                          T.C. Memo. 2000-372



                     UNITED STATES TAX COURT



       JAMES D. BARBER AND BETTY L. BARBER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 7777-95, 7778-95.          Filed December 7, 2000.


     George W. Gregory, for petitioners.

     Alexandra E. Nicholaides, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     ARMEN, Special Trial Judge:     In so-called affected items

notices of deficiency, respondent determined additions to tax to

petitioners’ Federal income taxes for the years and in the

amounts as shown below:
                                - 2 -


                           Additions to tax
                     Sec.         Sec.      Sec.
                  6653(a)(1)   6653(a)(2)   6659
     Year
                                   1
     1982          $1,162                   $5,236
                                   1
     1983              10                     —

            1
              50 percent of the interest payable with
         respect to the portion of the underpayment
         that is attributable to negligence or
         intentional disregard of rules or regulations.
         The underpayments for the years in issue were
         determined and assessed pursuant to a partnership-
         level proceeding. See secs. 6221-6233. In the
         present cases, respondent determined that the
         entire underpayment for each of the years in
         issue is attributable to negligence or intentional
         disregard of rules or regulations.


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     After concessions by petitioners,1 the issues for decision


     1
       Petitioners do not contest that the Sentinel EPS recyclers
that are involved in these cases were overvalued. See Gottsegen
v. Commissioner, T.C. Memo. 1997-314; see also Ulanoff v.
Commissioner, T.C. Memo. 1999-170. Petitioners therefore concede
(in par. 1. of the stipulation of facts) that they are liable for
the addition to tax for valuation overstatement under sec. 6659
for 1982. To the extent that petitioners’ concession may not
extend to sec. 6659(e), and assuming arguendo that petitioners
properly raised an issue under that section, then we decide such
issue in respondent’s favor. See, e.g., Addington v.
Commissioner, 205 F.3d 54, 62 (2d Cir. 2000), affg. Sann v.
Commissioner, T.C. Memo. 1997-259; Ulanoff v. Commissioner,
supra.
                                                   (continued...)
                               - 3 -

are as follows:

     (1) Whether petitioners are liable for additions to tax

under section 6653(a)(1) and (2) for negligence or intentional

disregard of rules or regulations.     We hold that petitioners are

so liable.

     (2) Whether petitioners are entitled to the terms of the

Plastics Recycling Project Settlement Offer proffered by

respondent in October 1988 to the tax matters partner of Whitman

Recycling Associates.   We hold that petitioners are not so

entitled.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   The stipulated facts and attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Plymouth, Michigan, at the time that each of their petitions was

filed with the Court.



     1
      (...continued)
     Moreover, it would appear that petitioners have abandoned
their contention regarding the statute of limitations (the so-
called Davenport issue) in view of the recent affirmance of this
Court’s opinion on that issue by the Court of Appeals for the
Eleventh Circuit. See Davenport Recycling Associates v.
Commissioner, 220 F.3d 1255 (11th Cir. 2000), affg. T.C. Memo.
1998-347; see also Klein v. United States, 86 F. Supp.2d 690
(E.D. Mich. 1999); Clark v. United States, 68 F. Supp.2d 1333,
1342-1346 (N.D. Ga. 1999); Kohn v. Commissioner, T.C. Memo. 1999-
150. However, if we are mistaken in this regard, then we refer
the parties to paragraphs 1 and 22 of the stipulation of facts,
and we decide the Davenport issue in respondent’s favor based on
the foregoing precedent.
                                - 4 -

A.   The Whitman Transactions

     These cases are part of the Plastics Recycling group of

cases.   In particular, the additions to tax arise from the

disallowance of losses, investment credits, and energy credits

claimed by petitioners with respect to a partnership known as

Whitman Recycling Associates (Whitman or the partnership).

     For a detailed discussion of the transactions involved in

the Plastics Recycling group of cases, see Provizer v.

Commissioner, T.C. Memo. 1992-177, affd. per curiam without

published opinion 996 F.2d 1216 (6th Cir. 1993).   The underlying

transactions involving the Sentinel recycling machines

(recyclers) in petitioners’ cases are substantially identical to

the transactions in Provizer v. Commissioner, supra, and, with

the exception of certain facts that we regard as having minimal

significance, petitioners have stipulated substantially the same

facts concerning the underlying transactions that were described

in Provizer v. Commissioner, supra.

     In a 4-step series of simultaneous transactions closely

resembling those described in the Provizer case and stipulated by

the parties herein, Packaging Industries of Hyannis,

Massachusetts (PI) manufactured and sold2 four Sentinel


     2
        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
                                                   (continued...)
                               - 5 -

EPS3 recyclers to ECI Corporation (ECI) for $1,520,000 each.    ECI

simultaneously resold the recyclers to F&G Corporation (F&G) for

$1,750,000 each.   F&G simultaneously leased the recyclers to

Whitman.   Finally, Whitman simultaneously entered in a joint

venture with PI and Resin Recyclers Inc. (RRI) to “exploit” the

recyclers and place them with end-users.    Under this latter

arrangement, PI was required to pay Whitman a monthly joint

venture fee.

     For convenience, we refer to the series of transactions

between and among PI, ECI, F&G, Whitman, and RRI as the Whitman

transactions.

     The sales of the Sentinel EPS recyclers from PI to ECI were

financed using 12-year nonrecourse notes.    The sales of the

recyclers from ECI to F&G were financed using 12-year “partial

recourse” notes; however, the recourse portion of the notes was

payable only after the first 80 percent of the notes, the


     2
      (...continued)
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.
     3
        EPS stands for expanded polystyrene. The case of
Provizer v. Commissioner, T.C. Memo. 1992-177, affd. per curiam
without published opinion 996 F.2d 1216 (6th Cir. 1993), involved
Sentinel expanded polyethylene (EPE) recyclers. However, 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 EPS recyclers); Ulanoff v.
Commissioner, T.C. Memo. 1999-170 (same).
                                 - 6 -

nonrecourse portion, was paid.    No negotiations for the price of

the recyclers took place between, or among, PI, ECI and F&G.

     At the closing of the Whitman partnership, PI, ECI, F&G,

Whitman, and RRI entered into arrangements whereby PI would pay a

monthly joint venture fee to Whitman, in the same amount that

Whitman would pay as monthly rent to F&G, in the same amount that

F&G would pay monthly on its note to ECI, in the same amount that

ECI would pay monthly on its note to PI.   Further, in connection

with the closing of the Whitman partnership, PI, ECI, F&G,

Whitman, and RRI entered into offset agreements providing that

the foregoing payments were bookkeeping entries only and were

never in fact paid.   Also in connection with the closing of the

Whitman partnership, PI, ECI, F&G, Whitman, and RRI also entered

into cross-indemnification agreements.

B.   Individuals Involved

     Richard Roberts (Roberts) was a businessman and the general

partner in a number of limited partnerships that leased Sentinel

EPE recyclers.    Roberts was also a 9-percent shareholder in F&G,

the corporation that leased the recyclers to Whitman in the

Whitman transactions.

     Raymond Grant (Grant) was an investment banker, attorney,

and accountant.   Grant was also the president and sole owner of

ECI, the corporation that sold the recyclers to F&G in the

Whitman transactions.
                               - 7 -

     From 1982 through 1985, Roberts and Grant were in the

business of promoting tax-sheltered investments.   Roberts and

Grant also served as general partners in other investments.

Before the Whitman transactions, Roberts and Grant were clients

of the accounting firm H.W. Freedman & Co. (Freedman & Co.).

     Harris W. Freedman (Freedman), a certified public accountant

and the named partner in Freedman & Co., was the president,

chairman of the board, and 9.1 percent owner of F&G.   Freedman

was experienced with leveraged leasing, and he owned 94 percent

of a Sentinel EPE recycler.

     Freedman & Co. prepared the tax returns for ECI, F&G, and

Clearwater Group, the partnership that was involved in Provizer

v. Commissioner, supra.   Although Freedman & Co. did not prepare

the initial financial projections included in the Whitman private

placement offering memorandum, Freedman & Co. reviewed those

financial projections and made suggestions as to format and

substance.

