Poison Creek Ranches #1, Ltd., Poison Creek Ranches #2, Ltd., Poison Creek Ranches #3, Ltd., Poison Creek Ranches #4, Ltd., Walter J. Hoyt, III, Tax Matters Partner, et al. - Page 8

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          to honor their obligations to Ranches and continue to participate           
          in the partnership and inactive partners as those who have walked           
          away from their note obligations and/or no longer participate in            
          the partnership.                                                            
               As an alternative, respondent made a settlement offer to the           
          partners on an individual basis.  The terms of the offer provided           
          generally that a partner who accepted would be allowed a                    
          deduction for any cash paid to the "Hoyt Organization" in the               
          year of payment.  The partner would not be allowed any other                
          deductions or credits nor be required to recognize any income               
          related to the partnerships.  The record does not indicate how              
          many partners accepted this settlement offer (referred to as the            
          out-of-pocket settlement).                                                  
               Respondent's spreadsheets calculating the partners'                    
          interests in the partnerships have been stipulated and have been            
          received into evidence.  For the first year, respondent allocated           
          a portion of the partnership debt, which consisted of the reduced           
          amount of the notes to Ranches, to each of the partners who                 
          assumed personal liability.  The allocation was based on the                
          original percentages of partnership liabilities assumed as                  
          reflected in the partnerships' books and records.  The resulting            
          amounts represented each partner's beginning capital account                
          balance.  Each year respondent adjusted these balances for actual           
          capital contributions made to the partnerships and for increases            





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