1997 Tax Ct. Memo LEXIS 388 | Tax Ct. | 1997
1997 Tax Ct. Memo LEXIS 388">*388 An appropriate order will be issued denying petitioners' motion, and Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON,
OPINION OF THE SPECIAL TRIAL JUDGE 1997 Tax Ct. Memo LEXIS 388">*389
WOLFE,
In a notice of deficiency dated March 26, 1986, respondent determined a deficiency in petitioners' 1981 joint Federal income tax in the amount of $ 102,686, plus an addition to tax under
1997 Tax Ct. Memo LEXIS 388">*391 In a
In respondent's trial memorandum and posttrial brief, respondent asserted a lesser addition to tax under
The parties filed a Stipulation of Settled Issues concerning the adjustments relating to petitioners' participation in the Plastics Recycling Program. The stipulation provides: 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, with the exception of petitioners' potential liability for additions to the tax for valuation overstatements under 4. With respect to the issue of the addition to the tax under
In their petition, petitioners raised the statute of limitations on assessment as a bar to respondent's deficiency determination. Respondent asserted otherwise in the answer, and petitioners have not argued the statute of limitations elsewhere in the record. In view of the third1997 Tax Ct. Memo LEXIS 388">*393 stipulation in the stipulation of settled issues, we consider that any statute of limitations defense has been conceded by petitioners.
The issues remaining in this case are: (1) Whether petitioners are liable for the additions to tax for negligence under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated herein by this reference.
This case concerns petitioners' investment in Plymouth Equipment Associates (Plymouth), a limited partnership that leased seven Sentinel expanded polyethylene (EPE) recyclers. The transactions involving the Sentinel EPE recyclers leased by Plymouth are substantially identical to those in the Clearwater Group limited partnership (Clearwater), the partnership considered in
In transactions closely resembling those in the
No arm's-length negotiations for the price of the Sentinel EPE recyclers took place among PI, ECI, and F & G Corp. All of the monthly payments required among the entities in the above transactions offset each other. These transactions were done simultaneously. Although the recyclers were sold and leased for the above amounts under the structure of simultaneous1997 Tax Ct. Memo LEXIS 388">*395 transactions, the fair market value of a Sentinel EPE recycler in 1981 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.
Both Clearwater and Plymouth leased Sentinel EPE recyclers from F & G Corp. and licensed those recyclers to FMEC Corp. Apart from leasing and licensing seven recyclers instead of six, the underlying transactions involving Plymouth do not differ in any substantive respect from the Clearwater transactions considered in the
For convenience, we refer to the series of transactions among PI, ECI Corp., F & G Corp., Plymouth, FMEC Corp., and PI as the Plymouth transactions. In addition to the Plymouth transactions, a number of other limited partnerships entered into transactions similar to the Plymouth transactions, also involving Sentinel EPE recyclers and Sentinel expanded polystyrene (EPS) recyclers. We refer to these collectively as the Plastics Recycling transactions.
1997 Tax Ct. Memo LEXIS 388">*396
Plymouth is a New York limited partnership that closed on December 21, 1981. Richard Roberts (Roberts) is the general partner of Plymouth.
A private placement memorandum for Plymouth 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 memorandum. Ulanoff owns a 1.27-percent interest in Plymouth and a 4.37-percent interest in Taylor Recycling Associates. Burstein owns a 2.605-percent interest in Empire Associates and a 5.82-percent interest in Jefferson Recycling Associates. Like Plymouth, Taylor Recycling Associates, Empire Associates, and Jefferson Recycling Associates are partnerships that leased Sentinel recyclers. Burstein also was a client and business associate of Elliot I. Miller (Miller), the corporate counsel to PI.
The Plymouth offering memorandum states that the general partner will receive fees from Plymouth in the amount of $ 37,500. According to the offering memorandum, 10 percent of the proceeds from the offering--$ 97,500--was allocated to the1997 Tax Ct. Memo LEXIS 388">*397 payment of sales commissions and offeree representative fees. The offering memorandum further provides that the general partner "may retain as additional compensation all amounts not paid as sales commissions or offeree representative fees". Roberts therefore was to receive a minimum of $ 37,500 and up to $ 135,000 from Plymouth.
