                       T.C. Memo. 2000-159



                     UNITED STATES TAX COURT


DURHAM FARMS #1, J.V., GARY L. BLACKBURN, TAX MATTERS PARTNER ET
AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent


     1
      Cases of the following petitioners are consolidated
herewith: Durham Farms #1, J.V., Gary L. Blackburn, Tax Matters
Partner, docket No. 2468-94; W.J. Hoyt Sons Management Company,
Gary L. Blackburn, Tax Matters Partner, docket No. 5104-94; W.J.
Hoyt Sons Management Company, Gary L. Blackburn, Tax Matters
Partner, docket No. 5105-94; W.J. Hoyt Sons Management Company,
Gary L. Blackburn, Tax Matters Partner, docket No. 5106-94;
Durham Genetic Engineering 1984-3, J.V., Gary L. Blackburn, Tax
Matters Partner, docket No. 9271-94; Shorthorn Genetic
Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters Partner,
docket No. 9752-94; Durham Genetic Engineering 1984-3, J.V., Gary
L. Blackburn, Tax Matters Partner, docket No. 9768-94; Shorthorn
Genetic Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters
Partner, docket No. 9814-94; Timeshares Breeding Service 1989-1,
J.V., Gary L. Blackburn, Tax Matters Partner, docket No. 18707-
94; W.J. Hoyt Sons Management Company, Gary L. Blackburn, Tax
Matters Partner, docket No. 18710-94; Durham Farms #1, J.V., Gary
L. Blackburn, Tax Matters Partner, docket No. 20957-94; Shorthorn
Genetic Engineering 1982-1, J.V., Gary L. Blackburn, Tax Matters
Partner, docket No. 22821-94; Shorthorn Genetic Engineering 1984-
5, J.V., Gary L. Blackburn, Tax Matters Partner, docket No.
23429-94; Durham Genetic Engineering 1984-3, J.V., Gary L.
Blackburn, Tax Matters Partner, docket No. 23777-94; Durham Farms
#1, J.V., Gary L. Blackburn, Tax Matters Partner, docket No.
8175-95; Shorthorn Genetic Engineering 1982-1, J.V., Gary L.
Blackburn, Tax Matters Partner, docket No. 10053-95; Shorthorn
Genetic Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters
Partner, docket No. 11217-95; Durham Genetic Engineering 1984-3,
J.V., Gary L. Blackburn, Tax Matters Partner, docket No. 12500-
                                                   (continued...)
                               - 2 -

     Docket Nos.    2465-94,    2468-94,     Filed May 18, 2000.
                    5104-94,    5105-94,
                    5106-94,    9721-94,
                    9752-94,    9768-94,
                    9814-94,   18707-94,
                   18710-94,   20957-94,
                   22821-94,   23429-94,
                   23777-94,    8175-95,
                   10053-95,   11217-95,
                   12500-95,   13236-95,
                   14712-95,   20843-95,
                   20868-95,   21629-95,
                   24241-95,   24643-95.



     Michael D. Culy , for petitioners in docket Nos. 5104-94,
5105-94, 5106-94, 18710–94, and 22821-94.

     Timothy G. Buck, for petitioners in docket Nos. 5104-94,
5105-94, 22821-94, and 23777-94.

     Montgomery W. Cobb, for petitioners in docket Nos. 2465-94,
2468-94, 9721-94, 9752-94, 9768-94, 9814-94, 18707-94, 18710-94,
20957-94, 22821-94, 23429-94, 23777-94, 8175-95, 13236-95, 14712-


     1
      (...continued)
95; Durham Genetic Engineering 1986-2, J.V., Gary L. Blackburn,
Tax Matters Partner, docket No. 13236-95; Timeshares Breeding
Services 1989-1, J.V., Gary L. Blackburn, Tax Matters Partner,
docket No. 14712-95; Durham Farms #1, J.V., Dan C. Johnson, A
Partner Other Than the Tax Matters Partner, docket No. 20843-95;
Shorthorn Genetic Engineering 1984-5, J.V., Lawrence Dees, A
Partner Other Than the Tax Matters Partner, docket No. 20868-95;
Shorthorn Genetic Engineering 1982-1, J.V., Gary L. Blackburn,
Tax Matters Partner, docket No. 21629-95; Durham Genetic
Engineering 1984-3, J.V., Thomas Emerson, A Partner Other Than
the Tax Matters Partner, docket No. 24241-95; Timeshares Breeding
Services 1990-1, J.V., Edgar Marco, A Partner Other Than the Tax
Matters Partner, docket No. 24643-95. By Order dated Oct. 27,
1999, the Court removed Walter J. Hoyt III, as tax matters
partner in each of the consolidated cases. In that same Oct. 27,
1999, Order, the Court appointed Gary L. Blackburn as successor
tax matters partner of each partnership in the cases and also
permitted him to be intervening tax matters partner in those
cases commenced by a partner other than a partnership’s tax
matters partner.
                               - 3 -

95, 20843-95, 20868-95, 21629-95, 24241-95, and 24643-95.

     Walter J. Hoyt III, pro se in docket Nos. 10053-95, 11217-
95, and 12500-95.2

     Walter J. Hoyt III (participant), pro se in docket Nos.
20843-95, 20868-95, 24241-95, and 24643-95.3

     Gerald W. Douglas, Ann M. Murphy, Wesley F. McNamara, Paul
Robeck, Kathy I. Shaw, Catherine Caballero, and Ralph W. Jones,
for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   These cases were assigned to Special Trial

Judge Stanley J. Goldberg, pursuant to Rules 180, 181, and 183.

All Rule references are to the Tax Court Rules of Practice and

Procedure.   Section references are to the Internal Revenue Code

in effect for the years in issue.   The Court agrees with and

adopts the opinion of the Special Trial Judge, which is set forth

below.

                OPINION OF THE SPECIAL TRIAL JUDGE

     GOLDBERG, Special Trial Judge:    Respondent issued a notice

of final partnership administrative adjustment (FPAA) to each

partnership involved in these consolidated cases determining the

adjustments in the amounts and for the taxable years as set forth



     2
      After the trial was held and the parties filed their
posttrial briefs, Walter J. Hoyt III was allowed by the Court to
withdraw as tax matters partner from these cases.
     3
      See supra note 2.
                              - 4 -

in appendix A hereto.4

     After concessions, the primary issues for decision are:   (1)

Whether each of seven of the eight partnerships in the instant

cases--Durham Farms #1, J.V., Gary L. Blackburn, Tax Matters

Partner (DF #1), Shorthorn Genetic Engineering 1982-1, J.V., Gary

L. Blackburn, Tax Matters Partner (SGE 82-1), Durham Genetic

Engineering 1984-3, J.V., Gary L. Blackburn, Tax Matters Partner

(DGE 84-3), Shorthorn Genetic Engineering 1984-5, J.V., Gary L.

Blackburn, Tax Matters Partner (SGE 84-5), Durham Genetic

Engineering 1986-2, J.V., Gary L. Blackburn, Tax Matters Partner

(DGE 86-2), Timeshares Breeding Services 1989-1, J.V., Gary L.

Blackburn, Tax Matters Partner (TBS 89-1), and Timeshares

Breeding Services 1990-1, J.V., Gary L. Blackburn, Tax Matters

Partner (TBS 90-1)--purchased and acquired ownership of breeding

cattle that are subject to an allowance for depreciation under



     4
      The years in issue for Durham Farms #1 are 1987, 1988, and
its years ended Sept. 30, 1989 through 1992. The years in issue
for Shorthorn Genetic Engineering 1982-1 are its years ended
Sept. 30, 1990 through 1992. The years in issue for Shorthorn
Genetic Engineering 1984-5 are 1987, 1988, and its years ended
Sept. 30, 1989 through 1992. The years in issue for Durham
Genetic Engineering 1984-3 are 1987, 1988, and its years ended
Sept. 30, 1989 through 1992. The year in issue for Durham
Genetic Engineering 1986-2 is 1991. The years in issue for
Timeshares Breeding Services 1989-1 are 1989 and 1991. The year
in issue for Timeshares Breeding Services 1990-1 is 1992. The
years in issue for W.J. Hoyt Sons Management Co. are its years
ended Sept. 30, 1987 through 1990. Respondent granted DF #1, SGE
82-1, SGE 84-5, and DGE 84-3, each permission to change to a
taxable year ended Sept. 30, beginning with that partnership’s
year ended Sept. 30, 1989.
                              - 5 -

section 167 for the years in issue; (2) whether those seven

cattle-breeding partnerships each have substantiated and are

entitled to their claimed depreciation deductions with respect to

their breeding cattle for the years in issue; (3) whether those

seven cattle-breeding partnerships are entitled to certain

interest deductions with respect to the promissory note each

partnership issued in connection with the purported acquisition

of its breeding cattle; (4) whether any of those seven cattle-

breeding partnerships is entitled to farm, guaranteed payment,

and certain other deductions it claimed; (5) whether DGE 84-3 and

SGE 84-5 are entitled to an investment credit for 1987; (6)

whether some of those seven cattle-breeding partnerships had

certain additional farm income for some of the years in issue;

(7) whether the eighth partnership, W.J. Hoyt Sons Management

Co., Gary L. Blackburn, Tax Matters Partner (Management), is

entitled to certain credits and deductions it claimed for the

years in issue; and (8) whether Management had certain additional

farm and other income for the years in issue.

                        FINDINGS OF FACT

     Some of the facts and certain documents have been stipulated

for trial pursuant to Rule 91 and are found accordingly.   The

Court incorporates the parties’ stipulations in this opinion by

reference.

     At the times their respective petitions herein were filed,
                                  - 6 -

DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, TBS 90-

1, and Management each maintained its principal place of business

in Burns, Oregon.

A.   Overview

      Walter J. Hoyt III (Jay Hoyt) is a general partner of each

of the seven cattle-breeding partnerships that are involved in

the instant cases.   These seven cattle-breeding partnerships were

formed and began operating in the years indicated as follows:

                     Partnership           Year

                       DF #1               1973
                       SGE 82-1            1982
                       DGE 84-3            1984
                       SGE 84-5            1984
                       DGE 86-2            1990
                       TBS 89-1            1989
                       TBS 90-1            1990


DF #1, SGE 82-1, DGE 84-3, and SGE 84-5 had each been formed as a

California or Nevada limited partnership.

      Jay Hoyt’s father was a prominent breeder of Shorthorn

cattle, one of the three major breeds of cattle in the United

States.   In order to expand his business and attract investors,

the father had started organizing and promoting cattle-breeding

partnerships by the late 1960's.     Before and after the father’s

death in early 1972, Jay Hoyt and other members of the Hoyt

family were extensively involved in organizing and operating

cattle-breeding partnerships.     From about 1971 through 1992, Jay

Hoyt organized, promoted to numerous investors, and operated as a
                               - 7 -

general partner a total of almost 100 cattle-breeding

partnerships.

     Several of these earlier cattle-breeding partnerships,

including DF #1, were the subject of this Court’s opinion in

Bales v. Commissioner, T.C. Memo. 1989-568, wherein the years in

issue generally were 1977, 1978, and 1979.   The Hoyt family

originally through W.J. Hoyt & Sons had sold breeding cows or

heifers to these earlier partnerships for no money down and a

promissory note.   In general, the promissory note required a

partnership to pay the stated purchase price for its cattle over

a specified long-term period of 10 years or more.   For about the

first 5 years, no principal payments were required from the

partnership but only annual interest payments at a specified

interest rate per annum.   Over the remaining years, the

partnership was to pay the note’s full principal amount in equal

annual installments.   W.J. Hoyt & Sons was further granted a

security interest in the partnership’s breeding cattle, securing

payment on the partnership’s promissory note.   W.J. Hoyt & Sons

and the partnership concurrently also entered into a management

agreement, pursuant to which W.J. Hoyt & Sons obligated itself to

undertake all management with respect to a partnership’s breeding

cattle, pay all expenses, and provide stud bull services, in

exchange for receiving all calves produced and any culled cows

(the sharecrop agreement).   The sharecrop agreement further
                               - 8 -

obligated W.J. Hoyt & Sons to replace any partnership breeding

cow that could no longer serve as a breeding cow with another cow

of a specified quality.   In addition, W.J. Hoyt & Sons further

guaranteed that there would be a 10-percent annual increase in

the size of the partnership’s breeding herd.

     Most of the cattle sold to these earlier partnerships were

represented to be registered Shorthorn heifers on the bills of

sale issued to the partnership.   Others were appendix registered

and/or crossbred.   Some were “grade” heifers.   All of the cattle

owned by the partnerships registered with the American Shorthorn

Association (ASA) were registered under the W.J. Hoyt & Sons

name, and not under a partnership’s name.   However, other of the

Shorthorn cattle sold to the partnerships were not registered

with the ASA.   Instead, these cattle were issued certificates by

the Hoyt family (Hoyt certificates).

     As indicated previously, the Hoyt family through W.J. Hoyt &

Sons originally had (1) sold the breeding cattle to earlier

cattle-breeding partnerships they formed and promoted to

investors and (2) managed those partnerships’ breeding cattle

pursuant to a sharecrop agreement with each partnership.   These

arrangements somewhat changed over the years, in that the Hoyt

family conducted these activities through various entities.5    At


     5
      In Bales v. Commissioner, T.C. Memo. 1989-568 (wherein the
years in issue generally were 1977 through 1979), this Court,
                                                   (continued...)
                               - 9 -

some point before the years in issue, Jay Hoyt   decided that when

the Hoyt family sold breeding cattle to a cattle-breeding

partnership, he should not be negotiating as general partner of

that cattle-breeding partnership its purchase of those same

cattle and then managing that partnership’s cattle under a

sharecrop agreement between the partnership and W.J. Hoyt & Sons.

However, despite these different entities the Hoyt family

employed, Jay Hoyt continued to head the Hoyt organization and

was ultimately in charge of all of the Hoyt organization’s

operations.   All of the individuals managing various entities in


     5
      (...continued)
among other things, determined with respect to the transactions
of several earlier cattle partnerships (which the Hoyt family
organized and operated, including DF #1) that (1) those
partnerships had acquired the benefits and burdens of ownership
with respect to specific breeding cattle and (2) the promissory
notes they issued were valid recourse indebtedness. In addition,
Jay Hoyt (as tax matters partner) and respondent later concluded
settlements with respect to the years 1980 through 1986 of those
partnerships and a number of other cattle-breeding partnerships
the Hoyt family organized (including settlements for 1980 through
1986 for some of the seven cattle-breeding partnerships involved
in the instant cases). In the instant cases, which involve the
years 1987 through 1992 and concern transactions the seven
cattle-breeding partnerships in issue entered into after those in
Bales, however, the parties disagree whether these seven cattle-
breeding partnerships obtained actual ownership of specific
breeding cattle and whether the promissory notes the partnerships
issued were valid indebtedness. The terms “sale”, “sold”,
“purchase”, “partnership’s cattle”, and similar terms, insofar as
relating to subsequent transactions now in issue, are used herein
for convenience and are not intended as ultimate findings or
conclusions concerning the partnerships’ acquisition of cattle.
Similarly, the use herein of such terms indicating that interest
or principal payments were due should not be construed as our
conveying any legal conclusion concerning the validity of the
partnerships’ promissory notes.
                              - 10 -

the Hoyt organization answered to him.

     At some point, W.J. Hoyt Sons Ranches (Ranches) (which

originally in the 1960's had been an oral partnership of Jay

Hoyt, his two brothers Ric Hoyt and Seth Hoyt, and their father)

was reformed and became the seller of the cattle to the cattle-

breeding partnerships that Jay Hoyt and the Hoyt family organized

and operated.   After it was reformed, Ranches’ partners included

Betty Hoyt (Jay Hoyt’s wife), Ric Hoyt, and Steve Hoyt (another

of Jay Hoyt’s brothers).   Ranches operated until about the late

1980's, as the process of its liquidation was begun around 1987

or 1988.   During Ranches’ liquidation, some of Ranches’ former

operations continued to be carried out by Ranches Trust.   After

Ranches was liquidated, around 1992 W.J. Hoyt Sons Ranches MLP

became the seller of more cattle to certain of the cattle-

breeding partnerships.   The promissory notes many of the cattle-

breeding partnerships previously had issued to Ranches were

transferred to W.J. Hoyt Sons Ranches MLP.

     In addition, during 1976, Management (a Nevada limited

partnership that is one of the eight partnerships involved in the

instant cases) was formed to manage all of the cattle

collectively owned by a group of 17 cattle-breeding partnerships

that the Hoyt family had previously organized.   Jay Hoyt was

Management’s general partner, and its other limited partners

included the cattle-breeding partnerships whose cattle Management
                               - 11 -

managed.   Other cattle-breeding partnerships that Jay Hoyt

organized after 1976 also became partners in Management.    Each

cattle-breeding partnership and Management generally entered into

a sharecrop agreement similar to those previously entered into by

various cattle-breeding partnerships and W.J. Hoyt & Sons.

     The Feedlot Co. partnership was composed of certain Hoyt

family members and Management.    Among other things, the Feedlot

Co. partnership was formed to obtain a line of credit from a

commercial lender to finance purchases of feed for the cattle the

Hoyt organization managed.

