William G. and Debra C. Kellen - Page 21




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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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