The offering memorandum lists significant business and tax risk factors associated with an investment in Plymouth. Specifically, the offering memorandum states: (1) There is a substantial likelihood of audit by the Internal Revenue 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) Plymouth has 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 Plymouth's 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 conflicts1997 Tax Ct. Memo LEXIS 388">*398 of interest exist.
Although the offering memorandum represented that the Sentinel EPE recycler was a unique machine, it was not. Several machines capable of densifying low density materials were already on the market in 1981. 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
Roberts is a businessman and the general partner in a number of limited partnerships that leased and licensed Sentinel EPE recyclers, including Plymouth. He also is a 9-percent shareholder in F & G Corp., the corporation that leased the recyclers to Plymouth. 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 745 Fifth Avenue, Suite 410 New York, New York 10022
Prior to the Plymouth transactions, Roberts and Grant were clients of the accounting firm H. W. Freedman & Co. (Freedman & Co.). Harris W. Freedman (Freedman), a certified public accountant (C.P.A.) and 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., and Plymouth. 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.
Petitioners resided in Fort Lee, New Jersey, at the time their petition was filed. Hereafter, reference to petitioner in the singular denotes David Singer.
In 1930, at the age of 16, petitioner left high school during his sophomore year and entered the work force. By the late 1930's he was selling, with some success, 1997 Tax Ct. Memo LEXIS 388">*400 sundry goods and dresses. Petitioner then served in the Army for 45 months. Approximately 1 year after completing his military service petitioner became a salesman for a floor covering business, Hy Abrams Co., owned by his brother-in-law. Petitioner also helped his father, a carpenter, collect rent on houses his father owned on the lower East Side of Manhattan. In the 1950's his father sold those houses and purchased several apartment buildings in Harlem. Together the buildings had a total of 28 apartment units.
In 1960 petitioner's father passed away, and petitioner inherited the apartment buildings. At that time petitioner's brother-in-law offered to sell him an interest in Hy Abrams Co., but only if petitioner sold the apartment buildings so he could devote more time to the business. Petitioner did so and invested the proceeds in Hy Abrams Co. for a 30-percent interest. Hy Abrams Co. became Hy Abrams Corp., and petitioner was named vice president, although he continued to devote his attention primarily to sales activities. In 1978 petitioner's brother-in-law retired, and the corporation was liquidated. Petitioner was not yet ready to retire, and with his daughter he started his1997 Tax Ct. Memo LEXIS 388">*401 own floor covering business named Singer Carpet Distributors, Inc. (Singer Carpet). Petitioner operated Singer Carpet out of a warehouse in New Jersey for 4 years before retiring at the age of 68.
On their 1981 Federal income tax return, petitioners reported gross income from wages, interest, dividends, and capital gains 2 in the amount of $ 373,286, less $ 34,669 in losses from partnerships, trusts, etc., including losses here in issue. Consequently, in the absence of significant deductions or credits, petitioners were subject to payment of Federal income taxes in a substantial amount for taxable year 1981.
In 1981, petitioner acquired a 5.07-percent limited partnership interest in Plymouth for $ 50,000. As a result of the investment in Plymouth, on their 1981 return petitioner and his wife Shirley claimed an operating loss in the amount of $ 40,555, and investment1997 Tax Ct. Memo LEXIS 388">*402 tax and business energy credits totaling $ 82,526. Respondent disallowed petitioners' claimed operating loss and credits related to Plymouth in full.
Petitioner learned of the Plastics Recycling transactions and Plymouth in November or December of 1981 from Abraham Bramnick (Bramnick). Bramnick is a stockbroker with the brokerage house Bond Richmond in New York City. Petitioner and Bramnick have known each other socially since the late 1960's or early 1970's. Prior to 1981, petitioner and Bramnick invested in some initial public offerings (IPO's) together, and according to petitioner, most of these were successful. Petitioner recalled his introduction to the Plastics Recycling transactions and Plymouth as follows: There was one before [Plymouth], I think it was Empire, and for some reason or other, I didn't jump at it and then [Bramnick] called me, well, you missed it, because they've got all the members they needed, they don't have it--they may not have it again. Then they came back a week or two later, I don't remember, but he said, this thing is alive again * * *.