     Timeshares Breeding Services is another operation that was

started by the Hoyt organization around the mid-1980's.    It

arranged leases of bulls ostensibly owned by the Timeshares

cattle-breeding partnerships the Hoyt family had organized and

promoted to numerous investors.   Unlike the earlier cattle-

breeding partnerships, which typically owned breeding cows or

heifers, the Timeshares partnerships owned breeding bulls.      These

breeding bulls typically would be leased to owners of commercial-

grade cattle herds under the borrow-a-bull program Timeshares

Breeding Services conducted.

B. Changes in the Hoyt Organization’s Cattle Management and
Record-Keeping Practices

     By at least the early 1980's, the Hoyt organization’s cattle

management and record keeping practices changed dramatically.

These changed management and record-keeping practices continued
                              - 12 -

during the period from 1987 through 1992.   The record in the

instant cases reflects that many of the documents, records, and

tax returns the Hoyt organization prepared relating to its

transactions with the cattle-breeding partnerships it formed are

inaccurate and unreliable.

     For instance, the cattle-breeding partnerships the Hoyt

organization formed in 1983, 1984, 1985, and 1986 had no

specific breeding cattle assigned to them even as of 1987.6     This

is reflected in a report the Hoyt organization prepared with

respect to the 1986 operating results of cattle-breeding

partnerships it had formed.   This report, dated December 31,

1986, states that no operating results were reported on cattle-

breeding partnerships formed in 1983, 1984, 1985, and 1986

because those partnerships were still “in the process of forming

their breeding herds * * * [in a selection process] which


     6
      Each of the breeding cattle a partnership acquired was
supposed to be listed and identified in the bill of sale Ranches
issued that partnership. According to Jay Hoyt, the Hoyt
organization’s original practice had been to attach copies of all
the animals’ registration certificates to the bill of sale. He
further indicated that after the Hoyt organization’s cattle
records were computerized around 1985, a Schedule A containing
all of this same information (including each individual animal’s
tag number, registration number, birth date, and sex, as well as
the respective registration numbers of its sire and dam) was
instead prepared and attached to the bill of sale. In addition,
although the sharecrop agreement that Management and a cattle-
breeding partnership entered typically recognized that any
registration papers on a partnership’s breeding cattle would be
taken out in the Hoyt family’s name, the sharecrop agreement
required Management to know the identity and number of a
partnership’s breeding cattle at all times.
                              - 13 -

requires approximately 4 years to complete.”    It further states

that those partnerships’ operating results would be reported

annually only when “their investment period is completed.”

Similar statements are also made in an earlier 1984 Annual Report

Of Operating Results Of Cattle Breeding Partnerships that the

Hoyt organization prepared.   That report states that “No

partnership results have been shown for any partnerships formed

in 1983 and 1984.   They, like the 1982 partnerships, are still in

the process of forming their breeding herd through a selection

process requiring, approximately 3 years.”

     Notwithstanding the Hoyt organization’s failure to provide

requisite numbers of specific breeding cattle to them, many of

these partnerships formed in 1982, 1983, 1984, 1985, and 1986

filed tax returns for those years claiming deductions with

respect to their “breeding cattle herds”.7     In addition, to

support the deductions the partnerships claimed, the Hoyt

organization issued bills of sale, annual herd recap sheets, and



     7
      The Hoyt organization prepared the tax returns for the
cattle-breeding partnerships it formed and operated. Jay Hoyt as
the managing general partner of a partnership typically signed
and filed that partnership’s return. For example, the
depreciation schedule included in DGE 84-3's 1988 return reflects
that it had “acquired” breeding herds for $4,759,500 on Feb. 1,
1984, and for $359,000 on Feb. 1, 1986, each of which it had been
depreciating over 5 years. Similarly, the depreciation schedule
included in SGE 84-5's 1987 return reflects that it had
“acquired” breeding herds for $4,826,000 on Apr. 1, 1984, and for
$350,000 on Feb. 1, 1986, each of which it had been depreciating
over 5 years.
                               - 14 -

other documents purporting to evidence that sales of large

numbers of specific cattle had been made to these partnerships in

those years.8

     During the litigation in Bales v. Commissioner, T.C. Memo.

1989-568, the Hoyt organization scheduled the “herds” of some of

the earlier partnerships the Hoyt family had formed (including

those “herds” of Florin Farms #3 (FF #3) and Florin Farms #4 (FF

#4)) to be liquidated during 1984 and 1985.      In a memorandum

dated October 31, 1984, to his brother Ric Hoyt and other of the

Hoyt organization’s cattle managers, Jay Hoyt instructed them

that any cows they sold at certain public cattle sales during

1984 and 1985 would be attributed to specified partnerships, like

FF #3 and FF #4, to be liquidated.      The memorandum also stated

that immediately before record ownership of such cows was

transferred to their buyers, “ownership” of the cows would be

assigned to FF #3 and FF #4.   According to the memorandum, those

other partnerships “giving up” “their cows” to FF #3 and FF #4




     8
      For example, in evidence are two bills of sale both dated
Apr. 1, 1984, that the Hoyt organization issued to SGE 84-5. One
bill of sale reflects SGE 84-5 to have acquired 500 breeding cows
with calves at side on that date for a stated price of
$5,080,000. The other bill of sale reflects SGE 84-5 to have
acquired 269 head of breeding cows on that date for a stated
price of $5,080,000. Also in evidence is a 1984 herd recap sheet
for SGE 84-5 that reflects the partnership to have purchased 693
breeding cattle during 1984.
                              - 15 -

were to receive back “other cows”.9

     The numbers of cattle owned by the cattle-breeding

partnerships reflected in Management’s financial statements for

its fiscal years ended September 30, 1989 and 1990, were not

based upon cattle Management was actually managing.   Jay Hoyt had

assigned the preparation of Management’s 1989 and 1990 fiscal

year financial statements to another individual working in the

Hoyt organization.   From about the fall of 1989 through early

1991, this worker performed this and other related work with

respect to the fiscal year 1989 and 1990 financial statements.

In a memorandum dated October 24, 1989, to Jay Hoyt, the worker

(1) noted that in Management’s financial statements for prior

years the numbers of cattle reflected in the original bills of

sale the Hoyt organization had issued each cattle partnership

were used as the cattle counted in each partnership’s breeding


     9
      In the Oct. 31, 1984, memorandum, Jay Hoyt claimed that
these “cattle exchange transactions” between other partnerships
and FF #3 and FF #4 would be “tax free exchanges”. He further
maintained that the rationale for the “exchanges” was that the
other partnerships would be “receiving” a more mature, “proven
cow” from FF #3 or FF #4, in return for their “giving up” an
unproven, “glamor girl cow”. In fact, the 1984 and 1985
“dispersal sale cattle prices” that FF #3 and FF #4 “realized”
were later offered in evidence by the taxpayers in the Bales v.
Commissioner, T.C. Memo. 1989-568. This valuation evidence
ultimately was relied heavily upon by this Court in reaching its
conclusion that the stated sales prices the Bales cattle-breeding
partnerships had earlier agreed to pay the Hoyt family for their
breeding cattle were within a reasonable range of those cattle’s
fair market value. See id.    In further point of fact, as
discussed infra, FF #3 and FF #4 were not liquidated and never
received these “dispersal sale proceeds”.
                               - 16 -

herd and (2) asked whether the worker should adjust those cattle

numbers to allow for the 10-percent annual herd increase required

in the sharecrop agreements between the partnerships and

Management.    In his written response to the October 24, 1989,

memorandum, Jay Hoyt told the worker not to make allowances in

the cattle numbers for the 10-percent annual herd increase

requirement.    In a later memorandum dated December 31, 1990, to

Jay Hoyt, the worker stated that it was impossible to reconcile

Management’s financial statements with the tax returns the Hoyt

organization had prepared.    The worker added that Jay Hoyt was

right in previously stating Management’s financial statements to

be a “mess”.    In another memorandum to Jay Hoyt dated January 7,

1991, the worker raised certain questions with him concerning the

billing of cattle boarding expenses for the 1990 fiscal year to

the cattle-breeding partnerships.    Among other things, the worker

questioned why Florin Farms #1 (FF #1), FF #3, and FF #4 were to

be billed for such expenses, as the worker thought those

partnerships had been liquidated and had no cattle.    See supra

note 9.   In his written reply to the worker, Jay Hoyt stated that

the money to have been distributed to FF #1, FF #3, and FF #4,

had instead been used by him to pay attorney's fees.    He further

stated that all of the cattle collectively owned by the first 17

cattle-breeding partnerships the Hoyt family had organized had

been reallocated among each of those 17 partnerships during 1990,
                                - 17 -

and that now each partnership had cattle again.

     In a memorandum dated February 4, 1991, issued to various

workers in the Hoyt organization, Jay Hoyt instructed them to

register with the ASA a calf for each cow that had been bred, not

just the “live calves”.10    According to Jay Hoyt, this was

necessary in order to qualify for a lower registration fee rate

of $6 per animal.11

     In his memorandum dated October 1, 1993, to the Hoyt

organization’s cattle managers, Jay Hoyt instructed them to

prepare herd recap sheets for the cattle-breeding partnerships up

through December 31, 1992.    He further advised them that, using

some of Management’s other cattle record information, they were

to “fill in” Management’s cattle records by recording specific

cattle as belonging to a particular partnership.    He commented

that all of the cattle a partnership was assigned must have



     10
      The ASA generally did not inspect or otherwise verify the
existence of the Shorthorn cattle registered with it, because it
generally accepted to be true the information concerning the
animal provided in the registration application a breeder
submitted. However, where an animal being registered was
produced through artificial insemination techniques, such as
embryo transplanting, the ASA’s rules required that the animal’s
asserted parentage be established through a blood test.
     11
      At about this time, the Hoyt organization proposed to
Roger Hunsley (Mr. Hunsley) (who had been the ASA’s executive
director since about 1983 and an expert witness for the taxpayers
in Bales v. Commissioner, supra,) that it be allowed to register
calves for a lower registration fee of $6 per animal, in return
for its promising to register a minimum of 4,000 calves annually
for 1991 and 1992. Mr. Hunsley accepted this proposal.
                                - 18 -

something in common that would make those cattle different from

cattle assigned to other partnerships.    He then suggested

possible groupings the managers might use in assigning cattle

among the partnerships, including common sires, common

grandsires, common cow families, just bulls, just females, ASA

appendix registry cattle, full blood cattle, etc.

C. Transactional Documentation Relating to the Seven Cattle-
Breeding Partnerships’ Purchases of Cattle From 1987 Through 1992

     The record contains almost no transactional documentation

relating to DF #1’s, SGE 82-1’s, DGE 84-3’s, SGE 84-5’s, DGE 86-

2’s, TBS 89-1’s, and TBS 90-1’s purchases of breeding cattle

during 1987 through 1992.    Unlike Bales v. Commissioner, T.C.

Memo. 1989-568,12 among other things, there is no (1) bill of

sale issued by Ranches or its successors to each of the seven

cattle-breeding partnerships listing and identifying the

individual breeding cattle sold to each partnership, (2) ?Full

Recourse Promissory Note” issued by each partnership for its

cattle, and (3) sharecrop agreement between Management and each

partnership.     The record contains documentation relating only to

transactions some of these seven partnerships entered into before

1987.     The record also includes certain annual herd recap sheets

the Hoyt organization issued concerning the breeding cattle of



     12
      See also River City Ranches #4, J.V. v. Commissioner, T.C.
Memo. 1999-209 (involving similar sheep-breeding partnerships Jay
Hoyt organized and operated).
                               - 19 -

each partnership.   These herd recap sheets are discussed more

fully infra.

D.   Some Investors’ Failure To Make Payments

      During the period from 1987 through 1992, a large number of

investors in the cattle-breeding partnerships the Hoyt

organization had formed (including some investors in certain of

the seven cattle-breeding partnerships in the instant cases)

failed to continue making the specified payments required of

them, including paying their pro rata share of the payments

required under their partnership’s “Full Recourse Promissory

Note”.   The Hoyt organization never sought to enforce and hold

any of the defaulting investors personally liable for the

payments they had defaulted upon.    These investors were allowed

to walk away from their partnership’s “Full Recourse Promissory

Note”.

E. DF #1's, SGE 82-1's, DGE 84-3's, SGE 84-5's, DGE 86-2's, TBS
89-1's, and TBS 90-1's Respective Returns for the Years in Issue

      DF #1's returns for some of the years in issue reflect that

it originally claimed depreciation on a “breeding herd” placed in

service in 1990, for which its cost or other basis was

$1,123,972.    DF #1 depreciated this breeding herd over 5 years.

      SGE 82-1's returns for some of the years in issue reflect

that it originally claimed depreciation on a “breeding herd”

placed in service in 1990, for which its cost or other basis was

$1,923,810.    SGE 82-1 depreciated this breeding herd over 12
                              - 20 -

years.

     DGE 84-3's returns for some of the years in issue reflect

that it originally claimed depreciation on a “breeding herd” it

placed in service on February 1, 1984, for which its cost or

other basis was $4,759,500, and on a “breeding herd” it placed in

service on February 1, 1986, for which its cost or other basis

was $359,000.   DGE 84-3 depreciated each breeding herd over 5

years.

     SGE 84-5's returns for some of the years in issue reflect

that it original claimed depreciation on a “breeding herd” it

placed in service on April 1, 1984, for which its cost or other

basis was $4,826,000, and on a “breeding herd” it placed in

service on February 1, 1986, for which its cost or other basis

was $350,000.   SGE 84-5 depreciated each breeding herd over 5

years.

     DGE 86-2's returns for 1991 reflect that it originally

claimed depreciation on a “breeding herd” placed in service in

1991, for which its cost or other basis was $4,312,237.     DGE 86-2

depreciated this breeding herd over 5 years.

     TBS 89-1's returns for 1989 and 1991 reflect that it

originally claimed depreciation on a “breeding herd” placed in

service on March 1, 1989, for which its cost or other basis was

$5,250,000, and on a “breeding herd” placed in service on January

1, 1991, for which its cost or other basis was $2,775,994.    TBS
                              - 21 -

89-1 depreciated each breeding herd over 5 years.

     TBS 90-1's return for 1992 reflects that it originally

claimed a $2,174,204 depreciation deduction on a “bull breeding”.

F. Respondent’s Examinations of the Returns of Many Cattle-
Breeding Partnerships and Certain Entities in the Hoyt
Organization; the FPAA’s Issued in the Instant Cases; and
Petitioners’ Respective Petitions

     Respondent commenced examinations of returns for the years

1987 through 1992 that had been filed by (1) numerous cattle-

breeding partnerships the Hoyt organization had formed (including

DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS

90-1) and (2) certain Hoyt organization entities (including

Management).   During these examinations, respondent asked the

cattle-breeding partnerships and their representatives, among

other things, to substantiate the depreciation and other

deductions claimed on those partnerships’ returns.

     During the examinations conducted, respondent noted a number

of inconsistencies between the deductions claimed on the cattle-

breeding partnerships’ returns and various documents the

partnerships and their representatives provided.    In addition,

respondent received bills of sale for some 26 newly formed

partnerships (where the 1987 return for each partnership was the

first return that partnership had filed) that reflected those

partnerships to have collectively purchased over 13,000 breeding

cattle during 1987.   Only the bills of sale for 21 of the 26

newly formed partnerships had a Schedule A listing and
                                - 22 -

identifying the individual animals a partnership had allegedly

purchased.     The bills of sales for these 21 partnerships

reflected them to have collectively purchased more than 10,000

breeding cattle during 1987.     Similarly, certain 1991 herd recap

sheets respondent received reflected 18 partnerships, including

DGE 86-2, as each purchasing 500 to 600 breeding cows during

1991.     For instance, the 1991 herd recap sheet for DGE 86-2

reflects the partnership to have purchased 545 breeding cows

during 1991.13

     During the examination, respondent issued numerous

administrative summonses to the cattle-breeding partnerships and

certain entities in the Hoyt organization, pursuant to which

respondent sought information and documents relating to the

cattle breeding partnerships’ alleged cattle purchases from the

Hoyt organization.     Among other things, respondent sought to

inspect and count the breeding cattle allegedly purchased and

owned by the cattle-breeding partnerships.     The Hoyt organization


     13
      As indicated previously, the record contains no bills of
sale relating to DF #1's, SGE 82-1's, DGE 84-3's, SGE 84-5's, DGE
86-2's, TBS 89-1's, and TBS 90-1's purchases of breeding cattle
during 1987 through 1992. Indeed, the revenue agent who examined
the returns covering the period from 1987 through 1992 of all the
cattle-breeding partnerships the Hoyt organization had formed
(including the returns of the seven partnerships involved in the
instant cases) testified that no bills of sale were provided to
respondent for any breeding cattle purchases any of the
partnerships allegedly made from 1988 through 1991. Yet, in his
testimony, Jay Hoyt claimed that all of the bills of sale
relating to the partnerships’ alleged breeding cattle purchases
from 1988 through 1992 had been provided to respondent.
                                - 23 -

initially failed to provide much of this information, resulting

in respondent’s commencing a summons enforcement proceeding in

the U.S. District Court for the District of Oregon.    On July 17,

1992, the District Court ordered Jay Hoyt to provide certain

information and allow respondent to inspect and count the “Hoyt

cattle” (which was defined to be the various cattle owned,

maintained, or under the custody or control of any of the 92

partnerships that were the subject of the summons enforcement

proceeding).   To comply with this July 17, 1992, Order,

respondent and Jay Hoyt executed an October 30, 1992, memorandum

of understanding concerning the cattle count to be conducted by

respondent’s expert Ron Daily (Mr. Daily).    In his signed

statement also dated October 30, 1992, Jay Hoyt further provided

information as to 11 specified locations at which the “commingled

Hoyt cattle herd” was kept.   Among other things, Jay Hoyt, in

this signed statement, represented there to be an estimated

16,075 to 16,775 cattle (including some calves that might later

be born) at the 11 locations.    He further stated these 11

locations to be all of the locations for the Hoyt herd cattle as

of October 28, 1992.

