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the taxpayers in Krause undertook a significant investigation of
the proposed investment, including researching EOR. The other
taxpayer was a geological and mining engineer who hired an
independent expert to review the offering materials. See id. at
166. In contrast, petitioners did not have any experience or
education in plastics recycling. Moreover, neither Keith nor
Warren undertook an independent investigation of Masters.
Petitioners failed to hire an independent expert in plastics to
evaluate the transaction.
Keith and Warren were both sophisticated and well educated
businessmen. There were many factors that should have alerted
petitioners to conduct independent investigations of Masters.
The offering memorandum warned each prospective purchaser that he
should consult with his own professional adviser as to the legal,
tax, and business aspects of investing in Masters. Moreover, the
offering memorandum also warned potential investors about
numerous business and tax risks. Nevertheless, petitioners
disregarded these warnings and failed to undertake an appropriate
independent investigation.
3. Conclusion as to Negligence
Under the circumstances of these cases, petitioners failed
to exercise due care in claiming large deductions and tax credits
with respect to Masters on their Federal income tax returns. It
was not reasonable for petitioners to rely as they did on the
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