 | 15,798.75 | |
24512-89 | 2,569.00 | ||
10147-91 | 2,231.00 | 13,388.00 |
1996 Tax Ct. Memo LEXIS 418">*421 The parties in each of these consolidated cases filed a Stipulation of Settled Issues concerning the adjustments relating to their participation in the Plastics Recycling Program. Although there are insubstantial differences in the language used, such as singular terminology versus plural terminology, the stipulations are substantively identical. The stipulations in each of these consolidated cases provide, in part: 1. 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. 2. The underpayments in income tax attributable to petitioners' participation in the Plastics Recycling Program are substantial underpayments attributable to tax-motivated transactions, subject to the increased rate of interest established under 3. This stipulation resolves all issues that relate to the items claimed on petitioners' tax returns resulting from their participation in the Plastics Recycling Program, except for the petitioners' potential liability for additions to the tax 1996 Tax Ct. Memo LEXIS 418">*422 for valuation overstatements under
Long after the trials in these cases, petitioners in docket Nos. 10147-91 (Selvin), 24512-89 (David), and 19760-89 (Blount) each filed a Motion For Leave to File Motion for Decision Ordering Relief From the Negligence Penalty and the Penalty Rate of Interest and to File Supporting Memorandum of Law under Rule 50. These motions were filed with attached exhibits on September 22, 1995, October 2, 1995, and November 30, 1995, respectively. On those same dates, each petitioner who filed a motion for leave also lodged with the Court a motion for decision ordering relief from the additions to tax for negligence and the increased rate of interest, with attachments, and a memorandum in support of such motion. Subsequently, respondent filed objections, with attachments, and memoranda in support thereof. For reasons discussed in more detail at the end of this opinion, and also in
The issues remaining in these consolidated cases are: (1) Whether the assessment in 1996 Tax Ct. Memo LEXIS 418">*423 docket No. 24512-89 (David) is barred by the statute of limitations; (2) whether petitioners are liable for additions to tax under section 6653(a)(1) and (2) for negligence; and (3) whether petitioners are liable for additions to tax under
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.
These cases concern petitioners' investments in four limited partnerships that leased Sentinel expanded polyethylene (EPE) recyclers: Phoenix Recycling Group (Phoenix), Scarborough Leasing Associates (Scarborough), SAB Resource Reclamation Associates (SAB Reclamation), and SAB Resource Recycling Associates (SAB Recycling). Petitioners Zenkel are limited partners in SAB Reclamation; petitioner Blount is a limited partner in Phoenix; petitioners David are limited partners in SAB Recycling; and petitioners Selvin are limited partners in Scarborough. For convenience we refer to these partnerships collectively as the Partnerships.
The transactions1996 Tax Ct. Memo LEXIS 418">*424 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
In the
All of the monthly payments1996 Tax Ct. Memo LEXIS 418">*425 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 1981 and 1982 was not in excess of $ 50,000.
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 100 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 leased Sentinel EPE recyclers from F & G Corp. and licensed those recyclers to FMEC Corp. The transactions of the Partnerships differ from the underlying transactions in the
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 (EPS) recyclers. We refer to these collectively as the Plastics Recycling transactions.
Phoenix and Scarborough are New York limited partnerships that were formed in late 1981. The general partner of Phoenix is Richard Roberts (Roberts). He and Samuel L. Winer (Winer) are the general partners of Scarborough. Winer is also the general partner of Clearwater, the partnership considered in the
SAB Reclamation and SAB Recycling are New York limited partnerships that were organized and promoted in 1982 by Stuart Becker1996 Tax Ct. Memo LEXIS 418">*427 (Becker), a certified public accountant (C.P.A.) and the founder and principal owner of Stuart Becker & Co., P.C. (Becker Co.), an accounting firm that specialized in tax matters. Becker organized a total of six recycling partnerships (the SAB Recycling Partnerships). Two of the SAB Recycling Partnerships closed in late 1981, two closed in early 1982 (SAB Reclamation and SAB Recycling), and two more closed in late 1982.
The general partner of each of the SAB Recycling Partnerships, including SAB Reclamation and SAB Recycling, is SAB Management Ltd. (SAB Management). SAB Management is wholly owned by Scanbo Management Ltd. (Scanbo), which is wholly owned by Becker. Scanbo is an acronym for three of Becker's children: Scott, Andy, and Bonnie. The officers and directors of SAB Management and Scanbo are as follows: (1) Becker, president and director; (2) Noel Tucker (Tucker), vice president, treasurer, and director; and (3) Steven Leicht (Leicht), vice president, secretary, and director. During the years in issue, Tucker and Leicht also worked at Becker Co. Tucker was vice president. Each owned between 5 and 7 percent of the stock of Becker Co. SAB Management did not engage in any business1996 Tax Ct. Memo LEXIS 418">*428 before becoming involved with the SAB Recycling Partnerships.
With respect to each of the Partnerships, a private placement memorandum was distributed to potential limited partners. Reports by F & G Corp.'s evaluators, Dr. Stanley M. Ulanoff (Ulanoff), a marketing consultant, and Dr. Samuel Z. Burstein (Burstein), a mathematics professor, were appended to the offering memoranda. Ulanoff owns a 1.27-percent interest in Plymouth Equipment Associates and a 4.37-percent interest in Taylor Recycling Associates, partnerships that leased Sentinel recyclers. Burstein owns a 2.605-percent interest in Empire Associates and a 5.82-percent interest in Jefferson Recycling Associates, also partnerships that leased Sentinel recyclers. Burstein also was a client and business associate of Elliot I. Miller (Miller), the corporate counsel to PI.
The offering memoranda for Phoenix, Scarborough, SAB Reclamation, and SAB Recycling state that the general partner will receive fees from those partnerships in the respective amounts of $ 40,000, $ 73,000, $ 110,000 and $ 97,375. SAB Management received fees of approximately $ 500,000 as the general partner of the SAB Recycling Partnerships. In addition, Becker1996 Tax Ct. Memo LEXIS 418">*429 Co. prepared the partnership returns and Forms K-1 for all of the SAB Recycling Partnerships and received fees for those services.
The offering memoranda also allocate a percentage of the proceeds from each offering--7.5 percent in the case of SAB Reclamation and SAB Recycling and 10 percent in the case of Phoenix and Scarborough--to the payment of sales commissions and offeree representative fees. In addition, the offering memoranda provide that the respective general partners "may retain as additional compensation all amounts not paid as sales commissions or offeree representative fees." However, neither SAB Management nor Becker retained or received any sales commissions or offeree representative fees. Instead, after the closing of each SAB Recycling Partnership, Becker rebated to each investor whose investment was not subject to a sales commission or offeree representative fee an amount equal to 7.5 percent of such investor's original investment.
The offering memoranda list significant business and tax risk factors associated with investments in the Partnerships. Specifically, the offering memoranda state: (1) There is a substantial likelihood of audit by the Internal Revenue1996 Tax Ct. Memo LEXIS 418">*430 Service (IRS) and the purchase price paid by F & G Corp. to ECI Corp. probably will be challenged as being in excess of fair market value; (2) the Partnerships have no prior operating history; (3) the general partner has no prior experience in marketing recycling or similar equipment; (4) the limited partners have no control over the conduct of the Partnerships' business; (5) there is no established market for the Sentinel EPE recyclers; (6) 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 (7) certain potential conflicts of interest exist.
