River City Ranches #1 Ltd., Leon Shepard, Tax Matters Partner - Page 84

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          claimed.  Further, respondent engaged in almost continuous and               
          protracted litigation with the partnerships and partners over the            
          disallowance of partnership tax benefits.  However, the decision             
          in Bales v. Commissioner, T.C. Memo. 1989-568, set back                      
          respondent’s efforts, as the decision rejected respondent’s                  
          economic sham theory and allowed the Bales partners many of their            
          claimed tax benefits.                                                        
               Although in 1989, respondent suspected that Jay Hoyt had                
          been selling a large number of fictitious cattle to the cattle               
          partnerships, the evidence respondent possessed at that time did             
          not confirm this suspicion.  As a result, respondent decided that            
          during the examination of the post-1986 cattle and sheep                     
          partnership returns, a count and inspection of all the cattle and            
          sheep were essential.  From the fall 1992 through spring 1993                
          livestock count and inspection, respondent determined that the               
          Hoyt organization had greatly overstated the number and value of             
          the livestock owned by the partnerships.  As a result of the                 
          count and inspection, respondent believed by February 1993 that              
          he possessed sufficient evidence to support the issuance of                  
          prefiling notices and freezing tax refunds claimed by partners.              
               Following the respondent’s issuance of prefiling notices to             
          the partners in February 1993, and the completion of the count               
          and inspection of the cattle and sheep, the Examination Division             
          on or about December 30, 1993, issued letters to all the partners            






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