BRONSON v. COMMISSIONER

T.C. Memo. 2002-260

UNITED STATES TAX COURT

SEYMOUR BRONSON AND PHYLLIS C. BRONSON, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 11377-00, 11378-00, Filed October 9, 2002.
11383-00.

E. Martin Davidoff, for petitioners.

Rodney J. Bartlett and Timothy S. Sinnott, for respondent.

MEMORANDUM OPINION

DINAN, Special Trial Judge: In separate notices of

deficiency, respondent determined that petitioners are liable for

the following additions to tax for the respective taxable years:

1
Cases of the following petitioners are consolidated
herewith: Donald K. Gordon-Wylie and Frances T. Gordon-Wylie,
docket No. 11378-00; and James R. Garrity and Sandra T. Garrity,
docket No. 11383-00.
 - 2 -
Taxable Year Additions to Tax
Docket No. Ending Sec. 6653(a)(1) Sec. 6653(a)(2)

11377-00 Feb. 29, 1984 $186 *
11378-00 Dec. 31, 1983 256 *
11383-00 Dec. 31, 1983 184 *

* 50% of the interest due on deficiencies of $3,712, $5,117,
and $3,672, respectively.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue.

The issue for decision is whether petitioners are liable for

each of the additions to tax determined by respondent.2

Background

Some of the facts have been stipulated and are so found.

The stipulations of fact and those attached exhibits which were

admitted into evidence are incorporated herein by this reference.

On the date the petitions were filed in these cases, petitioners

all resided in New Jersey.

Petitioners each invested in a venture known as Arid Land

Research Partners (“Arid Land” or “the partnership”) in December

1983. They all became involved with the partnership through Paul

Trimboli, an accountant and financial planner. Prior to the time

2
In each of the petitions, petitioners argued that (1) the
notice of deficiency was issued “beyond the Statute of
Limitations”; (2) the notice “is invalid due to the fact that the
Commissioner failed to make a determination” after an examination
of facts particular to petitioners’ case; and (3) the
Commissioner failed to allow petitioners “their appeal rights
within the Internal Revenue Service”. Petitioners concede the
first issue. Petitioners did not address the remaining issues in
their briefs, and we therefore consider them to have been
abandoned and we need not address them here.
 - 3 -

period in issue, Mr. Trimboli had worked at the public accounting

firm Bugni, LaBanca & Paduano for approximately 7 years, doing

primarily tax work and some auditing work. In 1983, he started a

business on his own as a certified public accountant and

financial planner. The education Mr. Trimboli had completed at

that time--a bachelor’s degree in accounting and the bulk of the

courses required to become a certified financial planner through

the College of Financial Planning--included courses in Federal

and State taxation. However, Mr. Trimboli had no experience as a

financial planner prior to starting his own business in 1983.

Mr. Trimboli learned of jojoba investments in early 1983

through a financial planning association to which he belonged.

In June 1983 and again in September 1983, Mr. Trimboli traveled

to California to investigate the partnership as a potential

investment opportunity. He traveled to Blythe, California, and

to Bakersfield, California, where there were plantations on which

jojoba was already being grown. He also visited a research

facility located at and operated for the use of the University of

California at Riverside which was involved in the growing of

jojoba. On the first trip, Mr. Trimboli was accompanied by

Robert Cole--who would become the general partner of the

partnership--and on the second trip he was accompanied by Mr.

Cole and three of Mr. Trimboli’s own colleagues. On these trips,

Mr. Trimboli also met with Eugene Pace, who was the president of
 - 4 -

what was to become the purported research and development

contractor to the partnership, U.S. Agri Research & Development

Corp.

In all, Mr. Trimboli sold investments in the partnership to

approximately seven of his clients. He received commissions for

selling these interests in the partnership, similar to the

commissions he received for selling other types of investments.

