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end of 1981. Thus the agreement provides that there are cattle
that are no longer subject to depreciation.
In addition, as set out above, the agreement provides that
payments made by the partnerships to Ranches by transfer of
calves or culled cows will constitute ordinary income in a manner
consistent with the decision in Bales v. Commissioner. In that
case the Court stated that dispositions of breeding cattle,
including culled cows, are taxed pursuant to section 1231(a)
subject to the recapture provisions of section 1245. The Court
further stated calves that are used for payment on the notes are
not held for breeding purposes and are not accorded section 1231
treatment. Bales v. Commissioner, T.C. Memo. 1989-568. Such
calves would not be subject to an allowance for depreciation and
thus would not be subject to the limitation on depreciable cattle
set forth above. Cf. sec. 1.167(a)-6(b), Income Tax Regs. If
petitioner's reading were accepted, this provision concerning
calves would be rendered meaningless.
We note that the agreement is not completely clear in all of
its terms. In part, the agreement provides: "For Federal income
tax purposes, all the cattle are adult breeding cattle, each
having an original depreciable basis of $4,000." We do not think
this provision is clear and unambiguous because it could be read
on its own to limit the type of cattle held by the partnerships.
However, we interpret this paragraph as qualifying the one
directly preceding it which limits the number of cattle subject
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