River City Ranches 1, Ltd. v. Comm'r

T.C. Memo. 2003-150

UNITED STATES TAX COURT

RIVER CITY RANCHES #1 LTD., LEON SHEPARD,
TAX MATTERS PARTNER,
RIVER CITY RANCHES #2 LTD., LEON SHEPARD,
TAX MATTERS PARTNER,
RIVER CITY RANCHES #3 LTD., LEON SHEPARD,
TAX MATTERS PARTNER,
RIVER CITY RANCHES #4 LTD., LEON SHEPARD,
TAX MATTERS PARTNER,
RIVER CITY RANCHES #5 LTD., LEON SHEPARD,
TAX MATTERS PARTNER,
RIVER CITY RANCHES #6 LTD., LEON SHEPARD,
TAX MATTERS PARTNER,
ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 787-91, 4876-94, Filed May 23, 2003.
9550-94, 9552-94,
9554-94, 13595-94,
13597-94, 13599-94,
382-95, 383-95,

1
The Appendix sets forth, for each of these consolidated
cases, the docket number, partnership, and tax matters partner.
By orders issued from June 22, 2000, through May 15, 2001, the
Court removed Walter J. Hoyt III (Jay Hoyt), as tax matters
partner in each of the consolidated cases. In those orders, the
Court appointed a successor tax matters partner in each case.
 - 2 -

385-95, 386-95,
14718-95, 14719-95,
14720-95, 14722-95,
14724-95, 21461-95,
5196-96, 5197-96,
5198-96, 5238-96,
5239-96, 5240-96,
5241-96, 9779-96,
9780-96, 9781-96,
14038-96, 21774-96,
3304-97, 3305-97,
3306-97, 3311-97,
3749-97, 15747-98,
15748-98, 15749-98,
15750-98, 15751-98,
15752-98, 15753-98,
15754-98, 19106-98,
13250-99, 13251-99,
13256-99, 13257-99,
13258-99, 13259-99,
13260-99, 13261-99,
13262-99, 16557-99,
16563-99, 16568-99,
16570-99, 16572-99,
16574-99, 16578-99,
16581-99, 17125-99.

Montgomery W. Cobb, for petitioners.

Terri Ann Merriam and Wendy S. Pearson, for participating
partners in docket Nos. 9554-94, 13599-94, 383-95, and 16578-99.

Thomas A. Dombrowski, Catherine A. Caballero, Alan E.
Staines, Thomas N. Tomashek, Dean H. Wakayama, and Nhi Luu, for
respondent.

Contents

FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . . 7

A. Overview of the Hoyt Operations . . . . . . . . . . . . . 7

B. Formation and Operation of the Hoyt Sheep Partnerships . . 9
 - 3 -

C. Respondent’s Examination Efforts and Enforcement Actions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

D. Governmental Investigations of Jay Hoyt . . . . . . . . 25

E. Certain Agreements Extending the Period of Limitations That
Jay Hoyt and the IRS Executed . . . . . . . . . . . . . 30

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Issue 1. Entitlement to Partnership Level Theft Loss Deductions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

A. The Parties’ Arguments . . . . . . . . . . . . . . . . . 32
1. Petitioners’ Arguments . . . . . . . . . . . . . . 32
2. Respondent’s Arguments . . . . . . . . . . . . . . 34

B. Discussion of Applicable Law . . . . . . . . . . . . . 35
1. Section 165 Theft Loss . . . . . . . . . . . . . . 35
2. Estoppel Principles . . . . . . . . . . . . . . . . 37
a. Equitable Estoppel . . . . . . . . . . . . . 37
b. Collateral Estoppel . . . . . . . . . . . . 39
c. Judicial Estoppel . . . . . . . . . . . . . 41

C. Discussion of Partnership Level Theft Loss Deductions . 43
1. Determination of Whether the Sheep Partnerships Were
Victims of Theft . . . . . . . . . . . . . . . . . 43
a. The Occurrence of a Theft . . . . . . . . . 43
(i) Jay Hoyt’s Conviction of Federal Crimes
. . . . . . . . . . . . . . . . . . 45
(ii) Petitioners’ Claim That a Theft From the
Partners is a Theft From the
Partnerships . . . . . . . . . . . . 51
(iii) Petitioners’ Claim That a Theft Occurred
Under State Law . . . . . . . . . . 55
(iv) Analysis of Case Law Cited by
Petitioners . . . . . . . . . . . . 61
b. The Year of Discovery Requirement . . . . . 65
(i) Application of Equitable Estoppel . 67
(ii) Application of the Rod Warren Ink Case
. . . . . . . . . . . . . . . . . . 72
(iii) Petitioners’ Year of Discovery Claim
. . . . . . . . . . . . . . . . . . 76
c. The Remaining Elements of a Theft Loss . . . 76
2. Application of Collateral and Judicial Estoppel . . 77
a. Collateral Estoppel . . . . . . . . . . . . 77
b. Judicial Estoppel . . . . . . . . . . . . . 80
 - 4 -

D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . 82

Issue 2. Expiration of the Period of Limitations . . . . . . 82

A. The Parties’ Arguments . . . . . . . . . . . . . . . . . 82
1. Petitioners’ Arguments . . . . . . . . . . . . . . 82
2. Respondent’s Arguments . . . . . . . . . . . . . . 85

B. Discussion of Applicable Law . . . . . . . . . . . . . . 87

C. Determination as to Whether the Applicable Periods of
Limitations on Assessment Have Expired . . . . . . . . . 91

D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . 101

Issue 3. Whether Some Partnerships’ Purported Purchases of
Breeding Sheep Constitute Either Valuation Overstatements
for Purposes of Section 6621(c)(3)(A)(i) or Sham and
Fraudulent Transactions for Purposes of Section
6621(c)(3)(A)(v) . . . . . . . . . . . . . . . . . . . . 101

A. The Parties’ Arguments . . . . . . . . . . . . . . . . . 101
1. Petitioners’ Arguments . . . . . . . . . . . . . . 101
2. Respondent’s Arguments . . . . . . . . . . . . . . 104

B. Section 6621(c) . . . . . . . . . . . . . . . . . . . . 106

C. The Tax Court’s Jurisdiction . . . . . . . . . . . . . . 107

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . 110

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: These consolidated 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 at issue. The Court agrees

with and adopts the opinion of the Special Trial Judge, which is

set forth below.
 - 5 -

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

adjustments for the taxable years at issue.2 From 1981 through

1998, Walter J. Hoyt III (Jay Hoyt) promoted these nine sheep

breeding partnerships to numerous investors and managed

partnership operations. For convenience, these partnerships are

hereinafter sometimes referred to as the Hoyt sheep partnerships

and these consolidated cases are referred to in the singular

(i.e., instant case). In addition, the individual partners in

the sheep partnerships are collectively referred to as sheep

partners.

On June 22, 1999, the Court issued its opinion in River City

2
The years at issue for River City Ranches #1 are 1986 and
its years ended Sept. 30, 1991 through 1996. The years at issue
for River City Ranches #2 are 1986 and 1987, its year ended Sept.
30, 1991, and its years ended Sept. 30, 1993 through 1996. The
years at issue for River City Ranches #3 are 1986 and 1987, its
years ended Sept. 30, 1989 through 1991, and its years ended
Sept. 30, 1993 through 1996. The years at issue for River City
Ranches #4 are 1984 and 1986, and its years ended Sept. 30, 1992
through 1996. The years at issue for River City Ranches #5 are
1986, 1987 and 1988, and its years ended Sept. 30, 1989 through
1996. The years at issue for River City Ranches #6 are 1986 and
its years ended Sept. 30, 1992 through 1996. The years at issue
for River City Ranches 1985-2/River City Ranches #7 are 1987 and
1988, and its years ended Sept. 30, 1989 through 1996. (In 1991,
River City Ranches 1985-2 became known as River City Ranches #7.)
The years at issue for Ovine Genetic Technology Syndicate 1987-1
are its years ended Sept. 30, 1990 through 1996. The years at
issue for Ovine Genetic Technology 1990 (OGT 90) are 1992, 1993,
1994, 1995, and 1996.
 - 6 -

Ranches #4, J.V. v. Commissioner, T.C. Memo. 1999-209, affd. 23

Fed. Appx. 744 (9th Cir. 2001), a test case in which the Tax

Court upheld respondent’s disallowance of all deductions that

three Hoyt sheep partnerships claimed for taxable years not at

issue in the instant cases.3

After concessions,4 the primary issues for decision in the

instant cases (which petitioners raised in amended petitions)

are: (1) Whether the nine Hoyt sheep partnerships are entitled

to theft loss deductions under section 165 for each of the years

at issue equal to the total cash payments made by the partners in

each such year to the partnerships; (2) whether the period of

limitations provided under section 6229 expired prior to the time

that respondent issued FPAAs to some partnerships for certain

taxable years; and (3) whether purported purchases of breeding

sheep that some partnerships reported for pre-1989 taxable years

constitute either (a) “valuation overstatement” as defined in

3
River City Ranches #4, River City Ranches #6, and OGT 90
were the partnerships at issue in this test case. The taxable
years decided were: For River City Ranches #4, 1987 and 1988,
and its years ended Sept. 30, 1989 through 1991; and for River
City Ranches #6, 1987 and 1988, and its years ended Sept. 30,
1989 through 1991. For OGT 90 the year decided was 1991.
4
The parties have resolved all of the adjustments in each
notice of final partnership administrative adjustment issued to
each of the nine sheep partnerships. Among other things,
petitioners now agree that the sheep partnerships did not acquire
the benefits and burdens of ownership of any sheep and that the
promissory note each partnership issued in connection with its
purported acquisition of sheep is not a valid indebtedness.
 - 7 -

section 6621(c)(3)(A)(i), or (b) “sham and fraudulent

transaction” as defined in section 6621(c)(3)(A)(v).

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.

The parties have stipulated that at the time the respective

petitions herein were filed, each of the nine Hoyt sheep

partnerships maintained its principal place of business in Burns,

Oregon. However, the record reflects that the partnerships were

operated from a Hoyt organization office located in Elk Grove,

California. Further, each sheep partnership, with the exception

of River City Ranches 85-2, was formed under and governed by

California law. River City Ranches 85-2 was a Nevada general

partnership and in 1991 became known as River City Ranches #7

(RCR #7).

A. Overview of the Hoyt Operations

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 1960s. Before and after the father’s

death in early 1972, Jay Hoyt and other members of the Hoyt
 - 8 -

family were extensively involved in organizing and operating

numerous cattle breeding partnerships. From about 1971 through

1998, Jay Hoyt organized, promoted to thousands of investors, and

operated as a general partner more than 100 cattle breeding

partnerships. For convenience, all or some of the cattle

breeding partnerships hereinafter are sometimes referred to as

the Hoyt cattle partnerships or cattle partnerships.5

Before 1971, the Hoyt family for many years resided in

Sacramento, California, and conducted most of their cattle

operations in northern California. In 1975, the family started

relocating their cattle operations to Burns, Oregon, because land

prices became too expensive in northern California. By the

1980s, the Hoyt family resided in the Burns area, and the Hoyt

organization maintained offices in Burns, Oregon, and Elk Grove,

California.

Around 1978 or 1979, Jay Hoyt became interested in the

possibility of organizing sheep breeding partnerships similar to

the cattle breeding partnerships. Due to this interest, Jay Hoyt

began discussions with David Barnes, a longtime sheep breeder and

childhood friend.

David Barnes and his wife April Barnes owned and operated

Barnes Ranch, their sole proprietorship sheep breeding business

5
For a more detailed account of the Hoyt cattle operations
and partnerships see Durham Farms #1, J.V. v. Commissioner, T.C.
Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003).
 - 9 -

located in California’s Sacramento Valley. The Barnes’ son,

Randy Barnes, eventually took on a substantial role in the

management and operation of the family sheep business after

completing college in 1985.

David Barnes had extensive experience in breeding several

breeds of purebred sheep. However, by the 1980s, he concentrated

on Rambouillets and Suffolks. Rambouillets have white faces and

cream colored bodies and are a breed noted for producing good

quality wool. Suffolks, on the other hand, have black faces and

legs and cream colored bodies and are a breed noted for producing

good quality meat. By the late 1980s, David Barnes and Randy

Barnes had acquired very good reputations in purebred sheep

breeding circles and generally were considered to be among the

country’s top breeders of Rambouillets and Suffolks.

As a result of various discussions and negotiations with

David Barnes, Jay Hoyt decided to form, operate, and promote

sheep partnerships in a very similar manner as the Hoyt cattle

partnerships.

B. Formation and Operation of the Hoyt Sheep Partnerships

From 1981 through 1991, Jay Hoyt formed eight of the nine

sheep partnerships at issue under and pursuant to the laws of

California. RCR #7 was formed under and pursuant to the laws of

Nevada. From their inception, all nine sheep partnerships were

operated from the Hoyt office located in Elk Grove, California.
 - 10 -

The Certificate and Articles of Limited Partnership of River

City Ranches Ltd. (RCR #1) states that the partnership was formed

in 1981 as a limited partnership under and pursuant to the laws

of the State of California. Jay Hoyt was designated the general

partner, and the individual investors were collectively

designated the limited partners.

The Certificate and Articles of Limited Partnership of River

City Ranches #2 Ltd. (RCR #2) states that the partnership was

formed in 1982 as a limited partnership under and pursuant to the

laws of the State of California. Jay Hoyt was designated the

general partner, and the individual investors were collectively

designated the limited partners.

The Certificate of Limited Partnership of River City Ranches

#3 Ltd. (RCR #3) states that the partnership was formed in 1983

as a limited partnership prepared and recorded under section

15502 of the California Corporations Code, Uniform Limited

Partnership Act. Jay Hoyt was designated the general partner,

and the individual investors were collectively designated the

limited partners.

The Certificate and Articles of Limited Partnership of River

City Ranches #4 Ltd. (RCR #4) states that the partnership was

formed in 1984 as a limited partnership under and pursuant to the

laws of the State of California. Jay Hoyt was designated the
 - 11 -

general partner, and the individual investors were collectively

designated the limited partners.

The Partnership Agreement of River City Ranches #5 Ltd. (RCR

#5) states that the partnership was formed in 1985 as a general

partnership under the laws of the State of California pursuant to

the provisions of the Uniform Partnership Act. The agreement

states that the Uniform Partnership Act of the State of

California at the time of the partnership’s formation or as may

be thereafter amended shall govern the partnership. Jay Hoyt and

W.J. Hoyt Sons Management Co. (Management) were designated the

managing partners, and the individual investors were collectively

designated as the investing partners. All the investing partners

were general partners of the partnership and not limited

partners, as in the previous sheep partnerships.

The Partnership Agreement of River City Ranches #6 Ltd. (RCR

#6) states that the partnership was formed in 1986 as a general

partnership under the laws of the State of California pursuant to

the provisions of the Uniform Partnership Act. The agreement

states that the Uniform Partnership Act of the State of

California at the time of the partnership’s formation or as may

be thereafter amended shall govern the partnership. Jay Hoyt was

designated the managing partner, and the individual investors

were collectively designated as the investing partners. All the

investing partners were general partners of the partnership.
 - 12 -

The Partnership Agreement of Ovine Genetic Technology

Syndicate 1987-1, J.V. (OGT 87) states that the partnership was

formed in 1987 as a general partnership under the laws of the

State of California pursuant to the provisions of the Uniform

Partnership Act. The agreement states that the Uniform

Partnership Act of the State of California at the time of the

partnership’s formation or as may be thereafter amended shall

govern the partnership. Jay Hoyt and Management were designated

the managing partners, and the individual investors were

collectively designated as the investing partners. All the

investing partners were general partners of the partnership.

The record does not contain any partnership agreements for

RCR #7 or Ovine Genetic Technology 1990 (OGT 90). However, other

documents in the record indicate that RCR #7 is a Nevada general

partnership governed by the Uniform Partnership Act of the State

of Nevada, and OGT 90 is a California general partnership

governed by the Uniform Partnership Act of the State of

California.

From the time each Hoyt sheep partnership was formed through

1998, Jay Hoyt was the general partner responsible for all the

management, operation, and promotion functions. He maintained

power of attorney to manage and conduct partnership business.

Jay Hoyt oversaw the entire Hoyt operation and made all major

decisions.
 - 13 -

Jay Hoyt was also the tax matters partner (TMP) of each

partnership and was a licensed enrolled agent. As an enrolled

agent he represented many of the investor-partners before the

Internal Revenue Service (IRS). In 1997, the IRS disbarred Jay

Hoyt as an enrolled agent for certain alleged improprieties

relating to his individual income tax returns. By orders of the

Tax Court issued from June 22, 2000, through May 15, 2001, Jay

Hoyt was removed as TMP from the sheep partnerships.

From April 1981 through February 1987, Jay Hoyt,

representing each of the Hoyt sheep partnerships (excluding OGT

90)6, entered into agreements with David Barnes to purchase

Rambouillet and Suffolk breeding ewes from Barnes Ranch for each

of the partnerships. The separate agreements that each

partnership entered into with Barnes Ranch were substantially

similar in all material respects. Each agreement contained terms

for the partnerships to purchase the sheep with no money down by

each issuing Barnes Ranch a promissory note. The partners of

each partnership then personally assumed the partnership debt

under an assumption agreement. Further, each partnership entered

into a share-crop operating agreement with Barnes Ranch to manage

6
In the River City Ranches #4 test case, Jay Hoyt
maintained that OGT 90 in 1990 entered into sheep sale and share-
crop management agreements with W.J. Hoyt Sons Ranches MLP, not
with Barnes Ranch. However, during that test case trial, David
Barnes testified that Barnes Ranch had sold OGT 90 its “breeding
sheep”. See River City Ranches #4, J.V. v. Commissioner, T.C.
Memo. 1999-209, affd. 23 Fed. Appx. 744 (9th Cir. 2001).
 - 14 -

and pay all expenses with respect to each partnership’s breeding

sheep.

