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ROBERT L. WHEELER and HELENE E. WHEELER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent; MORTON S. ROSEN and BEVERLY ROSEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTWheeler v. CommissionerDocket Nos. 4346-80, 4347-80.
United States Tax Court T.C. Memo 1983-385; 1983 Tax Ct. Memo LEXIS 403; 46 T.C.M. 642; T.C.M. (RIA) 83385;June 30, 1983. 1983 Tax Ct. Memo LEXIS 403">*403Milton A. Levenfeld andAlan F. Segal, for the petitioners.Stephen J. Morrow andAllan E. Lang, for the respondent.FAYMEMORANDUM FINDINGS OF FACT AND OPINION
FAY,
Judge: Respondent determined the following deficiencies in petitioners' Federal income tax:Docket No. Year Deficiency 4346-80 (Robert L. 1975 $15,240 and Helene E. 1976 22,580 Wheeler) 1977 13,814 4347-80 (Morton 1975 46,424 S. and Beverly 1976 42,537 Rosen) 1977 24,532 These cases are consolidated for trial, briefing, and opinion. The issue is whether petitioners are entitled to various deductions and credits claimed in connection with their investments in a cattle breeding operation.
FINDINGS OF FACT
Some of the facts are stipulated and found accordingly.
All petitioners herein resided in Illinois when they filed their petitions.
Petitioners Morton S. Rosen1983 Tax Ct. Memo LEXIS 403">*404 and Robert L. Wheeler are dental partners practicing in Illinois. In 1973, petitioner Morton S. Rosen entered a commercial cattle breeding tax shelter promoted by Ralph A. Eckhardt (Eckhardt), an Iowa cattle operator and a dental patient of Rosen. In 1975, Rosen's partner, petitioner Robert L. Wheeler, entered the same tax shelter.
Pursuant to this tax shelter, petitioners were to purchase a herd of cattle from American Land and Cattle Industries, Inc., (ALC), a corporation wholly owned and operated by Eckhardt. The herd was to be maintained for the production of cattle to be sold for feeding and slaughter. ALC hoped to retain superior female progeny to upgrade the quality of the herds while inferior female animals and steer calves would be sold for slaughter, a process referred to as "culling." ALC represented that unregistered cattle would be bred with purebred bulls. Breedable heifers would be added back to the basic herd to replace those that had been culled. In this manner, petitioners would have a constantly evolving herd.
Petitioners allegedly purchased the following herds for the following stated purchase prices:
Size of Stated Purchase Year Herd (Brand) Price Petitioner 1973 70 (Hereford) $70,000 Morton S. 1974 30 (Angus) 60,000 Rosen 1975 30 (White Faced 60,000 Angus) 1976 50 (Charolais) 100,000 Petitioner 1975 30 (Angus) 60,000 Robert L. 1976 30 (Hereford) 60,000 Wheeler 1983 Tax Ct. Memo LEXIS 403">*405 Each herd was purchased with a small cash downpayment and a large nonrecourse note to ALC. In addition, a portion of the stated purchase price of each herd consisted of either a "bank loan" or an "ALC advance." The manner in which the herds were financed is illustrated by the following chart.
Purchase Nonrecourse "Bank" "ALC" Herd Price Cash Note Loan Advance Petitioner 1973 $70,000 $7,700 $45,500 0 $16,800 Morton S. 1974 60,000 3,900 39,000 $16,800 300 Rosen 1975 60,000 3,000 39,000 18,000 0 1976 100,000 0 70,000 0 30,000 Petitioner 1975 60,000 3,000 39,000 18,000 0 Robert L. 1976 60,000 0 42,000 0 18,000 Wheeler Each "bank loan" was made with the Decatur County State Bank of Leon, Iowa. No loan applications, financial statements, or net worth statements were submitted by either Eckhardt, Rosen, Wheeler, or any other person in connection with these loans, and no inspections of any cattle or land owned by either Eckhardt or petitioners was conducted by the bank in connection with these loans. Proceeds of these loans never left the bank; they were used to purchase certificates1983 Tax Ct. Memo LEXIS 403">*406 of deposit which were retained by the bank as collateral for the loans.
No part of the "ALC advances" which constitute a portion of the stated purchase price of several of petitioners' herds has been repaid by petitioners.
Under the purchase agreements, ALC guaranteed to replace, at no cost to petitioners, any purchased breeding animal that died or was lost (from whatever cause). After two years, ALC guaranteed that cash from the sale of cattle would be equal to or greater than the annual payment due ALC on the nonrecourse note plus the maintenance fee. In addition, ALC guaranteed to purchase back petitioners' herds at their "Net Herd Value" whenever petitioners chose to terminate the agreement. After seven years, the "Net Herd Value" was guaranteed to be at least whatever portion of the purchase price exceeded the nonrecourse note. Thus, for instance, the "Net Herd Value" of Wheeler's 1975 herd was guaranteed at $21,000 as of December 31, 1981.
ALC was to provide the requisite management service to care, feed, breed, and otherwise maintain and sell the cattle. In return, petitioners were required to pay an annual $98 maintenance fee per head for the 1973, 1974, and 19751983 Tax Ct. Memo LEXIS 403">*407 herds. The fee was $147 per head for the 1976 herd.
In connection with this venture, petitioners claimed various farm expense deductions and investment tax credits. In his notices of deficiency, respondent disallowed all deductions to the extent they exceeded any reported income and all credits arising out of this cattle shelter for petitioners' taxable years 1975 and 1976. 1983 Tax Ct. Memo LEXIS 403">*408 to be the cattle owned by petitioners and pictures of the inspected cattle were taken.
