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Судебные дела / Зарубежная практика  / River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner, et al. 1 v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1999-209, Docket Nos. 9551-94, 9553-94, 13596-94, 13598-94, 384-95, 387-95, 14721-95, 14723-95, 21630-95., Filed June 22, 1999

River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner, et al. 1 v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1999-209, Docket Nos. 9551-94, 9553-94, 13596-94, 13598-94, 384-95, 387-95, 14721-95, 14723-95, 21630-95., Filed June 22, 1999

24.06.2008  

River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner, et al. 1 v. Commissioner.

United States Tax Court - Memorandum Decision

T.C. Memo. 1999-209

Docket Nos. 9551-94, 9553-94, 13596-94, 13598-94, 384-95, 387-95, 14721-95, 14723-95, 21630-95.

Filed June 22, 1999.

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1 The following cases are consolidated herewith: River City Ranches #6, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 9553-94; River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 13596-94; River City Ranches #6, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 13598-94; River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 384-95; River City Ranches #6, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 387-95; River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 14721-95; River City Ranches #6, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 14723-95; Ovine Genetic Technology 1990, J.V., Walter J. Hoyt III, Tax Matters Partner, Docket No. 21630-95.

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Walter J. Hoyt III (tax matters partner), pro se. Timothy G. Buck and Michael D. Culy, for the petitioner in Docket No. 9553-94. Michael A. MacDonald, for the petitioner in Docket No. 384-95. Catherine J. Caballero and Paul Robeck, for the respondent.

MEMORANDUM OPINION

DAWSON, Judge: This case was assigned to Special Trial Judge Stanley J. Goldberg, pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. 2 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

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2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

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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 the adjustments in the amounts and for the taxable years as set forth in Appendix A hereto. 3

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3 The years in issue for River City Ranches #4 are 1987, 1988, its year ended Sept. 30, 1989, year ended Sept. 30, 1990, and year ended Sept. 30, 1991. Respondent granted River City Ranches #4 permission to change to a taxable year ended Sept. 30, beginning with its year ended Sept. 30, 1989. The years in issue for River City Ranches #6 are 1987, 1988, its year ended Sept. 30, 1989, year ended Sept. 30, 1990, and 1991. Respondent granted River City Ranches #6 permission to change to a taxable year ended Sept. 30, 1989, beginning with its year ended Sept. 30, 1989. The year in issue for Ovine Genetic Technology 1990 is 1991.

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After concessions, the primary issues for decision are: (1) Whether each of these three partnerships, River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner (RCR #4), River City Ranches #6, J.V., Walter J. Hoyt III, Tax Matters Partner (RCR #6), and Ovine Genetic Technology 1990, J.V., Walter J. Hoyt III, Tax Matters Partner (OGT 90), purchased and acquired ownership of breeding sheep that are subject to an allowance for depreciation under section 167; (2) whether each partnership has substantiated and is entitled to its claimed depreciation deductions with respect to its breeding sheep for the years in issue; (3) whether RCR #4 and RCR #6 are entitled to certain interest deductions with respect to the promissory note each partnership issued in connection with the purported acquisition of its breeding sheep; (4) whether each partnership is entitled to certain farm, guaranteed payment, and other deductions it claimed; and (5) whether RCR #4 and RCR #6 each had certain capital gains income and/or additional farm income for some of the years in issue.

Background

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.

At the times their respective petitions herein were filed, RCR #4, RCR #6, and OGT 90 each maintained its principal place of business either in Burns, Oregon, or in Herald, California.

A. Overview

Walter J. Hoyt III (Mr. Hoyt), is a general partner of each of the three sheep breeding partnerships that are involved in the instant cases ≈ RCR #4, RCR #6, and OGT 90. From 1981 through the time of the trial in the instant cases, Mr. Hoyt organized, promoted to numerous investors, and operated as a general partner a total of nine separate sheep breeding partnerships. These nine partnerships were formed and began operating in the years indicated as follows:

RCR #4 and RCR #6 each had been formed as a California limited partnership. 4

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4 Although Mr. Hoyt testified that all of the partnerships formed before 1987 had been formed as California limited partnerships, he later indicated that a few of OGT 90's partners may have been limited partners.

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Before 1981, Mr. Hoyt and his family for a number of years had engaged in promoting and operating a number of cattle breeding partnerships. Mr. Hoyt's father was a prominent breeder of Shorthorn cattle, one of the three major breeds of cattle in the United States. In order to expand his business and attract investors, the father had started organizing and promoting cattle breeding partnerships in the late 1960's. One of these cattle breeding partnerships previously was the subject of this Court's opinion in Bales v. Commissioner [Dec. 46,099(M)], T.C. Memo. 1989-568.

Around 1978 or 1979, Mr. Hoyt became interested in the possibility of organizing similar sheep breeding partnerships. As a result, he began discussions with David Barnes (Mr. Barnes), a longtime sheep breeder and childhood friend.

For a number of years, Mr. Barnes and his wife April had owned and operated Barnes Ranches, their sole proprietorship sheep breeding business located in the Sacramento Valley in California. They have a son, Randy Barnes (Randy). After completing college in 1985, Randy eventually took on a substantial role in the management and operation of the business.

Mr. Barnes had extensive experience in breeding several breeds of purebred sheep, including Hampshires, Rambouillets, and Suffolks. However, by the 1980's, he concentrated on Rambouillets and Suffolks. Rambouillets have white faces and feet and cream colored bodies and are a breed noted for producing good-quality wool. Suffolks, on the other hand, have black faces and legs and cream colored bodies and are a breed noted for producing good-quality meat.

By the late 1980's, Mr. Barnes and Randy had acquired very good reputations in purebred sheep breeding circles and were generally considered to be among the country's top breeders of Rambouillets and Suffolks. During the 1980's, they typically would enter annually between 20 to 25 of some of their best yearling sheep in various national purebred sheep shows around the country, and their sheep often won awards at these shows.

Substantially all of the Barnes Ranches' breeding flock consisted of ewes, since a number of ewes would often be bred with and serviced by one ram. Typically, its breeding flock ewes produced a single crop of lambs each year. However, in some instances certain ewes might give birth to twins, and on relatively infrequent occasions a particular ewe might even produce triplets. Over the years, of the total number of lambs produced annually, about half were females. Only a relatively small percentage of the lambs born, perhaps no more than 10 to 15 percent in any given year, would be added to and kept in the Barnes Ranches breeding flock. Ewes could have a potential breeding life of 7 to 9 years. However, as part of their continuing efforts to improve their breeding flock, the Barnes family periodically evaluated a breeding sheep's quality level and breeding performance and would cull from their breeding flock those sheep they judged to be unproductive or incapable of producing offspring of sufficient quality.

With respect to the lambs the Barnes Ranches breeding flock annually produced, the Barnes family generally would sell their surplus and lesser quality lambs (i.e., those that were not good candidates either for addition to the breeding flock, entry in national show competitions, or sale to other breeders) 5 after those lambs reached a certain age. Some of these lambs were sold to teenagers participating in 4-H programs. However, the vast majority of the lambs were sold to commercial meat packing companies. 6

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5 For instance, a breeder of lower quality sheep might purchase a few Suffolk rams from the Barnes family in an effort to improve the quality of that breeder's flock. This breeder's flock operations might be geared solely to producing lambs sold for meat. Indeed, sometimes a Suffolk ram will be bred with a ewe of another breed, as the resulting hybrid offspring's meat quality can often be higher than that of a nonhybrid offspring of the ewe's breed.

6 Male lambs not raised for breeding purposes were castrated. These castrated animals are called wethers.

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The yearling sheep that the Barnes family annually entered in national shows were often sold at auction following completion of the particular competition.

The Barnes family owned only a limited amount of pasture in the Sacramento Valley. Hence they would enter into rental arrangements to secure the additional pasture needed for Barnes Ranches sheep operations.

In April 1981, as a result of Mr. Hoyt's and Mr. Barnes' earlier discussions and negotiations, RCR #1 (the first sheep breeding partnership that Mr. Hoyt organized and promoted) entered into certain agreements with Barnes Ranches. Pursuant to these agreements, Barnes Ranches sold to RCR #1 a specified number of registered purebred Rambouillet and Suffolk breeding ewes 7 for no money down and the partnership's promissory note (the sheep sale agreement). 8 In general, the promissory note required the partnership to pay Barnes Ranches the stated purchase price for the sheep over a 15-year term. For the first 5 years, no principal payments on the note were required from the partnership, but only annual interest payments at a specified interest rate per annum. Over the next 10 years, the partnership was to pay the note's full principal amount in 10 equal annual installments. Barnes Ranches was further granted a security interest in the partnership's breeding sheep, securing payment on the partnership's promissory note. Concurrent with their entry into the sheep sale agreement, RCR #1 and Barnes Ranches also entered into a 15-year management agreement (whose 15-year term coincided with the promissory note's payment period), pursuant to which Barnes Ranches obligated itself to undertake all management with respect to the partnership's breeding sheep, pay all expenses, and provide stud ram services, in exchange for receiving all lambs produced and any culls (the sharecrop agreement). The sharecrop agreement further obligated Barnes Ranches to replace any partnership ewe that could no longer serve as a breeding ewe with another ewe of a specified quality. In addition, Barnes Ranches guaranteed that there would be a net 5-percent annual increase in the size of the partnership's breeding flock.

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7 See infra note 10.

8 The parties disagree whether RCR #4, RCR #6, OGT 90 and the other partnerships obtained actual ownership of specific sheep and whether the promissory notes the partnerships issued were valid indebtedness. The terms "sale", "sold", "purchase", "partnership's sheep", and similar terms are used herein for convenience and are not intended as ultimate findings or conclusions concerning the partnerships' acquisition of sheep. Similarly, the use herein of such terms indicating that interest or principal payments were due should not be construed as our conveying any legal conclusion concerning the validity of the partnerships' promissory notes.

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Except for perhaps OGT 90, each of the other later sheep breeding partnerships that Mr. Hoyt organized, including RCR #4 and RCR #6, entered into similar sheep sale and sharecrop agreements with Barnes Ranches. 9 The separate sheep sale and sharecrop agreements that RCR #4 and RCR #6 each entered into with Barnes Ranches are discussed more fully infra.

