Lewin v. Comm'r

MALCOLM I. LEWIN AND TRINA LEWIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Lewin v. Comm'r

No. 477-95

United States Tax Court

T.C. Memo 2003-305; 2003 Tax Ct. Memo LEXIS 304; 86 T.C.M. (CCH) 532;

November 3, 2003., Filed

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Decision was entered for respondent.

UNITED STATES TAX COURT

Christopher S. Rizek , for petitioners.

   Louise R. Forbes and D. Sean McMahon , for

               respondent.

Dawson, Howard A., Jr.;

Wolfe, Norman H.

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DAWSON; WOLFE

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge : This case was assigned to Special Trial Judge Norman H. Wolfe pursuant to the provisions of section 7443A(b)(4) in effect when these proceedings commenced and Rules 180, 181, and 183. Unless otherwise indicated, section references are to the Internal Revenue Code in effect at relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

         OPINION OF THE SPECIAL TRIAL JUDGE

WOLFE, Special Trial Judge : In a so-called affected items notice of deficiency, respondent determined additions to tax with respect to petitioners' 1982 Federal income tax of $ 6,006 under section 6659 for valuation overstatement, $ 1,237 under section 6653(a)(1) for negligence, and under section 6653(a)(2) in an amount equal to 50 percent of the interest due on $ 24,747, the amount of the underpayment attributable to negligence. The underpayment was determined pursuant to a partnership-level proceeding. See secs. 6221-6233. After concessions, ¹ there are two issues remaining for decision. The first issue is whether petitioners are liable for the additions to tax under the provisions of section 6653(a)(1) and (2) for negligence or intentional disregard of rules or regulations. We hold that they are liable for these additions to tax. The second issue is whether petitioners are entitled to the benefits of a settlement offer that was made available to some other taxpayers. We hold that they are not entitled to the benefits of that settlement offer.

             FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulated facts and the attached exhibits are incorporated by this reference. ² Petitioners resided in North Caldwell, New Jersey, at the time they filed the petition in this case.

A. The Plastics Recycling Transaction

This case is part of the Plastics Recycling group of cases. The issues in this group of cases center about a circular multistep transaction involving the sale and lease of machines designed to recycle plastic scrap. The additions to tax arise from the disallowance of losses, investment credits, and energy credits petitioners claimed with respect to a New York limited partnership called SAB Foam Recycling Associates (SAB Foam).

For a detailed discussion of the transactions involved in the Plastics Recycling cases, see Provizer v. Commissioner, T.C. Memo 1992-177">T.C. Memo. 1992-177, affd. per curiam without published opinion 996 F. 2d 1216 (6th Cir. 1993). The parties have stipulated that the underlying transactions involving the recycling machines (recyclers) in this case are substantially similar to the transactions involving the Sentinel polyethylene (EPE) recyclers considered in Provizer and the Sentinel polystyrene (EPS) recyclers considered in Gottsegen v. Commissioner, T.C. Memo 1997-314">T.C. Memo. 1997-314.

In a series of simultaneous transactions that for convenience are referred to herein as the SAB Foam transactions, Packaging Industries Group, Inc. (PI), of Hyannis, Massachusetts, manufactured and sold ³ four EPS ⁴ recyclers to Ethynol Cogeneration, Inc. (ECI), for $ 6,080,000 ($ 1,520,000 per machine). ECI agreed to pay PI $ 451,000 for the four recyclers at the closing, with the balance of $ 5,629,000 financed through a 12-year nonrecourse promissory note (ECI note). Each monthly installment on the ECI note was $ 81,250.

Simultaneously, ECI resold the recyclers to F&G Equipment Corp. (F&G) for $ 7 million. F&G agreed to pay ECI $ 513,000 at the closing, with the balance of $ 6,487,000 financed through a purportedly partial recourse promissory note (F&G note). The F&G note was recourse against F&G to the extent of 20 percent of its face value. However, the recourse portion was payable only after F&G satisfied the nonrecourse portion of the note. Each monthly installment on the F&G note was $ 81,250. In turn, F&G leased the recyclers to SAB Foam for a monthly base rent of $ 81,250. Pursuant to the lease and in accordance with applicable provisions of the Internal Revenue Code and the Treasury regulations, F&G elected to treat SAB Foam as having purchased the recyclers for purposes of the investment and business energy tax credits.

Simultaneously, SAB Foam entered into a joint venture with PI and Resin Recyclers, Inc. (RRI). The joint venture agreement provided that RRI was to assist SAB Foam with the placement of recyclers with end-users and that PI was to pay a monthly joint venture fee to SAB Foam of $ 81,250.

In connection with the SAB Foam transactions, therefore, the arrangement was that PI would pay a monthly joint venture fee to SAB Foam, in the same amount that SAB Foam would pay monthly to F&G as rent, in the same amount that F&G would pay monthly to ECI on the F&G note, in the same amount that ECI would pay monthly to PI on the ECI note. In connection with these arrangements by PI, ECI, F&G, SAB Foam, and RRI, these monthly payments were offsetting, so they could be kept as bookkeeping entries with no money actually changing hands.

On its 1982 Form 1065, U.S. Partnership Return of Income, SAB Foam reported that the four recyclers had an aggregate basis of $ 7 million, or $ 1,750,000 each, for purposes of the investment and business energy tax credits. In the present case, the undisputed evidence, including the stipulation of the parties, establishes that the recyclers were not properly valued at $ 1,750,000 but instead had a maximum value of $ 30,000 to $ 50,000 each. SAB Foam reported a net ordinary loss of $ 662,556. SAB Foam included the portion of credits and losses attributed to petitioners on the Schedule K-1, Shareholder's Share of Income, Credits, Deductions, Etc., issued to petitioners and filed with SAB Foam's partnership tax return.

B. Private Offering Memorandum

The private offering memorandum (memorandum) that generally was distributed to potential investors contemplated the creation of SAB Foam. SAB Management, Ltd. (SAB Management), a New York corporation, was SAB Foam's general partner, its tax matters partner (TMP), and a 1-percent owner. The limited partners, or investors, owned the remaining 99 percent of SAB Foam.

The memorandum informed investors that the business of SAB Foam would be conducted in accordance with the transaction described above. The memorandum warned potential investors of significant business and tax risk factors associated with investments in SAB Foam. The memorandum was replete with warnings. In bold capital letters, the memorandum unequivocally stated: "THIS OFFERING INVOLVES A HIGH DEGREE OF RISK" .

Specifically, the memorandum warned potential investors that: (1) There was a substantial likelihood of audit by the Internal Revenue Service (IRS); (2) "On audit, the purchase price of the Sentinel EPS recyclers to be paid by F&G to ECI may be challenged by the * * * [IRS] as being in excess of the fair market value thereof, a practice followed by * * * [the IRS] in transactions it deems to be 'tax shelters'. Such purchase price is the basis for computing the regular investment and energy tax credits to be claimed by * * * [SAB Foam and ultimately by its partners]"; (3) the partnership had no prior operating history; (4) the general partner had limited experience in marketing recycling or similar equipment; (5) the limited partners would have no control over the conduct of the partnership's business; (6) there was no established market for the sale, leasing, or licensing of Sentinel EPS Recyclers; and (7) certain potential conflicts of interest existed.

The memorandum projected that in the initial year of investment an investor contributing $ 50,000 for one unit would receive total investment tax credits and business energy credits of $ 81,529 plus tax deductions of $ 38,768. The memorandum stated that an investor in SAB Foam was required to have an individual net worth and/ or net worth with a spouse of $ 1 million, inclusive of residences and personal property, or income of $ 200,000 per year for each unit of investment.

