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1982 the recyclers were not properly valued at $1,750,000 each,
but instead had only a maximum value of $30,000 to $50,000 each.
On its 1982, 1983, 1984, and 1985 tax returns, Masters reported
net ordinary losses of $713,291, $36,205, $16,720, and $15,832,
respectively. Losses and credits were reported by Masters on its
tax returns, and the portions attributable to petitioners,
respectively, were included on Forms K-1 issued to them and filed
with Masters’ tax returns.
B. The Private Offering Memorandum
Generally, Masters distributed a private offering memorandum
to potential investors. The offering memorandum informed
investors that Masters’ business would be conducted in accordance
with the transaction described above. The offering memorandum
also warned potential investors of significant business and tax
risks associated with investing in Masters.
Specifically, the offering memorandum warned potential
investors that: (1) There was a substantial likelihood of an
audit by the Internal Revenue Service (IRS); (2) “On audit, the
purchase price of the Sentinel EPS recyclers to be paid by F&G to
ECI may be challenged by the * * * [IRS] as being in excess of
the fair market value thereof, a practice followed by * * * [the
IRS] in transactions it deems to be tax shelters”; (3) the
partnership had no prior operating history; (4) the limited
partners would have no control over the conduct of the
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