- 10 -
Overlooking the lack of evidence, however, Mr. Meinke’s
advice was clearly from someone with an inherent conflict of
interest and as such cannot be the basis of petitioners’ defense
to the negligence penalties. See Chamberlain v. Commissioner,
supra; Rybak v. Commissioner, 91 T.C. 524, 565 (1988). Mr.
Meinke was a promoter of the Yuma Mesa partnership and was a
principal in the related entities. Petitioners were aware of
this conflict of interest at the time of the investment and when
they claimed the loss on their return. We find that petitioners’
decision to rely upon the advice of Mr. Meinke, who had helped to
establish the partnership and who convinced petitioners to make
their investment, was not the action of a reasonable or
ordinarily prudent person under the circumstances.
In their brief, petitioners cite Kantor v. Commissioner, 998
F.2d 1514 (9th Cir. 1993), affg. in part and revg. in part T.C.
Memo. 1990-380. In Kantor, the Court of Appeals for the Ninth
Circuit held that the taxpayers were not negligent because they
were not acting unreasonably in claiming a section 174 deduction
for the development of computer software. The court noted the
almost complete absence of case law interpreting section 174 at
the time the taxpayers claimed the deduction and stated that the
taxpayers reasonably could have been led to believe by the
general partner’s experience and involvement with the research
project that they were entitled to the deduction. The court
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011