     In the cattle count he performed from fall 1992 through

spring 1993, Mr. Daily determined there were a total of 7,993

cattle.   Of the 7,993 total cattle he counted, 4,764 were mature

breeding cattle.   At every location that he visited and counted
                              - 24 -

cattle, Mr. Daily asked the ranch manager to sign a statement

agreeing or disagreeing with the numbers of cattle Mr. Daily

determined were present.   With just a few exceptions, all of the

ranch managers at each location agreed with Mr. Daily’s cattle

numbers.   During the cattle count he conducted, Mr. Daily further

had asked Jay Hoyt to disclose whether there were any additional

locations where other cattle might be located.   However, in his

witness statement submitted to the District Court on or about

January 23, 1993, Jay Hoyt maintained that the specific locations

for the cattle had been provided to respondent and indicated that

he saw no reason why the cattle count could not go on.

     In the respective FPAA’s issued to DF #1, SGE 82-1, DGE 84-

3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1, respondent, among

other things, determined that the partnerships had failed to

substantiate many of their claimed deductions.   For instance,

with respect to the depreciation deduction DF #1 claimed on its

breeding cattle for its year ended September 30, 1991, the FPAA

issued to DF #1 for that year states, in pertinent part:

     It has been determined that * * * [DF #1] is not
     entitled to the depreciation deduction claimed on its
     Schedule F because the partnership has not established:
     (1) That it possessed depreciable assets which it used
     for the production of income or in carrying on a trade
     or business; (2) the accumulated depreciation and
     depreciable basis of its assets; and (3) the relevant
     date and proper computation method.

     In the FPAA’s issued to Management for its years ended

September 30, 1987 through 1990, respondent, among other things,
                                - 25 -

determined that Management had failed to report tens of millions

of dollars of income from (1) cattle purportedly transferred to

it by numerous cattle-breeding partnerships as management fees

under the sharecrop agreements between them and Management and

(2) large numbers of those same cattle Management then

purportedly transferred to Ranches in payment for feed,

management, consulting, freight services, and other goods and

services provided by Ranches.

     DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, TBS

90-1, and Management filed respective petitions seeking review of

the FPAA’s that had been issued to them.   In their respective

petitions or amended petitions, these partnerships have modified

the depreciation and other deductions being claimed by them for

the years in issue.   The total depreciation, other deductions,

and other adjustments now in issue are given infra in appendix B

to this Memorandum Opinion.

                                OPINION

     Petitioners bear the burden of proving that respondent’s

determinations in the FPAA’s are incorrect.   See Rules 142(a),

240(a); Welch v. Helvering, 290 U.S. 111 (1933).   Particularly,

where respondent, as in the instant cases, has disallowed

depreciation and other deductions claimed by a partnership, it is

incumbent on petitioners to substantiate and establish the

partnership’s entitlement to those deductions under the terms of
                               - 26 -

the applicable statutes permitting those deductions.   See New

Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934); Karme v.

Commissioner, 673 F.2d 1062, 1065 (9th Cir. 1982), affg. 73 T.C.

1163 (1980).

Issue 1. Depreciation Deductions Claimed by the Seven Cattle-
Breeding Partnerships in the Instant Cases

     Section 167 generally allows as a depreciation deduction a

reasonable allowance for exhaustion and wear and tear of property

used in business or of property held for the production of

income.   The person who bears the economic loss of invested

capital resulting from the exhaustion and wear and tear of

business property or property held for the production of income

is the one entitled to the depreciation deduction.    See Helvering

v. F. & R. Lazarus & Co., 308 U.S. 252, 254 (1939).

     In the instant cases, petitioners and respondent recognize

that for DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1,

and TBS 90-1 to be entitled to their claimed depreciation and

other deductions, each partnership must be the owner for tax

purposes of the specific numbers of breeding cattle that it

allegedly purchased and placed in service during the years in

issue.    Respondent raises no contention that each partnership was

in an activity not engaged in for profit.   Although respondent

has not asserted that each partnership’s transaction was a sham,

the parties disagree to some extent with respect to the

transactions’ economic substance.   They disagree over whether
                              - 27 -

each partnership’s stated purchase price approximated the then

fair market value of the cattle.   They also disagree over whether

the purportedly recourse long-term notes the partnerships issued

were valid indebtedness.

     For a sale to have occurred for tax purposes, the benefits

and burdens of ownership must be transferred.    See Grodt & McKay

Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237-1238 (1981).

This test is a practical one, and there are no hard and fast

rules.   Instead, the transaction must be viewed as a whole, in

light of realism and practicality.     See Commissioner v. Segall,

114 F.2d 706, 709-710 (6th Cir. 1940), revg. on other grounds 38

B.T.A. 43 (1938); Harmston v. Commissioner, 61 T.C. 216, 228-229

(1973), affd. 528 F.2d 55 (9th Cir. 1976).    Some of the factors

to be considered are:   (1) Whether legal title passes; (2) how

the parties treat the transaction; (3) whether an equity in the

property was acquired; (4) whether the contract creates a present

obligation on the purchaser to make payments; (5) whether the

right of possession is vested in the purchaser; (6) which party

bears the risk of loss or damage to the property; and (7) which

party receives the profits from the operation and sale of the

property.   See Grodt & McKay Realty, Inc. v. Commissioner, supra

at 1237-1238; see also Cherin v. Commissioner, 89 T.C. 986, 996-

997 (1987).
                              - 28 -

     A. Whether DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2,
TBS 89-1, and TBS 90-1 Acquired the Benefits and Burdens of
Ownership as to Specific Breeding Cattle

     For DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1,

and TBS 90-1 to be entitled to their claimed depreciation

deductions, each partnership must establish that it acquired the

benefits and burdens of ownership as to the specific individual

breeding cattle making up its alleged breeding herd.   In that

connection, however, the record discloses petitioners to be in

substantial difficulty in establishing that each partnership

actually acquired anywhere near its stated number of breeding

cattle.   Indeed, the evidence petitioners presented to

substantiate and identify the specific individual breeding cattle

these partnerships “owned” is considerably lacking, exhibits

major shortcomings, and, at times, is directly contradicted by

the Hoyt organization’s own internal documents.   Certain of these

internal documents raise serious doubts in the Court’s mind as to

whether large numbers of the breeding cattle allegedly sold these

partnerships, in fact, existed.

     No registration papers with respect to specific breeding

cattle were obtained in any partnership's name.   Rather, any

registration certificates reflect only the Hoyt family to be the

owner of those registered cattle.14


     14
      Unlike the parties in River City Ranches #4, J.V. v.
Commissioner, T.C. Memo. 1999-209 (a case involving similar
                                                   (continued...)
                              - 29 -

     Petitioners further acknowledge that there are some problems

regarding the records they have offered in evidence to

substantiate the depreciation and other deductions claimed by the

partnerships.   Petitioners also have indicated that the

depreciation deductions to which the partnerships are entitled

likely will be less than what the partnerships originally had

claimed.

     On brief, however, petitioners argue that sufficient

breeding cattle existed in each year during the period from 1987

through 1992 to have been purchased by all of the cattle-breeding

partnerships the Hoyt organization formed (including by the seven

partnerships in the instant cases).    Petitioners claim this has

been established by (1) the bills of sale and annual herd recap

sheets the Hoyt organization issued (which petitioners maintain

were accurate and contemporaneous documents)15 and (2) their


     14
      (...continued)
sheep-breeding partnerships Jay Hoyt formed and operated), the
parties in the instant cases did not introduce in evidence
detailed information from numerous individual animal registration
certificates.
     15
      On brief, petitioners further cite the cattle count
performed during the litigation of Bales v. Commissioner,
T.C. Memo. 1989-568, pursuant to which there were estimated to be
6,500 adult cows in the herds of 29 cattle-breeding partnerships.
The Court notes that this previous count was done in 1985.
Moreover, not all of the estimated 6,500 cattle were actually
examined and counted. Rather, cattle were counted in randomly
selected portions of 7 out of 26 fields or pastures. From the
250 to 400 cows counted in what was thought was a representative
sampling, a statistician extrapolated that there were a total of
                                                   (continued...)
                             - 30 -

witness Norm Favre’s (Mr. Favre) conclusion there were a total of

26,205 cattle in the Hoyt universal herd pursuant to the cattle

count he performed from fall 1992 through spring 1993.16




     15
      (...continued)
approximately 6,500 adult cows present. It is further to be
noted that following 1985, the Hoyt organization claimed that
thousands of breeding cattle that it managed on behalf of
numerous cattle-breeding partnerships died as a result of drought
and disease. In fact, many of the cattle-breeding partnerships
claimed deductions on their returns for their alleged large
cattle losses from drought and disease. Although petitioners
have now conceded the loss deductions for drought and disease
originally claimed by the partnerships in the instant cases, the
Hoyt organization’s prior position was that thousands of breeding
cattle were lost during 1987 through 1992 to drought and disease.
In addition, the record also contains evidence indicating that,
following 1985, the Hoyt organization may have sold off a large
number of breeding cattle which had been assigned to the cattle-
breeding partnerships. These cattle loss claims, as well as the
Hoyt organization’s possible sale of breeding cattle previously
assigned to the partnerships, are discussed more fully notes 30
and 31. At any rate, the figure of 6,500 cattle estimated in the
previous 1985 cattle count is neither conclusive nor unequivocal
evidence establishing the numbers of breeding cattle that
actually might have been present during the 1987 through 1992
period.
     16
      The Hoyt organization hired Mr. Favre to conduct this
cattle count. Originally, Mr. Favre was supposed to count the
cattle together with respondent’s expert Mr. Daily. However,
because of disagreements between Mr. Daily and the Hoyt
organization concerning (1) the procedures to be used in
performing the count and (2) scheduling the counts at various
locations, Mr. Favre and Mr. Daily conducted their respective
cattle counts separately. It is further to be noted that unlike
Mr. Daily (who testified in the instant cases as an expert
witness on cattle counting and cattle appraisal), Mr. Favre did
not testify as an expert. Rather, Mr. Favre testified as a fact
witness, and his cattle count report was entered in evidence as a
business record of the Hoyt organization.
                                - 31 -

     B. The Bills of Sale and Herd Recap Sheets Issued by the
Hoyt Organization

     As indicated previously, petitioners argue that various

bills of sale and annual herd recap sheets the Hoyt organization

issued substantiate the depreciation deductions on breeding

cattle being claimed for the years in issue in the instant cases

by DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and

TBS 90-1.17    They maintain that these bills of sale and herd

recap sheets are reliable and contemporaneous documents

evidencing the alleged specific individual breeding cattle each

partnership purportedly purchased and owned from 1987 through

1992.     In making this contention, petitioners heavily rely on the

testimony of Jay Hoyt.

     Jay Hoyt specifically testified that the bills of sale and

annual herd recap sheets the Hoyt organization issued to the

cattle-breeding partnerships were reliable and contemporaneous

documents.    Although he acknowledged occasional but inadvertent



     17
      In their brief, petitioners contend that the annual herd
recap sheets in evidence reflect that, collectively, all of the
cattle-breeding partnerships (which in some years may have
included perhaps almost 100 separate partnerships) owned the
following total numbers of cattle on the dates indicated:

                   Date     Total Number of Cattle

                  1-1-87           22,457
                  1-1-88           25,613
                  1-1-89           23,418
                  1-1-90           17,336
                  1-1-92           22,148
                              - 32 -

accounting and/or clerical errors may have been made in compiling

the cattle records the Hoyt organization maintained, he asserted

the annual herd recap sheets were at least 95 percent accurate.

He explained the process by which the annual herd recap sheets

were prepared.   According to Jay Hoyt, the Hoyt organization had

computerized its cattle records around 1985.   During each year,

the cow hands and cattle managers maintained notebooks and other

papers containing pertinent information on individual cattle they

managed (country records).   In general, in the fall the cattle

would be rounded up and brought to winter pasture.   The cattle

managers near the end of the year would then submit these country

records on all the cattle to other Hoyt organization personnel to

have the information entered onto the Hoyt organization’s

computerized cattle record keeping system.   From this information

that the cattle managers submitted, a cattle-breeding

partnership’s herd recap sheet for that year would be prepared.

Jay Hoyt related that the herd recap sheets for each year would

be prepared by the early part of the following year.    He added

that once the data from the original country record source

documents had been entered, all of the country records were

typically destroyed, as it was no longer necessary to maintain

those documents because the information on them had been entered

into and was contained in the Hoyt organization’s computerized

records.
                             - 33 -

     The Court finds substantial portions of Jay Hoyt’s testimony

evasive and less than forthright.    His claims regarding the

contemporaneous nature and reliability of the bills of sale and

herd recap sheets are directly contradicted by substantial other

convincing evidence in the record.    The Court considers highly

suspect the herd recap sheets and other documents the Hoyt

organization prepared during the period from 1987 through 1992.

Indeed, as the Court indicated supra, by the early 1980's the

Hoyt organization’s cattle management and record-keeping

practices had changed dramatically.    As a result, many of the

documents, records, and tax returns the Hoyt organization

subsequently prepared regarding transactions between itself and

the many cattle-breeding partnerships (which it had formed,

promoted to numerous investors, and managed) were inaccurate and

unreliable.

     Contrary to petitioners’ and Jay Hoyt’s contentions, the

Court does not believe that the 1987 through 1992 annual herd

recap sheets in evidence are contemporaneous documents.    Among

other things, if the 1988, 1989, and 1990 herd recap sheets had

existed and been available during the fall 1989 through early

1991 period, the Hoyt organization worker preparing Management’s

financial statements for its fiscal years ended September 30,

1989 and 1990, would then have consulted those herd recap sheets

to find out each cattle-breeding partnership’s “breeding herd
                                - 34 -

numbers”.    Instead, as reflected by the worker’s questions to Jay

Hoyt and Jay Hoyt’s responses (which we have previously noted), a

far different process was employed to prepare Management’s 1989

and 1990 fiscal year financial statements.18

     The Court would further note (as was stated supra) that the

record includes none of the bills of sale that purportedly were

issued to cattle-breeding partnerships from 1988 through 1992,

notwithstanding that a number of these partnerships (including

several of the seven cattle-breeding partnerships in the instant

cases) reported on their tax returns purchasing breeding cattle

during this period for which they are claiming deductions.     A

revenue agent for respondent testified that no bills of sale for

any cattle-breeding partnerships were furnished for years after

1987.     Yet, Jay Hoyt testified that he provided to respondent

such bills of sale for the years from 1988 through 1992.19


     18
      It is further to be noted that following Mr. Favre’s
completion of his cattle count in about spring 1993 (which count
was mentioned supra note 16, and is discussed in more detail
infra), Jay Hoyt, in a memorandum dated Oct. 1, 1993, instructed
the Hoyt organization’s cattle managers to prepare herd recap
sheets for the cattle-breeding partnerships up through Dec. 31,
1992. See supra note 17.
     19
      We do not find to be credible this and other similar
assertions of Jay Hoyt regarding these bills of sale. Respondent
had been requesting them from Jay Hoyt, the cattle-breeding
partnerships, and the Hoyt organization since at least about 1992
(when respondent actively started examining many of the returns
filed by the partnerships and certain Hoyt organizations for the
years covering the 1987 through 1992 period). Jay Hoyt testified
these alleged 1988 through 1992 bills of sale had been provided
                                                   (continued...)
                               - 35 -

     With respect to some of the bills of sale and herd recap

sheets issued before 1988 that are in evidence, there are a

number of discrepancies and inconsistencies.    For instance, two

bills of sale both dated April 1, 1984, were issued by the Hoyt

organization to SGE 84-5.   One bill of sale reflects SGE 84-5 to

have acquired 500 breeding cows with calves at side on that date

for a stated price of $5,080,000.   The other bill of sale

reflects SGE 84-5 to have acquired 269 breeding cows on that date

for a stated price of $5,080,000.   Also, only one of these bills

of sale includes a Schedule A listing and describing the specific

individual cattle SGE 84-5 acquired.    Moreover, the 1984 herd

recap sheet for SGE 84-5 reflects it to have acquired 693

breeding cattle during 1984.   See supra note 8.

