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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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