     Freedman & Co. also provided tax services to John D. Bambara

(Bambara).   Bambara was the president and sole owner of First

Massachusetts Equipment Corp. (FMEC Corp.), another entity that

was involved in Provizer v. Commissioner, supra.   Bambara was

also the president of PI and a member of its board of directors

and with his wife and daughter also owned 100 percent of the

stock of PI, the corporation that sold the recyclers to ECI in
                               - 8 -

the Whitman transactions.

     Elliot I. Miller (Miller), a practicing attorney who was

experienced in tax matters, was the corporate counsel to PI.

Miller represented Grant personally and Grant’s clients who

invested in programs that Grant promoted.     Miller met Grant in

the 1970's when Grant was involved in marketing a coal mine.

Miller was also a 9.1-percent owner of F&G.

     John Y. Taggert (Taggert) was a well-known tax attorney, the

head of the tax department of the New York law firm of Windells,

Marx, Davis & Ives, and an adjunct professor of tax law at the

New York University Law School.   Taggert had been acquainted with

Miller for many years before 1982.     Miller recommended that

Roberts employ Taggert and his firm as counsel to the general

partner in the initial Plastics Recycling partnership.     Taggert

and other members of his firm prepared the offering memorandum,

tax opinion, and other legal documents for the initial Plastics

Recycling partnership, for the Clearwater partnership, and for

about 16 other Plastics Recycling partnerships, including

Whitman.   Taggert owned a 6.66-percent interest in a second-tier

Plastics Recycling partnership.

     Robert Gottsegen (Gottsegen) was a businessman active in the

plastics industry and a longtime business associate of Bambara.

Gottsegen was the sole owner of RRI, the corporation that was

involved in the joint venture in the Whitman transactions, and a
                                - 9 -

9.1-percent owner of F&G.    Gottsegen was the owner of several

Sentinel recyclers and also the petitioner in Gottsegen v.

Commissioner, T.C. Memo. 1997-314.

     Samuel L. Winer (Sam Winer or Winer) was Whitman’s general

partner and tax matters partner, as well as a promoter of the

partnership.   Winer purportedly paid $1,000 for a 1-percent

interest in all items of income, gain, deduction, loss, and

credit of the partnership.

C.   The Private Offering Memorandum

     By a private placement offering memorandum dated September

28, 1982 (the offering memorandum), subscriptions for 18 limited

partnership units in Whitman were offered by the partnership’s

promoter to potential limited partners at $50,000 per partnership

unit.   Pursuant to the offering memorandum, the limited partners

would own 99 percent of Whitman and the general partner, Sam

Winer, would own the remaining 1 percent.    Also pursuant to the

offering memorandum, each limited partner was required to have a

net worth (including residence and personal property) in excess

of $1 million, or net income in excess of $200,000, for each

investment unit.

     The offering memorandum stated that Winer would receive

$62,000 for administrative and other services to be paid from the

proceeds of the private placement offering as “management fees”.

The offering memorandum also stated that the partnership would
                              - 10 -

pay “fees of purchaser representatives and selling commissions”

from the proceeds of the offering in an amount equal to 10

percent of the aggregate price of the units.   Thus, Winer would

earn a 10-percent commission upon selling an interest in the

partnership.   In addition, the offering memorandum stated that

Winer could “retain as additional compensation all amounts not

paid as purchaser representative fees or sales commissions in

connection with the Offering”.

     The face of the offering memorandum warned, in bold capital

letters, that “THIS OFFERING INVOLVES A HIGH DEGREE OF RISK”.

The offering memorandum also warned that “An investment in the

partnership involves a high degree of business and tax risks and

should, therefore, be considered only by persons who have a

substantial net worth and substantial present and anticipated

income and who can afford to lose all of their cash investment

and all or a portion of their anticipated tax benefits.”   The

offering memorandum went on to enumerate significant business and

tax risks associated with an investment in Whitman.   Among those

risks, the offering memorandum stated: (1) There was a

substantial likelihood of audit by the Internal Revenue Service,

and the purchase price paid by F&G to ECI might be challenged as

being in excess of the fair market value; (2) the partnership had

no prior operating history; (3) the management of the

partnership’s business would be dependent on the services of the
                                 - 11 -

general partner, who had limited experience in marketing

recycling or similar equipment; (4) the limited partners would

have no control over the conduct of the partnership’s business;

(5) there were no assurances that market prices for virgin resin

would remain at their current costs per pound or that the

recycled pellets would be as marketable as virgin pellets; and

(6) certain potential conflicts of interest existed.

     The offering memorandum informed investors that the Whitman

transactions would be executed simultaneously.

     The offering memorandum prominently touted the anticipated

tax benefits for the initial year of investment for an investor

in the partnership.     In this regard, the offering memorandum

stated, in part, as follows:

          The principal tax benefits expected from an
     investment in the Partnership are to be derived from
     the Limited Partner’s share of investment and energy
     tax credits and tax deductions expected to be generated
     by the Partnership in 1982. The tax benefits on a per
     Unit basis are as follows:

                                Projected
                            Regular Investment     Projected Tax
              Payment     and Energy Tax Credits    Deductions
      1982    $50,000            $77,000              $38,940


     The Limited Partners are not liable for any additional
     payment beyond their cash investment for their Units,
     nor are they subject to any further assessment.

     The offering memorandum also included a tax opinion prepared

by the law firm of Boylan & Evans concerning tax issues involved
                              - 12 -

in the Plastics Recycling program.4    William A. Boylan (Boylan)

and John D. Evans (Evans) were formerly partners at Windells,

Marx, Davis & Ives, the law firm that had provided the legal

opinion for Sentinel EPE recycler partnerships such as

Clearwater, before leaving in 1982 and forming their own law

firm.

     Also included in the offering memorandum were the reports of

two “evaluators”, Samuel Z. Burstein (Burstein) and Stanley

Ulanoff (Ulanoff).   Burstein was a professor of mathematics at

New York University.   Burstein’s report concluded that the

Sentinel EPS recyclers were capable of continuous recycling.     The

report also concluded that the recycling system would yield a

material having commercial value.

     At the time Ulanoff prepared his report, he was a professor

of marketing at Baruch College and also the author of numerous

books on technical and marketing subjects.    Ulanoff’s report

concluded that the price paid by F&G for the Sentinel EPS

recyclers, the rent paid by Whitman, and the joint venture

profits were fair and reasonable.

     Burstein owned a 5.82-percent interest in another Plastics

Recycling partnership that leased Sentinel EPS recyclers.

Ulanoff owned interests in other Plastics Recycling partnerships


     4
        The tax opinion prepared by Boylan & Evans was part of
the private offering memoranda of approximately 92 other Sentinel
EPS recycler partnerships.
                              - 13 -

that leased both Sentinel EPS and EPE recyclers.5

     The offering memorandum represented that Sentinel EPS

recyclers were unique machines.   However, they were not.    Several

machines capable of densifying low density materials were already

on the market in 1982.   Other plastics machines available at that

time ranged in price from $20,000 to $200,000, including the

Foremost “Densilator”, the Nelmor/Weiss Densification System

(Regenolux), the Buss-Condux Plastcompactor and the Cumberland

Granulator.   See Provizer v. Commissioner, T.C. Memo. 1992-177,

and the discussion regarding respondent’s experts, infra.

Moreover, the recyclers were incapable of recycling expanded

polystyrene by themselves and had to be used in connection with

extruders and pelletizers.

D.   Respondent’s Experts

     At trial, petitioners did not offer expert testimony.

Rather, petitioners stipulated that the Court may adopt its

findings regarding the expert testimony and reports of Steven

Grossman (Grossman) and Richard S. Lindstrom (Lindstrom) as found

in Ulanoff v. Commissioner, T.C. Memo. 1999-170; Gottsegen v.

Commissioner, T.C. Memo. 1997-314; and Fine v. Commissioner, T.C.