     At trial, Jay Hoyt testified that the above two bills of

sale covered a single April 1, 1984, transaction in which 769

breeding cows and 500 calves were sold to SGE 84-5 for a total



     19
      (...continued)
by him to respondent. He maintained that respondent had been
given access to everything the Hoyt organization had. He also
asserted that many of the Hoyt organization’s records later
became unavailable, because those records had been seized by
postal inspectors from the Hoyt organization’s offices in June
1995. However, the postal inspector who conducted the seizure
testified that shortly after effecting the seizure, he had
provided Jay Hoyt with an inventory of the seized documents.
This postal inspector also related that, in response to Jay
Hoyt’s and the Hoyt organization representatives’ later requests,
he had offered them access to the documents that had been seized.
According to the postal inspector, Jay Hoyt had also been
provided with copies of all the seized documents.
                              - 36 -

price of $5,080,000.   He further claimed that the Schedule A to

one bill of sale (listing and identifying the specific 269

individual breeding cows the partnership purportedly acquired)

had been lost.   In his testimony, Jay Hoyt further acknowledged

SGE 84-5's 1984 herd recap sheet (reflecting the partnership to

have purchased 693 breeding cattle during 1984) to be

inconsistent with the two April 1, 1984, bills of sale.   However,

he asserted that Management’s practice, in preparing the herd

recap sheets for a cattle-breeding partnership’s first year of

operations, had been to reflect the net number of cattle later on

hand at yearend as the number of cattle a cattle-breeding

partnership purchased.   He further specifically testified that

the prospective breeding cows SGE 84-5 was to purchase had been

identified in 1983 and that he reviewed a list of the cows in

early 1984.   He added that between the April 1, 1984, purchase

date and December 31, 1984, some of the cows SGE 84-5 had

purchased possibly might have been lost, causing those cows not

to be reflected in SGE 84-5's 1984 herd recap sheet.

     The Hoyt organization’s above-asserted “accounting practice”

is contrary to standard accounting principles because its herd

recap sheets show each partnership’s breeding herd to have had no

cattle born, no cattle culled, and no deaths or disappearances.

It is extremely unlikely that the breeding herd each of these

partnerships purportedly acquired would, in fact, have produced
                                - 37 -

no calves during that partnership’s first year of operations.

Presumably, an important incident of breeding herd ownership is

the right to benefit from any calves produced by that herd.     (The

sharecrop agreements provided that a partnership would still

retain the breeding value certificates (i.e., essentially the

rights to any registration papers) on any calves produced by its

breeding herd, even though, pursuant to the sharecrop agreement,

all calves were to belong to the Hoyt organization entity that

managed the partnership’s breeding herd.)     For instance, SGE 84-5

(according to Jay Hoyt) entered into its transaction to acquire

769 breeding cows on April 1, 1984.      At least 269 of SGE 84-5's

“breeding cows” (the Schedule A to the bill of sale that should

have listed and specifically identified these 269 cows allegedly

having been lost) are reflected as producing no calves during

1984.     Similarly, another important incident of breeding herd

ownership would be the detriment suffered from losses to that

herd.20


     20
      The Hoyt organization issued certain warranties to the
cattle-breeding partnerships that entered transactions with it.
For instance, Ranches (as the “seller” of the breeding cattle)
generally agreed to replace any cattle that could no longer serve
as breeding cattle during a 10-year period. Similarly,
Management (which managed a partnership’s “breeding herd”)
further guaranteed there would be a 10-percent annual increase in
the size of the partnership’s “breeding herd”. However,
according to certain Hoyt organization records, the Hoyt
organization for a number of years had been greatly “in arrears”
on its “warranty obligations” to the cattle-breeding partnerships
and by about 1990 “owed” over 5,000 breeding cattle to the
                                                   (continued...)
                              - 38 -

     Neither does the Court believe these and other accounting

deficiencies were inadvertent and attributable to a lack of

proper accounting training on the part of Jay Hoyt and other

individuals preparing these records.   Several former Hoyt

organization workers testified that, over the years, substantial

fictitious cattle information was created and entered in the Hoyt

organization’s computerized cattle records.   These   witnesses

included:   (1) Robert Baker, who was hired by Jay Hoyt in June

1984 to design a computerized cattle record keeping system for

the Hoyt organization and then established and managed the Hoyt

organization’s computerized cattle record keeping system from

about 1985 through 1987,21 (2) Terry Hawkins (Mr. Hawkins), who


     20
      (...continued)
partnerships. These “warranty obligations” apparently were never
satisfied.
     21
      Mr. Baker testified that, because of the Bales case
litigation, he had been given a May 1985 deadline to establish
the Hoyt organization’s computerized cattle records. See Bales
v. Commissioner, T.C. Memo. 1989-568. As a result, he began by
entering information and generating computer records “capturing”
the Hoyt family’s and Hoyt organization’s past 32 years of cattle
operations. He related that Jay Hoyt had also furnished him with
a list of random sires to use in assigning specific sires to many
individual cattle whose sires, in fact, were unknown. He added
that he had been instructed by Jay Hoyt to follow a similar
procedure in “capturing” the Hoyt organization’s subsequent
“cattle inventories” and in registering large numbers of cattle
with the ASA. He stated that he attempted to match and attribute
each calf to a “random sire” that had the same matching physical
characteristics. He further acknowledged that the Hoyt
organization’s registering of calves from unknown sires as being
offspring of known sires violated the ASA’s registration rules,
as the random sires he assigned to calves, in many cases, were
                                                   (continued...)
                             - 39 -

from around 1987 through 1992 helped to maintain many of the Hoyt

organization’s cattle records (including obtaining information on

cattle kept at numerous locations), and (3) Donna Schnitker (Mrs.

Schnitker), who as Management’s cattle marketing director handled

Management’s cattle sales to third parties.   The Court found the

testimony of these individuals to be credible and trustworthy.22


     21
      (...continued)
unrelated, nonsibling bulls. In addition, Mr. Baker testified
that sometimes, when the Hoyt organization would be selling an
animal to a third party, he had been instructed to fabricate a
false pedigree for that animal, which he did.
     22
      Indeed, much of these witnesses’ testimony regarding the
Hoyt organization’s deceptive cattle marketing practices and its
fabrication of pedigree and other cattle record information is
corroborated by Jay Hoyt’s own May 27, 1987, written comments to
an Apr. 22, 1987, memorandum that Mr. Baker had submitted to Ric
Hoyt. The following is an excerpt of some of Jay Hoyt’s comments
to certain of the complaints expressed in Mr. Baker’s memorandum:

          [Mr. Baker’s first complaint]: Louie’s [a cattle
     manager handling public cattle sales to third parties]
     ‘special’ deals are starting to mess up the SPR [i.e.,
     Shorthorn performance records] side of cattle office.

          [Jay Hoyt’s comment]:   What percentage?   100
     percent - etc.

          [Mr. Baker’s next complaint]: I created a paper
     for Louie because the dam had to be by Instant Replay
     so the calf could be registered sired by Copyright.
     The calf is rejecting on the SPR weaning sheet because
     the dam is not enrolled in SPR and is not in computer.
     I don’t want her in the computer because she doesn’t
     exist.

          [Jay Hoyt’s comment]: How does R.W. [Mr. Baker]
     know she does not exist. R.W. just knows she
     disappeared. She might be at Mayo’s, left in
     California, etc.
                                                  (continued...)
                          - 40 -



22
     (...continued)

        *    *    *   *   *    *   *

     [Mr. Baker’s next complaint]: We have to go in
and change birth weights in the calf file because
they’re too high.

     [Jay Hoyt’s comment]: That’s R.W.’s job - He
doesn’t deal with customers and know what they want.

     [Mr. Baker’s next complaint]: Louie takes a bull
paper or steer paper that died or was slaughtered and
uses them for bulls he’s selling without regard of what
it does to me.

     [Jay Hoyt’s comment]: What it does to R.W. is
gives him a job. He has absolutely no understanding
where the money comes from to run his office. This is
our fault. He had a chance to turn a paper into cash
that would not have been if he had his way. That
should be a success and not a problem.

     [Mr. Baker’s next complaint]: The progeny history
of the cow doesn’t match, a true picture of the cow’s
history can never be assured because we don’t know if
its her real calf or not, and when we get slaughter
information back we can’t put it in on the right animal
because he’s a bull and was sold.

     [Jay Hoyt’s comment]: What percentage? This one
is sad. It shows how serious the problem is. The
carcass data should just be attached to a copy of the
paper and entered. The bull goes in the sale DATA.
The data is STILL included in every place needed for
Seth [Jay Hoyt’s brother] and I. We don’t need the
original paper to do our tracking. All that must be
done is to record what happened on the copy of the
paper.

     [Mr. Baker’s next complaint]: That messes up what
I tell you, USDA, and Seth. I have to take up untold
hours finding red calves that have red sires and red
dams, knowing full well the sire has to be taken with a
grain of salt. All of these things are easy for Louie
                                              (continued...)
                               - 41 -

The record further includes a February 4, 1991, memorandum of Jay

Hoyt to certain workers in the Hoyt organization, instructing

them not to include information on cattle deaths in the cattle

inventory records and to place such information under a “new

smoke screen file name”.23   See also infra note 25.

     The Court finds the herd recap sheets the Hoyt organization

prepared highly suspect and unreliable, as the Hoyt organization

failed to employ good record-keeping practices and did not

prepare the recap sheets and its other cattle records in

accordance with standard, fundamental accounting principles.    The


     22
      (...continued)
     because he just says make it work. It’s a nightmare
     for us because we have to cover the tracks and make
     sure everything fits together.

          [Jay Hoyt’s comment]: WRONG. R.W. has never been
     instructed or asked ‘to cover anyone’s tracks’. His
     job is to record what happens IN THE OPEN, in front of
     everyone. His personal protection is provided by the
     Policy. We take the responsibility. I sense R.W. will
     think ‘if the Policy said kill someone would that be
     OK, and wouldn’t I be held accountable?’ Sure, but
     R.W. is not asked to kill anyone. He is asked to
     provide them with a gun and shells. He knows what they
     are going to do with it, sure, but he isn’t doing it.
     They don’t put gun sellers in jail when the gun kills
     someone. We are dealing with the real live problem of
     giving the marketing people what they ask for and only
     they will be held accountable for what they do with it
     if R.W. documents it with Louie’s or Ric’s
     instructions. R.W. just records what they did with
     what he produced under their instructions.
     23
      In this same Feb. 4, 1991, memorandum, which was discussed
earlier, Jay Hoyt had also instructed these workers to register
with the ASA a calf for each cow bred, not just existing, “live
calves”. See supra note 10.
                                 - 42 -

Court can also see no good reason or justification for the Hoyt

organization’s preparing these annual herd recap sheets and other

cattle records in this highly deficient manner–-if each cattle-

breeding partnership, as petitioners maintain, indeed “owned”

anywhere near the number of specific breeding cattle stated in

its “bill of sale”.24     Indeed, the Court finds that the herd

recap sheets and other records were prepared in this manner

because the requisite numbers of specific breeding cattle did not

exist and could not, in fact, be assigned to each partnership.25

     C. The Court’s Evaluation of the Cattle Counts Conducted by
Mr. Daily and Mr. Favre

     Mr. Daily and Mr. Favre counted the cattle over essentially

the same time period from fall 1992 through spring 1993.26


     24
      As discussed previously, the record does not contain any
of the alleged bills of sale for years after 1987 that Jay Hoyt
claimed were issued by the Hoyt organization to cattle-breeding
partnerships.
     25
      The record contains a handwritten note of Jay Hoyt to one
of the Hoyt organization’s cattle managers. This note states, in
pertinent part:

     The cattle numbers we used in the loan application are
     the numbers in the computer and balance to the books.
     They are the numbers. Any difference between them and
     yours are assigned to location ‘Ric’. It’s his job to
     get them accounted for. Not yours or mine. This is to
     be ‘fixed’ with the equity in his place. Don’t say
     they don’t exist, say they are not in the herd I’m
     responsible for. Ric has failed to account for almost
     2,000 head. Might explain why he acts so nervous-
     spooky.
     26
          See supra note 16, describing how they wound up
                                                       (continued...)
                               - 43 -

However, there is a tremendous disparity between the total number

of cattle each of them counted and determined were present.

     Mr. Daily, as reflected in his report, determined the cattle

present in the Hoyt organization herd that might belong to the

cattle-breeding partnerships and counted the following numbers of

cattle in the categories indicated:

          Category         Mature Cattle    Total Cattle

     Cows                      3,115           3,115
     Bulls                       761           1,619
     Breeding heifers            888           1,596
     Feedlot heifers             –-              182
     Timeshares Breeding         –-              477
        Service heifers
     Calves                      –-               904
     Steers                       –                10
       Total                   4,764            7,903

Mr. Daily further confirmed that there were 90 bulls on loan to

ranchers under the borrow-a-bull program.   He further counted

2,066 steers and heifers at the Miller Feed Yard in Lasalle,

Colorado, and 889 steers and heifers at the North Platte Feed

Yard in North Platte, Nebraska, but did not include these cattle

with those possibly belonging to the partnerships, because the

feedlot managers had told him the cattle belonged to Ric Hoyt and

were being raised for slaughter.

     Mr. Favre, on the other hand, as reflected in his report,

determined to be present and counted the following numbers of



     26
      (...continued)
undertaking separate counts.
                                - 44 -

cattle in the categories indicated:

             Category               Cattle

          Cows                       3,991
          Bulls                      1,819
          Heifers                    5,397
          Heifers and steers           470
          Mixed age cattle              97
          Timeshares Breeding        2,436
             Services bulls
          Timeshares Breeding        3,271
             Services heifers
          Calves                     8,486
          Steers                       238
            Total                   26,205

The cattle numbers contained in Mr. Favre’s report were based on

tally sheets he compiled in counting the cattle.    These tally

sheets disclose the particular location and the cattle manager.

The majority of the tally sheets further contain columns in which

to record the tag number, tag color, sex, color, brand, class,

etc., of individual cattle.   However, in some of the tally

sheets, Mr. Favre did not record any of this information, but he

recorded only total numbers of cattle and type of cattle.

Further, as reflected by the cattle tag numbers that are recorded

on Mr. Favre’s tally sheets, there were numerous instances where

he counted the same cattle more than once.    Indeed, on brief,

petitioners concede there were duplications but argue the

duplication rate to be only 9.6 percent.     Petitioners thus assert

there were still a total of 23,689 cattle (the 26,205 total

cattle Mr. Favre determined were present, less a 9.6-percent

discount).
                              - 45 -

     The Court has reviewed the accuracy of the cattle numbers in

Mr. Daily’s and Mr. Favre’s respective reports.   Generally, the

Court found Mr. Daily’s numbers fairly reliable, although it is

possible he may have missed or omitted relatively small numbers

of cattle.   It is further to be noted that, in a number of

instances, Mr. Daily obtained signed statements in which the Hoyt

organization cattle managers at particular locations essentially

agreed with the numbers of cattle Mr. Daily had counted at those

locations.   In contrast, the Court found a number of instances

where Mr. Favre’s report numbers were significantly at variance

with his tally sheets.   Moreover, an even more substantial

problem exists with respect to his counting the same cattle more

than once.   Our examination indicates that his actual duplication

rate may far exceed the 9.6-percent duplication rate petitioners

have conceded.

     Mr. Favre stated that he returned to certain locations to

count new cattle that had arrived at those locations.   He claimed

he avoided counting again any cattle he had already counted,

because, according to him, he would have recognized if he had

seen those cattle before by their appearance and through using

his intuition.   In a related connection, Jay Hoyt did testify

that different colored tags were used by the Hoyt organization in

various parts of the country and that sometimes the same tag

number might appear on the different colored tags worn by two
                               - 46 -

separate animals.    However, this testimony of Jay Hoyt still does

not satisfactorily explain the large number of duplicate tag

numbers found in Mr. Favre’s tally sheets.    With only a few

exceptions, the tally sheets either disclose no tag color for the

duplicate tag numbers involved or reflect that those duplicate

tag numbers were for the same tag color.

     The Court has major problems with Mr. Favre’s cattle numbers

and does not consider those numbers to be reliable.    Though it

has confidence in the cattle count performed by respondent’s

expert Mr. Daily, the Court has no confidence in the reliability

of Mr. Favre’s numbers because it does not believe Mr. Favre’s

count to have been performed in a competent and proficient

manner.   As indicated previously, Mr. Daily was accepted by the

Court as an expert on cattle counting and cattle appraisal and

had extensive prior professional experience in counting and

evaluating cattle.    In the cattle count he conducted of the Hoyt

organization herd, Mr. Daily further was assisted by an

experienced crew.    In contrast, Mr. Favre testified as a fact

witness, and his report was accepted in evidence as a business

record of the Hoyt organization.    Mr. Favre also had only rather

limited prior experience in counting and evaluating cattle, and

his level of experience and expertise was substantially below

that of Mr. Daily.    In conducting his count, Mr. Favre was

assisted by Jay Hoyt and other of the Hoyt organization’s cattle
                              - 47 -

people.

