River City Ranches #1 Ltd., Jeffry Bergamyer, Tax Matters Partner - Page 18

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          statements in connection with his promotion and operation of the            
          cattle partnerships.  In his referral report to the CID, this               
          team member concluded that Hoyt was selling to some partnerships            
          cattle that had already been sold to other partnerships and that            
          he was depreciating cattle that did not exist.  The CID then                
          conducted an investigation of the alleged nonexistent cattle and            
          Hoyt’s represented value for them.8  The CID conducted two other            
          investigations of Hoyt but did not recommend that Hoyt be                   
               With many cows and sheep spread over many facilities, the              
          IRS had difficulty proving that the partnerships were shams.  On            
          October 19, 1989, the IRS suffered a major setback when this                
          Court filed its opinion Bales v. Commissioner, T.C. Memo.                   
          1989-568, wherein this Court found that the Bales partnerships              
          had acquired the benefits and burdens of ownership with respect             
          to specific breeding cattle, that the purchase prices for the               
          partnership cattle did not exceed their fair market value, and              
          that the promissory notes the partnerships issued were valid                
          recourse indebtedness.                                                      

               8On Oct. 13, 1989, during the CID’s above-mentioned                    
          investigation, the U.S. Attorney’s Office in Sacramento requested           
          that the CID review certain information and determine whether IRS           
          special agents from the CID should join in an ongoing grand jury            
          investigation of Hoyt for possible violations of the internal               
          revenue laws.  On Nov. 3, 1989, the IRS Regional Counsel’s Office           
          requested that IRS special agents be authorized to participate in           
          the grand jury investigation.  On Oct. 2, 1990, the U.S.                    
          Attorney’s Office ended the grand jury investigation of Hoyt                
          without an indictment.                                                      

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