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have invested in Tandrill in order to earn a profit, we believe that
petitioner chose to invest in an area in which he had little
background in order to realize tax benefits.
Petitioner was financially sophisticated. His tax advisers at
Peak Marwick gave him “an education” on the anticipated tax benefits
of Tandrill’s trading. They informed him that the tax consequences
of his investment in Tandrill “could be advantageous.” It is clear
that petitioner expected the tax losses that Tandrill generated.
Moreover, petitioner expected to carry back losses from
Tandrill 3 years. See sec. 172(b)(1)(A). Tandrill began operations
in 1979, and that year petitioner carried his Tandrill losses back
to 1976, the year in which he reported a gain of almost $3.5 million
from the sale of Hy-Gain stock and an adjusted gross income of
$2,047,797. Petitioners’ tax liability for 1976 was $1,355,566.
Thus, as a result of investing in Tandrill, petitioners were
expecting to carry back a net operating loss into 1976. This
carryback would reduce their tax liability by $1,053,742. This
reduction, more than any supposed profit potential, was petitioner’s
real motive.
Mr. Illingworth was the “brains” behind Tandrill’s trading
activities. While he clearly understood the nature of Tandrill’s
options and futures transactions, he delegated at least a
considerable portion of the decision making.45 Concurrently, Mr.
45 Mr. Illingworth’s precise role in Tandrill’s trading
(continued...)
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