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downpayment (5 percent of the purchase price) plus a 5-year
financing arrangement. Had the acquisition been nothing more
than a $6,225 passive investment in an ongoing business, noted
the Court of Appeals, it would have been reasonable for the
taxpayers to rely on the advice of a good friend who had
thoroughly investigated the investment.24 However, because the
transaction was structured and represented as a purchase in the
amount of $124,500, the Court of Appeals held that something more
was required.
In the cases before us, petitioners claimed tax benefits
based on the assumption that they owned and leased, through the
Partnerships, an interest in $20,927,98825 worth of recycling
machines in 1981 and 1982. Based on total investments ranging
from $6,250 to $93,750 in 1981 alone, petitioners each claimed
qualified investments in new investment credit property with
bases ranging from $52,997 to $784,496.26 These inflated bases
generated claims to first-year tax credits in 1981 ranging from
$8,156 to $156,900, and claims to deductible losses ranging from
24 The adviser had his accountant and attorney review and check
out the structure of the investment; he spoke with the investment
principal; he looked into the principal's background and checked
out his references, banks, other business connections, and the
Better Business Bureau; and he spoke with competitors to make
sure the venture was viable.
25 Eighteen recyclers (4 owned by Foam, 7 each by Empire and
Plymouth) each valued at $1,162,666 totals $20,927,988.
26 The basis figures were derived from petitioners' 1981 Forms
3468, Schedule B, Computation of Business Energy Investment
Credit.
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