     In connection with evaluating the reliability of Mr. Favre’s

cattle count numbers, the Court further considers noteworthy

that, in a combined report Mr. Favre and certain of the Hoyt

organization cattle people issued later in February of 1994,

they, among other things, asserted that thousands of cattle in

the Hoyt herd had perished from 1988 through 1992 as a result of

drought conditions.   However, as discussed more fully infra note

31, the Court finds dubious this assertion of Mr. Favre and these

other individuals.

     On the basis of the foregoing discussion and the credible

evidence of record, the Court concludes that, as of April 1993,

the Hoyt organization herd included 3,150 cows, 1,855 bulls,

2,000 heifers, 1,000 Timeshares Breeding Services heifers, and

2,300 calves.   In arriving at these numbers, we have adjusted and

modified the cattle numbers Mr. Daily determined in some

situations where we felt it appropriate.   It is to be noted,

however, that this still does not provide us with the numbers of

mature breeding cattle contained annually in the Hoyt

organization herd during the period from 1987 through 1992.

     D. The Total Numbers of Breeding Cattle Present During 1987
Through 1992

     Again (as was the case with the numbers of cattle determined

in Mr. Daily’s and Mr. Favre’s respective cattle counts) there is

a wide disparity in the numbers of breeding cattle the parties
                               - 48 -

contend were present and available annually from 1987 thorough

1992 to be “owned” by the cattle-breeding partnerships.       Mr.

Daily (respondent’s expert) estimated the following total numbers

of cattle, consisting of breeding cattle and calves, were present

annually on the dates indicated:

            Mature Breeding Cattle
                            Bred                              Total
  Date      Bulls Cows    Heifers       Subtotal   Calves     Cattle
 1-1-87      765   3,912     520         5,197     4,725      9,922
 1-1-88      546   4,246     374         5,166     3,397      8,563
 1-1-89      550   2,920     513         3,983     2,336      6,319
 1–1-90      987   3,103     550         4,640     2,482      7,122
 1-1-91    1,124   3,498     667         5,289     2,798      8,087
 1-1-92      761   3,115     583         4,459     3,119      7,578

Mr. Daily based his above 1987 cattle figures on an inventory of

the Hoyt organization’s cattle dated January 1, 1987.       This

inventory listed a total of 13,481 animals of all classes and

ages.27   Mr. Daily examined the locations, types of cattle, and


     27
      In their stipulation, the parties agreed that all joint
exhibits (including the Jan. 1, 1987, inventory) were true copies
of the original and that (although all other evidentiary
objections were reserved) any objections as to authenticity were
waived. The Jan. 1, 1987, inventory is further listed and
described in the stipulation as being “a cattle inventory dated
January 1, 1987, prepared by Gayle Wallace. It indicates that
there were a total of 13,481 head of all cattle of all classes
and ages as of that date.” However, in the stipulation,
petitioners further stated they did not agree with the
description given numerous joint exhibits listed therein,
including the Jan. 1, 1987, inventory. On brief, petitioners
dispute there is any evidence in the record establishing this
inventory was prepared by Gayle Wallace. (Ms. Wallace was a Hoyt
organization worker who in 1987 had worked together with Mr.
Hawkins in helping maintain the Hoyt organization’s cattle
records. They further maintain that it and certain other Hoyt
organization cattle inventories in the record are not inventories
                                                   (continued...)
                              - 49 -

cattle numbers listed therein and concluded the inventory

represented a reasonable starting point from which to estimate

the numbers of cattle present annually from 1987 through 1991.

He arrived at his 1988 through 1991 cow figures by examining the

Hoyt organization’s calving records for those years and

concluding that an assumed calf crop rate of 80 percent would be

reasonable.   He arrived at his 1988 through 1991 bull figures by

concluding that a ratio of one bull to every 20 cows would be

reasonable.   His 1992 cattle figures, however, were based on his

own fall 1992 through spring 1993 cattle count.

     Petitioners, on the other hand, contend that much higher

numbers of breeding cattle were present annually during 1987

through 1992.   Jay Hoyt, in his testimony, estimated that the

Hoyt herd included the following numbers of breeding cattle

(which numbers he stated include some calves as well):

                             Total Breeding Cattle
                Year         (incl. some calves)

                1987            24,000-29,000
                1988            18,000-20,000
                1989            16,000-18,000
                1990            10,000-12,000
                1991            16,000-18,000
                1992            17,000-18,000

Jay Hoyt based these estimates on certain unspecified documents

he claimed to have examined–-presumably, including the annual


     27
      (...continued)
of the Hoyt organization’s “entire herd” and are only listings
“as of a particular time, of cattle in specific locations”.
                                - 50 -

herd recap sheets the Hoyt organization prepared.    For instance,

although he did not elaborate and identify the specific documents

upon which he relied, he claimed his 1987 estimate was based on

his examination of certain 1986 and 1987 documents.    In addition,

petitioners (as was earlier indicated supra note 17) maintain the

annual herd recap sheets in evidence reflect the cattle-breeding

partnerships to have owned the following total numbers of cattle

on the dates indicated:

                 Date     Total Number of Cattle

                1-1-87           22,457
                1-1-88           25,613
                1-1-89           23,418
                1-1-90           17,336
                1-1-92           22,148

     The Court does not accept petitioners’ contentions

concerning the numbers of breeding cattle present during 1987

through 1992.   As was previously discussed, the Court considers

much of Jay Hoyt’s testimony in the instant cases evasive and

less than forthright.    Accordingly, the Court does not find his

cattle estimates credible.    Moreover, as was also previously

discussed, the Court found highly suspect the 1987 through 1992

herd recap sheets and does not believe those herd recap sheets to

be contemporaneous and reliable documents.

     The credible evidence in the record essentially confirms and

supports Mr. Daily’s estimates of breeding cattle that were

present during 1987 through 1992.    Mrs. Schnitker, who served as
                              - 51 -

Management’s cattle marketing director from 1987 through 1990,28

estimated Management during those years managed a total of 5,000

cattle annually.   Of the 5,000 total cattle, she further

estimated 3,000 were mature female cows and another 1,000 cattle

consisted of weaned male and female calves.   She also related

that the total numbers of cattle annually present stayed about



     28
      Mrs. Schnitker had begun working for the Hoyt organization
as Ric Hoyt’s secretary. She eventually became Ric Hoyt’s
assistant, as he traveled extensively on business and was out of
the office for substantial periods during the year. In addition,
she had some background in the cattle business and was familiar
with the required paperwork, as her husband (who also worked for
the Hoyt organization) previously had worked on several ranches.
Mrs. Schnitker became Management’s cattle marketing director in
late 1987, when Ric Hoyt either left the Hoyt organization or
reduced his activities on the Hoyt organization’s behalf. She
served as Management’s cattle marketing director from late 1987
through July 31, 1990. As cattle marketing director, Mrs.
Schnitker reported to another individual who served as
Management’s general manager. In connection with being cattle
marketing director, Mrs. Schnitker had to see that sufficient
cattle were sold to generate the funds Management needed to pay
its operating expenses. In addition, she was responsible for
Management’s cattle registration department and was Mr. Hawkins’
supervisor. (As indicated previously, Mr. Hawkins helped
maintain the Hoyt organization’s cattle records.) Mrs. Schnitker
related that generally the cattle sold to third parties were
mostly bulls and steers and included only a few cows, as she had
been told female breeding cattle were to be sold to the cattle-
breeding partnerships. However, she added that, on occasion,
when Management’s financial needs were pressing, a load of
heifers would be sold. Mrs. Schnitker further testified that she
did not know whether any of the cattle sold had belonged to the
cattle-breeding partnerships. She elaborated that she relied on
Mr. Hawkins for information on the cattle Management managed, as
she would have to have accurate information regarding what
numbers of cattle were available to be sold to meet Management’s
cash operating requirements. She also stated she considered the
cattle information Mr. Hawkins provided to her to be reliable, as
she knew him to be a careful and meticulous individual.
                                - 52 -

the same during these years.    Tom James, who had operated and

managed Timeshares Breeding Services since about 1986, testified

that Timeshares Breeding Services had a total of approximately

3,133 to 3,234 cattle in 1993, and that this would have been the

maximum number of cattle Timeshares Breeding Services had in its

operation at any one time.29

     Although petitioners argue far greater numbers of additional

breeding cattle existed and were available to be purchased and

owned by all of the cattle-breeding partnerships during 1987

through 1992, they have failed to produce any concrete,

convincing evidence establishing their claim.

     Most importantly, petitioners have failed to account for and

establish precisely the total number of breeding cattle annually

present from 1987 through 1992, which the Hoyt organization

collectively managed on behalf of each of the numerous cattle-

breeding partnerships it organized, promoted, and operated.     The



     29
      Tom James estimated that, in 1993, the Timeshares Breeding
Services operation had a total of 3,133 to 3,234 cattle,
consisting of the following numbers of bulls, cows, and heifers:

     Location or Parties
       Holding Cattle      Bulls         Cows     Heifers

     Clements, CA              410      --           370
     Trent, TX                  33   255-256         -–
                                                1
     Various Users             265     --         1,800-1,900
       Total                   708   255-256      2,170-2,270
1
     Represents calves owed by users for their use of bulls in
three or four breeding seasons.
                              - 53 -

Court believes that the Hoyt organization failed to provide such

a full and proper accounting because the requisite numbers of

individual breeding cattle it purportedly sold to and managed on

behalf of these partnerships never existed.   See infra note 38.

Moreover, there is evidence in the record indicating that a large

number of breeding cattle previously assigned to many of the

partnerships may have been sold off by the Hoyt organization to

meet its financial obligations.30   In addition, as indicated

earlier, the Hoyt organization had claimed that large numbers of

cattle it managed on behalf of the partnerships died as a result

of drought and disease during the 1987 through 1992 period–-a

claim the Court finds dubious.31


     30
      Included in materials the Hoyt organization prepared for a
special meeting in early 1990 of Hoyt & Sons Ranch Properties
(another Hoyt organization entity) unit holders are statements
that the Hoyt “combined herd” was now one-third its former size
because of (1) the Hoyt organization’s repayment of loans
received from institutional lenders and (2) reductions due to the
drought from 1987 through 1988. See infra note 31.
     31
      In his written statement submitted to the District Court
in the summons enforcement proceeding in early 1993, Jay Hoyt
stated that “In 1987, 1988 and 1989, because of drought, we were
forced to sell at beef prices, a substantial portion of our
purebred cow herd.” Similarly, a Combined Report, Analysis, And
Conclusion Of Experts, dated Feb. 19, 1994 (written by Mr. Favre
and several of the Hoyt organization’s cattle people), asserts
that, because of the drought that occurred in California, Oregon,
and other western States from 1988 through 1992, the Hoyt
organization was unable to determine and record the deaths of
thousands of cattle. This report relates that, in 1988, the Hoyt
organization decided not to sell some cows and bulls and,
instead, to use the drought as part of a natural selection
process that would eliminate cattle unable to forage well in poor
                                                   (continued...)
                               - 54 -

     The Court concludes that petitioners have failed to

establish that, during 1987 through 1992, substantially more

breeding cattle were present than were estimated by respondent’s

expert Mr. Daily.32   The Court further concludes that petitioners

have failed to show that breeding cattle existed in each year

during this period in numbers corresponding with those



     31
      (...continued)
feed conditions. However, Mr. Hawkins (who helped maintain the
Hoyt organization’s cattle records) testified that the Hoyt
organization had not suffered any substantial cattle losses
during this period as a result of drought or disease. Moreover,
a cattle expert for petitioners acknowledged that he would
question the competence of any cattle operator that allowed a
large number of cattle to perish during drought. This expert
indicated that an operator could either provide food and water to
the cattle, move them, or sell them off. In any event,
petitioners have now conceded the alleged large losses for
drought and disease previously claimed by the partnerships in the
instant cases. See supra note 15.
     32
      On brief, petitioners note that: (1) Petitioner’s expert
Mr. Hunsley (the ASA’s executive director) testified that, in
1986 (when he was serving as an expert witness for the taxpayers
in Bales v. Commissioner, T.C. Memo. 1989-568), he visited some
of the Hoyt ranch properties in Oregon, saw perhaps 3,000 cattle,
and estimated a total of 5,000 to 6,000 cattle were there; and
(2) certain State of Oregon brand inspection reports covering
8,796 head of cattle were issued during 1987. However, the Court
has major reservations (which are discussed more fully infra)
about Mr. Hunsley’s veracity and does not give this testimony
much weight. As to the brand inspection reports, the Court has
not found persuasive the numbers of cattle reflected in these
reports, as a new report must be issued for cattle when their
shipment out of State is delayed beyond the scheduled date. In
addition, as respondent points out, the brand inspection and
other health reports in evidence do not firmly establish a
definite number of total cattle, as these papers are required
when cattle are moved and the same cattle may be moved more than
once during a year.
                              - 55 -

purportedly purchased and owned by all of the cattle-breeding

partnerships.   See Rules 142(a), 240(a).   Indeed, the 1987 bills

of sale in evidence (which the Court previously determined were

highly suspect and unreliable) reflect 26 newly formed

partnerships alone to have purportedly purchased over 13,000

breeding cattle during that year.

     E. Whether a Partnership’s Stated Purchase Price Reasonably
Approximated the Cattle’s Fair Market Value

     Petitioners contend that the breeding cattle each

partnership acquired from the Hoyt organization had a value of

$4,000 per animal and that the total stated purchase price each

partnership paid for its breeding cattle was reasonable.

     Respondent, on the other hand, contends that during the

years relevant to the instant cases, the Hoyt organization’s

breeding cattle had a value substantially below $4,000 per

animal.   The Court essentially agrees with respondent.

     In asserting their $4,000 per animal valuation, petitioners

rely heavily on the testimony of their expert Mr. Hunsley.    Mr.

Hunsley has been the ASA’s executive director since about 1983

and was also an expert witness for the taxpayers in Bales v.

Commissioner, T.C. Memo. 1989-568.     Although Mr. Hunsley had not

examined the specific individual cattle the partnerships in the

instant cases purportedly purchased and owned, he claimed to have

seen a number of cattle in the Hoyt organization herd over the

years, including at cattle shows and on visits he made to certain
                              - 56 -

of the Hoyt ranch properties in 1986 and 1989.   He related that

during his visit in 1986, when he had been retained as an expert

for the Bales case, he saw about 3,000 cattle and estimated there

to have been a total of perhaps 6,000 cattle present.

     Mr. Hunsley opined that the cattle in the Hoyt herd were in

the top 25 percent of the Shorthorn breed.   He further opined

that the Hoyt Shorthorn cattle had an average value of $4,000 per

head during 1987 through 1992.   Mr. Hunsley noted that in the

Bales case, he had also concluded the cattle he had seen during

his 1986 visit were worth $4,000 per head.   He maintained that

the general market prices for Shorthorn cattle had not changed

significantly during 1987 through 1992.

     The Court does not accept Mr. Hunsley’s conclusions with

respect to the value of the Hoyt herd cattle during 1987 through

1992.   Among other things, Mr. Hunsley did not address how his

opinions might have to be revised if (1) a large number of the

breeding cattle a partnership purportedly purchased did not, in

fact, exist, or (2) the parentage or registered status of a

partnership’s cattle was suspect or unknown.   In addition, the

Court has major reservations concerning some of the assertions

Mr. Hunsley made regarding the Hoyt organization cattle.   On

cross-examination by respondent’s counsel, Mr. Hunsley denied

knowing of any irregularities with respect to cattle the Hoyt

organization registered with the ASA.   He specifically denied
                              - 57 -

that he had waived or allowed the Hoyt organization to dispense

with the ASA rules requiring blood testing to verify the

parentage of certain calves the Hoyt organization had registered

as being produced from embryo transplants.    However, Mr.

Hunsley’s claims were directly contradicted by Mrs. Schnitker’s

later testimony.

     Mrs. Schnitker explained that her husband had been involved

in the embryo transplant work done by the Hoyt organization.    She

related that around 1990 Jay Hoyt met with her and her husband

and told them a calf had to be registered with the ASA for each

embryo transplant the Hoyt organization had done, regardless of

whether an actual calf had been produced.    Mrs. Schnitker said

she agreed to handle the registrations, provided she could reach

an understanding with Mr. Hunsley with respect to any nonexistent

calves being registered.   According to Mrs. Schnitker, she and

Mr. Hunsley came to such an understanding permitting the Hoyt

organization to register these nonexistent calves, but he had

also told her the Hoyt organization would not be allowed to

register any subsequent cattle characterized as progeny of these

nonexistent calves.

     The Court finds Mrs. Schnitker’s above testimony credible.

In addition to believing her to be a trustworthy witness, the

Court notes that other reliable evidence in the record

corroborates various aspects of her testimony.    The record
                              - 58 -

includes a 1991 invoice for the registration work that Mrs.

Schnitker issued to the Hoyt organization and a later note and a

memorandum of Jay Hoyt directing other Hoyt organization workers

to pay Mrs. Schnitker’s invoice.33   Moreover, as indicated

earlier, at about this same time:    (1) Jay Hoyt, in a February 4,

1991, memorandum, instructed other Hoyt organization workers to

register with the ASA a calf for each cow bred, not just “live

calves”; and (2) the Hoyt organization proposed to Mr. Hunsley

that it be allowed to register calves with the ASA at a lower

registration fee of $6 per calf, in return for promising to

register a minimum of 4,000 calves annually for 1991 and 1992.

