Zenkel v. Commissioner

• Decision Date: 27 August 1996
• Docket Number: Docket No. 24512-89.,Docket No. 12091-89.,Docket No. 19760-89.,Docket No. 10147-91.
• Citation: 72 T.C.M. 499
• Parties: Bruce and Lois Zenkel, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

72 T.C.M. 499

T.C. Memo. 1996-398

Bruce and Lois Zenkel, et al.¹ v. Commissioner.

Docket No. 12091-89.

Docket No. 19760-89.

Docket No. 24512-89.

Docket No. 10147-91.

United States Tax Court.

Filed August 27, 1996.

Stuart A. Smith, New York, N.Y., and David H. Schnabel, for the petitioners in Docket Nos. 12091-89, 24512-89, and 10147-91. Stuart A. Smith, New York, N.Y., David H. Schnabel, and Richard J. Walsh, for the petitioner in Docket No. 19760-89. Mitchell Hausman, Gail A. Campbell, and Frances Ferrito Regan, for the respondent in Docket No. 12091-89. Gail A. Campbell and Frances Ferrito Regan, for the respondent in Docket No. 19760-89. Jennifer J. Kohler and Frances Ferrito Regan, for the respondent in Docket No. 24512-89. Wendy Sands and Frances Ferrito Regan, for the respondent in Docket No. 10147-91.

                CONTENTS
                [CCH Page]
                MEMORANDUM FINDINGS OF FACT AND OPINION ...................................................      501
                OPINION OF THE SPECIAL TRIAL JUDGE ........................................................      501
                FINDINGS OF FACT ..........................................................................      503
                  A.  The Plastics Recycling Transactions .................................................      503
                  B.  The Partnerships ....................................................................      504
                  C.  Richard Roberts......................................................................      505
                  D.  Stuart Becker and Steven Leicht .....................................................      505
                

                  E.  Petitioners and Their Introduction to the Partnership Transactions ..................      506
                      1.  Bruce and Lois Zenkel ...........................................................      506
                      2.  Robert G. Blount ................................................................      506
                      3.  Morton and Carol David ..........................................................      507
                      4.  Ira and Helen Selvin ............................................................      507
                OPINION ...................................................................................      508
                  A.  Statute of Limitations ..............................................................      508
                  B.  Section 6653(a)—Negligence ..........................................................      509
                      1.  The So-Called Oil Crisis ........................................................      510
                      2.  Petitioner's Purported Reliance on Tax Advisers .................................      512
                          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 ..........................................      512
                          b.  Becker ......................................................................      513
                          c.  Steele and Sprague ..........................................................      515
                      3.  The Private Offering Memoranda ..................................................      515
                      4.  Miscellaneous ...................................................................      517
                      5.  Conclusion as to Negligence .....................................................      518
                  C.  Section 6659—Valuation Overstatement ................................................      518
                      1.  The Grounds for Petitioners' Underpayments ......................................      519
                      2.  Concession of the Deficiency ....................................................      520
                      3.  Section 6659(e) .................................................................      521
                  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 ..................................................................      522
                

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

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 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 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 EPE recyclers in these cases are substantially identical to those in the Provizer case.

In notices of deficiency, respondent determined the following deficiencies in and additions to petitioners' Federal income taxes:

                Penalty                       Additions to Tax
                                                                                                     -----------    ----------------------------------------------
                Docket No.   Petitioner                                         Year   Deficiency    Sec. 6621(c)   Sec. 6653(a)(1)   Sec. 6653(a)(2)    Sec. 6659
                12091-89      Bruce and Lois Zenkel .........................   1979   $26,330.001 2               --                 --         $ 7,899.004
                                                                                1980       483.001       --               --                 --            --
                                                                                1982    72,349.00         2            $3,617.00              3          21,705.004
                19760-89      Robert G. Blount ..............................   1981    52,662.49         2             2,633.12              3          15,798.75
                24512-89      Morton and Carol David ........................   1982    51,356.00         2             2,569.00              3          15,407.004
                10147-91      Ira and Helen Selvin ..........................   1981    44,626.00         2             2,231.00              3          13,388.00
                1 The deficiencies in docket No. 12091-89 for taxable years 1979 and 1980 result from disallowance of investment tax credit carrybacks and business energy credit
                carrybacks from taxable year 1982
                2 Sec. 6621(c) was repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act of 1989 (OBRA 89), Pub. L. 101-239, 103 Stat. 2106, 2399, effective for tax returns
                due after Dec. 31, 1989, OBRA 89 sec. 7721(d). 163 Stat. 2400. The repeal does not affect the instant cases. The annual rate of interest under sec. 6621(c) for interest accruing
                after Dec. 31, 1984, equals 120 percent of the interest payable under sec. 6601 with respect to any substantial underpayment attributable to tax-motivated transactions
                3 50 percent of the interest payable with respect to the portion of the underpayment attributable to negligence
                4 In the alternative to the addition to tax under sec. 6659, respondent also determined that petitioners' underpayments were subject to the addition to tax under sec
                6661
                

The parties in each of these consolidated cases filed a Stipulation of Settled Issues concerning the adjustments relating to their participation in the Plastics Recycling Program. Although there are insubstantial differences in the language used, such as singular terminology versus plural terminology, the stipulations are substantively identical. The stipulations in each of these consolidated cases provide, in part:

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, except for the 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 in these cases, petitioners in docket Nos. 10147-91 (Selvin), 24512-89 (David), and 19760-89 (Blount) 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 September 22, 1995, October 2, 1995, and November 30, 1995, respectively. On those same dates, each petitioner who filed a motion for leave 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 such motion. Subsequently, respondent filed objections, with attachments, and memoranda in support thereof. For reasons discussed in more detail at the end of this opinion, and also in Farrell v. Commissioner [Dec. 48,236(M)], T.C. Memo. 1996-295, petitioners' motions shall be denied.

The issues remaining in these consolidated cases are: (1) Whether the assessment in docket No. 24512-89 (David) is barred by the statute of limitations; (2) whether petitioners are liable for additions to tax under section 6653(a)(1) and (2) for negligence; and (3) whether peti...