Mr. Trimboli was retained by Arid Land to prepare the 1983 tax

return for the partnership as well as to prepare the Schedules

K-1, Partner’s Share of Income, Credits, Deductions, etc., sent

to the individual investors reflecting their share of the losses

claimed by the partnership on its own return. In preparing the

return and the schedules, Mr. Trimboli relied on financial

information provided by Mr. Cole and on the opinion letter given

to Mr. Cole by outside counsel, discussed below. Mr. Trimboli

subsequently prepared tax returns for individual clients,

claiming the losses reflected on the Schedules K-1 as deductions.

Mr. Trimboli had no experience in farming or in research and

development ventures. He could not recall the exact nature of

Mr. Cole’s experience which would be relevant to operating a

jojoba operation, other than the fact that he knew that “there

was some experience.”

A private placement memorandum for investments in the

partnership, dated December 1, 1983, was distributed to each of
 - 5 -

the petitioners. Prefatory material in the memorandum contained

the following caveats:

PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO CONSTRUE
THIS MEMORANDUM OR ANY PRIOR OR SUBSEQUENT COMMUNICATIONS AS
CONSTITUTING LEGAL OR TAX ADVICE. * * * INVESTORS ARE URGED
TO CONSULT THEIR OWN COUNSEL AS TO ALL MATTERS CONCERNING
THIS INVESTMENT.

* * * * * * *

NO REPRESENTATIONS OR WARRANTIES OF ANY KIND ARE
INTENDED OR SHOULD BE INFERRED WITH RESPECT TO THE ECONOMIC
RETURN OR TAX ADVANTAGES WHICH MAY ACCRUE TO THE INVESTORS
IN THE UNITS.

EACH PURCHASER OF UNITS HEREIN SHOULD AND IS EXPECTED
TO CONSULT WITH HIS OWN TAX ADVISOR AS TO THE TAX ASPECTS.

In a section entitled “Use of Proceeds”, an estimation of various

expenditures, the memorandum stated that 90.7 to 93.0 percent of

the capital contributions from the partners would be allocated to

the research and development contract (regardless of the total

amount of the contributions). The only other expenses were to be

organizational costs, legal fees, and commissions. One of the

“risk factors” listed for the investment contained the following

discussion:

Federal Income Tax Consequences: An investment in the
units involves material tax risks, some of which are set
forth below. Each prospective investor is urged to consult
his own tax advisor with respect to complex federal (as well
as state and local) income tax consequences of such an
investment.
* * * * * * *

(c) Validity of Tax Deductions and Allocations.

The Partnership will claim all deductions for
federal income tax purposes which it reasonably
 - 6 -

believes it is entitled to claim. There can be no
assurance that these deductions may not be contested or
disallowed by the Service * * * . Such areas of
challenge may include * * * expenditures under the R &
D Contract * * * .

* * * * * * *

The Service is presently vigorously auditing
partnerships, scrutinizing in particular certain
claimed tax deductions. * * * Counsel’s opinion is
rendered as of the date hereof based upon the
representations of the General Partner * * * . Counsel
shall not review the Partnership’s tax returns. * * *

(d) Deductibility of Research or Experimental
Expenditures.

The General Partner anticipates that a substantial
portion of the capital contributions of the Limited
Partners to the Partnership will be used for research
and experimental expenditures of the type generally
covered by Sections 174 and 44F of the Code
(particularly in recently issued IRS regulations issued
thereunder). However, prospective investors should be
aware that there is little published authority dealing
with the specific types of expenditures which will
qualify as research or experimental expenditures within
the meaning of Section 174, and most of the
expenditures contemplated by the Partnership have not
been the subject of any prior cases or administrative
determinations.

There are various theories under which such
deductions might be disallowed or required to be
deferred. * * * No ruling by the Service has been or
will be sought regarding deductibility of the proposed
expenditures under Section 174 of the Code.

A section entitled “Tax Aspects” contains the following

information concerning a legal opinion from outside counsel

obtained by the general partner:

The General Partner has received an opinion of counsel
concerning certain of the tax aspects of this investment.
The opinion * * * is available from the General Partner.
 - 7 -

Since the tax applications of an investment in the
Partnership vary for each investor, neither the Partnership,
the General Partner nor counsel assumes any responsibility
for tax consequences of this transaction to an investor.
* * * The respective investors are urged to consult their
own tax advisers with respect to the tax implications of
this investment. * * *

The opinion letter referenced in the private placement

memorandum was one which purportedly had been written for Mr.