Roberts is a businessman and the general partner in a number of limited partnerships that leased and licensed Sentinel EPE recyclers, including Phoenix and Scarborough. He also is a 9-percent shareholder in F & G Corp., the corporation that leased the recyclers to Phoenix and Scarborough. From 1982 through 1985, Roberts maintained the following office address with Raymond Grant (Grant), the sole owner and president of ECI Corp.:
Grant/Roberts, Investment Banking, Tax Sheltered Investments, 1996 Tax Ct. Memo LEXIS 418">*431 745 Fifth Avenue, Suite 410, New York, New York 10022
Grant was instrumental in the hiring of Ulanoff as an evaluator of the Plastics Recycling transactions; the two had met on a cruise. Roberts and Grant together have been general partners in other investments.
Prior to the Partnership transactions, Roberts and Grant were clients of the accounting firm H. W. Freedman & Co. (Freedman & Co.). Harris W. Freedman (Freedman), the named partner in Freedman & Co., was the president and chairman of the board of F & G Corp. He also owned 94 percent of a Sentinel EPE recycler. Freedman & Co. prepared the partnership returns for ECI Corp., F & G Corp., Phoenix, and Scarborough. It also provided tax services to John D. Bambara (Bambara). Bambara is the 100-percent owner of FMEC Corp., as well as its president, treasurer, clerk, and director. He, his wife, and daughter also owned directly or indirectly 100 percent of the stock of PI.
Becker does not have an engineering background, and he is not an expert in plastics materials or plastics recycling. He received a B.S. degree in accounting from New York University in 1964 and an M.B.A. in taxation from1996 Tax Ct. Memo LEXIS 418">*432 New York University School of Business Administration in 1973. He passed the certified public accountancy test in 1967 and was the winner of the gold medal, awarded to the person achieving the highest score on the examination for that year. Since early 1966, Becker has practiced as a C.P.A. exclusively in the tax area. From 1964 until 1972 he worked for the accounting firm of Touche, Ross & Co., and in 1972 he joined the accounting firm of Richard A. Eisner & Co. as the partner in charge of the tax department. In 1977, Becker founded Becker Co.
Becker had considerable experience involving tax shelter transactions before he organized the SAB Recycling Partnerships. He prepared opinions regarding tax shelters' economic and tax projections, advised individuals and companies with respect to investments in tax shelters, lectured extensively about tax shelter investments generally, and lectured and published with respect to leveraged tax shelters. Becker described a leveraged tax shelter as "a transaction where [the ratio of] the effective [tax] writeoff, which includes the value of the tax credit, * * * [to the amount invested] exceeds one to one." Becker Co. specialized in tax-advantaged1996 Tax Ct. Memo LEXIS 418">*433 investments. From 1980 to 1982, approximately 60 percent of the work done by Becker Co. involved tax sheltered and private investments. Becker has owned minority interests in general partners of numerous limited partnerships. Prior to organizing the SAB Recycling Partnerships, Becker owned 5 percent of the general partner of partnerships involved in approximately 14 transactions concerning river transportation (such as barges, tow boats, and grain elevators).
Although investment counseling was related to his firm's line of business, Becker did not consider himself in the business of providing investment advice. Becker did not normally hire other professionals for consultation or advice. In circumstances where he believed there was a need for outside advice, he would so advise the client. Between 30 and 40 of Becker's clients invested in the Plastics Recycling partnerships.
Becker learned of the Plastics Recycling transactions when a prospective client presented him with an offering memorandum concerning the transactions in August or September 1981. Becker reviewed the offering memorandum and spoke to Miller, one of the key figures in the transactions and an acquaintance of Becker's. 1996 Tax Ct. Memo LEXIS 418">*434 Miller was a shareholder of F & G Corp. and, as noted, the corporate counsel to PI. He also represented Grant and some of Grant's clients. Thereafter, Becker recommended the investment to the prospective client. Although the prospective client did not invest in the Plastics Recycling transactions, Becker became interested in the proposal and organized the SAB Recycling Partnerships in order to make similar investments in Sentinel EPE recyclers conveniently available to appropriate clients.
In organizing the SAB Recycling Partnerships, Becker was not allowed to change the format of the transactions or the purchase, lease, or licensing prices of the Sentinel EPE recyclers. He was allowed only to conduct a limited investigation of the proposed investments and choose whether or not to organize similar partnerships. Becker relied heavily upon the offering materials and discussions with persons involved in the matter to evaluate the Plastics Recycling transactions. He and two other members of Becker Co., Leicht and Tucker, investigated PI and visited its plant in Hyannis, Massachusetts, where they saw the Sentinel EPE recyclers. Tucker did not testify at any of the trials.
During his 1996 Tax Ct. Memo LEXIS 418">*435 investigation of the Plastics Recycling transactions, Becker did not hire any plastics, engineering, or technical experts, or recommend that his clients do so. Becker discussed the transactions with Michael Canno (Canno) of the Equitable Bag Co., a manufacturer of paper and plastic bags. Canno never saw the recyclers or the pellets and never wrote any reports assessing the equipment or the pellets. In addition, Becker retained a law firm, Rabin & Silverman, to assist him in organizing the SAB Recycling Partnerships. See
Leicht and Tucker also familiarized themselves with the Plastics Recycling transactions. Leicht has a B.A. degree in finance and accounting from Penn State University, a J.D. from SUNY Buffalo, and an LL.M. in taxation from New York University School of Law. Leicht ran a mathematical check on the numbers contained in the offering materials for Becker, but he did not test the underlying assumptions upon which they were based. He also visited PI in Hyannis and met with Miller and other1996 Tax Ct. Memo LEXIS 418">*436 insiders to the transactions. Leicht never communicated an opinion as to the value of the recyclers other than what was presented in the offering memoranda. He has no education or expertise in plastics materials or plastics recycling.
Petitioners in these 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 Bruce and Lois Zenkel (the Zenkels) resided in Scarsdale, New York, when their petition was filed. Bruce Zenkel (Mr. Zenkel) graduated from the University of Michigan and took some post-graduate courses at the University of Pennsylvania. Mr. Zenkel did not testify at trial. Lois Zenkel (Mrs. Zenkel) attended Connecticut College and in 1975 received a degree from Manhattanville College. During the years in issue, Mrs. Zenkel was a freelance photographer, and Mr. Zenkel was an investment banker. On their joint 1982 Federal1996 Tax Ct. Memo LEXIS 418">*437 income tax return, the Zenkels reported gross income from wages, interest, dividends, State and local tax refunds, capital gains, and other sources in excess of $ 300,000.
In 1982, Mrs. Zenkel acquired a 9-percent limited partnership interest in SAB Reclamation for a gross investment of $ 50,000, without taking into consideration any sales commission rebate or advance royalty distribution. Based on Mrs. Zenkel's interest in SAB Reclamation, on their 1982 Federal income tax return the Zenkels claimed an operating loss in the amount of $ 40,100 and investment tax and business energy credits totaling $ 83,712. Their total credits claimed, $ 85,547, were subject to a limitation of $ 62,841. The Zenkels carried back the unused portion of the credits to 1979 and 1980. Respondent disallowed the Zenkels' claimed operating loss and credits related to Mrs. Zenkel's investment in SAB Reclamation.
