True v. USA., 98-8015
| Decision Date | 09 September 1999 |
| Docket Number | No. 98-8015,98-8015 |
| Citation | 190 F.3d 1165 |
| Parties | (10th Cir. 1999) JEAN D. TRUE, individually and as personal representative of the estate of Henry A. True, Jr.; HENRY A. TRUE, III; KAREN S. TRUE, DIEMER D. TRUE; SUSAN L. TRUE; DAVID L. TRUE; MELANIE A. TRUE, Plaintiffs-Appellants, v. UNITED STATES OF AMERICA, Defendant-Appellee |
| Court | U.S. Court of Appeals — Tenth Circuit |
Appeal from the United States District Court for the District of Wyoming. D.C. No. 96-CV-1050-J
[Copyrighted Material Omitted] Richard E. Day (Mark L. Carman of Williams, Porter, Day and Neville, P.C.; and Ronald M. Morris with him on the briefs) of Williams, Porter, Day and Neville, P.C., Casper, Wyoming, for Plaintiffs-Appellants.
Jonathan S. Cohen (Loretta C. Argrett, Assistant Attorney General, and Teresa T. Milton, Department of Justice, Washington, D.C.; David D. Freudenthal, United States Attorney for the District of Wyoming, Cheyenne, Wyoming, of counsel, with him on the briefs) of the Department of Justice, Washington, D.C., for Defendant-Appellee.
Before TACHA, BARRETT and BRORBY, Circuit Judges.
Appellants, Jean D. True (individually and personal representative of the estate of Henry A. True, Jr.), Henry A. True III, Karen S. True, Diemer D. True, Susan L. True, David L. True, and Melanie A. True (hereinafter "taxpayers," "Trues," or "True family"), challenge the district court's summary judgment order in favor of the government, claiming the court erroneously applied the step transaction doctrine to invalidate certain business transactions they executed. In addition, Appellants argue the district court erred when it refused to apply the collateral estoppel doctrine to bar relitigation of particular issues decided in an earlier tax case involving the same parties.1 We exercise jurisdiction pursuant to 28 U.S.C. § 1291 and affirm in part, reverse in part, and remand for further proceedings.2
This tax refund suit arises from the Trues' dispute with the Internal Revenue Service over the characterization of certain transactions involving several True family businesses. The Trues engage in a variety of business ventures including oil and gas production and exploration, and ranching. They conduct their family businesses primarily as general partnerships or Subchapter S Corporations, with Henry True, Jr. (prior to his death) and his wife, Jean, owning equal controlling interests, and their three sons, Henry, Diemer, and David, sharing equal minority interests in the ownership and operation of the businesses.3 The family businesses involved in this case are True Ranches, a partnership engaged in ranching, farming, and feedlot operations; Smokey Oil Company, a Wyoming corporation engaged in oil and gas production and exploration; True Oil Company, a general partnership engaged in oil and gas production and exploration; and Bear Lodge Mountain Corporation and True Land and Royalty Company, two Subchapter S corporations the Trues organized to acquire and deal in oil and gas leases.
Two separate series of transactions involving the Trues' businesses are presently in dispute. The first involves a multi-stage purchase, exchange, and transfer involving ranchland properties (hereinafter "ranchland transactions"), and the second involves the acquisition and subsequent assignment of oil and gas leases in exchange for guaranteed minimum overriding royalty payments (hereinafter "oil and gas lease transactions"). In order to explain clearly the events giving rise to this suit, we summarize the transactions separately.
During the 1980s, the True family purchased five new ranch properties to add to their ranching operations. Each purchase took place through the same series of steps, described as follows. First, instead of True Ranches directly acquiring the ranchlands, the taxpayers arranged for Smokey Oil Company to purchase the parcels of real property, while True Ranches acquired the operating assets of each ranch. Smokey Oil Company then transferred the ranchlands to True Oil Company in exchange for selected productive oil and gas leases. Internal Revenue Code § 1031 permitted the Trues to treat the exchange as a like-kind, tax-free exchange.4 After the transfer, True Oil Company immediately distributed the newly acquired ranchlands to the individual family-member partners of True Oil Company as tenants in common. The partners then contributed their undivided interests in the lands to True Ranches by general warranty deed. Internal Revenue Code §§ 721 and 731 allowed the Trues to treat these distributions as non-recognition transactions.
