Bales v. Commissioner
| Decision Date | 19 October 1989 |
| Docket Number | 16414-83,14956-83,24307-83,28639-84,14178-83,28787-84,29404-84,28938-84,29464-84,29111-84,12274-83,13800-83,29681-84,4499-83,29594-84,18099-83,18832-82,21409-84,29108-84,28681-84,13174-83,Docket No. 12479-82,28638-84,28657-84 |
| Parties | Ralph W. Bales and Ruth C. Bales, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Jim Dismukes, Douglas A. MacDonald, John M. Bekins, and Thomas E. Smail, Jr., Davis, Calif., for the petitioners. Theodore Garelis, for the respondent.
Memorandum Findings of Fact and Opinion
These consolidated cases were assigned to Special Trial Judge Daniel J. Dinan pursuant to section 7456(d) (), and Rules 180, 181 and 183.2 The Court agrees with and adopts his opinion which is set forth below.
DINAN, Special Trial Judge:
These cases were consolidated for trial, briefing, and opinion. The 26 dockets which were tried are test cases for petitioners in similar partnerships. Some of those other petitioners have stipulated to be bound by the opinion in these consolidated cases.
Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as set forth in appendix B. The deficiencies in tax result from respondent's disallowance of losses and investment tax credits incurred by petitioners in their investments in cattle breeding partnerships.
The issues for decision are: (1) whether the purchase price of the cattle was within a reasonable range of their actual value; (2) whether the benefits and burdens of ownership transferred from seller to buyer; (3) whether petitioners had a profit objective when entering into these transactions; (4) whether the expenses incurred by the partnerships were ordinary and necessary; (5) whether petitioners are entitled to deductions for interest; (6) whether petitioners are entitled to depreciation allowances; (7) whether petitioners are entitled to deduct the management fee; (8) whether petitioners are entitled to investment tax credits; (9) whether petitioners are entitled to capital gains treatment on the disposition of the cattle; and (10) whether petitioners are liable for an increased rate of interest under section 6621(c) for entering into a tax motivated transaction.
Some of the facts have been stipulated. The stipulations of fact and accompanying exhibits are incorporated by this reference.
At the time the petitions were filed in these cases all petitioners resided in California, except for two petitioners who resided in the following places:
Petitioner Docket No. Place of Residence
Bales 12479-82 Texas
Pugh 29681-84 Saudi Arabia
Findings of Fact
These cases concern various transactions between petitioners as investors in cattle breeding partnerships and the Hoyt family as promoters and managers of the breeding partnerships.
The Hoyt family first became involved in raising cattle in the early 1950s. Walter J. Hoyt, Jr. began by purchasing cattle for his sons who raised and showed them at 4H and FFA events. Soon thereafter Mr. Hoyt decided to get in the actual business of raising cattle. He began without much direction. He bought registered Shorthorns here and there. This approach caused him to accumulate a conglomerate of cattle from other cattlemen's breeding programs. Sometime in the early 1960's, he decided to get serious about developing his own purebred program. He sold off the cattle he had previously purchased and embarked on a plan to raise his own purebred herd. He bought cattle that fit his model. On occasion he purchased entire small herds from other breeders to give some uniformity to his new herd. The cattle Walter J. Hoyt, Jr. purchased in the early 1960's cost him approximately $1,500 a head.
The uniform Shorthorns he purchased in the early 1960's became known as the "Hoyt Base Cows." These cows were so named because they formed the genetic base that produced the cows involved in the partnerships and even the cows on the ranch today. The data available on the "Hoyt Base Cows" is less extensive than the data on the cattle raised by the Hoyts because the Hoyts kept better records on the cattle they raised.
In order to increase his herd, Walter J. Hoyt, Jr. needed new capital. He raised capital by selling some of his cows to neighbors and friends. After he sold them he would enter into an agreement to manage the cows sold. The management fee would be paid either on a crop share or cash basis. The sale of these cows and the management agreement were all done orally.
The persons who purchased these cattle often had the cattle registered in their names. However this caused a problem when trying to sell them because those persons did not have the same name recognition as Walter J. Hoyt, Jr. did.