Prior to this inspection, on August 1, 1982, Eckhardt contacted Gordon Reisinger, a cattle broker for the Clifton Cattle Company, to acquire a load of cattle. Pursuant to a sales agreement, Reisinger delivered 170 cattle to Eckhardt just prior to the inspection. Subsequent to the inspection, Reisinger repossessed the cattle on October 1, 1982, upon Eckhardt's default of the sales agreement. Reisinger identified the cattle in the pictures taken at the August 31 inspection as the same cattle he sold to Eckhardt.
We must agree with respondent that the cattle inspected on August 31, 1982, were nothing more than a "rent-a-herd" staged to lead respondent into believing they were owned by petitioners. It goes without saying that if petitioners did not own any cattle, none of the claimed deductions and credits are allowable. Respondent has shown to our satisfaction that no such herds, whether through the evolutionary product of the "culling process" or otherwise, existed either at the time of the inspection or at any time prior to the inspection. Therefore, we sustain respondent's determination.
1983 Tax Ct. Memo LEXIS 403">*409 Petitioners' counsel admit the cattle that were inspected were not petitioners' cattle although at the time of the inspection, they, too, assumed the cattle inspected were petitioners'.
We further hold for respondent on alternative grounds. The tax avoidance considerations so overwhelmingly pervade this tax shelter in comparison to any true economic objectives that, under the particular facts of this case, even if the cattle did exist, petitioners lacked the requisite profit motive to be allowed the disputed deductions. See recent1983 Tax Ct. Memo LEXIS 403">*410 decisions of this Court,
Fox v. Commissioner, 80 T.C. 972">80 T.C. 972Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471Petitioners are individual passive investors who essentially knew nothing about cattle. They were content to make small cash payments and report huge tax write-offs through highly inflated purchase prices by using nonrecourse liability and other financing techniques. 1983 Tax Ct. Memo LEXIS 403">*411 large incomes from petitioners' dental practices, all at the expense of the Federal government. See also
Houchins v. Commissioner, 79 T.C. 570">79 T.C. 570Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 12211983 Tax Ct. Memo LEXIS 403">*412 Petitioners contend the burden of proof has shifted to respondent since he has raised an issue different from the issue asserted in the notice of deficiency. 1983 Tax Ct. Memo LEXIS 403">*413 for the purpose of receiving additional evidence. Such authority, however, is inherent in the judicial administration of the law and a court's fact finding function. It is also implicit in
Rules 59 and60, Federal Rules of Civil Procedure , which authorize new trials and certain relief from judgments or orders.Zenith Radio Corp. v. Hazeltime Research Inc. 401 U.S. 321">401 U.S. 321 (1971)Thomas v. SS Santa Mercedes, 572 F.2d 1331">572 F.2d 1331Nor-Cal Adjusters v. Commissioner, 503 F.2d 359">503 F.2d 359Caracci v. Brother Internat'l Sewing Machine Corp. of La., 222 F. Supp. 769">222 F. Supp. 769341 F.2d 377">341 F.2d 377 (5th Cir. 1965). Respondent's motion to reopen this case was based on newly discovered evidence that the cattle inspected on August 31, 1982, were not, in fact, owned by petitioners. This1983 Tax Ct. Memo LEXIS 403">*414 evidence was clearly material to the case and warranted reopening the record for this limited purpose. Decisions will be entered under Rule 155.Footnotes
1. In his notice of deficiency, respondent originally determined deficiencies of $38,313 and $17,502 for 1976 and 1977 in docket No. 4347-80 (Morton S. and Beverly Rosen). By amended answer, respondent increased those deficiencies to reflect the above amounts.↩
2. With respect to petitioners Morton S. and Beverly Rosen, the statute of limitations bars assessment of 1973 and 1974 taxes.↩
3. This admission was made at the hearing to reopen the record for the purpose of receiving newly discovered evidence. See pgs. 10-11,
infra.↩ 4. For instance, proceeds of the "bank loans" never left the bank. They were simply used to purchase certificates of deposit which were retained by the bank as collateral for the loans. Moreover, contrary to the bank's policy in granting cattle loans, no applications, financial statements, or net worth statements were filed in connection with these loans, and the bank made no inspection of any cattle or land pursuant to the granting of these loans. These loans were not based on petitioners' credit, or, for that matter, anyone's credit. The bank was totally free of any risk for these loans. The loans were made solely because the proceeds of the loans themselves were put up as security. We fail to see any purpose served by these loans. ↩
5. The parties entered into this stipulation prior to the discovery of evidence regarding the "rent-a-herd." ↩
6. We are not influenced in that Rosen and Wheeler may not have been aware of the ALC guarantee. The guarantee is unambiguously and prominently set forth in the agreement.↩
7. In his notice of deficiency, respondent disallowed the claimed deductions and credits since petitioners lacked a profit motive.↩
8.
Rule 1 of the Tax Court Rules of Practice and Procedure↩ provides, in part, that where there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure.9. In reaching our decision, we limited our consideration of the evidence presented at the reopening hearing to the affidavit of Gordon Reisinger.↩
Document Info
Docket Number： Docket Nos. 4346-80, 4347-80.
Citation Numbers： 46 T.C.M. 642, 1983 Tax Ct. Memo LEXIS 403, 1983 T.C. Memo. 385
Filed Date： 6/30/1983
Precedential Status： Non-Precedential
Modified Date： 11/21/2020