The Zenkels learned of the Plastics Recycling transactions and SAB Reclamation from Robert Steele (Steele), an accountant with Becker Co. At the time, Becker Co. prepared the Zenkels' Federal and State income tax returns. Mr. Zenkel had earlier met Steele and Becker on separate occasions during the1996 Tax Ct. Memo LEXIS 418">*438 mid-1970's. Mr. Zenkel initially met Becker in connection with some investment offerings with which Mr. Zenkel was involved. After Mrs. Zenkel also met Steele, the couple hired Becker Co. to handle their tax and related accounting needs.
Steele provided Mrs. Zenkel with a copy of the SAB Reclamation offering memorandum. Mrs. Zenkel looked it over and discussed the investment with Mr. Zenkel. She did not know whether Becker or Steele had any experience, education, or background in plastics recycling. The Zenkels each talked to Steele about the investment. Mr. Zenkel called Becker directly and asked him a large number of questions about the Plastics Recycling transactions. Becker answered his questions and related the particulars of his investigation to Mr. Zenkel. The Zenkels had extensive investment experience prior to investing in SAB Reclamation. Mrs. Zenkel considered Mr. Zenkel, who had professional experience in the syndication business, to be sophisticated in financial matters.
Petitioner Robert G. Blount (Blount) resided in Southhampton, New York, when his petition was filed. He received an undergraduate degree in accounting from Babson College in1996 Tax Ct. Memo LEXIS 418">*439 1960 and joined the accounting firm of Arthur Andersen & Co. (Andersen) that same year. Blount became a C.P.A. in 1965 and in 1970 he became a partner at Andersen. In 1973 he left Andersen and became the chief financial officer of a small company and in 1974 he joined American Home Products (AHP), a major pharmaceutical manufacturer, as its treasurer and vice president of finance, subsequently advancing to positions of greater responsibility with AHP. On his 1981 Federal income tax return, Blount reported gross income from wages in excess of $ 332,000.
Blount acquired a 2.605-percent interest in Phoenix for a gross investment of $ 25,000 in 1981, without taking into consideration any sales commission rebate or advance royalty distribution. As a result of his investment in Phoenix, on his 1981 Federal income tax return Blount claimed an operating loss in the amount of $ 20,520 and investment tax and business energy credits totaling $ 42,402. Respondent disallowed Blount's claimed operating loss and credits related to his investment in Phoenix.
Blount learned of the Plastics Recycling transactions and Phoenix in 1981 from William Sprague (Sprague), a former colleague at Andersen who1996 Tax Ct. Memo LEXIS 418">*440 had been introduced to the transactions by Leicht. Sprague joined Andersen in 1935, became a C.P.A. in 1938 (receiving the silver medal for the second highest grade on the examination), and had been a partner at Andersen for approximately 20 years when he retired in 1973. His work at Andersen was primarily in the area of auditing and administrative functions within the firm. Sprague knew Leicht because the latter also worked for Andersen, specifically from 1974 through 1980, and the two occasionally had lunch together. Leicht was working at Becker Co. in late 1981 when he suggested to Sprague that he look at some of the potential investments that passed through Becker Co. Sprague was familiar with Becker Co., and he knew Becker personally since both had been involved with the New York State Society of C.P.A.'s.
Leicht gave Sprague a copy of the Phoenix offering memorandum, and he reviewed it over a couple of days. Sprague was a complete stranger to the idea of plastics recycling and was incapable of evaluating the technical or engineering details associated with the investment. Thereafter, he discussed the investment with Leicht, and Leicht described his visits to PI. Becker stated1996 Tax Ct. Memo LEXIS 418">*441 that he too discussed the investment with Sprague and disclosed the extent of his investigation; Sprague, however, could not recall their conversation. Sprague did not otherwise investigate the Plastics Recycling transactions; he relied exclusively on the offering materials and Becker Co.
During this time, Sprague saw Blount on business occasions and also lunched with him about once a month. At one such lunch, the two were discussing investment opportunities when Blount mentioned that he was going to receive additional compensation income. Sprague suggested the Plastics Recycling transactions as a potential investment and in general terms recounted the information he had received from Leicht. He explained that as a service to clients, Becker Co. screens such investments--not to guarantee them--but to determine generally if the proposed investments are something their clients should look into. Sprague suggested that Blount contact Leicht or Becker, but Blount never spoke to either of them. Blount simply reviewed the offering memorandum for a few hours and gave it to his tax preparer, Marilyn Gowin (Gowin). Gowin reviewed all supporting documents for any transactions appearing on Blount's1996 Tax Ct. Memo LEXIS 418">*442 tax returns. Blount considered Phoenix to be a high-risk investment.
Petitioners Morton and Carol David (the Davids) resided in New York, New York, when their petition was filed. Morton David (David) received a B.A. degree from City College of New York in 1956 and a J.D. from Harvard Law School in 1961. From 1961 through 1963, David was an assistant to the special trial counsel of the American Stock Exchange. He then practiced corporate law at the law firm of Cooper, Ostrand, Devarco & Ackerman from 1963 until 1967. David has not practiced law since then. Instead, David has engaged in the business of workouts and turnarounds of technology companies, including a small cable television company, a burglar alarm company, a military contracting company, an electronics company, and a computer company. On their joint 1982 Federal income tax return, the Davids reported gross income from wages, interest, dividends, State and local tax refunds, and capital gains in excess of $ 750,000.
David acquired a 2.538461-percent interest in SAB Recycling for a gross investment of $ 25,000 in 1982, without taking into consideration any sales commission rebate or advance1996 Tax Ct. Memo LEXIS 418">*443 royalty distribution. As a result of his interest in SAB Recycling, on their joint 1982 Federal income tax return the Davids claimed an operating loss in the amount of $ 19,871 and investment tax and business energy credits totaling $ 41,320. Respondent disallowed the Davids' claimed operating loss and credits related to SAB Recycling.
David learned of the Plastics Recycling transactions and SAB Recycling from Becker in late 1981 or 1982. He first met Becker sometime in 1963 when David was general counsel for Perfect Photo Co. (PPC) and Becker did tax work for PPC on behalf of Touche, Ross & Co. From 1968 until 1984, Becker provided David with personal tax advice and performed tax accounting work for companies that David controlled. David spent 4 to 6 hours reviewing the offering memorandum for SAB Recycling and thereafter he discussed the investment with Becker. Becker described his investigation of the Plastics Recycling transaction to David in detail.
David has no education or experience in plastics materials or plastics recycling, and he knew that Becker was not an expert in the plastics industry. He did not discuss the investment with anyone who was knowledgeable or expert 1996 Tax Ct. Memo LEXIS 418">*444 in the plastics industry. He never viewed a recycler or independently investigated PI. David did not investigate whether there was a market for recycled pellets or independently verify any of the representations in the offering memorandum. He simply reviewed the SAB Recycling offering memorandum and discussed the proposed investment with Becker.