Cole by outside counsel based on information provided by Mr.

Cole. The letter, dated December 7, 1983, concludes by stating

general caveats and disclaimers along with the opinion that “it

is more likely than not that a partner of Arid Land Research

Partners, a Limited Partnership will prevail on the merits of

each material tax issue presented herein.” However, the

conclusions regarding the issue of the section 174 deduction in

particular were vague and nonconclusive in nature.

Finally, the investor subscription agreement accompanying

the private placement memorandum required a subscriber upon

purchase of an interest to aver that:

He understands that an investment in the Partnership is
speculative and involves a high degree of risk, there is no
assurance as to the tax treatment of items of Partnership
income, gain, loss, deductions of credit and it may not be
possible for him to liquidate his investment in the
Partnership.

As the result of partnership level proceedings concerning

Arid Land Research Partners, this Court ultimately entered a

decision disallowing in full the partnership’s claimed ordinary

loss of $463,688 for taxable year 1983. This decision was based
 - 8 -

upon a stipulation by the partnership and the Commissioner to be

bound by the outcome of the case in which this Court rendered our

opinion in Utah Jojoba I Research v. Commissioner, T.C. Memo.

1998-6. In that case, we found that the Utah Jojoba I Research

partnership (“Utah I”) was not entitled to a section 174(a)

research or experimental expense deduction (or a section 162(a)

trade or business expense deduction) because (a) Utah I did not

directly or indirectly engage in research or experimentation, and

(b) the activities of Utah I did not constitute a trade or

business, nor was there a realistic prospect of Utah I ever

entering into a trade or business. Id.

The Bronsons

Petitioner Seymour Bronson operated a retail business during

1983 which he had operated since 1949 and in which he had several

employees. The business took in gross receipts of $195,838

during the year in issue, for a profit of $15,706. Prior to

opening the business, Mr. Bronson had attended college for a time

and had served in the military in World War II. He has no

academic background in finance, economics, or taxation, but he

did have a course in accounting. He had limited experience in

investments prior to Arid Land.

Petitioner Phyllis C. Bronson also operated a retail

business during 1983. She had operated the business since 1973,

and during the year in issue the business took in gross receipts
 - 9 -

of $316,085 for a profit of $20,902. Mrs. Bronson also had a

partial college education, with no courses in economics, finance,

or taxation, and she had limited investment experience.

Mr. Trimboli began doing work for the Bronsons approximately

3 years prior to 1983. The Bronsons were clients of Bugni,

LaBanca & Paduano, and Mr. Trimboli had assisted in preparing

their tax returns. The Bronsons were aware that Mr. Trimboli

received commissions for selling interests in Arid Land as well

as other investments. In December 1983, the Bronsons purchased

seven units in Arid Land through Mr. Trimboli for a total of

$7,700 in cash and a promissory note of $11,550.

The Bronsons filed a joint Federal income tax return for the

taxable year ending February 28, 1984. On this return, they

reported the following amounts of income and loss:3

Business income $37,138
Interest income 1,030
Dividends 603
Capital gain distribution 78
“Management fee” income 825
Partnership income 411
Subtotal 40,085
Arid Land loss (17,369)
Total income 22,716

Laura DiTommaso, an accountant at Bugni, LaBanca & Paduano and a

colleague of Mr. Trimboli, was listed as the return preparer on

3
We use the terms “income” and “loss” primarily to reflect
the items reported on the “income” section of the Form 1040, U.S.
Individual Income Tax Return, filed by petitioners. We use this
terminology rather than the more technical terminology of the
Internal Revenue Code because these are the amounts reflected on
the faces of the returns which petitioners signed.
 - 10 -

the Bronsons’ tax return for the taxable year in issue. Ms.