Petitioner also discussed the Plastics Recycling transactions with Martin Bach (Bach), a certified public accountant (C.P.A.). Bach and petitioner were introduced sometime in 1981 by Bramnick. At the time, petitioner was looking for a tax return preparer. Petitioner retained Bach, and Bach prepared petitioners' return for 1981 and for several years thereafter.
Bach does not have any education or work experience in engineering, plastics materials, or plastics recycling. He graduated cum laude with a B.S. degree in accounting from Long Island University in 1947. Three years later he became a certified public accountant in New York State. After college, Bach worked for several accounting firms before founding his own practice in 1956, named Martin Bach & Co., P.C. (Bach & Co.).
Bach headed Bach & Co. for approximately 30 years until his practice was taken over by another firm. Located in the Wall Street area, Bach & Co. primarily serviced stock brokerage houses. The firm represented clients before the Securities and Exchange Commission (SEC), provided tax services, and performed certified audits on a monthly1997 Tax Ct. Memo LEXIS 388">*404 and annual basis. Bach & Co. performed accounting services for approximately 50 brokerage houses during Bach's tenure and employed five accountants at its peak. Over the course of his career, Bach reviewed a large number of prospectuses and offering circulars that were filed with the SEC, as well as private placements that had been suggested to clients.
Like petitioner, Bach learned of the Plastics Recycling transactions and Plymouth in 1981 from Bramnick. Bond Richmond was a longstanding client of Bach & Co., and Bramnick was Bach's primary contact at Bond Richmond. On occasion, Bramnick forwarded private placement memoranda to Bach, "just to look at". In this instance, Bramnick sent Bach the Plymouth offering memorandum and asked him what he thought about it. Bach reviewed the offering memorandum for approximately 3 hours. He found the economic projections "very lucrative", to the investor, even if reduced "by 50-percent". Bach then met with Bramnick and told him that he thought the situation was interesting and that it warranted further investigation. He also received a phone call from petitioner asking for his thoughts about Plymouth.
Next, Bach contacted Peter Gardino (Gardino), 1997 Tax Ct. Memo LEXIS 388">*405 a broker who had traded for one of Bach & Co.'s former accounts. During 1981 Gardino was working in the syndicate department of a brokerage house. Gardino reviewed the Plymouth offering memorandum and arranged for the two of them to visit the PI plant in Hyannis, Massachusetts, sometime in November. Bach invited Bramnick to go with them. Bach explained: "I thought he would go too, but he didn't want to go." Petitioner recalled that Bach also extended an invitation to him to visit the PI plant in Hyannis, but petitioner declined.
Gardino and Bach toured the PI plant. Bach testified that he was impressed with the plant and the "spirit of the workers." Although the Sentinel EPE recycler was explained to Bach, he did not understand "the technicalities of the machine too well". Bach recalls being told that the Sentinel EPE recycler was unique, but he could not remember what he was told about the capability of the machine or its place in the market. He testified, "I just don't remember being told specifically by anybody anything--they told me a lot of things when I was up there, but I don't remember all the things they told me. Pete [Gardino] was asking most of the questions." Bach did1997 Tax Ct. Memo LEXIS 388">*406 not review any of the accounting or cost records pertaining to the Sentinel EPE recycler while he was at PI, nor did he ask to see them.
In addition to touring the PI plant, Bach and Gardino were taken by a PI representative to visit some end-users of the machines and see them in operation. Gardino and Bach questioned the end-users, but Bach's lack of understanding limited the number of questions he could ask to one. Bach recalled that, "The only question I asked the people was about the breakdown, does the machine breakdown because I don't have a great technical background." He understood from the end-users that the machine was functioning perfectly well.