Petitioners Ira and Helen Selvin (the Selvins) resided in Roslyn Estates, New York, when their petition was filed. Ira Selvin (Selvin) received a B.S. degree from New York University School of Commerce. Excluding his active service in the U.S. Army during World Wars I and II, Selvin has practiced accounting for his entire career until he retired in approximately 1980. He was a sole practitioner for 30-35 years and serviced many clients in the garment industry. Selvin eventually turned his practice over to the accounting firm of Cooper, Selvin & Strasburg. Although it maintained an office for him, Selvin never actively worked for that firm. On their joint 1981 Federal income tax return, the Selvins reported gross income from interest, dividends, capital gains, pensions or annuities, and other sources in excess of1996 Tax Ct. Memo LEXIS 418">*445 $ 172,000.
In 1981 Selvin acquired an interest in Scarborough as a nominee on behalf of himself and other members of his accounting firm (hereinafter "the Selvin group"). The Selvin group invested $ 180,000 for an 18.27-percent interest in Scarborough. The amount of Selvin's share in Scarborough is not entirely clear from the record in docket No. 10147-91. Selvin stated that he invested $ 30,000 in Scarborough, which is the equivalent of a 3.05-percent interest (30,000/180,000 = 16.67 percent; .1667 x .1827 = 3.05 percent). However, the Selvins claimed $ 44,626 of investment tax and business energy credits using a reported basis in qualifying property of $ 223,126. That amount is 15 percent of the total basis owned by the Selvin group (223,126/1,487,504 = .15), which is the equivalent of an investment of only $ 27,000 (180,000 x .15 = $ 27,000) and a total interest in Scarborough of 2.74 percent (.18277 x .15 = .0274). Relying on the documentary evidence, we find that the Selvins paid $ 27,000 for their partnership interest in Scarborough.
As reported on Selvin's 1981 Form K-1 from Scarborough, the Selvin group's share of Scarborough's operating loss equaled $ 142,821, and its share1996 Tax Ct. Memo LEXIS 418">*446 of Scarborough's basis in the recyclers was $ 1,487,504. The Selvins did not claim any portion of the operating loss on their joint 1981 Federal income tax return but, as noted, they did claim investment tax and business energy credits totaling $ 44,626. Respondent disallowed these claimed credits.
Selvin learned of the Plastics Recycling transactions and Scarborough from Becker. He first met Becker on a trip to Israel in approximately 1968 and the two have been friendly ever since. Selvin has never referred a client to Becker, although on one occasion Becker referred a client to Selvin. Becker gave Selvin a copy of the Scarborough offering memorandum. Selvin spent several hours reviewing the offering memorandum and discussed it with Becker. Becker answered Selvin's questions and explained the full extent of his investigation, such as his visit to PI, speaking with Canno, and his research of trade journals to confirm the price of plastic pellets. Becker never represented that he was an expert in plastics materials or plastics recycling. Selvin did not do any independent investigation of the Sentinel EPE recyclers or plastics recycling in general. He invested in Scarborough based 1996 Tax Ct. Memo LEXIS 418">*447 solely on his review of the offering materials and his discussions with Becker.
After the 1981 SAB Recycling Partnerships closed, Becker paid Selvin's accounting firm to send an accountant to PI to confirm, by serial number, that as of December 31, 1981, the equipment that was leased to the 1981 SAB Recycling Partnerships was indeed available for use. Becker arranged for this verification, independent of PI, because he understood that the investment tax and business energy credits would not be available if the qualifying property was not available for use.
OPINION
We have decided more than 30 of the Plastics Recycling group of cases. 21996 Tax Ct. Memo LEXIS 418">*448 The majority of these cases, like the consolidated cases herein, raised issues regarding additions to tax for negligence and valuation overstatement. We have found the taxpayers liable for such additions to tax in all but one of the opinions to date on these issues, although procedural rulings have involved many more favorable results for taxpayers. 3
In
Although petitioners have not agreed to be bound by the
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 the respective stipulations of settled issues filed shortly before trial. The record plainly supports respondent's determination regardless of such concessions. For a detailed discussion of the facts and the applicable law in a substantially identical case, see
In their petition, the Davids alleged that the notice of deficiency in docket No. 24512-89 was not issued within the statutory limitations period. This issue 1996 Tax Ct. Memo LEXIS 418">*451 appears to have been abandoned. The Stipulation of Settled Issues in docket No. 24512-89 indicates that the only issues remaining for decision in that case are the potential liability of the Davids for additions to tax under sections 6653(a) and 6659. None of the trial memoranda or briefs in docket No. 24512-89 address this issue.
Regardless of whether the issue was abandoned, the record in docket No. 24512-89 shows that the notice of deficiency in that case was issued within the statutory limitations period. In general, section 6501(a) requires assessment of tax to be made within 3 years after a return is filed, whether the return was filed on or after the date prescribed. Section 6501(b)(1) provides that if a return is filed before the due date, for purposes of section 6501, the return shall be considered filed on the due date. Section 6501(c)(4) provides that if, before the expiration of the time to assess the tax under section 6501(a), the parties consent in writing to extend the time for the assessment of the tax, the tax may be assessed at any time before the end of the period agreed upon.
The Davids' joint 1982 Federal income tax return was due on April 15, 1983, and was filed1996 Tax Ct. Memo LEXIS 418">*452 on or before that date. Therefore, the 3-year period of limitations under section 6501(a) initially was set to expire on April 15, 1986. However, the Davids and respondent executed three consecutive Forms 872, Consent to Extend the Time to Assess Tax. The first of these Forms 872 was fully executed on March 21, 1986, prior to expiration of the normal 3-year period of limitations, and the last of these Forms 872 extended the period of limitations to December 31, 1989. The notice of deficiency was mailed on July 21, 1989, well before the expiration of the extended limitations period. The Davids have presented no evidence that the Forms 872 were not properly executed. Accordingly, the notice of deficiency in docket No. 24512-89 was issued within the statutory limitations period, as extended by the parties, and the assessment in docket No. 24512-89 is not barred by the statute of limitations.
We note that in their respective petitions, the Selvins and the Zenkels also claimed that the notices of deficiency issued in their cases were barred by the statute of limitations. However, the Selvins conceded the issue at a call of the calendar on March 21, 1994, and the Zenkels conceded the issue1996 Tax Ct. Memo LEXIS 418">*453 in the stipulation of facts filed in their case. Blount never raised a statute of limitations issue.
Respondent determined that petitioners are liable for additions to tax for negligence under section 6653(a)(1) and (2). Petitioners have the burden of proving that respondent's determinations of these additions to tax are erroneous. Rule 142(a);
Section 6653(a)(1) imposes an addition to tax equal to 5 percent of the underpayment if any part of an underpayment of tax is due to negligence or intentional disregard of rules or regulations. Section 6653(a)(2) imposes an addition to tax equal to 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations.
Negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances.
When petitioners invested in the partnerships, they had no education or experience in plastics materials or plastics recycling, nor had any of them seen a Sentinel EPE recycler. In each of these consolidated cases, petitioners maintain that they were reasonable in claiming deductions and investment credits with respect to their investments in the Partnerships. In support of such contentions, petitioners argue, in general terms: (1) That claiming the deductions and credits with respect to the Partnerships was reasonable in light of the so-called1996 Tax Ct. Memo LEXIS 418">*455 oil crisis during the years in issue; and (2) that they reasonably relied upon the offering materials and a qualified adviser.
