Cherin v. Comm'r of Internal Revenue

Citation89 T.C. No. 69,89 T.C. 986
Decision Date23 November 1987
Docket NumberDocket No. 7034-84
PartiesRALPH CHERIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Petitioner invested in the Southern Star Land & Cattle Co ., Inc. tax shelter program. HELD, the purported sales of cattle were lacking in economic substance and the benefits and burden s of ownership were not transferred to petitioner. HELD FURTHER, applicability of sec. 6621(c) determined. Judith A. Frankel, for the petitioner.

Avery B. Cousins III, for the respondent.

WHITAKER, JUDGE:

Respondent determined deficiencies in petitioner's Federal income tax for the years and in the amounts as follows:

+--------------+
                ¦Years¦Amount  ¦
                +-----+--------¦
                ¦1972 ¦$27,425 ¦
                +-----+--------¦
                ¦1973 ¦18,905  ¦
                +-----+--------¦
                ¦1974 ¦13,191  ¦
                +-----+--------¦
                ¦1975 ¦2,740   ¦
                +-----+--------¦
                ¦1976 ¦1,586   ¦
                +-----+--------¦
                ¦1977 ¦185     ¦
                +-----+--------¦
                ¦1978 ¦1,416   ¦
                +--------------+
                

By amendment to the answer, respondent asserts that the deficiencies constitute substantial underpayments attributable to tax-motivated transactions within the meaning of section 6621(c), 1 formerly section 6621(d). The issues for decision all arise out of petitioner's investment in a cattle program operated and offered by Southern Star Land & Cattle Co., Inc. (Southern Star). 2 Petitioner's investments were made in June 1971 and January 1972. This same cattle shelter has been the subject of three Memorandum Opinions of this Court, Hunter v. Commissioner, T.C. Memo. 1982-126; Siegel v. Commissioner, T.C. Memo. 1985-441; and Jacobs v. Commissioner, T.C. Memo. 1985-609. Thus the essential question to be determined is whether this petitioner's case is factually distinguishable from Hunter, Siegel, and Jacobs. Petitioner contends that it is distinguishable.

FINDINGS OF FACT

Some of the facts have been stipulated and they are so found. Petitioner's residence at the time of the filing of this petition was in Hialeah, Florida.

In and prior to 1971, petitioner's principal business was the management of beauty shop. In 1971, petitioner separated from his wife and allocated to her for her support many of the income- producing properties which comprised his beauty shop business. He also anticipated retirement upon reaching the age of 65 in 1975. Petitioner was looking for an investment which would produce significant income for his retirement years when his income from other sources was expected to be materially reduced. In due course, petitioner inquired of Nathan Newman, an accountant, financial advisor and attorney, who had been assisting petitioner for approximately 20 years, as to possible investments. Newman was then aware of the Southern Star program and apparently had an arrangement with Southern Star for payment of a finder's fee for investors in the program produced by him, a fact which petitioner did not discover until long after his investments had been made. Newman recommended that petitioner invest in the Southern Star program which was described by him to petitioner as one which would not require petitioner's personal attention and would produce a regular income after retirement. Newman showed to petitioner a projection showing receipt of regular income after 1975. The projection had been prepared by a Mr. Levine who was described as a friend. 3 Petitioner thereafter made some projections himself, but made no other investigation. Petitioner was relatively unsophisticated in making investments and had become accustomed to relying upon Newman whom petitioner regarded as capable and unbiased. Petitioner had no experience in either ownership or management of cattle and had no desire to become a cattle operator. Petitioner's reliance upon Mr. Newman's advice under the facts of this case was reasonable.

In 1981 Southern Star ceased business. It purported to recognize a dollar liability to petitioner but no payments were made to him. No collection efforts were made by petitioner since he believed that Southern Star was without assets. Petitioner's herds were purportedly liquidated but petitioner never received any proceeds of sale. To the extent not sold to third parties, whatever was left of petitioner's herds was transferred to another cattle operation in Mississippi without petitioner's consent.

When petitioner made each of these investments in 1971 and 1972, he contemplated that his payments on the purchase price of the first herd together with sales of culls and calves would pay in full the purchase price of that herd by 1976 or 1977 and that the sales revenue generated from both herds would pay the purchase price of the second herd by 1979.

We have compared the sales and management agreements pertaining to petitioner's two herds with those involved in the Siegel and Hunter cases and find that the differences in petitioner's documents are not material. Such differences as do exist are largely between petitioner's 1971 sales agreement and the Siegel and Hunter sales agreements.11

In providing for the higher interest rate, the Congress chose to use the ‘handle‘ of ‘tax motivated transactions‘. This term suggests that the taxpayer's motive is to be critical in determining whether the higher interest rate is to apply. However, the Congress chose to provide a complete definition of this term in paragraph (3)(A) of section 6621(c). An examination of the first three clauses of this definition suggests an intention that the taxpayer's motive ordinarily (perhaps, always) plays no part in the determination of whether a transaction is a tax motivated transaction because it comes within one or more of these three clauses. Clause (iv), authorizing respondent to add more categories of tax motivated transactions, is not so limited. Clause (iv) authorizes respondent to provide by regulations that certain activities constitute tax motivated transactions. Three of the activities so specified in sec. 301.6621- 2T, Proced. and Admin. Regs., depend on the taxpayer's purposes. 4 The regulation was adopted on December 26, 1984, by T.D. 7998, 1985-1 C.B. 368, 49 Fed. Reg. 50390 (Dec. 28, 1984).

