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standpoint. Petitioners are not insulated from the negligence
additions to tax by claiming reliance on Gallagher.
Petitioners also contend that they read and reasonably
relied upon the Empire offering memorandum and the reports of the
evaluators annexed thereto. However, a careful consideration of
the materials in the Empire offering memorandum, especially the
discussions in the prospectus of high writeoffs and risk of
audit, would have alerted a prudent and reasonable investor to
the questionable nature of the promised deductions and credits.
See Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988),
affg. Dister v. Commissioner, T.C. Memo. 1987-217. The preface
to the memorandum contained the following: NO OFFEREE SHOULD
CONSIDER THE CONTENTS OF THIS MEMORANDUM *** AS *** EXPERT
ADVICE. *** EACH OFFEREE SHOULD CONSULT HIS OWN PROFESSIONAL
ADVISERS AS TO LEGAL, TAX, ACCOUNTING AND OTHER MATTERS RELATING
TO ANY PURCHASE BY HIM OF UNITS. It also clearly stated that the
Empire transaction involved significant tax risks and that in all
likelihood the Internal Revenue Service would challenge the
transaction. In a "business risks" section, it warned that there
was no history for the partnership and no established market for
the recyclers or the pellets.
At trial, Bennett could not recall having read those
business risk warnings or the statements that there was no market
for the recyclers or for the pellets of recycled plastic. Black
could not recall having read that there was no market for the
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