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promotional materials received by petitioners specifically called
the Hoyt investment a “tax shelter” and specifically stated that
the primary return on any investment would be from tax savings.
In the years preceding their investment, 1987 through 1989,
petitioners reported adjusted gross income (AGI) averaging
approximately $43,000 each year. In each of these years,
petitioners paid Federal income taxes in an amount averaging
approximately $4,300. After making their investment in DSBS 87-C
in January 1991, petitioners filed a 1990 return on which they
claimed a deduction for a partnership loss of $148,390, reducing
their 1990 tax liability on $46,162 of wage income to only $842.
Petitioners then filed the Form 1045 on which they used the
partnership loss to reduce their tax liability to zero in each of
1987, 1988, and 1989. Finally, for the year in issue, 1991,
petitioners claimed an additional partnership loss deduction of
$45,510, resulting in a tax liability of $1,798. While this loss
was partially offset by the farm income reported on the return,
petitioners’ tax liability was nevertheless less than half of
petitioners’ average tax liability before application of the
carryback in the years prior to their investment.
Petitioners claimed the tax benefits from the partnership
losses based solely on the advice that they received from the
promoters of the investment and from other Hoyt investors.
Furthermore, the promotional materials that petitioners received
had clearly indicated that there were substantial tax risks in
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