DiTommaso does not specifically recall preparing the return in

question. However, the procedure which she would have followed

at the time was to use the Schedule K-1 provided and to rely upon

the information on the schedule because nothing looked “odd or

out of the ordinary”.

Following the entry of the decision concerning the

partnership, discussed above, respondent adjusted the Bronsons’

return by disallowing their claimed share of the partnership

loss, $17,369, and making a computational adjustment to their

itemized deductions. In the statutory notice of deficiency which

provides the basis for our jurisdiction in this case, respondent

determined that the Bronsons are liable for additions to tax

under section 6653(a)(1) and (2) in the respective amounts of

$186 and 50 percent of the interest due on a $3,712 deficiency.

Prior to issuing the notice of deficiency, respondent did not

make inquiries of the Bronsons concerning the proposed

adjustments, nor did respondent provide them with an opportunity

for an administrative appeal.

The Gordon-Wylies

Petitioner Donald K. Gordon-Wylie was a sales account

manager at Digital Equipment Corporation during 1983. He

possesses an associate’s degree and has no academic background in

accounting, finance, tax, or economics. Petitioner Frances T.
 - 11 -

Gordon-Wylie worked as a receptionist and clerk at Bugni, LaBanca

& Paduano during 1983. Both of the Gordon-Wylies had limited

investing experience.

Mrs. Gordon-Wylie met Mr. Trimboli several years prior to

1983 while working at Bugni, LaBanca & Paduano. Mr. Gordon-Wylie

was introduced to Mr. Trimboli in 1983, when Mr. Trimboli began

preparing the Gordon-Wylies’ tax returns as well as assisting

them with financial planning. In December 1983, the Gordon-

Wylies purchased six units in Arid Land through Mr. Trimboli for

a total of $6,600 in cash and a promissory note of $9,900.

The Gordon-Wylies filed a joint Federal income tax return

for the taxable year 1983. On this return, they reported the

following amounts of income and loss:4

Wages $63,673
Interest income 276
Dividends 978
Capital loss (1,153)
Rental loss (2,943)
Subtotal 60,831
Arid Land loss (14,888)
Total income 45,943

Mr. Trimboli prepared the Gordon-Wylies’ return for taxable year

1983.

Following the entry of the decision concerning the

partnership, discussed above, respondent adjusted the Gordon-

Wylies’ return by disallowing their claimed share of the

4
See supra note 3.
 - 12 -

partnership loss, $14,888. In the statutory notice of deficiency

which provides the basis for our jurisdiction in this case,

respondent determined that the Gordon-Wylies are liable for

additions to tax under section 6653(a)(1) and (2) in the

respective amounts of $256 and 50 percent of the interest due on

a $5,117 deficiency. Prior to issuing the notice of deficiency,

respondent did not make inquiries of the Gordon-Wylies concerning

the proposed adjustments, nor did respondent provide them with an

opportunity for an administrative appeal.

The Garritys

During 1983, petitioners James R. Garrity and Sandra T.

Garrity assisted in operating a family-run Exxon Service Center.

Mr. Garrity has a bachelor’s degree in business and has taken

basic courses in taxes and economics. Mrs. Garrity has a high

school education and has no academic background in taxes,

economics, or finance.

Mr. Trimboli had been assisting the Garritys and their

family with their personal and corporate tax returns for several

years prior to 1983. The Garritys knew that Mr. Trimboli would

likely receive a commission for selling them an interest in Arid

Land. In December 1983, the Garritys purchased five units in

Arid Land through Mr. Trimboli for a total of $5,500 in cash and

a promissory note of $8,250.
 - 13 -

The Garritys filed a joint Federal income tax return for the

taxable year 1983. On this return, they reported the following

amounts of income and loss:5

Wages $46,158
Interest income 1,015
Subtotal 47,173
Arid Land loss (12,407)
Total income 34,766

Mr. Trimboli prepared the Garritys’ return for taxable year 1983.