See supra notes 10 and 11.   The record further includes a letter

Mr. Hunsley issued to the Hoyt organization on or about February

14, 1991, in which he essentially agreed to the Hoyt

organization’s proposal regarding a lower calf registration fee.

In that letter, Mr. Hunsley also mentioned his close work with

Mrs. Schnitker in registering “embryo transplant calves”.

     The record reflects that petitioners’ asserted valuation of

$4,000 per animal is still substantially higher than the prices

the Hoyt organization realized in selling cattle to independent,




     33
      By this time, Mrs. Schnitker had left her position as
Management’s cattle marketing director and was no longer a Hoyt
organization worker.
                              - 59 -

unrelated third parties in arm’s-length transactions.34   Mrs.

Schnitker testified as to the prices she obtained in selling

cattle as Management’s cattle marketing director from 1987

through 1990.   Her sales included sales to feedlots (whereby the

cattle essentially would be sold at meat prices) and other sales

to Shorthorn breeders.   She related that the best quality (i.e.,

“A” herd) mature breeding cows with registration papers could go

for a price as high as $2,000 or $2,500, depending upon the

individual cow’s quality.   However, lesser quality cattle without

registration papers (i.e., “B” herd or lower) would sell for


     34
      The record discloses that the Hoyt organization contrived
certain transactions pursuant to which small numbers of breeding
cattle (possibly “belonging” to some of the cattle-breeding
partnerships) ostensibly were sold for high prices. For
instance, in an interoffice memorandum dated Dec. 9, 1985, Jay
Hoyt outlined plans to have his brother Bob Hoyt and the
brother’s business associate “purchase” a heifer for $19,000 at
one of the Hoyt organization’s cattle sales to “help our sales
average”. This memorandum further states that (1) Ranches would
provide the brother and the brother’s business associate with the
funds to “purchase” the heifer and (2) the brother and business
associate would “transfer” the heifer back as their capital
contribution to a Timeshare partnership. In another instance, in
his memorandum dated Dec. 2, 1991, to various Hoyt organization
workers, Jay Hoyt instructed the workers to have the partnership
representatives line up two individuals to buy two Timeshare
bulls at the Red Bluff and Klamath Falls cattle sales. These two
bulls, Jay Hoyt stated, should “sell” for $4,500 to $5,000
apiece. He added that if the money had to be provided to the two
individuals, the workers should take it out of the General
Partners’ Office (an office in the Hoyt organization) and should
get the money back to the General Partners’ Office by deducting
the money out of the Feedlot Co.’s (another entity in the Hoyt
organization) first check from the Red Bluff and Klamath Falls
sales. At any rate, the Court finds the bona fides of these and
other similar “transactions” to be highly suspect and
questionable.
                               - 60 -

substantially less.   Obviously, many of the breeding cattle

purportedly sold the partnerships were nowhere near the quality

of an “A” herd cow selling for $2,000 or $2,500.35   Indeed, the

registered status and parentage of a substantial number of

breeding cattle the partnerships purportedly purchased and owned

are either dubious or unknown.

     We conclude the partnerships’ stated purchase prices for

their “breeding cattle” were many times the actual fair market

value of those “cattle”.36   Thus, each partnership’s stated


     35
      There is no credible evidence in the record from which the
Court can estimate the actual number of “A” herd cattle annually
in the Hoyt herd from 1987 through 1992. The Court does not
believe Jay Hoyt’s claim that, during 1987, of the 24,000 to
29,000 total cattle he estimated were present in the Hoyt
organization herd, approximately 40 percent were “A” herd
animals. The Court thinks that, in all likelihood, the number of
“A” herd animals in the Hoyt organization herd had greatly
declined by 1987 or 1988. Among other things, when Ranches was
liquidated, Ric and Steve Hoyt took some of the cattle Ranches
previously either owned and/or managed. Moreover, in a
memorandum dated Sept. 17, 1990, to the Hoyt organization’s
cattle and ranch managers, Jay Hoyt advised them that the “A”
herd concept was being abandoned, because, according to Jay Hoyt,
no herd sire prospect (i.e., essentially a potentially very high
quality breeding bull) had been sold in the last 2 years.
     36
      The record contains a marketing plan for Management. This
plan notes that in order for Management to make a profit on its
bulls, it will have to sell them for the following specified
prices: (1) A weaner bull for $800, (2) a 10- to 12-month-old
bull for $1,050, (3) a 13- to 15-month-old bull for $1,320, and
(4) a 16- to 18-month-old bull for $1,600. The plan goes on to
state that for bulls that cannot be sold at a profit, one option
is to market those bulls to “Time Share” which will “pay” $3,500
per bull. However, it states, “Time Share” was not planning to
buy a great number of bulls from Management in 1989. The record
further reflects that, at about this time, the Hoyt organization
                                                   (continued...)
                              - 61 -

purchase price for its cattle did not reasonably approximate

those “cattle’s” fair market value.

     F.   Validity of the Partnerships’ Notes

     In deciding the extent to which a nonrecourse note has

economic substance, a number of cases have relied heavily on

whether the fair market value of the property acquired with the

note was within a reasonable range of its stated purchase price.

See Estate of Franklin v. Commissioner, 544 F.2d 1045 (9th Cir.

1976), affg. 64 T.C. 752 (1975); Hager v. Commissioner, 76 T.C.

759 (1981); see also Hilton v. Commissioner, 74 T.C. 305, 363

(1980), affd. 671 F.2d 316 (9th Cir. 1982); cf. Frank Lyon Co. v.

United States, 435 U.S. 561 (1978) (where, among other things,

the buyer-lessor in a sale-leaseback transaction was personally

liable on the mortgage).   As the Court of Appeals for the Ninth

Circuit in Estate of Franklin v. Commissioner, supra at 1048,

stated, in pertinent part:

     An acquisition * * * if at a price approximately equal
     to the fair market value of the property under ordinary
     circumstances would rather quickly yield an equity in
     the property which the purchaser could not prudently
     abandon. This is the stuff of substance. It meshes
     with the form of the transaction and constitutes a
     sale.

          No such meshing occurs when the purchase price
     exceeds a demonstrably reasonable estimate of the fair
     market value. Payments on the principal of the


     36
      (...continued)
typically “sold” bulls to various TBS partnerships for stated
prices of around $3,500 per bull.
                              - 62 -

     purchase price yield no equity so long as the unpaid
     balance of the purchase price exceeds the then existing
     fair market value. Under these circumstances the
     purchaser by abandoning the transaction can lose no
     more than a mere chance to acquire an equity in the
     future should the value of the acquired property
     increase. * * *

     In addition, even a purportedly recourse purchase note will

not be treated as true debt where payment, according to its

terms, is too contingent.   See Waddell v. Commissioner, 86 T.C.

848, 901-903 (1986), affd. 841 F.2d 264 (9th Cir. 1988).

Further, the mere labeling of a purchase note as recourse is not

controlling because substance, not form, must govern.   The note’s

recourse label thus will not preclude inquiry into the adequacy

of the collateral securing an alleged purchase money debt.     See

generally Waddell v. Commissioner, supra at 901-903.

     In Ferrell v. Commissioner, 90 T.C. 1154, 1186 (1988), this

Court held not to be bona fide debt for tax purposes certain

purportedly long-term recourse purchase notes that allegedly had

been assumed by limited partner investors, and elaborated as

follows:

          We are fully aware of the long line of decisions
     of this Court and other courts that have dealt with
     bona fide long-term recourse notes assumed by limited
     partners. In those cases, the courts have given
     credence to recourse notes as a basis for supporting
     claimed losses or establishing section 465 “at risk”
     amounts. See, e.g., Pritchett v. Commissioner, 827
     F.2d 644 (9th Cir. 1987), revg. and remanding 85 T.C.
     580 (1985) (at risk under sec. 465); Follender v.
     Commissioner, 89 T.C. 943 (1987) (at risk under sec.
     465; partnership’s basis); Melvin v. Commissioner, 88
     T.C. 63, 75 (1987) (at risk under sec. 465); Abramson
                             - 63 -

     v. Commissioner, 86 T.C. 360 (1986) (partnership’s
     basis; at risk under sec. 465).

          In all those cases, however, the recourse notes
     were given to independent third parties whose interests
     did not necessarily coincide with those of the note
     makers. Those cases did not involve, as does the
     instant case, transactions between two organizations
     created to carry out a tax shelter scheme, notes given
     for amounts having no relationship to economic reality,
     or notes which almost certainly would not be paid. See
     Goldstein v. Commissioner, 364 F.2d 734, 740-741 (2d
     Cir. 1966), affg. 44 T.C. 284 (1965); Durkin v.
     Commissioner, 87 T.C. 1329, 1376-1377 (1986); Waddell
     v. Commissioner, 86 T.C. 848, 902 (1986), affd. 841
     F.2d 264 (9th Cir. 1988); Houchins v. Commissioner, 79
     T.C. 570, 589-590 (1982).

           In the instant case, we are convinced, as stated
     above, that the purportedly recourse * * * notes
     served merely as a facade for the support of the tax
     benefits promised the investors * * *. The
     possibility that the notes would be paid was illusory.
     * * *

In Ferrell v. Commissioner, supra, the Court based its conclusion

regarding the invalidity of the notes on several factors:     (1)

The note holder’s not being an independent party but an essential

member of the tax shelter team; (2) the amounts of the notes

being many times the value of the property acquired; (3) the

unusual form of the notes, including the extremely long term for

payment of any of the notes’ principal; and (4) the prearranged

eventual release of the investors from their “assumptions of

personal liability” on the “recourse” notes.   See id. at 1186-

1190.

     In the instant cases, the Court is convinced that Jay Hoyt

and the Hoyt organization never intended to enforce the cattle-
                                - 64 -

breeding partnerships’ purportedly recourse notes against a

partnership and its partners on a genuinely recourse basis.     In

that regard, the Court does not find believable Jay Hoyt’s

testimony to the contrary.

     Jay Hoyt testified that although the cattle-breeding

partnerships formed before 1986 (including several of the seven

in the instant cases) had been limited partnerships, by about

1986 many of them had been converted to general partnerships

following the execution of restated partnership agreements for

them.     Even before this conversion, he added, limited partner

investors had executed assumption agreements, pursuant to which

they agreed to be fully personally liable for all amounts owed

under the “Full Recourse Promissory Note” their partnership had

issued for its purchased breeding cattle.     He related that he

typically had signed an individual investor’s name to an

assumption agreement on behalf of that investor, pursuant to a

power of attorney the investors had granted him.37


     37
      Many of the alleged partnership agreements, promissory
notes, and other related documents that purportedly were executed
during the 1987 through 1992 period do not appear in the record.
Jay Hoyt claimed that these documents were unavailable because
they had been seized by postal inspectors from the Hoyt
organization’s offices in June 1995. However, as indicated
earlier supra note 19, the postal inspector who conducted the
seizure also testified. This postal inspector related that he
had (1) provided Jay Hoyt with an inventory of the seized
documents shortly after the seizure was effected, and (2) later
(a) offered Jay Hoyt and other Hoyt organization representatives
access to the seized documents and (b) provided them with copies
                                                   (continued...)
                               - 65 -

      However, as the Court previously determined, the stated

purchase prices for a partnership’s “breeding cattle” greatly

exceeded those cattle’s fair market value.    Neither were these

arm’s-length transactions.   Jay Hoyt, as managing general

partner, represented each partnership in these transactions and

other Hoyt organization entities “sold” and then “managed” the

“breeding cattle” that a partnership had purportedly purchased.

The Hoyt organization greatly inflated the stated purchase prices

in order to increase the potential tax benefits for investors.

     In addition, as was noted earlier, the Hoyt organization

well before 1987 could never properly account for all the

specific individual breeding cattle that purportedly were

“purchased and owned” by the numerous cattle-breeding

partnerships it organized and operated over the years.    This

manifested itself in the many accounting deficiencies and

irregularities in the Hoyt organization’s cattle management and

record-keeping practices.    Indeed, petitioners have been unable

to establish that breeding cattle existed from 1987 through 1992

in numbers corresponding to those purportedly purchased and owned

by all of the cattle-breeding partnerships.

     The Hoyt organization further allowed a number of defaulting

investors to walk away from their partnership’s alleged recourse



     37
      (...continued)
of the seized documents.
                                - 66 -

promissory note debt.    In his testimony, Jay Hoyt maintained that

he and the Hoyt organization had concluded it was not practical

to bring collection actions against a large number of defaulting

investors.     He further stated that as a “general principle” the

Hoyt organization assumed that the “cattle” securing a defaulting

investor’s “note liability” had a value equal to 110 percent of

that “note liability”.    However, the Court does not believe Jay

Hoyt’s explanation as to why the Hoyt organization never sought

to enforce the “note liability” against these defaulting

investors.38

     In his testimony, Jay Hoyt also noted that certain of the

cattle-breeding partnerships had almost “fully paid off” their

“promissory note liabilities” with respect to some earlier cattle

purchase transactions that they and the Hoyt organization had

entered into.    He further indicated that, in substantial part,

these notes had been “paid off” through these partnerships’

“transferring back” cattle to the Hoyt organization.    However,

the Court does not consider such “payments” to be convincing


     38
      Among other things, the record contains standard letters a
large group of disgruntled investors (who were allowed to
withdraw from their cattle-breeding partnerships) issued to the
Hoyt organization in 1994 and 1995. In the letters, these
investors noted that the Hoyt organization had represented that
the investors would owe no further money because their respective
cattle partnership’s assets had a value sufficient to cover an
investor’s “note liability”. If not, the letters advised, these
investors requested a full accounting by the Hoyt organization
with respect to all cattle that had been owned by their
partnerships.
                              - 67 -

evidence establishing those notes and other subsequent notes

various cattle-breeding partnerships issued were valid recourse

indebtedness.   In a number of instances, the Hoyt organization

set highly inflated values on the cattle the partnerships

“transferred back” to it in “note payments”.   For instance, a

Hoyt organization note payment summary and a payment receipt

reflect that, in late 1987, SGE 82-1 transferred to the Hoyt

organization 82 registered Shorthorns having a stated total value

of $697,750 (which works out to an average stated value per cow

of approximately $8,508) and that the Hoyt organization credited

this $697,750 “payment” against SGE 82-1's promissory note,

allocating $232,122 to interest and $465,528 to principal.    The

Hoyt organization further, over the years, contrived other

transactions pursuant to which small numbers of breeding cattle

(possibly “belonging” to some of the cattle-breeding

partnerships) were purportedly sold for allegedly high prices at

public cattle sales.   See supra note 34.

     This highly unusual conduct by the Hoyt organization with

respect to these alleged recourse partnership debts casts

considerable doubt upon the bona fides of the “recourse

promissory notes” the partnerships issued to the Hoyt

organization.   In the subsequent note payment “transactions”, Jay

Hoyt and the Hoyt organization placed grossly inflated “values”

on certain alleged cattle a partnership “transferred back” to the
                              - 68 -

Hoyt organization, because the “payment” was only “applied”

against the grossly inflated stated purchase price that

partnership previously purportedly agreed to pay for its

“breeding cattle”.   In actuality, the Hoyt family and the Hoyt

organization never contemplated that each partnership’s

promissory note would ever have to be paid by that partnership

and its partners on a genuinely recourse basis.

     Jay Hoyt and the Hoyt organization entities involved in the

partnerships’ breeding cattle purchase transactions were not

independent parties acting at arm’s length.   Their actions

evidence that they themselves viewed the partnership notes as

essentially being illusory and having no practical economic

effect and that the notes were merely a facade to support the tax

benefits Jay Hoyt and the Hoyt organization had promised

investors in the partnerships.   See Ferrell v. Commissioner, 90

T.C. at 1186-1190; see also River City Ranches #4, J.V. v.

Commissioner, T.C. Memo. 1999-209; Hunter v. Commissioner, T.C.

Memo. 1982-126 n.17.

