Singer v. Commissioner

• Decision Date: 16 July 1997
• Docket Number: Docket No. 22931-86.
• Citation: 74 T.C.M. 120
• Parties: David and Shirley Singer v. Commissioner.
• Court: U.S. Tax Court

74 T.C.M. 120

T.C. Memo. 1997-325

David and Shirley Singer v. Commissioner.

Docket No. 22931-86.

United States Tax Court.

Filed July 16, 1997.

Stuart A. Smith and David H. Schnabel, for the petitioners. Paul Colleran, Maureen T. O'Brien, and William T. Hayes, for the respondent.

CONTENTS

                [CCH Page]
                MEMORANDUM FINDINGS OF FACT AND OPINION .....................................................   121
                OPINION OF THE SPECIAL TRIAL JUDGE ..........................................................   122
                FINDINGS OF FACT ............................................................................   122
                  A.  The Plastics Recycling Transactions ...................................................   122
                  B.  Plymouth Equipment Associates .........................................................   123
                  C.  Richard Roberts .......................................................................   124
                  D.  Petitioners and Their Introduction to Plymouth Equipment Associates ...................   124
                OPINION .....................................................................................   126
                  A.  Section 6653(a)—Negligence ............................................................   126
                      1. The So-Called Oil Crisis ...........................................................   127
                      2. Petitioner's Purported Reliance on an Adviser ......................................   127
                      3. Miscellaneous ......................................................................   130
                      4. Conclusion as to Negligence ........................................................   132
                  B.  Section 6659—Valuation Overstatement ..................................................   133
                      1. The Grounds for Petitioners' Underpayments .........................................   133
                      2. Concession of the Deficiency .......................................................   134
                      3. Section 6659(e) ....................................................................   135
                  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 .................................................................................  136
                

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

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.

OPINION OF THE SPECIAL TRIAL JUDGE

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 notice of deficiency dated March 26, 1986, respondent determined a deficiency in petitioners' 1981 joint Federal income tax in the amount of $102,686, plus an addition to tax under section 6659 for valuation overstatement in the amount of $30,465. 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).¹

In a first amendment to answer, respondent asserted additions to tax for 1981 in the amount of $5,134 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.

In respondent's trial memorandum and posttrial brief, respondent asserted a lesser addition to tax under section 6659 for valuation overstatement in the amount of $24,758. We consider the addition to tax under section 6659 to be reduced accordingly.

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 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 section 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 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 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).

In their petition, petitioners raised the statute of limitations on assessment as a bar to respondent's deficiency determination. Respondent asserted otherwise in the answer, and petitioners have not argued the statute of limitations elsewhere in the record. In view of the third stipulation in the stipulation of settled issues, we consider that any statute of limitations defense has been conceded by petitioners.

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.

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

This case concerns petitioners' investment in Plymouth Equipment Associates (Plymouth), a limited partnership that leased seven Sentinel expanded polyethylene (EPE) recyclers. The transactions involving the Sentinel EPE recyclers leased by Plymouth 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 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 $1,162,667 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.

No arm's-length negotiations for the price of the Sentinel EPE recyclers took place among PI, ECI, and F & G Corp. 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 Plymouth 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 Plymouth 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., Plymouth, FMEC Corp., and PI as the Plymouth transactions. In addition to the Plymouth transactions, a number of other limited partnerships entered into transactions similar to the Plymouth transactions, also involving Sentinel EPE recyclers and Sentinel expanded polystyrene (EPS) recyclers. We refer to these collectively as the Plastics Recycling transactions.

B. Plymouth Equipment Associates

Plymouth is a New York limited partnership that closed on December 21, 1981. Richard Roberts (Roberts) is the general partner of Plymouth.

A private placement memorandum for Plymouth was distributed to potential limited partners. Reports by F & G Corp.'s evaluators, Dr. Stanley M. Ulanoff (Ulanoff), a...