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9 The evidence of record does not include written sheep sale agreements between Barnes Ranches and each of the sheep partnerships. Although the record contains bills of sale that Barnes Ranches issued to eight of the nine partnerships, respondent, among other things, asserts that these bills of sale (1) do not accurately reflect the sheep sold to the partnerships, and (2) are inconsistent with (a) the partnerships' returns, (b) records Mr. Hoyt and his organization maintained on the partnerships' sheep (e.g., annual flock recap sheets), and (c) in some instances, petitioners' original pleadings. Also, as will be more fully discussed infra, during or after the examinations respondent conducted, Mr. Hoyt and his representatives originally provided to respondent a bill of sale, dated Feb. 1, 1984, reflecting that 1,350 sheep had been sold to RCR #4. However, Mr. Hoyt later testified this document was only a "draft bill of sale", and indicated that another document listing 1,468 sheep was the actual finalized bill of sale issued by Barnes Ranch to RCR #4 on Feb. 1, 1984. Furthermore, the parties dispute whether OGT 90 and Barnes Ranches entered into similar sheep sale and sharecrop agreements in 1990. Respondent contends that such agreements were entered into, whereas petitioners contend OGT 90 entered into agreements with W.J. Hoyt Sons Ranches MLP, not with Barnes Ranches. While no written sharecrop agreement between OGT 90 and W.J. Hoyt Sons Ranches MLP and corresponding bill of sale listing OGT 90's purchased sheep were offered in evidence, the record does contain a later sharecrop agreement between OGT 90 and Barnes Ranches covering a term from Oct. 1, 1993, through Sept. 30, 2004.

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The entry dates of the separate sheep sale agreements that these eight sheep breeding partnerships (excluding OGT 90) each concluded with Barnes Ranches, the number of breeding ewes petitioners contend each partnership thereby acquired, 10 and each partnership's stated purchase price for its breeding sheep are as follows:

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10 The bills of sale issued to the partnerships, in fact, list some rams as well as ewes. However, annual partnership flock recap sheets (which are discussed more fully infra) covering the respective years in which each partnership entered into its sheep sale agreement, reflect only breeding ewes as being initially acquired and owned throughout that year by a partnership.

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In their respective sharecrop agreements, Barnes Ranches and the above partnerships agreed that, in all registration papers obtained with respect to a partnership's breeding sheep, the Barnes family would remain the stated owners of those sheep. However, each sharecrop agreement required Barnes Ranches to maintain adequate records allowing it to identify at all times a partnership's breeding sheep.

The respective bills of sale that Barnes Ranches issued to the above partnerships are the exclusive purportedly contemporaneous documentation in the record listing the specific individual breeding sheep each partnership purchased when it entered into its transaction with Barnes Ranches. Each bill of sale ostensibly identified all of the breeding sheep that partnership purchased by listing and giving each individual sheep's tag number, registration number, sex, breed, birth date, sire's registration number, and dam's registration number. However, as will be more fully discussed infra, petitioners have subsequently acknowledged these bills of sale contained "numerous errors".

As indicated previously, pursuant to the sheep sale agreements, virtually all of the breeding sheep that these partnerships (excluding OGT 90) acquired from Barnes Ranches were supposed to be Rambouillet and Suffolk ewes. 11 In addition, substantially all of the breeding sheep these partnerships acquired were supposed to be registered sheep. In point of fact, most of the sheep that Barnes Ranches sold to each partnership had not actually been registered with a national sheep breed association.

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11 RCR #6's bill of sale, in fact, lists a very small number of Hampshires as being acquired by that partnership. The record does not disclose why RCR #6 would have wanted to purchase this small number of Hampshires from Barnes Ranches. By the 1980's, the Barnes family was concentrating on Rambouillets and Suffolks. Further, in his testimony, Mr. Hoyt had related that each sheep partnership's stated purpose and business was to produce registered Rambouillets and registered Suffolks.

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Notwithstanding the high quality of a particular Rambouillet's or Suffolk's appearance and physical traits, that sheep's lack of registration papers can dramatically reduce its market value and the market value of its progeny for purebred breeding purposes. Essentially, none of the governing national sheep breed associations will register a sheep unless that sheep's complete ancestral line can be traced back in the association's breed registry to the time when that sheep breed was established. In other words, all of that sheep's ancestors must be registered sheep of that breed.

During the years relevant to these cases, the American Rambouillet Sheep Breeders Association was the only generally recognized national breed association with which purebred Rambouillets could be registered. During those same years, purebred Suffolks could be registered with either of two generally recognized national breed associations, the American Suffolk Sheep Society or the National Suffolk Association.

A qualified individual purebred sheep of any age can be registered with one of the above three national breed associations. However, the registration fee charged can be higher for sheep that are over a specified age. During the period relevant to these cases, none of these three associations physically examined a sheep being registered with it, as such examinations of individual sheep were not feasible given the numbers of sheep each association annually registered. These associations, instead, relied on a breeder to provide accurate information in the registration application submitted to the association.

At each of the three breed associations, the registration process is substantially the same. In general, a breeder must first submit a completed registration application form for the individual sheep. The completed application will include the breeder's name, the breeder's identification number for the sheep (i.e., tag number), the sheep's date of birth and sex, and pertinent information as to its sire and dam (primarily their respective association registration numbers). Association personnel would then review the completed application and verify the information provided on the sheep's ancestry against the association's records. If the registration application was approved, then the association assigned the sheep a registration number, made appropriate entries in the association's records, and issued a registration certificate for that sheep to the breeder. No other sheep registered with the association would have the same registration number, as each registration number was assigned sequentially in chronological order, when the application for that sheep had been approved and a registration certificate was to be issued.

During the period relevant to these cases, Barnes Ranches kept its own breeding records with respect to its sheep and those belonging to the sheep partnerships. It also issued breeding certificates of its own for some of these sheep (Barnes certificates).

Mr. Barnes was a limited partner in RCR #4. Randy was a limited partner in RCR #6.

The Barnes family did not employ artificial insemination techniques with respect to their breeding sheep until at least 1987. They began to collect and freeze semen from some of their best rams in perhaps 1987. It was not until at least about 1988 that they began employing embryo collection and transplant techniques with respect to some of their best ewes. No artificial insemination techniques were ever employed with respect to the partnership sheep that Barnes Ranches managed.

B. RCR #4's and RCR #6's Respective Bills of Sale, Promissory Notes, Assumption Agreements, and Sharecrop Agreements

As indicated previously, the record contains only limited transactional documentation relating to RCR #4's and RCR #6's respective purchases of breeding sheep from Barnes Ranches. This documentation consists of (1) a bill of sale issued by Barnes Ranches listing the specific individual sheep sold to each partnership, (2) a "Full Recourse Promissory Note" issued by each partnership for its sheep, (3) an Assumption Agreement later issued by Mr. Hoyt in connection with each partnership's promissory note, and (4) a sharecrop agreement between Barnes Ranches and each partnership. The record does not include a written sheep sale agreement between Barnes Ranches and RCR #4 or a written sheep sale agreement between Barnes Ranches and RCR #6, offering memoranda for either partnership, or a partnership agreement for RCR #6.

A bill of sale dated February 1, 1984, that Barnes Ranches issued ostensibly lists and identifies the 1,468 specific individual breeding sheep petitioners contend Barnes Ranches transferred to RCR #4 pursuant to their sheep sale agreement of that same date. A bill of sale dated January 15, 1986, that Barnes Ranch issued ostensibly lists and identifies the 1,415 specific individual breeding sheep Barnes Ranches transferred to RCR #6 pursuant to their sheep sale agreement of that same date. Substantially, all of this same information concerning specific individual sheep that RCR #4, RCR #6, and other partnerships purchased from Barnes Ranches is summarized in the corrected bills of sale that petitioners later prepared and submitted in evidence following the trial in the instant cases. Petitioners' corrected bills of sale are discussed more fully infra.

The RCR #4 promissory note for $2,087,880 dated February 1, 1984, that Mr. Hoyt issued to Barnes Ranches was stated to be a "Full Recourse Promissory Note". The note further stated that "each and every partner" was to be personally and collectively liable upon the note as "their respective personal liability may appear on the books of the partnership." Mr. Hoyt's signature appeared twice at the bottom of the note; under one signature he was stated to be signing the note as individual general partner of RCR #4 and under his second signature he was stated to be signing the note as "attorney-in-fact" for RCR #4's limited partners.

In connection with the above RCR #4 "Full Recourse Promissory Note", Mr. Hoyt further signed the names of 14 RCR #4 limited partners to another document dated December 31, 1984, entitled "Certificate of Assumption of Primary Liability". This certificate stated that each of the undersigned limited partners thereby agreed to be fully personally liable for all amounts owed under RCR #4's note.

The RCR #6 promissory note for $1,960,140 dated January 15, 1986, that Mr. Hoyt issued to Barnes Ranches was stated to be a "Full Recourse Promissory Note". This note stated that each and every partner was to be personally and collectively liable on the note as "their respective personal liability may appear on the books of the partnership". Mr. Hoyt's signature appeared twice at the bottom of this note; under one signature he was stated to be signing the note as individual general partner of RCR #6 and under the second signature he was stated to be signing the note as attorney-in-fact for RCR #6's limited partners.

In connection with the above RCR #6 "Full Recourse Promissory Note", Mr. Hoyt further signed the names of 17 RCR #6 limited partners to another document dated December 31, 1986, entitled "Certificate Of Assumption Of Personal Liability". This certificate stated that each of the undersigned limited partners thereby agreed to be fully personally liable for all amounts owed under RCR #6's note.

RCR #4 and RCR #6 each entered into a sharecrop agreement with Barnes Ranches, pursuant to which Barnes Ranches was to provide all management and was to pay all expenses with respect to a partnership's breeding flock over a 15-year term. Barnes Ranches further was obligated to replace any partnership ewe that could no longer adequately serve as a breeding ewe with another ewe of equal or better quality to those that partnership had originally purchased. Also, it guaranteed that there would be an annual 5-percent net increase in the size of a partnership's breeding flock. In exchange for its services under the sharecrop agreement, Barnes Ranches was to receive all lambs produced by a partnership's breeding sheep, as well as any culls.

The sharecrop agreement further recognized that any registration papers on a partnership's breeding sheep would be taken out in the Barnes family's name. However, the sharecrop agreement required Barnes Ranches to know the identity and number of a partnership's breeding sheep at all times. Further, although all lambs produced by a partnership's breeding sheep during the sharecrop agreement's term were to be given to Barnes Ranches as compensation for its management services, all "breeding value certificates" on any male lambs born would still belong to the partnership. Essentially, a breeding value certificate embodied the rights to the registration papers obtained on that particular lamb.

C. The Time When the RCR #4 Bill of Sale Document Listing 1,468 Sheep Was Prepared

The above bill of sale for RCR #4 that Barnes Ranches issued was not a contemporaneous document and was prepared well after its stated date of February 1, 1984. Among the 1,468 sheep listed in this "February 1, 1984", bill of sale, are two Suffolk ewes that are stated therein to have the respective registration numbers 564033 and 573587. See infra Appendix B, petitioners' corrected RCR #4 bill of sale, tag no. 377 and tag no. 82-853. However, each ewe was not registered with the American Suffolk Sheep Society until at least after early 1986, when the ewe then would have been assigned the registration number (564033 or 573587) shown in the bill of sale. The evidence of record includes certain information from American Suffolk Sheep Society registration certificates issued for (1) the two Suffolks shown in the RCR #4 bill of sale as having the registration numbers 564033 and 573587, and (2) 44 other Suffolks born in late 1985 and early 1986, each of which had a lower registration number than 564033 and 573587. 12 The latter 44 Suffolks could not have been registered before the time of their births in late 1985 or early 1986. Thus, the two Suffolks with the higher registration numbers 564033 and 573587 must have been registered with the society sometime after early 1986. As indicated previously, the American Suffolk Society assigned its registration numbers sequentially in chronological order when the registration application for that particular Suffolk had been approved and a registration certificate was to be issued. The American Suffolk Society registration certificate information as to (1) the two Suffolk ewes, registration Nos. 564033 and 573587, and (2) the 44 other Suffolks born in late 1985 and early 1986, is set forth infra in Appendix D to this Opinion.