Bach did not consult an independent appraiser with respect to the value of the Sentinel EPE recycler, but instead relied upon the representations in the Plymouth offering memorandum. As Bach recalled: "I believe that I saw * * * an independent appraisal stating how they got to the value of the machine based upon the production, the income the pellets would bring, the royalties, et cetera." Bach did not investigate the market for recycled resin pellets. Nor did he contact the F & G Corp. evaluators or inquire if either of them 1997 Tax Ct. Memo LEXIS 388">*407 had an interest in the Plastics Recycling transactions. Bach concluded that the author of the appraisal--whose name he could not recall--was independent based on what he read in the offering memorandum. 3
After returning from Hyannis, Bach related his observations to Bramnick. Bach recalled speaking to petitioner only by telephone. Bach could not recall the substance of his communication to petitioner or for how long they spoke. He characterized petitioner as "basically only an annual tax account" and explained that he "didn't see * * * [petitioner] on a regular basis" With respect to Plymouth, Bach "spoke mostly to Mr. Bramnick", who in turn saw petitioner on a regular basis. Bach recalled arguing with Bramnick because Bramnick wanted petitioner to purchase two limited partnership units at a cost of $ 100,000, whereas Bach thought "one 1997 Tax Ct. Memo LEXIS 388">*408 is enough". Bond Richmond, not Bach, was petitioner's offeree representative for Plymouth, and that status entitled it to a commission equal to 10 percent of petitioner's investment.
In contrast to Bach's recollection of events, petitioner claims that after Bach returned from Hyannis, he and his wife discussed the Plymouth transaction with Bach at a dinner meeting. According to petitioner, Bach informed them that he and a client had visited PI and thought well of it, and that Bach was taking another client, who petitioner knew was "a very successful attorney for some insurance company." As petitioner recalls, "I said if it was good enough for those fellows, it's * * * good enough for me. So that's when we made up our mind to do it."
Petitioners have no education or work experience in plastics materials or plastics recycling. They did not read the Plymouth offering memorandum, see a Sentinel EPE recycler, or otherwise investigate Plymouth or the Plastics Recycling transactions to any extent. Petitioners never made a profit in any year from their investment in Plymouth.
OPINION
We have decided a large number of the Plastics Recycling group of cases.
In
Although petitioners have not agreed to be bound by the
Based on the entire record in this case, including the extensive stipulations, testimony of respondent's experts, and petitioner's testimony, we hold that the Plymouth transaction was a sham and lacked economic substance. In reaching this conclusion, we rely heavily upon the overvaluation of the Sentinel EPE recyclers. 1997 Tax Ct. Memo LEXIS 388">*411 Respondent is sustained on the question of the underlying deficiency. We note that petitioners have explicitly conceded this issue in the stipulation of settled issues filed shortly before trial. The record plainly supports respondent's determination regardless of such concession. For a detailed discussion of the facts and the applicable law in a substantially identical case, see
Respondent asserted the additions to tax for negligence under
Negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances.
Petitioners contend that they were reasonable in claiming a loss deduction and investment tax and business energy credits with respect to Plymouth. Petitioner maintains that he expected an economic profit in light of the so-called oil crisis in the United States in 1981, and that he reasonably relied upon Bach as a qualified adviser on this matter.
Petitioner claims that he reasonably expected to make an economic profit because plastic is an oil derivative and the United States was experiencing a so-called oil crisis when he invested in Plymouth. Based upon our review of the record, we find petitioner's claim unconvincing, regardless of the so-called oil crisis. 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.
Petitioner testified that he "was told by Marty [Bach] or Abe Bramnick that the potential of the investment is great because oil1997 Tax Ct. Memo LEXIS 388">*414 is going crazy and this thing was something". Bramnick did not testify at the trial of this case, and Bach could not recall the substance of his communications with petitioner. Petitioner did not read the Plymouth offering memorandum or in any manner attempt to research the business aspects of the Plymouth transaction. In view of petitioners' failure seriously to investigate or learn about the Plymouth transaction, we are not convinced that they invested in Plymouth with an honest objective of making an economic profit, regardless of the so-called oil crisis.
Moreover, petitioners did not adequately explain how the so-called oil crisis provided a reasonable basis for them to invest in Plymouth and claim the associated operating loss and credits. The offering memorandum 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 his 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 in1997 Tax Ct. Memo LEXIS 388">*415 crude oil prices results in only a 30 to 40% increase in the cost of plastics products." Furthermore, 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
In addition, the taxpayers in the
Petitioner contends that he reasonably relied upon Bach as a qualified adviser on this matter.
A taxpayer may avoid liability for the additions to tax under
Reliance on representations by insiders, promoters, or offering materials has been held an inadequate defense to negligence.