On June 1, 1971, petitioner and Southern Star entered into a sales agreement providing for the purchase 4 of a herd of 25 purebred Aberdeen Angus female cows and a one-third interest in a bull. Simultaneously with execution of the sales agreement, petitioner entered into a management agreement pursuant to which Southern Star undertook to manage the herd. Petitioner probably executed a number of related documents, as specified in these two agreements, including one or more promissory notes, a security agreement, and he may have received a separate bill of sale. On January 17, 1972, petitioner entered into a similar set of agreements for the purchase of a herd of five Aberdeen Angus cows and a two- thirds interest in an Aberdeen Angus bull. The principal reason for acquisition of the second herd was to obtain the contract right under the management agreement to have the herd include a bull calf out of Southern Star's prize bull. Petitioner never inspected the cattle allocated to his herds.

The parties have primarily sought to focus on the distinctions from and similarities to the facts in Hunter, Siegel, and Jacobs. Therefore, a discussion of Southern Star and its cattle program is a necessary background. Southern Star was organized in 1970 by Neil Levine and Harry Epstein. 5 It operated three cattle ranches — at Citra, Florida; Cassoday, Kansas; and Marshfield, Missouri. In general the Southern Star program contemplated the purchase of one or more herds of cattle, varying in size, with herd management by Southern Star constituting an essential element of the program. The terms of the management agreements were indefinite, with termination to occur when the herds were liquidated. Liquidation was to occur upon notice under varying circumstances, the investor's opportunity to give notice being more restrictive than Southern Star's. While the management agreement remained in effect, the herds were to be managed solely in the discretion of Southern Star. Each management agreement provided specifically that, so long as the agreement was in effect, Southern Star had ‘full control of the location, maintenance, expansion, breeding, and culling‘ as well as the determination of the ‘most opportune time for sales.‘ The size of each investor's herd was to be increased by about 50 percent through the retention of calves. Calves which were not so retained were to be sold by Southern Star and the proceeds divided between the parties, except that in all transactions except petitioner's 1971 purchase the proceeds were applied first on the unpaid purchase price. The herds of specific investors such as petitioner were at least in theory identified by tattoo and ear tag numbers but were mixed with other similar herds and other cattle of Southern Star and placed on one or more of the ranches in Southern Star's discretion.

Thus, when the Congress added (v) any sham or fraudulent transaction‘, in the Tax Reform Act of 1986, the Congress had before it a definition of tax motivated transaction that was mostly ‘no- fault‘ but that had some alternatives that depended on the taxpayer's motives. The question in the instant case is whether ‘sham‘ is to be no-fault or is to be affected by petitioner's motives.

The majority contend that ‘the presence of a profit motive does not preclude a determination that a transaction lacks economic substance and thus is a sham. ‘ (Slip opin. at 23.) I disagree with their application of this analysis to section 6621(c)(3)(A)(v).

The intended effect of the 1986 amendment to section 6621(c) is expressed in the Statement of the Managers attached to the Conference report (H. Rept. 99-841 (Conf.) II-796 (1986), 1986-3 C.B. (Vol. 4) 796) as follows:

The Tax Court has recently held (DeMartino v. Comm'r., T.C. Memo 1986-263 (June 30, 1986); Forseth v. Comm'r., T.C. Memo 1985-...

To continue reading

Request your trial
145 cases
  • Martuccio v. Commissioner
    • United States
    • U.S. Tax Court
    • 1 Junio 1992
    ...¶ 9129], 808 F.2d 1219, 1220 (6th Cir. 1987), affg. Forseth v. Commissioner [Dec. 42,265], 85 T.C. 127 (1985); Cherin v. Commissioner [Dec. 44,333], 89 T.C. 986, 993-994 (1987). According to the Sixth Circuit, economic substance is a threshold requirement to an inquiry into a taxpayer's sub......
  • Rasmussen v. Commissioner
    • United States
    • U.S. Tax Court
    • 8 Abril 1992
    ...supra at 1237-1238, we identified six factors to be considered in deciding whether a sale was bona fide. See also Cherin v. Commissioner [Dec. 44,333], 89 T.C. 986, 997 (1987); Massengill v. Commissioner [Dec. 45,048(M)], T.C. Memo. 1988-427, affd. [89-1 USTC ¶ 9337] 876 F.2d 616 (8th Cir. ......
  • Dixon v. Commissioner
    • United States
    • U.S. Tax Court
    • 11 Diciembre 1991
    ...¶ 9130], 862 F.2d 1486, 1492 (11th Cir. 1989), affg. Glass v. Commissioner [Dec. 43,495], 87 T.C. 1087 (1986); Cherin v. Commissioner [Dec. 44,333], 89 T.C. 986, 993 (1987). Petitioners contend, in more than one context, that the Kersting corporations involved in these cases were viable ent......
  • Peat Oil & Gas Assocs. v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 31 Marzo 1993
    ...Commissioner, 84 T.C. 564 (1985), or the economic substance test, see Illes v. Commissioner, 982 F.2d 163 (6th Cir.1992); 2 Cherin v. Commissioner, 89 T.C. 986 (1987); 3 James v. Commissioner, 87 T.C. 905 (1986), affd. 899 F.2d 905 (10th Cir.1990), there is no apparent benefit to be gained ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT