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The partnerships reported income recognized on the transfer
of cattle to Ranches in payment of principal and interest as gain
under section 1231. Respondent adjusted this item to zero on the
final partnership administrative adjustments issued to each
partnership.
Pursuant to the settlement agreement, the numbers of cattle
subject to depreciation by the partnerships for the taxable years
in issue were reduced. All cattle were subject to revised
valuation as well. As a result, the amounts of principal due on
the notes payable to Ranches for the cattle purchased were
reduced, and respondent recalculated the annual interest due
based on these amounts according to the provisions of the
settlement agreement. Such interest was to be computed on an
original principal balance of $4,000, the settled cost basis of
the breeding cattle per head, times the number of cattle in
service during the first year of each partnership.
The pertinent portions of the agreement provide:
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
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Last modified: May 25, 2011