Memo. 1995-222.   In those cases, we found Grossman and Lindstrom

to be experts in the fields of plastics, engineering, and



     5
        Ulanoff was also the petitioner in Ulanoff v.
Commissioner, T.C. Memo. 1999-170.
                              - 14 -

technical information, and they submitted reports regarding both

Sentinel EPS and EPE recyclers.6

     1. Grossman

     Grossman is a professor in the Plastics Engineering

Department at the University of Massachusetts at Lowell.    He has

a bachelor of science degree in chemistry from the University of

Connecticut and a doctorate degree in polymer science and

engineering from the University of Massachusetts.   He also has

more than 15 years of experience in the plastics industry,

including more than 4 years of experience as a research and

development scientist at Upjohn Company in its Polymer Research

Group.

     Grossman is also a partner in the law firm of Hayes,

Soloway, Hennessey, Grossman & Hage, P.C..   The firm practices in

the area of intellectual property, including patents, trademarks,

copyrights, and trade secret protection.

     Grossman's report concerning the value of the Sentinel EPS

recyclers discusses the limited market for the recycled plastic

material.   Grossman concluded that these recyclers were unlikely

to be successful products because of the absence of any new

technology, the absence of a continuous source of suitable scrap,



     6
        Grossman and Lindstrom were also found to be experts in
Provizer v. Commissioner, T.C. Memo. 1992-177, as well as in a
number of other Plastics Recycling cases. See, e.g., Carroll v.
Commissioner, T.C. Memo. 2000-184.
                               - 15 -

and the absence of any established market.    Grossman suggested

that a reasonable comparison of the products available in the

polystyrene industry in 1982 with the Sentinel EPS recyclers

reveals that the recyclers had very little commercial value and

were similar to comparable products available on the market in

component form.   For these reasons, Grossman opined that the

Sentinel EPS recyclers did not justify the "one-of-a-kind" price

tag that they carried.

     Specifically, Grossman reported that there were several

machines on the market as early as 1981 that were functionally

equivalent to, and significantly less expensive than, the

Sentinel EPS recyclers.   These machines included: (1) The Japan

Repro recycler, available in 1981 for $53,000; (2) the Buss-

Condux Plastcompactor, available before 1981 for $75,000; (3)

Foremost Machine Builders' "Densilator", available from 1978-1981

for $20,000; and (4) the Midland Ross Extruder, available in 1980

and 1981 for $120,000.    Grossman observed that all of these

machines were "widely available".

     Grossman examined both the Sentinel EPS recycler and a Japan

Repro recycler and found that the construction of the two

machines was "nearly identical".    Further, Grossman concluded

that the recycled polystyrene produced by both machines would

also be nearly identical.    In Grossman's opinion, neither the

Japan Repro recycler nor the Sentinel EPS recycler represented "a
                              - 16 -

serious effort at recycling" because the end product from both

machines was not completely devolatized and required further

processing.   It was also Grossman's opinion that an individual

who seriously wanted to recycle would not purchase either of

these machines.

     Grossman's opinion regarding the Sentinel EPS recycler was

based on his personal examination of a Sentinel EPS recycler, as

well as the descriptions of such recyclers as set forth in the

writings of other professionals.   Grossman did not, however,

observe the Sentinel EPS recycler in actual operation.

     Finally, Grossman reported on the relationship between the

plastics industry and the petrochemical industry.   Grossman noted

that although the development of the petrochemical industry is a

contributing factor in the growth of the plastics industry, the

two industries have a "remarkable degree of independence".

Grossman observed that the "oil crisis" in 1973 triggered "dire"

predictions about the future of plastics that had not been

fulfilled in 1981.   Grossman stated that the cost of a plastic

product depends, in large part, on technology and the price of

alternative materials.   Grossman's studies concluded that a 300-

percent increase in oil prices results in a 30- to 40-percent

increase in the cost of plastic.

     Grossman did not specifically value the Sentinel EPS

recycler.   However, as previously stated, Grossman concluded that
                              - 17 -

existing technology was available that provided equivalent

capability of recycling polystyrene.   Specifically regarding the

Sentinel EPS recycler, Grossman also concluded that recycling

equipment that achieved the same result as the Sentinel EPS

recycler sold for about $50,000 during the relevant period.

     2. Lindstrom

     Lindstrom graduated from the Massachusetts Institute of

Technology with a bachelor's degree in chemical engineering.

From 1956 until 1989, Lindstrom worked for Arthur D. Little,

Inc., in the areas of process and product evaluation and

improvement and new product development, with special emphasis on

plastics, elastomers, and fibers.   At the time of trial,

Lindstrom continued to pursue these areas as a consultant.

     In his report, Lindstrom determined that several different

types of equipment capable of recycling expanded polystyrene were

available and priced between $25,000 and $100,000 in 1982.    With

respect to the Sentinel EPS recycler in 1982, Lindstrom stated:

“Several machines were available that could reprocess EPS into

higher quality, more useful, higher value product and these

machines or processing systems cost $50,000 to $100,000.”

     Lindstrom examined the Buss-Condux Plastcompactor and the

Regenolux.   Lindstrom found that these machines were functionally

equivalent to the Sentinel EPS recycler and were available in the

years and at the prices reported by Grossman, detailed supra.
                              - 18 -

Lindstrom also reported that various equipment companies, such as

the Cumberland Engineering Division of John Brown Plastics

Machinery, were willing to provide customized recycling programs

to companies at a minimum cost of $50,000.

     Lindstrom found that the Sentinel EPS recycler could process

between 100 and 200 pounds of plastic per hour.

     Lindstrom observed a Sentinel EPS recycler in operation and

was allowed to inspect the machine closely.   Lindstrom estimated

the manufacturing cost of the Sentinel EPS recycler to be

approximately $20,000 and the market value of the machine to be

approximately $25,000.

E.   Fair Market Value of the Recyclers

     At all relevant times, the fair market value of the Sentinel

EPS recycler did not exceed $50,000 per machine.7

F.   Petitioners and Their Introduction to Whitman

     Jim Barber (petitioner) is a well-educated individual,

having graduated from the University of Michigan in 1957 with a

bachelor of science degree in mechanical engineering.   For most

of his career, petitioner has worked in the field of industrial

automation.   In 1982, petitioner was employed by the Bendix

Corp., and he was about 48 years old.


     7
        Our finding is based on the expert reports and testimony
of Grossman and Lindstrom, as stipulated by the parties. We note
that petitioners independently stipulated that the Sentinel EPS
recycler had a maximum value of between $30,000 to $50,000 per
machine. That latter stipulation is consistent with our finding.
                                - 19 -

     Petitioner Betty L. Barber is also a well-educated

individual.   During the years in issue, she was a college

professor at Eastern Michigan University.

     Petitioners are financially successful.       During the years in

issue, they received both compensation for services and income

from other sources in the total amount (exclusive of partnership

losses) as follows:

                       1982               1983
                      $90,990            $70,573

     Petitioner is a relatively sophisticated investor, and he

generally made the investment decisions for his family.

     Prior to purchasing a partnership interest in Whitman,

petitioner’s investment portfolio included a variety of

interests.    For example, in 1978, petitioner invested in

University Associates, a real estate partnership that owned an

apartment complex in San Diego, California.    In 1979 through

1981, petitioner invested in several oil and gas partnerships,

including Winer Development Co.    In addition, petitioner

maintained an account with a national brokerage firm and invested

in publicly held securities.    He also owned a receivable in the

form of a land contract.

     Petitioner has a younger brother, John Barber (petitioner’s

brother), who, like petitioner, graduated from the University of

Michigan with a degree in engineering.    Since the mid-1970's,

petitioner’s brother has been enrolled to practice before the
                                - 20 -

Internal Revenue Service (an enrolled agent) and has prepared tax

returns.   Although petitioner has occasionally consulted with his

brother, by telephone, on “complex” tax matters, petitioner has

never asked his brother to prepare petitioners’ tax returns.

Also, petitioner has never disclosed details regarding his own

personal financial status to his brother.   However, petitioner

has asked his brother for investment advice, and his brother has

offered such advice.   For example, it was petitioner’s brother

who recommended that petitioner invest in University Associates

in 1978, and it was petitioner’s brother who put petitioner in

touch with Sam Winer in 1979.    Contact with Winer led petitioner

to invest in Winer-promoted oil and gas partnerships, including

Winer Development Co., from 1979 through 1981.   These various

Winer-promoter partnerships produced tax benefits.