Petitioners argue that they reasonably expected to make an economic profit from the Partnership transactions because plastic is an oil derivative and the United States was experiencing a so-called oil crisis during the years 1981 and 1982.
Petitioners' contention that they reasonably expected an economic profit from the Partnership transactions is unconvincing. Petitioners did not give due consideration to the caveats and warnings contained in the offering memoranda, nor seriously investigate or educate themselves in the Plastics Recycling transactions. Moreover, testimony by one of respondent's experts establishes that the oil pricing changes during the late 1970's and early 1980's did not justify petitioners' claiming excessive investment credits and purported losses based on vastly exaggerated valuations of recycling machinery.
Petitioners' claim that they reasonably expected an economic profit from the Partnership transactions is undermined by their indifference to the warnings in the offering memoranda and their lack1996 Tax Ct. Memo LEXIS 418">*456 of knowledge regarding the transactions in general, notwithstanding the so-called oil crisis. Mrs. Zenkel did not know how many recyclers SAB Reclamation leased or who manufactured the recyclers. Blount had no idea who the general partner of Phoenix was, how a Sentinel EPE recycler worked, the value placed on the recyclers, how many recyclers Phoenix leased, or how he was going to make a profit from his investment. David did not know how many recyclers SAB Recycling purchased or the price of each machine. Selvin knew nothing about resin prices, was not aware of any companies that would be suitable end-users, and did not know whether Scarborough had any assets, or how the venture was to work.
Petitioners failed to explain how the so-called oil crisis, or the media coverage of it, provided a reasonable basis for them to invest in the Partnerships and claim the associated tax deductions and credits. The offering materials warned that there could be no assurances that prices for new resin pellets would remain at their then current level. One of respondent's experts, Steven Grossman, explained that the price of plastics materials is not directly proportional to the price of oil. In his1996 Tax Ct. Memo LEXIS 418">*457 report, he stated that less than 10 percent of crude oil is utilized for making plastics materials, and that studies have shown that "a 300% increase in crude oil prices results in only a 30 to 40% increase in the cost of plastics products." Moreover, during 1980 and 1981, in addition to the media coverage of the so-called oil crisis, there was "extensive continuing press coverage of questionable tax shelter plans."
Petitioners' reliance on
1996 Tax Ct. Memo LEXIS 418">*459 Moreover, the taxpayers in the
In
Petitioners also maintain that they reasonably relied upon the advice of a qualified adviser. The Zenkels discussed the investment with Steele and Becker; Blount discussed it with Sprague; and the Davids and the Selvins discussed it with Becker.
The concept of negligence and the argument of reliance on an expert are highly fact intensive. Petitioners in these cases are very well educated professionals whose intellect and business sophistication are reflected in their financial and business success. Blount is a C.P.A. and business executive with 13 years1996 Tax Ct. Memo LEXIS 418">*461 of accounting experience with Arthur Andersen, 3 of those as a partner, and employment with American Home Products, a major pharmaceutical company, initially as vice president of finance and treasurer in 1974, and subsequently in positions of greater responsibility. David was a corporate attorney before engaging in workouts and turnarounds of technology companies. Selvin is a C.P.A. who ran his own accounting firm for 30 to 35 years in New York City. In respect of these accomplishments and their obvious financial prowess, petitioners Blount, David, and Selvin do not pretend to be unsophisticated investors.
Mrs. Zenkel, on the other hand, claims that she is an unsophisticated investor. Her claim is without merit. In her SAB Reclamation subscription agreement, Mrs. Zenkel expressly represented and warranted that she had the experience and expertise in financial and business affairs necessary to evaluate the merits and risks of investing in SAB Reclamation. Moreover, her decision to invest in SAB Reclamation was made with the assistance of Mr. Zenkel, an investment banker with experience in the syndication business. Although Mr. Zenkel did not testify at the trial 4, the record shows1996 Tax Ct. Memo LEXIS 418">*462 that he discussed SAB Reclamation with his wife, Steele, and Becker. Becker testified that Mr. Zenkel "called me directly regarding the program. He had a large number of questions which I answered for him, and apparently based on that he made
1996 Tax Ct. Memo LEXIS 418">*463 Petitioners assert that they relied upon one or more members of the accounting firm of Becker Co., and in particular on its founder and principal owner Stuart Becker, to investigate the tax law and the underlying business circumstances of a proposed investment. In the Blount case, petitioner placed reliance on this firm only indirectly or secondhand, through Sprague. Becker, who is experienced in tax matters, explains that he made an investigation within the limits of his resources and abilities and fully disclosed what he had done. The question here is whether petitioners actually and reasonably relied on the accountant with respect to valuation problems requiring expertise in engineering and plastics technology or whether the accountant gave the tax advice and facilitated the transaction, but did not make a full and independent investigation of the relevant business and technology, and did clearly inform his clients of the limits of his knowledge and investigation of the transaction. For reasons set forth below, we believe the latter statement more accurately describes what happened here.
A taxpayer may avoid liability for the additions to tax under section 6653(a)(1) and (2) if he or she reasonably relied on competent professional advice.
Reliance on representations by insiders, promoters, or offering materials has been held an inadequate defense to negligence.
Becker had no education, special qualifications, or professional1996 Tax Ct. Memo LEXIS 418">*467 skills in plastics engineering, plastics recycling, or plastics materials. In evaluating the Plastics Recycling transactions and organizing the SAB Recycling Partnerships, Becker supposedly relied upon: (1) The offering materials; (2) a tour of the PI facility in Hyannis; (3) discussions with insiders to the transactions; (4) Canno; and (5) his investigation of the reputation and background of PI and persons involved in the transactions.
Despite his lack of knowledge regarding the product, the target market, and the technical aspects at the heart of the Plastics Recycling transactions, Becker did not hire an expert in plastics materials or plastics recycling, or recommend that his clients do so. The only independent person having any connection with the plastics industry with whom Becker spoke was Canno. A client of Becker Co., Canno was a part owner and the production manager of Equitable Bag Co., a manufacturer of paper and plastic bags. Becker spoke to Canno about the recyclers and PI, but did not hire or pay him for any advice. Canno did not visit PI's plant in Hyannis, see or test a Sentinel EPE recycler, or see or test any of the output from a Sentinel EPE recycler or the recycled1996 Tax Ct. Memo LEXIS 418">*468 resin pellets after they were further processed by PI. According to Becker, Canno endorsed the Partnership transactions after reviewing the offering materials. Asked at trial if Canno had done any type of comparables analysis, Becker replied, "I don't know what Mr. Canno did."
