River City Ranches #1 Ltd. v. Commissioner

• Decision Date: 23 May 2003
• Docket Number: Docket No. 13260-99.,Docket No. 9779-96.,Docket No. 14722-95.,Docket No. 16574-99.,Docket No. 5197-96.,Docket No. 17125-99.,Docket No. 382-95.,Docket No. 15753-98.,Docket No. 787-91.,Docket No. 15754-98.,Docket No. 3304-97.,Docket No. 386-95.,Docket No. 13256-99.,Docket No. 16568-99.,Docket No. 21461-95.,Docket No. 3749-97.,Docket No. 5238-96.,Docket No. 14719-95.,Docket No. 5239-96.,Docket No. 5240-96.,Docket No. 4876-94.,Docket No. 14724-95.,Docket No. 16570-99.,Docket No. 14718-95.,Docket No. 16563-99.,Docket No. 13251-99.,Docket No. 13261-99.,Docket No. 15751-98.,Docket No. 15748-98.,Docket No. 21774-96.,Docket No. 9550-94.,Docket No. 16572-99.,Docket No. 385-95.,Docket No. 13599-94.,Docket No. 15750-98.,Docket No. 15747-98.,Docket No. 14720-95.,Docket No. 9554-94.,Docket No. 16557-99.,Docket No. 13597-94.,Docket No. 9552-94.,Docket No. 15749-98.,Docket No. 13262-99.,Docket No. 3306-97.,Docket No. 3311-97.,Docket No. 13595-94.,Docket No. 13259-99.,Docket No. 13257-99.,Docket No. 5241-96.,Docket No. 16581-99.,Docket No. 5198-96.,Docket No. 16578-99.,Docket No. 14038-96.,Docket No. 9781-96.,Docket No. 13250-99.,Docket No. 19106-98.,Docket No. 383-95.,Docket No. 5196-96.,Docket No. 15752-98.,Docket No. 9780-96.,Docket No. 3305-97.,Docket No. 13258-99.
• Citation: 85 T.C.M. 1365
• Parties: 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. v. Commissioner.<SMALL><SUP>1</SUP></SMALL>
• Court: U.S. Tax Court

85 T.C.M. 1365

T.C. Memo. 2003-150

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. v. Commissioner.¹

Docket No. 787-91.

Docket No. 4876-94.

Docket No. 9550-94.

Docket No. 9552-94.

Docket No. 9554-94.

Docket No. 13595-94.

Docket No. 13597-94.

Docket No. 13599-94.

Docket No. 382-95.

Docket No. 383-95.

Docket No. 385-95.

Docket No. 386-95.

Docket No. 14718-95.

Docket No. 14719-95.

Docket No. 14720-95.

Docket No. 14722-95.

Docket No. 14724-95.

Docket No. 21461-95.

Docket No. 5196-96.

Docket No. 5197-96.

Docket No. 5198-96.

Docket No. 5238-96.

Docket No. 5239-96.

Docket No. 5240-96.

Docket No. 5241-96.

Docket No. 9779-96.

Docket No. 9780-96.

Docket No. 9781-96.

Docket No. 14038-96.

Docket No. 21774-96.

Docket No. 3304-97.

Docket No. 3305-97.

Docket No. 3306-97.

Docket No. 3311-97.

Docket No. 3749-97.

Docket No. 15747-98.

Docket No. 15748-98.

Docket No. 15749-98.

Docket No. 15750-98.

Docket No. 15751-98.

Docket No. 15752-98.

Docket No. 15753-98.

Docket No. 15754-98.

Docket No. 19106-98.

Docket No. 13250-99.

Docket No. 13251-99.

Docket No. 13256-99.

Docket No. 13257-99.

Docket No. 13258-99.

Docket No. 13259-99.

Docket No. 13260-99.

Docket No. 13261-99.

Docket No. 13262-99.

Docket No. 16557-99.

Docket No. 16563-99.

Docket No. 16568-99.

Docket No. 16570-99.

Docket No. 16572-99.

Docket No. 16574-99.

Docket No. 16578-99.

Docket No. 16581-99.

Docket No. 17125-99.

United States Tax Court.

Filed May 23, 2003.

Montgomery W. Cobb, for the 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 the respondent.

Contents

                FINDINGS OF FACT .................................................................................. 1368
                A. Overview of the Hoyt Operatins ................................................................. 1368
                B. Formation and Operation of the Hoyt Sheep Partnership .......................................... 1368
                C. Respondent's Examination Efforts and Enforcements Actions ...................................... 1371
                D. Governmental Investigations of Jay Hoyt ........................................................ 1373
                E. Certain Agreements Extending the Period of Limitations That Jay Hoyt and the IRS Executed ...... 1374
                OPINION ........................................................................................... 1375
                Issue 1. Entitlement of Partnership Level Theft Loss Deductions ................................... 1375
                A. The Parties' Arguments ......................................................................... 1375
                   1. Petitioners' Arguments ...................................................................... 1375
                   2. Respondent's Arguments ...................................................................... 1376
                B. Discussion of Applicable Law ................................................................... 1376
                   1. Section 165 Theft Loss ...................................................................... 1376
                   2. Estoppel Principles ......................................................................... 1377
                      a. Equitable Estoppel ....................................................................... 1377
                      b. Collateral Estoppel ...................................................................... 1377
                      c. Judicial Estoppel ........................................................................ 1378
                C. Discussion of Partnership Level Theft Loss Deductions .......................................... 1378
                   1. Determination of Whether the Sheep Partnerships Were Victims of Theft ....................... 1378
                      a. The Occurrence of a Theft ................................................................ 1379
                         (i) Jay Hoyt's Conviction of Federal Crimes .............................................. 1379
                         (ii) Petitioners' Claim That a Theft From the Partners is a Theft From the Partnerships... 1380
                         (iii) Petitioners' Claim That a Theft Occurred Under State Law ........................... 1382
                

                         (iv) Analysis of Case Law Cited By Petitioners ........................................... 1383
                      b. The Year of Discovery Requirement ........................................................ 1384
                         (i) Application of Equitable Estoppel .................................................... 1385
                         (ii) Application of the Rod Warren Ink Case .............................................. 1386
                         (iii) Petitioners' Year of Discovery Claim ............................................... 1387
                      C. The Remaining Elements of a Theft Loss ................................................... 1387
                   2. Application of collateral and Judicial Estopped ............................................. 1387
                      a. Collateral Estoppel ...................................................................... 1387
                      b. Judicial Estoppel ........................................................................ 1388
                D. Conclusion ..................................................................................... 1389
                Issue 2. Espiration of the Period of Limitations .................................................. 1389
                A. The Parties' Arguments ......................................................................... 1389
                   1. Petitioners' Arguments ...................................................................... 1389
                   2. Respondent's Arguments                                                                        1390
                B. Discussion of Applicable Law ................................................................... 1390
                C. Determination as to Whether the Applicable Periods of Limitations on Assessment Have Espired ... 1391
                D. Conclusion ..................................................................................... 1394
                Issue 3. Whether Some Partnerships' Purported Purchases of Breeding Sheep Contitute 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) .......................................... 1394
                A. The Parties' Arguments ......................................................................... 1394
                   1.Petitioners' Arguments ....................................................................... 1394
                   2.Respondent's Arguments ....................................................................... 1395
                B. Section 6621(c) ................................................................................ 1396
                C. The Tax Court's Jurisdiction ................................................................... 1396
                APPENDIX .......................................................................................... 1397
                

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.

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 Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209, affd. [2002-1 USTC ¶ 50,105] 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 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...