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Court litigation, IRS personnel either strongly suspected or
believed these partnerships to be abusive tax shelters. The
IRS’s original position had been that the purported acquisitions
of breeding animals by the cattle and sheep partnerships lacked
economic substance (i.e., were economic shams), that the
partnerships’ stated purchase prices for the animals greatly
exceeded the fair market value of the animals, and that the
promissory note each partnership issued in connection with its
purported acquisition of breeding animals was not a valid
indebtedness.
The holding in Bales v. Commissioner, T.C. Memo. 1989-568,
however, set back considerably the IRS’s tax enforcement efforts
against Jay Hoyt and the cattle and sheep partnerships that he
promoted and operated under his tax shelter program. In Bales,
this Court did not sustain the IRS’s disallowance of many of the
tax benefits a number of partners in specific cattle partnerships
involved therein claimed for 1977, 1978, and 1979. This Court,
among other things, found that the Bales partnerships had
acquired the benefits and burdens of ownership with respect to
specific breeding cattle, that the purchase prices for the
partnership cattle did not exceed their fair market value, and
that the promissory notes these partnerships issued were valid
recourse indebtedness.
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