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turn their excess pay over to Graham as initial payments to
acquire interests in “investment programs” that did not
produce any economic return and apparently never had any
prospects of doing so. Graham purported to fulfill his
prophecies about the tax treatment of the Programs by
preparing petitioners’ tax returns and claiming deductions
and credits that have been disallowed in full, with
resulting deficiencies* * *.
* * * * * * *
When a tax shelter is a sham devoid of economic
substance and a taxpayer relies solely on the tax shelter
promoter to prepare his income tax return or advise him how
to prepare the return with respect to the items attributable
to the shelter that the promoter has sold him, it will be
difficult for the taxpayer to carry his burden of proving
that he acted reasonably or prudently. Although a tax
shelter participant, as a taxpayer, has a duty to use
reasonable care in reporting his tax liability, the promoter
who prepares the participant’s tax return can be expected to
report large tax deductions and credits to show a relatively
low amount of tax due, and thereby fulfill the prophecies
incorporated in his sales pitch.
We conclude that there are no grounds for application of judicial
estoppel in the present case.
In a vein similar to their judicial estoppel argument,
petitioners further argue that Mr. Hoyt’s deception resulted in
an “honest mistake of fact” by petitioners when they entered into
their investment. More specifically, petitioners assert that
they had insufficient information concerning the losses and that
“all tangible evidence available to the Hoyt partners supported
Jay Hoyt’s statements.”
Reasonable cause and good faith under section 6664(c)(1) may
be indicated where there is “an honest misunderstanding of fact
or law that is reasonable in light of all the facts and
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