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The private placement memorandum contained numerous warnings
regarding the tax risks involved with making an investment in
Arid Land. Although the parties stipulated that petitioners
received a copy of the memorandum, petitioners could not recall
having reviewed it prior to making the investment. In any case,
the warnings were there and would have been evident if
petitioners had exercised reasonable care and read the
memorandum. After making their investment regardless of these
risks, petitioners claimed a loss of $34,739 for 1983 despite the
fact that they had only recently invested cash of just $15,400,
and they subsequently claimed another loss of $798 for 1984.4
The disproportionate and accelerated loss in 1983--along with the
resulting substantial tax savings--should have been further
warning to petitioners for the need to obtain outside,
independent advice regarding the propriety of the deductions.
Despite these warnings, petitioners did not seek such advice or
conduct any other type of inquiry into the propriety of the
deductions. We find that it was negligent for petitioners to
4Petitioners 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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