The memorandum included a marketing report by Stanley Ulanoff (Ulanoff), a marketing consultant and professor, and a technical opinion by Samuel Z. Burstein (Burstein), a mathematics professor. The memorandum warned investors not to rely on the statements and opinions contained in the memorandum but to conduct an independent investigation.

The memorandum included a Form of Opinion of Counsel (tax opinion) prepared by Boylan & Evans, a New York law firm. The tax opinion, addressed only to the general partner, included in the first paragraph the following disclaimer:

   We have consented to your inclusion of the proposed

   form of this letter in the Memorandum, but this letter

   is intended for your own individual guidance and for

   the purpose of assisting prospective purchasers and

   their tax advisors in making their own analysis, and no

   prospective purchaser is entitled to rely upon this

   letter.

The tax opinion expressly warned that the investment and energy tax credits available to limited partners would be reduced or eliminated if the partnership could not demonstrate that the price paid for the recyclers approximated their fair market value. The tax opinion did not purport to rely on any independent confirmation of the fair market value of the recyclers. Instead, the tax opinion clearly relied on Ulanoff's conclusion that the purchase price to be paid by F&G was fair and reasonable. The tax opinion also states: "PI, ECI, F&G, and the Partnership have represented to us that the prices paid by ECI and by F&G and the terms of the Lease were negotiated at arm's length." The tax opinion concludes that the basis to the partnership upon which the aggregate investment and energy tax credits are to be computed is the price paid by F&G for the recyclers.

C. Individuals Involved

Malcolm I. Lewin (petitioner) graduated from the City College of New York and graduated from New York University Law School in 1966. In 1967, petitioner came to work for Miller & Summit, a New York law firm, as the two-partner partnership's only associate. Elliot Miller (Miller) was one of the partners. Petitioner worked primarily on corporate and transactional matters. He was employed by Miller & Summit for about 4 years. During that time, he performed a variety of professional services for PI, which was a major client for Miller. On many occasions he visited the premises of PI, which then were located in New Jersey and under different ownership than in 1982. After his employment by Miller & Summit ended in 1971, petitioner joined the New York law firm of Lans, Feinberg, & Cohen (LFC). Thereafter, petitioner only rarely spoke with Miller.

Miller was one of the key figures in the Plastics Recycling transactions and an acquaintance of Stuart Becker (Becker). Miller was the corporate counsel to PI for many years and was a 9.1- percent shareholder of F&G. He also represented F&G, Burstein, and Raymond Grant, who was the sole shareholder of ECI. Miller practiced law from 1958 to the present, primarily in the area of business and tax transactions and litigation. For some years he practiced as a partner in the firm of Miller & Summit.

Robert S. Cohen (Cohen) received his B.A. degree from Alford University and his J. D. degree from Fordham University. After graduating from law school in 1962, Cohen enlisted in the military and was released from active duty as a first lieutenant. He then worked for a law firm in New York until he formed LFC in 1968. In practice he was primarily a commercial litigator until the early eighties, when New York passed an equitable distribution law with respect to divorce. Then he concentrated his practice on family law.

Becker organized and promoted SAB Foam. Becker was the sole shareholder of Scanbo Management, Ltd. (Scanbo), which wholly owned SAB Management. Becker served as the president of SAB Management and principal of Stuart Becker & Co., P. C. (Becker Co.), an accounting firm that emphasized tax matters. He does not have an engineering background, and he is not an expert in plastics materials or plastics recycling.

In his practice Becker specialized in tax matters generally and particularly in tax-advantaged investments, so he had considerable experience involving so-called tax shelter transactions. Becker received his B. S. degree in accounting from New York University in 1964 and an M.B.A. in taxation from 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 for achieving the highest score on the examination for the year. Since early 1966, Becker has practiced as an accountant 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. (Eisner Co.) as the partner in charge of the tax department. In 1977, he was the founder and principal owner of Becker Co. Becker learned of the Plastics Recycling transactions in 1981 when a prospective client presented him with an offering memorandum concerning one of the transactions. Subsequently he organized limited partnerships to offer the Plastics Recycling transaction to his clients and others.

Cohen had met Becker through his relationship with Richard Eisner, Becker's partner at Eisner Co., and through his stepbrothers, who were Becker's clients. Cohen retained Becker on several occasions as an accounting expert. In turn, Becker retained Cohen and LFC on various legal matters, including his own divorce.

H. Robert Feinberg (Feinberg) attended New York University School of Commerce, Accounts & Finance on a university scholarship and graduated in 3-

Feinberg met Becker through Cohen and developed a professional relationship with him. This relationship included referrals between LFC and Becker Co., as well as personal matters. Feinberg considered Becker a very bright and sophisticated accountant. Becker retained Feinberg to protect his interests as a promoter of SAB Foam. Becker did not employ Feinberg to represent the partnership but to advise him for his own protection. Petitioner did not know Becker personally but rather knew of him from his relationship with both Cohen and Feinberg.

Herbert Dooskin (Dooskin) received a B.A. in economics from City College of New York and an M.B.A. from Baruch College. He began his career as a financial accountant in 1962 with Alexander Grant & Co. (Alexander Grant), an accounting firm currently known as Grant Thornton. He became a partner in 1970, and when he left the firm in 1986 for employment by a client, Dooskin was the managing partner of the New York office and chairman of the firm's executive committee. Dooskin was primarily an auditor and was not a tax accountant. Dooskin had met petitioner when they were in college, and they served together in the Army. In 1982, petitioner brought the memorandum to Dooskin for review. Dooskin passed the memorandum on to Ronald Sacco (Sacco), a tax professional at Alexander Grant, for review. According to Dooskin, Sacco's view was that the investment and the economics of the deal were "dependent upon the valuation of the equipment". After Dooskin and Sacco each spent about 3 hours reviewing the matter, Dooskin concluded that the proposal "looked like a legitimate business, * * * compressing plastic, and that it was better than most". Neither Dooskin nor Sacco performed an independent analysis of the valuation of the recyclers. All of Dooskin's and Sacco's information relating to the valuation of the recyclers came from either petitioner or the memorandum. Dooskin made no separate charge to petitioner for the few hours he and his associate spent examining the memorandum.

D. Partnership-Level Litigation

On August 15, 1988, respondent issued a notice of proposed adjustments to tax return to SAB Foam for 1982 and 1983. On September 28, 1988, Robert L. Steele, a tax partner with Becker Co., submitted a protest letter (protest letter) to respondent on behalf of SAB Management. The protest letter included the following statement:

   We hereby agree to follow the Tax Court's decision in the

   lead cases selected in accordance with the Order of

   June 12, 1987, such cases being:

     1. Elliot I. Miller, Petitioner v.

     Commissioner of Internal Revenue, Respondent,

     Docket No. 10382-86

     2. Elliot I. Miller and Myra K. Miller, Petitioner v.

      Commissioner of Internal Revenue, Respondent, Docket

     No. 10383-86

     3. *Leo Fine and Judith H. Fine, Petitioners v.

     Commissioner of Internal Revenue, Respondent, Docket

     No. 35437-85

              * * * * * * *

* New controlling case:

     Harold M. Provizer and Joan Provizer, Petitioners v.

     Commissioner of Internal Revenue, Respondent, Docket

     No. 27141-86.

On January 20, 1989, on behalf of SAB Foam, Becker submitted the following notice to respondent:

   In our protest dated September 28, 1988, we stated that the

   Partnership agreed to be bound by the lead cases (Fine, Miller

   and Miller).