Becker visited the PI plant in Hyannis, toured the facility, viewed a Sentinel EPE recycler in operation, and saw products that were produced from recycled plastic. He claims that during his visit he was told that the recycler was unique and that it was the only machine of its type. In fact, the Sentinel EPE recycler was not unique; instead, several machines capable of densifying low density materials already were on the market. Other plastics recycling machines available during 1981 ranged in price from $ 20,000 to $ 200,000, including the Foremost Densilator, Nelmor/Weiss Densification System (Regenolux), Buss-Condux Plastcompactor, and Cumberland Granulator. See
Becker was also told that PI had put an enormous amount of research and development--10 to 12 years' worth--into the creation and production of the Sentinel EPE recycler. 1996 Tax Ct. Memo LEXIS 418">*469 When he asked to see the cost records for some kind of independent verification, however, his request was denied. Becker was informed that such information was proprietary and secret, and that he would just have to take PI's representations as true. Although PI claimed that all of its information was a trade secret, and that it never obtained patents on any of its machines, PI had in fact obtained numerous patents prior to the recycling transactions and had also applied for a trademark for the Sentinel recyclers. Becker decided to accept PI's representations after speaking with Miller (the corporate counsel to PI), Canno (who had never been to PI's plant or seen a Sentinel EPE recycler), and a surrogate judge from Rhode Island who did business in the Boston-Cape Cod area (and who had no expertise in engineering or plastics materials). Becker testified that he was allowed to see PI's internal accounting controls regarding the allocation of royalty payments and PI's recordkeeping system in general. In
Becker confirmed at trial that he relied on the offering1996 Tax Ct. Memo LEXIS 418">*470 materials and discussions with PI personnel to establish the value and purported uniqueness of the recyclers. Becker testified that he relied upon the reports of Ulanoff and Burstein contained in the offering materials, despite the fact that: (1) Ulanoff's report did not contain any hard data to support his opinion; (2) Ulanoff was not an economics or plastics expert; (3) Becker did not know whether Burstein was an engineer; and (4) Burstein was a client of Miller's and was not an independent expert. In addition, Ulanoff and Burstein each owned an interest in more than one partnership that owned Sentinel recyclers as part of the Plastics Recycling program.
Becker explained at trial that in the course of his practice when evaluating prospective investments for clients, he focuses on the economics of the transaction and investigates whether there is a need or market for the product or service. With respect to the Partnership transactions, the records indicate that Becker overlooked several red flags regarding the economic viability and market for the Sentinel EPE recyclers. The offering memoranda for the Partnership transactions warned that there was no established market for the Sentinel1996 Tax Ct. Memo LEXIS 418">*471 EPE recyclers. Becker never saw any marketing plans for selling the pellets or leasing the recyclers. He accepted representations by PI personnel that they would be marketing the recyclers to clients and that there was a sufficient base of end-users for the machines, yet he never saw PI's client list. At the time of the closing of the Partnerships, Becker did not know who the end-users were or whether there were any end-users actually committed to the transaction.
Becker purportedly checked the price of the pellets by reading trade journals of the plastics industry. However, he did not use those same journals to investigate the recyclers' purported value or to see whether there were any advertisements for comparable machines. The record in these cases does not indicate that any of petitioners or their advisers other than Becker asked to see those journals for their own examination. In concluding that the Partnerships would be economically profitable, Becker made two assumptions that he concedes were unsupported by any hard data: (1) That there was a market for the pellets; and (2) that market demand for them would increase.
Becker also had a financial interest in SAB Reclamation1996 Tax Ct. Memo LEXIS 418">*472 and SAB Recovery. He received fees in excess of $ 500,000 with respect to the SAB Recycling Partnerships, more than $ 200,000 of which was derived from SAB Reclamation and SAB Recycling. Becker also received fees from individual investors for investment advice. In addition, Becker Co. received fees from the SAB Recycling Partnerships for preparing their partnership returns. As Becker himself testified, petitioners could not have read the offering materials and been ignorant of the financial benefits accruing to him.
We find that petitioners' purported reliance on Becker was not reasonable, not in good faith, nor based upon full disclosure. Becker's expertise was in taxation, not plastics materials or plastics recycling, and his investigation and analysis of the Plastics Recycling transactions reflected this circumstance. Selvin and David knew Becker was not expert in plastics materials or plastics recycling, and the Zenkels and Blount had no reason to believe otherwise. Becker testified that he was very careful not to mislead any of his clients regarding the particulars of his investigation. As he put it: "I don't recall saying to a client I did due diligence * * * [Rather,] I told1996 Tax Ct. Memo LEXIS 418">*473 [my clients] precisely what I had done to investigate or analyze the transaction. I didn't just say I did due diligence, and leave it open for them to define what I might or might not have done."
The purported value of the Sentinel EPE recycler generated the deductions and credits in these cases, and that circumstance was reflected in the offering memoranda. Certainly Becker recognized the nature of the tax benefits and, given their education and business experience, petitioners should have recognized it as well. Yet neither petitioners nor Becker verified the purported value of the Sentinel EPE recycler. Becker confirmed at trial that he relied on PI for the value of the Sentinel EPE recyclers. Investors as sophisticated as petitioners either learned or should have learned the source and shortcomings of Becker's valuation information when he reported to them and "precisely" disclosed "what [he] had done to investigate or analyze the transaction." Accordingly, we hold that petitioners did not reasonably or in good faith rely on Becker as an expert or a qualified professional working in the area of his expertise to establish the fair market value of the Sentinel EPE recycler and the1996 Tax Ct. Memo LEXIS 418">*474 economic viability of the Partnership transactions. Becker never assumed such responsibility, and he fully described the particulars of his investigation, taking care not to mischaracterize it as "due diligence."
In the end, Becker and petitioners relied on PI personnel for the value of the Sentinel EPE recyclers and the economic viability of the Partnership transactions. See
Petitioners Zenkel and Blount purport to have relied on advisers other than or in addition to Becker. The only person with whom Blount discussed the Plastics Recycling transactions was Sprague, who in turn had spoken with Becker and Leicht. Blount also gave a copy of the offering memorandum to his tax return preparer, Gowin. Mr. Zenkel spoke to Becker; both he and Mrs. Zenkel spoke to Steele.
Blount learned about the Plastics Recycling transactions from Sprague. Sprague suggested the Plastics Recycling transactions to Blount as an investment option after Blount mentioned that he was going to receive additional compensation income. Sprague recalled introducing the investment to Blount in the following manner: 1996 Tax Ct. Memo LEXIS 418">*476 "If you're looking for investments, you might contact Stephen Leicht or Stuart Becker, because I * * * understand that they, as a service to clients, do screen numerous such investments,
Blount never spoke to Becker or Leicht. He simply reviewed the offering memorandum, spoke with Sprague, and furnished the offering memorandum to his tax return preparer. Sprague is not an expert in plastics materials or plastics recycling and could not evaluate the technical or engineering details of the Phoenix transaction. He testified that in 1981 he "was a complete stranger to this notion of reprocessing plastics and recycling." Sprague's investigation of Phoenix consisted of reading the offering memorandum and talking to Leicht and Becker. Blount has not shown that his tax return preparer, Gowin, possessed the requisite expertise in recycling or the plastics industry to have enabled her properly to1996 Tax Ct. Memo LEXIS 418">*477 evaluate the merits of the Phoenix transaction. In light of the foregoing, Blount will not be relieved of the negligence additions to tax based upon his purported reliance on Sprague and Gowin.