Bach has no education or work experience in engineering, plastics1997 Tax Ct. Memo LEXIS 388">*421 materials, or plastics recycling. His investigation of the Plastics Recycling transactions and Plymouth consisted of a review of the offering memorandum, plus a visit to the PI plant and some end-users chosen by a PI representative. Bach acknowledged that he does not "have a great technical background" and that he "didn't understand the technicalities of the machine too well even though it was explained to [him]". Because of his limited technical background, the only question he posed to the end-users with whom he spoke was whether the machine broke down.
Bach indicated that he deferred to Gardino with respect to the technical aspects of the Sentinel EPE recycler. He claimed that Gardino had a technical background, understood the technicalities of the machine, and "asked a lot of questions about how the machine operates, what it does." When asked if he could elaborate on Gardino's technical background, however, Bach replied: "No. All I know is that * * * he was the head of the syndicate department and used to pass on all offerings that came into * * * his place of business, * * * and even though he wasn't an engineer, he had an engineering background." Bach did not know what type1997 Tax Ct. Memo LEXIS 388">*422 of degree Gardino earned in college or whether he had any experience in plastics recycling. Gardino did not testify at the trial of this case.
Bach acknowledged that he was not qualified to assess the value of the Sentinel EPE recycler. He did not consult an independent appraiser or anyone with expertise in plastics materials or plastics recycling. Bach relied upon the Plymouth offering memorandum for the value of the machine. He recalled reading "an independent appraisal stating how they got to the value of the machine based upon the production, the income the pellets would bring". However, Bach did not investigate the market for recycled resin pellets. Nor did he contact Ulanoff or Burstein, or inquire whether they had an interest in the Plastics Recycling transactions. He concluded that the author of the appraisal was independent based solely on the offering memorandum. In fact, Ulanoff and Burstein each invested in several Plastics Recycling partnerships, and as the offering memorandum disclosed, Burstein was a client and business associate of the corporate counsel to PI, Miller.
Upon returning from his visit to the PI plant in Hyannis, Bach recalled speaking to petitioner about1997 Tax Ct. Memo LEXIS 388">*423 his observations, "but not face-to-face. I know we spoke on the telephone." However, Bach could not recall the substance of his communication with petitioner or for how long they spoke on the phone. Petitioner claims that he and his wife had a dinner meeting with Bach to discuss his observations at PI. According to petitioner, Bach informed him over dinner that Plymouth "was a wonderful deal," that another of Bach's clients purportedly "felt it was very good," and that Bach intended to accompany another client to Hyannis. Bach has no recollection of any such meeting.
We hold that petitioner's purported reliance on Bach was not reasonable, not in good faith, nor based upon full disclosure. Petitioner met and retained Bach to prepare his and his wife's tax return in 1981. Bach characterized petitioners as an annual tax account whom he saw infrequently. Bramnick was at least one of petitioner's stock brokers and sometimes was an investment adviser to petitioner. Bramnick introduced the Plastics Recycling transactions and Plymouth to petitioner, as well as to Bach. His firm, Bond Richmond, was the offeree representative for petitioners and as such received a 10-percent commission on 1997 Tax Ct. Memo LEXIS 388">*424 petitioners' investment. Bach testified that he spoke mostly to Bramnick with respect to Plymouth and that Bramnick saw petitioner on a regular basis. However, notwithstanding Bramnick's obvious involvement in this matter, petitioner purports to have relied on Bach.
