- 43 -
relative to the dollar amounts invested, further investigation of
the Partnership transactions clearly was required.
The offering memoranda raised numerous caveats and warnings
with respect to the Partnerships, including: (1) The
Partnerships had no operating history; (2) management of the
Partnerships' business was dependent upon the general partner,
who had no experience in marketing recycling equipment and who
was required to devote only such time to the Partnerships as he
deemed necessary; (3) the limited partners had no right to take
part in, or interfere in any manner with, the management or
conduct of the business of the Partnerships; (4) there was no
established market for the Sentinel recyclers; (5) although
competitors were purportedly not marketing comparable equipment,
and the Sentinel recyclers purportedly involved "carefully
guarded trade secrets," PI did "not intend to apply for a patent
for protection against appropriation and use by others." The
Foam offering memorandum also noted "that since August 1981, PI
[had] become a sublicensee of 104 other Sentinel Recyclers" and
had "encountered longer start-up periods than anticipated". A
careful consideration of the materials in the offering memoranda
in these cases, especially the discussions of high writeoffs and
risk of audit, should have alerted a prudent and reasonable
investor to the questionable nature of the promised deductions
and credits. See Collins v. Commissioner, 857 F.2d 1383, 1386
(9th Cir. 1988), affg. Dister v. Commissioner, T.C. Memo. 1987-
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