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12 Although a few sample registration certificates are in evidence, the parties did not introduce into the record registration certificates for all of the sheep. Instead, the parties submitted a stipulated exhibit listing information from numerous individual certificates. This stipulated exhibit covers certificates petitioners provided to respondent prior to trial, certificates respondent obtained from national sheep breed associations, and certificates petitioners provided to respondent after the trial. Unfortunately, the exhibit omits the date upon which each registration certificate was issued. Thus, in examining the registration certificate information on the 46 Suffolks discussed above, the Court was unable to ascertain the specific dates upon which their American Suffolk Sheep Society certificates were issued.

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D. Some Individual Investors' Failure To Make Payments

During the period from 1981 through 1991, a number of investors in the eight sheep partnerships (excluding OGT 90) that entered into transactions with Barnes Ranches failed to continue making the specified payments required of them, including paying their pro rata share of the payments required under their partnership's long-term "Full Recourse Promissory Note". Mr. Hoyt (who was the general partner managing each partnership) permitted all of these defaulting investors to withdraw from their partnership. He essentially tried to treat their withdrawal from a partnership as having no effect upon the potential tax benefits being claimed by the partnership's remaining partners.

Barnes Ranches and the partnerships never sought to hold any of the defaulting investors personally liable for the payments they had defaulted upon. These investors were allowed to walk away from their partnership's long-term "Full Recourse Promissory Note".

E. RCR #4's, RCR #6's, and OGT 90's Respective Returns for the Years in Issue

RCR #4's returns for some of the years in issue reflect that it originally claimed depreciation and investment tax credit on a "Breeding Flock" placed in service on February 1, 1984, for which its stated cost or other basis was $1,983,486. RCR #4 depreciated this breeding flock over a 5-year period.

RCR #6's returns for some of the years in issue reflect that it originally claimed depreciation and investment tax credit on a "Breeding Flock" placed in service on January 5, 1986, for which its stated cost or other basis was $1,868,139. RCR #6 depreciated this breeding flock over a 5-year period.

OGT 90's return for 1991 reflects it claimed depreciation on "1 sheep breeding" acquired on January 1, 1991, for which its depreciable basis was $1,952,076. OGT 90 depreciated this "1 sheep breeding" over a 5-year period.

On their respective returns for the years in issue, RCR #4, RCR #6, and OGT 90 also claimed deductions for interest, other farm expenses, guaranteed payments, and losses for sheep suffering from drought and/or trichomoniasis. The partnerships claimed additional deductions for IRA contributions and other expenses.

F. Respondent's Examinations of the Nine Sheep Partnerships; the FPAA's Issued to RCR #4, RCR #6, and OGT 90; RCR #4's, RCR #6's, and OGT 90's Respective Petitions; Certain Pretrial Discovery Conducted; and Certain Evidence Offered During and After the Trial

Respondent commenced examinations of various returns filed by the nine sheep breeding partnerships, including the returns of RCR #4, RCR #6, and OGT 90 for the years in issue. During these examinations, respondent asked the partnerships and their representatives, among other things, to substantiate the depreciation and other deductions claimed on the returns of the partnerships.

In the respective FPAA's issued to RCR #4, RCR #6, and OGT 90, respondent, among other things, determined that the partnerships had failed to substantiate many of their claimed deductions and thus disallowed those deductions. For instance, with respect to the depreciation deduction RCR #4 claimed on its breeding sheep for 1987, the FPAA issued to RCR #4 for that year states, in pertinent part:

It has been determined that River City Ranches No. 4, J.V., partnership is not entitled to the depreciation expense as reported on the partnership Schedule F since the partnership has not established the cost or adjusted basis or existence of the assets, including but not limited to animals, allegedly acquired by the partnership during the taxable year 1984, or that if acquired by the partnership during that year, that the assets were placed in service during that year * * *

RCR #4, RCR #6, and OGT 90 filed respective petitions seeking review of the FPAA's that had been issued to them. In its pleadings, RCR #4 originally maintained that it had acquired a breeding flock of 1,353 sheep on February 1, 1984. Subsequently, petitioners asserted that RCR #4 had acquired a breeding flock of 1,468 breeding sheep on that date. Similarly, in its amended petition, OGT 90 alleged that it had originally purchased a breeding flock for $2,932,753 in 1990, and this breeding flock was placed in service in 1991.

In their respective petitions or amended petitions, RCR #4, RCR #6, and OGT 90 claimed certain additional deductions for the years in issue. The total depreciation and other deductions claimed by them now in issue are given infra in Appendix E to this Memorandum Opinion.

During either the examinations respondent conducted of the nine sheep partnerships' returns or pretrial discovery, petitioners provided respondent with respective bills of sale that Barnes Ranches issued to each partnership (excluding OGT 90), listing all of the individual sheep a partnership had purchased. Although petitioners first provided respondent with a bill of sale document for RCR #4 listing 1,350 sheep, petitioners eventually provided respondent with a second bill of sale document for RCR #4 listing 1,468 sheep. The individual sheep this second RCR #4 bill of sale document lists are quite different from those listed in the first RCR #4 bill of sale document that originally had been provided to respondent by petitioners. Petitioners contend the second document was the actual bill of sale issued on February 1, 1984, to evidence and reflect Barnes Ranches' transfer to RCR #4 of the 1,468 individual sheep described and listed thereon. As indicated previously, however, this second document was prepared well after its stated date of February 1, 1984.

During either the examinations respondent conducted or pretrial discovery, petitioners further provided respondent with annual flock recap sheets on the breeding sheep each of these partnerships (excluding OGT 90) owned from 1981 through 1991 that had been prepared by Mr. Hoyt's organization. As indicated previously, these annual flock recap sheets are inconsistent with the above bills of sale for the partnerships that petitioners provided to respondent. Unlike the bills of sale (which list some rams as being initially acquired by the partnerships), the annual flock recap sheets reflect only ewes as being acquired and owned by each partnership from the date when that partnership and Barnes Ranches entered into their transaction, through December 31, 1991. The 1981 through 1991 flock recap sheets are contained infra in Appendix F to this Opinion.

During pretrial discovery, respondent also sought to inspect and count the partnerships' sheep. From October 7, 1992, through February 2, 1993, respondent's expert Kempton Clark (Mr. Clark) counted, at nine different locations, all of the sheep petitioners contend were then owned by the partnerships, as well as some sheep owned by others. Mr. Clark counted a total of 131 adult male sheep and 5,469 adult female sheep. Of the total 5,600 sheep counted by Mr. Clark, approximately 2,600 were lower quality commercial sheep, as opposed to registered purebred breeding sheep that had been purchased by the partnerships in 1992 from third parties unrelated to Mr. Hoyt and the Barnes family. The partnerships had paid average prices of either $75 or $100 per head for those lower quality sheep, and some of those sheep may have been hybrids.

During the trial, respondent offered in evidence various analyses of the partnerships' respective bills of sale and the individual sheep listed thereon. Among other things, one analysis noted that hundreds of sheep in the bills of sale were shown as being the offspring of a dam with the registration number 772871. Petitioners eventually acknowledged that the bills of sale contained a substantial number of "errors" in identifying the individual breeding sheep that Barnes Ranches sold to each partnership.

At the end of the trial, the Court granted petitioners additional time to offer registration certificates they and the Barnes family had that tied into the bills of sale for the partnerships and/or to submit a stipulation by the parties with regard to such certificates. As a result, the parties have stipulated an exhibit into evidence summarizing the information contained in 9,485 registration certificates issued for individual sheep born during the period from 1965 through 1993. Of the 9,485 registration certificates, 6,973 certificates are from national sheep breed associations and 2,512 certificates are Barnes certificates. Some of the certificates had been provided to respondent by petitioners prior to trial, other certificates had been provided to respondent by various national sheep breed associations, and another 105 certificates were provided by petitioners to respondent following the trial. The individual registration certificates listed in the exhibit are organized by date of birth and then by tag number. None of these certificates reflect a partnership to be a registered sheep's owner. Rather, the 9,485 certificates show either Barnes Ranches, Mr. Barnes, or Randy to be the owner of these sheep.

Petitioners compared the above 9,485 registration certificates to the respective bills of sale that Barnes Ranches had issued to eight of the sheep partnerships (excluding OGT 90). 13 These bills of sale have a total of 9,361 separate entries describing and identifying individual breeding sheep sold to these partnerships. Of these 9,361 bills of sale entries, petitioners have determined 4,839 entries can be matched to certificates. In making these 4,839 matches, petitioners frequently had to correct some of the information in an entry to match the information contained in a particular registration certificate. The parties have now further stipulated an exhibit in evidence containing petitioners' corrected bills of sale for these eight sheep partnerships. Petitioners' corrected bills of sales for RCR #4 and RCR #6 are contained infra, respectively, in Appendices B and C to this Memorandum Opinion. The parties, however, disagree as to the number of actual breeding sheep that RCR #4, RCR #6, and these other partnerships acquired from Barnes Ranches.

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13 As indicated previously, petitioners contend that OGT 90 did not purchase its breeding sheep from Barnes Ranches. Further, the record contains no bill of sale or other documentation identifying the specific individual breeding sheep petitioners assert that OGT 90 acquired from W.J. Hoyt Sons Ranches MLP. See supra note 9.

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Respondent examined petitioners' 4,839 matches and agrees that there are 3,176 registration certificates which essentially match entries on petitioners' corrected bills of sale. The parties have stipulated an exhibit in evidence listing the entries that respondent agrees the certificates essentially match. Respondent, however, does not stipulate the existence of any of the sheep described in this exhibit; respondent only stipulates that 3,176 of the registration certificates essentially match these listed entries from the corrected bills of sale.

Respondent disputes petitioners' remaining 1,663 asserted matches. Specifically, respondent claims: (1) As to 1,248 of the remaining matches, petitioners matched the same registration certificate to more than one bill of sale entry; (2) as to 300 of the matches, other registration certificates show those same dams as having given birth to another lamb less than 160 days prior to having the matched animal; and (3) as to 115 of the matches, the match occurred after petitioners changed the tag number, registration number, and breed information given in the original bill of sale entry. The parties have stipulated exhibits in evidence identifying the matches that respondent disputes falling into these foregoing categories.

The parties' above posttrial stipulations relate only to the matching of registration certificates to petitioners' corrected bills of sale for the partnerships. The parties agree that neither petitioners nor respondent is to be precluded from arguing that a partnership's breeding flock consisted of more or fewer breeding sheep than the number of certificates matched.

