Friedman v. Commissioner
| Decision Date | 26 December 1996 |
| Docket Number | Docket No. 24753-88.,Docket No. 6302-89. |
| Parties | Mark Friedman v. Commissioner. David and Deborah B. Alter v. Commissioner. |
| Court | U.S. Tax Court |
Stuart A. Smith and David H. Schnabel, New York, N.Y., for the petitioners in Docket Nos. 24753-88 and 6302-89. Jennifer J. Kohler, Elizabeth A. Maresca, and Frances Ferrito Regan, for the respondent in Docket No. 24753-88. Donald A. Glasel, Mitchell Hausman, Jennifer J. Kohler, and Francis Ferrito Regan, for the respondent in Docket No. 6302-89.
CONTENTS
[CCH Page]
MEMORANDUM FINDINGS OF FACT AND OPINION ............................................. 1561
OPINION OF THE SPECIAL TRIAL JUDGE .................................................. 1561
FINDINGS OF FACT .................................................................... 1562
A. The Plastics Recycling Transactions ........................................... 1562
B. The Partnerships .............................................................. 1562
C. Petitioners and Their Introduction to the Partnership Transactions ............ 1563
1. Mark Friedman .............................................................. 1563
2. David and Deborah B. Alter ................................................. 1564
OPINION ............................................................................. 1565
A. Section 6653(a)—Negligence .................................................... 1566
1. The Private Offering Memoranda ............................................. 1567
2. The So-Called Oil Crisis ................................................... 1568
3. Petitioners' Purported Reliance on Advisers ................................ 1569
4. Miscellaneous .............................................................. 1573
5. Conclusion as to Negligence ................................................ 1575
B. Section 6659—Valuation Overstatement .......................................... 1575
1. The Grounds for Petitioners' Underpayments ................................. 1576
2. Concession of the Deficiencies ............................................. 1577
3. Section 6659(e) ............................................................ 1578
C. Petitioners' Motions For Leave To File Motion For Decision Ordering Relief
From the Negligence Penalty and the Penalty Rate of Interest and To File
Supporting Memoranda of Law ................................................... 1579
MEMORANDUM FINDINGS OF FACT AND OPINION
These cases were assigned to Special Trial Judge Norman H. Wolfe pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. They were tried and briefed separately but consolidated for purposes of opinion. All section references are to the Internal Revenue Code in effect for the tax year in issue, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.
WOLFE, Special Trial Judge:
These cases are part of the Plastics Recycling group of cases. For a detailed discussion of the transactions involved in the Plastics Recycling cases, see Provizer v. Commissioner [Dec. 31,504(M)], T.C. Memo. 1992-177, affd. without published opinion 996 F.2d 1216 (6th Cir. 1993). The facts of the underlying transactions and the Sentinel recyclers in these cases are substantially identical to those considered in the Provizer case.
In a notice of deficiency dated July 7, 1988, respondent determined a deficiency in petitioner Friedman's 1981 Federal income tax in the amount of $14,275, plus additions to tax in the amount of $4,283 under section 6659 for valuation overstatement, in the amount of $714 under section 6653(a)(1) for negligence, and under section 6653(a)(2) in the amount of 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence. Respondent also determined that interest on the deficiency accruing after December 31, 1984, would be calculated at 120 percent of the statutory rate under section 6621(c).
In a notice of deficiency dated January 19, 1989, respondent determined a deficiency with respect to the joint Federal income tax return filed by David and Deborah B. Alter (petitioners Alter) for 1981 in the amount of $27,575, plus additions to tax in the amount of $8,272.50 under section 6659 for valuation overstatement, in the amount of $1,378.75 under section 6653(a)(1) for negligence, and under section 6653(a)(2) in the amount of 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence. Respondent also determined that interest on the deficiency accruing after December 31, 1984, would be calculated at 120 percent of the statutory rate under section 6621(c). In a stipulation of settled issues filed August 8, 1990, petitioners Alter conceded the disallowance of a real estate office rent deduction claimed on their 1981 return in the amount of $3,320.
The parties in each of these consolidated cases filed Stipulations of Settled Issues concerning the adjustments relating to petitioners' participation in the Plastics Recycling Program. The stipulations provide:
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 I.R.C. § 6621(c), formerly § 6621(d).
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 I.R.C. § 6659 and for negligence under the applicable provisions of § 6653(a).
Long after the trials of these cases, petitioners each filed a Motion For Leave To File Motion For Decision Ordering Relief From the Negligence Penalty and the Penalty Rate of Interest and To File Supporting Memorandum of Law under Rule 50. These motions were filed with attached exhibits on October 20, 1995, in the Friedman case, and on November 13, 1995, in the Alter case. On those same dates, petitioners each also lodged with the Court a motion for decision ordering relief from the additions to tax for negligence and the increased rate of interest, with attachments, and a memorandum in support of the motion. Subsequently, respondent filed objections, with attachments, and memoranda in support thereof, and petitioners thereafter filed reply memoranda. For reasons discussed in more detail at the end of this opinion, and also in Farrell v. Commissioner [Dec. 51,421(M)], T.C. Memo. 1996-295, these motions shall be denied. See also Gollin v. Commissioner [Dec. 51,591(M)], T.C. Memo. 1996-454; Grelsamer v. Commissioner [Dec. 51,530(M)], T.C. Memo. 1996-399; Zenkel v. Commissioner [Dec. 51,529(M)], T.C. Memo. 1996-398.
The issues remaining in these consolidated cases are: (1) Whether petitioners are liable for the additions to tax for negligence under section 6653(a)(1) and (2); and (2) whether petitioners are liable for additions to tax under section 6659 for underpayments of tax attributable to valuation overstatements.
Some of the facts have been stipulated in each case and are so found. The stipulated facts and attached exhibits are incorporated in the respective cases by this reference.
These cases concern petitioners' investments in two limited partnerships that leased Sentinel expanded polyethylene (EPE) recyclers: Clearwater Group (Clearwater) and Poly Reclamation Associates (Poly Reclamation). Petitioner Friedman is a limited partner in Clearwater, and petitioners Alter are limited partners in Poly Reclamation. For convenience, we refer to these partnerships collectively as the Partnerships.
The Clearwater partnership, and the transactions involving the Sentinel EPE Recyclers leased by Clearwater, were considered in Provizer v. Commissioner, supra. The transactions involving the Sentinel EPE recyclers leased by Poly Reclamation are substantially identical to the Clearwater transactions. Petitioners have stipulated substantially the same facts concerning the underlying transactions as we found in the Provizer case.
In the Provizer case, Packaging Industries, Inc. (PI), manufactured and sold six Sentinel EPE recyclers to ECI Corp. for $981,000 each. ECI Corp., in turn, resold the recyclers to F & G Corp. for $1,162,666 each. F & G Corp. then leased the recyclers to Clearwater, which licensed the recyclers to FMEC Corp., which sublicensed them back to PI. The sales of the recyclers from PI to ECI Corp. were financed with nonrecourse notes. Approximately 7 percent of the sales price of the recyclers sold by ECI Corp. to F & G Corp. was paid in cash with the remainder financed through notes. These notes provided that 10 percent of the notes were recourse but that the recourse portion of the notes was only due after the nonrecourse portion, 90 percent, was paid in full.
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 simultaneous transactions, the fair market value of a Sentinel EPE recycler...
To continue reading
Request your trial