     For the foregoing reasons and on the record presented, the

Court concludes that the partnership notes were not valid

indebtedness.
                              - 69 -

     G.   Conclusions39

     DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and

TBS 90-1 claimed to have acquired large numbers of breeding

cattle which did not exist.   In addition, the annual herd recap

sheets and other records petitioners offered were not reliable

and contemporaneous documents.   Each partnership’s stated

purchase price for its breeding cattle did not reasonably



     39
      On brief, petitioners assert that this Court’s prior
decision in Bales v. Commissioner, T.C. Memo. 1989-568,
collaterally estops respondent from relitigating a number of
issues concerning the transactions in the instant cases.
However, petitioners failed to raise collateral estoppel as a
defense in their pleadings. The Court thus does not consider
petitioners’ collateral estoppel argument to be properly before
it. In any event, collateral estoppel would not apply in the
instant cases. The Bales decision involved several cattle-
breeding partnerships organized by the Hoyt family that had
entered into earlier transactions to acquire breeding cattle.
However, the years in issue in Bales generally were 1977, 1978,
and 1979. The instant cases, in contrast, involve partnerships
(which other than DF #1 were not involved in Bales) that well
after 1979 entered into transactions to acquire breeding cattle
from the Hoyt organization. The years in issue for the
partnerships in the instant cases are 1987 through 1992. Most
importantly, as the Court has determined, by the early 1980's the
Hoyt organization’s cattle management and record-keeping
practices had changed dramatically. The issues in the instant
cases thus are not identical to those decided in Bales and
collateral estoppel cannot apply, as different transactions and
substantially different controlling facts are presented. See
Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), affd. 904 F.2d
525 (9th Cir. 1990); see also Commissioner v. Sunnen, 333 U.S.
591, 599-600 (1948) (“where two cases involve income taxes in
different taxable years, collateral estoppel must be used with
its limitations carefully in mind so as to avoid injustice. It
must be confined to situations where the matter raised in the
second suit is identical in all respects with that decided in the
first proceeding and where the controlling facts and applicable
legal rules remain unchanged.”).
                                 - 70 -

approximate the cattle’s fair market value.      The alleged recourse

promissory note each partnership issued was not a valid recourse

indebtedness.   In some instances, the Hoyt organization

attributed and reallocated certain breeding cattle originally

assigned to and “owned” by one partnership to another

partnership.    Accordingly, we hold that DF #1, SGE 82-1, DGE 84-

3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1 did not acquire the

benefits and burdens of ownership with respect to the breeding

cattle each had purportedly acquired.      See Ferrell v.

Commissioner, supra at 1186-1190; Grodt & McKay Realty, Inc. v.

Commissioner, 77 T.C. at 1237-1238.       We further hold that these

foregoing partnerships are not entitled to the depreciation

deductions they claimed upon such breeding cattle during the

years in issue.

Issue 2.   Interest Deductions

     As discussed supra in connection with parts E and F of Issue

1, the Court has concluded that the purported recourse promissory

notes DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1,

and TBS 90-1 each issued to the Hoyt organization in transactions

subsequent to those involved in Bales v. Commissioner, T.C. Memo.

1989-568, were not a valid indebtedness.      Accordingly, we hold

that these foregoing partnerships are not entitled to the

interest deductions they claimed for the years in issue with

respect to those notes.
                              - 71 -

     The record further reflects that DF #1, during some of the

years in issue, also claimed interest deductions with respect to

certain notes it issued in connection with transactions that

might have been the subject of the Bales decision.     These alleged

interest payments were “made” by the partnership purportedly

transferring back (at inflated values) “cattle” to the Hoyt

organization.   For instance, a Hoyt organization payment summary

and a payment receipt reflect that, in early 1987, DF #1

transferred to the Hoyt organization 14 heifers having a stated

total value of $111,056 (which works out to an average stated

value per heifer of just under $8,000) and that the Hoyt

organization credited this $111,056 “payment” against three of DF

#1's promissory notes, including two notes that DF #1 issued,

respectively, in 1976 and 1977.   The payment summary further

reflects that the Hoyt organization credited this $111,056

“payment” against the three notes, allocating $13,231 to interest

and $97,925 to principal.

     We are aware that the DF #1 notes issued in connection with

the transactions involved in Bales were previously determined by

this Court to be valid recourse indebtedness.   However, in the

instant cases, the Court does not believe DF #1 to be entitled to

interest deductions on those notes for the years in issue.    As

indicated previously, petitioner’s collateral estoppel claim is

not properly before the Court.    See supra note 39.   Moreover, by
                              - 72 -

the years in issue, the controlling facts had changed materially.

Among other things, by this time, the Hoyt organization’s cattle

management “practices” had changed so that DF #1 “owned” (for tax

purposes) few, if any, actual individual breeding cattle.    It is

thus extremely likely that the “14 heifers” purportedly

“transferred back” by DF #1 to the Hoyt organization in “payment”

of these notes (1) did not, in fact, exist and/or (2) were not

“owned” by DF #1 for tax purposes.     See also the discussion infra

concerning Issue 8.   We hold that DF #1 is not entitled to the

interest deductions it claimed for the years in issue on those

notes.

Issue 3.   Certain Farm and “Other” Deductions40

     As discussed supra in connection with Issue 1, the Court has

concluded DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-

1, and TBS 90-1 did not acquire the benefits and burdens of

ownership with respect to the breeding cattle each partnership

claimed to have acquired from the Hoyt organization.

Accordingly, we hold that these foregoing partnerships are not

entitled to the farm deductions they claimed for the years in

issue.

     Petitioners have further failed to substantiate the “other

deductions” DF #1, SGE 82-1, and DGE 84-3 claimed for the 1990


     40
      As indicated earlier, petitioners conceded the deductions
these cattle-breeding partnerships claimed for drought and
disease.
                              - 73 -

and 1991 tax years.   Consequently, we sustain respondent’s

determinations in the FPAA’s disallowing DF #1, SGE 82-1, and DGE

84-3 those deductions for the 1990 and 1991 tax years.    See Rules

142(a), 240(a).

Issue 4.   Deductions for Guaranteed Payments

     Petitioners assert that DF #1, SGE 82-1, DGE 84-3, SGE 84-5,

DGE 86-2, TBS 89-1, and TBS 90-1 are entitled to deductions for

the years in issue for certain guaranteed payments made to Jay

Hoyt during those years.

     Section 707(c) allows a deduction for a partnership for

guaranteed payments to partners.    Such payments are determined

without regard to the partnership income and are payments to a

partners for services or the use of capital.    See sec. 707(c).

To be deductible by the partnership, the guaranteed payments must

meet the requirements of section 162; they must be ordinary and

necessary expenses, reasonable in amount, and incurred in a trade

or business.   See Durkin v. Commissioner, 87 T.C. 1329, 1376-1377

(1986), affd. 872 F.2d 1271 (7th Cir. 1989); sec. 1.707-1(c),

Income Tax Regs.

     In deciding whether the payments are deductible under

section 162(a), the Court must look to the nature of the services

performed by the general partners rather than to their

designation or treatment by the partnership.    See Durkin v.

Commissioner, supra at 1388-1389.    Payments allocable to
                               - 74 -

organizational costs and syndication expenses must be

capitalized.   Organizational costs, if elected, are amortizable.

See secs. 263, 709.   Petitioners have the burden of proving what

portion of the fee is allocable to nondeductible capital portions

and to deductible expense portions, and such allocation must

reasonably comport with the value of the services performed.   See

Durkin v. Commissioner, supra at 1389.    Any fees for services to

be rendered in the future are not deductible in the year of

expenditure.   See id.   Whether payments to a partner represent a

reasonable compensation for services is a question of fact to be

determined on the basis of the particular circumstances of each

case.   See id.

     In the instant cases, the evidence presented on the payments

these partnerships made to Jay Hoyt is most unsatisfactory.    The

record includes a copy of DGE 84-3's partnership agreement.    It

provides that the managing general partner, Jay Hoyt, is to

receive a fee equal to 5 percent of that partnership’s profits.

Copies of the partnership agreements of the other partnerships

for the years in issue are not in the record.   However, Jay Hoyt

testified that he received a fee equal to 1 percent of a

partnership’s gross farm income.

     Petitioners have failed to establish that the alleged

payments each of these partnerships made to Jay Hoyt are

deductible under section 162(a) by that partnership.    Petitioners
                               - 75 -

provided scant information concerning (1) the nature of the

services Jay Hoyt performed for that partnership and (2) whether

the payments represented reasonable compensation for those

services Jay Hoyt rendered.   Thus we hold that DF #1, SGE 82-1,

DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1 are not

entitled to the deductions for guaranteed payments they claimed

for the years in issue.41   See Durkin v. Commissioner, supra at

1388-1389.

Issue 5.   IRA Deductions

     DF #1, DGE 84-3, and SGE 84-5 claimed deductions for some of

the years in issue for alleged individual retirement account

(IRA) contributions they made for certain of their partners.

     On brief, respondent concedes some of the claimed

contributions DF #1, DGE 84-3, and SGE 84-5 made have been

substantiated.   The Court thus holds that these foregoing

partnerships are entitled to IRA deductions for the years in

issue in the amounts respondent conceded.   The Court further

holds that these partnerships have not substantiated and are not

entitled to their claimed IRA deductions for the years in issue

in excess of the amounts respondent conceded.   See Rules 142(a),

240(a).



     41
      It is thus unnecessary for the Court to decide whether,
for purposes of sec. 707(c), the payments Jay Hoyt received were
determined without regard to partnership income, an issue upon
which the parties disagree.
                              - 76 -

Issue 6.   Accounting and Tax Return Preparation Fees Deductions

     SGE 82-1, DGE 84-3, SGE 84-5, and TBS 90-1 each claimed

deductions for accounting and tax return preparation fees for its

1992 tax year.

     Petitioners have failed to present sufficient evidence

substantiating that SGE 82-1, DGE-84-3, SGE 84-5, and TBS 90-1

paid such accounting and tax preparation fees.   Consequently, we

sustain respondent’s determinations in the FPAA’s disallowing the

deductions these foregoing partnerships claimed for the 1992 tax

year in issue.   See Rules 142(a), 240(a).

Issue 7.   Investment Tax Credits

     Petitioners claim that DGE 84-3 and SGE 84-5 are entitled to

investment credits for 1987 for cattle each partnership purchased

in 1984.   They maintain that under the earlier settlement

concluded for these partnerships for 1984 through 1986, the

cattle were excluded and not depreciated by each partnership for

those years.   Petitioners argue that these “excluded” cattle were

thus placed in service in 1987 and that DGE 84-3 and SGE 84-5 are

entitled to investment credits under certain transition rules

provided to section 38 concerning property purchased under a

binding contract.

     As discussed supra in connection with Issue 1, the Court

concluded DGE 84-3 and SGE 84-5 did not acquire the benefits and

burdens of ownership with respect to the breeding cattle each
                              - 77 -

partnership claimed to have acquired.   Accordingly, we hold that

DGE 84-3 and SGE 84-5 are not entitled to investment credits for

the years in issue.

Issue 8.   Capital Gains and/or Additional Farm Income

     In the respective FPAA’s issued to DF #1, SGE 82-1, DGE 84-

3, SGE 84-5, and TBS 89-1 for their 1988, 1989, 1990, 1991,

and/or 1992 tax years, respondent determined that (1) each

partnership had additional farm income from its transfer to a

Hoyt organization entity of calves produced by that partnership’s

breeding herd, and (2) certain income these partnerships reported

from the sale of some of its breeding cattle and breeding value

certificates42 was ordinary income, rather than capital gains.

     As discussed supra in connection with Issue 1, the Court has

determined that, during the period covering the 1988 through 1992

tax years, SGE 82-1, DGE 84-3, SGE 84-5, and TBS 89-1 did not

acquire the benefits and burdens of ownership with respect to the

breeding cattle they purportedly acquired from the Hoyt

organization.   As a result, these partnerships never owned for

tax purposes any breeding cattle to generate this income

respondent determined they had for the years in issue.



     42
      The sharecrop agreements provided that a partnership would
still retain the breeding value certificates (i.e., essentially
the rights to any registration papers) on calves produced by its
breeding herd, even though, pursuant to the sharecrop agreement,
all calves produced were to belong to the Hoyt organization
entity that managed the partnership’s breeding herd.
                              - 78 -

Accordingly, we hold that the 1988 through 1992 tax year capital

gains and/or other farm income adjustments respondent determined

against these foregoing partnerships cannot be sustained.

Issue 9.   Management’s Deductions and Credits

     In the FPAA’s issued to Management for its 1987, 1988, 1989,

and 1990 tax years, respondent disallowed various deductions and

credits claimed by Management.

     Among the adjustments in issue between the parties are tens

of millions of dollars of other farm deductions attributable to

large numbers of cattle Management purportedly had received from

numerous cattle-breeding partnerships and then ostensibly

transferred to Ranches in payment of feed, management,

consulting, freight services, and other goods and services

Ranches provided to Management.   As discussed supra in connection

with Issue 1, the Court has determined certain specified cattle-

breeding partnerships, during 1987 through 1990, did not acquire

the benefits and burdens of ownership with respect to the

breeding cattle they purportedly acquired from the Hoyt

organization.   As they and other cattle-breeding partnerships the

Hoyt organization formed and operated from 1987 through 1990,

were never the owners for tax purposes of any breeding cattle,

the Court concludes that Management “received” no cattle from

these partnerships to “transfer” to Ranches in “payment” of these

alleged goods and services Ranches provided to Management.
                              - 79 -

     On brief, respondent has conceded that Management is

entitled to certain deductions for the years in issue.     The Court

thus holds that Management is entitled to farming and other

deductions in the amounts respondent conceded.   The Court further

holds that Management is not entitled to deductions for the years

in issue in excess of the amounts respondent conceded.     See Rules

142(a), 240(a).

     On the record presented, petitioners have failed to

establish that Management is entitled to fuel tax credits.

Consequently, the Court sustains respondent’s determinations in

the FPAA’s that Management is not entitled to fuel tax credits

for some of the years in issue.   See Rules 142(a), 240(a).

Similarly, on the record presented, petitioners have failed to

establish that Management is entitled to deduct research and

development expenses under section 174.    Among other things, the

Court is not satisfied that expenditures were actually incurred

in the amounts claimed for research or experimentation.     See sec.

1.174-2(a)(1), Income Tax Regs.   There is evidence of numerous

irregularities in the Hoyt organization’s “cattle records”,

including the fabrication of substantial amounts of fictitious

cattle information.   See supra note 22.   Consequently, the Court

sustains respondent’s determinations in the FPAA’s that

Management is not entitled to deduct research and development

expenses under section 174 for some of the years in issue.    See
                              - 80 -

Rules 142(a), 240(a).

     On brief, petitioners concede they have failed to produce

any evidence regarding the section 179 expense that Management

claimed for its 1989 tax year.    Consequently, we sustain

respondent’s determination in the FPAA disallowing Management

such expense for the 1989 tax year.    See Rules 142(a), 240(a).

Issue 10.   Management’s Income

     In the FPAA’s issued to Management for its 1987, 1988, 1989,

and 1990 tax years, respondent determined that Management (1) had

(a) substantial management fees from its receipt of calves and

culls from numerous cattle-breeding partnerships and (b)

substantial sale income from its transfer of much of those same

cattle to Ranches, (2) had unreported 1990 capital gains income

from its sale of certain other assets, (3) received taxable

distributions of assets from Ranches and Hoyt & Sons Ranch

Properties, and (4) had income from the discharge of

indebtedness.

     As discussed supra in connection with Issues 1, 8, and 9,

the Court has determined that cattle-breeding partnerships the

Hoyt organization formed and operated from 1987 through 1992 did

not acquire the benefits and burdens of ownership with respect to

breeding cattle they purportedly acquired from the Hoyt

organization and were not the owners for tax purposes of any

breeding cattle.   These partnerships thus did not have any cattle
                                - 81 -

to generate the management fees and sales income (from

Management’s then “transferring” to Ranches large numbers of

animals “received” from the partnerships) respondent determined.

Accordingly, we hold that the 1987, 1988, 1989, and 1990 farm

income adjustments respondent determined against Management–-to

the extent of the management fee income and the sale income from

Ranches--cannot be sustained.    In all other respects, the Court

sustains the 1987, 1988, 1989, and 1990 farm income adjustments

respondent determined.   See Rules 142(a), 240(a).

     Petitioners offered no evidence concerning the 1990 section

1231 gain adjustment respondent determined against Management

from its sale of certain other assets.    Consequently, the Court

sustains respondent’s determination in the FPAA that Management

had $720,526 of section 1231 gain for the 1990 tax year.    See

Rules 142(a), 240(a).

     Petitioners offered no evidence concerning the 1988, 1989,

and 1990 taxable distribution adjustments respondent determined

Management had from its receipt of assets from Ranches and Hoyt &

Sons Ranch Properties.   On brief, respondent acknowledges that

since it was unclear whether Management received $8,160,745 of

the assets in 1989 or 1990, the same $8,160,745 amount was

included in both 1989 and 1990.    Respondent now states that he

believes the $8,160,745 amount belongs in Management’s income for

1990.   Consequently, the Court sustains respondent’s
                              - 82 -

determinations in the FPAA’s that Management had $1,450,793 in

taxable distributions for the 1988 tax year and $8,160,745 in

taxable distributions for the 1990 tax year.    See Rules 142(a),

240(a).   The Court further holds that Management had $2,648,902

in taxable distributions (the $10,809,647 respondent originally

determined, less the $8,160,745 respondent now states is properly

allocable to 1990) for the 1989 tax year.

     Petitioners offered no evidence concerning the 1989 and 1990

discharge of indebtedness adjustments respondent determined

Management had from the forgiveness of amounts owed by it to Hoyt

& Sons Ranch Properties on land leases from 1983 through 1989.

On brief, respondent acknowledges that the same $4,984,403 amount

was included in both 1989 and 1990.    Respondent now states he

believes this $4,984,403 of income should be recognized by

Management for 1990.   Consequently, the Court sustains

respondent’s determination in the FPAA that Management had

$4,984,403 of discharge of indebtedness income for the 1990 tax

year.   See Rules 142(a), 240(a).   The Court further holds that

Management had no discharge of indebtedness income for the 1989

tax year.

