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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, F.3d (9th Cir. 1996). In
Osterhout, we found that certain oil and gas partnerships were
not engaged in a trade or business and sustained respondent's
imposition of the negligence additions to tax with respect to one
of the partners therein.14 The taxpayer had relied in part upon
a tax opinion contained in the offering materials. The Ninth
Circuit Court of Appeals reversed our imposition of the
negligence additions to tax. Based on the Court of Appeals for
the Ninth Circuit's partial reversal of our decision in Balboa
Energy Fund 1981, petitioners argue that their reliance upon the
offering materials concerning their investments in Northeast and
Hyannis was reasonable and therefore sufficient to overcome the
additions to tax for negligence. The Court of Appeals for the
Ninth Circuit's opinion is unpublished, however. Moreover, the
prefaces to the offering memoranda for Northeast and Hyannis
warned prospective investors that the tax opinion letter was not
in final form, and was prepared for the general partner, and that
prospective investors should consult their own professional
advisers with respect to the tax benefits and tax risks
14 Osterhout v. Commissioner, T.C. Memo. 1993-251, involved a
group of consolidated cases. The parties therein agreed to be
bound by the Court's opinion regarding the application of the
additions to tax provided for under sec. 6653(a), inter alia.
Accordingly, although the Court's analysis focused on one
taxpayer, the additions to tax were sustained with respect to all
of the parties.
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