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The private placement memorandum contained numerous warnings
regarding the tax risks involved with the investment. After
making the investment regardless of these risks, petitioners
claimed a $13,847 ordinary loss for 1982, despite the fact that
petitioner had only recently invested just $5,000 in cash in the
partnership. This disproportionate and accelerated loss--along
with the resulting substantial tax savings--should have been
further warning to petitioners for the need to obtain outside
advice regarding the propriety of the deduction. Despite these
warnings, petitioners did not seek such advice or conduct any
other type of inquiry into the propriety of the deduction.
Instead, when it came time to complete their tax return, they
relied on the Schedule K-1 given to them by the partnership in
claiming a loss in an amount nearly triple that of their cash
investment.2 Taking into account petitioner’s extensive
background and ability to judge the merits of the investment as a
whole, it was negligent to have claimed this loss as a deduction
based only on the Schedule K-1 and without further inquiry.
2Petitioners argue that the instructions for Schedules K-1
provided by the Internal Revenue Service required them to report
the loss. The instructions state that the individual taxpayer
“must treat partnership items * * * consistent with the way the
partnership treated the items on its filed return.” The
instructions have further provisions dealing with errors on
Schedules K-1 as well as with the filing of statements to explain
inconsistencies between the partnership’s return and the
taxpayer’s return. We find to be unreasonable any belief by
petitioners that they were required by law to mechanically deduct
a loss which was improper.
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