     In September 1982, petitioner contacted Winer and expressed

an interest in investing in another oil and gas partnership.

Winer recommended instead that petitioner invest in the plastics

recycling industry, and Winer provided petitioner with a copy of

the offering memorandum for the Whitman partnership.    See supra

C.   In promoting the investment, Winer stated that petitioner

would receive tax benefits.

      Petitioner looked at the offering memorandum.   Petitioner

understood that if he invested in Whitman, then Winer, as

promoter, would receive a commission based on petitioner’s
                             - 21 -

purchase of an interest in the partnership.

     Before making a decision, petitioner asked Winer to send a

copy of the offering memorandum to petitioner’s brother.

Subsequently, petitioner telephoned his brother and, assuming

that his brother had read the offering memorandum, asked some

questions about making the investment.    After petitioner’s

brother “didn’t raise any objections to it”, petitioner decided

to invest.

     In or about October 1982, petitioner signed a subscription

agreement and purchased three-tenths of a limited partnership

unit (a 1.66 percent interest) in Whitman for $15,000.

     Petitioner did not, before signing the subscription

agreement and investing in Whitman, seek the advice of any expert

in the plastics recycling industry, nor did he talk to anyone

involved in the plastics recycling industry.    Likewise,

petitioner did not make any independent investigation of the fair

market value of the Sentinel EPS recycler; rather, he accepted,

and did not question, the $1,750,000 per machine value as

represented in the offering memorandum.

     Petitioner was influenced to sign the subscription agreement

by Winer and petitioner’s brother.    However, Winer did not have

an engineering background, and he was not an expert in either

plastics materials or plastics recycling.    Moreover, Winer did

not represent that he possessed specialized knowledge of the
                              - 22 -

plastics recycling industry, and he had, at most, only limited

experience in marketing recycling or similar equipment.

Petitioner’s brother had no specialized knowledge of the plastics

recycling industry, and he had no expertise in appraising either

the value of property in general or plastics recycling machines

in particular.   Petitioner did not know whether his brother had

any knowledge regarding the value of the Sentinel EPS recyclers,

nor did petitioner know whether his brother talked to anyone in

the plastics industry before giving him “advice”.   Petitioner

also did not know whether his brother read the offering

memorandum.

     At the time that petitioner signed the subscription

agreement and invested in Whitman, petitioner did not have any

education or work experience in either plastics materials or

plastics recycling, nor did petitioner have any specialized

knowledge about either the plastics industry in general or the

Sentinel EPS recycler in particular.

     In contrast, at the time that he signed the subscription

agreement, petitioner knew that his investment in Whitman offered

immediate tax benefits in excess of his $15,000 investment.

Petitioner had not previously made any investment that offered

immediate tax benefits in excess of his investment.   Petitioner

was influenced to invest in Whitman by the tax benefits described

in the offering memorandum and the statements made by Winer
                              - 23 -

regarding such benefits.

G.   Ultimate Finding Regarding Petitioner’s Motivation

     Petitioner invested in Whitman principally because the

investment offered immediate tax benefits in excess of his

investment.

H.   Events Leading to the Filing of Petitioners’ 1982 Return

     Early in 1983, petitioner received from Sam Winer a Schedule

K-1 (Partner’s Share of Income, Credits, Deductions, etc.) for

the Whitman partnership for the taxable year 1982.    The Schedule

K-1 disclosed that petitioner’s share of Whitman’s loss for 1982

was $11,852 and that petitioner’s share of the partnership’s

basis in the 4 EPS recyclers for investment credit purposes was

$116,200.   Although these amounts were actually consistent with

the tax benefits promised in the offering memorandum, petitioner

was sensitive to their magnitude and mindful of the fact that

they might flag his investment as a tax shelter.    Petitioner was

also uncertain how to convert his share of the partnership’s

basis in the recyclers into the regular investment tax credit and

the energy tax credit on his individual return.    Accordingly,

petitioner contacted a certified public accountant for

assistance.8

     The accountant that petitioner contacted was unable to help



     8
        Petitioner did not contact his brother because petitioner
did not disclose personal financial information to him.
                              - 24 -

and suggested instead that petitioner consult a tax attorney.

Accordingly, petitioner sought out Gerald Thompson (Thompson), a

young attorney who was affiliated with Krandle, Thompson & Mier

P.C. (KT&M), a small law firm in Livonia, Michigan.9   The firm’s

brochure indicated that the firm specialized in all areas of

business and corporation law and taxation.    Neither KT&M nor

Thompson had any relationship with either Winer or Whitman.

     Petitioner provided Thompson with copies of the Whitman

offering memorandum and his Schedule K-1.

     Thompson did not have any specialized knowledge regarding

the plastics recycling industry, and he did not have any

specialized knowledge regarding the nontax business aspects of

petitioner’s Sentinel EPS recycler investment.    Further, Thompson

did not make any independent attempt to evaluate the Whitman

partnership or to value the EPS recycler; rather, he confined

himself to the offering memorandum and petitioner’s Schedule K-1.

     As an attorney, Thompson did not consider himself qualified

to provide investment advice, and his practice was not to provide

such advice.   Thompson did not provide petitioner with any

investment advice.   Rather, Thompson provided petitioner with a

2-page letter dated April 4, 1983 (Thompson’s letter), together

with a completed Form 3468 (Computation of Investment Credit) and

a copy of an article on partnership audits.


     9
         Thompson was the son of one of the firm’s named partners.
                              - 25 -

     The opening paragraph of Thompson’s letter read as follows:

          You have retained us to review the Confidential Private
     Offering Memorandum (“Memorandum”) of Whitman Recycling
     Associates for the purpose of preparing and advising you
     with regard to Form 3468 to be filed with your 1982 tax
     return. Based upon our review of the Memorandum, we have
     prepared a Form 3468 as enclosed (with lines 18-27 yet to be
     completed), showing a full crediting of the amounts shown on
     your K-1 from the Partnership. It is our belief that the
     tax treatment of such items is more likely than not the
     proper treatment. However, we do not opine as to any other
     matters which may or may not be covered in the Memorandum or
     the opinion of the counsel therein.

     Thompson did not consider his letter to be a rousing

endorsement of the investment; rather, he considered the

investment to be “aggressive”, and his letter was replete with

“areas of concern” and various disclaimers.   One area of concern

focused on the value of the EPS recyclers:

          Obviously, the fair market value (“FMV”) of the
     Sentinel EPS Recyclers (“Recyclers”) is important
     because it is the starting point for determining the
     amount of credits available to the Partnership.
     Although I am not in a position to judge the FMV of the
     Recyclers, the valuation made in the Memorandum is
     challengeable. First of all, with regard to Ex. F,
     [Burstein’s and Ulanoff’s reports], neither evaluator
     appears to be primarily a property appraiser, and
     neither engages in an economic analysis of cost of
     production of the Recyclers, reasonable profit,
     comparables, capitalization of income, or other factors
     normally used in equipment appraisals.

Other areas of concern focused on the step-up in purchase price

from ECI to F&G, potential conflicts of interest, possible lack

of arm’s-length negotiations, F&G’s purported $7 million basis in

the recyclers, use of nonrecourse financing, and the circular

nature of the transactions.
                                - 26 -

     Thompson’s letter concluded with the following paragraph:

          Notwithstanding the foregoing risks, however, the
     items on your Partnership K-1 may be used as is for the
     reason that both the valuation overstatement penalty
     and the substantial understatement of income tax
     penalty are waived whenever the taxpayer (i.e., you)
     can show there was a reasonable basis for the claims
     made and that such claims were made in good faith. The
     [offering] memorandum, as well prepared as it is,
     should be an adequate “reasonable basis” upon which to
     base the filing of your Form 3468. Additionally, I
     believe you may rely upon it in good faith
     notwithstanding this letter, for this letter is no more
     legally enforceable than the Memorandum.

     After petitioner received Thompson’s letter, petitioner

prepared Form 3468 in his own hand, using the partially completed

copy prepared by Thompson as a model.    Petitioner then completed

petitioners’ Federal income tax return (Form 1040), which

petitioners signed on April 11, 1983.

