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reliance upon Mr. Booker's advice with respect to Encore was not
objectively reasonable.
Moreover, no independent experts in the field of leasing
master recordings were ever consulted by petitioners.
Petitioners claimed deductions and investment tax credits based
upon the assumption that they were leasing a master recording
purportedly worth $496,000, as listed in the offering materials,
and were responsible for marketing such recording for profit.
Clearly, this type of transaction would require a careful and
meaningful investigation.
Petitioners liken their situation to that of investors in
traded stocks who, due to their inability to fully evaluate such
investments, rely on the expertise of a stockbroker.
Petitioners, through their interest in Encore, however, were
purportedly engaged in the trade or business of commercially
developing and marketing a master recording with the intent to
make a profit. Such activity requires a degree of participation
and investigation higher than that which petitioners took and
higher than that which a casual investor in stocks undertakes.
We believe that a reasonable investor would have done more than
petitioners did in determining the profitability of entering into
a trade or business with the intent of making a profit. We find
that petitioners' actions, in failing to conduct anything
approaching a meaningful investigation of Encore, were not the
actions that a reasonable and ordinarily prudent person would
have taken under the circumstances.
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Last modified: May 25, 2011