Bach does not have any education, experience, or expertise in engineering, plastics materials, or plastics recycling. He indicated that his lack of technical background hindered his investigation of Plymouth and the Sentinel EPE recycler. Bach acknowledged that he had no competence to value the machines; yet he did not independently confirm their value or the economic viability of the Plastics Recycling transactions. Instead, he relied on the offering memorandum and representations by insiders for the value of the machines and the economic viability of the Plastics Recycling transactions. See
The purported value of the Sentinel EPE recycler generated the deductions and credits in this case, and that circumstance was reflected in the Plymouth offering memorandum. 1997 Tax Ct. Memo LEXIS 388">*425 Petitioners did not read the offering memorandum, but Bach did. Certainly Bach recognized and understood the nature of the tax benefits, and he discussed Plymouth and his investigation with Bramnick and petitioner. In his discussions with Bach and Bramnick, petitioner learned or should have learned about the amount and nature of the tax benefits. Indeed, the tax benefits involved herein were not inconsequential and certainly would have been of interest to petitioners in a year in which they recognized in excess of $ 300,000 in capital gains, mostly short-term gains. Bramnick urged that petitioner acquire two units of the Plymouth partnership for $ 100,000, but Bach, the tax return preparer, counseled that $ 50,000 of this transaction was enough. The direct reductions claimed on petitioners' 1981 tax return, from the investment tax credits alone, equaled 165 percent of their cash investment. Therefore, like the taxpayers in
Petitioner's own testimony is the only account in the record regarding the advice petitioner received from Bach and Bramnick. Bach could not recall the substance of his communications with petitioner, and Bramnick did not testify in the trial of this case. 4 Petitioner's testimony in this case is self-serving and often not credible, and this Court is not required to accept it as true.
1997 Tax Ct. Memo LEXIS 388">*428
Petitioners stipulated that the fair market value of a Sentinel EPE recycler in 1981 was not in excess of $ 50,000. Notwithstanding this concession, petitioners contend that they were reasonable in claiming credits on their 1981 Federal income tax return based upon each recycler's 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.
We accord no weight to the Carmagnola reports submitted by petitioners. The projected valuations1997 Tax Ct. Memo LEXIS 388">*429 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 record that respondent used them as a basis for any determinations in the notice of deficiency. Even so, counsel for petitioners obtained copies of these reports and urge that they support the reasonableness of the value reported on petitioners' 1981 return. Not surprisingly, petitioners' counsel did not call Carmagnola to testify in this case, but preferred instead to rely solely upon his preliminary ill-founded valuation estimates (Carmagnola has not been called1997 Tax Ct. Memo LEXIS 388">*430 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 Sixth Circuit Court of Appeals in the
Petitioners cite a number of cases in support of their position, including
Petitioners' reliance on the
In
In contrast, petitioners and their purported adviser did not have 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. Further, neither Bach nor petitioners consulted or hired any independent experts in the field of plastic materials or plastics recycling. 5 Instead, they relied upon the offering1997 Tax Ct. Memo LEXIS 388">*434 materials and representations by insiders to the Plastics Recycling transactions. We consider petitioners' arguments with respect to
Petitioners' reliance upon the Court of Appeals for the Ninth Circuit's partial reversal of our decision in
1997 Tax Ct. Memo LEXIS 388">*436 Moreover, the Plymouth offering memorandum warned prospective investors that the accompanying tax opinion letter was not in final form and was prepared for the general partner, and that prospective investors should consult their own professional advisers with respect to the tax benefits and tax risks associated with Plymouth. The tax opinion letter accompanying the Plymouth offering memorandum was addressed solely to the general partner and began with the following opening disclaimer: This opinion is provided to
Petitioners' reliance on the
Bach did not possess sufficient knowledge of the plastics or recycling industries to render a competent opinion. This fact1997 Tax Ct. Memo LEXIS 388">*439 has been deemed relevant by the Court of Appeals for the Second Circuit. See
Under the circumstances of this case, petitioners failed to exercise due care in claiming a large loss deduction and tax credits with respect to Plymouth on their 1981 Federal income tax return. Petitioner declined to read the offering memorandum, visit PI, or otherwise learn about the Plymouth transactions and the Sentinel EPE recycler to any significant extent. Instead, petitioner purports to have relied on Bach, the accountant he only recently had retained to prepare petitioners' tax1997 Tax Ct. Memo LEXIS 388">*440 return. Bach had no education or experience in plastics materials or plastics recycling, and he ultimately relied upon the offering memorandum for the value of, capabilities, and market demand for the machines. The tax benefits flowing from Plymouth were contingent upon the purported value of the Sentinel EPE recycler. Yet neither petitioner nor Bach in good faith investigated the fair market value of a Sentinel EPE recycler, or the underlying viability, financial structure, and economics of the Plymouth transaction. We hold, upon consideration of the entire record, that petitioners are liable for the negligence additions to tax under
In the notice of deficiency, respondent determined that petitioners were 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 investment tax credits and business energy credits, based on a purported value 1997 Tax Ct. Memo LEXIS 388">*442 of $ 1,162,666 for each Sentinel EPE recycler. Petitioners concede that the fair market value of a Sentinel EPE recycler in 1981 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 contend that
Petitioners argue that the disallowance of the claimed investment tax and business energy credits was not "attributable to" a valuation overstatement. According to petitioners, the credits were disallowed because the Plymouth transaction lacked economic substance, not because of any valuation overstatement. It follows, petitioners reason, that because the "attributable to" language of
Petitioners' argument rests on the mistaken premise that our holding herein that the Plymouth transaction lacked1997 Tax Ct. Memo LEXIS 388">*445 economic substance was separate and independent from the overvaluation of the Sentinel EPE recyclers. To the contrary, in holding that the Plymouth transaction 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 operating loss; (2) the underpayment of tax; and (3) our finding that the Plymouth transaction lacked economic substance.
