Greene v. Commissioner
| Decision Date | 30 June 1997 |
| Docket Number | Docket No. 32552-85. |
| Citation | 73 T.C.M. 3205 |
| Parties | Ira S. Greene and Robin C. Greene v. Commissioner. |
| Court | U.S. Tax Court |
This case was assigned to Special Trial Judge Norman H. Wolfe pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 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:
This case is 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. 48,102(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 this case are substantially identical to those considered in the Provizer case. In a separate, earlier opinion, this Court denied petitioners' motion for summary judgment. See Greene v. Commissioner [Dec. 43,686], 88 T.C. 376 (1987).
In a notice of deficiency dated June 21, 1985, respondent determined a deficiency in petitioners' 1981 joint Federal income tax in the amount of $53,202.25. In an answer to the petition, respondent asserted that petitioners are liable for increased interest on the deficiency accruing after December 31, 1984, calculated at 120 percent of the statutory rate under section 6621(c).1 In an amendment to answer, respondent asserted additions to tax for that year pursuant to section 6659 at the 30-percent rate for valuation overstatement, in the amount of $2,660 under section 6653(a)(1) for negligence, and under section 6653(a)(2) in the amount of 50 percent of the interest due on the underpayment attributable to negligence.
The parties filed a Stipulation of Settled Issues concerning the adjustments relating to petitioners' participation in the Plastics Recycling Program. The stipulation provides:
1. Petitioners are not entitled to any deductions, losses, investment credits, business energy investment credits or any other tax benefits claimed on their 1981 tax return as a result of petitioner's participation in Resource Reclamation Associates.
2. The underpayment in income tax attributable to petitioner's participation in Resource Reclamation Associates is a substantial underpayment attributable to a tax motivated transaction, subject to the increased rate of interest established under I.R.C. § 6621(c), formerly section 6621(d).
3. This stipulation resolves all issues that relate to the items claimed on petitioners' 1981 tax return resulting from petitioner's participation in Resource Reclamation Associates, with the exception of petitioners' potential liability for additions to the tax for a valuation overstatement under I.R.C. § 6659 and for negligence under the applicable provisions of I.R.C. § 6653(a).
4. With respect to the issue of the addition to the tax under I.R.C. § 6659, petitioners do not intend to contest the issue of the value of the Sentinel Recycler or the existence of a valuation overstatement on the petitioners' return; however, petitioners preserve their right to argue that the underpayment in tax is not attributable to a valuation overstatement within the meaning of I.R.C. § 6659(a)(1), and that even if I.R.C. § 6659 is applicable, the Secretary should have waived the addition to tax pursuant to the provisions of I.R.C. § 6659(e).
The issues remaining in this case 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 the addition to tax under section 6659 for underpayment of tax attributable to a valuation overstatement.
Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated herein by this reference.
This case concerns petitioners' investment in Resource Reclamation Associates (Resource), a limited partnership that leased Sentinel expanded polyethylene (EPE) recyclers. The transactions involving the Sentinel EPE recyclers leased by Resource are substantially identical to those in the Clearwater Group limited partnership (Clearwater), the partnership considered in Provizer v. Commissioner, supra. Petitioners have stipulated substantially the same facts concerning the underlying transactions as we found in the Provizer case.
In transactions closely resembling those in the Provizer case, Packaging Industries, Inc. (PI), manufactured and sold seven 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 Resource, 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 sale 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 in 1981 was not in excess of $50,000.
PI allegedly sublicensed the recyclers to entities that would use them to recycle plastic scrap. The sublicense agreements provided that the end-users would transfer to PI 100 percent of the recycled scrap in exchange for a payment from FMEC Corp. based on the quality and amount of recycled scrap.
Both Clearwater and Resource leased Sentinel EPE recyclers from F & G Corp. and licensed those recyclers to FMEC Corp. Apart from leasing and licensing seven recyclers instead of six, the underlying transactions involving Resource do not differ in any substantive respect from the Clearwater transactions considered in the Provizer case.
For convenience, we refer to the series of transactions among PI, ECI Corp., F & G Corp., Resource, FMEC Corp., and PI as the Resource transactions. In addition to the Resource transactions, a number of other limited partnerships entered into transactions similar to the Resource transactions, also involving Sentinel EPE recyclers and Sentinel expanded polystyrene (EPS) recyclers. We refer to these collectively as the Plastics Recycling transactions.
Resource is a New York limited partnership that closed on October 15, 1981. Richard Roberts (Roberts) is the general partner of Resource.
A private placement memorandum for Resource was distributed to potential limited partners. Reports by F & G Corp.'s evaluators, Dr. Stanley M. Ulanoff (Ulanoff), a marketing consultant, and Dr. Samuel Z. Burstein (Burstein), a mathematics professor, were appended to the offering memorandum. Both Ulanoff and Burstein invested in the Plastics Recycling transactions. Burstein also was a client and business associate of Elliot I. Miller (Miller), the corporate counsel to PI.
The Resource offering memorandum states that the general partner will receive fees from Resource in the amount of $40,000. In addition, the offering memorandum provides that the general partner "may retain as additional compensation all amounts not paid as sales commissions or offeree representative fees". According to the offering memorandum, it was anticipated that 10 percent of the proceeds from the offering — $95,000 — would be allocated to the payment of sales commissions and offeree...
To continue reading
Request your trial