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circumstances, including the experience, knowledge, and education
of the taxpayer.” Sec. 1.6664-4(b)(1), Income Tax Regs.
However, “reasonable cause and good faith is not necessarily
indicated by reliance on facts that, unknown to the taxpayer, are
incorrect.” Id.
For the reasons discussed above in applying the negligence
standard, whether or not petitioners had a “mistake of fact” does
not alter our conclusion that petitioners’ actions in relation to
their investment and the tax claims were objectively
unreasonable. Furthermore, and again for the reasons discussed
above, petitioners’ failure to investigate further--beyond what
was made available to them by Mr. Hoyt and his organization--was
also not an objectively reasonable course of action.
C. Petitioners’ Investigation
Petitioners further argue that they had reasonable cause for
the underpayment because they made a reasonable investigation
into the partnership, taking into account the level of their
sophistication. Petitioners assert that this investigation
yielded no indication of wrongdoing by Mr. Hoyt, and petitioners
further assert that an “average taxpayer was unable to discover
Hoyt’s fraud”. As we have held, petitioners’ investigation into
the partnership went no further than members of the Hoyt
organization and other Hoyt partner-investors. Relying on these
individuals as a source of objective information concerning the
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