   Due to various changes in circumstances including but not

   limited to a settlement of all such then pending lead cases, the

   Partnership hereby withdraws its statement to be bound by such

   cases or any other case.

Becker mailed this notice by certified mail, return receipt requested, and signed it "Stuart Becker, Tax Matters Partner".

On December 9, 1991, respondent issued a notice of final partnership administrative adjustment (FPAA) to SAB Management for 1982. In the FPAA, respondent disallowed all items of income, losses, deductions, and credits reported with respect to SAB Foam's equipment leasing activities for 1982. Accordingly, respondent: (1) Increased ordinary income by $ 662,556; (2) determined that SAB Foam's investment and business energy tax credits with respect to the recycling equipment were zero, instead of the $ 7 million claimed as the qualified investment on the partnership tax return; and (3) increased SAB Foam's "other income" by $ 5,626.

Subsequently, SAB Foam's TMP filed a petition with the Court. On September 7, 1993, the Court entered a decision in SAB Foam Recycling Associates 1982 v. Commissioner, docket No. 5103- 92. This decision reflected a full concession by SAB Foam of all items of income (loss) and credit previously claimed for the partnership.

E. Petitioners' Introduction to Plastics Recycling

In 1981 and 1982, petitioner, Cohen, and Feinberg were partners in LFC. In 1981, Feinberg approached petitioner about SAB Resource Recycling Associates (SAB Resource), a limited partnership structured substantially like SAB Foam. Petitioner explained to Feinberg his alleged familiarity with PI and suggested Miller as a resource for more information. He then talked with Miller about the transaction. Miller reminded petitioner of his experience with PI but never specifically discussed the value of the machines with petitioner. Instead, Miller stated to petitioner that valuations were done on the recyclers and that as to the people who did the valuations, "he knew them, they were qualified, they appeared to be qualified".

Petitioner next sought the advice of his friend Dooskin. According to petitioner, Dooskin and his associate Sacco reported favorably on the memorandum. Petitioner claimed 20 years later that he remembered Dooskin's saying "that they had reviewed a lot of deals in this time and this was certainly a lot better than many, if not most, of those they had looked at". They added, according to petitioner, "that the issue of the value that was assigned to the machines was something to look at more carefully."

After discussing the investment with Miller and Dooskin, and then further with Cohen and Feinberg, petitioner was ready to invest in SAB Resource. When petitioner tried to invest in SAB Resource, however, Feinberg informed him that the investment opportunity had closed.

On January 14, 1982, the limited partners of SAB Resource, including Cohen and Feinberg, received a letter from SAB Management, the general partner of SAB Resource. The letter, signed by Becker, stated that the transaction contemplated by SAB Resource was complete and distributed a modest initial royalty. On June 7, 1982, SAB Management sent a memo to the limited partners purporting to update the status of their investment in SAB Resource.

In 1982, Feinberg again approached petitioner with an investment opportunity. This time the proposal related to SAB Foam. Petitioner again forwarded the memorandum to Dooskin, who gave the same response that he had given concerning SAB Resource. Petitioner discussed the initial results of the SAB Resource transactions with Feinberg, saw the letters of January 14 and June 7, and invested in SAB Foam.

According to the Schedule K-1 issued by SAB Foam to petitioners for 1982 and reflected on petitioners' 1982 Federal income tax return, petitioners invested $ 12,500 and acquired a 1.455882-percent limited partnership interest in SAB Foam's profits, losses, and capital. On their 1982 tax return, petitioners claimed an ordinary loss of $ 9,646 from SAB Foam and an investment and energy tax credit of $ 20,021. Petitioners had no experience with the plastics materials or the plastics recycling industry.

                OPINION

We have decided many Plastics Recycling cases. Most of these cases, like the present case, have presented issues regarding additions to tax for negligence. See, e.g., Weitzman v. Comm'r, T.C. Memo. 2001-215; Thornsjo v. Comm'r, T.C. Memo 2001-129">T.C. Memo. 2001-129; West v. Commissioner, T.C. Memo. 2000-389; Barber v. Commissioner, T.C. Memo 2000- 372; Barlow v. Commissioner, T.C. Memo. 2000-339, affd. 301 F. 3d 714 (6th Cir. 2002); Ulanoff v. Commissioner, T.C. Memo 1999-170">T.C. Memo. 1999-170; Merino v. Commissioner, T.C. Memo. 1997-385, affd. 196 F. 3d 147, 151-155 (3d Cir. 1999); Greene v. Commissioner, T.C. Memo. 1997-296; Kaliban v. Commissioner, T.C. Memo 1997-271">T.C. Memo. 1997-271; Sann v. Commissioner, T.C. Memo. 1997-259 n. 13 (and cases cited therein), affd. sub nom. Addington v. Commissioner, 205 F. 3d 54 (2d Cir. 2000).Although we have considered each case on its own particular facts and circumstances, in all but two of the Plastics Recycling cases ⁵ we found the taxpayers liable for the additions to tax for negligence.

In Provizer v. Commissioner, T.C. Memo. 1992-177, the test case for the group of cases, we resolved the Plastics Recycling issues as follows: (1) We found that each recycler had a fair market value of not more than $ 50,000; (2) we held that the transaction, which was virtually identical to the transaction in the present case, was a sham because it lacked economic substance and a business purpose; (3) we sustained the additions to tax for negligence under section 6653(a)(1) and (2); (4) we sustained the addition to tax for valuation overstatement under section 6659 because the underpayment of taxes related directly to the overvaluation of the recyclers; and (5) we held that the partnership losses and tax credits claimed with respect to the Plastics Recycling partnership at issue were attributable to tax-motivated transactions within the meaning of section 6621(c). We also found that other recyclers were commercially available during the years in issue. See id. In reaching the conclusion that the transaction lacked a business purpose, this Court relied heavily upon the overvaluation of the recyclers. Similarly, in Gottsegen v. Commissioner, T.C. Memo. 1997-314, we found that each EPS recycler had a fair market value of not more than $ 50,000 and relied heavily on the overvaluation of the recyclers in concluding that the taxpayer was negligent and liable for accuracy-related penalties. See Addington v. Commissioner, supra.

Issue 1. Section 6653(a)(1) and (2) Additions to Tax for Negligence

Section 6653(a)(1) provides for an addition to tax equal to 5 percent of the underpayment if any part of the underpayment of tax is due to negligence or intentional disregard of rules or regulations. Section 6653(a)(2) provides for 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 exercise under the circumstances. See Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947-948 (1985). The pertinent question is whether a particular taxpayer's actions are reasonable in light of the taxpayer's experience, the nature of the investment, and the taxpayer's actions in connection with the transactions. See Henry Schwartz Corp. v. Commissioner, 60 T.C. 728">60 T.C. 728, 740 (1973); see also Turner v. Commissioner, T.C. Memo. 1995-363 (" When considering the negligence addition, we evaluate the particular facts of each case, judging the relative sophistication of the taxpayers as well as the manner in which the taxpayers approached their investment."). The determination of negligence is highly factual. See Merino v. Comm'r, 196 F. 3d at 151, 154.

Respondent determined that petitioners are liable for negligence under section 6653(a)(1) and (2) with respect to the underpayment of tax attributable to petitioners' investment in SAB Foam. Respondent's determination of negligence is presumed correct, and petitioners have the burden of proving that they were not negligent. See Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933); see also Addington v. Commissioner, supra; Merino v. Commissioner, 196 F. 3d 147 (3d Cir. 1999); Goldman v. Commissioner, 39 F. 3d 402, 407 (2d Cir. 1994), affg. T.C. Memo. 1993-480; Luman v. Comm'r, 79 T.C. 846">79 T.C. 846, 860-861 (1982); Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 791-792 (1972). ⁶

A taxpayer may avoid liability for negligence under section 6653(a)(1) and (2) if he or she reasonably relied on competent professional advice. United States v. Boyle, 469 U.S. 241">469 U.S. 241, 250-251, 83 L. Ed. 2d 622">83 L. Ed. 2d 622, 105 S. Ct. 687">105 S. Ct. 687 (1985); Freytag v. Commissioner, 89 T.C. 849">89 T.C. 849, 888 (1987), affd. 904 F. 2d 1011 (5th Cir. 1990), affd. 501 U.S. 868">501 U.S. 868, 115 L. Ed. 2d 764">115 L. Ed. 2d 764, 111 S. Ct. 2631">111 S. Ct. 2631 (1991). Reliance on professional advice, standing alone, is not an absolute defense to negligence but rather a factor to be considered. Freytag v. Commissioner, supra.For reliance on professional advice to excuse a taxpayer from the negligence additions to tax, the taxpayer must show that the professional had the expertise and knowledge of the pertinent facts to provide informed advice on the subject matter. David v. Commissioner, 43 F. 3d 788, 789-790 (2d Cir. 1995), affg. T.C. Memo. 1993-621; Goldman v. Commissioner, supra at 408; see Freytag v. Commissioner, supra; Sann v. Commissioner, T.C. Memo 1997-259">T.C. Memo. 1997-259.

Reliance on representations by insiders, promoters, or offering materials has been held an inadequate defense to negligence. Goldman v. Commissioner, supra; Sann v. Comm'r, supra; see Berry v. Comm'r, T.C. Memo. 2001-311; Carroll v. Commissioner, T.C. Memo. 2000-184. Pleas of reliance have been rejected when neither the taxpayer nor the advisers purportedly relied upon by the taxpayer knew anything about the nontax business aspects of the contemplated venture. See David v. Comm'r, supra; Goldman v. Commissioner, supra.

Petitioners primarily contend that they were not negligent because they reasonably relied on the memorandum and their advisers. Petitioners had no education or experience in plastics materials or plastics recycling, nor had they seen a Sentinel EPS recycler, when they invested in SAB Foam. Moreover, they did not consult with anyone who had such expertise in plastics or plastics recycling.

As an associate for Miller & Summit, petitioner may have learned about business practices of PI long ago, but that in no way establishes him as an authority about PI or the plastics industry. When petitioner was employed by Miller & Summit and was assigned work for PI, that company was located in New Jersey under different ownership and had not yet manufactured any recyclers. By the time of the transactions in issue, PI had moved to Hyannis, Massachusetts. Nothing in the record establishes that petitioner had any special knowledge about PI or its business in 1981-82. Petitioner's knowledge of SAB Foam, rather, is derived primarily from the memorandum and Miller.

The memorandum was essentially a sales-oriented document, and it contained numerous warnings that prospective investors should not rely on it. Petitioners' advisers either lacked knowledge about the subject of the proposed investment or were part of the sales group and therefore inherently and obviously unreliable. Under the circumstances of this case petitioners' purported reliance on the materials in the memorandum, as well as their advisers, does not relieve them of liability for the additions to tax for negligence. Petitioners argue that they are different from the numerous other investors who have negligently speculated on the Plastics Recycling deal because they or their friends had a special relationship with Miller or Becker. As explained below, we consider this argument to be contrary to the facts of this case and wholly unpersuasive.

A. The Memorandum and Petitioners' Colleagues

1. The Memorandum

Petitioner contends that before purchasing shares in SAB Foam he read the memorandum and its accompanying materials. The purported value of the recyclers is what generated the deductions and credits. The memorandum clearly reflects this circumstance. The recyclers, which in fact have a value of no more than $ 50,000 each, were reported by SAB Foam to have a basis of $ 1,750,000 each. As a result of the purported value of the recyclers, petitioners' investment of $ 12,500 produced for them on their 1982 tax return claimed tax credits of $ 20,021 and deductions of $ 9,646. The direct benefits claimed on petitioners' tax return, from the tax credits alone, far exceeded their cash investment. Like the taxpayers in Provizer v. Commissioner, T.C. Memo 1992-177">T.C. Memo. 1992-177, "except for a few weeks at the beginning, petitioners never had any money in the deal." Under these circumstances, a reasonably prudent person would have asked a qualified adviser whether such a windfall were not "too good to be true." See McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827, 850 (1989).

The memorandum included numerous caveats and warnings regarding the business and tax risks of SAB Foam. It stated that the offering involved a high degree of risk and that each offeree should consult his own professional advisers as to legal, tax, accounting, and other matters relating to any purchase of any units in the partnership. A careful consideration of the memorandum, and the discussion of high writeoffs and risk of audit, would have alerted a prudent investor to question the nature of the promised tax benefits.

Moreover, the tax opinion made clear that there was no independent evaluation of the SAB Foam transactions. The opinion indicated that Boylan & Evans relied on the statements of the general partner and "other statements of fact and opinion furnished to us by persons familiar with the transaction described in the Memorandum." Boylan & Evans clearly based its conclusion about the fair market value of the recyclers on the assumption that the parties to the transactions had negotiated prices at arm's length. In light of the close relationships existing among the parties to the SAB Foam transactions and the enormous price paid for the recyclers (largely with nonrecourse notes exchanged in a plainly circular transaction), petitioners should have questioned whether the prices were in fact negotiated at arm's length. Under these circumstances, petitioners' claim that they reasonably and in good faith relied on the tax opinion is unconvincing. A sophisticated, experienced, and intelligent lawyer like petitioner would know, or at least should know, better than to rely blindly upon a document with the warnings and defects of the memorandum.

Petitioners' contention that they reasonably relied on the expert opinions of Ulanoff and Burstein is unjustified. Neither Ulanoff nor Burstein was an expert in plastics or plastics recycling, and both relied on information provided by PI and other parties related to the transaction in providing their reports. In addition, Ulanoff and Burstein each owned an interest in at least one partnership that owned recyclers as part of the Plastics Recycling program. See, e.g., Jaroff v. Comm'r, T.C. Memo 1996- 527. Petitioners did not independently obtain these individuals' advice but rather received their reports as part of the promotional material received from SAB Foam. Reliance on the memorandum, and the reports therein, is simply an inadequate defense for petitioners. Given the well-disclosed fact that the investment and energy tax credits generated by SAB Foam depended on the fair market value of the recyclers, petitioner should have made inquiries about the value of the recyclers rather than merely relying on the promotional reports of Ulanoff and Burstein and any discussions he may have had with Miller or Dooskin.

2. Miller

Petitioner also contends that he reasonably relied on Miller. When approached by petitioner with respect to the offering memorandum for SAB Resource and later as to the memorandum for SAB Foam, Miller was supportive of the investment. With regard to the value of the recyclers, Miller was supportive of the expert reports by Ulanoff and Burstein. The memorandum disclosed that Miller was a 9.1-percent shareholder of F&G, was corporate counsel to PI, and represented Raymond Grant, the sole shareholder of ECI. The memorandum also noted that "Miller [would] receive substantial additional compensation for representing PI in connection with this transaction." Not surprisingly, Miller was supportive of SAB Foam.

