Sann v. Commissioner
| Decision Date | 10 June 1997 |
| Docket Number | Docket No. 21209-90.,Docket No. 21519-88.,Docket No. 4789-89.,Docket No. 22399-90.,Docket No. 21518-88.,Docket No. 22466-90. |
| Parties | John Sann and Marianne Sann, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Stuart A. Smith, New York, N.Y., and David H. Schnabel, for the petitioners. Louise R. Forbes, Paul Colleran, Gary S. Gross, Mary P. Hamilton, and William T. Hayes, for the respondent.
CONTENTS
[CCH Page]
MEMORANDUM FINDINGS OF FACT AND OPINION ........................................... 2951
OPINION OF THE SPECIAL TRIAL JUDGE ................................................ 2952
FINDINGS OF FACT .................................................................. 2953
A. The Plastics Recycling Transactions ........................................ 2953
B. The Partnerships ........................................................... 2954
C. Richard Roberts ............................................................ 2955
D. Guy B. Maxfield ............................................................ 2955
E. Petitioners and Their Introduction to the Partnership Transactions ......... 2956
1. John and Marianne Sann .................................................. 2956
2. Laurence M. Addington ................................................... 2957
3. David M. Cohn ........................................................... 2958
OPINION ........................................................................... 2960
A. Statute of Limitations ..................................................... 2961
B. Section 6653(a)—Negligence ................................................. 2963
1. The Private Offering Memoranda .......................................... 2963
2. The So-Called Oil Crisis ................................................ 2965
3. Petitioners' Purported Reliance on an Adviser ........................... 2966
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 .................. 2966
b. Maxfield .......................................................... 2967
4. Miscellaneous ........................................................... 2969
5. Conclusion as to Negligence ............................................. 2971
C. Section 6659—Valuation Overstatement ....................................... 2972
1. The Grounds for Petitioners' Underpayments ............................. 2972
2. Concession of the Deficiency ........................................... 2974
3. Section 6659(e) ........................................................ 2975
D. 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 Memorandum of Law ............................................... 2976
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.2 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.
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. 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 these cases are substantially identical to those considered in the Provizer case.
In three notices of deficiency, issued on June 16, 1988, in Docket No. 21518-88 (Sann), on June 6, 1988, in Docket No. 21519-88 (Addington), and on December 22, 1988, in Docket No. 4789-89 (Cohn), respondent determined the following deficiencies in and additions to petitioners' 1981 Federal income taxes:
Additions to Tax
-------------------------------------
Sec. Sec. Sec
Petitioners Deficiency 6653(a)(1) 6653(a)(2) 6659
Sann .............................. $192,666 $9,633.30 1 $54,582.60
Addington ......................... 63,137 3,156.85 1 18,840
Cohn .............................. 10,250 512.50 1 2,892.30
1 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence
The additions to tax determined under section 6653(a)(2) were calculated on the amount of $181,942 in the Sann
case; on the amount of $62,800 in the Addington case; and on the amount of $9,641 in the Cohn case
In another three notices of deficiency, issued on July 19, 1990, in Docket Nos. 22466-90 and 22399-90 (Sann and Addington, respectively), and on July 20, 1990, in Docket No. 21209-90, (Cohn), respondent determined the following deficiencies in and additions to petitioners' 1982 Federal income taxes:
Additions to Tax
-----------------------------------
Sec. Sec. 2Sec
Petitioners Deficiency 6653(a)(1) 6653(a)(2) 6659
Sann ..................... $94,403 $ 4,720 1 $ 23,030
Addington ................ 44,317 2,215,85 1 10,649
Cohn ..................... 15,893 795 1 4,020
1 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence
The additions to tax determined under section 6653(a)(2) were calculated on the full amount of the deficiency in
each case
2 In the alternative to the sec. 6659 addition to tax, respondent determined an addition to tax under sec. 6661 for
substantial understatement of liability. Respondent conceded the sec. 6661 additions to tax in the respective
posttrial briefs in each case.
In all six notices of deficiency, respondent also determined that interest on the deficiencies accruing after December 31, 1984, would be calculated at 120 percent of the statutory rate under section 6621(c). In the posttrial brief for Docket No. 4789-89 (Cohn), respondent asserted a lesser section 6659 addition to tax in the amount of $2,447. We consider the section 6659 addition to tax in Docket No. 4789-89 to be accordingly reduced.
On July 1 and July 11, 1994, respondent filed motions for leave to file amended answers in Docket Nos. 4789-89 (Cohn) and 21518-88 (Sann), respectively. This Court denied both motions on July 11, 1994.
The parties in each of these cases filed substantively identical Stipulations of Settled Issues concerning the adjustments relating to petitioners' participation in the Plastics Recycling Program. In general, the stipulations provide:3
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 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' return. Petitioners, however, reserve the 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 the tax pursuant to I.R.C. § 6659(e).
In the stipulations of settled issues for Docket Nos. 21209-90 (Cohn), 22399-90 (Addington), and 22466-90 (Sann), petitioners also reserved the right to argue whether the respective assessments of tax and additions to tax for 1982 were barred by the statute of limitations.
Long after the trials of these cases, in each case 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. These motions were filed with attached exhibits during the last week of October and first week of November 1995. Petitioners concurrently lodged with the Court motions for decision ordering relief from the additions to tax for negligence and the increased rate of interest, with attachments and memoranda in support of the motions. Subsequently, respondent filed objections, with attachments and memoranda in support thereof, and petitioners thereafter filed reply memoranda. For reasons discussed in more...
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