     In preparing petitioners’ tax return for 1982, petitioner

followed his custom of preparing petitioners’ returns himself

without the assistance of a return preparer.10

I.   Petitioners’ Tax Returns

     1.   The Whitman Partnership

     The tax benefits claimed by petitioners on their Federal

income tax return for 1982, the initial year of investment in

Whitman, exceeded their $15,000 investment in the partnership.

Thus, on their 1982 return, petitioners claimed a regular



     10
        Petitioner also prepared petitioners’ tax return for
1983 without the assistance of a return preparer.
                                - 27 -

investment tax credit and energy tax credit in the aggregate

amount of $17,511.    Petitioners also claimed a loss in the amount

of $11,852 for their distributive share of the partnership’s

reported loss for 1982.    The investment credits and the

partnership loss served to reduce petitioners’ liability for

Federal income tax as reported on their 1982 return by $23,240.11

     2.    Other Partnerships

     Petitioners reported losses from partnerships other than

Whitman on their income tax returns for 1982 and 1983, as

follows:

            Partnership             1982         1983
            University Associates   $589         $554
            Winer Development        255          —
            Columbian Oil & Gas      –--         3,441
            Enterprise Energy        –--         3,074

     Petitioners did not report any income or gain in respect of

any partnership on either their 1982 or 1983 tax return.

J.   The Partnership-Level Proceeding

     Whitman is a so-called TEFRA partnership subject to the

unified partnership audit and litigation procedures set forth in

sections 6221 through 6233.     See Tax Equity and Fiscal



     11
        Petitioners also claimed a loss on their 1983 return in
the amount of $594 for their distributive share of Whitman’s
reported loss for that year. The partnership loss served to
reduce petitioners’ tax liability for 1983 by $193.
     The record does not reveal whether petitioners claimed
losses from Whitman on their returns for years after 1983;
however, the record does establish that petitioner never made a
profit in any year from his investment in Whitman.
                              - 28 -

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a),

96 Stat. 648.   On May 30, 1989, respondent mailed a Notice of

Final Partnership Administrative Adjustment (FPAA) to Sam Winer,

the tax matters partner of the Whitman partnership, for each of

the taxable years 1982 and 1983.12   A copy of each FPAA was also

mailed to petitioners.

     The FPAA’s advised petitioners of adjustments respondent

proposed to make to the partnership returns (Forms 1065) filed by

Whitman.   Specifically, the FPAA’s disallowed all deductions and

credits claimed by Whitman in connection with its plastics

recycling activities for 1982 and 1983.13

     On June 22, 1989, a case was commenced in this Court at

docket No. 14535-89 and captioned “Whitman Recycling Associates,

Sam Winer, Tax Matters Partner, Petitioner v. Commissioner of the




     12
        Respondent also mailed FPAA’s to Winer for the taxable
years 1984 and 1985, which years were also in issue as part of
the partnership action described infra in the text.
     13
        In October 1988, some 7 months before respondent mailed
the FPAA’s, respondent made the so-called Plastics Recycling
Project Settlement Offer (the settlement offer). The settlement
offer was made in writing to Winer as Whitman’s tax matters
partner. The terms of the settlement offer are described in
detail in section “I” of the Background portion of Davenport
Recycling Associates v. Commissioner, T.C. Memo. 1998-347, affd.
220 F.3d 1255 (11th Cir. 2000). Suffice it to say that the
transmittal letter stated that the settlement offer would not be
repeated and that the offer would expire 30 days from the date of
the letter. Winer did not accept the settlement offer on behalf
of the partnership. Accordingly, respondent mailed the FPAA’s
that are described above in the text.
                               - 29 -

Internal Revenue, Respondent”.14   Subsequently, on February 23,

1994, the Court entered decision in the Whitman case pursuant to

the Commissioner’s Motion for Entry of Decision under Rule

248(b).   The Court’s decision, which reflected the full

concession by Whitman of all items of income, loss, and the

underlying valuation used for the Sentinel EPS recyclers for tax

credit purposes for 1982 and 1983, completely sustained the

Commissioner’s FPAA determinations for those years.15

     At no time during the pendency of the proceedings in docket

No. 14535-89 did petitioners file with the Court a notice of

election to participate in the partnership action pursuant to

Rule 245(b).

                               OPINION

     We have decided many Plastics Recycling cases.     Most of

those cases have presented issues regarding additions to tax for

negligence.    See, e.g., Barlow v. Commissioner, T.C. Memo. 2000-

339; Carroll v. Commissioner, T.C. Memo. 2000-184; Ulanoff v.

Commissioner, T.C. Memo. 1999-170; Gottsegen v. Commissioner,

T.C. Memo. 1997-314; Greene v. Commissioner, T.C. Memo. 1997-296;



     14
        All of the limited partners of Whitman who had an
interest in the outcome of the partnership proceeding were
treated as parties to the proceeding. See sec. 6226(c) and (d).
See also Title XXIV, Tax Court Rules of Practice and Procedure,
regarding partnership actions.
     15
        Similarly, the Court’s decision completely sustained the
Commissioner’s FPAA determinations for 1984 and 1985.
                              - 30 -

Kaliban v. Commissioner, T.C. Memo. 1997-271; Sann v.

Commissioner, T.C. Memo. 1997-259 n.13 (and cases cited therein),

affd. Addington v. Commissioner, 205 F.3d 54 (2d Cir. 2000).     We

found the taxpayers liable for the additions to tax for

negligence in nearly all of those cases.

I. Section 6653(a)(1) and (2) Negligence

     Respondent determined that petitioners are liable for

additions to tax under section 6653(a)(1) and (2) with respect to

the underpayment attributable to petitioners’ investment in

Whitman.   Petitioners have the burden of proof to show that they

are not liable for the additions to tax.   See Addington v.

Commissioner, supra; Goldman v. Commissioner, 39 F.3d 402, 407

(2d Cir. 1994), affg. T.C. Memo. 1993-480; Luman v. Commissioner,

79 T.C. 846, 860-861 (1982); Bixby v. Commissioner, 58 T.C. 757,

791-792 (1972).   See generally Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).16

     Section 6653(a)(1) and (2) imposes additions to tax if any

part of the underpayment of tax is due to negligence or

intentional disregard of rules or regulations.   Negligence is

defined as the failure to exercise the due care that a reasonable


     16
        Cf. sec. 7491(c), effective for court proceedings
arising in connection with examinations commencing after July 22,
1998. In the present cases, the examination of petitioners’
income tax returns for 1982 and 1983 commenced well before July
22, 1998.
                               - 31 -

and ordinarily prudent person would exercise under the

circumstances.   See Neely v. Commissioner, 85 T.C. 934, 947

(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, 740 (1973).     In this regard,

the determination of negligence is highly factual.    "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."    Turner v. Commissioner, T.C. Memo. 1995-363.

     Under some circumstances, a taxpayer may avoid liability for

negligence if reasonable reliance on a competent professional

adviser is shown.    See United States v. Boyle, 469 U.S. 241, 250-

251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

Reliance on professional advice, standing alone, is not an

absolute defense to negligence, but rather a factor to be

considered.   See Freytag v. Commissioner, supra.    For reliance on

professional advice to excuse a taxpayer from negligence, the

taxpayer must show that the professional had the requisite

expertise, as well as knowledge of the pertinent facts, to

provide informed advice on the subject matter.    See David v.
                               - 32 -

Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995), affg. T.C.

Memo. 1993-621; Goldman v. Commissioner, supra; Freytag v.

Commissioner, supra.

     In making the investment in Whitman, petitioner contends

that he reasonably relied on the advice of two individuals,

namely, his brother and Winer.

     A.   Petitioner’s Reliance on Winer

     Petitioner contends that before he invested in Whitman, he

had a history of investing with Winer and that such investments

were financially successful.   Therefore, petitioner argues, he

was justified on relying on Winer’s advice in deciding to invest

in Whitman.   We disagree.

     Although the record demonstrates that petitioner did invest

in several Winer-promoted investments from 1979 to 1981, there is

no evidence, other than petitioner’s unsupported allegation, that

such investments were financially successful.     In this regard, it

is well established that the Court is “not required to accept the

self-serving testimony of petitioner * * * as gospel.”      Tokarski

v. Commissioner, 87 T.C. 74, 77 (1986).     See Niedringhaus v.

