Barlow v. Commissioner
| Decision Date | 03 November 2000 |
| Docket Number | Docket No. 6393-95.,Docket No. 6394-95.,Docket No. 4652-95.,Docket No. 4651-95. |
| Citation | 80 T.C.M. 632 |
| Parties | Myron Barlow and Arlene Barlow v. Commissioner. |
| Court | U.S. Tax Court |
Neal Nusholtz, Royal Oak, Michigan, for the petitioners. Alexandra E. Nicholaides, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
These consolidated cases were assigned to Special Trial Judge Robert N. Armen, Jr., pursuant to the provisions of section 7443A(b)(5) of the Internal Revenue Code in effect at the time of assignment and Rules 180, 181, and 183.1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE.
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:
Additions to Tax
---------------------------------
Sec. Sec. Sec
Year 6653(a)(1) 6653(a)(2) 6659
1982 ........... $4,829 1 $23,100
1983 ........... 49 1
1984 ........... 22 1
1985 ........... 25 1
1 50 percent of the interest payable with respect to the
portion of the underpayment which 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
After concessions by petitioners,2 the issues remaining for decision 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 they are.
(2) Whether assessment of additional interest under section 6621(c) without prior opportunity to contest such assessment violates the Due Process Clause of the Fifth Amendment. We hold that it does not.
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 Grosse Pointe Farms, Michigan, at the time that each of their petitions was filed with the Court.
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 Dickinson Recycling Associates (Dickinson or the partnership).
For a detailed discussion of the transactions involved in the Plastics Recycling group of cases, see Provizer v. Commissioner [Dec. 48,102(M)], 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 Provizer and stipulated by the parties herein, Packaging Industries of Hyannis, Massachusetts (PI) manufactured and sold4 four Sentinel EPS5 recyclers to ECI Corp. (ECI) for $1,520,000 each. ECI simultaneously resold the recyclers to F&G Corp. (F&G) for $1,750,000 each. F&G simultaneously leased the recyclers to Dickinson. Finally, Dickinson 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 Dickinson a monthly joint venture fee.
For convenience, we refer to the series of transactions between and among PI, ECI, F&G, Dickinson, and RRI as the Dickinson 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 nonrecourse portion, was paid. No arm's-length negotiations for the price of the recyclers took place between, or among, PI, ECI and F&G.
At the closing of the Dickinson transaction, PI, ECI, F&G, Dickinson, and RRI entered into arrangements whereby PI would pay a monthly joint venture fee to Dickinson, in the same amount that Dickinson 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 Dickinson transaction, PI, ECI, F&G, Dickinson, and RRI entered into offset agreements so that the foregoing payments were bookkeeping entries only and were never in fact paid. Also in connection with the closing of the Dickinson transaction, PI, ECI, F&G, Dickinson, and RRI also entered into cross-indemnification agreements.
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 Dickinson in the Dickinson 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 Dickinson transactions.
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 Dickinson 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 Dickinson 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 [Dec. 48,102(M)], T.C. Memo. 1992-177. Bambara was also the president of PI and a member of its board of directors and with his wife and daughter owned 100 percent of the stock of PI, the corporation that sold the recyclers to ECI in the Dickinson 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 Dickinson. 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 long-time business associate of Bambara. Gottsegen was the sole owner of RRI, the corporation that was involved in the joint venture in the Dickinson transactions, and a 9.1-percent owner of F&G. Gottsegen was the owner of several Sentinel recyclers and also the petitioner in Gottsegen v. Commissioner [Dec. 52,141(M)], T.C. Memo. 1997-314.
Samuel L. Winer (Sam Winer or Winer) was Dickinson's general partner and tax matters partner. Winer purportedly paid $1,000 for a 1-percent interest in all items of income, gain, deduction, loss, and credit of the partnership. For his services, Winer received $62,000 from the proceeds of the private placement offering.
By a private placement offering memorandum dated October 26, 1982 (the offering memorandum), subscriptions for 18 limited partnership units in Dickinson 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 Dickinson and the general partner, Winer, would own the remaining 1 percent. 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 Dickinson would pay "fees of purchaser representatives...
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