A large unspecified number of the above 9,485 certificates cover sheep that the Barnes family never sold to the partnerships. In their above matching efforts, petitioners did not attempt to identify and segregate breeding sheep that were never sold to a partnership. For instance, none of the sheep born in 1965 could possibly have been sold to a partnership, as the first transaction between Barnes Ranches and one of the partnerships occurred in 1981.

Discussion

Petitioners bear the burden of proving that respondent's determinations in the FPAA's are incorrect. See Rules 142(a), 240(a); Welch v. Helvering [3 USTC ╤ 1164], 290 U.S. 111 (1933). Particularly, where respondent, as in the instant cases, has disallowed depreciation and other deductions claimed by a partnership, it is incumbent on petitioners to substantiate and establish the partnership's entitlement to those deductions under the terms of the applicable statutes permitting those deductions. See New Colonial Ice Co. v. Helvering [4 USTC ╤ 1292], 292 U.S. 435 (1934); Karme v. Commissioner [82-1 USTC ╤ 9316], 673 F.2d 1062, 1065 (9th Cir. 1982), affg. [Dec. 36,843] 73 T.C. 1163 (1980).

Issue 1. Depreciation Deductions

Section 167 generally allows as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear of property used in business or of property held for the production of income. The person who bears the economic loss of invested capital resulting from the exhaustion, wear and tear of business property or property held for production of income is the one entitled to the depreciation deduction. See Helvering v. F. & R. Lazarus & Co. [39-2 USTC ╤ 9793], 308 U.S. 252, 254 (1939).

In the instant cases, petitioners and respondent recognize that for RCR #4, RCR #6, and OGT 90 to be entitled to their claimed depreciation and certain other deductions, each partnership must be the owner for tax purposes of the specific numbers of breeding sheep that it allegedly purchased and placed in service. Respondent raises no contention that each partnership was in an activity not engaged in for profit. Although respondent has not asserted that each partnership's transaction was a sham, the parties disagree to some extent with respect to the transactions' economic substance. They disagree over whether each partnership's stated purchase price approximated the then fair market value of the sheep. They also disagree over whether the purportedly recourse long-term notes the partnerships issued were valid indebtedness.

For a sale to have occurred for tax purposes, the benefits and burdens of ownership must be transferred. See Grodt & McKay Realty, Inc. v. Commissioner [Dec. 38,472], 77 T.C. 1221, 1237-1238 (1981). This test is a practical one, and there are no hard and fast rules. Instead, the transaction must be viewed as a whole, in light of realism and practicality. See Commissioner v. Segall [40-2 USTC ╤ 9676], 114 F.2d 706, 709-710 (6th Cir. 1940), revg. on other grounds [Dec. 10,086] 38 B.T.A. 43 (1938); Harmston v. Commissioner [Dec. 32,214], 61 T.C. 216, 228-229 (1973), affd. [76-1 USTC ╤ 9213] 528 F.2d 55 (9th Cir. 1976). Some of the factors to be considered are: (1) Whether legal title passes; (2) how the parties treat the transaction; (3) whether an equity in the property was acquired; (4) whether the contract creates a present obligation on the seller to execute and deliver a deed and a present obligation on the purchaser to make payments; (5) whether the right of possession is vested in the purchaser; (6) which party bears the risk of loss or damage to the property; and (7) which party receives the profits from the operation and sale of the property. See Grodt & McKay Realty, Inc. v. Commissioner, supra at 1237-1238; see also Cherin v. Commissioner [Dec. 44,333], 89 T.C. 986, 996-997 (1987).

A. Whether RCR #4, RCR #6, and OGT 90 Acquired the Benefits and Burdens of Ownership as to Specific Breeding Sheep

For RCR #4, RCR #6, and OGT 90 to be entitled to their claimed depreciation deductions, each partnership must establish that it acquired the benefits and burdens of ownership as to the specific individual breeding sheep comprising its alleged breeding flock. In that connection, however, the record discloses petitioners to be in substantial difficulty in establishing that each partnership actually acquired anywhere near its stated number of breeding sheep. Indeed, the evidence petitioners presented to substantiate and identify the specific individual breeding sheep these partnerships "owned" is considerably lacking, exhibits major shortcomings, and, at times, is so flawed as to raise serious doubts in the Court's mind as to whether large numbers of the breeding sheep allegedly sold these partnerships, in fact, existed.

No registration papers with respect to specific breeding sheep were obtained in any partnership's name. The almost 9,500 registration certificates (accumulated by the Barnes family over the years) in the record reflect only the Barnes family to be the owner of those registered sheep. Further, from 1981 through 1987, Barnes Ranches and the Barnes family purportedly sold to eight of the partnerships (excluding OGT 90) a far greater total number of specific individual breeding sheep than petitioners have been able to match to registration certificates. Of the total 9,361 breeding sheep entries in the bills of sale for these eight partnerships, petitioners have been able to match just over half to registration certificates.

Petitioners further acknowledge that there are significant problems regarding specific individual sheep listed in the bills of sale, and assert that numerous errors were made by the person or persons who prepared the original bills of sale the partnerships received. They further concede that from the approximately 3,000 adult breeding sheep, respondent's expert Mr. Clark counted during pretrial discovery (which are all the sheep petitioners contend the nine partnerships owned by about 1992, excluding another 2,600 commercial sheep the partnerships had purchased from unrelated third parties in 1992), it is impossible to trace and reconstruct the specific individual depreciable sheep the partnerships owned during the years in issue. Incidentally, petitioners did not specify how ownership of these 3,000 breeding sheep that Mr. Clark counted was specifically held and divided up among each of the nine sheep partnerships. 14

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14 In his testimony, Mr. Hoyt indicated that, as of the end of 1991, the eight partnerships (excluding OGT 90) owned a total of approximately 1,600 sheep and that OGT 90 owned approximately 1,300 sheep.

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On brief, however, petitioners attempt to gloss over and minimize their failure and inability to identify large numbers of the individual breeding sheep that RCR #4, RCR #6, and the other partnerships purportedly purchased from Barnes Ranches. Petitioners specifically argue, in pertinent part, as follows:

The petitioners acknowledge that there are significant problems with the Schedule A's [listing and identifying all the specific breeding sheep a partnership ostensibly purchased from Barnes Ranches] attached to the bills of sale. Clearly, the person or persons who put the data into the computer which was then placed on the Schedule A's made numerous errors. It appears that in some cases, only the ear tag entry may be reliable. However, even while the Respondent recognizes that there are 3,176 matches between the bills of sale and the registration certificate data base, the Respondent asks the Court to totally and entirely disregard the bills of sale. Why? Should not the partnership be given depreciation for the animals that the Respondent agrees are there?

The fact is, the Schedule A is just an attachment to the bill of sale. The critical issue is not the identification of specific animals, but whether the partnership purchased the breeding flock it purported to purchase. Did RCR #4 purchase 1,350 breeding sheep? 15 The answer to that question is not found by attacking the Schedule A, which has many errors among the 475 entries which the parties stipulate match registration certificates. * * * The answer to the question is found by determining how many sheep were available to be purchased by RCR #4 in 1984. If there were enough animals available for purchase, and the seller and buyer both acknowledge the transaction, and the partnership files a tax return reflecting the transaction, then errors on the Schedule A are not really significant.

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15 Petitioners contend that RCR #4 purchased 1,468, not 1,350, breeding sheep from Barnes Ranches on Feb. 1, 1984. Mr. Hoyt testified that the bill of sale document in evidence listing 1,468 sheep, not another bill of sale document listing only 1,350 sheep, was the actual, final bill of sale that Barnes Ranches issued. See supra note 9. However, as the Court determined in its findings, the document Mr. Hoyt claimed was the actual bill of sale had not been prepared until sometime after early 1986.

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The petitioners do not wish to minimize the fact that better care should have been taken to prepare correct and complete Schedule A's for attachment to the bills of sale. However, it is the bill of sale which effectuates the transaction, not the Schedule A. Each bill of sale states a number of sheep purchased and these are generally reflected in the flock recap sheets. * * * The Respondent uses many pages of his brief attacking the Schedule A's and the Petitioners, acknowledging there are many errors, will not attempt to convince this Court that an obvious error is somehow accurate. However, this is not a concession that no entries in the Schedule A's are accurate.

The parties have stipulated that 3,176 of the approximately 10,000 animals sold to the partnerships are found in both the registration certificates and the Schedule A's. * * * Further, the 1,248 matches that Respondent calls duplicates are duplicates because they are reflected on more than one Schedule A. * * * These animals could clearly have been sold to one partnership, repossessed and resold to another partnership. These 1,248 so-called duplicates should be considered matches by the Court. * * * The respondent would prefer to impugn [sic] criminal behavior to the Petitioners before the Respondent would admit the obvious. * * * there is nothing underhanded in the Schedule A's. There is just a sloppy job of data entry. The Respondent wishes to focus on the Schedule A's. There is good reason to do so (from Respondent's perspective) for to focus on the registration certificates can only lead to one conclusion ≈ there were plenty of animals for each partnership to purchase.

Before leaving this discussion of Schedule A's, the Petitioners would like to ask the Court to consider a couple of questions. If a rancher wishes to buy a registered animal from one of the partnerships, would the rancher, as a purchaser of registered sheep be more interested in how the animal was characterized in the previous transaction's Schedule A, or would the rancher want to see the registration certificate for the animal being purchased? The answer is obvious, the only real paper of worth in the industry is the registration certificate. How accurately the animal is characterized in a Schedule A is not nearly as important as whether there is a registration certificate for that animal. The petitioners have studied the data base in detail and will show the Court * * * there were easily enough sheep for these partnerships to purchase.

The Petitioners again note that there is no reason to respond to the analysis of obvious errors in the Schedules A's, and will not take up valuable time and space doing so.

B. Bills of Sale

As indicated in the Court's findings of fact, certain bills of sale are the only transactional documentation in evidence identifying and listing the individual breeding sheep that eight of the nine sheep partnerships, including RCR #4 and RCR #6, each purportedly acquired pursuant to a sheep sale agreement with Barnes Ranches. No similar bill of sale or other documentary evidence for OGT 90 was offered.

Petitioners additionally offered extensive testimony from Mr. Barnes and Mr. Hoyt concerning (1) their negotiations as to (a) the specific breeding sheep that Barnes Ranches allegedly sold to each partnership and (b) each partnership's stated purchase price for those sheep; and (2) the preparation and issuance by Barnes Ranches to a partnership of the bill of sale listing that partnership's specific breeding sheep. Mr. Barnes and Mr. Hoyt each testified that, during their negotiations, specified groups of breeding sheep were identified and possible purchase prices for them were discussed. Ultimately, Mr. Barnes provided pertinent information to a Hoyt organization employee on the specific breeding sheep that each partnership was supposedly to purchase, as this employee prepared the bill of sale, along with the Schedule A attached thereto, that Mr. Barnes then signed and issued to a partnership.