Commissioner, 99 T.C. 202, 219-220 (1992).      It should have been a

simple matter for petitioner to produce documentary evidence

(e.g., investment reports, prior years’ tax returns) to support

his allegation.   However, he did not.     In this regard, it is also

well established that a party’s failure to introduce documentary
                              - 33 -

evidence that is within his possession or control and that he

implies would be favorable to him, gives rise to the presumption

that, if produced, such evidence would be unfavorable.   See

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165

(1946), affd. 162 F.2d 513 (10th Cir. 1947).   Furthermore, the

documentary evidence introduced at trial suggests that

petitioner’s Winer-promoted investments may have been successful

only in producing tax benefits.   Thus, on petitioners’ 1982

return, petitioners claimed a partnership loss from Winer

Development Co.; on petitioners’ 1983 return, petitioners claimed

partnership losses from two other oil and gas partnerships.    It

is at least noteworthy that petitioners did not report any income

or gain from any partnership on either their 1982 or 1983 tax

return.

     In addition, reliance on representations by insiders or

promoters has been held to be an inadequate defense to

negligence.   See Pasternak v. Commissioner, 990 F.2d 893, 903

(6th Cir. 1993) (reliance on promoter of tax shelter is not a

defense to the negligence addition), affg. T.C. Memo. 1991-181;

Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992)(even

an unsophisticated taxpayer may not reasonably rely on “advice”

from a promoter of a tax shelter); Goldman v. Commissioner,

supra; LaVerne v. Commissioner, 94 T.C. 637, 652-653 (1990),

affd. without published opinion 956 F.2d 274 (9th Cir., 1992),
                               - 34 -

affd. without published opinion sub nom. Cowles v. Commissioner,

949 F.2d 401 (10th Cir. 1991).   Advice from such individuals “is

better classified as sales promotion”.     Vojticek v. Commissioner,

T.C. Memo. 1995-444.   The rationale for this view is based on the

insider’s or promoter’s self-interest, which makes such “advice”

inherently suspect.    See Addington v. Commissioner, 205 F.3d at

59 (“It is unreasonable for taxpayers to rely on the advice of

someone who they should know has a conflict of interest.”);

Goldman v. Commissioner, 39 F.3d at 408; LaVerne v. Commissioner,

supra at 652-653.

     In the present cases, Winer’s self-interest is clearly

demonstrated by the offering memorandum.    Thus, the offering

memorandum stated: (1) Winer would receive a 1-percent interest

in “all items of income, gain, deduction, loss or credit arising

from the operations of the Partnership”; (2) Winer would receive

$62,000 for administrative and other services to be paid from the

proceeds of the private placement offering as “management fees”;

(3) Whitman would pay “fees of purchaser representatives and

selling commissions” from the proceeds of the offering in an

amount equal to 10 percent of the aggregate price of the units;

and (4) Winer could “retain as additional compensation all

amounts not paid as purchaser representative fees or sales

commissions in connection with the Offering”.    The incentives to

Winer to tout the investment were therefore readily apparent.
                                - 35 -

     At trial, petitioner admitted understanding that if he

invested in Whitman, then Winer, as promoter, would receive a

commission based on petitioner’s purchase of an interest in the

partnership.    Petitioner also admitted that he looked at the

offering memorandum and therefore should have known, if he did

not know in fact, that Winer stood to benefit financially in the

other ways enumerated above.     See Addington v. Commissioner, 205

F.3d at 59.

     Pleas of reliance have also been rejected when neither the

taxpayer nor the adviser knew anything about the nontax business

aspects of the contemplated venture.     See id. at 58 (“In general,

it is unreasonable to rely on an adviser who lacks knowledge

about the industry in which the taxpayer is investing.”); Freytag

v. Commissioner, supra; Beck v. Commissioner, 85 T.C. 557 (1985);

see also Patin v. Commissioner, 88 T.C. 1086, 1131 (1987), affd.

without published opinion 865 F.2d 1264 (5th Cir. 1989), affd.

sub nom. Gomberg v. Commissioner, 868 F.2d 865 (6th Cir. 1989),

affd. sub nom. Skeen v. Commissioner, 864 F.2d 93 (9th Cir.

1989), affd. per curiam without published opinion sub nom.

Hatheway v. Commissioner, 856 F.2d 186 (4th Cir. 1988); Klieger

v. Commissioner, T.C. Memo. 1992-734.     Insofar as Winer is

concerned, Winer did not have an engineering background, and he

was not an expert in either plastics materials or plastics

recycling.     Moreover, Winer never represented that he possessed
                              - 36 -

specialized knowledge of the plastics recycling industry, and he

had, at most, only limited experience in marketing recycling or

similar equipment.   Indeed, Winer’s limited experience (at best)

in marketing recycling or similar equipment was one of the

business risks that the offering memorandum specifically

identified.

     In sum, we do not think that petitioner’s professed reliance

on Winer’s advice was reasonable.

     B.   Petitioner’s Reliance on His Brother

     Petitioner also contends that he relied on his brother’s

advice in deciding to invest in Whitman and that such reliance

was reasonable.   Although the record demonstrates that petitioner

relied on his brother, we do not think that such reliance was

reasonable.

     As previously stated, pleas of reliance have been rejected

when neither the taxpayer nor the adviser knew anything about the

nontax business aspects of the contemplated venture.   E.g.,

Addington v. Commissioner, supra; Freytag v. Commissioner, supra;

Beck v. Commissioner, supra; see also Patin v. Commissioner,

supra; Kleiger v. Commissioner, supra.   In the present cases,

petitioner’s brother had no specialized knowledge of the plastics

recycling industry and had no expertise in appraising either the

value of property in general or plastics recycling machines in

particular.   In fact, the record suggests that petitioner knew
                               - 37 -

that his brother had no knowledge regarding the value of the

Sentinel EPS recyclers.    Moreover, petitioner did not know

whether his brother even talked to anyone in the plastics

industry before giving him “advice”.    In addition, petitioner did

not know whether, but rather merely assumed that, his brother

read the offering memorandum before giving him “advice”.

     It is noteworthy that petitioner did not call his brother to

testify at trial.   Petitioner’s failure to do so gives rise to

the inference that his brother’s testimony would not have been

favorable to petitioner.    See Mecom v. Commissioner, 101 T.C.

374, 386 (1993), affd. without published opinion 40 F.3d 385 (5th

Cir. 1994); Pollack v. Commissioner, 47 T.C. 92, 108 (1966),

affd. 392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co.

v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513

(10th Cir. 1947).

      Petitioners rely on Dyckman v. Commissioner, T.C. Memo.

1999-79, for the proposition that reliance on a trusted friend or

adviser (such as petitioner’s brother) relieves a taxpayer from

liability for negligence.    That case, however, is clearly

distinguishable from the present ones.

     In Dyckman v. Commissioner, supra, we held for the taxpayers

on the issue of negligence based on special and unusual

circumstances, including the taxpayers’ complete lack of

sophistication in investment matters and the long-term
                               - 38 -

relationship of trust and friendship that existed between the

taxpayers and their C.P.A.    Also determinative was the fact that

the taxpayers did not invest as a means of obtaining tax

benefits; rather, their sole motivation was to provide for their

retirement, and they were not even aware that their investment

was in a partnership designed to produce tax benefits.     Further,

the taxpayers were not provided with any literature, such as an

offering letter or prospectus, regarding their investment.

     In contrast, petitioner is a relatively sophisticated

investor and possessed investment experience at the time that he

invested in Whitman.    Moreover, petitioner was also provided with

a copy of the offering memorandum.      Furthermore, petitioner was

aware that his investment in Whitman produced immediate tax

benefits in excess of his investment.     Indeed, the promise of

such benefits was the principal factor that motivated petitioner

to invest in Whitman.

     For the foregoing reasons, petitioners’ reliance on Dyckman

v. Commissioner, supra, is misplaced.      Likewise, petitioners’

reliance on Zidanich v. Commissioner, T.C. Memo. 1995-382, is

misplaced for essentially the same reasons.