Nothing in the record suggests that Miller had any expertise or knowledge with respect to plastics or plastics recycling, or that petitioners believed he had any such knowledge or expertise. There is also no showing that petitioner had any special or enduring friendship with Miller, despite petitioner's contrary argument. Miller's testimony indicates that during the time in issue he had only a tenuous acquaintance with petitioner. Miller specifically stated that after petitioner ceased working for him, 10 years before the investment in issue, Miller saw petitioner only rarely. Given the extent to which Miller was immersed in the plastics recycling partnerships, how much he stood to benefit financially, and his lack of expertise regarding plastics materials and plastics recycling, we do not consider petitioners' purported reliance on Miller reasonable or in good faith. "It is unreasonable for taxpayers to rely on the advice of someone who they should know has a conflict of interest." Addington v. Commissioner, 205 F. 3d at 59. See Vojticek v. Commissioner, T.C. Memo. 1995-444, to the effect that advice from such persons "is better classified as sales promotion."

3. Becker

Petitioner also contends that through his partners, Cohen and Feinberg, he had a special relationship with Becker and therefore was entitled to rely upon Becker as the accountant's other clients were not. Most of petitioner's interaction with Becker was indirect and through his partners.

At the outset the Court noted that Becker was on petitioner's witness list, but that petitioners' counsel had decided not to call him. The Court questioned counsel in this matter because of petitioner's specific reliance on his relationship with Becker. However, petitioners' obviously well-prepared and capable counsel adhered to his decision not to call upon Becker concerning the supposedly special relationship but, instead, to rely upon Becker's extensive testimony in the Jaroff case. ⁷ See Bresler v. Commissioner, 65 T.C. 182">65 T.C. 182, 188 (1975), Pollack v. Commissioner, 47 T.C. 92">47 T.C. 92, 108 (1966), affd. 392 F. 2d 409 (5th Cir. 1968), and Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158, 1165 (1946), affd. 162 F. 2d 513 (10th Cir. 1947), to the effect that the failure of a party to offer available testimony gives rise to the inference that it would have been unfavorable to his contention. Accordingly, we review Becker's testimony in the Jaroff case below and consider the extent of his expertise and the likelihood that he gave special assurances or guarantees to petitioner or petitioner's partners.

Becker had no education, special qualifications, or professional skills in plastics engineering, plastics recycling, or plastics materials. In evaluating the Plastics Recycling transactions and organizing the SAB recycling partnerships, Becker supposedly relied upon: (1) The memorandum and the accompanying materials; (2) a tour of the PI facility in Hyannis; (3) discussions with insiders to the transactions; (4) Michael Canno (Canno), a client of Becker Co.; 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. The only independent person having any connection with the plastics industry with whom Becker spoke was Canno. Canno was part owner and the production manager of Equitable Bag Co., a manufacturer of paper and plastic bags. Becker spoke to Canno about the recyclers and PI, but he did not hire or pay him for any advice. Canno did not visit the PI plant in Hyannis, see or test a recycler, or see or test any of the output from a recycler or the recycled resin pellets after further processing. According to Becker, Canno endorsed the Plastics Recycling transactions after reviewing the memorandum. When asked whether Canno had performed any type of comparables analysis, Becker replied: "I don't know what Mr. Canno did."

Becker visited the PI plant in Hyannis, toured the facility, viewed a recycler in operation, and saw products that were produced from recycled plastic. Becker claims that PI personnel told him that the recycler was the only machine of its type. In fact, the recycler was not unique; instead, as we have found in many cases involving substantially similar machines, several comparable machines were available in 1981 and 1982 ranging in price from $ 20,000 to $ 200,000. See, e.g., Provizer v. Commissioner, T.C. Memo 1992-177">T.C. Memo. 1992-177.

Becker was also told that PI had put an enormous amount of research and development (i.e., 10 to 12 years' worth) into the creation and production of the recyclers. When he asked to see the cost records for some kind of independent verification, however, his request was denied. Becker was informed that such information was proprietary and secret, and that he would just have to take PI's representations as true. Becker decided to accept PI's representations after speaking with Miller (corporate counsel to PI), Canno (who had never been to PI's plant or seen a recycler), and a surrogate judge from Rhode Island who did business in the Boston-Cape Cod area (and who had no experience in engineering or plastics materials). Becker testified that he was allowed to see PI's internal accounting controls regarding the allocation of royalty payments and PI's record-keeping system in general. In Provizer v. Comm'r, supra, though, this Court found that "PI had no cost accounting system or records."

Becker confirmed in his testimony that he relied on the memorandum and discussions with PI personnel to establish the value and purported uniqueness of the recyclers. Becker testified that he relied upon the reports of Ulanoff and Burstein contained in the offering materials, despite the fact that: (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.

Becker further explained in his testimony that in the course of his practice when evaluating prospective investments for clients, he focuses on the economics of the transaction and investigates whether there is a need or market for the product or service. The records indicate, though, that Becker overlooked several red flags regarding the economic viability of and market for the recyclers. The memorandum warned that there was no established market for the recyclers. Becker never saw any marketing plans for selling the pellets (the product of the recyclers) or leasing the recyclers. He accepted representations by PI personnel that they would be marketing the recyclers to clients and that there was a sufficient base of end-users for the machines; yet he never saw PI's client list. At the time of the closing of the various partnerships, Becker did not know who the end-users were or whether there were any end- users actually committed to the transaction.

Becker purportedly checked the price of the pellets by reading trade journals of the plastics industry. He did not, however, use those same journals to investigate the recyclers' purported value. In concluding that the SAB partnerships would be economically profitable, Becker made two assumptions that he concedes were unsupported by any hard data: (1) That there was a market for the pellets, and (2) that market demand for them would increase.

Becker had a financial interest in the SAB recycling partnerships generally. Directly or indirectly he received fees of more than $ 500,000 with respect to the SAB recycling partnerships. Becker also received fees for investment advice from some individual investors and from the SAB recycling partnerships for preparing their partnership returns. As Becker himself indicated in his testimony, potential investors could not have read the memorandum and remained ignorant of the financial benefits accruing to him.

Petitioner is a very well-educated and highly accomplished and sophisticated attorney. Without question, he possessed the intellect, skills, experience, and resources to have the viability of the SAB Foam transactions thoroughly investigated either by himself or by an independent qualified expert. Petitioners claim that they relied on Becker, known through Cohen and Feinberg, for the bona fides and viability of the SAB Foam transactions. Yet Becker's expertise was in taxation, not plastics materials or plastics recycling, and his investigation and analysis of the Plastics Recycling transactions reflected this circumstance. Moreover, Becker indicated that he was careful not to mislead any of his clients regarding the particulars of his limited investigation. As he put it: "I don't recall saying to a client I did due diligence * * * [Rather,] I told [my clients] precisely what I had done to investigate or analyze the transaction. I didn't just say I did due diligence, and leave it open for them to define what I might or might not have done."

The purported value of the recyclers generated the deductions and credits in this case, and that circumstance was clearly reflected in the memorandum. Certainly Becker recognized the nature of the tax benefits and, given his education and experience, petitioner should have recognized it as well. Yet petitioner, Cohen, Feinberg, and Becker neglected to verify the purported value of the recyclers. Becker confirmed in his testimony incorporated in this record by stipulation that he relied on PI for the value of the recyclers. An investor as sophisticated as petitioner either learned or should have learned the source and shortcomings of Becker's valuation information when he reported to them and "precisely" disclosed "what [he] had done to investigate or analyze the transaction." Accordingly, we hold that petitioners did not in good faith or reasonably rely on Becker as an expert or qualified professional working in the area of his expertise to establish the fair market value of the recyclers and the viability or bona fides of the SAB Foam transactions. Becker never assumed such responsibility, and he fully described the particulars of his investigation, taking care not to mischaracterize it as "due diligence".

