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value of cattle sold to the partnerships. See, e.g., Mora v.
Commissioner, supra at 292.13
In King v. Commissioner, supra at 204, we held that “the
proper application of the actual knowledge standard in section
6015(c)(3)(C), in the context of a disallowed deduction, requires
respondent to prove that petitioner had actual knowledge of the
factual circumstances which made the item unallowable as a
deduction.” In other words, respondent had to prove that
petitioner knew the Hoyt organization had an insufficient number
of cattle to sustain the partnership deductions claimed on the
joint return and knowingly claimed improper deductions. Nothing
in the record indicates, however, that respondent made any
reasonable effort to identify the grounds for the disallowance of
the Hoyt partnership losses and credits petitioner and Mr. Foy
claimed, or to evaluate his ability to prove that petitioner had
actual knowledge of the factual circumstances that caused the
disallowance of the Hoyt partnership items before taking his
position in this case. Respondent should have meaningfully
evaluated whether he could prove that petitioner had actual
knowledge by taking into account the information supplied by
petitioner, the extensive audit and litigating history regarding
the Hoyt organization and the Hoyt partnerships, and the specific
13By Sept. 10, 2002, Mr. Hoyt had been indicted, convicted,
and sentenced for his fraudulent activities with respect to the
Hoyt partnerships.
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