The Court finds substantial portions of Mr. Hoyt's and Mr. Barnes' trial testimony highly questionable and not credible. Indeed, much of their testimony was evasive and less than forthright. Initially, Mr. Hoyt specifically testified that when a partnership consummated its transaction, he and Mr. Barnes reviewed the Schedule A attached to the bill of sale. He further claimed that, to the best of his knowledge, the Schedule A (listing and identifying the specific breeding sheep that each particular partnership purportedly purchased from Barnes Ranches) was accurate. 16 As the Court determined in its findings of fact, however, the RCR #4 bill of sale in evidence listing 1,468 sheep was not a contemporaneous document and was prepared well after its stated date of February 1, 1984. Yet, Mr. Hoyt claimed that it was the "finalized bill of sale" issued by Barnes Ranches to RCR #4 on February 1, 1984, and that another document listing 1,350 sheep that had earlier been provided to respondent as the RCR #4 bill of sale had only been a "draft bill of sale". Similarly, Mr. Barnes initially testified that the bills of sale were reliable, and that he had been "comfortable" with the bill of sale he issued to each partnership. Petitioners have now essentially acknowledged to be untrue these earlier factual assertions that Mr. Barnes and Mr. Hoyt made concerning the reliability of the bills of sale. Petitioners state that the bills of sale contained many "errors" and have offered in evidence corrected bills of sale for the partnerships.

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16 Mr. Hoyt testified, on cross-examination, as follows:

Q. Okay. Mr. Hoyt, the bills of sale that we've talked about for #4 and #6 ≈ and I'd be happy to show you one ≈ they're signed by David Barnes, is that correct, as the seller?

A. That's my memory, yes.

Q. The attachments [i.e., Schedule A's] to the bills of sale, who prepared those?

A. I can't find a face in my memory as to who actually put together that document.

Q. Are you familiar with the attachments? If I asked you questions about the information contained on the attachments, which are the list of the animals and information about the animals, would you be the person to ask, or would one of the Barneses be the better witness?

A. I am familiar with them.

Q. Would the * * * [Barneses] also know?

A. Oh, I don't know. That's a general question how ≈

Q. Did you go over the lists with David Barnes or Randy Barnes?

A. With David Barnes.

Q. Okay.

A. At the time of the transaction.

* * * * * * *

Q. Mr. Hoyt, the attachments to the bills of sale, to the best of your knowledge are they ≈ do they contain accurate information?

A. Yes.

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In addition, the Court finds incredible and unworthy of belief petitioners' suggestion that Mr. Barnes and Mr. Hoyt (who were both experienced businessmen and longtime breeders of purebred livestock) had unknowingly participated in the issuance of unreliable sales documents evidencing the specific breeding sheep these partnerships purportedly purchased. The Court further does not believe that, over the long period from about 1981, when RCR #1 and Barnes Ranches entered into the first transaction, through the time of the trial in the instant cases, Mr. Barnes and Mr. Hoyt had been unaware of the many problems with these bills of sale. Mr. Barnes and his son Randy managed each partnership's "breeding sheep", and the sharecrop agreement each partnership and Barnes Ranches concurrently entered provided the Barnes family was to maintain sufficient records allowing a partnership's "breeding sheep" to be identified at all times. This contractual requirement was never complied with given the considerable difficulty petitioners now have in identifying the specific breeding sheep each partnership purportedly had purchased. Mr. Hoyt was the managing general partner of each of these partnerships, and he and his organization were responsible for preparing each partnership's tax returns and maintaining its records. 17

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17 According to the testimony given by Mr. Barnes and Mr. Hoyt, no other individuals besides themselves participated in negotiating each partnership's transaction with Barnes Ranches. They also failed to identify and name the Hoyt organization employees who had prepared the bills of sale, and petitioners offered no testimony from such employees regarding the preparation of the bills of sale.

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C. Annual Flock Recap Sheets

On cross-examination by respondent's counsel, Mr. Hoyt was asked to explain the inconsistency between the RCR #4 "finalized bill of sale" dated February 1, 1984, listing 1,468 sheep (which document, in fact, was prepared sometime after early 1986) and the 1984 flock recap sheep reflecting the partnership had acquired only 1,350 sheep during that year. Mr. Hoyt's explanation was that, although RCR #4 acquired 1,468 animals on February 1, 1984, it had suffered losses to its flock causing it to have as of the end of 1984 the 1,350 animals reflected in the flock recap sheet. He related that these losses to RCR #4's flock were not reflected in the 1984 flock recap sheet because it had been his and his organization's accounting practice, in preparing an annual flock recap sheet for a partnership's first year of operations, to reflect the number of animals in the partnership's flock at yearend as the number of animals initially acquired by it.

Mr. Hoyt's above testimony is not consistent with the accounting treatment accorded RCR #1, RCR #2, and RCR #3 in the prior annual flock recap sheets. With respect to RCR #1, RCR #2, and RCR #3, Mr. Hoyt maintained that it had been his organization's practice not to account for events such as culls, deaths, and disappearances during each of those partnership's first year of operations. The 1981, 1982, and 1983 flock recap sheets, in fact, reflect each partnership as owning, as of the end of its first year of operations, the same number of animals specified in its bill of sale. See infra Appendix F.

Moreover, this accounting treatment is completely contrary to standard accounting principles because these flock recap sheets show each partnership's breeding flock to have had no lambs born, no sheep culled, and no deaths or disappearances. It is extremely unlikely that the alleged breeding flock each of these partnerships purportedly acquired would, in fact, have produced no lambs during that partnership's first year of operations. RCR #1 entered into its transaction with Barnes Ranches to acquire 401 breeding sheep on April 20, 1981; RCR #2 entered into its transaction with Barnes Ranches to acquire 514 breeding sheep on February 15, 1982; RCR #3 entered into its transaction to acquire 584 breeding sheep on March 20, 1983. Presumably, an important incident of breeding flock ownership is the right to benefit from any lambs produced by that flock. 18 However, the above 1981, 1982, and 1983 flock recap sheets intentionally omitted and failed to provide such material information concerning a partnership's alleged breeding sheep during that partnership's first year of operations.

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18 Although the sharecrop agreements provided that Barnes Ranches, as compensation for its services, was to receive all lambs a partnership's breeding flock produced, a partnership was still to retain the breeding value certificates as to any male lambs. See, however, infra, the discussion regarding breeding value certificate transactions whereby the partnerships later "sold" some of these "certificates" to the Barnes family.

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Further, while the bills of sale reflect the eight partnerships (excluding OGT 90) as having also acquired some rams from Barnes Ranches, the annual flock recap sheets show each partnership to have always owned only breeding ewes. The Court does not find convincing Mr. Hoyt's attempted explanation of this discrepancy. He claimed that the partnerships initially had acquired these rams for various short-term breeding projects that were terminated by the end of each partnership's first year of operations. However, the flock recap sheets do not reflect these partnerships to have later "exchanged" for ewes these rams they initially "acquired". Further, the sharecrop agreement each partnership had entered already obligated Barnes Ranches to provide stud ram services to a partnership's breeding sheep.

The Court considers the flock recap sheets Mr. Hoyt and his organization compiled highly suspect and unreliable, as Mr. Hoyt and his organization failed to employ good record keeping practices and appear to have prepared the recap sheets in a manner contrary to standard, fundamental accounting principles. The Court also can see no good reason or justification for their preparing these annual flock recap sheets in this highly deficient manner ≈ if each of these partnerships, as petitioners maintain, indeed "owned" anywhere near the number of specific individual breeding sheep stated in its bill of sale. Indeed, the Court believes that the flock recap sheets were prepared in this manner because the requisite number of specific breeding sheep did not exist and could not, in fact, be assigned to each partnership. It is also to be noted that the flock recap sheets were, at times, inconsistent with the partnership returns Mr. Hoyt filed. For instance, the annual flock recap sheets reflect that RCR #3 had no breeding sheep by 1987. However, notwithstanding its apparently having no sheep, on its returns for the years 1987, 1988, and 1989, RCR #3 continued to claim and take farming expense deductions.

D. Petitioners' Corrected Bills of Sale

Notwithstanding the above problems with the bills of sale and flock recap sheets, petitioners argue that the stated number of breeding sheep each partnership purportedly purchased and depreciated actually existed. Petitioners assert that each partnership did acquire beneficial ownership of its stated number of breeding sheep on the date when that partnership and Barnes Ranches had entered into their transaction. Petitioners claim that this is established by the large number of matches petitioners have been able to make between (1) certain registration certificates and (2) petitioners' corrected bills of sale for the partnerships. The Court disagrees.

Of the total 9,361 corrected bill of sale entries covering specific breeding sheep that Barnes Ranches purportedly sold to eight of the partnerships, petitioners have determined that 4,839 entries can be matched to registration certificates. However, respondent agrees that only 3,176 of petitioners' corrected bill of sale entries can be matched to a certificate. These 3,176 agreed matches are allocated among the eight partnerships as follows:

It is not surprising that petitioners were able to match far from all of their 9,361 corrected bill of sale entries to certificates. Indeed, at trial, Mr. Barnes claimed that just a "majority" of the breeding sheep that RCR #4 purchased from him were actually "registered sheep". (In giving this "majority of the sheep" estimate, Mr. Barnes apparently counted as "registered sheep" even sheep that had only been issued Barnes certificates.) Similarly, during his cross-examination, Randy could not estimate how many of RCR #6's "breeding sheep" were ultimately registered with a national sheep breed association, but instead he maintained that all of those sheep were "registerable" (i.e., capable of being registered).

As respondent points out, a registration certificate does not conclusively establish that a sheep, though registered with a national sheep breed association, actually existed. Respondent notes that the three national sheep breed associations with which Rambouillets and Suffolks were registered, never physically inspected or otherwise verified whether a sheep being registered with them actually existed, but essentially they relied upon and accepted to be true the registration application information a breeder submitted. Respondent further notes that Barnes' certificates were certificates the Barnes family themselves had issued.

In addition, petitioners, in their matching efforts, have failed to identify and segregate sheep the Barnes family owned but did not "sell" to the partnerships. In fact, many of the 9,485 certificates the parties introduced in the record cover sheep that could not have been "sold" to the partnerships under the bills of sale. For instance, when RCR #1 and Barnes Ranches entered into the first sheep sale transaction in 1981, any sheep born in 1965 would either have been dead or too old to be "sold" as a breeding sheep to RCR #1. Similarly, any sheep born from 1988 through 1993 would also not have been "sold" to the partnerships, because the partnership transactions took place from 1981 through 1987. The Court further thinks that, in all likelihood, other large numbers of the sheep covered in these certificates that were born from 1966 through 1987 were also not sold to the partnerships. 19

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19 Randy claimed that Barnes Ranches, his parents, and he, collectively, owned in the neighborhood of 1,500 ewes during 1987 and 1988. Mr. Barnes maintained that, from 1989 through 1992, they tried to keep the Barnes Ranches breeding flock at about 1,000 sheep.

