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credits and deductions. Petitioners argue that this makes the
case different from other similar cases and makes their
subsequent investment in SAB Foam reasonable. The modest royalty
was not sufficient to change the character of the deal.
Petitioners’ assertion that the amount invested was
“relatively small” is irrelevant when considering the amount of
tax benefits quickly claimed. The tax benefits and risks of the
transaction were substantial, and they were set forth in the
memorandum for anyone to see. Undoubtedly investors as
sophisticated as petitioner and his partners knew the size of the
potential benefits and risks here or should have known them if
they had been properly careful.
E. Conclusion as to Negligence
Under the circumstances of this case, petitioners failed to
exercise due care in claiming large deductions and tax credits
with respect to SAB Foam on their Federal income tax return. In
view of petitioner’s sophistication, experience, and education,
it was not reasonable for petitioners to rely as they did on an
interconnected group of advisers, promoters, and insiders, none
of whom had any expertise in plastics recycling. Petitioner
should have been able to determine that the recyclers were not
unique, that they were not worth the amount ascribed to them, and
that SAB Foam lacked economic substance and had no potential for
profit. None of the so-called advisers undertook a good faith
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