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The primary purpose of this memorandum is to
memorialize the bases we reached for settling all cases
involving Hoyt Cattle partnerships for the years 1980
through 1986. It is our express intent to apply the
provisions specified in this memorandum to determine the tax
effects on partnership transactions and operations.
* * * * * * *
Satisfaction of obligations for interest, principal payments
and management fees by transferring calves and culled cows
will constitute ordinary income to the investor
partnerships. This convention is consistent with the Tax
Court's decision in Bales v. Commissioner, which provides
that
-- calves are not section 1231(a) property; and
-- although culled cattle are section 1231(a) property,
the gain on which may be long term capital gain
(depending on the holding period), depreciation allowed
must be recaptured as ordinary income under the
provisions of section 1245.
Principal payments equal to 10% of the face amount of the
notes payable to Ranches will begin according to terms of
the notes -- in the sixth year of the partnership * * *
The agreement includes a provision listing "the total number
of cattle in service and subject to depreciation by the investor
partnerships" for each of the taxable years 1980 through 1986.
The parties have stipulated:
All payments on the promissory notes made by the
partnerships to Hoyt & Sons Ranches beginning in the sixth
year after their respective notes were executed were paid by
transferring cattle with a zero basis, rather than cash.
* * *
The petitioners agree that all of the figures shown on
Schedules (Joint Exhibits 36-AJ through 39-AM) [schedules of
the interest and principal due for each of the years 1983
through 1986] are correct. The petitioners agree that all
of the interest and principal payments beginning in the
sixth year of the notes were made by the transfers of cattle
rather than cash. * * *
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