Jaroff v. Commissioner

• Decision Date: 27 November 1996
• Docket Number: Docket No. 18885-89.,Docket No. 27392-89.
• Parties: Leon M. and Mary K. Jaroff<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

72 T.C.M. 1361

T.C. Memo. 1996-527

Leon M. and Mary K. Jaroff¹ v. Commissioner.

Docket No. 18885-89.

Docket No. 27392-89.

United States Tax Court.

Filed November 27, 1996.

Stuart A. Smith and David H. Schnabel, for the petitioners. Maureen T. O'Brien and David N. Brodsky, for the respondent.

                CONTENTS
                [CCH Page]
                MEMORANDUM FINDINGS OF FACT AND OPINION ..........................................      1362
                OPINION OF THE SPECIAL TRIAL JUDGE ...............................................      1362
                FINDINGS OF FACT .................................................................      1363
                   A.  The Plastics Recycling Transactions .......................................      1363
                   B.  The Partnerships ..........................................................      1364
                   C.  Staurt Becker and Steven Leicht ...........................................      1365
                   D.  Petitioners and Their Introduction to the Partnership Transactions.........      1366
                OPINION ..........................................................................      1367
                   A.  Section 6653(a)—Negligence ................................................      1368
                       1.  The Private Offering Memoranda ........................................      1369
                       2.  The So-Called Oil Crisis ..............................................      1370
                       3.  Petitioners' Purported Reliance on a Tax Adviser ......................      1371
                           a.  The Circumstances Under Which a Taxpayer May Avoid Liability
                               Under Section 6653(a)(1) and (2) Because of Reasonable Reliance
                               on Competent and Fully Informed Professional Advice ...............      1371
                           b.  Becker and Tucker .................................................      1372
                       4.  Miscellaneous .........................................................      1375
                       5.  Conclusion as to Negligence ...........................................      1377
                   B.  Section 6659—Valuation Overstatement ......................................      1377
                       1.  The Grounds for Petitioners' Underpayments ............................      1377
                       2.  Concession of the Deficiencies ........................................      1379
                       3.  Section 6659(e) .......................................................      1380
                   C.  Petitioners' 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 ..............................................      1381
                

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

These consolidated 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. All section references are to the Internal Revenue Code in effect for the tax years 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.

OPINION OF THE SPECIAL TRIAL JUDGE

WOLFE, Special Trial Judge:

These consolidated 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. 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 involving the Sentinel recyclers in these consolidated cases are substantially identical to those in the transaction considered in the Provizer case.

In a notice of deficiency dated May 24, 1989, respondent determined a deficiency in petitioners' 1982 Federal income tax in the amount of $8,119, and additions to tax for that year in the amount of $1,985 under section 6659² for valuation overstatement, in the amount of $406 under section 6653(a)(1) for negligence, and under section 6653(a)(1)(B)³ in an amount equal to 50 percent of the interest due on the amount of the underpayment attributable to negligence, $6,619. Respondent also determined that interest on deficiencies accruing after December 31, 1984, would be calculated at 120 percent of the statutory rate under section 6621(c). The increased interest was calculated on the amount of $6,619. In her answer, respondent asserted that the entire deficiency was subject to the increased rate of interest under section 6621(c). In her trial memorandum, respondent asserted that the section 6659 addition to tax should be reduced to $1,550, and that only $6,619 of the deficiency was subject to section 6621(c) (as originally determined in the notice of deficiency). We consider the amounts in dispute in docket No. 18885-89 to be adjusted accordingly.

In a notice of deficiency dated August 18, 1989, respondent determined a deficiency in petitioners' 1981 Federal income tax in the amount of $20,837, and additions to tax for that year in the amount of $1,299 under section 6659 for valuation overstatement, in the amount of $1,042 under section 6653(a)(1) for negligence, and under section 6653(a)(2) in an amount equal to 50 percent of the interest due on the amount of the underpayment attributable to negligence. Respondent also determined that interest on deficiencies accruing after December 31, 1984, would be calculated at 120 percent of the statutory rate under section 6621(c). The increased interest was calculated on the amount of $4,329. In an amendment to answer, respondent asserted an increased addition to tax under section 6659 in the amount of $4,952, and also the entire deficiency of $20,837 was subject to the increased rate of interest under section 6621(c). We consider the amounts in dispute in docket No. 27392-89 to be adjusted accordingly.

For each of these consolidated cases, the parties filed a Stipulation 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).

4. With respect to the issue of the addition to the tax under I.R.C. § 6659, Petitioners do not intend to contest the value of the Sentinel Recycler or the existence of a valuation overstatement on the Petitioners' returns; however, Petitioners reserve 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 the Secretary should have waived the addition to tax pursuant to the provisions of I.R.C. § 6659(e).

Long after the trial of these consolidated cases, on September 18, 1995, petitioners filed a Motion For Leave To File Motion For Decision Ordering Relief From the Negligence Penalty and the Penalty Rate of Interest and To File Supporting Memorandum of Law under Rule 50. On that same date, petitioners lodged with the Court a motion for decision seeking 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 an objection, with attachments, and a memorandum in support thereof, and petitioners filed a reply memorandum. 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, petitioners' motion 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 the provisions of section 6653(a); and (2) whether petitioners are liable for additions to tax under section 6659 for underpayments of tax attributable to valuation overstatements.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated herein by this reference.

A. The Plastics Recycling Transactions

These consolidated cases concern petitioners' investments in two limited partnerships that leased Sentinel expanded polyethylene (EPE) recyclers: SAB Resource Recovery Associates (SAB Recovery) and SAB Resource Reclamation Associates (SAB Reclamation). For convenience, we refer to these two partnerships collectively as the Partnerships.

The transactions involving the Sentinel EPE Recyclers leased by the Partnerships are substantially identical to those in the Clearwater Group limited partnership (Clearwater), the partnership considered in Provizer v. Commissioner [Dec. 48,102(M)], T.C. Memo. 1992-177. 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...