The dates on which the purchase agreements each of the eight

partnerships and Barnes Ranch entered into, the number of

purported breeding ewes each partnership allegedly acquired, the

total stated purchase price, and the average price per sheep each

partnership agreed to pay for its sheep are as follows:

Total
Date of Number Purchase Avg. Price
Partnership Entry of Ewes Price per Sheep

RCR #1 4-20-81 401 $455,100 $1,135
RCR #2 2-15-82 514 626,400 1,219
RCR #3 3-20-83 584 713,140 1,221
RCR #4 2-01-84 1,468 2,087,880 1,422
RCR #5 5-01-85 1,257 1,825,000 1,452
RCR #6 1-15-86 1,415 1,960,140 1,385
RCR #7 2-01-87 1,873 3,982,360 2,126
OGT 87 1-05-87 1,849 3,636,600 1,967

Each of the nine sheep partnerships at issue was supposedly

formed to operate as a sheep breeding partnership, owning its own

flock of sheep purchased from Barnes Ranch. However, Jay Hoyt

and David Barnes were not independent parties acting at arm’s

length with respect to any of the sheep agreements. In

actuality, none of the sheep partnerships acquired the benefits

and burdens of ownership of any of the sheep listed above.

The bills of sale that Barnes Ranch issued the sheep

partnerships (excluding OGT 90) listed large numbers of

individual breeding sheep that did not exist. The flock recap

sheets prepared by Jay Hoyt contained false information and did
 - 15 -

not represent the sheep purportedly owned by each partnership.

Further, the total purchase price that each partnership agreed to

pay for its sheep was many times the fair market value of similar

quality sheep. Additionally, it was determined that none of the

promissory notes that the sheep partnerships issued for their

sheep were bona fide recourse debt. The notes had no economic

effect to the partnerships and were not valid indebtedness.

Moreover, Barnes Ranch did not even provide the partnerships with

the management services required under the agreements.

The cattle and sheep partnerships were organized and

operated in essentially the same manner. In addition, all of the

Hoyt organization investor partnerships were marketed and

promoted in an identical fashion. Jay Hoyt even used the

promotional literature prepared for the cattle partnerships to

promote the sheep partnerships. Some of the investors placed in

the sheep partnerships believed they had invested in cattle

partnerships.

In the early 1980s with the formation of many more investor

partnerships, the documents, records, and tax returns the Hoyt

organization prepared relating to its transactions with the

cattle partnerships were inaccurate, unreliable, and in many

instances falsified. Likewise, the Hoyt organization prepared

and maintained the sheep partnerships’ documents, records, and

tax returns in an inaccurate and unreliable manner. These
 - 16 -

deficient record-keeping practices continued for both the cattle

and sheep partnerships through 1998, when all the investor

partnerships were consolidated for bankruptcy purposes. For the

years at issue, often no records were kept at all.

As the general partner managing each sheep partnership, Jay

Hoyt was responsible for and directed the preparation of the tax

returns of each partnership, and he typically signed and filed

each tax return. However, separate bookkeeping and accounting

records for each of the sheep partnerships were never maintained.

Nor did Jay Hoyt maintain separate bank accounts for each of

the sheep partnerships. From 1981 until sometime in 1990, checks

from the sheep partners were received at the Hoyt office in Elk

Grove, California, and deposited in one checking account. The

account was in the name of River City Ranches (RCR account) and

maintained at the Bank of Alex Brown located in Elk Grove,

California.7

Sometime in 1990, Jay Hoyt discontinued using the RCR

account. He implemented a new business practice of commingling

all Hoyt organization funds in one checking account referred to

as the pooling account. This account was in the name of W.J.

Hoyt Sons Ranches MLP (MLP) and maintained at the First

Interstate Bank in Elk Grove, California. The funds in the

7
The Bank of Alex Brown became the First Interstate Bank
in 1989.
 - 17 -

pooling account were then allocated to the various Hoyt entities

based on a percentage determined by a pooling committee

administered by Jay Hoyt. The duration of the pooling account

cannot be determined by the record. During the years at issue,

substantial sums were deposited into and withdrawn by check from

both the RCR account and the pooling account.

At the end of 1993 or early 1994, the sheep partnerships’

promissory notes and share-crop management agreements were

assigned to MLP. From that point on, MLP was responsible for

providing the various functions that were previously the

responsibility of Barnes Ranch.

C. Respondent’s Examination Efforts and Enforcement Actions

Since approximately 1980, the IRS regularly examined many of

the partnership returns of the Hoyt cattle partnerships and the

individual returns of their partners. The IRS also examined the

sheep partnerships’ returns and the individual returns of their

partners. Because Jay Hoyt did not maintain separate bank

accounts and accurate accounting records for each of the sheep

partnerships, the IRS audited the partnership tax returns as a

group. The IRS generally disallowed the partnership tax benefits

that each cattle and sheep partnership and their respective

partners claimed, resulting in those partnerships and partners

commencing numerous cases in the Tax Court.

The Tax Court litigation over the years concerning the Hoyt
 - 18 -

cattle and sheep partnerships includes: (1) Bales v.

Commissioner, T.C. Memo. 1989-568; River City Ranches #4, J.V. v.

Commissioner, T.C. Memo. 1999-209, affd. 23 Fed. Appx. 744 (9th

Cir. 2001); and Durham Farms #1, J.V. v. Commissioner, T.C. Memo.

2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003), three test

cases dealing with partnership adjustments; (2) numerous other

cases involving the 1980 through 1986 taxable years of Hoyt

cattle partnerships and their partners that essentially were

resolved after respondent and Jay Hoyt entered into a memorandum

of understanding (MOU) on May 20, 1993, which outlined a basis

for a settlement of all outstanding cattle partnership cases for

the 1980 through 1986 taxable years; and (3) the instant case

involving the nine Hoyt sheep partnerships.

From 1984 through 2000, the IRS’s tax enforcement efforts

with respect to the tax shelter program operated by Jay Hoyt

included: (1) Examinations of the returns of the cattle and

sheep partnerships and their partners; (2) disallowance of the

partnership tax benefits that were claimed; (3) issuance of

prefiling notices to partners and freezing tax refunds they

claimed; and (4) defending litigation commenced in the Tax Court

by partnerships and partners over the adjustments determined in

the FPAAs and notices of deficiency issued by respondent.

From the IRS examinations of the returns of all the cattle

and sheep partnerships and investor-partners through this Tax
 - 19 -

Court litigation, IRS personnel either strongly suspected or

believed these partnerships to be abusive tax shelters. The

IRS’s original position had been that the purported acquisitions

of breeding animals by the cattle and sheep partnerships lacked

economic substance (i.e., were economic shams), that the

partnerships’ stated purchase prices for the animals greatly

exceeded the fair market value of the animals, and that the

promissory note each partnership issued in connection with its

purported acquisition of breeding animals was not a valid

indebtedness.

The holding in Bales v. Commissioner, T.C. Memo. 1989-568,

however, set back considerably the IRS’s tax enforcement efforts

against Jay Hoyt and the cattle and sheep partnerships that he

promoted and operated under his tax shelter program. In Bales,

this Court did not sustain the IRS’s disallowance of many of the

tax benefits a number of partners in specific cattle partnerships

involved therein claimed for 1977, 1978, and 1979. This Court,

among other things, found that the Bales partnerships had

acquired the benefits and burdens of ownership with respect to

specific breeding cattle, that the purchase prices for the

partnership cattle did not exceed their fair market value, and

that the promissory notes these partnerships issued were valid

recourse indebtedness.
 - 20 -

The Examination Division examined many of the returns of the

cattle and sheep partnerships and their partners for the 1980

through 1986 taxable years. During the Bales litigation, the

Examination Division obtained extensions from the partners in the

cattle partnerships to extend the period of limitations for

assessing and collecting income tax liabilities for the 1980,

1981, and 1982 tax years.8 After obtaining the extensions, the

Examination Division temporarily suspended examination activity

with respect to those tax years.

In early 1989, the Examination Division resumed examining

and processing the individual returns filed by partners in the

cattle partnerships for the 1980, 1981, and 1982 tax years.

Shortly thereafter, standard revenue agent reports for those

years were prepared that proposed to disallow all tax benefits

these partners had claimed from the cattle partnerships.

From about 1988 through 1991, an Examination Division team

conducted partnership-level examinations of many of the returns

of the cattle and sheep partnerships for the 1983 through 1986

8
The unified partnership audit and litigation provisions
of secs. 6221-6233, are not applicable to the pre-1983 taxable
years of the cattle and sheep partnerships. These provisions
were enacted as part of the Tax Equity & Fiscal Responsibility
Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 324,
648, and are generally applicable to partnership taxable years
beginning after Sept. 3, 1982.
 - 21 -

taxable years.9 During these examinations, Jay Hoyt and the Hoyt

organization failed to provide adequate documents and records

substantiating the livestock the partnerships purportedly

acquired and owned.

Following the 1989 Bales opinion, the IRS attempted to

verify the existence of all purported livestock that the cattle

and sheep partnerships allegedly owned for post-1979 taxable

years. As a result of an administrative summons enforcement

action brought in the United States District Court for the

District of Oregon (U.S. District Court) in 1992, the IRS first

inspected and counted all the purported cattle and sheep that

these partnerships allegedly owned from fall 1992 through spring

1993. The livestock count and inspection were conducted in

connection with the IRS’s examinations of the post-1986 taxable

year returns of the partnerships.

By February 1993, although the IRS’s inspection and

livestock count were not fully completed, IRS personnel concluded

that Jay Hoyt and the Hoyt organization had greatly overstated

the number of actual breeding animals that these partnerships

claimed to own. The IRS further concluded that Jay Hoyt and the

Hoyt organization had also grossly overvalued the livestock upon

which the partnerships were claiming tax benefits.

9
The unified partnership audit and litigation provisions
of secs. 6221-6233, applied to these partnership taxable years.
See supra note 8.
 - 22 -

Based on the above conclusions from its count of the cattle

and sheep, the IRS, beginning in February 1993, generally froze

and stopped issuing income tax refunds to partners in the cattle

and sheep partnerships. The IRS issued prefiling notices to the

investor-partners advising them that, starting with the 1992

taxable year, the IRS would (1) disallow the tax benefits that

the partners claimed on their individual returns from the cattle

and sheep partnerships and (2) not issue any tax refunds these

partners might claim attributable to such partnership tax

benefits.10

Respondent eventually issued: (1) Notices of deficiency to

numerous investor-partners for the 1980, 1981, and 1982 tax

years, in which respondent determined that none of the tax

benefits the partners claimed from the cattle and sheep

partnerships were allowable; and (2) FPAAs to many of the cattle

and sheep partnerships for the taxable years 1983, 1984, 1985,

and 1986, in which respondent disallowed the tax benefits these

partnerships claimed.

Following the IRS’s freezing in February 1993 of tax refunds

to partners in the cattle and sheep partnerships, the Hoyt

organization experienced financial difficulties. Freezing the

10
Ultimately, this Court, in Durham Farms #1, J.V. v.
Commissioner, T.C. Memo. 2000-159, and River City Ranches #4,
J.V. v. Commissioner, T.C. Memo. 1999-209, upheld respondent’s
disallowance of almost all tax benefits claimed by those cattle
and sheep partnerships for certain post-1986 taxable years.
 - 23 -

tax refunds greatly diminished the amount of money the Hoyt

organization obtained from new and existing partners.

After the opinion in Bales was filed and appropriate

decisions were entered, settlement negotiations were conducted

between Jay Hoyt and the IRS, which culminated in the MOU.

Beginning in 1993, an increasing number of investor-partners

were becoming disgruntled with Jay Hoyt and the Hoyt

organization. Many partners stopped making their partnership

payments and withdrew from their partnerships, due in part to

respondent’s tax enforcement. Jay Hoyt urged the partners to

support and remain loyal to the organization in challenging the

IRS’s actions. The Hoyt organization warned that partners who

stopped making their partnership payments and withdrew from their

partnerships (1) would be reported to the IRS as having

substantial debt relief income and (2) would have to deal with

the IRS on their own.

On or about June 8, 1995, in the 32d Judicial District Court

for the Parish of Terrebonne, State of Louisiana, a group of

investors obtained an $11 million default judgment against Jay

Hoyt, Management, MLP, and several cattle breeding partnerships

for fraud and other violations. See Mabile, et al. v. Walter J.

Hoyt, III, et al., No. 95-112222. On February 24, 1997, the

plaintiffs in the Louisiana lawsuit filed involuntary bankruptcy

petitions in the U.S. Bankruptcy Court for the District of Oregon
 - 24 -

(Bankruptcy Court) to force Management and MLP into bankruptcy

and liquidate each company’s assets. On June 5, 1997, the

Bankruptcy Court entered an order for relief, in effect finding

that Management and MLP were both bankrupt.

In the Management and the MLP bankruptcy cases, the United

States Trustee (U.S. Trustee), in 1997, moved to have the

Bankruptcy Court substantively consolidate all assets and

liabilities of almost all Hoyt organization entities and the many

Hoyt investor partnerships. This consolidation included all the

cattle and sheep partnerships. On November 13, 1998, the

Bankruptcy Court entered its Judgment for Substantive

Consolidation, consolidating all the above mentioned entities for

bankruptcy purposes. The U.S. Trustee then sold off what little

livestock that the Hoyt organization owned and/or managed on

behalf of the cattle and sheep partnerships.

From 1992 through 1998, the IRS at various times issued

standard letters to investor-partners advising them of the IRS’s

position in disputing the claimed tax benefits from the cattle

and sheep partnerships. From 1992 through 1998, Revenue Agent

Norman Johnson and other IRS employees discussed the IRS’s

position with hundreds of investor-partners in the cattle and

sheep partnerships. Many of the discussions addressed the

confusion various partners had regarding certain tax issues as a

result of the conflicting information and tax advice that Jay
 - 25 -

Hoyt and the Hoyt organization provided the investor-partners.

Respondent ultimately issued FPAAs to the cattle and sheep

partnerships for post-1986 taxable years, in which respondent

disallowed the tax benefits these partnerships claimed for those

years. These partnerships then commenced numerous Tax Court

cases for a redetermination of the FPAA adjustments.

On June 22, 1999, this Court issued its opinion in River

City Ranches #4, J.V. v. Commissioner, T.C. Memo. 1999-209, a

test case sustaining respondent’s disallowance of all tax

benefits claimed by three sheep partnerships. On May 18, 2000,

this Court issued its opinion in the Durham Farms #1, J.V. v.

Commissioner, T.C. Memo. 2000-159, a test case in which the Court

disallowed almost all tax benefits that seven cattle partnerships

claimed. In light of these holdings and the mounting evidence,

petitioners conceded the various partnership adjustments,

choosing to focus on the issues raised in their amended petition.

D. Governmental Investigations of Jay Hoyt

After the initial IRS examinations of the many cattle and

sheep partnerships, several investigations by various Government

agencies were commenced relating to Jay Hoyt’s activities.

From 1984 through 1986, the IRS’s Criminal Investigation

Division (CID) conducted an investigation of Jay Hoyt for

allegedly backdating documents to enable 12 investor-partners to

claim improper deductions and credits for 1980, 1981, and 1982.
 - 26 -

On July 31, 1986, the IRS District Counsel’s Office in

Sacramento, California, referred the matter to the Department of

Justice (DOJ) for prosecution.

The DOJ then forwarded the matter to the U.S. Attorney’s

Office in Sacramento for review and consideration. On August 12,

1987, the U.S. Attorney’s Office declined to prosecute Jay Hoyt.

The Assistant U.S. Attorney assigned to consider the possible

criminal tax prosecution concluded that: (1) The total tax loss

to the Government from the backdating was relatively small,

probably less than $30,000; and (2) it would be difficult to

obtain a conviction of Jay Hoyt in a jury trial.

In July 1989, a member of the IRS Examination Division team

(which had been examining the returns of many of the cattle and

sheep partnerships for the 1983 through 1986 taxable years)

recommended that the CID investigate Jay Hoyt for allegedly

making and/or assisting in fraudulent or false tax return

statements in connection with his promotion and operation of the

cattle partnerships. In his referral report to the CID, this

team member concluded that Jay Hoyt was selling cattle to some

partnerships that had already been sold to other partnerships and

that he was depreciating cattle that did not exist. The CID then

conducted an investigation of the alleged nonexistent cattle and

Jay Hoyt’s represented value for them. CID’s investigation was

completed no later than October 1, 1990.
 - 27 -

On October 13, 1989, during the CID’s above-mentioned

investigation, the U.S. Attorney’s Office in Sacramento requested

that the CID review certain information and determine whether IRS

special agents from the CID should join in an ongoing grand jury

investigation of Jay Hoyt for possible violations of the Internal

Revenue laws. On November 3, 1989, the IRS Regional Counsel’s

Office requested that IRS special agents be authorized to

participate in the grand jury investigation. On October 2, 1990,

the U.S. Attorney’s Office ended the grand jury investigation of

Jay Hoyt without an indictment.

On or about August 31, 1993, the CID commenced an

investigation of Jay Hoyt for possible criminal violations of the

Internal Revenue laws due to his alleged misrepresentation of the

total number and value of purported cattle that the cattle

partnerships allegedly owned. The CID closed the investigation

on or about October 7, 1993, and did not recommend that the IRS

attempt to have Jay Hoyt prosecuted.

On or about September 8, 1995, the CID commenced an

investigation of Jay Hoyt for possible criminal violations of the

Internal Revenue laws relating to the alleged shortage of cattle

from the Hoyt cattle partnerships. The CID closed this

investigation on September 29, 1995, and did not recommend that

the IRS attempt to have Jay Hoyt prosecuted.
 - 28 -

From 1993 through 1998, other governmental agencies also

investigated Jay Hoyt, including the Securities and Exchange

Commission (SEC), the United States Postal Service (USPS), and

the U.S. Trustee. As a result of a referral for further

investigation from the U.S. Attorney’s Office in Seattle,

Washington, to the USPS, postal inspectors in late 1993 commenced

an investigation of Jay Hoyt and the Hoyt organization for

possible mail fraud violations.

During 1993 and 1994, the SEC conducted an ongoing

investigation of Jay Hoyt, but the SEC eventually closed its

investigation and deferred to the USPS’s investigation of Jay

Hoyt that had been commenced in late 1993. In June 1995, postal

inspectors seized numerous documents and records from the offices

of the Hoyt organization pursuant to a search warrant.

In 1995, Hoyt & Sons Ranch Properties (HSRP) partnership,

one of the Hoyt organization’s ranch land partnerships, filed a

bankruptcy petition under Chapter 11 of the Bankruptcy Code in

the Bankruptcy Court. After the bankruptcy filing, the U.S.

Trustee commenced an investigation of Jay Hoyt for possible gross

mismanagement or bankruptcy fraud in connection with HSRP. The

U.S. Trustee also investigated Jay Hoyt in connection with the

Management and MLP bankruptcy cases commenced in 1997.

