Webber v. Commissioner
| Decision Date | 12 October 1983 |
| Docket Number | 31099-81,31096-81,27393-81,27409-81,24614-82.,18431-81,Docket No. 14500-81,29564-81,7228-82 |
| Parties | Douglas G. Webber and Betty J. Webber, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Michael P. Casterton and James R. Luppino, 1515 River Park Drive, Sacramento, Calif., for the petitioners. James M. Eastman and Edward I. Kaplan, for the respondent.
Memorandum Findings of Fact and Opinion
These consolidated cases were assigned to and heard by former Special Trial Judge Darrell D. Hallett pursuant to the provisions of section 7456(c) of the Internal Revenue Code2 and Rules 180 and 181, Tax Court Rules of Practice and Procedure.3 The opinion of former Special Trial Judge Hallett was prepared and submitted prior to his resignation on July 1, 1983. The Court agrees with and adopts that opinion, which is set forth below.
HALLETT, Special Trial Judge:
Respondent determined deficiencies in petitioners' Federal income taxes for the years and in the amounts as follows.
Addition
to Tax
Docket No. Year Deficiency Sec. 6653(a)
14500-81 1977 .............. $13,397.53 $-0-
1978 .............. 15,650.00 -0-
1979 .............. 15,776.00 -0-
18431-81 1975 .............. 2,853.00 -0-
1976 .............. 1,174.00 -0-
1977 .............. 14,170.00 -0-
27393-81 1976 .............. 11,640.00 -0-
1977 .............. 4,472.00 -0-
1978 .............. 6,810.00 -0-
1979 .............. 3,530.00 -0-
27409-81 1976 .............. 10,904.00 545
1977 .............. 5,456.00 273
1978 .............. 6,231.00 312
29564-81 1976 .............. 4,440.00 -0-
1977 .............. 2,137.00 -0-
1978 .............. 1,974.00 -0-
31096-81 1977 .............. 4,081.00 -0-
1978 .............. 2,366.00 -0-
31099-81 1975 .............. 4,195.00 -0-
7228-82 1978 .............. 12,839.55 -0-
1979 .............. 8,981.95 -0-
1980 .............. 6,375.00 -0-
24614-82 1979 .............. 960.00 -0-
1980 .............. 4,981.00 -0-
The issues for decision are as follows:
(1) Whether petitioners are entitled to investment tax credits and depreciation determined by reference to the contract purchase prices of beaver breeding herds;
(2) Whether petitioners are entitled to interest deductions in the amounts paid and designated as interest in their beaver purchase contracts and notes;
(3) What is the fair market value of the beavers purchased by petitioners;
(4) Whether petitioners had an objective to make a profit in connection with the purchase and maintenance of their beaver breeding herds;
(5) Whether petitioners are liable for recapture of investment tax credits with respect to purchased beavers disposed of during the taxable years;
(6) Whether petitioners Sypolt and Webber had ordinary income or capital gain from the sale of beavers; and
(7) Whether all petitioners except Coker and Moore are liable for the addition to tax provided by section 6653(a) for negligence or intentional disregard of the rules and regulations.
The issues covered in the trial of these consolidated cases are all related to the petitioners' purchase and maintenance of domestic beaver breeding herds. We will first set forth the facts common to the beaver industry as a whole, and then find facts pertaining to each individual petitioner. The parties have agreed that all of the testimony and exhibits received during the trial of these cases may be considered as evidence in each individual case.
Some of the facts have been stipulated, and are found accordingly.
From the days of exploration and development of North America, there has been a significant industry based upon the production, marketing, and manufacture of beaver pelts. The majority of pelts are trapped in the wild by thousands of small producers. Others are taken from beaver bred and raised on various ranches located in the western United States. Beaver pelts are marketed by producers through auction outlets and large skin dealers and are made into consumer products by manufacturers, most of which are located in Europe and, to a lesser extent, New York City. From 1970 through 1980, the number of beaver pelts marketed annually in Canada ranged from approximately 350,000 to 600,000, with a total value of from 4.5 to 26 million dollars. During the same period, the number of pelts marketed in the United States ranged from 100,000 to 450,000 annually with pelt values of from 1 to 17.5 million dollars.