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The Court is also not satisfied that even some of the agreed matches necessarily represent actual sheep that Barnes Ranches had "sold" to the partnerships. To make many of these matches, petitioners frequently had to disregard substantial portions of the information contained in a particular original bill of sale entry. For instance, certain entries in the original RCR #6 bill of sale reflecting Rambouillets (born to a dam having the registration number 772871) were subsequently matched by petitioners to certificates issued by the Hampshire Association. A comparison of (1) the information given in those RCR #6 bill of sale entries, with (2) the information contained in the Hampshire Association certificates to which they subsequently were matched, is contained infra in Appendix G to this Memorandum Opinion. 20

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20 Petitioners' corrected RCR #6 bill of sale infra in Appendix C, does not reflect all of the corrections that should have been made to these original bill of sale entries, as each corrected entry should have information identical to the certificate to which it was matched.

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Most importantly, notwithstanding petitioners' argument to the contrary, there are a still a number of serious questions concerning the contemporaneous nature and reliability of the bills of sale that Barnes Ranches originally issued. 21 Rather than helping to reconcile and satisfactorily address these questions regarding the bills of sale, upon closer examination, petitioners' posttrial matching efforts substantially diminish their position that the stated numbers of specific breeding sheep the partnerships purportedly purchased, in fact, existed.

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21 The bill of sale document for RCR #4 dated Feb. 1, 1984, listing 1,350 breeding sheep (which Mr. Hoyt claimed was only a "draft bill of sale") has 9 Suffolks indicated to be of the Treasure Valley bloodline. According to one of petitioner's experts, the Treasure Valley bloodline was the premier Suffolk bloodline during the early 1980's, and top Treasure Valley Suffolks rams back then had sold for many thousands of dollars. However, Randy testified that the Treasure Valley bloodline was not a factor in the Barnes Ranches breeding flock until later in 1987 or 1988, when he first purchased a group of 15 Treasure Valley ewes for $75,000. He further related that, at about that time, he also made rental arrangements to obtain the use of two Treasure Valley rams. One such ram was leased by him for 1 year for $15,000; the second ram was leased by him for 1 year for $10,000. He also stated that none of the 15 Treasure Valley ewes he purchased were resold to the partnerships. In addition, it is to be noted that the bill of sale document for OGT 87, dated Jan. 5, 1987, lists one Treasure Valley sheep and that the bill of sale document for RCR #5-2, dated Feb. 1, 1987, lists two Treasure Valley sheep.

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In the corrected bills of sale, included among the listed breeding sheep that RCR #4 and RCR #6, respectively, purportedly purchased from Barnes Ranches are large numbers of Rambouillets and Suffolks reflected as being offspring of either (1) a Rambouillet dam having the registration number 772871 or (2) a Suffolk dam having the registration number 772871. Petitioners' corrected RCR #4 bill of sale (see infra Appendix B) lists (1)(a) 28 individual Rambouillets born in 1982 and (b) 37 individual Rambouillets born in 1983, all of which Rambouillet breeding sheep are shown as being the offspring of a Rambouillet dam, registration number 772871, and (2)(a) 12 individual Suffolks born in 1982 and (b) 33 individual Suffolks born in 1983, all of which Suffolk breeding sheep are shown as being the offspring of a Suffolk dam, registration number 772871. The tag numbers of these Rambouillets and Suffolks listed in the RCR #4 corrected bill of sale as being offspring of a dam with the registration number 772871, are set forth infra in Appendix H to this opinion. Similarly, petitioners' corrected RCR #6 bill of sale (see infra Appendix C) lists (1)(a) 26 individual Rambouillets born in 1984 and (b) 123 individual Rambouillets born in 1985, all of which Rambouillet breeding sheep are shown as being the offspring of a Rambouillet dam, registration number 772871, and (2)(a) 92 individual Suffolks born in 1984 and (b) 6 individual Suffolks born in 1985, all of which Suffolk breeding sheep are shown as being the offspring of a Suffolk dam, registration number 772871. The tag numbers of these Rambouillets and Suffolks listed in the RCR #6 corrected bill of sale as being offspring of a dam with the registration number 772871, are set forth infra in Appendix I to this opinion.

The record reflects that the Barnes family had a Rambouillet ewe with respect to which they issued a Barnes certificate and assigned the registration number 772871. Similarly, the Barnes family had registered a Suffolk ewe with either the American Suffolk Society or the National Suffolk Association that was issued the registration number 772871. 22 However, it is physically impossible for these two registered ewes to have produced annually the high numbers of Rambouillet and Suffolk breeding sheep attributed to them in the RCR #4 and RCR #6 corrected bills of sale. 23 As the Court determined in its findings, the Barnes family did not begin utilizing the artificial insemination technique of embryo transplanting with respect to some of their breeding ewes until at least 1988, well after the time it concluded these transactions with RCR #4, RCR #6, and other of the sheep partnerships. 24

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22 Interestingly, this Suffolk ewe, registration No. 772871, is listed among the breeding sheep sold to RCR #4 in petitioners' corrected RCR #4 bill of sale. The corrected RCR #4 bill of sale further shows this ewe to have been born on Apr. 18, 1982. See infra Appendix B, tag No. 82-3.

23 In this connection, David Barnes testified, on cross-examination, as follows:

Q. So, one ewe during her lifetime couldn't produce like hundreds of offspring?

A. Well, yes, she could.

Q. Okay. And in ≈ would that be true in ≈ when you first started in 1981 for those ewes?

A. Yes, you could if you did embryo transplanting, yes, you could.

Q. Would you do embryo transplants in 1981?

A. No, we wouldn't.

Q. 1982?

A. I think it was in about the 19 ≈ late 1989, '90, '91, in those years we did embryo transplanting.

Q. Okay. So for ewes that were in existence earlier than that, you wouldn't have hundreds of offspring?

A. No.

Q. Okay.

A. We'd like to, but no.

24 Petitioners' corrected bills of sale for RCR #1, RCR #2, RCR #3, and RCR #5 also list numerous Rambouillets and Suffolks that are shown as being offspring of a dam with the registration number 772871 among the breeding sheep that were purportedly sold to those partnerships.

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Further examination of petitioners' corrected bills of sale for RCR #4 and RCR #6 also discloses improbably high numbers of quadruplets, quintuplets, sextuplets, heptuplets, and octuplets listed among the Rambouillets and Suffolks these partnerships purportedly purchased from Barnes Ranches. In the RCR #4 corrected bill of sale, the Court has identified 35 sets of quadruplets, 22 sets of quintuplets, 7 sets of sextuplets, and 1 set of heptuplets. These quadruplet-or-better sibling "breeding sheep" that RCR #4 purportedly purchased are set forth infra in Appendix J to this opinion. Similarly, in the RCR #6 corrected bill of sale, the Court has identified 14 sets of quadruplets, 4 sets of quintuplets, 1 set of sextuplets, and 1 set of octuplets. These quadruplet-or-better sibling "breeding sheep" that RCR #6 purportedly purchased are set forth infra in Appendix K to this opinion.

The Court does not believe that the breeding ewes the Barnes family owned and/or managed actually produced the numbers of high-multiple-sibling offspring indicated in the RCR #4 and RCR #6 corrected bills of sale. The Barnes family did not employ embryo transplanting with respect to some of their breeding ewes until at least 1988. Although Mr. Barnes claimed that his own breeding flock ewes, as well as ewes in the partnerships' breeding flocks, often gave birth to twins and, on occasion, even triplets, 25 he did not mention how frequently, if ever, these ewes gave birth to quadruplet-or-higher offspring. 26

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25 The sharecrop agreement a partnership and Barnes Ranches entered, provided that Barnes Ranches was to receive all lambs produced by that partnership's breeding sheep during the sharecrop agreement's 15-year term.

26 Petitioners' RCR #5-2 and OGT 87 corrected bills of sale also list a number of high-multiple-sibling offspring among the "breeding sheep" that were purportedly sold to those partnerships.

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Most of these quadruplet, quintuplet, sextuplet, heptuplet, and octuplet Rambouillets and Suffolks that are listed in the RCR #4 and RCR #6 corrected bills of sale also lack registration certificates. See infra Appendices J and K, reflecting those of these listed quadruplet-or-better sibling "breeding sheep" to which a certificate was matched. Virtually all of the other Rambouillets and Suffolks in these corrected bills of sale attributed to the two dams each having the registration numbers 772871 lack registration certificates. See infra Appendices H and I, indicating those of these "breeding sheep" to which a certificate was matched.

None of petitioners' witnesses (including Mr. Barnes and Randy) elaborated as to why so many of these above breeding sheep that RCR #4 and RCR #6 purportedly purchased (which sheep petitioners and their experts argue were high quality Rambouillets and Suffolks having values ranging from $500 to $2,130) were never ultimately registered. Indeed, the Court believes that, in all likelihood, these allegedly "registerable Rambouillets and Suffolks" were never registered with national sheep breed associations because (1) such "breeding sheep" were fictitious and did not exist and (2) the bill of sale parentage asserted for them was patently dubious.

Petitioners' matching efforts have not convinced the Court of the actual existence of anywhere close to the stated total number of breeding sheep that purportedly were sold each partnership. We do not accept petitioners' claims that their problems in substantiating each partnership's breeding sheep stem merely from "sloppy data entry" in preparing the original bills of sale that Mr. Barnes issued. Indeed, we do not believe that these many bill of sale "errors" (which petitioners have now acknowledged) were inadvertently made without Mr. Barnes' and Mr. Hoyt's knowledge. The RCR #4 bill of sale that Mr. Barnes issued reflects almost all of the 1,468 breeding sheep that were sold to be registered sheep. Yet, in his later testimony, Mr. Barnes asserted that just a "majority" of the breeding sheep that RCR #4 purchased from him were actually registered sheep. Petitioners also offered no testimony from the employee or employees who prepared the bills of sale. Neither did petitioners or their witnesses identify and name these employees.

Mr. Barnes signed and issued all of these bills of sales. These bills of sale presumably were important ownership documents evidencing each partnership's acquisition of beneficial ownership of specified individual breeding sheep, and these documents ordinarily should have been prepared with some care. In the respective testimony they gave at trial, Mr. Barnes and Mr. Hoyt were silent about the numerous "errors" in these bills of sale that petitioners have now acknowledged. Indeed, Mr. Barnes and Mr. Hoyt had each claimed that the bills of sale were reliable and accurately reflected the specific individual sheep that had been sold to the partnerships. If, as petitioners argue, the stated numbers of breeding sheep each partnership purportedly purchased from Barnes Ranches truly existed, the Court then finds inexplicable the conduct of Mr. Barnes and Mr. Hoyt over the years and the poor records they maintained on a partnership's "breeding sheep".