On November 24, 1998, the Government filed an indictment in

the U.S. District Court against Jay Hoyt and several other
 - 29 -

persons who had worked for or engaged in transactions with the

Hoyt organization, including April and David Barnes, charging

them with numerous counts of conspiracy and mail fraud. On June

2, 1999, the Government filed a superseding indictment against

the same defendants, which, among other things, charged Jay Hoyt

with 54 counts of conspiracy to commit fraud, mail fraud,

bankruptcy fraud, and money laundering. See United States v.

Barnes, et al., No. CR 98-529-JO-04 (D. Or. Feb. 12, 2001), affd.

sub nom. United States v. Hoyt, 47 Fed. Appx. 834 (9th Cir.

2002). All future references to Jay Hoyt’s indictment are to the

superseding indictment of June 2, 1999.

Following a jury trial in the U.S. District Court case noted

above, on February 12, 2001, Jay Hoyt was convicted of 1 count of

conspiracy to commit fraud, 31 counts of mail fraud, 3 counts of

bankruptcy fraud, and 17 counts of money laundering. See id.

The U.S. District Court then sentenced Jay Hoyt to 235 months of

imprisonment and also ordered him to pay restitution of over $102

million to the individual victims of his crimes. This $102

million figure represented the total amount that the Government

(using Hoyt organization records) determined was paid to the Hoyt

organization from 1982 through 1998 by investor-partners in the

cattle partnerships, the sheep partnerships, and other similar

partnerships that Jay Hoyt promoted. The fraud perpetrated by

Jay Hoyt “impacted over 4,000 people and had actual and intended
 - 30 -

losses exceeding $200 million.” United States v. Hoyt, 47 Fed.

Appx. 834, 837 (9th Cir. 2002).

Following the Government’s filing in late 1998 of the

indictment against Jay Hoyt, respondent moved this Court to

remove Jay Hoyt as TMP in many of the cattle and sheep

partnership cases before the Tax Court. In orders issued from

June 22, 2000, through May 15, 2001, this Court removed Jay Hoyt

as TMP in numerous cattle and sheep partnership cases, pursuant

to Rule 250(b).

E. Certain Agreements Extending the Period of Limitations That
Jay Hoyt and the IRS Executed

Jay Hoyt and the IRS executed agreements extending the

period of limitations on assessments for certain taxable years of

RCR #2, RCR #3, RCR #4, RCR #5, and RCR #7. Jay Hoyt executed

each of the extension agreements as TMP for the various sheep

partnerships.

The partnership taxable year involved, the date upon which

the partnership filed its return for that year, the IRS extension

form used, the respective dates upon which Jay Hoyt and the IRS

executed the various forms, the date to which Jay Hoyt and the

IRS (in the form) agreed to extend the period of limitations, and

the date upon which respondent issued each partnership the FPAA

are as set forth below:
 - 31 -
Taxable Date Date to Date
Year Return IRS Date Executed Which FPAA
Partnership Ended Filed Form Hoyt IRS Extended Issued

RCR #2 12-31-87 05-19-88 872-P 02-15-91 02-27-91 12-31-92 12-20-93
872 04-06-91 04-10-91 12-31-92
872 & 07-25-92 08-26-92 06-30-93
872-P
872-P 03-06-93 03-29-93 12-31-93

RCR #3 12-31-87 10-20-88 872-P 02-15-91 02-22-91 12-31-92 12-20-93
872 04-06-91 04-10-91 12-31-92
872-P & 07-25-92 08-26-92 06-30-93
872
872-P 03-06-93 03-30-93 12-31-93

RCR #3 09-30-89 04-15-90 872-P & 07-25-92 08-26-92 06-30-93 12-20-93
872
872-P 03-06-93 03-30-93 12-31-93

RCR #4 12-31-84 10-18-85 872-O 08-01-87 08-01-87 Indefinite 03-25-96

RCR #5 12-31-87 10-21-88 872-P 02-15-91 02-22-91 12-31-92 12-20-93
872 04-06-91 04-10-91 12-31-92
872-P & 07-25-92 08-26-92 06-30-93
872

RCR #5 12-31-88 10-17-89 872-P 02-15-91 02-22-91 12-31-92 12-20-93
872 04-06-91 04-10-91 12-31-92
872-P & 07-25-92 08-26-92 06-30-93
872
872-P 03-06-93 03-30-93 12-31-93

RCR #5 09-30-89 04-15-90 872-P & 07-25-92 08-26-92 06-30-93 12-20-93
872
872-P 03-06-93 03-30-93 12-31-93

RCR #7 12-31-87 10-20-88 872-P 02-15-91 02-22-91 12-31-92 12-20-93
872 04-06-91 04-10-91 12-31-92
872-P & 07-25-92 08-26-92 06-30-93
872
872-P 03-06-93 03-30-93 12-31-93

RCR #7 12-31-88 10-17-89 872-P 02-15-91 02-22-91 12-31-92 12-20-93
872 04-06-91 04-10-91 12-31-92
872-P & 07-25-92 08-26-92 06-30-93
872
872-P 03-06-93 03-30-93 12-31-93

RCR #7 09-30-89 04-15-90 872-P & 07-25-92 08-26-92 06-30-93 12-20-93
872
872-P 03-06-93 03-30-93 12-31-93

OPINION

Petitioners bear the burden of proof on all issues raised in

their amended petitions. Rules 142(a), 240(a); Welch v.

Helvering, 290 U.S. 111 (1933).
 - 32 -

Issue 1. Entitlement to Partnership Level Theft Loss Deductions

A. The Parties’ Arguments

1. Petitioners’ Arguments

It is our understanding that the gist of petitioners’ theory

regarding entitlement to a theft loss deduction for each taxable

year at issue is as follows: (1) Each of the nine sheep

partnerships was the victim of a theft by Jay Hoyt because his

conviction in the U.S. District Court for specific Federal crimes

establishes the existence of the theft11; (2) since Oregon is

where the partnerships were formed and operated, Oregon is the

jurisdiction where the thefts occurred; (3) Oregon criminal

statutes that are similar to the Federal criminal statutes Jay

Hoyt was convicted of violating are evidence that Jay Hoyt’s

Federal crimes are also crimes in Oregon; and (4) each

partnership is entitled to a theft loss deduction equal to the

total amount of cash invested by the partners in each year.

Further, petitioners contend that the Government’s

successful prosecution of Jay Hoyt precludes respondent, under

doctrines of collateral and/or judicial estoppel, from denying

that the Hoyt sheep partnerships and their investor-partners were

victims of a theft.

11
The details of Jay Hoyt’s criminal conviction and
specific crimes for which he was found guilty are discussed supra
pp. 28-30.
 - 33 -

While petitioners argue that a theft occurred in each year

equal to the total amount of cash contributed in that year, they

admit that each of the sheep partnerships did not discover the

alleged thefts until after the years at issue. However,

petitioners argue that this Court should apply the doctrine of

equitable estoppel and the Ninth Circuit’s holding in Rod Warren

Ink v. Commissioner, 912 F.2d 325, 326 (9th Cir. 1990), revg. 92

T.C. 995 (1989), to the “exceptional circumstances” presented in

this case, to override section 165(e) and allow each partnership

to deduct a theft loss for each of the years at issue.

Petitioners acknowledge that they seek this remedy to reduce the

amount of interest that individual partners will be assessed as a

result of the partnership adjustments.

Petitioners assert that if the IRS had warned the investor-

partners that serious problems existed and disclosed information

the IRS had regarding Jay Hoyt’s diverting of their funds and

selling of nonexistent sheep to their partnerships, the partners

would not have continued investing in the partnerships and would

have stopped their payments to the Hoyt organization. At a

minimum, petitioners state, these partners might have been able

to discover the theft earlier, allowing the partnerships and

themselves to claim earlier offsetting theft loss deductions.

Petitioners thus maintain that each partnership under equitable

principles should be allowed a theft loss deduction for each of
 - 34 -

the years at issue equal to the cash payments made by the

partners to the partnerships during those years.

2. Respondent’s Arguments

Respondent contends that the Hoyt sheep partnerships are not

entitled to theft loss deductions for any of the years at issue.

Respondent argues that petitioners have failed to satisfy all of

the requirements under section 165 for deducting a theft loss.

Specifically, respondent asserts that petitioners have failed to

establish: (1) The partnerships, as opposed to the partners,

were victims of a theft; (2) the amount of the alleged theft; (3)

that the alleged theft from each partnership was discovered

during the 1984 through 1996 years at issue; and (4) that no

reasonable prospect for recovery existed during the years at

issue.

Respondent states that in United States v. Barnes, et al.,

No. CR 98-529-JO-04 (D. Or. Feb. 12, 2001), the Government’s

prosecution focused on the activities of Jay Hoyt, other co-

defendants, and the Hoyt organization in promoting and operating

the cattle partnerships, not the sheep partnerships. Hence,

respondent maintains that collateral estoppel and judicial

estoppel are inapplicable, as the Government’s conviction of Jay

Hoyt neither establishes a theft from the sheep partnerships nor

precludes respondent from denying that the sheep partnerships
 - 35 -

were victims of a theft.12

Respondent disputes that equitable estoppel or the Rod

Warren Ink case should be applied to override section 165(e) and

allow the partnerships theft loss deductions for the years at

issue. Respondent asserts that petitioners have failed to

establish: (1) The IRS misled the partnerships and their

partners about Jay Hoyt’s fraudulent activities against them; and

(2) the partnerships and their partners reasonably relied to

their detriment on the IRS’s alleged failure to stop and disclose

Jay Hoyt’s promotion of the cattle and sheep partnerships at an

earlier date. Additionally, respondent adds that the Court of

Appeals for the Ninth Circuit requires “affirmative misconduct”

by the Government as a threshold matter before deciding whether

the traditional requirements of equitable estoppel are met.

Respondent disputes that there was affirmative misconduct by the

IRS.

B. Discussion of Applicable Law

1. Section 165 Theft Loss

Section 165 generally allows a taxpayer to deduct losses

12
In this connection, Jeffrey Hull (the postal inspector
who investigated Jay Hoyt and later worked with the prosecution
team) testified that the criminal case focused on the cattle
partnerships and not the sheep partnerships. Mr. Hull explained
that his investigation had focused upon the cattle partnerships
since they represented the majority of the investor partnerships,
and that he and others saw no point in having to address
collateral issues concerning the sheep partnerships.
 - 36 -

from the theft of property. Sec. 165(a), (c)(3). Petitioners

bear the burden of proving by a preponderance of the evidence

that a theft actually occurred. Rule 142(a); Jones v.

Commissioner, 24 T.C. 525, 527 (1955); Allen v. Commissioner, 16

T.C. 163, 166 (1951); Ginesky v. Commissioner, T.C. Memo. 1994-

551.

To carry this burden of proof, section 165 requires

petitioners to establish all the required elements of a theft

loss. Yates v. Commissioner, T.C. Memo. 1988-565. First,

petitioners must show that a theft occurred under the law of the

jurisdiction wherein the alleged loss occurred. Monteleone v.

Commissioner, 34 T.C. 688, 692 (1960). Second, petitioners must

prove the amount of the theft loss. Gerstell v. Commissioner, 46

T.C. 161, 175 (1966); sec. 1.165-8(c), Income Tax Regs. Third,

petitioners must establish the date that the loss from theft was

discovered. Sec. 165(e); McKinley v. Commissioner, 34 T.C. 59,

63 (1960); sec. 1.165-8(a), Income Tax Regs.

For purposes of section 165, “any loss arising from theft

shall be treated as sustained during the taxable year in which

the taxpayer discovers such loss.” Sec. 165(e); sec. 1.165-

8(a)(2), Income Tax Regs. However, if in the year of discovery

there exists a claim for reimbursement with respect to which

there is a reasonable prospect of recovery, only that portion of

the loss not covered by that claim for reimbursement is
 - 37 -

considered sustained by the taxpayer. Viehweg v. Commissioner,

90 T.C. 1248, 1255-1256 (1988); secs. 1.165-8(a)(2), 1.165-

1(d)(2)(ii), Income Tax Regs.

As used in section 165, the term “theft” is a word of

general and broad connotation, intended to cover any criminal

appropriation of another’s property, including theft by larceny,

embezzlement, obtaining money by false pretenses, and any other

form of guile. Bellis v. Commissioner, 61 T.C. 354, 357 (1973),

affd. 540 F.2d 448 (9th Cir. 1976); see sec. 1.165-8(d), Income

Tax Regs. Whether a loss from theft has occurred for purposes of

section 165 is determined under the laws of the State wherein the

loss allegedly was sustained. Bellis v. Commissioner, 540 F.2d

448, 449 (9th Cir. 1976), affg. 61 T.C. 354 (1973). However, a

Federal criminal statute may provide the requisite criminality

allowing a taking of a taxpayer’s property to be considered a

theft for purposes of section 165. E.g., Nichols v.

Commissioner, 43 T.C. 842, 884-885 (1965)(holding Federal mail

fraud to be a theft for purposes of section 165).

2. Estoppel Principles

a. Equitable Estoppel

“Equitable estoppel is a judicial doctrine that ‘precludes a

party from denying his own acts or representations which induced

another to act to his detriment.’” Hofstetter v. Commissioner,

98 T.C. 695, 700 (1992)(quoting Graff v. Commissioner, 74 T.C.
 - 38 -

743, 761 (1980), affd. 673 F.2d 784 (5th Cir. 1982)). It is well

established that the doctrine of equitable estoppel should be

applied against the Commissioner in tax cases “‘with the utmost

caution and restraint.’” Kronish v. Commissioner, 90 T.C. 684,

695 (1988) (quoting Boulez v. Commissioner, 76 T.C. 209, 214-215

(1981), affd. 810 F.2d 209 (D.C. Cir. 1987)). Further, the

Supreme Court has stated that the Government may not be estopped

on the same grounds as other litigants. OPM v. Richmond, 496

U.S. 414, 419 (1990); Heckler v. Community Health Servs., 467

U.S. 51, 60 (1984).

The following conditions must be satisfied before equitable

estoppel will be applied against the Government: (1) A false

representation or wrongful, misleading silence by the party

against whom the opposing party seeks to invoke the doctrine; (2)

an error in a statement of fact and not in an opinion or

statement of law; (3) ignorance of the true facts; (4) reasonable

reliance on the acts or statements of the one against whom

estoppel is claimed; and (5) adverse effects of the acts or

statement of the one against whom estoppel is claimed. See

Kronish v. Commissioner, supra, and cases cited therein. Thus,

the doctrine requires a finding that a claimant relied on the

Government’s representations and suffered a detriment because of

that reliance. Norfolk S. Corp. v. Commissioner, 104 T.C. 13, 60

(1995), affd. 140 F.3d 240 (4th Cir. 1998).
 - 39 -

In addition to the traditional elements of equitable

estoppel, the Court of Appeals for the Ninth Circuit requires the

party seeking to apply the doctrine against the Government to

prove affirmative misconduct. See Purcell v. United States, 1

F.3d 932, 939 (9th Cir. 1993), and cases cited. The aggrieved

party must prove “‘affirmative misconduct going beyond mere

negligence’” and, even then, “‘estoppel will only apply where the

government’s wrongful act will cause a serious injustice, and the

public’s interest will not suffer undue damage by imposition of

the liability.’” Purer v. United States, 872 F.2d 277, 278 (9th

Cir. 1989) (quoting Wagner v. Director, Fed. Emergency Mgmt.

Agency, 847 F.2d 515, 519 (9th Cir. 1988)). Affirmative

misconduct requires “ongoing active misrepresentations” or a

“pervasive pattern of false promises,” as opposed to an isolated

act of providing misinformation. Watkins v. United States Army,

875 F.2d 699, 708 (9th Cir. 1989). Affirmative misconduct is a

threshold issue to be decided before determining whether the

traditional elements of equitable estoppel are present. See

Purcell v. United States, supra at 939.

b. Collateral Estoppel

Collateral estoppel basically precludes parties and their

privies from relitigating issues actually and necessarily

litigated and decided in a final prior judgment by a court of

competent jurisdiction. Peck v. Commissioner, 90 T.C. 162, 166
 - 40 -

(1988), affd. 904 F.2d 525 (9th Cir. 1990). For collateral

estoppel to apply in a factual context, the following conditions

must be met: (1) The issue in the second suit must be identical

in all respects with the one decided in the first suit; (2) there

must be a final judgment rendered by a court of competent

jurisdiction; (3) collateral estoppel may be invoked against

parties and their privies to the prior judgment; (4) the parties

must have actually litigated the issues and the resolution of

these issues must have been essential to the prior decision; and

(5) the controlling facts and applicable legal rules must remain

unchanged. Peck v. Commissioner, supra at 166-167.

The Supreme Court has broadened the scope of collateral

estoppel beyond its common-law limits by abandoning the

requirement of mutuality of the parties, and has conditionally

approved the “offensive” use of collateral estoppel by a

plaintiff who was not a party to the prior lawsuit. See Parklane

Hosiery Co. v. Shore, 439 U.S. 322, 331 (1979). However,

offensive use of collateral estoppel only applies when a

plaintiff seeks to foreclose a defendant from relitigating an

issue the defendant previously litigated unsuccessfully in

another action against the same or a different party. Id. at 326

n.4. Further, the Supreme Court subsequently held that nonmutual

offensive collateral estoppel could not be applied to preclude
 - 41 -

the Government’s relitigation of the issue presented. United

States v. Mendoza, 464 U.S. 154, 159-164 (1984).

While some lower courts have indicated that the language in

Mendoza is somewhat ambiguous, the Tax Court and the Court of

Appeals for the Ninth Circuit, to which this case is appealable,

have both on numerous occasions interpreted Mendoza as holding

that nonmutual offensive collateral estoppel may not be invoked

against the Government. Natl. Med. Enter., Inc. v. Sullivan, 916

F.2d 542, 545 (9th Cir. 1990); Black Constr. Corp. v. INS, 746

F.2d 503, 504 (9th Cir. 1984); Kroh v. Commissioner, 98 T.C. 383,

402 (1992); McQuade v. Commissioner, 84 T.C. 137, 144 (1985);

Barrett-Crofoot Invs. v. Commissioner, T.C. Memo. 1994-59.

c. Judicial Estoppel

Judicial estoppel is a doctrine that prevents parties in

subsequent judicial proceedings from asserting positions

contradictory to those they previously have affirmatively

persuaded a court to accept. United States ex rel. Am. Bank v.

