Myers v. Commissioner
| Decision Date | 20 October 1986 |
| Docket Number | 34874-84.,Docket No. 34863-84 |
| Citation | 52 TCM (CCH) 841,1986 TC Memo 518 |
| Parties | Angus Adair Myers v. Commissioner. Arden E. Myers and Edith M. Myers v. Commissioner. |
| Court | U.S. Tax Court |
James L. Schwartz, Mark H. Schiff, Paul T. Saharack, and Steven M. Heinz, for the petitioners. Robert L. Archambault, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent determined the following deficiencies in petitioners' Federal income tax:
Petitioner Docket No. Year Deficiency
Arden E. and Edith M. Myers .................... 34874-84 1980 $63,985
1981 13,711
Angus Adair Myers .............................. 34863-84 1980 65,890
1981 2,541
The issues for decision are whether the statute of limitations bars assessment of petitioners' 1980 taxes, and whether certain commodity futures transactions resulted in capital or ordinary loss.
Some of the facts have been stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Petitioners resided in McCook, Nebraska, at the time their petitions were filed. Petitioners Arden E. Myers and Edith M. Myers, husband and wife, filed joint Federal income tax returns for the taxable years 1980 and 1981 with the Internal Revenue Service Center in Ogden, Utah. Petitioner Angus Adair Myers filed individual income tax returns for the same years. In 1980 and 1981, Arden E. Myers and Angus Adair Myers were entitled to equal distributive shares of the income, gain, loss, deductions, and credits of Myers Brothers, a partnership. Each of the issues in dispute involves adjustments to the 1980 and 1981 partnership returns of Myers Brothers.
Myers Brothers (the partnership) owned a 7,000 acre ranch in McCook, Nebraska. During 1980 and 1981, the partnership raised cattle, corn, and wheat; they began to cultivate soybeans in 1982.
The partnership did not purchase cattle as part of its ongoing business; it raised its own cattle. From 375 to 500 cows were on the ranch at any given time. Each year, these cows calved in the spring and continued to graze into the summer. In the fall, the calves were placed in a feedlot where they remained for approximately a year until they were ready to go to market, i.e., finished fat cattle. During 1980 and 1981, from 800 to 1,000 head of cattle were on petitioners' ranch at any given time. The pounds of cattle on feed during those years usually ranged from approximately 600,000 pounds to 1 million pounds.
In 1980 the partnership sold approximately 425 head of cattle, including 375 head of finished fat cattle and 50 cows. Of the finished 375 fat cattle, approximately 50 percent were steers; the remaining 50 percent were heifers averaging 1,100 pounds each. In 1981 the partnerships sold 237 head of cattle, including 87 steers and 150 heifers.
In each of the years in issue, the partnership harvested approximately 150,000 bushels of corn and approximately 40,000 bushels of wheat, all of which were placed with the Commodity Credit Corporation (CCC) as security for nonrecourse loans under the CCC agricultural loan program. By loaning the partnership the fair market value of these commodities, the CCC guaranteed a floor price for the partnership's corn and grain. In 1980 and 1981, the partnership stored some of the corn in silos for its own use as feed for the cattle; the rest of the corn was sold.
The partnership did not plant soybeans in 1980 or 1981, but began to raise them in 1982. In 1982, petitioners irrigated 150 acres for the cultivation of soybeans, and harvested approximately 50 to 60 bushels per acre. Soybeans were a supplement used in the cattle feed on the partnership's ranch.
In 1980 and 1981, the partnership purchased and sold futures contracts for corn, wheat, soybeans, cattle, hogs, gold, treasury bills and treasury bonds. The partnership was at times "long" in the market and other times "short" in the market, and, at times, spread (long one future month and short another in the same commodity).
The partnership realized gains and losses in certain commodity futures transactions during 1980 and 1981, as follows:
1980
Commodity Gain or (Loss)
Live cattle .................... ($237,567.50)
Feeder cattle .................. 62,421.50
Soybeans ....................... ( 116,238.50)
Soybean meal ................... 3,220.00
Soybean oil .................... 4,560.00
Corn ........................... ( 35,962.50)
Wheat .......................... 8,132.50
____________
Net Loss ..................... ($311,434.50)
1981
Commodity Gain or (Loss)
Live cattle .................... $ 26,892.50
Feeder cattle .................. ( 32,838.00)
Soybeans ....................... 4,842.50
Corn ........................... ( 7,572.50)
Wheat .......................... ( 13,055.00)
____________
Net Loss ..................... ($ 21,730.50)
On Schedules F of its 1980 and 1981 returns (Forms 1065), the partnership claimed deductions for commodity futures hedging losses totaling $330,435 for 1980 and $57,701 for 1981. Respondent, in his notices of deficiency, disallowed these ordinary loss deductions but allowed the losses as short term capital losses.