End products made from beaver include coats, hats, gloves, vests, purses, pillows, and bedspreads.
The market for beaver pelts is part of the fur market which includes fox, mink, chinchilla, muskrat, and racoon. Although these animals, like beaver, are all trapped in the wild, some have been raised domestically and bred on fur farms for a number of years. For example, much of the mink production in North America is raised and bred on farms.
In 1922, the United States Department of Agriculture published a bulletin suggesting the possibility of domestic beaver farming. The earliest known experiment in actually raising and breeding beaver commercially occurred in 1925 when Mark L. Weaver placed a number of wild beaver in a fenced area located in Salt River Canyon, Wyoming. That experiment turned out to be a failure, but over the years Mr. Weaver and others continued experimenting with raising and breeding beaver in various situations. By the 1950's, ranches were in operation which utilized individual pens, generally made primarily of concrete with a water flow area, covered nest box, feeding facilities, and an enclosed environment sufficient to house a breeding pair of beaver and their kits. One of the early ranches, built in 1952 near Hamilton, Montana, is still in existence today.
By the mid-1960's Mr. Weaver and his associates had formed a sales organization and developed a sales program to provide a means for beaver owners to list their animals for sale and attempt to bring more investors and owners into the industry. By 1966, there were approximately 80 beaver ranches and a total of approximately 18,000 animals on the ranches. In 1966, the Securities and Exchange Commission conducted an investigation of the Weaver sales organization which culminated in the organization and the individuals associated with it being enjoined from future sales activities. Within 2 to 3 years of the issuance of the injunction, the number of beavers on ranches dropped drastically from approximately 18,000 to less than 4,000. Many of the owners of the ranches simply left the beavers to die from starvation in their pens. Others were turned loose in the wild and some were killed because the operator of the ranch could not feed the animals and the owners of the beaver were not paying the ranch operators for feed.
The number of ranches and beavers began to increase again in the early 1970's to the point that there were approximately 10,000 beavers on various ranches by 1976.
In 1968, the Western Beaver Breeder's Cooperative Association (WBBCA) was formed. WBBCA, since that time, has operated as a marketing and agricultural cooperative. Its members are beaver owners and ranch operators. It functions as a service organization, handling the collection of feed bills, keeping detailed records of each owner's beaver herds, and engaging in marketing activities. Individuals associated with and principally involved in the activities of WBBCA from 1970 through 1976 included Dennis Crum, Paul Sharp, Jerry Milligan, and Mac Roundy. In 1976 or 1977, the individuals associated with WBBCA essentially split into two groups. The group remaining with WBBCA had the view that it was then time to start pelting on a fairly heavy basis, make the pelts into garments, and market the garments. The other group, whose members became associated with an organization which had been formed in 1974 and with the name of Western Beaver Farms Limited (WBF), had the philosophy that more years of selective breeding and genetic development were necessary before intensive pelting should be commenced. WBF is a general partnership with nine partners including Dennis Crum and Mac Roundy. After the 1977 division, Mac Roundy and Dennis Crum were primarily involved with WBF. Jerry Milligan retained his association with WBBCA. WBF, like WBBCA, functions as a service organization for owners and ranchers.
Since 1950, detailed records have been maintained with respect to beaver kept on the ranches. In 1964, recordkeeping was computerized. Each of the petitioners involved in these cases received a computer listing of their animals at the time of purchase. Thereafter, they received quarterly ranch reports accounting for births, deaths, and dispositions of animals. Included in the information maintained on these records for each beaver is a tattoo number; the ranch and pen location of the animal; the sex; the age; its litter size; characteristics of its fur; and its breeding and reproductive history.
During the early to mid-1970's, many beavers were sold to individual investors on terms and at stated sales prices substantially similar to those described below with respect to the beavers purchased by the petitioners involved in these cases. Typically, purchases were made of a breeding herd of 10 to 40 pairs of adult beavers, some of...
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