Petitioners argue that in
Moreover, a virtually identical argument was rejected in
Petitioners' reliance on
1997 Tax Ct. Memo LEXIS 388">*449
Petitioners argue that their concession of the deficiency precludes imposition of the
Petitioners' open-ended concession does not obviate our finding that the Plymouth transaction 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 case, no argument was made and no evidence was presented to the Court to prove that disallowance and concession of the claimed investment tax credits and other tax benefits related to anything other than a valuation overstatement. To the contrary, petitioners stipulated substantially the same facts concerning the Plymouth transaction as we found in
Petitioners' reliance on
1997 Tax Ct. Memo LEXIS 388">*453 We held in
Petitioners argue that respondent erroneously failed to waive the
We note initially that petitioners did not request respondent to waive the
However, we do not decide this issue solely on petitioners' failure timely to request a waiver but instead, we have considered the issue on its merits. Petitioners urge that petitioner relied on Bach in deciding on the valuation claimed on their 1981 tax return. Petitioners contend that such reliance was reasonable and, therefore, that respondent should have waived the
In support of the contention that petitioner acted reasonably, petitioners cite
We hold that petitioners did not have a reasonable basis for the adjusted bases or valuations claimed on their 1981 tax return with respect to their investment in Plymouth. In this case, respondent could find that petitioner's reliance on Bach was unreasonable. The record in this case does not establish an abuse of discretion on the part of respondent but supports respondent's position. We hold that respondent's refusal to waive the
Approximately 4 months after the trial of this case, petitioners 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 Law1997 Tax Ct. Memo LEXIS 388">*458 under Rule 50. Petitioners also lodged with the Court a motion for decision ordering relief from the additions to tax for negligence and from the increased rate of interest, with attachments and a memorandum in support of such motion. Respondent filed an objection, with attachments and a memorandum in support thereof, and petitioners thereafter filed a reply memorandum. Petitioners argue that they should be afforded the same settlement that was reached between other taxpayers and the IRS in docket Nos. 10382-86 and 10383-86, each of which was styled
Counsel for petitioners seek to raise a new issue long after the trial in this case. Resolution of such issue might well require a new trial. Such further trial "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' motion for leave were granted, the arguments set forth in their motion for decision and the attached memorandum, lodged with this Court, are invalid and such motion would be denied. Therefore, and for reasons set forth in more detail below, petitioners' motion for leave shall be denied.
