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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,
petitioner’s investment of $12,500 produced for him on his 1982
tax return claimed tax credits of $20,382 and deductions of
$9,646. The direct benefits claimed on petitioner’s tax return,
from the tax credits alone, far exceeded his cash investment.
Like the taxpayers in Provizer v. Commissioner, T.C. Memo. 1992-
177, “except for a few weeks at the beginning, [petitioner] 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
units in the partnership. A careful consideration of the
memorandum, and the discussion of high writeoffs and risk of
audit, would have alerted a prudent investor to question the
nature of the promised tax benefits.
Moreover, the tax opinion made clear that there was no
independent evaluation of the SAB Foam transactions. The opinion
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