Following the entry of the decision concerning the

partnership, discussed above, respondent adjusted the Garritys’

return by disallowing their claimed share of the partnership

loss, $12,407. In the statutory notice of deficiency which

provides the basis for our jurisdiction in this case, respondent

determined that the Garritys are liable for additions to tax

under section 6653(a)(1) and (2) in the respective amounts of

$184 and 50 percent of the interest due on a $3,672 deficiency.

Prior to issuing the notice of deficiency, respondent did not

make inquiries of the Garritys concerning the proposed

adjustments, nor did respondent provide them with an opportunity

for an administrative appeal.

Discussion

Section 6653(a)(1) imposes an addition to tax equal to 5

percent of the underpayment of tax if any part of the

5
See supra note 3.
 - 14 -

underpayment is attributable to negligence or intentional

disregard of rules or regulations. Section 6653(a)(2) provides

for a further addition to tax equal to 50 percent of the interest

due on the portion of the underpayment attributable to negligence

or intentional disregard of rules or regulations. Negligence is

defined to include “any failure to reasonably comply with the Tax

Code, including the lack of due care or the failure to do what a

reasonable or ordinarily prudent person would do under the

circumstances.” Merino v. Commissioner, 196 F.3d 147, 154 (3d

Cir. 1999) (quoting Heasley v. Commissioner, 902 F.2d 380, 383

(5th Cir. 1990)), affg. T.C. Memo. 1997-385.

Petitioners’ primary argument is that they were not

negligent because they relied on advice from Mr. Trimboli and, in

the case of the Bronsons, Ms. DiTommaso. Reasonable reliance on

professional advice may be a defense to the negligence additions

to tax. United States v. Boyle, 469 U.S. 241, 250-251 (1985);

Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d

1011 (5th Cir. 1990), affd. on another issue 501 U.S. 868 (1991).

The advice must be from competent and independent parties, not

from the promoters of the investment. LaVerne v. Commissioner,

94 T.C. 637, 652 (1990), affd. without published opinion sub nom.

Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991), affd.

without published opinion 956 F.2d 274 (9th Cir. 1992); Rybak v.

Commissioner, 91 T.C. 524, 565 (1988).
 - 15 -

Petitioners analogize their cases to Anderson v.

Commissioner, 62 F.3d 1266, 1271 (10th Cir. 1995), affg. T.C.

Memo. 1993-607. In Anderson, the taxpayer relied on both an

investment adviser and an accountant in making his investment.

The Court of Appeals, although it affirmed the decision of the

Tax Court that the taxpayers were liable for additions to tax for

negligence, found that reliance on the investment adviser, who

received a commission for selling the investment to the taxpayer,

was reasonable under the circumstances of the case. Cf., e.g.,

Carmena v. Commissioner, T.C. Memo. 2001-177 (financial adviser

receiving commissions for sale of investments had inherent

conflict of interest in advice given to investors). However, the

Court of Appeals stressed that the investment adviser--an

independent insurance agent and registered securities dealer--was

a good friend of the taxpayer and was not affiliated with the

investment the taxpayers entered into. Anderson v. Commissioner,

supra at 1271.

The present cases are distinguishable from Anderson in two

important respects. First, in the cases at hand, Mr. Trimboli

was involved with principals of the investment prior to the

creation of the partnership. In particular, he was in contact

with Mr. Cole, who was to become the general partner of Arid

Land, and with Mr. Pace, who was to become the president of the

research and development contractor. Although petitioners argue
 - 16 -

that Mr. Trimboli was an outsider who coincidentally prepared the

partnership’s return and the Schedules K-1, we find that Mr.

Trimboli’s relationship with the partnership and its principals

makes him more than a disinterested commission-based salesman, as

was the case in Anderson. In light of his relationship to Arid

Land, Mr. Trimboli cannot be considered to be an independent

adviser.