C.I.T. Constr., Inc., 944 F.2d 253, 257-259 (5th Cir. 1991);

Edwards v. Aetna Life Ins. Co., 690 F.2d 595, 598-599 (6th Cir.

1982). The Tax Court, as well as the Courts of Appeals for the

Ninth Circuit, have accepted the doctrine of judicial estoppel.

See Helfand v. Gerson, 105 F.3d 530, 534 (9th Cir. 1997);

Huddleston v. Commissioner, 100 T.C. 17, 28-29 (1993).
 - 42 -

The doctrine of judicial estoppel focuses on the

relationship between a party and the courts, and it seeks to

protect the integrity of the judicial process by preventing a

party from successfully asserting one position before a court and

thereafter asserting a completely contradictory position before

the same or another court merely because it is now in that

party’s interest to do so. Edwards v. Aetna Life Ins. Co., supra

at 599; Huddleston v. Commissioner, supra at 26. Whether or not

to apply the doctrine is within the court’s sound discretion. It

should be applied with caution in order “to avoid impinging on

the truth-seeking function of the court because the doctrine

precludes a contradictory position without examining the truth of

either statement.” Daugharty v. Commissioner, T.C. Memo. 1997-

349 (quoting Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218

(6th Cir. 1990)).

Because judicial estoppel focuses primarily on the

relationship between a party and the courts, it is

distinguishable from equitable estoppel, which focuses primarily

on the relationship between the parties themselves. Teledyne

Indus., Inc. v. NLRB, supra at 1219-1220. Judicial estoppel

generally requires acceptance by a court of the prior position

and does not require privity or detrimental reliance of the party

seeking to invoke the doctrine. Id.; Huddleston v. Commissioner,
 - 43 -

supra at 26. Acceptance by a court does not require that the

party being estopped prevailed in the prior proceeding with

regard to the ultimate matter in dispute, but rather only that a

particular position or argument asserted by the party in the

prior proceeding was accepted by the court. In re Cassidy, 892

F.2d 637, 641 (7th Cir. 1990); Edwards v. Aetna Life Ins. Co.,

supra at 599 n.5; Huddleston v. Commissioner, supra at 26.

Although judicial estoppel is somewhat similar to collateral

estoppel, there are substantial differences between the two

doctrines. See Teledyne Indus., Inc. v. NLRB, supra at 1220.

Thus, judicial estoppel may apply in a case “where neither

collateral estoppel nor equitable estoppel * * * would

apply.” Allen v. Zurich Ins. Co., 667 F.2d 1162, 1166-1167 (4th

Cir. 1982).

C. Discussion of Partnership Level Theft Loss Deductions

1. Determination of Whether the Sheep Partnerships Were
Victims of Theft

As previously stated, in order to sustain a theft loss

deduction, petitioners must prove the following elements: (1)

That each sheep partnership was the victim of a theft pursuant to

the law of the jurisdiction where the loss was sustained; (2) the

year that each partnership discovered the loss from the theft;

and (3) the amount of theft loss that each partnership suffered.

See Yates v. Commissioner, T.C. Memo. 1988-565.

a. The Occurrence of a Theft

Petitioners have the burden of establishing a theft of
 - 44 -

partnership property from each of the sheep partnerships.

Petitioners rely on Jay Hoyt’s Federal conviction and three

Oregon statutes that are similar to the Federal criminal statutes

Jay Hoyt was convicted of violating as proof of the occurrence of

a theft from the partnerships. On the premise that Jay Hoyt’s

conviction establishes a theft from the individual investors,

petitioners claim that the partnerships were the victims of Jay

Hoyt’s theft, because “a theft from all the partners, is a theft

from the partnerships.” Finally, petitioners cite various cases

for propositions that they assert establish a theft from the

partnerships.

The Court is mindful that throughout all of petitioners’

arguments dealing with a theft loss, they treat “partners” and

“partnerships” as the same, making no clear distinction between

these terms. As set forth infra pp. 51-55, a clear distinction

exists under both California and Nevada law. Further, a

distinction between partners and partnerships exists under

Federal law. See sec. 6226.

Because all the partnerships at issue are subject to the

provisions enacted in the Tax Equity & Fiscal Responsibility Act

of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 648, our

jurisdiction is limited exclusively to the determination of the

tax treatment of partnership items for the partnership year to

which the FPAA relates. See sec. 6226; infra pp. 108-109. We
 - 45 -

have no jurisdiction in this partnership level proceeding over

nonpartnership items, which can only be determined at the

individual partner level. Affiliated Equip. Leasing II v.

Commissioner, 97 T.C. 575, 576 (1991).

The Court shall not allow petitioners to freely interchange

the partners with the partnerships to suit their arguments.

Accordingly, when addressing the petitioners’ theft loss

arguments, the Court will apply the distinction between the

partners and the partnerships as required by law.

(i) Jay Hoyt’s Conviction of Federal Crimes

On February 12, 2001, Jay Hoyt was convicted of 1 count of

conspiracy to commit fraud, 31 counts of mail fraud, 3 counts of

bankruptcy fraud, and 17 counts of money laundering. See United

States v. Barnes, et al., No. CR-98-529-JO-04 (D. Or. Feb. 12,

2001). The indictment charged Jay Hoyt and others with

conspiring to “defraud thousands of investors” by selling

investment interests “by means of false promises and

representations.” The U.S. District Court described Jay Hoyt’s

crimes as “the most egregious white collar crime committed in the

history of the State of Oregon.” United States v. Hoyt, 47 Fed.

Appx. 834, 836 (9th Cir. 2002). Jay Hoyt was ordered to pay

restitution to each victim (investor-partner) in an amount equal

to the total payments each individual made to the Hoyt

organization.
 - 46 -

Although Jay Hoyt’s indictment dealt with fraud perpetrated

against individual investors through the use of cattle

partnerships only, the judgment ordered restitution to all the

partners in the cattle and sheep partnerships. By definition,

restitution is the “act of making good or giving equivalent for

any loss, damage, or injury.” Black’s Law Dictionary 1180 (5th

ed. 1979). Further, a general obligation exists for a person who

defrauds another to make restitution to the person defrauded.

Kreimer v. Commissioner, T.C. Memo. 1983-672. Accordingly, the

U.S. District Court would not have ordered Jay Hoyt to pay

restitution to the sheep partners had they not been victims of

his crimes. Moreover, in Jay Hoyt’s appeal of his conviction, he

did not argue that the U.S. District Court erred by including the

sheep partners in the restitution order. See United States v.

Hoyt, supra.

Because the sheep partners were included in the restitution

order and all the sheep partnerships were formed, organized, and

operated in essentially the same fashion as the cattle

partnerships, we conclude that Jay Hoyt defrauded the individual

investors in the nine sheep partnerships in the same manner that

he was convicted of defrauding the individual investors in the

cattle partnerships.

Petitioners state that the “conviction established Hoyt’s

theft from all his partners and partnerships.” Petitioners
 - 47 -

assert that the indictment in the criminal case provides

sufficient facts to establish the existence of a theft for

purposes of a theft loss. As previously mentioned, under TEFRA

we have no jurisdiction in this partnership level proceeding over

nonpartnership items, which can only be determined at the

individual partner level. See sec. 6226; Affiliated Equip.

Leasing II v. Commissioner, supra at 576. Accordingly, we

analyze each of the crimes Jay Hoyt was convicted of committing

to determine whether the partnerships are entitled to a theft

loss deduction.

Jay Hoyt was convicted of one count of conspiracy to commit

mail fraud and multiple counts of mail fraud, but these criminal

acts were perpetrated against prospective and current partners,

not the partnerships. Nothing in the indictment indicates that

the partnerships were the victims of the conspiracy or mail fraud

committed by Jay Hoyt, nor was any restitution awarded to the

partnerships. Clearly, the victims of these crimes for which Jay

Hoyt was convicted and ordered to pay restitution were

exclusively individual investors. Crimes perpetrated on the

partnerships simply were not the nature or focus of the Federal

conspiracy and mail fraud investigation and prosecution.

Jay Hoyt was convicted of 31 counts of mail fraud for using

the USPS to execute his intentional scheme to defraud and to

obtain money through false promises and false pretenses. Each of
 - 48 -

the 31 counts corresponds to a particular mailing either sent by

the Hoyt organization from Burns, Oregon, to a partner in one of

the cattle partnerships or a check sent by a partner in one of

the cattle partnerships to Burns, Oregon. These individual

mailings collectively establish that the victims of the mail

fraud were the individual cattle partners who received mailings

from the Hoyt organization and sent checks to the Hoyt

organization. For the sheep partnerships all to be victims of

mail fraud, each partnership would have had to receive some mail

from the Hoyt organization and then part with partnership

property based on false promises and false pretenses contained

within the mailing. No evidence was presented establishing that

these events ever occurred. Further, as previously stated, the

partnerships were not included in the indictment as victims of

the mail fraud.

The indictment charged and the prosecution proved that Jay

Hoyt and others made false representations and promises “to

prospective investors and current investors in order to obtain

money from them” using the “investors simply as sources of cash.”

The fraud was perpetrated on the investors; Jay Hoyt knew for

many years he did not have the total amount of livestock that he

claimed and could not meet the various guarantees he promised,

yet he continued to create new partnerships and fictitious

livestock as a scheme and artifice to defraud individuals. The
 - 49 -

fact that Jay Hoyt used the partnerships as an integral part of

perpetuating fraud against individual investors through false

promises and false pretenses does not establish a theft on the

partnership level.

Petitioners cannot rely on Jay Hoyt’s conspiracy to commit

fraud and mail fraud convictions to establish theft from the

partnerships by inserting a different set of victims from those

stated in the indictment and proven at the criminal trial.

Because we determine that Jay Hoyt’s fraud was perpetrated on the

individual partners, we hold that his conviction for conspiracy

to commit fraud and mail fraud does not establish that a

partnership level theft occurred.

Petitioners make no mention of Jay Hoyt’s conviction for

bankruptcy fraud. As to this charge, Jay Hoyt was convicted of

knowingly and fraudulently (1) concealing property from

creditors, the U.S. Trustee, and other officers of the court, (2)

making material false oaths, accounts, and testimony, and (3)

making material false declarations, certificates, verifications,

or statements under penalty of perjury. There is no evidence in

the record that any of the property concealed was sheep

partnership property. Petitioners do not specifically assert,

the record does not contain evidence, nor do we find that the

conviction for bankruptcy fraud establishes a theft on the sheep

partnerships for any of the years at issue.
 - 50 -

Jay Hoyt was also convicted of money laundering for

concealing from the bankruptcy trustee over $1,600,000 in funds

received from investors after June 5, 1997, that were deposited

into First Security Bank and later withdrawn in varying

increments. The 17 money laundering counts for which Jay Hoyt

was convicted each represent individual checks drawn on the First

Security Bank account that were each (1) made payable to Hoyt

related partnerships or individuals, and (2) of a value greater

than $10,000. The dates for each of these 17 checks range from

on or about June 30, 1997, through January 15, 1998.

Accordingly, the money laundering conviction, which was based on

activities that commenced in 1997, cannot possibly be used as

evidence to establish a theft prior to that date. Since 1996 is

the last year at issue for all of the nine sheep partnerships,

the money laundering conviction in no way establishes a theft

from any of the sheep partnerships for any of the years at issue.

Rejecting the arguments advanced by petitioners, the Court

holds that none of the Federal crimes committed by Jay Hoyt

establish that a section 165 theft was perpetrated on the

partnerships for any of the years at issue. Accordingly, a theft

from each partnership of partnership property must be proven

under another theory for petitioners to establish that the

partnerships were the victims of theft.
 - 51 -

(ii) Petitioners’ Claim That a Theft From the
Partners is a Theft From the Partnerships

Petitioners contend that even if the Court finds that Jay

Hoyt’s Federal conviction does not establish theft on the

partnership level, at a minimum, the conviction establishes a

theft from the partners. Based on this contention and their

assertion that the partners are synonymous with the partnerships,

petitioners conclude that the partnerships sustained a theft.

To reach this conclusion, petitioners argue that: (1) Under

State law, a partnership is its partners; (2) since the

partnerships are aggregates of all the partners, and all the

partners were defrauded, then the partnerships were defrauded;

(3) stealing from partners by using the partnerships as the

vehicle for fraud is indistinguishable from stealing from the

partnerships; and (4) stealing from the partnerships is a theft

from the partners because the partners jointly own the

partnership assets. Petitioners have failed to cite any

authority supporting these arguments.

Petitioners state that the partnership law of Oregon,

Nevada, and California arguably applies to the partnerships at

issue. However, only California and Nevada law applies, because

eight of the sheep partnerships were formed under and governed by

California law, with the remaining sheep partnership formed under

and governed by Nevada law.

In particular, RCR #1, RCR #2, RCR #3, and RCR #4 were
 - 52 -

formed in California as limited partnerships. RCR #5, RCR #6,

OGT 87, and OGT 90 were formed in California as general

partnerships, and RCR #7 was formed in Nevada as a general

partnership.

Petitioners’ argument that under State law a partnership is

its partners provides no legal support for their conclusion that

the partnerships were victims of theft. Under California limited

partnership law, a limited partnership is a partnership formed by

two or more persons under California law and having one or more

general partners and one or more limited partners. Cal. Corp.

Code secs. 15501, 15611(1) (West 1991 & Supp. 2002). Pursuant to

California and Nevada general partnership law, a partnership is

an association of two or more persons to carry on as co-owners a

business for profit. Cal. Corp. Code sec. 15006(1); Nev. Rev.

Stat. Ann. sec. 87.060 (Michie 1999 & Supp. 2001). It is obvious

by definition that a partnership comprises of its partners.

However, no conclusion can be drawn from this fact alone that a

theft from the partners is a theft from the partnerships.

Petitioners’ argument that the partnerships were defrauded

because the partnerships are aggregates of all the partners who

were defrauded is unsupported by California and Nevada law. This

argument is a refined rendition of petitioners’ first argument

and is based on their conclusion that for all purposes a

partnership is an aggregate of its individual partners.
 - 53 -

The “aggregate theory” and the “entity theory” are two

theories regarding the basic nature of a partnership. The

aggregate theory considers a partnership to be no more than an

aggregation of the individual partners. Whereas, the entity

theory characterizes a partnership as a separate entity distinct

from its partners. Whether the aggregate theory or the entity

theory should be applied for all purposes has not ultimately been

determined. Unger v. Commissioner, T.C. Memo. 1990-15, affd. 936

F.2d 1316 (D.C. Cir. 1991). The theory employed varies from case

to case, often depending on the issue to be decided. Id.

Under the aggregate approach, each partner has an interest

in specific partnership property. Unger v. Commissioner, 936

F.2d 1316, 1318 (D.C. Cir. 1991), affg. T.C. Memo. 1990-15. In

contrast, under the entity approach, partnership property is

attributable to the partnership only, not to the partners. Id.

The California and Nevada partnership law deals with

partnerships as aggregates for certain purposes and as entities

for others. The definition of a partnership as an “association

of two or more persons” to carry on as co-owners a business for

profit suggests that a partnership is an aggregate of its

members. However, the fact that specific partnership property is

a distinct category of property indicates the entity approach

would apply to partnership assets. See Stilgenbaur v. United
 - 54 -

States, 115 F.2d 283, 286 (9th Cir. 1940); State v. Elsbury, 63

Nev. 463, 467-468, 175 P.2d 430, 433 (1946).

The entity approach (as opposed to the aggregate approach)

is in accord with the clear intent of the California and Nevada

partnership law, that partnership property is a separate and

distinct category of property. Accordingly, petitioners cannot

apply the aggregate approach to conclude that the partnerships

were defrauded.

Petitioners’ argument that Jay Hoyt’s use of the

partnerships to perpetrate fraud on the partners is tantamount to

stealing from the partnerships is without merit. The record

establishes that Jay Hoyt defrauded the individual investors, not

the partnerships, of their money. As previously mentioned, the

fact that Jay Hoyt utilized the partnerships as a guise to

defraud individuals does not establish a theft on the partnership

level.

Petitioners’ argument that the partners jointly own the

partnership assets is unsupported by the law. Under California

limited and general partnership law and Nevada general

partnership law, a partner’s interest in a partnership is

personal property and the partner has no interest in specific

partnership property. See Evans v. Galardi, 16 Cal. 3d 300, 307,

546 P.2d 313, 319 (1976); Stilgenbaur v. United States, supra at

286; State v. Elsbury, 63 Nev. at 467-468, 175 P.2d at 433.
 - 55 -

Specific partnership property is a distinct category of

property, separate from a partner’s interest in the partnership.

Stilgenbaur v. United States, supra. A partner’s personal

property interest in the partnership grants the partner a right

to his share of profits and surplus, not an ownership interest to

any particular portion of the partnership assets. Comstock v.

Fiorella, 260 Cal. App. 2d 262, 265, 67 Cal. Rptr. 104, 106

(1968). Contrary to petitioners’ assertion, under California and

Nevada partnership law, the partners do not jointly own the

partnership assets. Therefore, petitioners’ argument fails to

establish a theft on the partnership level.

The arguments presented by petitioners fail to recognize the

legal distinction between a partnership and its partners. Thus

their claim that a theft from the partners is a theft from the

partnerships is without merit and unsupported by the law.

(iii) Petitioners’ Claim That a Theft Occurred
Under State Law

Petitioners assert that Jay Hoyt’s criminal acts, for which

he was convicted under Federal law in Oregon, constitute theft

under similar Oregon statutes. Namely, Oregon Revised Statutes

(ORS): (1) Section 164.085, theft by deception; (2) section

164.170, laundering a monetary instrument; and (3) section

164.172, engaging in a financial transaction in property derived
 - 56 -

from unlawful activity.13 Petitioners rely exclusively on Jay

Hoyt’s Federal conviction in Oregon to establish the elements of

a theft under State law. However, since we held above that

petitioners cannot rely solely on Jay Hoyt’s conviction to

establish theft from the partnerships, petitioners must prove

they were the victims of a theft under the applicable law of the

jurisdiction where the alleged thefts occurred.

Petitioners state that they rely on the Oregon criminal

statutes because Jay Hoyt was convicted of Federal crimes in

Oregon and each partnership was formed and operated in Oregon.

