Foothill Ranch Company Partnership, Buck Equities, Ltd., Tax Matters Partner - Page 3

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          improvements; and (3) the county would incrementally issue FRC              
          permits to construct housing units as FRC fulfilled its                     
          obligation to construct the aforementioned buildings and                    
          improvements.                                                               
               In May of 1988, FRC executed separate agreements, with Lyon            
          Communities, Inc. (Lyon), and P.B. Partners (Partners), to sell             
          each of them a large parcel of the Whiting Ranch.  Lyon and                 
          Partners entered into their respective agreements with the                  
          intention to develop each of their parcels.  To ensure that the             
          county would issue the construction permits necessary for such              
          development, each sales agreement provided that FRC would fulfill           
          its construction obligations to the county.  The sales agreements           
          also imposed on FRC construction obligations that were unrelated            
          to its obligations to the county (e.g., the construction of                 
          affordable housing units).  In addition, the sales agreements               
          provided that Lyon and Partners would perform some of the                   
          construction required pursuant to FRC's obligations to the                  
          county.                                                                     
               By the end of FRC's 1988 tax year, FRC had not completed its           
          construction obligations.  On its 1988 Form 1065 (U.S.                      
          Partnership Return of Income), which was filed on October 16,               
          1989, FRC used the percentage of completion method of accounting            
          (PCM) to calculate the income attributable to its property                  
          transactions with Lyon and Partners.  On September 28, 1995,                






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