Second, the investment adviser in Anderson was a good friend

of the taxpayer. Petitioners’ purely professional relationships

with Mr. Trimboli, spanning no more than several years, are not

analogous to the close friendship between taxpayer and adviser in

Anderson. See also Dyckman v. Commissioner, T.C. Memo. 1999-79

(taxpayers reasonably relied on an adviser who was a close

personal friend); Reile v. Commissioner, T.C. Memo. 1992-488

(taxpayers reasonably relied on advice from an adviser who was an

acquaintance and fellow “temple recommend holder”). Furthermore,

petitioners’ professional dealings with Mr. Trimboli were only in

the context of an accountant-client relationship (or that of a

coworker, as was the case with Mrs. Gordon-Wylie). No petitioner

could have had prior dealings with Mr. Trimboli as a financial

planner because he had no experience in the field prior to 1983.

Cf. Wright v. Commissioner, T.C. Memo. 1994-288 (taxpayers

reasonably relied upon an individual who was recommended to them

as a financial adviser, who had a strong presence in the
 - 17 -

community as such, and who misled the taxpayers concerning the

propriety of an investment). Thus, the relationships between

petitioners and Mr. Trimboli were not close enough or prolonged

enough--either personally or professionally--to merit special

consideration in the level of due care required by petitioners in

these cases.

With respect to his role as tax adviser,6 Mr. Trimboli

largely relied on the opinion letter addressed to Arid Land’s

general partner, Mr. Cole. There is little to indicate that Mr.

Trimboli researched the issues himself thoroughly enough to come

to any independent conclusions concerning the propriety of the

deductions. We find that Mr. Trimboli’s reliance on the opinion

letter further supports our conclusion that Mr. Trimboli did not

render independent, objective advice concerning the propriety of

the partnership’s position on tax issues. Thus, we do not accept

petitioners’ assertion that Mr. Trimboli’s reliance on the

opinion letter should itself insulate petitioners from the

negligence additions to tax.

Because Mr. Trimboli was not an independent adviser,

petitioners’ reliance on any advice from him was not reasonable.

Bello v. Commissioner, T.C. Memo. 2001-56 (reliance on advice

6
We assume for the sake of argument that petitioners
approached Mr. Trimboli for substantive tax advice. There is no
evidence in the record that any petitioner did more than rely on
Mr. Trimboli’s representation that Arid Land was a good financial
investment.
 - 18 -

from an accountant concerning an investment was unreasonable

where the accountant had been retained by the investment

promoter); LaVerne v. Commissioner, supra; Rybak v. Commissioner,

supra.

Petitioners assert that the standard set forth by the Fifth

Circuit Court of Appeals in Heasley v. Commissioner, 902 F.2d 380

(5th Cir. 1990), revg. T.C. Memo. 1988-408, should be applicable

in this case. In Heasley, the court found that the taxpayers--

who were moderate-income, blue-collar investors with little

education or prior investment experience--were to be held to a

lower standard of due care when evaluating whether they were

negligent in making an investment. The court found that the

taxpayers, the Heasleys, were not negligent because, among other

reasons, they had relied on financial advisers. Id. at 384. The

financial consultant who had sold the Heasleys the investment had

referred them to an independent accountant for assistance in

preparing their tax return with respect to the investment. The

accountant, in turn, had reviewed the investment materials prior

to completing the return. The court noted that “nothing in the

record supports a finding that Smith [the accountant] did not

independently assess the Heasleys’ tax liability or that Danner

[the financial consultant] influenced Smith’s calculations.” Id.

at 384 n.9.
 - 19 -

Heasley is not applicable to the cases at hand. First,

petitioners in these cases, although having limited investment

experience, are not entirely unsophisticated in business matters:

The Bronsons operated two sole proprietorships; Mr. Gordon-Wylie

was a corporate sales account manager; Mrs. Gordon-Wylie was

employed by an accounting firm; and the Garritys assisted in the

operation of an incorporated business. Second, we have found

petitioners’ reliance on Mr. Trimboli to be unreasonable because

he was not an independent adviser. Furthermore, the Gordon-

Wylies and the Garritys relied solely on one individual, and that

individual both sold them their investment and advised them as to

its legal effect without independently researching the legal

issues involved. The Bronsons also effectively relied on one

individual because, as discussed below, they did not consult with

their return preparer concerning the investment, nor did the

preparer independently investigate it herself before classifying

the purported loss as a deduction.

