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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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