In the end, petitioners indirectly and Becker directly relied upon PI personnel for the value of the recyclers and the economic viability of the SAB Foam transactions. See Vojticek v. Commissioner, T.C. Memo. 1995-444, to the effect that advice from such persons "is better classified as sales promotion." As explained above, Becker did not have any education, special qualifications, or professional skills in plastics materials or plastics recycling. A taxpayer may rely upon his adviser's advice and expertise (in this case accounting and tax advice) only where such reliance is objectively reasonable, but it is not reasonable or prudent to rely upon a tax adviser regarding matters outside his field of expertise or with respect to facts that he does not verify. See Addington v. Commissioner, 205 F. 3d at 58; Goldman v. Commissioner, 39 F. 3d at 408; Skeen v. Commissioner, 864 F. 2d 93 (9th Cir. 1989), affg. Patin v. Commissioner, 88 T.C. 1086">88 T.C. 1086 (1987); Lax v. Commissioner, T.C. Memo 1994-329">T.C. Memo. 1994-329, affd. 72 F.3d 123">72 F.3d 123 (3d Cir. 1995); Rogers v. Commissioner, T.C. Memo 1990-619">T.C. Memo. 1990-619.

4. Cohen and Feinberg

Petitioner also relied upon his partners Cohen and Feinberg. ⁸ Cohen's knowledge of the SAB Foam transactions was derived from his review of the memorandum and his discussions with Becker. Cohen testified that Becker told him he could rely on the valuations attached to the memorandum. ⁹ Feinberg's knowledge of the SAB Foam transactions was also derived from his review of the memorandum and his discussions with Becker. After Becker retained Feinberg to protect Becker's interests as general partner of SAB Foam, Feinberg instructed Becker to verify the information in the memorandum, including the valuations, and according to Feinberg, Becker complied. ¹⁰ We already have established, though, that petitioners may not reasonably rely on Becker's advice. Since Cohen and Feinberg themselves lacked the expertise and knowledge of the pertinent facts to provide informed advice to petitioner, any advice they gave petitioner about SAB Foam plainly was of very limited value. See David v. Commissioner, 43 F. 3d 788 (2d Cir. 1995). Cohen and Feinberg were partners and coinvestors rather than advisers on whom petitioners could rely with respect to the SAB Foam transactions. We hold that it was not reasonable for petitioner to rely upon the advice received from either Cohen or Feinberg.

B. Alleged Experts

Petitioners contend that Dooskin and Sacco provided the requisite independent analysis of the investment. We disagree. Dooskin and Sacco, neither of whom had any knowledge of the plastics recycling industry, reviewed the memorandum for, at most, 7 hours combined. Their only knowledge of SAB Foam came from the memorandum (i.e., promotional material) and from what petitioner told them. Dooskin testified that he informed petitioner the investment "passed muster", but that the economics of the investment "was dependent upon the valuation of the equipment". Petitioners, however, failed to undertake the necessary due diligence and seek a thorough and independent analysis of the value of the recyclers despite Dooskin's warning. We are not convinced that Dooskin's and Sacco's review of the memorandum was any more than a very limited inquiry. Neither petitioner nor his partners made any separate payment for professional services by Dooskin and Sacco, and consequently they could not expect the accountants to do more than read the memorandum for form and apparent professionalism, potential benefits, and obvious dangers.

C. Petitioners' Relationship With Miller and Becker

Regardless of the foregoing, petitioners contend that petitioner's alleged "deep and longstanding professional relationship" with his advisers justified his reliance on them. We disagree. See Barlow v. Commissioner, T.C. Memo 2000-339">T.C. Memo. 2000-339; cf. Dyckman v. Commissioner, T.C. Memo. 1999-79; Zidanich v. Commissioner, T.C. Memo 1995-382">T.C. Memo. 1995-382. Petitioner was sufficiently experienced and sophisticated to know that SAB Foam was a tax shelter, and that the value of the transaction depended on the value of the underlying assets; and he failed to consult either an independent appraiser or anyone with expertise in plastics recycling.

In addition, the evidence does not support petitioner's claims that he had a unique and special relationship with his advisers Miller and Becker. Cf. Dyckman v. Comm'r, supra (absolving taxpayers from the negligence penalty, in part, because of the long-term special relationship of trust and friendship between the taxpayers and their adviser).

First, petitioner contends that he "kept in touch" with Miller over the 10 years after he left Miller & Summit. At trial, however, Miller testified that after petitioner left the firm, they "rarely" kept in touch. On this matter, we consider Miller a more reliable witness than petitioner. Miller's testimony clearly shows that he had no special and close relationship with petitioner during the years in issue. Petitioner asserts that he also had an especially close relationship with PI. Petitioner testified, however, that he did not do any work for PI after he left Miller & Summit, and that was 10 years before the years in issue. As noted above, by the time in issue PI was under new ownership in a new location, and there is no reason to believe petitioner had any great knowledge about the company or its business in 1982.

Second, Cohen and Feinberg claim to have a particularly close relationship with Becker. Becker, however, testified that he had a "very close relationship with the majority of [his] clients." Cohen and Feinberg were not singled out, and nothing in the evidence demonstrates that Becker treated Cohen and Feinberg any differently from any other client. ¹¹ Becker offered the investments in SAB Foam and other similar partnerships to many of his clients.

D. Miscellaneous

We dismiss petitioners' contention that the allegedly successful 1981 investment enjoyed by Cohen and Feinberg in SAB Resource evidenced the reasonableness of the 1982 investment in SAB Foam. SAB Resource limited partners received a royalty payment within 3 months of their investment in addition to the credits and deductions. Petitioners argue that this makes the case different from other similar cases and makes their subsequent investment in SAB Foam reasonable. The modest royalty was not sufficient to change the character of the deal.

Petitioners' assertion that the amount invested was "relatively small" is irrelevant when considering the amount of tax benefits quickly claimed. The tax benefits and risks of the transaction were substantial, and they were set forth in the memorandum for anyone to see. Undoubtedly investors as sophisticated as petitioner and his partners knew the size of the potential benefits and risks here or should have known them if they had been properly careful.

E. Conclusion as to Negligence

Under the circumstances of this case, petitioners failed to exercise due care in claiming large deductions and tax credits with respect to SAB Foam on their Federal income tax return. In view of petitioner's sophistication, experience, and education, it was not reasonable for petitioners to rely as they did on an interconnected group of advisers, promoters, and insiders, none of whom had any expertise in plastics recycling. Petitioner should have been able to determine that the recyclers were not unique, that they were not worth the amount ascribed to them, and that SAB Foam lacked economic substance and had no potential for profit. None of the so-called advisers undertook a good faith investigation of the fair market value of the recyclers or of the underlying economic viability or financial structure of SAB Foam. Further, most of petitioner's professional advisers had a financial interest in either SAB Foam or another similar partnership. The Plastics Recycling transaction was a sham, and, as a sophisticated attorney, petitioner should have been able to figure this out if he really had tried. Upon consideration of the entire record, respondent's determinations that petitioners are subject to negligence penalties under section 6653(a)(1) and (2), with respect to their tax return for 1982, are sustained.