Mr. and Mrs. Zenkel each discussed the investment with Steele. Neither Steele nor Mr. Zenkel testified in docket No. 12091-89. Mrs. Zenkel could not recall the content of her conversations with Steele; she remembered only that he told her that the investment had tax benefits and that he responded positively when she asked him if SAB Reclamation was a worthwhile investment. Mrs. Zenkel testified that she did not know that Becker Co. was involved in tax-oriented investments, whether Steele had any background in plastics materials or plastics recycling, whether Becker or Steele investigated PI, whether they investigated and/or compared the recycler with any similar products, whether they investigated end-users, or whether either of them checked with independent plastics experts as to the value of the recycler. Mrs. Zenkel testified that if she had known any of the particulars of Becker's and Steele's investigation, she has since forgotten them. The record in docket No. 12091-89 does not establish1996 Tax Ct. Memo LEXIS 418">*478 that the Zenkels' purported reliance on Steele was reasonable, in good faith, or based upon full disclosure.
In addition to purportedly relying on Becker, Steele, and/or Sprague, petitioners maintain that they reasonably relied upon the offering memoranda and the tax opinion letter appended thereto. However, petitioners' testimony and actions indicate that they did not thoroughly review or study all of the information set out in the offering memoranda and that they ultimately did not place a great deal of reliance, if any, on the representations therein.
The offering memoranda included numerous caveats and warnings with respect to the Partnerships, including: (1) The substantial likelihood of audit by the IRS and a likely challenge of the purported value of the recyclers; (2) the general partners' lack of experience in marketing recycling or similar equipment; (3) the lack of an established market for the recyclers; and (4) uncertainties regarding the market prices for virgin resin and the possibility that recycled pellets would not be as marketable as virgin pellets. In addition, the offering memoranda noted a number of conflicts of interest, 1996 Tax Ct. Memo LEXIS 418">*479 including Miller's interest in F & G Corp. and his representation of Burstein, PI, and Grant, who was the sole shareholder of ECI Corp. A careful consideration of the materials in the respective offering memoranda in these cases, especially the discussions 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
In each case, the projected tax benefits in the respective offering memoranda exceeded petitioners' respective investments. According to the offering memoranda, for each $ 50,000 investor, the projected first-year tax benefits were investment tax credits in excess of $ 82,500 plus deductions in excess of $ 39,000. Specifically, the projected investment tax credits and deductions for the Partnerships in the first year of the investment for each $ 50,000 investor were as follows: $ 82,639 and $ 39,323 for Scarborough in 1981; 1996 Tax Ct. Memo LEXIS 418">*480 $ 84,813 and $ 40,671 for Phoenix in 1981; $ 82,639 and $ 40,037 for SAB Recycling in 1982; and $ 83,712 and $ 40,234 for SAB Reclamation in 1982.
For Mrs. Zenkel's gross $ 50,000 investment, the Zenkel's claimed an operating loss in the amount of $ 40,100 and investment tax and business energy credits in the amount of $ 83,712. As a result of his gross $ 25,000 investment, Blount claimed a $ 20,520 operating loss and $ 42,402 in investment tax and business energy credits. For their gross $ 25,000 investment, the Davids claimed an operating loss in the amount of $ 19,871 and investment tax and business energy credits totaling $ 41,320. For their $ 27,000 investment, the Selvins claimed investment tax and business energy credits in the amount of $ 44,626.
The direct reductions in petitioners' Federal income tax, from the investment tax credits alone, ranged from 149 percent to 170 percent of their cash investments, without consideration of any rebated commissions or advance royalty payments. Therefore, after adjustments of withholding, estimated tax, or final payment, like the taxpayers in
Petitioners' reliance upon the Court of Appeals for the Ninth Circuit's partial reversal of our decision in This opinion is provided to
1996 Tax Ct. Memo LEXIS 418">*484
The parties in these consolidated cases stipulated that the fair market value of a Sentinel EPE recycler in 1981 and 1982 was not in excess of $ 50,000. 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 $ 1,162,666. 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 1984 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 $ 250,000. However, after additional information became available to him, Carmagnola concluded in a signed affidavit, dated March 16, 1993, that the machines actually had a fair market value of not more than $ 50,000 each in the fall of 1981 and 1982.
We accord no weight to the Carmagnola reports submitted1996 Tax Ct. Memo LEXIS 418">*485 by petitioners. The projected valuations therein were based on inadequate information, research, and investigation, and were subsequently rejected and discredited by their author. In one preliminary report, Carmagnola states that he has "a serious concern of actual
Respondent rejected the Carmagnola 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' counsel did not call Carmagnola to testify in these cases, but preferred instead to rely solely upon his preliminary, ill-founded valuation1996 Tax Ct. Memo LEXIS 418">*486 estimates. Carmagnola has not been called to testify in any of the Plastics Recycling cases before us. The Carmagnola reports were a part of the record considered by this Court and reviewed by the Court of Appeals for the Sixth Circuit in the
Petitioners rely on
In
Neither petitioners nor Becker had any formal education, expertise, or experience in plastics materials or plastics recycling. None of them had any personal insight or industry know-how in plastics recycling that would reasonably lead them to believe that the Plastics Recycling transactions would be economically profitable. Becker and petitioners relied upon representations by insiders to the Plastics Recycling transactions, and neither he nor petitioners1996 Tax Ct. Memo LEXIS 418">*489 hired any independent experts in the field of plastic materials or plastics recycling. Becker purportedly discussed the transactions with Canno, who apparently was familiar with the plastics industry, but Canno was not hired by Becker to investigate PI and the Sentinel EPE recycler, never saw a Sentinel EPE recycler, and never prepared any kind of formal, written analysis of the venture. Accordingly, we consider petitioners' arguments with respect to the
Petitioners also rely on two recent decisions by the Court of Appeals for the Fifth Circuit that reversed this Court's imposition of the negligence additions to tax in non-plastics recycling cases:
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. Petitioners1996 Tax Ct. Memo LEXIS 418">*492 did not reasonably rely upon the offering memoranda, or on Becker, Steele, and/or Sprague, and they did not in good faith investigate the underlying viability, financial structure, and economics of the Partnership transactions herein. We are unconvinced by the claims of these highly sophisticated, able, and successful business people that they reasonably failed to inquire about their investments and simply relied on the offering circulars and on Steele, Sprague, and ultimately Becker, despite warnings in the offering circulars and explanations by Becker about the limitations of his investigation. In each case, these taxpayers knew or should have known better. We hold, upon consideration of the entire records, that petitioners are liable for the negligence additions to tax under the provisions of section 6653(a)(1) and (2) for the taxable years at issue. Respondent is sustained on this issue.
Respondent determined that petitioners are each liable for the
A graduated addition to tax is imposed when an individual has an underpayment of tax that equals or exceeds $ 1,000 and "is attributable to" a valuation overstatement.
Petitioners claimed tax benefits, including an investment tax credit and a business energy credit, based on purported values of $ 1,162,666 for each Sentinel EPE recycler. Petitioners concede that the fair market value of a Sentinel EPE recycler in 1981 and 1982 was not in excess of $ 50,000. Therefore, if disallowance of petitioners' claimed tax benefits is attributable to such valuation overstatements, petitioners are liable for the
Petitioners argue that
Petitioners argue that the disallowance of the claimed tax benefits was not "attributable to" a valuation overstatement. According to petitioners, the tax benefits were disallowed because the Partnership transactions lacked economic substance, not because of any valuation overstatements. 1996 Tax Ct. Memo LEXIS 418">*496 It follows, petitioners reason, that because the "attributable to" language of
Petitioners' argument rests on the mistaken premise that our holding herein that the Partnership transactions lacked economic substance was separate and independent from the overvaluation of the Sentinel EPE recyclers. To the contrary, in holding that the Partnership transactions lacked economic substance, we relied heavily upon the overvaluation of the recyclers. Overvaluation of the recyclers was an integral factor in regard to: (1) The disallowed tax credits and other benefits in these cases; (2) the underpayments of tax; and (3) 1996 Tax Ct. Memo LEXIS 418">*497 our finding that the Partnership transactions lacked economic substance.