As we previously determined, the specific crimes Jay Hoyt was

convicted of violating in Oregon were perpetrated against

individual investors and were not thefts of partnership property.

Further, petitioners’ claim that the sheep partnerships were

formed and operated in Oregon is factually incorrect. As

previously discussed, eight of the sheep partnerships at issue

were formed in California and one partnership was formed in

Nevada.

Not only were a majority of the partnerships formed in

California, but the record shows that the majority of sheep

operations were performed in California. All of the agreements

were entered into in California between California or Nevada

partnerships and Barnes Ranch, a sole proprietorship operated in

13
Or. Rev. Stat. secs. 164.170 and 164.172 (2001), are
both money laundering statutes.
 - 57 -

California. The record establishes that any sheep that actually

existed were located on Barnes Ranch in Sacramento, California.

In addition, for all the years at issue, the record shows that

the checks from individual sheep partners were received at the

Elk Grove, California, office and deposited into the RCR account

or the pooling account at the bank located in Elk Grove,

California.

While the record contains evidence that money was deposited

into bank accounts in California during the years at issue, no

evidence was presented showing that the money ever left

California. There is no evidence in the record to establish that

any of the investor funds were ever transferred to the Hoyt

office in Burns, Oregon, or deposited into an Oregon bank account

during any of the years at issue. Further, petitioners failed to

present any evidence that any partnership property was illegally

taken from anywhere in Oregon during any of the years at issue.

Without any evidence to link the investor funds to Oregon,

petitioners cannot possibly prove that Oregon is the jurisdiction

where the alleged thefts occurred. Therefore, due to the lack of

evidence presented on this issue, petitioners have failed to

establish that a theft of partnership property occurred within

the State of Oregon during any of the years at issue. However,

in light of Jay Hoyt’s criminal activities in Oregon, we shall

analyze the three Oregon statutes cited by petitioners to
 - 58 -

determine whether any illegal activity occurred in Oregon

sufficient to establish petitioners were the victims of a theft.

We believe that petitioners equate the ORS section 164.085,

theft by deception statute, to the Federal conspiracy to commit

fraud and mail fraud statutes Jay Hoyt was convicted of

violating. To violate the Oregon theft by deception statute, a

person, with intent to defraud, must obtain the property of

another by: (1) Creating or confirming another’s false

impression of law, value, intention or other state of mind which

the actor does not believe to be true; (2) failing to correct a

false impression which the person previously created or

confirmed; (3) preventing another from acquiring information

pertinent to the disposition of the property involved; (4)

selling or otherwise transferring or encumbering property,

failing to disclose a lien, adverse claim or other legal

impediment to the enjoyment of the property; or (5) promising

performance which the person does not intend to perform or knows

will not be performed. Therefore, to establish a theft under the

Oregon statute cited by petitioners, they must prove that Jay

Hoyt, with intent to defraud each partnership by means of at

least one of the five methods stated in the theft by deception

statute, deceptively obtained partnership property each year from

each partnership equal to the amount of total cash the investors

contributed in each of those years.
 - 59 -

Petitioners state in their brief that the sheep partnerships

entered into “transactions with Hoyt and Barnes upon having been

deceived as to the transaction.”14 The record does not support

petitioners’ assertion that the partnerships were deceived in any

way. Although Jay Hoyt and David Barnes did enter into various

partnership agreements and transactions with the intent to

deceive, the victims of their intentional deception were the

individual investors, not the partnerships. Many of the

documents created by the partnership transactions were merely

instruments intentionally used to defraud individual investors by

creating false impressions and making promises known not to be

true.

As previously stated, petitioners readily admit that

investors would not have parted with their money if not for Jay

Hoyt’s deceptive practices. Petitioners’ admission further

emphasizes that the thefts occurred when the individuals were

deceived into parting with their money. The partnerships were

not victims of those deceptive practices and were not deceived by

those practices into parting with any partnership property.

Petitioners fail to show how Jay Hoyt’s theft by deception

perpetrated against the individual partners constitutes a theft

of partnership property under the law of Oregon.

14
Statements in a brief that are not supported by
testimony or documents introduced at trial are not evidence. See
Rule 143(b); Niedringhaus v. Commissioner, 99 T.C. 202, 217 n.7
(1992).
 - 60 -

The record is void of any evidence to establish that Jay

Hoyt or anyone else violated the Oregon theft by deception

statute with respect to the partnerships. Accordingly,

petitioners have not met their burden of establishing a theft on

the partnership level for section 165 purposes applying the

Oregon theft by deception statute.

Petitioners also cite the Oregon money laundering statutes,

Or. Rev. Stat. secs. 164.170 and 164.172 (2001), as establishing

a theft from the partnerships. Other than providing evidence of

Jay Hoyt’s conviction for violation of a similar Federal statute,

petitioners fail to present any evidence showing how the Oregon

statutes establish a theft on the sheep partnerships.

Petitioners have not provided evidence that Jay Hoyt or

anyone else conducted a financial transaction with proceeds of an

unlawful activity of a sum equal to the total amount invested by

the partners in each of the years at issue. Unlike the

indictment and evidence presented at Jay Hoyt’s Federal criminal

trial, petitioners failed to present any evidence that Jay Hoyt

or anyone else during any of the years at issue knowingly engaged

in a financial transaction in Oregon of a value greater than

$10,000 in property using the proceeds of any unlawful activity.

Additionally, both of the Oregon money laundering statutes

require proof that an underlying unlawful activity was committed

to obtain the proceeds involved in the financial transaction.
 - 61 -

Yet, petitioners did not specify which alleged unlawful activity

was committed to obtain the proceeds.

Jay Hoyt’s indictment specifically stated the underlying

unlawful activity committed in Oregon and presented 17 specific

monetary transactions (negotiated checks) constituting money

laundering.15 Because those checks bore dates in 1997 or 1998,

each check was negotiated after the tax years here at issue. See

supra p. 50. Petitioners did not introduce any checks or similar

evidence of any monetary transactions that were negotiated during

any of the years at issue.

Petitioners have not proven that any of the partnerships

were victimized during the years at issue by a violation of

either of the Oregon money laundering statutes. Petitioners

failed to present any evidence proving the elements of either

crime. Thus, by merely citing the two Oregon money laundering

statutes and not proving the elements of those crimes,

petitioners have not established a theft on the partnership level

for any of the years at issue.

(iv) Analysis of Case Law Cited by Petitioners

We now address the following cases which petitioners rely

upon as authority to support their various arguments that the

sheep partnerships are entitled to a theft loss deduction.

15
The specified unlawful activities used to establish
money laundering at Jay Hoyt’s criminal trial were mail fraud and
bankruptcy fraud.
 - 62 -

Petitioners cite: (1) Nichols v. Commissioner, 43 T.C. 842

(1965), for the general proposition that the “partnerships are

entitled to a theft loss deduction” because a “promoter’s fraud

in obtaining money from investors in a tax shelter constitutes

theft under Section 165”; (2) Cummin v. United States, 73 AFTR 2d

2092 (D.N.J. 1994), for the propositions that (a) “the

partnerships are entitled to a business theft loss” where the

partnerships’ transactions lack “economic substance by reason of

fraud”, and (b) “the Tax Court has contemplated there will be

circumstances where a partner’s out-of-pocket loss in a tax

shelter is deductible as a theft loss”; and (3) Girgis v.

Commissioner, T.C. Memo. 1987-556, affd. in part, revd. in part,

and remanded 888 F.2d 1386 (4th Cir. 1989), and Harrell v.

Commissioner, T.C. Memo. 1978-211, for the proposition that if it

is proven that “the money invested by a partner in a partnership

is lost to another partner’s theft of the same, the partnership

has incurred a loss.”

Petitioners’ reliance on Nichols v. Commissioner, supra, is

misplaced. Nichols is distinguishable from the instant cases and

is not persuasive in establishing that a theft loss occurred at

the partnership level.

The taxpayers in Nichols were individuals who invested in a

tax shelter and proved that the promoter of the investment did

not execute the transactions for which the investors bargained.
 - 63 -

In Nichols, the taxpayers alleged and proved numerous fraudulent

misrepresentations by the promoter which induced the individuals

to part with their money and which constituted theft under

applicable State and Federal law.

Although Jay Hoyt committed acts similar to the promoter in

Nichols, the critical difference is that Nichols was a deficiency

suit in which the petitioners were individual investors who

established they were the victims of a theft of their own out-of-

pocket expenditures. By contrast, the instant case is a TEFRA

proceeding brought on behalf of the partnerships seeking to

deduct as a theft loss from the partnerships the total amount of

cash fraudulently obtained from the investors.

As previously discussed, a theft from the partners is not a

theft from the partnerships, and Nichols cannot be cited as

authority to make this leap. The individual investors in Nichols

were allowed a theft loss deduction solely because they met all

the required elements of section 165. Nichols certainly does not

hold that a partnership is entitled to a theft loss deduction

when the individual investors are swindled by the promoter’s

fraud.

Likewise, the unpublished opinion in Cummin v. United

States, supra, does not support petitioners’ conclusion that the

sheep partnerships are entitled to a theft loss deduction.
 - 64 -

As in Nichols, at issue in Cummin were theft loss deductions

of individual investors, not of partnerships. Exclusively

analyzing a theft loss on the individual investor level, Cummin

never addresses the issue of a partnership level theft loss

deduction. We agree with respondent and find that Cummin simply

is not authority for petitioners’ proposition that “the

partnerships are entitled to a business theft loss.”

In their reply brief, petitioners claim that they cited

Cummin for the proposition that “the Tax Court has contemplated

there will be circumstances where a partner’s out-of-pocket loss

in a tax shelter is deductible as a theft loss.” This later

proposition adds nothing to petitioners’ arguments and is not

authority to allow a partnership level deduction where the

individual partners are swindled.

Finally, petitioners argue that both Girgis v. Commissioner,

T.C. Memo. 1987-556, and Harrell v. Commissioner, T.C. Memo.

1978-211, stand for the proposition that a partnership level loss

is incurred when money invested by a partner in a partnership is

taken by another partner. While both of these cases deal with

claims to partnership level losses, neither case stands for the

proposition set forth by petitioners. Further, the facts in both

of these cases are distinguishable from the facts in the instant

case because: (1) The theft by the partner in Girgis was an

embezzlement of partnership receipts and not of money invested by
 - 65 -

a partner; (2) the taxpayer in Harrell failed to prove that his

partner embezzled any partnership funds, so the Court allowed the

taxpayer an ordinary loss, not a theft loss, for his distributive

share of partnership loss in an amount equal to his investment

because all partnership assets had been irretrievably lost; and

(3) neither of the partners in Girgis or Harrell was fraudulently

induced into investing or becoming a partner in his respective

partnership.

Both Girgis and Harrell indicate that a partner’s

embezzlement of partnership funds gives rise to a partnership

level deduction. Embezzlement of funds from the sheep

partnerships, if proven, could be a theft within the purview of

section 165 for which the partnerships would be entitled a

deduction. See Marine v. Commissioner, 92 T.C. 958, 976-977

(1989). However, petitioners in the instant case have failed to

prove that an embezzlement of partnership property occurred

during any of the years in issue. Jay Hoyt was never charged

with such an embezzlement, and the record does not support such a

finding. Neither Girgis or Harrell supports petitioners’

argument that the sheep partnerships are entitled to theft loss

deductions for any of the years at issue.

b. The Year of Discovery Requirement

The year of discovery requirement would be relevant in this

case only if the petitioners had established a theft loss at the
 - 66 -

partnership level, which they have not. Assuming, arguendo, that

petitioners had proven that the partnerships were the victims of

a partnership level theft, petitioners still failed to satisfy

the year of discovery element required to claim a theft loss

deduction.

Petitioners acknowledge that pursuant to section 165(e), a

taxpayer may deduct a theft loss only in the tax year in which

the taxpayer discovers the loss. Further, petitioners concede

that the partnerships’ discovery of the alleged thefts occurred

in 1997 or 1998, which is after the last year at issue in this

case. However, petitioners assert that respondent is equitably

estopped from denying the theft loss deduction in each of the

years at issue regardless of the actual year of discovery. In

addition, petitioners argue that under Rod Warren Ink v.

Commissioner, 912 F.2d 325 (9th Cir. 1990), this Court “may

depart from the literal meaning of [section 165(e)] regarding the

year of discovery in order to avoid unintended negative

consequences to the taxpayer and to effectuate Congress’ intent.”

Petitioners’ sole purpose in seeking a deviation from the

discovery date requirements of section 165(e) to deduct the theft

losses in each of the years at issue is to distribute losses from

the partnerships to the individual partners, thereby reducing the

amount of interest partners owe on deficiencies related to the

TEFRA partnership adjustments.
 - 67 -

(i) Application of Equitable Estoppel

Petitioners argue that the doctrine of equitable estoppel

precludes respondent from relying on section 165(e) as a basis

for disallowing their claims to theft loss deductions.

Specifically, petitioners argue that respondent’s actions and

inactions in the course of auditing all the Hoyt organization

partnerships since the early 1980s resulted in the concealment of

material evidence from the partnerships and misleading silence to

the partnerships. They claim that through the audit process

respondent obtained information of Jay Hoyt’s fraud, yet failed

to timely inform them of this fraudulent activity. Further, they

allege that they relied to their detriment on respondent’s

concealment or misleading silence relating to the fraud.

As a threshold matter, petitioners must prove affirmative

misconduct by the Government in addition to the traditional

elements of equitable estoppel. See Purcell v. United States, 1

F.3d 932, 939 (9th Cir. 1993). Petitioners have failed to show

the traditional elements of equitable estoppel, much less

affirmative misconduct by respondent. They presented no evidence

of ongoing active misrepresentations or a pervasive pattern of

false promises by respondent. Having failed to show affirmative

misconduct by the Government, we conclude that petitioners cannot

assert equitable estoppel against respondent to deviate from the

year of discovery requirement in section 165(e).
 - 68 -

And, contrary to petitioners’ assertion that the traditional

elements of equitable estoppel have been met, thus warranting a

departure from the year of discovery requirement in section

165(e), the record reflects that respondent did not misrepresent

or conceal from the partnerships or the partners any material

facts obtained in the audits. Respondent audited the various

partnerships from 1984 through 1996, and reported its findings to

the partnerships and partners. Respondent issued all notices of

beginning of administrative proceeding, FPAAs, and prefiling

notices in a timely manner in accordance with the Internal

Revenue Code. According to petitioners, respondent “advised the

partners that their partnerships were being audited and adjusted,

because [respondent] determined the partnerships were shams and

constituted improper tax shelters.”

Petitioners, nonetheless, fault respondent for not doing

more to stop the fraud perpetrated by Jay Hoyt. They assert that

respondent, well before 1993, should have acted more effectively

to protect the partners and prospective investors from Jay Hoyt’s

fraudulent activities. Our review of the record discloses the

substantial difficulties that respondent encountered in obtaining

a sufficient amount of information to conclude the existence of a

fraud prior to 1993.

By the early 1980s, respondent generally disallowed the tax

benefits the cattle and sheep partnerships and their partners
 - 69 -

claimed. Further, respondent engaged in almost continuous and

protracted litigation with the partnerships and partners over the

disallowance of partnership tax benefits. However, the decision

in Bales v. Commissioner, T.C. Memo. 1989-568, set back

respondent’s efforts, as the decision rejected respondent’s

economic sham theory and allowed the Bales partners many of their

claimed tax benefits.

Although in 1989, respondent suspected that Jay Hoyt had

been selling a large number of fictitious cattle to the cattle

partnerships, the evidence respondent possessed at that time did

not confirm this suspicion. As a result, respondent decided that

during the examination of the post-1986 cattle and sheep

partnership returns, a count and inspection of all the cattle and

sheep were essential. From the fall 1992 through spring 1993

livestock count and inspection, respondent determined that the

Hoyt organization had greatly overstated the number and value of

the livestock owned by the partnerships. As a result of the

count and inspection, respondent believed by February 1993 that

he possessed sufficient evidence to support the issuance of

prefiling notices and freezing tax refunds claimed by partners.

Following the respondent’s issuance of prefiling notices to

the partners in February 1993, and the completion of the count

and inspection of the cattle and sheep, the Examination Division

on or about December 30, 1993, issued letters to all the partners
 - 70 -

in which it warned them that IRS personnel had concluded and

determined that: (1) A number of fictitious breeding cattle and

sheep had been sold to the Hoyt cattle and sheep partnerships;

and (2) Jay Hoyt and the Hoyt organization had overstated both

the numbers and value of the purported livestock that the

partnerships allegedly owned.

In the Examination Division letter sent to each partner,

respondent specifically informed the partners of the problems

that respondent had uncovered in the Hoyt organization’s tax

shelter program as a result of the respondent’s count and

inspection of the cattle and sheep. The letter provided the

partners with sufficient information to place them on notice that

fraudulent activity might be taking place. By providing the

partners with their findings, respondent discharged any duty it

arguably had to the partnerships and partners, as it was then up

to them to decide whether to take advantage of this

information.16 E.g., Wintner v. Commissioner, T.C. Memo. 1977-

144 (noting that IRS agents had told the taxpayer or put the

taxpayer on notice about the irregularities the agents had

uncovered in examining the books and records of the taxpayer’s

business; concluding further that having provided the taxpayer

16
Certainly by 1993, the partners also knew or should have
known that the IRS might: (1) Disallow the tax benefits that the
Hoyt cattle and sheep partnerships and their partners claimed;
and (2) attempt to uphold such disallowances and partnership
adjustments in any tax litigation that the partnerships and
partners commenced.
 - 71 -

with this information, the agents discharged any duty they owed

the taxpayer and did not misrepresent or conceal any material

facts concerning the embezzlement by the taxpayer’s employee).

Notwithstanding their receipt of the December 30, 1993,

Examination Division letter, the record reflects that many

partners instead chose to ignore the evidence and believe Jay

Hoyt. While believing Jay Hoyt may have ultimately been to their

detriment, the partners’ decision to do so and the failure of

them and the partnerships to discover any of the theft losses

during the years in issue was not due to a false representation

or misleading silence by respondent.

