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A. The Memorandum and Petitioner’s Colleagues
1. The Memorandum
Petitioner contends that before purchasing shares in SAB
Foam he read the memorandum and its accompanying materials. The
purported value of the recyclers is what generated the deductions
and credits. The memorandum clearly reflects this circumstance.
The recyclers, which in fact have a value of no more than $50,000
each, were reported by SAB Foam to have a basis of $1,750,000
each. As a result of the purported value of the recyclers,
petitioners’ investment of $12,500 produced for them on their
1982 tax return claimed tax credits of $20,385 and deductions of
$9,646. The direct benefits claimed on petitioners’ tax return,
from the tax credits alone, far exceeded their cash investment.
Like the taxpayers in Provizer v. Commissioner, T.C. Memo. 1992-
177, “except for a few weeks at the beginning, petitioners never
had any money in the deal.” Under these circumstances, a
reasonably prudent person would have asked a qualified adviser
whether such a windfall were not “too good to be true.” See
McCrary v. Commissioner, 92 T.C. 827, 850 (1989).
The memorandum included numerous caveats and warnings
regarding the business and tax risks of SAB Foam. It stated that
the offering involved a high degree of risk and that each offeree
should consult his own professional advisers as to legal, tax,
accounting, and other matters relating to any purchase of any
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