Petitioners argue that in
Moreover, a virtually identical argument was recently rejected in
Petitioners' reliance on
1996 Tax Ct. Memo LEXIS 418">*501
Petitioners argue that their concessions of the deficiencies preclude imposition of the
Petitioners' open-ended concessions do not obviate our finding that the Partnership transactions lacked economic substance due to overvaluation of the recyclers. This is not a situation where we have "to decide difficult valuation questions for no reason other than the application of penalties." See
Moreover, concession of the investment tax credit in and of itself does not relieve taxpayers of liability for the
In the present cases, no argument was made and no evidence was presented to the Court to prove that disallowance and concession of the investment tax credits related to anything other than a valuation overstatement. To the contrary, petitioners each stipulated substantially the same facts concerning the Partnership transactions as we found in
Petitioners' reliance on
1996 Tax Ct. Memo LEXIS 418">*505 We held in
Petitioners argue that respondent erroneously failed to waive the
However, we do not decide this issue solely on petitioners' failure timely to request waivers but, instead, we have considered the issue on its merits.
Petitioners urge that they relied on the respective offering materials and Becker, Steele, and/or Sprague in deciding on the valuation claimed on their tax returns. Petitioners contend that such reliance was reasonable, and, therefore, respondent should have waived the
The offering materials for the Partnerships contained numerous warnings and caveats, including the likelihood that the value placed on the recyclers would be challenged by the IRS as being in excess of fair market value. Further, petitioners' testimony raises doubts as to the extent to which they reviewed the offering memoranda or sought to resolve the numerous issues raised in the memoranda.
Sprague and Becker readily admitted that they possessed no special qualifications or professional skills in the recycling or plastics industries. Steele1996 Tax Ct. Memo LEXIS 418">*508 did not testify, and there is no showing in the records that he possessed any education or experience in plastics materials or plastics recycling. Neither Becker, Steele, nor Sprague ever hired or consulted any plastics engineering or technical experts with respect to the Plastics Recycling transactions. Becker spoke with his client Canno, who apparently had some knowledge of the plastics industry, but the substance of Canno's purported comments is doubtful and he had only minimal information about the transaction. At trial Becker confirmed that in the end he relied exclusively on PI, its personnel, and the offering materials as to the value and purported uniqueness of the machines. Sprague relied on Becker, and Steele assisted Becker.
In support of their contention that they acted reasonably, petitioners cite
We hold that petitioners did not have a reasonable basis for the adjusted bases or valuations claimed on their tax returns with respect to their investments in the Partnerships. In these cases, respondent properly could find that petitioners' respective reliance on the offering materials, Becker, Steele, and/or Sprague was unreasonable. The records in these cases do not establish an abuse of 1996 Tax Ct. Memo LEXIS 418">*510 discretion on the part of respondent but support respondent's position. We hold that respondent's refusal to waive the
Long after the trials of these cases, petitioners in docket Nos. 19760-89, 24512-89, and 10147-91 each filed a Motion For Leave To File Motion for Decision Ordering Relief From the Negligence Penalty and the Penalty Rate of Interest and To File Supporting Memorandum of Law under Rule 50. In addition, they lodged with the Court motions for decision ordering relief from the additions to tax for negligence and from the increased rate of interest, with attachments, and memoranda in support of such motions. Respondent filed objections, with attachments, and memoranda in support thereof and petitioners thereafter filed reply1996 Tax Ct. Memo LEXIS 418">*511 memoranda. Petitioners argue that they should be afforded the same settlement that was reached between other taxpayers and the IRS in
Counsel for petitioners seek to raise a new issue long after the trials in these cases. Resolution of such issue might well require new trials. Such further trials "would be contrary to the established policy of this Court to try all issues raised in a case in one proceeding and to avoid piecemeal and protracted litigation."
Even if petitioners' motions for leave were granted, the arguments set forth in each of petitioners' motions for decision and attached memoranda, lodged with this Court, are without merit and such motions would be denied. Therefore, and for reasons set forth in more detail below, petitioners' motions for leave shall be denied.
Some of our discussion of background circumstances underlying petitioners' motions is drawn from documents submitted by the parties and findings of this Court in two earlier decisions. Such matters are not disputed by the parties. See
On or about February 1988, a settlement offer (the Plastics Recycling project settlement offer or the offer) was made available by respondent in all docketed Plastics Recycling cases, and subsequently in all nondocketed cases.
In December 1988, the
Petitioners argue that they are similarly situated to the taxpayer in the
Petitioners contend that under the principle of "equality," the Commissioner has a duty of consistency toward similarly situated taxpayers and cannot tax one and not tax another without some rational basis for the difference.
The different tax treatment accorded petitioners and Miller was not arbitrary or irrational. While petitioners and Miller1996 Tax Ct. Memo LEXIS 418">*517 both invested in the Plastics Recycling project, their actions with respect to such investments provide a rational basis for treating them differently. Specifically, Miller foreclosed any potential liability for increased interest in his cases by making payment of the tax prior to December 31, 1984; no interest accrued after that date. In contrast, petitioners made no such payment, and they conceded that the increased rate of interest under
Petitioners argue that
We find that petitioners and Miller were treated equally to the extent they were similarly situated, and differently to the extent they were not. Miller foreclosed the applicability of the
To reflect the foregoing,
1. Cases of the following petitioners are consolidated for opinion: Bruce and Lois Zenkel, docket No. 12091-89; Robert G. Blount, docket No. 19760-89; Morton and Carol David, docket No. 24512-89; and Ira and Helen Selvin, docket No. 10147-91. The cases were tried and briefed separately.↩
1. The deficiencies in docket No. 12091-89 for taxable years 1979 and 1980 result from disallowance of investment tax credit carrybacks and business energy credit carrybacks from taxable year 1982.↩
2.
4. In the alternative to the addition to tax under
3. 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence.↩
2.
The following cases concerned the addition to tax for negligence, inter alia:
3. In
In
4. Mr. and Mrs. Zenkel both benefited from the tax deductions and credits from SAB Reclamation on their joint 1982 Federal Income tax return, and together they petitioned this Court in docket No. 12091-89. The testimony of Mrs. Zenkel and Becker shows that Mr. Zenkel was heavily involved in the decision to invest in SAB Reclamation, and his failure to testify does not further his wife's claim that she was an unsophisticated investor. See
5.
6. To the extent that
7. Petitioners' citation of
8. Although the records do not include a settlement offer to petitioners, petitioners have attached to their motions for decision a copy of a settlement offer to another taxpayer with respect to a plastics recycling case, and respondent has not disputed the accuracy of the statement of the plastics recycling settlement offer.↩
9. Although it is not otherwise a part of the record in these cases, respondent attached copies of the