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substantial tax benefits; and they had been investing for at
least two to three years with Mr. Jones. Unfortunately, they
relied on Mr. Jones, who had an inherent conflict of interest
because of his ties to CFS. Unlike the taxpayers in Dyckman v.
Commissioner, supra, petitioners were provided with a private
placement memorandum which warned that the offering involved a
high degree of risk.
We sympathize with petitioners and what they have been
through. However, based on the facts of this case, we find that
when petitioners claimed the substantial deduction on their
return, they had not exercised the due care of reasonable and
ordinarily prudent persons under similar circumstances.
Accordingly, we hold that petitioners are liable for the
negligence additions to tax imposed under section 6653(a)(1) and
(2).
Respondent determined that petitioners are liable for an
addition to tax under section 6661(a) for a substantial
understatement of tax for 1982. Section 6661(a), as amended by
the Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509,
sec. 8002, 100 Stat. 1951, provides for an addition to tax equal
to 25 percent of the amount of any underpayment attributable to a
substantial understatement. An understatement is substantial
when the understatement for the taxable year exceeds the greater
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