In January 1972, Walter J. Hoyt, Jr. died. His sons took over the cattle operation after his death. Generally speaking Walter J. Hoyt III (hereafter Jay Hoyt) took over the business end of the operation and Richard D. Hoyt (hereafter Ric Hoyt) took over the breeding end of the operation. Their brother Steve Hoyt is also involved; he runs the farming operation. Their sister Jana works in the office.
In December 1971, the general partnership of Walter J. Hoyt and sons, which consisted of Walter J. Hoyt, Jr. and his five sons, was converted into a California limited partnership. Walter J. Hoyt, Jr., Jay Hoyt, and Ric Hoyt were general partners. Seth Hoyt, Steven A. Hoyt, Jeffrey K. Hoyt, Bruce C. Smith, Mildred Summers, and Lola Hillman were limited partners. This limited partnership was formed shortly before Walter J. Hoyt, Jr.'s death. However, because of his death the limited partnership was never implemented. Its only asset is a membership in the American Shorthorn Association. The name, Walter J. Hoyt and Sons, which is the name registered with the American Shorthorn Association, is the herd name for the Hoyt cattle operation.
Hoyt & Sons is a partnership consisting of Ric Hoyt, his brother Steve, his sister Jana, and his sister-in-law Betty Jean (Jay Hoyt's wife). Hoyt & Sons was the owner of the cattle (the progeny of the Hoyt Base Cows) sold to the partnerships in the 1970's. Jay Hoyt is not a partner in Hoyt & Sons.3
In 1971 the Hoyts decided to expand their cattle operation. They raised the capital to do this by forming limited partnerships and selling interests therein to interested investors. The investors in these limited partnerships are mainly local people who know Jay Hoyt personally or know someone who knows Jay Hoyt. The investors are primarily wage earners who were looking for an investment for their retirement.
The first limited partnerships formed were Florin Farms #1, #2, #3, #4, and #5, respectively. They were formed in 1971. Certificates and Articles of Limited Partnership were filed in Sacramento County, California. Some of the partners in these partnerships were persons who had previously invested in Hoyt cattle. Those persons contributed their cattle to the partnerships as capital contributions.
In 1973 Jay Hoyt formed another limited partnership, Durham Farms #1. In 1979 Jay Hoyt formed Durham Farms #2, #3, and #4, respectively. Certificates and Articles of Limited Partnership were filed in Washoe County, Nevada, for these partnerships.
In 1975 Jay Hoyt formed limited partnerships entitled Washoe Ranches #1 and #2, respectively. In 1976 he formed the additional limited partnerships of Washoe Ranches #3, #4, #5, and #6. Certificates and Articles of Limited Partnership were filed in Washoe County, Nevada.
Jay Hoyt is the general partner in all these limited partnerships. In later years he formed additional Durham Farms, Florin Farms, and Washoe Ranches limited partnerships.
The limited partnerships were formed to engage in the business of cattle breeding. The certificates and articles of limited partnership also constitute the partnership agreement. The partnership agreements grant the general partner a power of attorney on behalf of all the limited partners in the partnership. The agreements also set forth the allocation of profits, losses, and assets amongst the partners. In addition, the agreements give the general partner full, exclusive, and complete management and control over the affairs of the partnership. Further, the general partner has the sole authority to make decisions affecting the partnership. The agreements, in the portion applicable to limited partners, state that limited partners shall not take part in the management of the business or transact any business for the partnership. The limited partners may, by majority vote, remove the general partner from the partnership and elect a successor in interest. In order for a limited partner to assign his interest he must have prior written consent from the general partner.
The agreements can be amended by an affirmative vote of partners owning a 50-percent capital interest but only after the amendment has been proposed by a group of partners having at least a 40 percent capital interest.
A partner cannot withdraw or have his interest redeemed unless the partnership dissolves. A partnership can only be dissolved by bankruptcy, receivership, dissolution by the general partner, or by written consent or vote by a group of partners having 66 2/3 percent of partnership capital.
The partnerships would dissolve by their own terms in 1990.
The agreements go on to state that if a partnership is dissolved, the general partner shall wind up the partnership's affairs, sell the assets after paying off all liabilities including the cost of dissolution, and then distribute the remainder to the limited partners as their interests appear.
The general partner is fully liable for partnership debts.
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