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investment, petitioners’ income tax returns were prepared by
Laguna Tax Service, an entity operated by Mr. Hoyt.1
Although they were not associated with the Hoyt cattle
operation until October 1995, petitioners reported losses from
their cattle investment on their 1994 income tax return, filed on
October 20, 1995. Petitioners attached to their 1994 income tax
return a Schedule F, Profit or Loss From Farming, and reported a
net loss of $184,000 from the “breeding value of registured [sic]
cattle”. The $184,000 net loss reflected gross income of
$191,636 less total expenses of $375,636. Expenses included
$165,625 in depreciation and section 179 expenses, $5,541 in
interest paid, $153,308 in “1994 Sharecrop Board expenses”, and
$51,162 in “Expense for the Cost Basis of Purchased Cattle that
Died in 1994". The $184,000 loss offset the $103,417 in adjusted
gross income petitioners earned in 1994 and resulted in
petitioners’ claiming a refund of tax withheld from their
earnings from employment in 1994 in the amount of $6,856. The
unused 1994 net operating losses were carried back to taxable
years 1991, 1992, and 1993.2
1 Mr. Hoyt was an enrolled agent registered to practice
before the Internal Revenue Service. After their 1994 return was
selected for examination, petitioners gave a power of attorney to
Mr. Hoyt to represent them before the Internal Revenue Service.
2 Petitioners’ taxes for 1991, 1992, and 1993 are not at
issue in this case.
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