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1993-607, where the taxpayers were found liable for negligence
additions to tax. In Anderson, the taxpayers claimed tax
benefits based upon their acquisition of property listed at
$124,500, but for which they actually paid $6,225 in a cash
downpayment (5 percent of the purchase price) plus a 5-year
financing arrangement. Had the acquisition been nothing more
than a $6,225 passive investment, noted the Court of Appeals, it
would have been reasonable for the taxpayers to rely on the
advice of a good friend who had thoroughly investigated the
investment.8 However, because the transaction was structured and
represented as a purchase in the amount of $124,500, the Court of
Appeals held that something more was required.
In the cases before us, petitioners claimed tax benefits
based on the assumption that they leased, through Empire, an
interest in $8,138,662 worth of recycling machines. Based on
their investments of $25,000 each, Black and Bennett each claimed
a qualified investment in new investment credit property with a
basis of $212,012, with resulting first-year tax credits of
$42,402 and deductible losses of $20,510, a substantial
transaction clearly requiring careful investigation under the
Anderson case. Petitioners' adviser, Gallagher, reviewed the
8 The adviser had his accountant and attorney review and check
out the structure of the investment; he spoke with the investment
principal; he looked into the principal's background and checked
out his references, banks, other business connections, and the
Better Business Bureau; and he spoke with competitors to make
sure the venture was viable.
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