This series of acquisitions, transfers and exchanges had positive tax implications for the Trues. Through the operation of I.R.C. § 1031(d), which essentially provides that the basis of property received in a tax-free exchange is the same as the basis of the property transferred, Smokey Oil Company received depletable oil and gas leases with the same cost basis it had in the non-depreciable ranchland it transferred in the exchange with True Oil Company. This allowed Smokey Oil Company to claim cost depletion deductions for the leases on its tax returns for 1989 and 1990 under I.R.C. § 612, resulting in substantial tax savings for the True family. True Oil Company, on the other hand, received the non-depreciable ranchland with a zero basis because the oil and gas leases it exchanged pursuant to I.R.C. § 1031 were fully cost depleted. Through the subsequent transfers, True Ranches acquired the ranchland with the same zero basis as True Oil Company's oil and gas leases. Ultimately, the Trues reaped the tax benefits of turning non-depreciable assets (ranchlands) into cost-depletable assets (oil and gas leases) in the hands of Smokey Oil Company, with the residual effect of ridding True Oil Company of fully cost-depleted assets (oil and gas leases) and leaving True Ranches with a zero basis in otherwise non-depreciable assets (ranchlands).
Employing a similar strategy, the Trues utilized Bear Lodge Mountain Corporation and True Land and Royalty Company to acquire and then assign numerous oil and gas leases. Neither of these entities had any employees, and they relied primarily on the land department of True Oil Company or independent landmen hired by True Oil Company to arrange the lease acquisitions. The Trues structured the transactions so that Bear Lodge Mountain Corporation and True Land and Royalty Company acquired the oil and gas leases, and shortly thereafter, assigned a 100 percent interest in the leases to either True Oil Company or Smokey Oil Company. In exchange, Bear Lodge Mountain Corporation or True Land and Royalty Company retained an overriding royalty of five percent, against which True Oil Company and Smokey Oil Company made annual advance royalty payments or "guaranteed minimum overriding royalty" payments over the life of the lease.
As a result of these transactions, True Oil Company and Smokey Oil Company deducted the guaranteed minimum overriding royalties paid to Bear Lodge Mountain Corporation and True Land and Royalty Company on their tax returns for 1989 and 1990 under Treas. Reg. § 1.612-3(b)(3). This arrangement allowed True Oil Company and Smokey Oil Company to realize the tax benefits of immediately expensing the guaranteed minimum overriding royalty payments instead of capitalizing the purchase of the leases as the Internal Revenue Code ordinarily requires for direct purchases of those type assets. On the other side of the transaction, even though the Internal Revenue Code required Bear Lodge Mountain Corporation and True Land and Royalty Company to report the guaranteed minimum overriding royalty payments as income they received in exchange for the oil and gas lease assignments, the companies could claim an offsetting cost depletion deduction under Treas. Reg. § 1.612-3(b)(1). This maneuvering resulted in an overall tax advantage for the True family businesses that passed through to the individual taxpayers.
C. Internal Revenue Service Proceedings
Suspicious of both the ranchland and oil and gas lease transactions, the Internal Revenue Service audited the Trues' tax returns for tax years 1989-1990. As a result of the audit, the Internal Revenue Service recharacterized both the ranchland transactions and oil and gas lease transactions, denying the Trues the described tax benefits associated with them.
The Internal Revenue Service treated the ranchland transactions as if True Ranches had acquired the property in the first instance, and thus assigned True Ranches the same basis in the property as the amount Smokey Oil Company paid to acquire the land. The Internal Revenue Service also disallowed the cost depletion deductions Smokey Oil Company took for the leases acquired from True Oil Company in the tax-free exchange. Instead, the Internal Revenue Service allocated the income from those leases to True Oil Company and allowed True Oil Company to take percentage depletion deductions, rather than the cost depletion Smokey Oil Company originally claimed.
As for the oil and gas lease transactions, the Internal Revenue Service treated True Oil Company and Smokey Oil Company as having directly acquired the leases instead of Bear Lodge Mountain Corporation and True Land and Royalty Company. Accordingly, the Internal Revenue Service (1) disallowed True Oil Company's and Smokey Oil Company's guaranteed minimum overriding royalty deductions, and (2) required the companies to treat the cost of acquiring the leases as capital expenditures. The Internal Revenue Service allowed Bear Lodge Mountain Corporation and True Land and Royalty Company to exclude the guaranteed minimum overriding royalty income, but did not permit the companies to claim a deduction for cost depletion.
The Trues paid under protest the deficiency from the 1989 and 1990 tax years as determined by the Internal...
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