Petitioners’ argument is based on the perspective of the

individual partners, not the partnerships. The party claiming

equitable estoppel must be the party that relied on the

Government’s representations and suffered a detriment because of

that reliance. Norfolk S. Corp. v. Commissioner, 104 T.C. 13, 60

(1995), affd. 140 F.3d 240 (4th Cir. 1998). Here the petitioners

claim that the partnerships relied on respondent’s concealment

and silence to the partnerships’ detriment, then argue that the

partners could not have discovered the loss on their own, but

relied on respondent to take action against Jay Hoyt. To meet

the elements of equitable estoppel, petitioners must establish

that the partnerships suffered to their detriment, not the

partners.

As previously discussed, the partnerships and the partners
 - 72 -

are separate and distinct. By arguing that the partners and not

the partnerships suffered to their detriment, petitioners have

not met a required element of equitable estoppel. Accordingly,

petitioners may not apply equitable estoppel to depart from the

section 165(e) year of discovery requirement.

(ii) Application of the Rod Warren Ink Case

Citing Rod Warren Ink v. Commissioner, 912 F.2d 325 (9th

Cir. 1990), petitioners argue that the sheep partnerships may

deduct theft losses in each year of occurrence rather than in the

year of discovery by the partnerships.

In Rod Warren Ink, the Court of Appeals for the Ninth

Circuit held that the personal holding company (PHC) therein

could deduct theft losses in the years the losses were sustained,

rather than in the year the losses were discovered. Id. at 327-

328.

Due to the unique interaction between section 165(e) and the

PHC tax scheme, a literal application of section 165(e) would

have forced the PHC in Rod Warren Ink to declare income it never

actually received, while preventing the PHC from offsetting this

income through appropriate loss deductions. Id. at 328.

Limiting its holding to the “unique factual pattern” and

“peculiar facts” presented in the case, id., the Court of Appeals

for the Ninth Circuit concluded that a departure from the literal

meaning of section 165(e) was warranted in order to avoid the
 - 73 -

absurd tax result stated above and to effectuate Congress’ intent

to provide relief to taxpayers victimized by theft or

embezzlement. Id. at 327. The Court of Appeals determined that

“Forcing the taxpayer to report the loss only in the year of

discovery for PHC purposes is contrary to the purposes and spirt

of both section 165(e) and the PHC tax scheme,” id. at 327, and

that “a literal application of section 165(e) would unduly

penalize the taxpayer.” Id. at 328. The Court of Appeals went

on to state that “Clearly, Congress did not intend for section

165(e) and the PHC tax scheme to function in such an inequitable

and absurd manner.” Id.

Petitioners’ reliance on Rod Warren Ink is misplaced. The

unique facts in Rod Warren Ink are distinguishable from the facts

in the instant case.

A major distinction between Rod Warren Ink and the instant

case is that the sheep partnerships are not personal holding

companies. See Willoughby v. Commissioner, T.C. Memo. 1994-398.

In addition, petitioners have not presented a persuasive

argument that a departure from the literal meaning of section

165(e) is warranted in order to avoid an “inequitable and absurd”

result. Petitioners assert that an absurd tax consequence will

result if the year of discovery requirement under section 165(e)

is applied, because the partnerships’ inability to discover Jay

Hoyt’s fraud at a sooner date caused the partners to accrue
 - 74 -

additional interest on the disallowed partnership tax benefits

they claimed.

For all the years at issue, the sheep partnerships

distributed substantial tax benefits to the sheep partners under

Jay Hoyt’s and the Hoyt organization’s tax shelter program. Up

until the time the amended petitions were filed in the instant

case following the River City Ranches #4, J.V. v. Commissioner,

T.C. Memo. 1999-209, test case opinion in June 1999, the TMP

maintained that the sheep partnerships were entitled to the tax

benefits reported on the partnership tax returns. From 1993

through 1999, the sheep partners chose to await the outcome of

the Tax Court litigation between respondent and their

partnerships, undoubtedly hoping that this litigation would

validate their entitlement to their claimed partnership tax

benefits. Yet, these partners also knew or should have known

that if respondent’s position in this litigation was upheld, the

Internal Revenue Code requires interest to be imposed on their

resulting income tax underpayments. See Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992)(“As a general rule,

taxpayers are charged with knowledge of the law.”).

Petitioners’ argument is in no way analogous to the

“inequitable and absurd” result in Rod Warren Ink, where the PHC

would have been required to declare income it never actually

received if not for the departure from section 165(e). In the
 - 75 -

instant case, if the alleged theft losses were proven and claimed

in the year of discovery, the partnerships would not have to

declare income in a previous year that was never actually

received. Petitioners are not seeking a departure from the year

of discovery requirement to rectify a situation where section

165(e) operates in an “inequitable and absurd” manner that would

unduly penalize the partnerships; petitioners merely are

attempting to reduce the amount of interest the partners, who are

not parties in this case, owe on tax underpayments.

A departure from the literal meaning of section 165(e) is

not warranted in the instant case to implement Congress’ intent.

Congress enacted section 165 to provide relief to taxpayers

victimized by theft or embezzlement. In Rod Warren Ink, the

literal application of section 165(e) would have subverted the

intent of Congress by allowing a theft loss deduction in the year

of discovery, but, at the same time, creating taxable income in

previous years. If petitioners were entitled to a theft loss

deduction, claiming that deduction in the year of discovery17

would provide relief from the thefts in the discovery year and

not unduly penalize the partnerships in any previous years.

By the partnerships strictly following the application of

section 165(e), the sheep partners would not receive the relief

from interest which petitioners seek for them. However, the

17
Petitioners concede that the alleged thefts were
discovered at the earliest in 1997. See supra p. 66.
 - 76 -

partnerships would receive the relief from theft intended by

Congress. The facts in the instant case are clearly

distinguishable from the unique facts in Rod Warren Ink and do

not warrant a departure from the year of discovery requirement

under section 165(e).

(iii) Petitioners’ Year of Discovery Claim

We have decided that equitable estoppel and the holding in

Rod Warren Ink v. Commissioner, supra, have no application in

this case. Thus, petitioners have failed to establish that a

departure from the literal meaning of section 165(e) is warranted

to allow the partnerships to claim theft loss deductions in any

of the years at issue. Accordingly, a theft loss deduction, if

proven, would only be allowed in the year of discovery. See sec.

165(e). Because petitioners admit that the partnerships did not

discover the alleged theft losses until 1997 or 1998, the year of

discovery requirement in section 165(e) precludes a theft loss

deduction in any of the years at issue. See sec. 6226.

c. The Remaining Elements of a Theft Loss

Although failure to prove only one of the elements of a

theft loss prohibits a taxpayer from claiming the deduction,

petitioners have failed to establish two essential elements of a

theft loss deduction. Namely, (1) that the partnerships were

victims of theft and (2) that the year of discovery was a year

before the Court. Since we have held that the partnerships are
 - 77 -

not entitled to a theft loss deduction for any of the years at

issue, the petitioners’ arguments concerning the remaining

elements of a theft loss are moot.

2. Application of Collateral and Judicial Estoppel

To further support their position, petitioners argue that

both collateral and judicial estoppel preclude respondent from

denying that Jay Hoyt’s conviction establishes a theft from the

partnerships and that the amount of the theft is equal to the

total amount contributed by the partners. Petitioners allege

that Jay Hoyt’s conviction establishes a theft from the

partnerships and that the respondent cannot deny what the

Government has already proven.

a. Collateral Estoppel

Petitioners attempt to utilize offensive collateral estoppel

against respondent. Procedurally, in order for a plaintiff to

assert offensive collateral estoppel against a defendant in a

current action, the current defendant must have unsuccessfully

litigated the issue in a previous action. See Kroh v.

Commissioner, 98 T.C. 383, 402 n.8 (1992)(citing Parklane Hosiery

Co. v. Shore, 439 U.S. 322, 326 n.4 (1979)). Here, petitioners

seek to apply the offensive form of collateral estoppel in a

situation where the Government was successful in the previous

action. Petitioners state that this is quite a rare situation,

but that no logical reason exists to preclude the application of
 - 78 -

offensive collateral estoppel when the current defendant was

previously successful. Petitioners freely admit that they found

no case law allowing for such an application. Additionally,

petitioners have not presented a persuasive argument or

sufficient rationale for this Court to adopt a use of offensive

collateral estoppel, which is the antithesis of that determined

by the Supreme Court of the United States in Parklane Hosiery Co.

v. Shore, supra. As the Government was successful in the

previous action against Jay Hoyt, petitioners are precluded from

asserting offensive collateral estoppel against respondent.

Further, petitioners seek to apply the nonmutual form of

offensive collateral estoppel against respondent to establish the

existence of a theft from the partnerships. Petitioners claim

that language in United States v. Mendoza, 464 U.S. 154 (1984),

allows nonmutual offensive collateral estoppel in certain

situations.

Petitioners assert, yet present no authority, that Mendoza

has been limited by some courts “to situations where the policy

concerns of the Court exist.” Petitioners cite, exempli gratia,

NLRB v. Donna Lee Sportswear Co., 836 F.2d 31 (1st Cir. 1987),

for the proposition that “Mendoza has been limited in application

to require mutuality only where important issues of law are at

stake.” However, petitioners fail to cite the many cases from

this Court and the Court of Appeals for the Ninth Circuit,
 - 79 -

wherein an appeal in the instant case would lie, which support a

quite different interpretation of Mendoza.

Contrary to petitioners’ construction of Mendoza, this Court

and the Court of Appeals for the Ninth Circuit have both on

numerous occasions interpreted Mendoza as holding that nonmutual

offensive collateral estoppel may not be invoked against the

Government. See Natl. Med. Enter., Inc. v. Sullivan, 916 F.2d

542, 545 (9th Cir. 1990); Black Constr. Corp. v. INS, 746 F.2d

503, 504 (9th Cir. 1984); Kroh v. Commissioner, supra at 402;

McQuade v. Commissioner, 84 T.C. 137, 144 (1985); Barrett-Crofoot

Invs. v. Commissioner, T.C. Memo. 1994-59. Accordingly, we

follow these cases and hold that petitioners may not invoke

nonmutual offensive collateral estoppel against respondent.

Assuming, arguendo, that in some circumstances nonmutual

offensive collateral estoppel could be applied against

respondent, petitioners failed to show that all the conditions

for application of collateral estoppel have been met. See Peck

v. Commissioner, 90 T.C. 162, 166-167 (1988). Specifically,

petitioners have not presented a persuasive argument that the

issue in the instant cases is “identical in all respects” with an

issue decided in Jay Hoyt’s criminal trial. Id. at 166.

Petitioners claim that respondent is estopped from

relitigating a theft from the partnerships, because Jay Hoyt was

“convicted of stealing all the money contributed to the
 - 80 -

partnerships by all the partners.” Petitioners’ statement is

factually misleading. As previously addressed, Jay Hoyt was

convicted of defrauding the individual investors, not the

partnerships. Furthermore, Jay Hoyt’s theft from the individual

partners was not ipso facto a theft from the partnerships.

The issue presented in Jay Hoyt’s criminal prosecution was

whether he conspired to “defraud thousands of investors.” There

is no dispute that the individual investors were defrauded of

some or all of the money they contributed. However, Jay Hoyt was

not charged with any crime against the sheep partnerships. The

issue in the instant cases is whether a “theft” occurred from the

nine sheep partnerships. The issue of thefts from the sheep

partnerships involved herein is not identical to an issue

litigated and decided in Jay Hoyt’s criminal trial. The two

issues are separate and distinct. Therefore, petitioners have

failed to satisfy the first condition required under Peck to

apply collateral estoppel. Consequently, we need not address the

remaining Peck conditions of collateral estoppel.

For the reasons stated above, petitioners are precluded from

asserting collateral estoppel against respondent with respect to

the issue of a theft from the sheep partnerships for any of the

years at issue.

b. Judicial Estoppel

Petitioners assert that judicial estoppel should apply
 - 81 -

because respondent has taken “clearly inconsistent” positions

from those taken in the criminal prosecution of Jay Hoyt.

Petitioners assert that while the total amount of restitution

ordered in the judgment against Jay Hoyt establishes the amount

of the theft, respondent takes the position that petitioners have

not proven the amount of theft for the years at issue. Further,

petitioners claim that respondent should not be allowed to

contest that Jay Hoyt is “guilty of fraud on a massive scale”.

According to petitioners, the “integrity of the judicial process

would suffer if the IRS were allowed to make the absurd claim

that Hoyt did not defraud petitioners.”

The Court is not persuaded that respondent has taken any

inconsistent positions with respect to the conviction of Jay

Hoyt. As previously stated throughout this opinion, petitioners

have failed to establish that they were defrauded of the amounts

alleged as theft losses. Further, Jay Hoyt’s conviction does not

establish thefts from the partnerships for any of the years at

issue. Respondent does not argue that Jay Hoyt is innocent of

fraud in inducing the investors to contribute cash to the

partnerships; respondent instead takes the position that the

partnerships were not the victims of that fraud. Respondent’s

position is consistent with that of the Government in the

criminal prosecution of Jay Hoyt, that the victims of his fraud

were the individual investors.
 - 82 -

Petitioners have failed to establish the elements necessary

to assert judicial estoppel against respondent. Therefore,

judicial estoppel cannot be utilized to prevent respondent from

disputing petitioners’ claim of the existence and amount of the

thefts from the partnerships.

D. Conclusion

This Court is well aware of Jay Hoyt’s criminal activities

and the harm he has caused to thousands of individuals. Further,

we sympathize with those that were defrauded by Jay Hoyt’s

deceptive practices. However, petitioners did not introduce any

evidence at trial which would support a finding that a theft loss

occurred on the partnership level during each of the years at

issue. Petitioners have not met the elements required to sustain

a section 165 theft loss deduction. Accordingly, we hold that

petitioners have failed to establish that the nine sheep

partnerships are entitled to theft loss deductions in any of the

years at issue.

Issue 2. Expiration of the Period of Limitations

A. The Parties’ Arguments

1. Petitioners’ Arguments

In their amended petitions, petitioners specifically pleaded

that the period of limitations had expired for each of the years

at issue. On brief, petitioners now assert that the period of

limitations has expired only with respect to the following
 - 83 -

partnership taxable years: (1) For RCR #2, 1987; (2) for RCR #3,

1987 and its year ended September 30, 1989; (3) for RCR #4, 1984;

(4) for RCR #5, 1987 and 1988, and its year ended September 30,

1989; (5) for RCR #7, 1987 and 1988, and its year ended September

30, 1989.

On April 23, 2001, respondent filed a motion for partial

summary judgment that the applicable period of limitations with

respect to 1984 for RCR #4 had not expired in docket No. 14038-

96. After petitioners filed an objection to that motion on June

13, 2001, and upon hearing from the parties on the motion during

the trial in the instant case, the Court took respondent’s motion

under advisement.

Petitioners contend that section 6231(c) and section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.

6793 (Mar. 5, 1987), taken together, require the IRS, upon

commencement of a criminal tax investigation of any TMP, to

immediately remove that individual as TMP by issuing written

notice that the IRS would treat the removed TMP’s partnership

items as nonpartnership items. According to petitioners, the

first sentence of section 301.6231(c)-5T, Temporary Proced. &

Admin. Regs., supra, expressly provides that, whenever any TMP is

under criminal tax investigation, the continued treatment of that

TMP’s items as partnership items always will interfere with the

effective and efficient enforcement of the revenue laws. Unlike
 - 84 -

Phillips v. Commissioner, 114 T.C. 115 (2000), affd. 272 F.3d

1172 (9th Cir. 2001), petitioners are not claiming that section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, in whole

or part, is invalid or that the IRS abused its discretion in

failing to issue Jay Hoyt (the TMP) the notice that it would

treat his items as nonpartnership items. Petitioners simply

argue that the temporary regulation in question is mandatory and

not discretionary.

Alternatively, petitioners argue that Jay Hoyt, as the TMP,

could not bind the partners of the partnership because he

suffered from numerous disabling conflicts of interest and could

not properly represent the interests of the partners.

Petitioners maintain that Jay Hoyt’s disabling conflicts of

interest bring the instant case squarely within the Court of

Appeals for the Second Circuit’s holding in Transpac Drilling

Venture 1982-12 v. Commissioner, 147 F.3d 221 (2d Cir. 1998),

revg. and remanding T.C. Memo. 1994-26.

Petitioners maintain that these alleged disabling conflicts

of interest on the part of Jay Hoyt involved other conflicts

besides the criminal tax investigations. Petitioners allege that

these other conflicts include Jay Hoyt’s: (1) Perpetrating an

ongoing fraud upon the partners by misrepresenting the numbers

and values of their livestock, while purporting to act as the

partners’ fiduciary; (2) diverting partner contributions to his
 - 85 -

other businesses and properties; (3) participation on both sides

of the livestock sales that the Hoyt organization made to the

partnerships; (4) negotiation of tax issues with the IRS where

the interests of the Hoyt family and the Hoyt organization

conflicted with the interests of the Hoyt cattle and sheep

partnerships and their partners; (5) commingling of partnership

payments and failing to account for his and the Hoyt

organization’s use of those funds; (6) incentive to make

concessions to the IRS, while under criminal investigation, that

were harmful to the partners in order to have the IRS abate

certain tax return preparer penalties that the IRS had assessed

against him; (7) failure to file the partnership returns timely,

thereby incurring late filing penalties; and (8) failure, during

1986, to either (a) inform the partners that he was under

criminal investigation by the IRS, or (b) withdraw from his

fiduciary roles on behalf of the partners.

2. Respondent’s Arguments

Respondent contends that the periods of limitations

applicable to the partnership years in question have not expired,

because the extension agreements that Jay Hoyt (the TMP) and the

IRS executed are valid and binding upon the partners. Respondent

asserts that Phillips v. Commissioner, supra, largely controls

the resolution of the limitations issue raised by petitioners in

the instant case. Specifically, respondent notes that in
 - 86 -

Phillips, this Court and the Court of Appeals for the Ninth

Circuit both rejected the taxpayer-partner’s argument that

section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra,

should be construed to require, whenever a criminal tax

investigation of a TMP of a partnership is commenced, that the

IRS automatically remove that individual as TMP.

Respondent further argues that the rationale employed by the

Court of Appeals for the Second Circuit in Transpac Drilling

Venture 1982-12 v. Commissioner, supra, is not applicable here,

because the facts of the instant case, like Phillips, are

distinguishable from those of Transpac. Respondent asserts that

there is no evidence that Jay Hoyt (the TMP), in executing the

extensions, had a disabling conflict of interest as a result of a

criminal tax investigation and was seeking to ingratiate himself

or curry favor with the IRS in exchange for lenient treatment

relating to the criminal investigation.