Issue 2. Piggyback Agreement

Petitioners argue that they are entitled to the benefits of the Stipulation of Settlement for Tax Shelter Adjustments (piggyback agreement) applicable to Plastics Recycling cases. Petitioners claim they are in essentially the same position as the taxpayers in Fisher v. Commissioner, T.C. Memo. 1994-434, and Estate of Satin v. Commissioner, T.C. Memo. 1994-435. Additionally, petitioners argue that in the stipulation of facts in the present case, "the parties unequivocally stipulated that petitioner agreed to be bound to the lead cases under the piggyback agreement. (Supp. Stip., pars. 34-35)." Respondent disagrees with these arguments, and we agree with respondent.

In Fisher and Estate of Satin this Court summarized the background of the piggyback agreement in the Plastics Recycling group of cases. On June 12, 1987, this Court ordered that the lead counsel for the taxpayers in the Plastics Recycling cases and respondent designate test or lead cases which would present all issues involved in the Plastics Recycling cases. In a letter dated August 14, 1987, respondent notified the Court that lead counsel for the taxpayers and respondent had selected the following docketed cases as the lead cases in the Plastics Recycling group: (1) Fine v. Commissioner, docket No. 35437-85; (2) Miller v. Commissioner, docket No. 10382-86; and (3) Miller v. Commissioner, docket No. 10383-86. In early 1988, the Fine case concluded without trial. The parties, thereafter, selected, and the Court designated, the case of Provizer v. Commissioner, docket No. 27141-86, as a lead case along with the two Miller cases.

After the lead counsel for the taxpayers and respondent agreed upon the test cases, respondent prepared a piggyback agreement with respect to the Plastics Recycling project so that taxpayers who did not wish to litigate their cases individually could agree to be bound by the results of the test cases. Fisher v. Commissioner, supra; Estate of Satin v. Commissioner, supra. The piggyback agreement, as set forth in the Fisher and Estate of Satin cases, provides as follows:

   With respect to all adjustments in respondent's notice



   of deficiency relating to the Plastics Recycling tax



   shelter, the parties stipulate the following terms of



   settlement:

   1. THE ABOVE ADJUSTMENT IS THE ONLY ISSUE IN THIS CASE;

   2. The above adjustment(s), as specified in the preamble, shall

   be determined by application of the same formula as that which

   resolved the same tax shelter adjustments with respect to the

   following taxpayer(s):

   Names(s): Harold M. Provizer and Joan Provizer v. Commissioner

   of Internal Revenue Tax Court Docket No.: 27141-86

   Names(s): Elliot I. Miller v. Commissioner of Internal Revenue

   Tax Court Docket No.: 10382-86

   Names(s): Elliot I. Miller and Myra K. Miller v. Commissioner of

   Internal Revenue Tax Court Docket No.: 10383-86 (hereinafter the

   CONTROLLING CASE)

   3. All issues involving the above adjustment(s) shall be

   resolved as if the petitioner(s) in this case was/ were the same

   as the taxpayer(s) in the CONTROLLING CASE;

   a. If the Court finds that any additions to tax or the section 6621(c)    interest are applicable to the underpayment attributable

   to the above-designated tax shelter adjustment(s), the

   resolution of the tax shelter issue and the applicability of

   such addition to tax or interest to that tax shelter issue in

   the CONTROLLING CASE, whether by litigation or settlement, shall

   apply to petitioner(s) as if the petitioner(s) in this case was/

   were the same as the taxpayer(s) in the CONTROLLING CASE;

   4. If the adjustment is resolved in the CONTROLLING CASE in a

   manner which affects the same issue in other years (e.g., *

   losses in later years or affects depreciation schedules), the

   resolution will apply to petitioners' later years as if the

   petitioners in this case was/ were the same as the taxpayer(s)

   in the CONTROLLING CASE;

   5. A decision shall be submitted in this case when the

   decision in the CONTROLLING CASE (whether litigated or

   settled) becomes final under I.R.C. sec. 7481    6. If the CONTROLLING CASE is appealed, the petitioner(s)

   consent(s) to the assessment and collection of the

   deficiency(ies), attributable to the adjustment(s) formulated by

   reference to the Tax Court's opinion, notwithstanding the

   restrictions under I.R.C. sec. 6213(a)    7. The petitioner(s) in this case will testify or provide

   information in any case involving the same tax shelter

   adjustment, if requested; and

   8. The petitioner(s) in this case consent(s) to the disclosure

   of all tax returns and tax return information for the purpose of

   respondent's discovering or submitting evidence in any case

   involving the same shelter adjustment(s).

The piggyback agreement was signed by counsel for the taxpayers and respondent in the Fisher and Estate of Satin cases and filed with the Court on September 12, 1988. Thereafter, the two Miller cases were settled, and agreed decision documents in those cases were entered by the Court on December 22, 1988. The settlement provided that the taxpayers were not liable for the additions to tax under section 6653(a) or increased interest for tax- motivated transactions under section 6621(c) (Miller settlement). Fisher v. Commissioner, supra; Estate of Satin v. Commissioner, supra.

This Court decided Provizer v. Commissioner, T.C. Memo. 1992-177, on March 27, 1992. In our Provizer opinion, and in the affirmance, all of the Plastics Recycling issues were decided for respondent, including the additions to tax under section 6653(a) and increased interest under section 6621(c). Respondent did not notify the taxpayers in the Fisher and Estate of Satin cases or notify any other taxpayers of the settlement of the Miller cases. Respondent ultimately attempted collection from the Fisher and Estate of Satin taxpayers pursuant to our decision in the Provizer case and paragraph 5 of the piggyback agreement set forth above. For reasons explained more fully in our above-cited opinions, we held that the taxpayers in the Fisher and Estate of Satin cases were entitled to be bound by the Miller settlement.

Petitioners contend that the protest letter is the equivalent of a piggyback agreement that would entitle them to the Miller settlement. We disagree. The piggyback agreement is an intricately developed contract with specific provisions tailored to the Plastics Recycling group of cases. Only the execution of a piggyback agreement by both petitioners and respondent could reflect the parties' mutual assent to settle the instant case based on the disposition of the lead case. See Fisher v. Commissioner, supra, and Estate of Satin v. Commissioner, supra, in which counsel for the taxpayers and respondent's counsel signed the piggyback agreement. Neither petitioners' counsel (or counsel for the general partner) in this case nor respondent's counsel executed a piggyback agreement. Petitioners' contention that the protest letter approximates a piggyback agreement is mistaken. At best, the protest letter indicates an intention that petitioners might be willing to enter into a formal piggyback agreement, but nothing in the record indicates that petitioners followed up on any such intent.

The protest letter itself indicates an intention "to follow the Tax Court's decision in the lead cases" but omits any mention of following a settlement of the lead cases, although that possibility is specifically mentioned in paragraph 5 of the piggyback agreement. Moreover, within a month after the Miller settlement was executed, Becker as TMP, having become aware of that settlement, submitted to respondent a clarification that SAB Foam did not wish to be bound by the settlement and, therefore, withdrew any statement of intention to be bound by any other case.

The facts of this case are that petitioners' TMP did not execute the piggyback agreement. Instead he made it clear that he did not wish to settle the case but to rely upon the results of litigation. Petitioners' unpersuasive argument is that, now that the litigation of the lead case and many others has been decided unfavorably to their position, they should be considered to have accepted the piggyback agreement that their TMP explicitly rejected.

