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petitioners have shown that the purported reliance in the instant
case was reasonable. See Freytag v. Commissioner, 89 T.C. 849,
889 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.
868 (1991). "In the face of a transaction which clearly lacked
economic substance, and which was designed to produce tax
benefits out of proportion with total investment, * * *
[petitioners’ arguments] do not establish the exercise of due
care.” Hildebrand v. Commissioner, 967 F.2d 350, 353 (9th Cir.
1992), affg. Ames v. Commissioner, T.C. Memo. 1990-87. Had there
been a bona fide examination of the offering materials, no
ordinarily prudent person would have found ERL to be a legitimate
investment. “Warning bells tolled, but * * * [Bauman] ignored
them”. Freytag v. Commissioner, supra at 889; see also Kantor v.
Commissioner, 998 F.2d 1514, 1522-1523 (9th Cir. 1993), affg. in
part and revg. in part T.C. Memo. 1990-380. At the very least,
Bauman was negligent. Accordingly, respondent’s determination
that petitioners are liable for the addition to tax under section
6653(a) for 1980 and additions to tax under section 6653(a)(1)
and (2) for 1981 and 1982 is sustained.
Issue 7. Section 6621(c)
Section 6621(c) provides for an increased rate of interest
with respect to any substantial underpayment of tax attributable
to one or more tax motivated transactions. An underpayment is
substantial if it exceeds $1,000. Sec. 6621(c)(2). A tax-
motivated transaction includes any sham or fraudulent
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