Some of our discussion of background and circumstances underlying petitioners' 1997 Tax Ct. Memo LEXIS 388">*460 motion is drawn from documents submitted by the parties and findings of this Court in two earlier decisions. See
The
1997 Tax Ct. Memo LEXIS 388">*461 On or about February of 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 Miller, 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 Miller both invested in the Plastics Recycling transactions, their actions with respect to such investments provide a rational basis for treating them differently. Miller foreclosed any potential liability for increased interest in his cases by making payments 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,
Footnotes
1. The deficiency notice refers to
sec. 6621(d) . This section was redesignated assec. 6621(c) by sec. 1511(c)(1)(A) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744, and repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Pub. L. 101-239, 103 Stat. 2106, 2399, effective for tax returns due after Dec. 31, 1989, OBRA 1989 sec. 7721(d), 103 Stat. 2400. The repeal does not affect the instant case. For simplicity, we refer to this section assec. 6621(c) . The annual rate of interest undersec. 6621(c)↩ for interest accruing after Dec. 31, 1984, equals 120 percent of the interest payable under sec. 6601 with respect to any substantial underpayment attributable to tax-motivated transactions.2. The bulk of petitioners' income for 1981 derived from gross capital gains in the amount of $ 313,523 ($ 292,960 of which was short-term capital gain).↩
3. The reports by the F & G Corp. evaluators, Ulanoff and Burstein, are the only reports appended to the offering memorandum that assess the Sentinel EPE recycler in any respect.↩
4. Petitioners failure to call Bramnick to testify gives rise to the inference that his testimony would not have been favorable to them. See
Mecom v. Commissioner , 101 T.C. 374">101 T.C. 37440 F.3d 385">40 F.3d 385 (5th Cir. 1994);Pollack v. Commissioner , 47 T.C. 92">47 T.C. 92392 F.2d 409">392 F.2d 409 (5th Cir. 1968);Wichita Terminal Elevator Co. v. Commissioner , 6 T.C. 1158">6 T.C. 1158162 F.2d 513">162 F.2d 513 (10th Cir. 1947);Sacks v. Commissioner , T.C. Memo 1994-217">T.C. Memo. 1994-21782 F.3d 918">82 F.3d 918↩ (9th Cir. 1996).5. Bach testified that he discussed the Plastics Recycling transactions and visited PI with Gardino, whom he claims had a technical background. However, Gardino did not testify in this case, and the record does not show that he was qualified to analyze the Sentinel EPE recycler or the Plastics Recycling transactions.↩
6.
Osterhout v. Commissioner , T.C. Memo. 1993-251Balboa Energy Fund 1981 v. Commissioner , 85 F.3d 634">85 F.3d 634 (9th Cir. 1996)sec. 6653(a)↩ , inter alia. Accordingly, although the Court's analysis focused on one taxpayer, the additions to tax were sustained with respect to all of the taxpayers.7. To the extent that
Heasley v. Commissioner , 902 F.2d 380">902 F.2d 380T.C. Memo. 1988-408 , merely represents an application ofTodd v. Commissioner , 89 T.C. 912">89 T.C. 912862 F.2d 540">862 F.2d 540 (5th Cir. 1988), we consider it distinguishable. To the extent that the reversal in theHeasley case is based on a concept that where an underpayment derives from the disallowance of a transaction for lack of economic substance, the underpayment cannot be attributable to an overvaluation, this Court and the Courts of Appeals for the Second, Fourth, Sixth and Eighth Circuits have disagreed. SeeGilman v. Commissioner , 933 F.2d 143">933 F.2d 143T.C. Memo. 1989-684 ;Zfass v. Commissioner, supra↩ .8. Petitioners' citation of
Heasley v. Commissioner, supra supra note 8 to the effect that the Courts of Appeals for the Second, Fourth, Sixth, and Eighth Circuits and this Court have not followed theHeasley opinion with respect to the application ofsec. 6659↩ .9. In their motion for decision, petitioners state: "After the lead counsel for taxpayers and Respondent had agreed upon the designation of the lead cases,
Respondent's counsel prepared piggyback agreements and offered them to counsel for the taxpayers in this case↩ and to other taxpayers." (Emphasis added.)10. In respondent's motion for leave to file an amended answer, respondent attached a copy of a settlement offer that was extended to petitioners and other taxpayers who at the time were represented by counsel other than their present counsel. The terms of the offer were as stated above, except that no mention was made with respect to the execution of a closing agreement (Form 906) stating the settlement and resolving the entire matter for all years.↩
11. In their motion for decision, petitioners state: "Respondent formulated a standard settlement position
which was extended to all taxpayers having docketed or non-docketed cases in the plastics recycling group,including Petitioner↩ ." (Emphasis added.)12. Although it is not otherwise a part of the record in this case, respondent attached copies of the
Miller↩ closing agreement and disclosure waiver to her objection to petitioners' motion for leave, and petitioners do not dispute the accuracy of the document.