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Reliance on representations by insiders, promoters, or
offering materials has been held an inadequate defense to
negligence. Goldman v. Commissioner, supra; LaVerne v.
Commissioner, 94 T.C. 637, 652-653 (1990), affd. without
published opinion 956 F.2d 274 (9th Cir. 1992), affd. without
published opinion sub nom. Cowles v. Commissioner, 949 F.2d 401
(10th Cir. 1991). Pleas of reliance have been rejected when
neither the taxpayer nor the advisers purportedly relied upon by
the taxpayer knew anything about the nontax business aspects of
the contemplated venture. Freytag v. Commissioner, supra; Beck
v. Commissioner, 85 T.C. 557 (1985).
The offering memorandum contains a description of various
business and tax risks associated with an investment in Sunbelt.
Despite a review of the offering memorandum and skepticism of its
contents, Storey made no effort to verify the information in the
offering memorandum beyond visiting PI's facilities and
contacting Miller, Bambara, Taggart, Giovannone, and Winer, all
of whom are insiders and promoters associated with Sunbelt.
Despite his lack of knowledge regarding the recycler, the target
market for the recycler, and the technical aspects of the
transactions, Storey did not contact an expert in plastics
recycling or engineering or recommend that petitioner do so.
Although Storey visited the PI plant in Hyannis, toured the
facility, and observed a demonstration of the recycler, he was
not qualified to analyze or assess the machines on display or the
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