Additionally, petitioners argue that a portion of the stipulation of facts amounts to a concession by respondent's counsel that petitioners are entitled to the Miller settlement. The stipulation paragraphs are as follows:

   34. On September 28, 1988 Robert L. Steele, on behalf of the Tax

   Matters Partner of SAB Foam Recycling Associates, filed a

   protest against the adjustments to the 1982 and 1983 tax years

   proposed by the Internal Revenue Service resulting from an

   examination of SAB Foam Recycling Associates. In such protest

   the Tax Matters Partner of SAB Foam Recycling Associates agreed

   to follow the Tax Court's decision in the following lead cases:

   Miller v. Commissioner, Docket No. 10382-89; Miller v.

   Commissioner, Docket No. 10383-86; and Provizer v.

   Commissioner, Docket No. 27141-86. A copy of the protest of

   the Tax Matters Partner of SAB Foam Recycling Associates dated

   September 28, 1988 is attached hereto and marked as Exhibit 10-

   J. [See supra pp. 14-15.]

   35. On January 20, 1989 Stuart Becker, as the Tax Matters

   Partner of SAB Foam Recycling Associates,  sent a letter to the

   District Director of the Internal  Revenue Service withdrawing

   the September 28, 1988  agreement to be bound by the lead cases.

   A copy of the  January 20, 1989 letter is attached hereto as

   Exhibit  11-J. [See supra p. 15.]

The stipulation paragraphs quoted above merely summarize the language of the protest letter and the withdrawal letter and refer to attached exhibits for the specific language. The language of the stipulation does not support the conclusion that respondent agreed that the protest letter was equivalent to an executed piggyback agreement. Petitioners' counsel essentially argues that by stipulation respondent's counsel has agreed to concede the issues in dispute in this case. The language of the stipulation does not support this startling conclusion, nothing else in the record supports it, and respondent's counsel clearly and explicitly has denied it. We disagree with petitioners' counsel's interpretation of the stipulation of facts.

Accordingly, we hold that petitioners are not entitled to the benefits of the Miller settlement or the piggyback agreement concerning Plastics Recycling cases.

To reflect the foregoing,

            Decision will be entered under Rule 155.

---

Footnotes

• 1. By stipulation, petitioners concede the imposition of the valuation overstatement addition to tax under sec. 6659↩. In addition, petitioners concede that the limitations period remains open for assessment and collection of any penalties, additions to tax, or interest attributable to partnership items for the 1982 tax year that may be held to be due from petitioners. Petitioners previously raised the statute of limitations as a defense in their petition.

• 2. The parties have stipulated that testimony and documentary evidence admitted in Cohen v. Comm'r, T.C. Memo. 2003-303T.C. Memo 2003-303">T.C. Memo 2003-303, 2003 Tax Ct. Memo LEXIS 306">2003 Tax Ct. Memo LEXIS 306, and in Feinberg v. Comm'r, T.C. Memo 2003-304">T.C. Memo. 2003-304, T.C. Memo 2003-304">T.C. Memo 2003-304, 2003 Tax Ct. Memo LEXIS 305">2003 Tax Ct. Memo LEXIS 305, shall be admitted in the present case, subject to the parties' relevance objections, if any. In addition, the parties have agreed to add to the record as exhibits the testimony of Elliot Miller in Provizer v. Commissioner, T.C. Memo. 1992-177, affd. per curiam without published opinion 996 F.2d 1216">996 F.2d 1216 (6th Cir. 1993), and of Stuart Becker in Jaroff v. Commissioner, T.C. Memo. 1996-527↩.

• 3. Terms such as "sale" and "lease", as well as their derivatives, are used for convenience only and do not imply that the particular transaction was a sale or lease for Federal tax purposes. Similarly, terms such as "joint venture" and "agreement" are also used for convenience only and do not imply that the particular arrangement was a joint venture or an agreement for Federal tax purposes.↩

• 4. In Provizer v. Comm'r, supra, the transaction involved EPE recyclers, but the EPS recycler partnerships and the EPE recycler partnerships are essentially identical. See Davenport Recycling Associates v. Commissioner, T.C. Memo 1998- 347, affd. 220 F. 3d 1255 (11th Cir. 2000); see also Gottsegen v. Commissioner, T.C. Memo. 1997-314↩ (involving both the EPE and the EPS recyclers).

• 5. In Dyckman v. Commissioner, T.C. Memo. 1999-79, and Zidanich v. Commissioner, T.C. Memo. 1995-382↩, we held the taxpayers were not negligent with respect to their participation in the Plastics Recycling program. Both cases involved unusual circumstances not present in this case.

• 6. Cf. sec. 7491(c), which places the burden of production on the Commissioner with respect to a taxpayer's liability for penalties and additions to tax. Sec. 7491(c) is effective for court proceedings arising in connection with examinations commencing after July 22, 1998. Petitioners do not contend, nor is there evidence, that their examination commenced after July 22, 1998, or that sec. 7491(c)↩ is applicable in this case.

• 7. The colloquy concerning petitioner's counsel's failure to provide Becker's testimony about his close relationship with Cohen and Feinberg is as follows:

     THE COURT: I didn't hear you mention Mr. Becker's name

     as a witness.

     MR. RIZEK: We are not going to call Mr. Becker as an additional

     witness. I think the 300 pages or so that we stipulated to in

     the supplemental stipulation are more than adequate to cover any

     points we wanted to establish with Mr. Becker.

     THE COURT: Well, that may be, but you're going to talk a lot

     about how these parties all had a relationship with Mr. Becker

     and all that sort of thing and you're not calling Mr. Becker?

     MR. RIZEK: We are not calling Mr. Becker. We don't think it's

     necessary, Your Honor. I don't think there's going to be any

     doubt at the conclusion of the evidence that's presented here

     that these Petitioners had fairly long standing relationships

     independent of this particular transaction with Mr. Becker.↩

• 8. Feinberg testified that "there was a very, very close professional as well as a personal and social relationship among us" and that they "shared information on a daily basis".↩

• 9. We note that Cohen testified: "I remember we talked about the valuations that were obtained and I remember him telling me in words or in substance that I could rely on those valuations." We consider Cohen's testimony inconsistent with Becker's testimony, and as to this matter we consider Becker's testimony reliable and Cohen's alleged recollection unreliable. See supra note 7 to the effect that this problem was known to petitioner and his counsel, who chose not to call upon Becker for clarifying testimony.↩

• 10. We note that Feinberg testified that the expert opinions of Ulanoff and Burstein had passed petitioner's review partly because of Becker's representation. With regard to SAB Resource, petitioner claims that he had instructed Becker to:

     go up to Hyannis and make sure that there were machines

     there, that there were orders for machines there, that

     the machines were producing product of the type that

     were described in the expert opinions as to what the

     machines were supposed to generate, or at least

     appeared to do that, and to see if there was some

     reasonable relationship to justify the price of the

     machine. [Emphasis added.].

  According to Feinberg, Becker confirmed that he had performed the suggested tasks. With regard to SAB Foam, Feinberg testified that he discussed the valuation with Becker on the same basis as with the previous transaction (i.e., SAB Resource).

  We consider Feinberg's testimony inconsistent with Becker's testimony, and as to this matter we consider Becker's testimony reliable and Feinberg's alleged recollection unreliable. See supra note 7 to the effect that this problem was known to petitioner and his counsel, who chose not to call upon Becker for clarifying testimony.↩

• 11. Becker testified:

     there is nothing different that I told to one client

     about the same issue than I told to another client.

     There may have been things I said to one client that

     might not have been said to another. But, if I spoke

     about one issue while I might not have used precisely

     the same words, in substance, * * * what was said to

     one client on one matter, was said to every other

     client when that matter was discussed.↩