Johnson v. Commissioner
| Decision Date | 29 July 1991 |
| Docket Number | Docket No. 26430-88. |
| Citation | 62 T.C.M. 254 |
| Parties | James E. Johnson and Susanna E. Johnson v. Commissioner. |
| Court | U.S. Tax Court |
James E. Johnson and Susanna E. Johnson, pro se. John A. Guarnieri, for the respondent.
Memorandum Findings of Facts and Opinion
The primary issue for decision is whether petitioners are entitled to depreciation deductions and investment tax credits relating to a claimed $5 million purchase of Charolais cattle. As discussed below, we conclude they are not.
Respondent determined the following deficiencies in income tax and additions to tax:
Additions to Tax
Year Deficiencies Sec. 6653(a)(1) Sec. 6653(a)(2)
1981 .................. $412,705.36 $20,635.26 50 percent of the interest
due on $412,705.36
1982 .................. 379,068.00 18,953.40 50 percent of the interest
due on $379,068
After concessions, the following issues remain:
1. Whether petitioners may deduct $512,096.52 in 1981 and $679,717.01 in 1982 for their farming and cattle activity, and whether they are entitled to investment credits of $618,648 in 1981 and $611,414 in 1982 for that activity. We are not convinced that the cattle transaction occurred as represented by petitioners, and thus we hold that they are not entitled to the deductions and credits they claimed relating to it.
2. Whether petitioners are entitled to a $50,000 bad debt deduction in 1981 under section 166. We hold that they are not.
3. Whether petitioners were negligent in 1981 and 1982 under section 6653(a)(1) and (2). We hold that they were.
All section references are to the Internal Revenue Code of 1954 as amended and in effect for 1981 and 1982. All Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioners are husband and wife who resided in Toms River, New Jersey, when they filed their petition. References to petitioner in the singular are to James Johnson.
Petitioners used the cash receipts and disbursements method of accounting from 1970 through 1988. In 1972 petitioner James Johnson had a net worth of $6 million.
Susanna Johnson did not have any knowledge or experience in farming or raising cattle.
Priscilla Oughton is petitioners' daughter. Petitioner maintained a checking account (#18-8129-9) in the name of "Priscilla Oughton, James Johnson Business Account" at the First National Bank of Toms River, New Jersey, from 1970 through 1988. Petitioner and Priscilla Oughton were signatories for the account; however, petitioner controlled all deposits and disbursements. Priscilla Oughton did not sign any checks drawn on the account from 1970 to the date of trial except for a few small checks to charitable organizations written with petitioner's permission.
Petitioner wrote the following checks from the account payable to Priscilla Oughton:
Date Amount
December 21, 1981 ................... $ 700,000
September 23, 1982 .................. 1,200,000
December 19, 1983 ................... 1,000,000
December 9, 1984 .................... 1,000,000
December 13, 1985 ................... 1,000,000
__________
Total ........................... $4,900,000
Each of the checks was deposited by petitioner on the same day in the account from which it was written. Priscilla Oughton neither knew about nor had possession of the checks.
Petitioner and Joseph Yelenscics, Sr., a businessman and banker, jointly purchased a farm in Florida in 1970 known as Rip Van Winkle Farm. Petitioner and Yelenscics later jointly purchased two more farms adjacent to Rip Van Winkle Farm known as Mar-K Farm and Wingfield Farm. All three were then collectively known as Rip Van Winkle Farms of Florida. Petitioner and Yelenscics purchased cattle to stock the farms at about the time they purchased the farms.
Petitioner and Yelenscics operated Rip Van Winkle Farms as a cattle ranch under an oral understanding that each had a one-half interest in the capital, profits, and losses of the operation. They filed U.S. partnership returns under the name Rip Van Winkle Farms of Florida.
Johnson Lumber Company was a partnership owned and operated in 1970 through 1972 by both petitioners as equal general partners. The Rip Van Winkle Farms partnership returns list Johnson Lumber Company as a 50-percent general partner of Rip Van Winkle Farms. Petitioner Susanna Johnson was substituted for Johnson Lumber Company as a Rip Van Winkle Farms general partner from 1973 through 1988. However, petitioner exercised control over his wife's interest in the farms. Petitioner or Yelenscics, or both, made all decisions for the partnership.
Petitioners' accountant, Everette H. Pfeiffer, prepared the Rip Van Winkle Farms partnership returns and amended returns from 1971 through 1988 based upon the cash receipts and disbursements method of accounting. Mr. Pfeiffer relied solely on unaudited information given to him. He did not attempt to verify or otherwise test the accuracy of any of the representations or information given to him.