Respondent maintains that to the extent other partnership

conflicts between Jay Hoyt and the partners existed, those

conflicts were of Jay Hoyt’s making, not due to IRS action or

inaction. Further, respondent asserts that the IRS was not a

party to the dealings between Jay Hoyt and the sheep partners

which created these alleged conflicts of interest, nor was the

IRS involved in concealing Jay Hoyt’s fraud upon the partners or

responsible for his failures.
 - 87 -

B. Discussion of Applicable Law

The TMP is the central figure of partnership proceedings and

his status is of critical importance to the proper functioning of

the partnership audit and litigation procedures of secs. 6221-

6233. Phillips v. Commissioner, 114 T.C. at 120-121; Computer

Programs Lambda, Ltd. v. Commissioner, 89 T.C. 198, 205 (1987).

Generally, there is a 3-year period of limitations on the

assessment of a tax attributable to any partnership item. Sec.

6229(a). And, generally, the issuance of an FPAA will suspend

the period of limitations, e.g., sec. 6229(d). The TMP (or any

other person authorized by the partnership in writing to enter

into such an agreement), however, may extend the period of

limitations on assessment with respect to all partners in a

partnership by entering into an extension agreement with the IRS

before the expiration of the limitation period. Sec.

6229(b)(1)(B).18

A TMP is generally designated at the time the partnership

return is filed. See sec. 301.6231(a)(7)-1T(c), Temporary

Proced. & Admin. Regs, 52 Fed. Reg. 6791 (Mar. 5, 1987).19 The

18
The period of limitations for a specific partner may
also be extended by an agreement between the IRS and that
partner. See sec. 6229(b)(1)(A).
19
Temporary regulations under sec. 6231 concerning the
designation, selection and termination of a TMP were issued in
1984 and 1987, and generally applied to all partnership taxable
years beginning after Sept. 3, 1982. Virtually identical
provisions are made by the final regulation sec. 301.6231(a)(7)-
(continued...)
 - 88 -

designation of a TMP remains effective until the termination of

that designation pursuant to section 301.6231(a)(7)-1(1)T,

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6792 (Mar. 5,

1987), which provides in pertinent part:

(l) Termination of designation. A designation of a
tax matters partner for a taxable year under this
section shall remain in effect until–

* * * * * * *

(4) The partnership items of the tax matters partner
become nonpartnership items under section 6231(c)
(relating to special enforcement areas), * * *

* * * * * * *

The termination of the designation of a partner as the
tax matters partner under this paragraph (l) does not
affect the validity of any action taken by that partner
as tax matters partner before the designation is
terminated. For example, if that tax matters partner
had previously consented to an extension of the period
for assessments under section 6229(b)(1)(B), that
extension remains valid even after termination of the
designation.

In turn, section 6231(c), relating to special enforcement areas,

applies to criminal investigations that the Secretary determines

by regulation to present special enforcement considerations.

Section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52

Fed. Reg. 6793 (Mar. 5, 1987),20 was promulgated by the Secretary

19
(...continued)
1, Proced. & Admin. Regs., which is effective for all
designations, selections, and terminations of a TMP occurring on
or after Dec. 23, 1996. See sec. 301.6231(a)(7)-1(s), Proced. &
Admin. Regs.
20
This temporary regulation concerning criminal tax
(continued...)
 - 89 -

pursuant to section 6231(c)(2) and (3) and provides for the

treatment of a partnership item of a partner who is the subject

of a criminal tax investigation as follows:

The treatment of items as partnership items with
respect to a partner under criminal investigation for
violation of internal revenue laws relating to income
tax will interfere with the effective and efficient
enforcement of the internal revenue laws. Accordingly,
partnership items of such a partner arising in any
partnership taxable year ending on or before the last
day of the latest taxable year of the partner to which
the criminal investigation relates shall be treated as
nonpartnership items as of the date on which the
partner is notified that he or she is the subject of a
criminal investigation and receives written
notification from the Service that his or her
partnership items shall be treated as nonpartnership
items. The partnership items of a partner who is
notified that he or she is the subject of a criminal
investigation shall not be treated as nonpartnership
items under this section unless and until such partner
receives written notification from the Service of such
treatment.

In Phillips v. Commissioner, supra, this Court dealt with

and rejected the arguments of a taxpayer-partner in several Hoyt

cattle partnerships that the periods of limitations for the

partnership taxable years in question had expired. The argument

was based on the theory that agreements that Jay Hoyt (the TMP of

each partnership) and the IRS executed extending the limitations

periods did not bind the partners of the partnership. In

Phillips v. Commissioner, supra, the taxpayer specifically argued

20
(...continued)
investigations applies to partnership taxable years beginning
after Sept. 3, 1982. See 52 Fed. Reg. 6779 (Mar. 5, 1987).
 - 90 -

that: (1) The second and third sentences of section 301.6231(c)-

5T, Temporary Proced. & Admin. Regs., supra, were invalid, so

that initiation of a criminal tax investigation of Jay Hoyt (the

TMP of the partnership) automatically converted his partnership

items into nonpartnership items as a matter of law, thereby

effectuating Jay Hoyt’s removal as TMP; (2) the criminal tax

investigation of Jay Hoyt (the TMP) created a conflict of

interest between Jay Hoyt’s duties as a fiduciary of the

partnership and his self-interest as the subject of a criminal

tax investigation, and such conflict necessitated his removal as

TMP based on the rationale of the Court of Appeals for the Second

Circuit in Transpac Drilling Venture 1982-12 v. Commissioner, 147

F.3d 221 (2d Cir. 1998); and (3) the Commissioner abused his

discretion by not issuing a written notice informing Jay Hoyt

(the TMP) that his partnership items would be treated as

nonpartnership items.

This Court, however, held that the extensions in Phillips v.

Commissioner, supra, were valid and that the periods of

limitations for those partnership taxable years thus had not

expired. In so holding, this Court concluded that: (1) Section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, was a

valid regulation; (2) the facts of Phillips were distinguishable

from those of Transpac, since the criminal tax investigation of

Jay Hoyt (a) did not create a disabling conflict of interest on
 - 91 -

the part of Jay Hoyt (the TMP) toward the partners of the

partnership, and (b) therefore, did not terminate his designation

as TMP; and (3) the taxpayer failed to establish that respondent

abused his discretion by not notifying Jay Hoyt (the TMP) that

his partnership items would be treated as nonpartnership items.

In Phillips v. Commissioner, 272 F.3d 1172 (9th Cir. 2001), affg.

114 T.C. 115 (2000), the Court of Appeals for the Ninth Circuit

agreed with the Tax Court’s reasoning and result in all pertinent

respects.

C. Determination as to Whether the Applicable Periods of
Limitations on Assessment Have Expired

In the instant case, the Court’s findings, supra p. 31, list

the partnership taxable years in question, the date upon which

the partnership return for each such year was filed, the

respective dates upon which Jay Hoyt (the TMP of that

partnership) and the IRS executed extension forms extending the

limitation period for that year, the date to which Jay Hoyt and

the IRS (in each extension) agreed to extend the limitation

period, and the date upon which respondent issued the partnership

the FPAA for that year.

As to each partnership taxable year in question, the parties

essentially agree that the 3-year period of limitations generally

provided under section 6229(a) would otherwise have expired prior
 - 92 -

to the date upon which respondent issued each partnership the

FPAA for that year, but for Jay Hoyt (the TMP) and the IRS’s

having executed timely an extension or a series of extensions

that extended the period of limitations beyond the date upon

which the FPAA was issued.

The parties disagree solely over whether the extensions that

Jay Hoyt executed for the taxable years set forth supra p. 83,

are valid and bind the partners of the partnership. Except for

the extension concerning the 1984 taxable year of RCR #4, these

extensions concern post-1986 partnership taxable years and were

executed by Jay Hoyt and the IRS on various dates from February

1991 through March 1993. Jay Hoyt and the IRS executed the

extension concerning RCR #4’s 1984 taxable year on August 1,

1987.

The Court rejects petitioners’ contention that section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, requires

the IRS automatically to end the partnership treatment of the

items of any TMP whenever a criminal tax investigation of that

TMP is commenced. The Court of Appeals for the Ninth Circuit

affirmed this Court’s determination in Phillips v. Commissioner,

114 T.C. 115 (2000), that such an interpretation of the temporary

regulation is improper, because it would require reading the

first sentence of the temporary regulation in isolation, divorced

from the other two sentences of the regulation as a whole.
 - 93 -

Phillips v. Commissioner, 272 F.3d at 1175-1176. The Court of

Appeals and this Court both concluded that the regulation,

properly read as a whole, vests discretion in the IRS to

terminate TMP status of an individual under criminal tax

investigation. See Phillips v. Commissioner, 272 F.3d at 1176

and 114 T.C. at 129, 132-133.

Petitioners next argue that Jay Hoyt, in executing the

extensions in question, was operating under purported disabling

conflicts of interest, requiring this Court, pursuant to the

rationale of the Court of Appeals for the Second Circuit in

Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221

(2d Cir. 1998), to invalidate these extensions and hold these

extensions not binding upon the partners. Petitioners interpret

Transpac as broadly requiring invalidation of a TMP’s extension

of the period of limitations if there is the mere potential for a

conflict of interest on the part of the TMP in executing the

extension. Additionally, petitioners suggest that a TMP also

engaged in serious breaches of his other general partnership

duties cannot execute an extension that binds the partners of the

partnership, even where that TMP’s execution of the extension

itself with the IRS is not established to be in obvious breach or

violation of his fiduciary duty as TMP to the partners.

In Transpac, Phillips v. Commissioner, 272 F.3d 1172 (9th

Cir. 2001), and Madison Recycling Associates v. Commissioner, 295
 - 94 -

F.3d 280 (2d Cir. 2002), affg. T.C. Memo. 2001-85, affg. T.C.

Memo. 1992-605, the alleged disabling conflict of interest that

purportedly existed during the execution of the extensions was

that each TMP was the subject of an ongoing criminal tax

investigation. In Transpac, the Court of Appeals for the Second

Circuit found a disabling conflict existed on the part of the

TMPs in executing the extensions and invalidated those

extensions. In contrast, in Phillips and Madison, both appellate

courts and this Court determined that the respective TMPs were

operating under no disabling conflict in executing the

extensions, and held the extensions valid and binding upon the

partners of the partnership.

In Phillips, neither the Court of Appeals for the Ninth

Circuit nor this Court viewed and interpreted the Transpac

holding as broadly as petitioners argue for in the instant case.

Further, both courts readily distinguished the facts in Phillips

from those in Transpac. See Phillips v. Commissioner, 272 F.3d

at 1175 and 114 T.C. at 130-132. As the Court of Appeals in

Phillips explained:

Phillips puts particular reliance on Transpac Drilling
Venture 1982-12 v. Commissioner, 147 F.3d 221 (2d Cir.
1998).

Transpac sets out with admirable clarity that a
TMP, although created by statute, owes a fiduciary duty
to his partners, and that, as the TMP’s acts bind his
partners, they “secure their due process protection” by
his faithful discharge of his fiduciary obligations.
Id. at 225. But in Transpac the court could observe,
 - 95 -

“The facts of the matter speak for themselves.” Id. at
227. The IRS had sought waivers of the statute of
limitations from the limited partners, who refused to
execute them. The IRS then went to the three TMPs who
knew themselves to be under criminal investigation in
connection with the partnership and were cooperating
with the government in its case against another
partner. As the court observed, they had “a powerful
incentive to ingratiate themselves to the government.”
Id. They gave the waivers the IRS wanted. The court
properly found the waivers invalid. Trust law,
generally, invalidates the transaction of a trustee who
is breaching his trust in a transaction in which the
other party is aware of the breach. See Restatement of
Trusts, secs. 288-297. Transpac is a salutary
application of this rule to the particular case of a
TMP who should have been seen by the IRS as laboring
under an incapacitating conflict of interest.

Two circumstances differentiate this case. The IRS
made no attempt to get waivers from limited partners.
The partnerships for which Hoyt was being investigated
have not been shown to be the partnerships involved in
this case. It is not intuitively obvious that Hoyt did
what is a routine accommodation--signing a waiver in
order to avoid immediate assessment by the IRS--in
order to ingratiate himself in the investigation of his
partnerships. Phillips has speculated that Hoyt so
acted; he has not proved it.

Similarly, this Court in Phillips v. Commissioner, 114 T.C. at

131-132, in distinguishing the facts in Phillips from those in

Transpac, noted that there was no evidence that: (1) The IRS

approached the limited partners to execute extensions or that

they refused to sign such extensions; (2) the promoter-TMP Jay

Hoyt was, before or during the relevant period, indicted or

convicted of a tax felony or cooperating with the Government; or

(3) the IRS misled the partners about the existence of criminal

tax investigations or ever instructed Jay Hoyt to say nothing
 - 96 -

about such criminal tax investigations. Further, the criminal

tax investigations had ended prior to Jay Hoyt’s execution of all

except one or two of the extensions.

This Court in Phillips further noted that Jay Hoyt, in

executing the extensions, did not try to curry favor or

ingratiate himself with the IRS in relation to the criminal tax

investigations. He continued to promote the partnerships in his

tax shelter program after the initiation of the criminal tax

investigations, continued to defend his legal position throughout

the criminal tax investigations, and continued to maintain that

all partnership items were legitimate, a position consistent with

that of his partners.

In Madison Recycling Associates v. Commissioner, 295 F.3d at

288-289, the Court of Appeals for the Second Circuit

distinguished its earlier Transpac holding as based on the

existence of an obvious and actual serious conflict of interest

on the part of each of the Transpac TMPs in executing the

extensions. It noted that, unlike Transpac, there was no

suggestion that the Madison TMP was a prospective governmental

witness, nor was there any evidence the TMP had given the

extensions in exchange for a grant of immunity or other

inducements relevant to the criminal tax investigation, as

neither the Madison TMP nor his representative apparently was
 - 97 -

even aware of the existence of (or the prospect of) a criminal

investigation.

In the instant case, Jay Hoyt executed virtually all of the

extensions in question when no criminal tax investigation of him

was being conducted. He executed extensions concerning the post-

1986 partnership years on various dates from February 1991

through March 1993. Earlier, in the summer of 1989, CID

commenced an investigation of Jay Hoyt for allegedly selling

nonexistent cattle to the Hoyt cattle partnerships, but this

investigation was completed by October 1, 1990. During this

investigation of Jay Hoyt, CID in October 1989 was asked to

review certain information and determine whether IRS special

agents should join in an ongoing grand jury investigation of Jay

Hoyt by the U.S. Attorney’s Office in Sacramento. This grand

jury investigation was closed on October 2, 1990. No prosecution

resulted from either the CID investigation or the grand jury

investigation.

Jay Hoyt executed the first of the extensions in question

concerning post-1986 partnership taxable years in mid-February

1991, several months after the closing of the above CID and grand

jury investigations in early October 1990. He executed the last

of these extensions concerning post-1986 partnership years in

early March 1993, over 5 months before CID’s next criminal tax

investigation of him commenced on or about August 31, 1993.
 - 98 -

Accordingly, the argument that an ongoing criminal tax

investigation created a disabling conflict for Jay Hoyt in

executing these extensions is without merit, since no criminal

investigations of Jay Hoyt were being conducted when these

extensions were executed.

The extension concerning RCR #4’s 1984 taxable year was

executed by Jay Hoyt and the IRS on August 1, 1987, shortly

before the U.S. Attorney’s Office in Sacramento declined to

prosecute him for his alleged backdating of documents. As this

Court observed in Phillips v. Commissioner, 114 T.C. at 152,

however, the Court of Appeals for the Second Circuit in Transpac

did not assume that the mere existence of an investigation would

subvert a TMP’s judgment and bend him to the Government’s will in

dereliction of his fiduciary duties to his partners.

As in Phillips, there is no evidence in the instant case

that Jay Hoyt executed the extensions under pressure in exchange

for leniency in relation to any criminal tax investigation of

him. In addition, Jay Hoyt continued to defend the legitimacy of

the sheep partnerships as he did with the cattle partnerships in

the Phillips case. With only minor exceptions, Jay Hoyt executed

the extensions in the instant case during the same time period he

executed the extensions in Phillips.

In the instant case, the Court concludes that petitioners

have failed to establish that Jay Hoyt, in executing the
 - 99 -

extension concerning the 1984 taxable year of RCR #4, was

operating under a disabling conflict of interest due to this

ongoing criminal investigation.

Although petitioners have alleged numerous breaches and

violations by Jay Hoyt of other general partnership duties, his

violations of those duties, if proven, have only a remote and

highly attenuated connection, at best, to his execution as TMP of

the extensions in dispute. The Court is not convinced that such

violations by Jay Hoyt of his other partnership duties in

managing and operating a partnership, constitute disabling

conflicts of interest in executing the extensions as TMP. See

Phillips v. Commissioner, 272 F.3d at 1175 (distinguishing

Transpac, by noting, among other things, that a TMP’s execution

of an extension often is a routine accommodation granted the IRS

and avoids respondent’s issuance of an FPAA immediately).

Petitioners further suggest that Jay Hoyt granted the

extensions in exchange for the IRS’s abatement of penalties

against him totaling $119,700, covering years prior to 1989. Of

the $119,700 of abated penalties, $90,000 were penalties under

section 6701 assessed against Jay Hoyt sometime in mid-1989. The

IRS abated the $90,000 of section 6701 penalties in early 1991,

following Jay Hoyt’s filing a refund claim in 1990. Petitioners

state that the IRS “inexplicably” abated all $119,700 in

penalties that it previously assessed against Jay Hoyt.
 - 100 -

Petitioners suggest that the abatement was a quid pro quo for Jay

Hoyt’s executing the extensions. The Court rejects this as an

unwarranted supposition on the part of petitioners.

In light of the issuance of the 1989 test case opinion in

Bales v. Commissioner, T.C. Memo. 1989-568, we believe that the

IRS, in all likelihood, chose to abate most of these penalties

because of doubts about whether its imposition of the penalties

ultimately would be sustained if Jay Hoyt were to bring a refund

suit in U.S. District Court challenging the propriety of the

penalties. As noted previously, this Court in Bales did not

sustain respondent’s disallowance of many of the tax benefits a

number of partners in Hoyt cattle partnerships claimed for 1977,

1978, and 1979. This Court decided, among other things, that the

Bales partnerships had acquired the benefits and burdens of

ownership with respect to specific breeding cattle, that the

purchase prices for the partnership cattle did not exceed the

fair market value of those cattle, and that the promissory notes

these partnerships issued were valid recourse indebtedness.