     In addition to the foregoing, we are not convinced that

petitioner regarded his brother as a trusted adviser.      First, the

contacts between petitioner and his brother on financial matters

appear to have been casual in nature, and those contacts were
                               - 39 -

invariably over the telephone.   Second, petitioner has never

disclosed details regarding his own personal financial status to

his brother.   Petitioner’s reticence in making disclosures to his

brother is illustrated by the following passage from the trial

transcript:

          Q: Mr. Barber, we’ve heard a lot about your
     brother. You rely on him almost exclusively for
     investment advice?

          A: I rely on him as a major [source] of advice.
     As I indicated earlier I also have an Olde [brokerage
     firm] stockbroker that’s done pretty good too. But my
     brother’s support goes back a long time because he’s
     been an enrolled agent and tax preparer for a long
     time, and certainly whenever I have a complex tax
     question or things like that, I do go to him.

          Q: Okay. Did you ask your brother about how to
     prepare the form to attach to your 1982 return?

          A: No, I did not. I only ask him questions over
     the phone. I don’t show him my own personal financial
     data. I do keep that separate from him.

          Q: Okay. So he doesn’t have a full picture of
     your financial status, so to speak?

          A:   Probably not.

          Q:   So he doesn’t know how much money you earn?

          A:   Right.

          Q: He doesn’t know all the different investments
     that you end up making?

          A: I don’t talk to him about my Olde stock,
     because that’s through my stockbroker I do that.

          Q: Okay. So you call upon him when you want some
     advice from him?
                                  - 40 -

             A:   Right.   Complex tax questions, things like
     that.

     In sum, we do not think that petitioner’s professed reliance

on his brother’s advice was reasonable.

     C.   Petitioner’s Reliance on Thompson

     Petitioner does not contend that he relied on Thompson in

making the investment in Whitman.       However, after having made the

investment, petitioner contends that he relied on Thompson in

claiming the associated tax benefits on his income tax returns.

Petitioner also contends that such reliance was reasonable.         We

acknowledge that neither Thompson nor his firm had any

relationship with either Winer or Whitman.       However, for the

following reasons we disagree that petitioner’s professed

reliance on Thompson was reasonable.

     First, Thompson was not an investment adviser.       Indeed, he

did not consider himself qualified to provide investment advice,

and his practice was not to provide such advice.       Thompson did

not purport to, nor did he, provide petitioner with investment

advice.   Cf. Anderson v. Commissioner, 62 F.3d 1266, 1268 (10th

Cir. 1995) (wherein the taxpayers relied on their own investment

adviser regarding the soundness of their investment), affg. T.C.

Memo. 1993-607.

     Second, Thompson did not have any specialized knowledge

regarding the plastics recycling industry.       In addition, Thompson

did not have any specialized knowledge regarding the nontax
                              - 41 -

business aspects of petitioner’s Sentinel EPS recycler

investment.   Thompson was therefore in no position himself to

evaluate either the technology of the Sentinel EPS recyclers or

whether the Whitman partnership was a viable economic enterprise.

See, e.g., Addington v. Commissioner, 205 F.3d at 58 (“In

general, it is unreasonable to rely on an adviser who lacks

knowledge about the industry in which the taxpayer is

investing.”).

     Third, Thompson did not make any independent attempt to

evaluate either the technology of the EPS recyclers or whether

the Whitman partnership was a viable economic enterprise.     He was

therefore in no position to opine on either of these matters.

     Fourth, Thompson had no knowledge of the value of the

Sentinel EPS recyclers, and he made no independent attempt to

determine their value.   Yet Thompson recognized, and he so

advised petitioner, that “the fair market value * * * of the

Sentinel EPS Recyclers * * * is * * * the starting point for

determining the amount of credits available to the Partnership.”

     Fifth, Thompson based his advice solely on the materials

furnished to him by petitioner, namely, the offering memorandum

and the 1982 Schedule K-1.

     Sixth, Thompson regarded the Whitman investment to be

“aggressive”, and he so advised petitioner.   At trial, Thompson

described what “aggressive” meant:
                              - 42 -

          A: * * * So, yes, they [Whitman and its promoter]
     were making maximum use, pushing the limit right to the
     edge. It was very aggressive or I wouldn’t have said
     it was. You know, you have to know how to deal with
     aggressive investments. Doesn’t mean it’s wrong, just
     means you take your chance.

          Q: I’m sorry.    You said you must “take your
     chance”?

          A:   You just take your chance.

          Q: And this is the kind of investment that you
     thought–-

          A: How close can you walk to the line without
     getting caught or tripped.

     Finally, Thompson’s letter expressed so many misgivings, and

was filled with so many qualifications, reservations, and

disclaimers, as to undermine any contention that the letter

justified petitioner’s reporting position.   Thus, numerous “areas

of concern” were identified in the letter.   First and foremost

among such “areas of concern” was the value of the recyclers,

which Thompson identified as “the starting point for determining

the amount of credits available to the Partnership.”   Thompson

expressly advised petitioner that “I am not in a position to

judge the FMV of the Recyclers”.   Yet Thompson, even with his

lack of appraisal skills, was able to conclude that “the

valuation made in the Memorandum is challengeable.”    He then went

on to explain why:

     First of all, with regard to * * * [Burstein’s and
     Ulanoff’s reports], neither evaluator appears to be
     primarily a property appraiser, and neither engages in
     an economic analysis of cost of production of the
                              - 43 -

     Recyclers, reasonable profit, comparables,
     capitalization of income, or other factors normally
     used in equipment appraisals.

In other words, no rational basis existed for the exorbitant

value assigned to the recyclers in the offering memorandum.

     At trial, Thompson testified that “I don’t consider my

letter to be a rousing endorsement of the investment”, an

assertion that can only be described as an understatement when

one considers the conclusion expressed in the letter: “I believe

you may rely upon [the offering memorandum] notwithstanding this

letter, for this letter is no more legally enforceable than the

Memorandum.” (Emphasis added.)   We regard this conclusion as

tantamount to a total disclaimer, a view that is supported by

Thompson’s testimony at trial:

          Q: Is there any reservation that you have on this
     * * * [conclusion] of the letter?

          A: Do I have a reservation? You mean would I
     take anything back of what I said?

          Q:   Sure.

          A: No, I don’t think I gave very much away.
     There’s nothing to take back.

     Petitioner’s contention that he regarded Thompson’s letter

as positive justification for claiming the tax credits and loss

deductions is, of course, self-serving.   See Tokarski v.

Commissioner, 87 T.C. at 77; Niedringhaus v. Commissioner, 99

T.C. at 219-220.   To accept petitioner’s contention would require

us to ignore the clear tenor of the letter and take several
                              - 44 -

statements out of context.   We are unwilling to do that.

     As the trier of fact, “it is our duty to listen to the

testimony, observe the demeanor of the witnesses, weigh the

evidence, and determine what we believe.”   Kropp v. Commissioner,

T.C. Memo. 2000-148; cf. Diaz v. Commissioner, 58 T.C. 560, 564

(1972).   In the present cases, we are convinced that petitioner

invested in Whitman principally because the investment offered

immediate tax benefits in excess of his investment.   We are

convinced that petitioner was determined to reap those benefits

if at all possible.

     Petitioner consulted with Thompson for two reasons.    First,

petitioner was uncertain how to convert his share of the

partnership’s basis in the recyclers as reported on the 1982

Schedule K-1 into tax credits on his individual return.     This is

borne out by the opening sentence of Thompson’s letter, which

states that petitioner retained the firm to review the offering

memorandum “for the purpose of preparing and advising you with

respect to Form 3468 to be filed with your 1982 tax return.”

(Emphasis added.)   This statement suggests that the filing of

Form 3468 with the sought-after tax credits was virtually a

foregone conclusion.

     Petitioner also consulted Thompson because petitioner was

sensitive to the magnitude of the tax benefits shown on his 1982

Schedule K-1, and he was concerned that the magnitude of those
                              - 45 -

benefits might expose his investment to be the tax shelter it

clearly was.   In this regard, we are convinced that petitioner

consulted Thompson in order to provide “cover” and

“plausibility”; likewise, we are convinced that petitioner was

determined to “interpret” whatever advice that he received as

justification for the tax benefits that he had purchased.