In addition to reliance on Mr. Trimboli, the Bronsons also

claim reliance on their tax return preparer, Ms. DiTommaso. From

the record, we conclude Ms. DiTommaso’s role was confined to a

routine return preparation in which she merely transferred the

purported loss from the Schedule K-1 onto the Bronsons’

return–the Bronsons neither sought nor received from Ms.

DiTommaso any particular advice concerning the investment or the
 - 20 -

related deduction. Blind reliance on a return preparer is not a

defense to negligence, and taxpayers retain a duty to file an

accurate return and generally are required to review their return

before signing it. Metra Chem Corp. v. Commissioner, 88 T.C.

654, 662 (1987). Furthermore, in order to avoid a negligence

addition to tax with respect to an error on a return, the error

must be the result of the preparer’s mistake based upon otherwise

correct information provided by the taxpayer. Pessin v.

Commissioner, 59 T.C. 473, 489 (1972). Submitting the Schedule

K-1 reflecting an improper loss to their return preparer, and in

turn receiving a completed tax return reflecting the same loss,

does not constitute a defense to negligence in the Bronsons’

case.

Finally, petitioners cite Hummer v. Commissioner, T.C. Memo.

1988-528, for the proposition that taxpayers cannot be negligent

where the relevant legal issue was “not well settled”.

Petitioners, however, did not receive substantive advice

concerning the deduction from anyone independent of the

investment, nor did they conduct their own investigation into the

propriety of the deduction. Indeed, there is no indication that

petitioners ever were aware of the nature of the purportedly

uncertain legal issues involved. Petitioners may not rely upon a

“lack of warning” as a defense to negligence where no reasonable

investigation was ever made, and where they were repeatedly
 - 21 -

warned of the relevant risks in the private placement memorandum.

Christensen v. Commissioner, T.C. Memo. 2001-185; Robnett v.

Commissioner, T.C. Memo. 2001-17.

The private placement memorandum contained numerous warnings

regarding the tax risks involved with making an investment in

Arid Land. Although the parties stipulated that petitioners all

received a copy of the private placement memorandum, for the most

part petitioners could not recall having seen and/or having

reviewed the memorandum prior to making an investment. In any

case, the warnings were there and would have been evident if

petitioners had exercised reasonable care and read the

memorandum. After making their investments regardless of these

risks, petitioners claimed large losses despite the fact that

they had only recently invested cash in amounts far less than the

amounts of the losses:7 The Bronsons paid $7,700 and claimed a

loss of $17,369 (43.3 percent of their income); the Gordon-Wylies

paid $6,600 and claimed a loss of $14,888 (24.5 percent of their

income); and the Garritys paid $5,500 and claimed a loss of

7
Petitioners argue that the instructions for Schedules K-1
provided by the Internal Revenue Service required them to report
the loss. The instructions state that the individual taxpayer
“must treat partnership items * * * consistent with the way the
partnership treated the items on its filed return.” The
instructions have further provisions dealing with errors on
Schedules K-1 as well as with the filing of statements to explain
inconsistencies between the partnership’s return and the
taxpayer’s return. We find to be unreasonable any belief by
petitioners or their return preparers that they were required by
law to mechanically deduct a loss which was improper.
 - 22 -

$12,407 (26.3 percent of their income).8 These disproportionate

and accelerated losses--along with the resulting substantial tax

savings--should have been further warning to petitioners for the

need to obtain outside, independent advice regarding the

propriety of the deduction. Despite these warnings, petitioners

did not seek such advice or conduct any other type of inquiry

into the propriety of the deductions. We find that it was

negligent for petitioners to have claimed these deductions under

the circumstances of these cases. We sustain respondent’s

determinations that petitioners are liable for the section

6653(a)(1) and (2) additions to tax for negligence.

To reflect the foregoing,

Decisions will be entered

for respondent.

8
See supra note 3.