As discussed previously, the Court does not believe that many of the breeding sheep purportedly sold by Barnes Ranches to these partnerships, in fact, existed. Experienced, longtime sheep breeders, like the Barnes family, would not have then maintained such inadequate records on the numerous individual breeding sheep they had purportedly sold to and managed for each partnership. The record reflects how important proper record keeping is in the breeding of high quality, registered purebred sheep. Each sharecrop agreement further required Barnes Ranches to maintain sufficient records allowing it to identify and keep track of a partnership's breeding sheep at all times. Further, if the stated numbers of breeding sheep these partnerships "owned" actually existed, then Mr. Hoyt would not have accepted such deficient record keeping practices with respect to each partnership's "breeding sheep". Not only was Mr. Hoyt the promoter and managing general partner of each sheep partnership since its formation, but he had extensive experience in the breeding of purebred cattle and the operation of similar cattle breeding partnerships.

Notwithstanding petitioners' arguments to the contrary, we conclude that many of the breeding sheep the partnerships allegedly purchased from Barnes Ranches did not, in fact, exist.

E. Whether a Partnership's Stated Purchase Price Reasonably Approximated the Sheep's Fair Market Value

For the breeding flock it purportedly acquired from Barnes Ranches, each partnership agreed to pay an average stated price per sheep as follows:

Petitioners contend the breeding sheep the partnerships purchased had values ranging from $500 to $2,130, and that the total stated purchase price each partnership paid was reasonable. In doing so, they are essentially asserting the Court should accept as correct the values placed on various individual breeding sheep in the bills of sale that Barnes Ranches issued these partnerships, despite the "substantial errors" that petitioners have now acknowledged were made in these bills of sale.

Respondent, on the other hand, contends that during 1981 through 1991, registered breeding sheep sold for amounts substantially below the values stated in these partnerships' bills of sale. The Court essentially agrees with respondent.

Petitioners offered only very generalized and vague expert testimony regarding the value of the breeding sheep the partnerships purchased. Their several experts opined with respect to (1) the high quality of some of the breeding sheep the Barnes family owned and (2) Mr. Barnes' and Randy's status in this country as top breeders of Rambouillets and Suffolks. These experts then further opined and concluded that the values the bills of sale placed on individual breeding sheep were reasonable.

Petitioners' experts furnished little in the way of analysis or explanation of their conclusions concerning the value of the sheep allegedly sold the partnerships. Further, they were basing their opinions upon their prior exposure to only a limited number of the Barnes family's sheep, primarily those sheep the Barnes family had either (1) entered in various national shows or (2) employed various artificial insemination techniques upon. As they had never examined the sheep that purportedly were sold to the partnerships, the experts merely assumed each partnership's sheep to be like these other very high quality sheep they knew the Barnes family to own. As a result, none of petitioners' experts anticipated the sheep sold the partnerships were anything other than high quality, registered Rambouillets or high quality, registered Suffolks. They further never addressed how drastically their opinions might have to be revised if (1) a large number of the breeding sheep a partnership purportedly purchased did not, in fact, exist, or (2) the parentage or registered status of many of a partnership's sheep was suspect or unknown. 27 Consequently, the Court gives little weight to these conclusions of these experts regarding the value of the partnerships' sheep.

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27 It is also to be noted that petitioners' experts examined only the original bills of sale that Mr. Barnes issued (which documents, petitioners have now acknowledged, contained numerous "errors"), not the corrected bills of sale that petitioners prepared after the trial. As discussed previously, however, there are substantial problems even with these corrected bills of sale.

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The record reflects that each partnership's stated purchase price for its breeding sheep was still substantially in excess of the prices the Barnes family, from 1981 through 1991, realized at auction for the yearling Rambouillets and Suffolks they had entered at various national shows. 28 These yearling sheep represented some of best young registered breeding sheep that the Barnes family owned. Sales records show the Barnes family sold such yearling sheep at auction for prices typically ranging from $175 to $1,100, and that usually any sheep commanding a price of $400 or more had been judged a champion or had won some other award at that particular national show. Obviously, many of the animals purportedly sold the partnerships were nowhere near the quality of a purebred breeding sheep selling for $400 or more. Indeed, the bills of sale listed substantial numbers of animals that apparently were never registered. Further, the parentage of many of the sheep in the bills of sale is either dubious or unknown.

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28 In this connection, Mr. Barnes testified that the breeding sheep "sold" to the partnerships were usually yearlings.

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We conclude the stated bill of sale purchase prices for RCR #4's and RCR #6's "breeding sheep" were many times the actual fair market value of those "sheep". Thus, each partnership's stated purchase price for its sheep did not reasonably approximate those "sheep's" fair market value.

F. Validity of the Partnerships' Notes

In deciding the extent to which a nonrecourse note has economic substance, a number of cases have relied heavily on whether the fair market value of the property acquired with the note was within a reasonable range of its stated purchase price. See Estate of Franklin v. Commissioner [76-2 USTC ╤ 9773], 544 F.2d 1045 (9th Cir. 1976), affg. [Dec. 33,359] 64 T.C. 752 (1975); Hager v. Commissioner [Dec. 37,905], 76 T.C. 759 (1981). See also Hilton v. Commissioner [Dec. 36,962], 74 T.C. 305, 363 (1980), affd. [82-1 USTC ╤ 9263] 671 F.2d 316 (9th Cir. 1982); cf. Frank Lyon Co. v. United States [78-1 USTC ╤ 9370], 435 U.S. 561 (1978), where, among other things, the buyer-lessor in a sale-leaseback transaction was personally liable on the mortgage. As the Court of Appeals for the Ninth Circuit in Estate of Franklin v. Commissioner [76-2 USTC ╤ 9773], 544 F.2d at 1048, stated, in pertinent part:

An acquisition * * * if at a price approximately equal to the fair market value of the property under ordinary circumstances would rather quickly yield an equity in the property which the purchaser could not prudently abandon. This is the stuff of substance. It meshes with the form of the transaction and constitutes a sale.

No such meshing occurs when the purchase price exceeds a demonstrably reasonable estimate of the fair market value. Payments on the principal of the purchase price yield no equity so long as the unpaid balance of the purchase price exceeds the then existing fair market value. Under these circumstances the purchaser by abandoning the transaction can lose no more than a mere chance to acquire an equity in the future should the value of the acquired property increase. * * *

In addition, even a purportedly recourse purchase note will not be treated as true debt where payment, according to its terms, is too contingent. See Waddell v. Commissioner [Dec. 43,023], 86 T.C. 848, 901-903 (1986), affd. [88-1 USTC ╤ 9192] 841 F.2d 264 (9th Cir. 1988). Further, the mere labeling of a purchase note as recourse is not controlling because substance, not form, must govern. The note's recourse label thus will not preclude inquiry into the adequacy of the collateral securing an alleged purchase money debt. See generally Waddell v. Commissioner, supra at 901-903.

In Ferrell v. Commissioner [Dec. 44,834], 90 T.C. 1154, 1186 (1988), this Court held not to be bona fide debt for tax purposes certain purportedly long-term recourse notes that allegedly had been assumed by limited partner-investors, and elaborated as follows:

We are fully aware of the long line of decisions of this Court and other courts that have dealt with bona fide long-term recourse notes assumed by limited partners. In those cases, the courts have given credence to recourse notes as a basis for supporting claimed losses or establishing section 465 "at risk" amounts. See, e.g., Pritchett v. Commissioner [87-2 USTC ╤ 9517], 827 F.2d 644 (9th Cir. 1987), revg. and remanding [Dec. 42,449] 85 T.C. 580 (1985)(at risk under sec. 465); Follender v. Commissioner [Dec. 44,305], 89 T.C. 943 (1987) (at risk under sec. 465; partnership's basis); Melvin v. Commissioner [Dec. 43,632], 88 T.C. 63, 75 (1987) (at risk under sec. 465); Abramson v. Commissioner [Dec. 42,919], 86 T.C. 360 (1986) (partnership's basis; at risk under sec. 465).

In all those cases, however, the recourse notes were given to independent third parties whose interests did not necessarily coincide with those of the note makers. Those cases did not involve, as does the instant case, transactions between two organizations created to carry out a tax shelter scheme, notes given for amounts having no relationship to economic reality, or notes which almost certainly would not be paid. See Goldstein v. Commissioner [66-2 USTC ╤ 9561], 364 F.2d 734, 740-741 (2d Cir. 1966), affg. [Dec. 27,415] 44 T.C. 284 (1965); Durkin v. Commissioner [Dec. 43,548], 87 T.C. 1329, 1376-1377 (1986); Waddell v. Commissioner [Dec. 43,023], 86 T.C. 848, 902 (1986), affd. [88-1 USTC ╤ 9192] 841 F.2d 264 (9th Cir. 1988); Houchins v. Commissioner [Dec. 43,023], 79 T.C. 570, 589-590 (1982).

In the instant case, we are convinced, as stated above, that the purportedly recourse * * * notes served merely as a facade for the support of the tax benefits promised the investors * * *. The possibility that the notes would be paid was illusory. * * *

In Ferrell v. Commissioner, supra, the Court based its conclusion regarding the invalidity of the notes on several factors: (1) The note holder's not being an independent party but an essential member of the tax shelter team; (2) the amount of the notes being many times the value of the property acquired; (3) the unusual form of the notes, including the extremely long term for payment of any of the note's principal; and (4) the prearranged eventual release of the investors from their "assumptions of personal liability" on the "recourse" notes. Id. at 1186-1190.

The record reflects that the partnership debt allegedly assumed by the limited partners was not bona fide recourse debt, as the assumption agreements Mr. Hoyt executed on behalf of the limited partners were apparently not legally enforceable against them. Mr. Hoyt claimed that, pursuant to an alleged oral or written power of attorney granted him, he had signed the limited partners' names to an assumption agreement whereby they had each agreed to be personally liable upon their partnership's promissory note. He further asserted that he was authorized to act as the attorney-in-fact for a partnership's partners in executing any necessary partnership documents. 29 However, according to Mr. Hoyt, all limited partners later defaulting upon their required note payments were allowed to withdraw from their partnership and to walk away from their partnership's alleged recourse promissory note debt. Mr. Hoyt indicated that, although he consulted with an attorney, he and the Barnes family chose not to enforce the assumption agreements and made no attempt to hold these defaulting limited partners personally liable for the payments allegedly due from them on their partnership's purported recourse debt. 30

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29 In a similar connection, Mr. Hoyt also claimed that the remaining partners of each limited partnership had signed an amended partnership agreement whereby, beginning in 1986, they had also become general partners of that partnership. The Court is skeptical of Mr. Hoyt's foregoing testimony and does not find it credible. At any rate, the Court doubts Mr. Hoyt and the Barnes family ever actually intended to hold these remaining partners personally liable on their partnership's promissory note.

30 In this connection, Mr. Hoyt testified, on direct examination, as follows:

Q. If a partner had assumed liability and withdrew from the partnership and refused to pay his assumed liabilities, how did you treat that?

A. In some cases it was the year that they withdrew. The amount of that liability was removed from their partnership capital account as a withdrawal. And in some situations when I was instructed by the partner and their power of attorney was rescinded, for example, back to the year that it was given to me, then I removed ≈ I made an adjustment and removed that capital from that partner's capital account back to the year that I was instructed to.