     In sum, we do not think that petitioner’s professed reliance

on Thompson was reasonable.   See, e.g., Addington v.

Commissioner, 205 F.3d 54 (2d Cir. 2000), affg. Sann v.

Commissioner, T.C. Memo. 1997-259.

     D.   Other Matters

     Petitioners contend that investors such as themselves should

not be burdened with the obligation of performing independent

investigations of the ventures in which they invest.    In

petitioners’ view, such a requirement would impose an economic

burden and prevent taxpayers such as themselves from investing.

As applicable to the present cases, however, this argument is

flawed in that it virtually presumes, among other things that:

Petitioner should not have been expected to carefully read the

offering memorandum; petitioner should not have been expected to

consider the numerous caveats and warnings regarding the business

and tax risks inherent in the Whitman investment; petitioner was

not principally motivated by the prospect of receiving immediate

tax benefits in excess of his investment; and petitioner was
                                - 46 -

justified in relying on an individual whom he knew had a conflict

of interest.

     As applied to the present cases, petitioners’ argument is

also flawed in that it ignores the various red flags that should

have alerted petitioner, a relatively sophisticated investor with

a technical background, that the Sentinel EPS recyclers were

overvalued and independent expert advice was therefore required.

Obvious red flags included the exorbitant cost of the recyclers

(i.e., $7 million) and the fact that the Whitman transactions, as

described in the offering memorandum, were to be executed

simultaneously in what was nothing other than a circular flow of

apparent payments made only through bookkeeping entries.

     Finally, mention should be made of two Plastics Recycling

cases that were decided after petitioners’ briefs were filed,

namely, Thompson v. United States, 223 F.3d 1206 (10th Cir.

2000), and Klein v. United States, 94 F. Supp.2d 838 (E.D. Mich.

2000).

        In Thompson v. United States, supra, the Court of Appeals

for the Tenth Circuit held that the District Court did not abuse

its discretion in instructing the jury that reasonable, good-

faith reliance on the advice of a professional adviser

constitutes a defense to negligence within the meaning of section

6653.     This holding served to uphold the jury’s verdict in favor

of the taxpayers on the issue of negligence.
                               - 47 -

       In Thompson v. United States, supra, the Government relied

heavily on the unpublished opinion of the Court of Appeals for

the Tenth Circuit in a similar Plastics Recycling case, Gilmore &

Wilson Constr. Co. v. Commissioner, 166 F.3d 1221 (10th Cir.

1999), affg. Estate of Hogard v. Commissioner, T.C. Memo. 1997-

174.    The Court of Appeals dismissed the Government’s   assertion

that its holding in that case was dispositive of the issue before

it:

       In that case we reviewed the tax court’s factual
       determination, made after a bench trial, that the
       taxpayers were negligent. Here we consider the more
       limited question of whether a reliance instruction was
       warranted. Had we been presented with such a question
       in Gilmore & Wilson, we would likely have upheld the
       instruction. See id. at *5 (“The evidence introduced,
       both at trial and through stipulation, presents a close
       question regarding whether taxpayers were negligent.”)
       For this reason, the government’s reliance on Gilmore &
       Wilson is misplaced. [Thompson v. United States, supra
       at 1210; fn. ref. omitted.]

       In the present cases, we have considered petitioners’

contention regarding reliance.    However, we have concluded, based

on the totality of the facts and circumstances presented at

trial, that petitioners’ professed reliance on Winer,

petitioner’s brother, and Thompson was not reasonable.

Accordingly, we regard Thompson v. Commissioner, supra, as

distinguishable from the present cases.

       In Klein v. United States, supra, the District Court denied

the Government’s motion for summary judgment on the issue of the

taxpayers’ liability for additions to tax for negligence.      The
                              - 48 -

District Court held that on the record before it, the issue of

negligence could not be decided as a matter of law but rather was

an issue to be decided by the trier of fact.

      In the present cases, we have addressed the issue of

negligence as an issue of fact, which we have decided based on

the totality of the facts and circumstances presented at trial.

Thus, Klein v. United States, supra, is distinguishable from the

present cases.

      E.   Conclusion

      Upon consideration of the entire record, we hold that

petitioners are liable for the additions to tax for negligence

under section 6653(a)(1) and (2).   Respondent is therefore

sustained on this issue.

II.   The Plastics Recycling Project Settlement Offer

      Petitioners contend that they are entitled to the terms of

the Plastics Recycling Project Settlement Offer.   See Davenport

Recycling Associates v. Commissioner, T.C. Memo. 1998-347, affd.

220 F.3d 1255 (11th Cir. 2000).

      It should be recalled that in October 1988, respondent made

the settlement offer, in writing, to Winer as the tax matters

partner of the Whitman partnership.    Respondent’s transmittal

letter stated that the settlement offer would not be repeated and

that the offer would expire 30 days from the date of the letter.

Winer did not accept the settlement offer on behalf of the
                              - 49 -

partnership.   Respondent then mailed the notices of final

partnership administrative adjustment; Winer commenced the

partnership action at docket No. 14535-89; and, ultimately, the

Court entered decision, pursuant to the Commissioner’s motion

under Rule 248(b), which completely sustained the Commissioner’s

FPAA determinations.

     Petitioners allege that they were never informed of the

settlement offer by respondent at the time that the offer was

made.   Respondent counters that the settlement offer was made to

Winer as Whitman’s tax matters partner and that any failure by

Winer to inform all of the limited partners of the existence of

the offer does not require respondent to renew the offer.    We

agree with respondent.

     There is no statutory or regulatory provision that obligates

respondent, when making a settlement offer to the tax matters

partner of a TEFRA partnership, to provide notice to the

partnership’s limited partners of the fact of such offer.    To the

contrary, section 6223(g) provides, in part, that “the tax

matters partner of a partnership shall keep each partner informed

of all administrative and judicial proceedings for the adjustment

at the partnership level of partnership items.”   In other words,

to the extent that Whitman’s limited partners were entitled to

notice regarding respondent’s making of the October 1988

settlement offer, the duty to provide such notice lay with Winer
                              - 50 -

and not with respondent.   See also sec. 301.6223(g)-1T(b)(1)(iv),

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6786 (March 5,

1987), which specifically obligates the tax matters partner to

furnish to the partners information with regard to the acceptance

by the Commissioner of any settlement offer.17   Cf. Computer

Programs Lambda v. Commissioner, 90 T.C. 1124, 1126-1127 (1988),

regarding the central role played by, and the duties imposed on,

the tax matters partner during litigation at the partnership

level.

     Further, the fact that Winer may have failed in his duty to

provide notice regarding the fact of respondent’s settlement

offer does not serve to “revive” the offer insofar as petitioners

are concerned.   In this regard, section 6230(f) expressly states:

     The failure of the tax matters partner * * * or any
     other representative of a partner to provide any notice
     or perform any act required under this subchapter
     [sections 6221-6233] or under regulations prescribed
     under this subchapter on behalf of such partner does
     not affect the applicability of any proceeding or
     adjustment under this subchapter to such partner.

Conclusion

     Petitioners have made other arguments that we have

considered in reaching our decision.   To the extent that we have

not discussed those arguments, we find them to be irrelevant or



     17
        Petitioners also appear to mistakenly place on the
Commissioner the duty to serve copies of a Rule 248(b) motion in
a partnership action. However, Rule 248(b)(3) squarely places
this duty on the tax matters partner. See also sec. 6230(l).
                             - 51 -

without merit.18

     To reflect our disposition of the disputed issues, as well

as petitioners’ concessions, see supra note 1,



                                        Decisions will be entered

                                   for respondent.




     18
        We also decline to consider arguments for which there is
no factual predicate in the evidentiary record. See Rule
143(b)(“statements in briefs * * * do not constitute evidence.”).
Further, insofar as additional interest under sec. 6621(c) may be
concerned, we refer petitioners to sec. 6621(c)(3)(A)(i), (v), as
well as Barlow v. Commissioner, T.C. Memo. 2000-339.