     To reflect the foregoing and the parties’ concessions,

                                           Decisions will be entered

                                      under Rule 155.
                              - 83 -

                   APPENDIX A-–FPAA Adjustments



DF #1

TYE        Adjustments

12-31-87     Total Adjustments to Ordinary Income

            Farm income                       $129,787
            Depreciation expense                23,826
            Interest expense                    13,285
            Other farm deductions              196,258
            Guaranteed payments                 13,841

           Other Adjustments
             Self-employment income           118,165
             IRA contribution                   8,000

12-31-88   Total Adjustments to Ordinary Income

             Farm income                      121,264
             Interest expense                   7,038
             Other farm deductions            207,292
             Guaranteed payments               10,597

           Other Adjustments
             Self-employment income            28,265

9-30-89    Total Adjustments to Ordinary Income

             Interest expense                   12,888
             Other farm deductions             246,107
             Guaranteed payments                 4,906

           Other Adjustments
             Self-employment income             26,514

9-30-90    Total Adjustments to Ordinary Income

             Farm Income                      137,299
             Depreciation expense             280,175
             Interest expense                  82,496
             Other farm deductions             27,578
             Cattle losses–-drought/disease   520,325
             Guaranteed payments                  280
                              - 84 -

           Other Adjustments
             Self-employment income           $799,505
             Other deductions                  137,299

9-30-91    Total Adjustments to Ordinary Income

             Depreciation expense              359,651
             Interest expense                  123,750
             Sharecrop calves                  325,360
             Cattle losses–-drought/disease    440,850
             Guaranteed payments                 3,254

           Other Adjustments
             Self-employment income           1,007,487
             Other deductions                   261,321

9-30-92    Total Adjustments to Ordinary Income

             Farm Income                        109,981
             Depreciation expense               439,924
             Interest expense                   131,737
             Calves–-management fee             152,059
             Guaranteed payments                  2,620

           Other Adjustments
             Self-employment income             574,281


SGE 82-1

TYE        Adjustments

9-30-90    Total Adjustments to Ordinary Income

             Farm income                      2,349,777
             Interest expense                    91,326
             Other farm deductions               27,578
             Guaranteed payments                    280

           Other Adjustments
             Self-employment income                 280
             Other deductions                 1,151,341

9-30-91    Total Adjustments to Ordinary Income

             Farm income                        150,392
             Depreciation expense               615,619
             Sharecrop calves                   491,360
                              - 85 -

             Cattle losses–-drought/disease $178,263
             Guaranteed payments               4,919

           Other Adjustments
             Self-employment income          792,056
             Other deductions              1,117,006

9-30-92    Total Adjustments to Ordinary Income

             Farm income                      65,734
             Depreciation expense            262,938
             Interest expense                  4,000
             Calves–management fee           272,873
             Accounting fees                   3,086
             Guaranteed payments               3,386

           Other Adjustments
             Self-employment income          270,024


DGE 84-3

TYE        Adjustments

12-31-87   Total Adjustments to Ordinary Income

             Depreciation expense          1,078,475
             Interest expense                330,319
             Other farm deductions            92,163
             Guaranteed payments              17,082

           Other Adjustments
             Self-employment income        1,392,722
             IRA contribution                 32,000

12-31-88   Total Adjustments to Ordinary Income

             Depreciation expense          1,074,885
             Interest expense                179,318
             Other farm deductions           118,490
             Guaranteed payments              11,288

           Other Adjustments
             Self-employment income        1,243,908
             IRA contribution                 20,000
                             - 86 -

9-30-89   Total Adjustments to Ordinary Income

            Depreciation expense             $134,884
            Interest expense                  113,757
            Other farm deductions             144,498
            Guaranteed payments                 1,486

          Other Adjustments
            Self-employment income             244,581

9-30-90   Total Adjustments to Ordinary Income

            Farm income                    2,054,133
            Depreciation expense              67,940
            Interest expense                 707,820
            Other farm deductions             27,578
            Cattle losses–-drought/disease    19,500
            Guaranteed payments                  280

          Other Adjustments
            Self-employment income             794,812
            Other deductions                   869,361

9-30-91   Total Adjustments to Ordinary Income

            Farm income                       148,621
            Depreciation expense              656,894
            Interest expense                  230,000
            Sharecrop calves                  401,720
            Cattle losses--drought/disease    367,633
            Guaranteed payments                 4,017

          Other Adjustments
            Self-employment income           1,232,481
            Other deductions                 1,058,365

9-30-92   Total Adjustments to Ordinary Income

            Farm income                        102,918
            Depreciation expense               411,672
            Interest expense                    42,750
            Calves–-management fee             127,063
            Accounting fees                      3,086
            Guaranteed payments                  2,300

          Other Adjustments
            Self-employment income             457,508
                              - 87 -

SGE 84-5

TYE        Adjustments

12-31-87   Total Adjustments to Ordinary Income

             Depreciation expense         $1,090,460
             Interest expense                187,962
             Other farm deductions            92,163
             Guaranteed payments              15,062


           Other Adjustments
             Self-employment income        1,264,350

12-31-88   Total Adjustments to Ordinary Income

             Depreciation expense            893,334
             Interest expense                    295
             Other farm deductions           119,820
             Guaranteed payments              15,328

           Other Adjustments
             Self-employment income          880,664
             IRA contribution                 28,000

9-30-89    Total Adjustments to Ordinary Income

             Depreciation expense            448,101
             Interest expense                303,687
             Other farm deductions           141,166
             Guaranteed payments               1,486

           Other Adjustments
             Self-employment income          744,396

9-30-90    Total Adjustments to Ordinary Income

             Farm income                   1,807,147
             Depreciation expense            138,075
             Interest expense                666,370
             Other farm deductions            27,578
             Cattle losses–-drought/disease 152,425
             Guaranteed payments                 280

           Other Adjustments
             Self-employment income          956,422
             Other deductions                931,694
                               - 88 -

9-30-91    Total Adjustments to Ordinary Income

             Farm Income                      $150,276
             Depreciation expense              155,998
             Interest expense                  209,500
             Sharecrop calves                  401,720
             Guaranteed payments                 4,018

           Other Adjustments
             Self-employment income             292,742
             Other deductions                   381,176

9-30-92    Total Adjustments to Ordinary Income

             Farm income                       101,493
             Depreciation expense              405,972
             Interest expense                   42,000
             Calves–-management fee            324,948
             Accounting fees                     3,086
             Guaranteed payments                 3,806

           Other Adjustments
             Self-employment income             496,884


DGE 86-2

TYE        Adjustments

12-31-91   Total Adjustments to Ordinary Income

             Depreciation expense                 862,447
             Sharecrop calves                   2,479,421
             Cattle losses–-drought/disease       976,369

           Other Adjustments
             Self-employment income             4,312,237


TBS 89-1

TYE        Adjustments

12-31-89   Total Adjustments to Ordinary Income

             Depreciation expense               1,056,720

           Other Adjustments
                                - 89 -

               Self-employment income         $1,056,720

12-31-91     Total Adjustments to Ordinary Income
               Farm income                         11,686
               Depreciation expense               555,199
               Board expense                   1,983,470
               Cattle losses–-drought/disease     237,325

             Other Adjustments
               Self employment income          2,750,837
               Other deductions                   14,578


TBS 90-1

TYE          Adjustments

12-31-92     Total Adjustments to Ordinary Income

               Depreciation expense            2,174,204
               Interest expense                  137,750
               Accounting fees                     3,086

             Other Adjustments
               Self-employment income          2,315,040


Management

TYE          Adjustments

9-30-87      Total Adjustments to Ordinary Income

               Gross receipts or sales            56,813
               Sales–-livestock raised         2,803,274
               Management fees                74,388,096
               Sales to Ranches               36,201,929
               Reclassified section 1231 gain 1,159,679
               Other sales                     2,175,457
               Other income                          644
               Depreciation expense            1,006,785
               Interest expense                    3,618
               Other farm deductions           4,608,140

             Other Adjustments
               Self-employment income          6,018,585
               Fuel credit                        10,732
               Research credit                   185,640
                                - 90 -

            Investment credit                    $2,189,204
9-30-88   Total Adjustments to Ordinary Income

            Gross receipts or sales                 217,125
            Income–-receipt of distrib.           1,450,793
                   ptrship. assets
            Sales–-livestock raised               1,600,240
            Management fees                      54,610,680
            Sales to Ranches                     41,409,067
            Other sales                           7,339,811
            Other income                             99,660
            Depreciation expense                    141,467
            Interest expense                         14,770
            Other farm deductions                 5,924,524

          Other Adjustments
            Self-employment income                5,574,221
            Fuel credit                              13,223

9-30-89   Total Adjustments to Ordinary Income

            Gross receipts or sales                  99,751
            Income–-discharge of indebtedness     4,984,403
            Income–-receipt of distrib.          10,809,647
              ptrship. assets
            Sales–-livestock raised               6,491,658

            Management fees                      35,889,200
            Sales to Ranches                     54,879,409
            Other sales                          12,131,943
            Depreciation expense                    141,858
            Interest expense                        369,617
            Other farm deductions                 7,058,246

          Other Adjustments
            Self-employment income               16,580,142
            Fuel credit                              13,223
            Section 179 expense                      13,566

9-30-90   Total Adjustments to Ordinary Income

            Income–-receipt of distrib.           8,160,745
              ptrship. assets
            Basis livestock sold                    172,739
            Sales–-livestock raised               1,999,969
            Management fees                      46,762,200
            Sales to Ranches                     32,057,283
            Other sales                           1,441,785
                   - 91 -

  Agriculture payments                   3,010
  Other income                      $5,527,069
  Depreciation expense                 537,993
  Interest expense                     222,963
  Other farm deductions              8,014,100
  General Partners’ Office expenses    620,731
  Laguna Tax Service expenses        1,401,315
  Income–-discharge of indebtedness 4,984,403

Other Adjustments
  Self-employment income           15,016,325
  Rental income                        56,190
  Dividend income                       1,180
  Section 1231 gain                   720,026
  Fuel credit                          14,462
  Section 179 expense               2,958,692
                              - 92 -


                 APPENDIX B–-Adjustments in Issue


DF #1

TYE        Adjustments

12-31-87    Interest expense                        $9,054
            Other farm deductions                   83,328
            Guaranteed payments                        833
            IRA contribution                         8,000

12-31-88     Farm income/capital gain           121,264
             Interest expense                     7,038
             Other farm deductions              134,037
             Guaranteed payments                  1,340

9-30-89      Interest expense                    12,888
             Other farm deductions              386,937
             Guaranteed payments                  3,869

9-30-90      Farm income                        137,299
             Depreciation expense               280,175
             Interest expense                    56,035
             Other farm deductions              386,937
             Guaranteed payments                  3,869
             Other deductions                   137,299

9-30-91      Depreciation expense               359,651
             Interest expense                   125,879
             Other farm deductions              247,842
             Guaranteed payments                  2,478

9-30-92      Farm income/capital gain           109,981
             Depreciation expense               439,924
             Interest expense                   131,737
             Other farm deductions              283,248
             Guaranteed payments                  2,620

SGE 82-1

TYE        Adjustments

9-30-90      Farm income/capital gain         2,349,777
             Depreciation expense               792,666
             Interest expense                   103,962
             Other farm deductions              771,345
                              - 93 -

            Guaranteed payments            $9,463
            Other deductions            1,551,341

9-30-91     Farm income/capital gain     150,392
            Depreciation expense         792,666
            Interest expense              20,071
            Other farm deductions        491,360
            Guaranteed payments            4,914

9-30-92     Farm income/capital gain      65,734
            Depreciation expense         262,938
            Interest expense              48,985
            Other farm deductions        272,873
            Accounting fees                3,086
            Guaranteed payments            3,386


DGE 84-3

TYE        Adjustments

12-31-87    Depreciation expense          432,900
            Interest expense              151,515
            Other farm deductions         598,176
            Guaranteed payments             5,981
            Investment credit           1,425,500

12-31-88     Depreciation expense        454,545
             Interest expense            151,515
             Other farm deductions       598,176
             Guaranteed payments           8,022
             IRA contribution             28,000

9-30-89      Depreciation expense         228,769
             Interest expense             151,515
             Other farm deductions        508,329
             Guaranteed payments            5,159

9-30-90      Farm income/capital gain   2,054,133
             Depreciation expense         398,000
             Interest expense             355,000
             Other farm deductions        422,343
             Guaranteed payments            4,223

9-30-91      Farm income/capital gain    148,621
             Depreciation expense        398,000
             Interest expense            182,735
             Other farm deductions       306,009
                              - 94 -

            Guaranteed payments            $8,022
            Other deductions            1,058,365

9-30-92     Farm income/capital gain     102,918
            Depreciation expense         158,625
            Interest expense             130,525
            Other farm deductions        306,009
            Accounting fees                3,086
            Guaranteed payments            3,060


SGE 84-5

TYE        Adjustments

12-31-87    Depreciation expense          557,632
            Interest expense              195,171
            Other farm deductions         946,368
            Guaranteed payments             9,463
            Investment credit           2,060,100

12-31-88     Depreciation expense         585,514
             Interest expense             195,171
             Other farm deductions        804,222
             Guaranteed payments            8,022
             IRA contribution              28,000

9-30-89      Depreciation expense         324,476
             Interest expense             195,171
             Other farm deductions        515,916
             Guaranteed payments            5,159

9-30-90      Farm income/capital gain   1,807,147
             Depreciation expense         447,027
             Interest expense             211,587
             Other farm deductions        515,916
             Guaranteed payments            5,159

9-30-91      Farm income/capital gain    150,276
             Depreciation expense        470,657
             Interest expense            211,587
             Other farm deductions       452,961
             Guaranteed payments           4,526

9-30-92      Farm income/capital gain    101,493
             Depreciation expense        195,070
             Interest expense            166,521
             Other farm deductions       452,691
                                - 95 -

              Accounting fees                       $4,526
              Guaranteed payments                    3,806


DGE 86-2

TYE          Adjustments

12-31-91       Depreciation expense                862,447
               Other farm deductions             2,479,421


TBS 89-1

TYE          Adjustments

12-31-89       Depreciation expense              1,050,000

12-31-91       Farm income/capital gain             11,686
               Depreciation expense                555,199
               Interest expense                    194,320
               Other farm deductions               700,533
               Guaranteed payments                   7,005


TBS 90-1

TYE          Adjustments

12-31-92       Depreciation expense                736,707
               Interest expense                    199,303
               Other farm deductions               627,921
               Accounting fees                       3,086
               Guaranteed payments                   6,271


Management

TYE          Adjustments

9-30-87        Farm income1                    114,755,879
               Depreciation expense                198,141
               Interest expense                      3,618
               Other farm deductions2           40,810,069
               Fuel credit                           1,862
               Research credit                   1,315,155
                1
                 Includes $74,388,096 of management fee income from
                            - 96 -

           sharecrop agreements with cattle-breeding partnerships
           and $36,201,929 of sales income (see comment 2 below)
           from its transfer of animals to Ranches.
               2
             Includes $36,201,929 payment made to Ranches to
           satisfy debt “over several years” for feed,
           management, consulting, freight services, etc.

9-30-88    Farm income1                        $103,783,980
           Income from receipt of                 1,450,793
             distrib. ptrship. assets
           Depreciation expense                      25,196
           Interest expense                          14,770
           Other farm deductions2                47,333,591
           Fuel credit                               13,223
           Research credit                        1,552,690
               1
             Includes $54,610,680 of management fee income from
           sharecrop agreements with cattle-breeding partnerships
           and $41,409,067 of sales income (see comment 2 below)
           from its transfer of animals to Ranches.
               2
             Includes $41,409,067 payment made to Ranches to
           satisfy debt “over several years” for feed,
           management, consulting, freight services, etc.

9-30-89    Farm income1                         102,989,553
           Income from receipt of                10,809,647
             distrib. ptrship. assets
           Income from discharge of               4,984,403
             indebtedness
           Depreciation expense                     231,521
           Interest expense                         369,617
           Other farm deductions2                61,937,655
           Fuels credit                              14,178
           Research credit                          762,645
           Section 179 expense                       13,566
               1
             Includes $35,889,200 of management fee income from
          sharecrop agreements with cattle-breeding partnerships
          and $54,879,409 of sales income (see comment 2 below)
          from transfer of animals to Ranches.
           2
            Includes $54,879,409 payment made to Ranches to
          satisfy debt “over several years” for feed,
          management, consulting, freight services, etc.
                           - 97 -


9-30-90   Farm income1                         $71,585,386
          Income from receipt of                 8,160,745
            distrib. ptrship. assets
          Income from discharge of               4,984,403
            indebtedness
          Additional sec. 1231 gain                720,526
          Depreciation expense                     515,265
          Interest expense                         222,963
          Other farm deductions2                40,161,738
          Fuel credit                               14,462
          Research credit                        1,828,968
           1
            Includes $47,762,200 of management fee income from
          sharecrop agreements with cattle-breeding partnerships
          and $32,057,283 of sales income (see comment 2 below)
          from transfer of animals to Ranches.
           2
            Includes $32,057,283 payment made to Ranches to
          satisfy debt “over several years” for feed,
          management, consulting, freight services, etc.
