Gilfred B. and Patricia Swartz - Page 16




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          investigation was ever made which would have allowed them to                
          discover such a lack of warning, and where they were repeatedly             
          warned of the relevant risks in the private placement memorandum.           
          Christensen v. Commissioner, T.C. Memo. 2001-185; Robnett v.                
          Commissioner, T.C. Memo. 2001-17.                                           
               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 private placement memorandum, petitioner             
          could not recall having reviewed the memorandum 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 $12,407            
          despite the fact that they had only recently invested cash of               
          just $5,500.2  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,              


          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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