Kenneth and Dorothy Hitchen - Page 6

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          Hoyt’s organization prior to investing.  Petitioners also did not           
          visit or otherwise investigate the cattle partnership prior to              
          making the investment, although at a later time they visited a              
          sheep ranch that they believed was related to their investment.             
               Petitioners’ initial investment was into a cattle                      
          partnership known as Shorthorn Genetic Engineering 86-5 (SGE 86-            
          5).  Petitioners did not make any payment immediately upon                  
          signing the investment documents.  Rather, the funds for their              
          initial investment were to be derived from the refunds                      
          petitioners were to receive upon filing their tax returns.                  
               By letter dated October 21, 1987, respondent notified                  
          petitioners that the refund that petitioners had requested on               
          their 1986 return had been frozen.  The letter stated in relevant           
               We have reviewed certain tax deductions and/or credits                 
               which are attributable to the above tax shelter                        
               promotion [SGE 86-5].  Based upon our review of that                   
               promotion, we believe that the tax deductions and/or                   
               credits are not allowable.  Accordingly, we have                       
               reduced the portion of any refund due to you which is                  
               attributable to the tax shelter promotion.                             
               The examination of the tax shelter promotion will be                   
               completed as expeditiously as possible.  If the                        
               examination results in adjustments to your return, you                 
               will be afforded the opportunity to exercise your                      
               appeal rights.                                                         
          Prior to preparing petitioners’ next tax return, for 1987, Mr.              
          Hoyt’s organization transferred petitioners’ partnership interest           
          from the SGE 86-5 cattle partnership to a sheep partnership known           

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