Also, in order to hold Jay Hoyt liable for certain return

preparer penalties, the Government in such refund suit would have

the burden of proof in establishing Jay Hoyt’s liability for the

penalty and would have to show, among other things, that Jay Hoyt

had known that the deductions and credits claimed were incorrect

and would result in an understatement of another’s tax. See
 - 101 -

secs. 6694(b), 6703(a), 6701(a)(3), 7427; Bailey v. United

States, 927 F. Supp. 1274, 1278 (D.Ariz. 1996), affd. 117 F.3d

1424 (9th Cir. 1997).

D. Conclusion

Based on the foregoing, petitioners have failed to establish

that any of the extensions Jay Hoyt (the TMP) and the IRS

executed are invalid. Accordingly, the Court holds that the

period of limitations with respect to each partnership taxable

year in question did not expire prior to respondent’s issuance of

the FPAA. See Rules 39, 142(a); Madison Recycling Associates. v.

Commissioner, 295 F.3d 280, 286 (2d Cir. 2002); Phillips v.

Commissioner, 272 F.3d 1172 (9th Cir. 2001); Amesbury Apartments,

Ltd. v. Commissioner, 95 T.C. 227, 241-243 (1990). In light of

this holding, respondent’s motion for partial summary judgment is

moot. See supra p. 84.

Issue 3. Whether Some Partnerships’ Purported Purchases of
Breeding Sheep Constitute Either Valuation Overstatements for
Purposes of Section 6621(c)(3)(A)(i) or Sham and Fraudulent
Transactions for Purposes of Section 6621(c)(3)(A)(v)

A. The Parties’ Arguments

1. Petitioners’ Arguments

In their amended petitions, petitioners ask this Court to

determine that purported purchases of breeding sheep reported by

some sheep partnerships are not tax-motivated transactions for

purposes of section 6621(c). Specifically, petitioners argue

that these transactions of the partnerships constitute neither
 - 102 -

valuation overstatements under section 6621(c)(3)(A)(i), nor sham

or fraudulent transactions under section 6621(c)(3)(A)(v).

On July 16, 2001, during the trial in the instant case,

respondent filed a motion to dismiss this section 6621(c) issue

for lack of jurisdiction, together with a memorandum of points

and authorities in docket No. 9550-94. The Court took the matter

under advisement. On August 3, 2001, respondent filed identical

motions, together with memoranda of points and authorities in

docket Nos. 787-91, 4876-94, 9552-94, 9554-94, 13597-94, 13599-

94, and 14038-96. The Court took these motions under advisement.

Petitioners timely filed their objections to respondent’s motions

to dismiss. The parties then filed their respective posttrial

briefs in the instant case, in which they have addressed the

section 6621(c) issue and respondent’s motions to dismiss.

Petitioners contend that this Court does have jurisdiction

in these partnership level proceedings to determine whether or

not the transactions involving the sheep partnerships are

attributable to tax-motivated transactions for purposes of

section 6621(c). Petitioners assert that these transactions are

neither valuation overstatements as defined in section

6621(c)(3)(A)(i), nor are they sham or fraudulent transactions as

defined in section 6621(c)(3)(A)(v). Among other things,

petitioners maintain that if these transactions were shams, they

were part of a fraud perpetrated by Jay Hoyt upon the partners
 - 103 -

and that the partners did not knowingly participate in this

fraud. Petitioners argue that it would be an absurd result to

penalize and impose section 6621(c) interest against these

victims of Jay Hoyt’s fraud, who (petitioners allege) invested

without the principal purpose of tax avoidance and genuinely

believed that their partnership was engaged in a legitimate

business activity.

Petitioners further argue that since they have conceded all

of the depreciation deductions and investment credits that the

Hoyt sheep partnerships claimed, the Court should find that there

are no valuation overstatements because any statements of value

or adjusted basis on the partnership returns concerning the

partnership’s purported breeding sheep are now irrelevant. In

making this argument, petitioners are relying upon and seeking to

come within the decisions by the U.S. Courts of Appeals for the

Fifth and Ninth Circuits and this Court in Todd v. Commissioner,

862 F.2d 540 (5th Cir. 1988), affg. 89 T.C. 912 (1987), Gainer v.

Commissioner, 893 F.2d 225 (9th Cir. 1990), affg. T.C. Memo.

1988-416, and McCrary v. Commissioner, 92 T.C. 827 (1989),

respectively.

Todd, Gainer, and McCrary all held that the section 6659

addition to tax for valuation overstatement was inapplicable

where the taxpayer conceded that no deductions or credits were

allowable, due to property not having been placed in service.
 - 104 -

Since none of the taxpayers in the three cited cases were

entitled to any deductions and credits regardless of any

valuation overstatement, there were no underpayments attributable

to a valuation overstatement. McCrary further held that section

6621(c) interest was inapplicable where deductions are disallowed

on separate and independent grounds that do not fall among the

categories of tax-motivated transactions listed in section

6621(c)(3)(A).

Noting the U.S. Court of Appeals for the Fifth Circuit’s

decision in Heasley v. Commissioner, 902 F.2d 380 (5th Cir.

1990), revg. T.C. Memo. 1988-408, petitioners additionally argue

that there can be no valuation overstatement where the

transaction was a sham and the asset alleged to have been

acquired does not exist.

2. Respondent’s Arguments

Respondent contends that this Court, as set forth in

respondent’s motions to dismiss, lacks jurisdiction in these

partnership proceedings to determine whether section 6621(c)

applies. However, respondent now further maintains that this

Court does have jurisdiction to and should determine that (1)

there were asset overvaluations and basis overstatements, and (2)

the partnership transactions were shams.

Respondent disputes petitioner’s argument that the

partnership transactions do not involve valuation overstatements
 - 105 -

for purposes of section 6621(c)(3)(A)(i). According to

respondent, the Todd, Gainer, and McCrary decisions (which

petitioners rely upon) are distinguishable. Respondent points

out that the parties in the instant case, besides agreeing that

the sheep partnerships are not entitled to almost all the tax

benefits they originally claimed for the years at issue, have

stipulated and agreed that (1) the partnerships failed to acquire

the benefits and burdens of ownership of any sheep, (2) many of

the purported breeding sheep a partnership allegedly purchased

were fictitious, and (3) each partnership’s stated purchase price

for its “sheep” greatly exceeded the value of those “sheep”.

Citing decisions of several appellate courts and this Court,

respondent asserts that where a partnership fails to acquire

ownership of any sheep for tax purposes, the partnership’s

correct adjusted basis for the sheep is zero, and a valuation

overstatement under section 6621(c)(3)(A)(i) exists. See Rose v.

Commissioner, 868 F.2d 851, 854 (6th Cir. 1989), affg. 88 T.C.

386 (1987); Zirker v. Commissioner, 87 T.C. 970, 978-979, 981

(1986); see also Zfass v. Commissioner, 118 F.3d 184, 190-191

(4th Cir. 1997) (and cases cited thereat), affg. T.C. Memo. 1996-

167; cf. Singer v. Commissioner, T.C. Memo. 1997-325; Greene v.

Commissioner, T.C. Memo. 1997-296.

Respondent additionally disagrees with petitioners’ argument

that the partnership transactions do not involve sham or
 - 106 -

fraudulent transactions under section 6621(c)(3)(A)(v).

Respondent notes that transactions constituting either shams in

fact or shams in substance are shams for purposes of section

6621(c)(3)(A)(v). Cherin v. Commissioner, 89 T.C. 986, 1000-1001

(1987); see Thomas v. United States, 166 F.3d 825, 834 (6th Cir.

1999) (holding that once a transaction is found to be a sham,

section 6621(c) interest is imposed regardless of a taxpayer’s

investment motive); Anderson v. Commissioner, 62 F.3d 1266, 1274

(10th Cir. 1995) (same), affg. T.C. Memo. 1993-607.

B. Section 6621(c)

Section 6621(c)21 (formerly section 6621(d)) provides for an

increased rate of interest with respect to “any substantial

underpayment” of tax in any taxable year “attributable to 1 or

more tax motivated transactions” if the amount of the

underpayment for such year so attributable exceeds $1,000.

Section 6621(c)(3)(A) generally lists the types of transactions

which are considered “tax motivated transactions”. A tax

motivated transaction includes any valuation overstatement within

the meaning of section 6659(c), and such a valuation

overstatement exists, among other situations, if the adjusted

basis of property claimed on any return exceeds 150 percent of

21
The Omnibus Budget Reconciliation Act of 1989 (OBRA
1989), sec. 7721(b), 103 Stat. 2106, 2399, repealed sec. 6621(c).
This repeal was effective for returns the due date for which
(determined without extensions) is after Dec. 31, 1989. See OBRA
1989 sec. 7721(c), 103 Stat. 2400, Pub. L. 101-239.
 - 107 -

the correct amount of basis. Secs. 6621(c)(3)(A)(i), 6659(c). A

tax motivated transaction further includes “any sham or

fraudulent transaction.” Sec. 6621(c)(3)(A)(v).

The section 6621(c) increased rate of interest does not

apply to deductions disallowed on separate and independent

grounds which do not fall within the specified categories of tax-

motivated transactions. McCrary v. Commissioner, 92 T.C. 827,

858-859 (1989). However, an increased rate of interest will

apply where a valuation overstatement or other category of tax-

motivated transaction is an integral part of or is inseparable

from the ground found for disallowance of an item. Irom v.

Commissioner, 866 F.2d 545, 547-548 (2d Cir. 1989), vacating in

part T.C. Memo. 1988-211; McCrary v. Commissioner, supra at 859-

860.

C. The Tax Court’s Jurisdiction

Congress enacted the partnership audit and litigation

procedures to provide a method to uniformly adjust items of

partnership income, loss, deduction, or credit that would affect

each partner. The statute makes a distinction between

partnership items and nonpartnership items. The tax treatment of

partnership items may only be determined in a partnership level

proceeding, while nonpartnership items may only be determined at

the individual partner level. See sec. 6221; Affiliated Equip.
 - 108 -

Leasing II v. Commissioner, 97 T.C. 575, 576 (1991); Maxwell v.

Commissioner, 87 T.C. 783, 787-788 (1986).

Section 622622 authorizes the judicial review of FPAAs and

provides in pertinent part:

SEC. 6226(f) SCOPE OF JUDICIAL REVIEW.-A court with
which a petition is filed in accordance with this
section shall have jurisdiction to determine all
partnership items of the partnership for the
partnership taxable year to which the notice of final
partnership administrative adjustment relates and the
proper allocation of such items among the partners.
[Emphasis added.]

Section 6231(a) defines the term “partnership item” as

follows:

(3) PARTNERSHIP ITEM.-The term “partnership item”
means, with respect to a partnership, any item required
to be taken into account for the partnership’s taxable
year under any provision of subtitle A to the extent
regulations prescribed by the Secretary provide that,
for purposes of this subtitle, such item is more
appropriately determined at the partnership level than
at the partner level. [Emphasis added.]

As defined, partnership items can only be those items

arising under subtitle A of the Internal Revenue Code. Section

22
The Taxpayer Relief Act of 1997 (Relief Act 1997), 111
Stat. 788, 1026, Pub. L. 105-34, sec. 1238(b)(1), amended sec.
6226(f) and expanded this Court’s jurisdiction in partnership
level proceedings to include the applicability of “any penalty,
addition to tax, or additional amount” related to the adjustment
of a partnership item. This amendment to sec. 6226(f) is
effective only for partnership taxable years ending after Aug. 5,
1997, and does not apply to the years at issue in the instant
case. Relief Act 1997 sec. 1238(c), 111 Stat. 1027. Moreover,
as noted supra note 21, sec. 6621(c) previously was repealed by
the OBRA 1989, effective for taxable years the due date of the
returns for which (determined without extensions) is after Dec.
31, 1989.
 - 109 -

6621(c), however, is within subtitle F, not subtitle A.

Affiliated Equip. Leasing II v. Commissioner, supra 577-578. In

contrast to a partnership item, an “affected item” is “any item

to the extent such item is affected by a partnership item.” Sec.

6231(a)(5). Thus, section 6621(c) interest is an “affected

item”, because a taxpayer-partner’s liability for such interest

may require findings of fact peculiar to a particular partner.

Affiliated Equip. Leasing II v. Commissioner, supra at 578;

N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 744-746

(1987) (noting that section 6621(c)’s applicability also turns on

the amount of a taxpayer’s underpayment attributable to a tax-

motivated transaction). Affected items of this type, because

they depend on partnership level determinations, are by

definition not partnership items and cannot be determined in a

partnership level proceeding. Affiliated Equip. Leasing II v.

Commissioner, supra at 578; N.C.F. Energy Partners v.

Commissioner, supra at 743-745. Accordingly, the Tax Court lacks

jurisdiction in this partnership level proceeding to decide the

applicability of section 6621(c) interest.

To reflect our holdings with respect to Issues 1 through 3

and the concessions of the parties,

Appropriate orders and

decisions will be entered under

Rule 155.
 - 110 -

APPENDIX

Docket No. Partnership and Tax Matters Partner

787-91 River City Ranches #1 Ltd., Leon Shepard,
Tax Matters Partner
River City Ranches #2 Ltd., Leon Shepard,
Tax Matters Partner
River City Ranches #3 Ltd., Leon Shepard,
Tax Matters Partner
River City Ranches #4 Ltd., Leon Shepard,
Tax Matters Partner
River City Ranches #5 Ltd., Leon Shepard,
Tax Matters Partner
River City Ranches #6 Ltd., Leon Shepard,
Tax Matters Partner

4876-94 River City Ranches #2, J.V., David Britton,
Tax Matters Partner

9550-94 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

9552-94 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

9554-94 River City Ranches 1985-2, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

13595-94 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

13597-94 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

13599-94 River City Ranches 1985-2, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

382-95 Ovine Genetic Technology Syndicate
1987-1, J.V., Linda Routzahn,
Tax Matters Partner

383-95 River City Ranches 1985-2, J.V.,*
Jeffry Bergamyer, Tax Matters Partner
 - 111 -

385-95 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

386-95 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

14718-95 River City Ranches #1, J.V., Stephen Hughes,
Tax Matters Partner

14719-95 River City Ranches #2, J.V., David Britton,
Tax Matters Partner

14720-95 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

14722-95 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

14724-95 River City Ranches #7, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

21461-95 Ovine Genetic Technology Syndicate
1987-1, J.V., Linda Routzahn,
Tax Matters Partner

5196-96 Ovine Genetic Technology Syndicate
1987-1, J.V., Linda Routzahn,
Tax Matters Partner

5197-96 Ovine Genetic Technology 1990, J.V.,
Leon Shepard, Tax Matters Partner

5198-96 River City Ranches #1, J.V., Stephen Hughes,
Tax Matters Partner

5238-96 River City Ranches #4, J.V., Leon Shepard,
Tax Matters Partner

5239-96 River City Ranches #7, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

5240-96 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

5241-96 River City Ranches #6, J.V.,
Joseph Sotro, Sr., Tax Matters Partner
 - 112 -

9779-96 River City Ranches #4, J.V., Leon Shepard,
Tax Matters Partner

9780-96 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

9781-96 River City Ranches #6, J.V.,
Joseph Sotro, Sr., Tax Matters Partner

14038-96 River City Ranches #4, J.V., Leon Shepard,
Tax Matters Partner

21774-96 Ovine Genetic Technology 1990, J.V.,
Leon Shepard, Tax Matters Partner

3304-97 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

3305-97 River City Ranches #2, J.V., David Britton,
Tax Matters Partner

3306-97 River City Ranches #1, J.V., Stephen Hughes,
Tax Matters Partner

3311-97 Ovine Genetic Technology Syndicate
1987-1, J.V., Linda Routzahn,
Tax Matters Partner

3749-97 River City Ranches #7, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

15747-98 Ovine Genetic Technology Syndicate
1987-1, J.V., Linda Routzahn,
Tax Matters Partner

15748-98 River City Ranches #1, J.V., Stephen Hughes,
Tax Matters Partner

15749-98 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

15750-98 River City Ranches #2, J.V., David Britton,
Tax Matters Partner

15751-98 River City Ranches #4, J.V., Leon Shepard,
Tax Matters Partner
 - 113 -

15752-98 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

15753-98 River City Ranches #6, J.V.,
Joseph Sotro, Sr., Tax Matters Partner

15754-98 River City Ranches #7, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

19106-98 Ovine Genetic Technology 1990, J.V.,
Leon Shepard, Tax Matters Partner

13250-99 Ovine Genetic Technology Syndicate
1987-1, J.V., Linda Routzahn,
Tax Matters Partner

13251-99 Ovine Genetic Technology 1990, J.V.,
Leon Shepard. Tax Matters Partner

13256-99 River City Ranches #1, J.V., Stephen Hughes,
Tax Matters Partner

13257-99 River City Ranches #2, J.V., David Britton,
Tax Matters Partner

13258-99 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

13259-99 River City Ranches #4, J.V., Leon Shepard,
Tax Matters Partner

13260-99 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner

13261-99 River City Ranches #6, J.V.,
Joseph Sotro, Sr., Tax Matters Partner

13262-99 River City Ranches #7, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

16557-99 River City Ranches #1, J.V., Stephen Hughes,
Tax Matters Partner

16563-99 Ovine Genetic Technology Syndicate
1987-1, J.V., Linda Routzahn,
Tax Matters Partner
 - 114 -

16568-99 River City Ranches #5, J.V., Stephen Hughes,
Tax Matters Partner
16570-99 River City Ranches #3, J.V., Michael Dale,
Tax Matters Partner

16572-99 River City Ranches #4, J.V., Leon Shepard,
Tax Matters Partner

16574-99 River City Ranches #2, J.V., David Britton,
Tax Matters Partner

16578-99 River City Ranches #7, J.V.,*
Jeffry Bergamyer, Tax Matters Partner

16581-99 River City Ranches #6, J.V.,
Joseph Sotro, Sr., Tax Matters Partner

17125-99 Ovine Genetic Technology 1990, J.V.,
Leon Shepard, Tax Matters Partner

_________________
*--River City Ranches 1985-2, J.V., was formed and began
operating in 1987. In 1991, the partnership became known as
River City Ranches #7, J.V.