- 25 -
the investment economically sound as to petitioner.6 We
therefore sustain respondent's determination regarding the
underlying deficiency.
Issue 2. Section 6653(a)(1) and (2) Negligence
Respondent determined that petitioners are liable for
additions to tax under section 6653(a)(1) and (2) with respect to
the underpayment attributable to petitioners' investment in
Clearwater. Respondent contends that it was not reasonable for
petitioner to invest in Clearwater without conducting an
independent investigation as to whether the transactions were an
economic sham, or more importantly, for petitioners to claim tax
benefits from such investment relying simply on the Clearwater
private offering memorandum.
6 Petitioners imply that we should adopt a subjective test,
i.e., consider factors listed in sec. 1.183-2(b), Income Tax
Regs., in deciding whether the Clearwater transactions were an
economic sham. In this regard, petitioners contend that the
investment in Clearwater was made with a "reasonable objective"
of making a profit, thus negating the conclusion that the
Clearwater transactions were an economic sham. We disagree. On
the basis of the record in this case, the contention that
petitioner entered into the Clearwater transactions with a
reasonable objective of making a profit is meritless. However,
in deciding whether the Clearwater transactions were an economic
sham, we find it unnecessary to discuss in any detail the factors
that lead us to conclude that petitioner did not invest in
Clearwater with the reasonable objective of making a profit. Cf.
McCrary v. Commissioner, 92 T.C. 827 (1989). For a discussion of
the professed reasonableness of petitioner's expectation of
making a profit from the Clearwater transactions, see Issue 2,
infra, where we decide whether petitioners are liable for the
additions to tax under sec. 6653(a)(1) and (2) for negligence or
intentional disregard of rules or regulations.
Page: Previous 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 NextLast modified: May 25, 2011