On November 4, 1983, petitioners and respondent executed Form 872-A, Special Consent to Extend the Time to Assess Tax, in which they timely agreed to extend the period for assessment of each petitioner's 1980 income tax liability. That form provided that the extended period of limitations would terminate 90 days after: (1) the Internal Revenue Service (IRS) received Forms 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax, from petitioners; or (2) the IRS executed and mailed Forms 872-T to petitioners; or (3) the IRS mailed notices of deficiency to petitioners. The Forms did not provide for any other methods of terminating the extension.
On February 7 and 17, 1984, counsel for petitioners mailed letters to respondent purporting to terminate petitioners' consent and requesting that respondent issue a notice of deficiency. These letters were received by respondent on or before February 10 and 21, 1984, respectively. Neither of the petitioners sent to respondent a Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax.
On July 11, 1984, more than 140 days after it received the letters from petitioners' counsel, respondent mailed a notice of deficiency to petitioners.
The partnership's 1980 and 1981 commodity futures transactions were not an integral part of its business.
OpinionPetitioners argue that the applicable statute of limitations barred assessment of their 1980 tax liabilities. Petitioners also contend that certain commodity futures transactions were "hedges" integrally related to the partnership's business, and that, as a result, losses incurred in these transactions were deductible as ordinary losses.
Petitioners argue that the applicable period of limitations expired before respondent issued the notices of deficiency for 1980. On November 4, 1983, respondent and each of the petitioners agreed to extend the period of limitations for the assessment of petitioners' 1980 income tax liabilities. The parties executed Forms 872-A, Special Consent to Extend the Time to Assess Tax. Neither respondent nor petitioners executed Forms 872-T. Respondent mailed notices of deficiency more than 90 days after receipt of letters from petitioners' counsel that purportedly terminated the extension. Petitioners argue that respondent's determination is therefore barred by the statute of limitations.
This Court rejected a similar argument in Grunwald v. Commissioner Dec. 42,841, 86 T.C. 85 (1986).1 In that case we held that a letter from an IRS appeals officer to the taxpayers' counsel was not sufficient to terminate a Form 872-A, and that the parties were bound by the explicit termination provisions of the form. 86 T.C. at 89. Because Form 872-A provided that the Commissioner could terminate the agreement only by issuing a statutory notice of deficiency or by executing and mailing a Form 872-T, the appeals officer's letter did not terminate the consent agreement. Cases decided before the introduction of Form 872-T, such as Johnson v. Commissioner Dec. 34,543, 68 T.C. 637 (1977), and Borg-Warner Corp. v. Commissioner 81-2 USTC ¶ 9684, 660 F.2d 324 (7th Cir. 1981), revg. a Memorandum Opinion of this Court Dec. 36,285(M), were found to be no longer controlling. 86 T.C. at 90. Petitioners' reliance on Rault v. Commissioner Dec. 39,041(M), T.C. Memo. 1982-283, is therefore misplaced because, like Johnson and Borg-Warner, Rault was decided before respondent revised Form 872-A and adopted Form 872-T. The letters from petitioners' counsel are not Forms 872-T and thus did not terminate petitioners' consent to extend the period for assessment of tax. The statutory notices were therefore timely as to both years in issue.
Petitioners contend that losses incurred on disposition of certain commodity futures contracts were deductible as ordinary losses.2 In 1980 and 1981 the partnership purchased and sold futures contracts for hogs, gold, treasury bills, and treasury bonds. Petitioners do not claim that these transactions were entered into for hedging purposes. The partnership also purchased and sold futures contracts for corn, wheat, soybeans, soybean meal, soybean oil, live cattle, and feeder cattle. Relying on Corn Products Refining Co. v. Commissioner 55-2 USTC ¶ 9746, 350 U.S. 46 (1955), petitioners contend that the purchase and sale of these...
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