Rip Van Winkle Farms moved some of the cattle from Florida to petitioners' ranches in Mississippi. Rip Van Winkle Farms sold its Florida farms in 1976.
Johnson Farms was a group of three farms, Bomar, Fuller, and Priester, located in the Meridian, Mississippi area. Johnson Farms totaled about 4,000 acres. They were operated as cattle and timber farms.
Petitioners' daughter, Priscilla Oughton, and her husband John Oughton held title to Johnson Farms from 1974 through 1988. However, neither Priscilla Oughton nor her husband controlled Johnson Farms. Neither of them had knowledge of cattle farming. Petitioner controlled the acquisition and disposition of Johnson Farms assets from 1974 to the date of trial. The daily operations were entrusted to Robert Johnson, petitioner's brother, and Robert Shelton, petitioner's brother-in-law.
Johnson Farms operated as a cattle and timber ranch. Profits and losses were reported on partnership returns. Pfeiffer prepared Priscilla and John Oughton's income tax returns as well as the Johnson Farms partnership returns from 1973 to the date of trial. Pfeiffer relied upon books and records maintained by petitioners to determine farm income and loss of the Oughtons and Johnson Farms. Pfeiffer did not attempt to verify the truth or otherwise test the accuracy of the information upon which he relied.
Pfeiffer did not review any of the Oughton's income tax returns with them. Instead, he gave the completed returns to petitioners.
In September 1973, petitioner and Yelenscics purchased about 4,000 acres of farmland in Delaware County, Oklahoma, known as Honey Creek Ranch. It included a 1,000 acre ranch known as Horseman Ranch. Petitioner Susanna Johnson and Yelenscics took title to these farms as tenants-in-common. They executed a written partnership agreement that lists the farm name as Honey Creek Ranch.
Honey Creek Ranch operated as a commercial beef cattle ranch. It is not clear whether or how many cattle were purchased with the ranch. Some Honey Creek cattle came from the Mississippi Farms controlled by petitioner. Some of those cattle were originally from the Rip Van Winkle Farms in Florida.
Honey Creek Ranch did not enter any of its cattle in contests or production sales promoted by breeding associations, such as the American Charolais Association.
The Rip Van Winkle Farms partnership obtained financing to operate Honey Creek Ranch from the Vinita Production Credit Association of Vinita, Oklahoma (Vinita PCA). The partnership first applied for a loan from Vinita PCA in 1975, and received several other loans until 1985.
Petitioner Susanna Johnson executed a bill of sale purporting to transfer her title in the personal property of the Honey Creek Ranch to Yelenscics to help him obtain financing for ranch operations. Petitioner Susanna Johnson remained a silent partner in the Honey Creek Ranch and Rip Van Winkle Farms partnership after the bill of sale was executed.
Vinita PCA held liens on all of the Honey Creek Ranch cattle from 1975 through 1985 to secure loans. To monitor its loans to Rip Van Winkle's Honey Creek Ranch, Vinita PCA occasionally conducted on-site inventories and prepared valuation reports concerning cattle and equipment on the ranch. Vinita PCA also monitored the ranch's operations.
Honey Creek Ranch satisfied part of its obligations to Vinita PCA directly from proceeds of cattle sold during 1975 through 1985. Weight or poundage primarily influenced the cattle prices that Honey Creek Ranch received during 1974 through 1987. The particular breeding history or pedigree of the animals sold did not influence those prices.
Petitioner effectively controlled his wife's interest in the farms. Petitioner or Yelenscics, or both, made all decisions for the farms.
Petitioners and Yelenscics reported profits and losses from the operation of Honey Creek Ranch under the same name and employer identification number as Rip Van Winkle Farms. The partnership returns filed by Rip Van Winkle Farms do not separately allocate income and expenses of the Florida and Oklahoma farms.
From 1974 through 1976, some cattle on the Honey Creek Ranch contracted brucellosis, an infectious disease. The State of Oklahoma quarantined the ranch, and paid owners of the infected cattle $50 per head to slaughter infected animals. Owners of registered cattle that were infected received more than $50 per head. The Honey Creek Ranch was paid at the rate of $50 per head.
Cattle maintained by Rip Van Winkle Farms at its Florida ranch were shipped to Johnson Farms. Some of these cattle were...
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