James G. and Linda C. Jaroff - Page 3

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          Linda Jaroff worked as a sales representative for the Software              
          Works! of L.A. and Allied Packaging Corp. in 1994 and for Allied            
          Packaging Corp. in 1995.  Petitioners filed joint Federal income            
          tax returns for 1994 and 1995 and reported combined wages of                
          $98,078 for 1994 and $85,583 for 1995.                                      
          A.  Petitioners’ 1994 and 1995 Income Tax Returns                           
               The notice of deficiency in this case relates to losses                
          petitioners reported from their investment in the cattle breeding           
          operations of W.J. Hoyt Sons Ranches MLP, an entity operated by             
          Walter J. Hoyt III (Mr. Hoyt) (collectively referred to as the              
          Hoyt cattle operation).                                                     
               In October 1995, petitioners purportedly purchased cattle              
          from the Hoyt cattle operation in exchange for a promissory note.           
          While the sales documents and other substantive details of the              
          transaction are not part of the record in this case,                        
          correspondence between petitioners and members of the Hoyt cattle           
          operation indicate that the investment was intended to generate             
          significant operating losses that petitioners would use to reduce           
          or eliminate their income tax liability.  Petitioners were                  
          required to remit 75 percent of the tax refunds resulting from              
          the transaction to the Hoyt cattle operation, allegedly in                  
          repayment of interest on the promissory note.  As part of their             

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