- 44 -
percent of their cash investments, without taking into
consideration any rebated commissions and advance royalty
payments. Therefore, after adjustments of withholding, estimated
tax, or final payment, like the taxpayers in Provizer v.
Commissioner, T.C. Memo. 1992-177, "except for a few weeks at the
beginning, petitioners [Snyder and Busch] never had any money in
the [Partnership transactions]." In view of the
disproportionately large tax benefits claimed on petitioners'
1981 and 1982 Federal income tax returns, relative to the dollar
amounts invested, further investigation of the Partnership
transactions clearly was required. A reasonably prudent person
would have asked a qualified independent tax adviser if this
windfall were not too good to be true. McCrary v. Commissioner,
92 T.C. 827, 850 (1989). A reasonably prudent person would not
conclude without substantial investigation that the Government
was providing tax benefits so disproportionate to the taxpayers'
investment of their own capital.
Petitioners' arguments are not supported by the Ninth
Circuit Court of Appeals' partial reversal of our decision in
Osterhout v. Commissioner, T.C. Memo. 1993-251, affd. in part and
revd. in part without published opinion sub nom. Balboa Energy
Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir. 1996). In
Osterhout, on which petitioners rely, we found that certain oil
and gas partnerships were not engaged in a trade or business and
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