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petitioner either did not read the offering memorandum in its
entirety or chose to ignore portions thereof. See Goldman v.
Commissioner, 39 F.3d 402, 407-408 (2d Cir. 1994), affg. T.C.
Memo. 1993-480, holding that the taxpayer’s reliance on offering
materials was not reasonable; see also Pasternak v. Commissioner,
990 F.2d 893, 903 (6th Cir. 1993), affg. Donahue v. Commissioner,
T.C. Memo. 1991-181, holding that claims that are probably “too
good to be true” should be investigated by a reasonably prudent
person.18
The offering memorandum was replete with caveats and
warnings regarding the business and tax risks associated with an
investment in San Nicholas. The cover page cautioned that “THIS
OFFERING INVOLVES A HIGH DEGREE OF RISK” and warned prospective
investors “NOT TO CONSTRUE THIS MEMORANDUM OR ANY PRIOR OR
SUBSEQUENT COMMUNICATIONS AS CONSTITUTING LEGAL OR TAX ADVICE.”
Potential inventors were urged “TO CONSULT THEIR OWN COUNSEL AS
TO ALL MATTERS CONCERNING THIS INVESTMENT” and were advised “TO
CONSULT WITH [THEIR] OWN TAX ADVISOR AS TO THE TAX ASPECTS.” The
single longest section of the offering memorandum was devoted to
“risk factors” and warned of numerous risks, specifically
including tax risks, the lack of a structured market and
18 In the present case, the parties stipulated to a
promotional videotape produced by U.S. Agri that described jojoba
as “liquid gold” and “the industrial crop of the future”, which
would be cultivated in “some of the most hostile land anywhere”.
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