Q. Do I understand your testimony to mean that there were partners that withdrew and instructed you to treat them on the books and records of the partnership as if they were never partners?

A. That's correct.

Q. Did you agree to that?

A. Yes, I did.

Q. Was there a provision provided in the partnership agreement for you to give those partners that rescinded their agreement that kind of commitment or arrangement on the books of the partnership?

A. I'm sorry. I'm not≈

Q. If I use the term rescinded, do you understand that term?

A. Yes, I do.

Q. Could you tell me what you understand by the term rescission or rescinded?

A. That it never took effect.

Q. Were there provisions under the partnership agreement to allow partners to rescind?

A. I cannot think of any specific item in the partnership agreement that gives them that right. It was ≈ the rescission I was speaking of is the rescission of the power of attorney they gave me that I signed ≈ that I used to sign the assumption agreements.

Now, when that was revoked or rescinded, then that assumption of that liability was treated as if it never occurred.

On cross-examination, Mr. Hoyt further elaborated as follows:

Q. Would you give credit to the individual partners when a sale on a foreclosed note was made for those animals covered by the foreclosed portion?

A. I'm not sure what the word credit means, the way you're using it.

Q. Would you do anything to their capital accounts?

A. Yes.

Q. What would you do?

A. Deduct all the capital that had been contributed to their capital account by assuming partnership liabilities.

Q. If ≈ so for each of those it would be ≈ the sales on * * * [foreclosure] would be a situation where a partner completely walked away from the partnership. Is that right, or not?

A. Walked away, or instructed me in some fashion that they had repudiated their debt.

Q. So there wouldn't be any situation where a * * * [partner] would walk away or repudiate part of his or her debt, to your recollection?

A. Nothing as a part repudiation comes to mind. I don't recall that happening.

Q. Did you keep any records on the value of the sheep that were returned, or sold on the foreclosed notes at the time they were returned back to the manager of the sheep [Barnes Ranches]?

A. No, we didn't have to. We had been instructed by counsel years ago that that should be agreed between the partnership and Barnes Ranches that the sheep returned had the value of the balance of the note.

Q. And these could be sheep that were any age, is that right?

A. Yes.

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In addition, the record reflects other highly unusual conduct by the Barnes family and Mr. Hoyt with respect to these alleged recourse partnership debts. As previously discussed, the sharecrop agreements provided that a partnership would still retain the breeding value certificates (i.e., the rights to any registration papers obtained) on male lambs produced by its breeding flock, even though, pursuant to the sharecrop agreement, all male and female lambs produced were to belong to Barnes Ranches as compensation for its services. Mr. Hoyt claimed that the partnerships, over the years, did sell some of their breeding value certificates to the Barnes family, and that each partnership reported large sums from selling such certificates on its partnership returns. He related that he and Randy at the beginning of each year typically negotiated these breeding value certificate transactions, as Randy would need to obtain the registration paper rights held by certain partnerships on particular male sheep he contemplated selling later that year at various annual shows.

Mr. Hoyt specifically testified that RCR #4, on its 1989 or 1990 return, reported $260,000 of income from its sales of breeding value certificates, and that RCR #6, on one of its later returns, reported about $500,000 of income from its sale of breeding value certificates. He stated the certificate proceeds were applied against the first principal payments that RCR #4 and RCR #6 each owed to Barnes Ranches under their respective "recourse promissory notes". He added that up to that point, the partnerships had not been reporting annually the income from their sales of breeding value certificates. Thus, the respective $260,000 or $500,000 of income that each partnership reported, for its fifth or sixth year of operation, also included some accumulated income each partnership had derived in prior years from selling breeding value certificates.

Although Randy did state that he and Mr. Hoyt, over the years, had negotiated the Barnes family's purchase of breeding value certificates held by the eight partnerships (excluding OGT 90, which petitioners contend did not enter into a transaction with Barnes Ranches), his testimony differed from and contradicted that of Mr. Hoyt's in important respects. Randy related that the Barnes family sold relatively few male sheep necessitating their purchase of a breeding value certificate from one of the partnerships. He estimated that they sold only a total of 10 to 15 such rams over the years. He further claimed that these 10 to 15 rams ultimately may have been sold by the Barnes family to various third parties for prices ranging from $500 to $1,000. 31

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31 Randy testified, on cross-examination, as follows:

Q. All right. And what happened to the lambs that came from the partnership? What did Barnes Ranch do with those lambs?

A. Well, the partnership lambs that came back, there were ≈ many of them would be ewe lambs and many of them would be ram lambs or wethers. The wethers, of course, would be sold for market. The ram lambs, if there were ram lambs deemed of value to do something else with, we would have to contact the partnerships, because they actually had control of the breeding value or the ≈ we didn't get any paperwork with those rams.

So if there were some rams that we wanted to do something with, we'd have to refer back to them. The ewe lambs we would keep or sell for market. The poor ones would be sold for market, the better ones maybe kept back and used for the 10 percent increase or the replacements in the sharecrop agreement.

Q. So I don't ≈ I guess I'm not sure whether I understand what happened to the ram lambs. You said that you had to contact the partnerships because they had some control over them?

A. They had control of the breeding value certificates.

Q. Okay.

A. So if we wanted to market any of those rams we would have to contact them for breeding value certificates. If not, if we were to castrate them we would either sell them to 4-H'ers as wether lambs for shows and a lot of those lambs would come in top dollar. Some of the lambs would be shipped to a feedlot or possibly just put out on pasture until they were ready for slaughter.

Q. For the ones that weren't castrated or treated in the way you just described, the ones that you had to get permission from the ≈ or talk to the partnerships about≈

A. Uh-huh.

Q. ≈ were they ultimately sold?

A. Some of them were.

Q. And what kind of prices did you get?

A. Well, some of them were in the range of $500 to $1,000.

Q. Okay. And did the partnerships ever receive any money from those sales?

A. I believe so.

Q. And which years would those have been? Have they been all the years in this?

A. Well, we're talking about a very few head over the 10 years that I was involved with it.

Q. What percentage of the lambs would have been sold this way, of the ram lambs?

A. I could probably give you a better estimate in terms of head than in terms of percentage≈

Q. Okay.

A. ≈ over the years.

Q. All right.

A. I would estimate of probably 10 to 15 head.

Q. So there are 10 to 15 ram lambs that were sold at the prices you mentioned?

A. Yes.

Q. Is that right?

A. Yes.

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Randy's testimony casts considerable doubt upon the bona fides of the "recourse promissory notes" the partnerships issued to Barnes Ranches. In the subsequent breeding value certificate "transactions", the Barnes family and Mr. Hoyt placed grossly inflated "prices" on certain breeding value certificates "held" by a partnership, because the "transaction proceeds" were only "applied" against the grossly inflated stated purchase price that partnership previously purportedly agreed to pay for its "breeding sheep". In actuality, the Barnes family and Mr. Hoyt never contemplated that each partnership's promissory note would ever have to be paid by that partnership and its partners on a genuinely recourse basis.

This conduct of the Barnes family and Mr. Hoyt is indeed behavior not characteristic of the business world and illustrates that the Barnes family and Mr. Hoyt were not independent parties acting at arm's length. Their actions evidence that they themselves viewed the partnership notes as essentially being illusory and having no practical economic effect and that the notes were merely a facade to support the tax benefits that Mr. Hoyt had promised investors in the partnerships. See Ferrell v. Commissioner [Dec. 44,834], 90 T.C. 1154, 1186-1190 (1988); see also Hunter v. Commissioner [Dec. 38,854(M)], T.C. Memo. 1982-126 n.17.

For the foregoing reasons and on the record presented, the Court concludes that the partnership notes were not valid indebtedness.

G. Petitioners' Failure To Substantiate OGT 90's Breeding Sheep

In comparison to the evidence they offered concerning specific individual sheep that the other partnerships, including RCR #4 and RCR #6, had allegedly purchased from Barnes Ranches from 1981 through 1987, petitioners presented scant evidence to substantiate OGT 90's alleged 1990 purchase of individual breeding sheep from W.J. Hoyt Sons Ranches MLP. Petitioners submitted virtually no contemporaneous transactional documents and records for OGT 90. See supra note 9. The Court further does not find convincing Mr. Hoyt's explanation as to why no pertinent documents and records for OGT 90 could be produced. 32 Thus we conclude that petitioners have failed to produce sufficient evidence substantiating OGT 90's claimed 1991 depreciation deduction with respect to the purported 1,301 breeding sheep" that it allegedly purchased during 1990. 33

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32 In his testimony, Mr. Hoyt indicated that OGT 90's records and many records of the other partnerships were unavailable, because those records had been seized by postal inspectors from his organization's offices in 1995. However, the postal inspector who conducted the seizure testified that shortly after effectuating the seizure, he had provided Mr. Hoyt with an inventory of the seized documents. This postal inspector also related that, in response to Mr. Hoyt's and Mr. Hoyt's representatives' later requests, he had offered them access to the documents that had been seized. According to the postal inspector, Mr. Hoyt was also provided with copies of all the seized documents.

33 Contrary to petitioners' contention, Mr. Barnes, on cross-examination, stated that he believed that Barnes Ranches had "sold" OGT 90 its "breeding sheep".

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H. Conclusions 34

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34 On brief, petitioners assert that this Court's prior decision in Bales v. Commissioner [Dec. 46,099(M)], T.C. Memo. 1989-568, collaterally estops respondent from relitigating a number of issues concerning the transactions in the instant cases. However, petitioners failed to raise collateral estoppel as a defense in their pleadings. The Court thus does not consider petitioners' collateral estoppel argument to be properly before it. In any event, collateral estoppel would not apply in the instant cases. The Bales decision involved several cattle breeding limited partnerships organized by Mr. Hoyt's family that had entered into transactions to acquire breeding cattle. The instant cases, in contrast, involve other sheep breeding limited partnerships that entered into transactions purportedly to acquire breeding sheep from either Barnes Ranches or W.J. Hoyt Sons Ranches MLP. The issues in the instant cases can hardly be said to be identical to those decided in Bales, as different partnerships and different transactions are presented. See Peck v. Commissioner [Dec. 44,544], 90 T.C. 162, 166-167 (1988), affd. [90-1 USTC ╤ 50,311] 904 F.2d 525 (9th Cir. 1990); see also Coward v. Commissioner [Dec. 52,017(M)], T.C. Memo. 1997-198.

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Both the RCR #4 and RCR #6 bills of sale listed large numbers of breeding sheep which did not actually exist. In addition, the RCR #4 bill of sale was not a contemporaneous document. Each partnership's stated purchase price for its breeding sheep further did not reasonably approximate the sheep's fair market value. Lastly, the alleged recourse promissory note each partnership issued was not a valid recourse indebtedness. Accordingly, we hold that RCR #4 and RCR #6 did not acquire the benefits and burdens of ownership with respect to the breeding sheep they each had purportedly acquired from Barnes Ranches. See Ferrell v. Commissioner, supra at 1186-1190; Grodt & Mckay Realty, Inc. v. Commissioner [Dec. 38,472], 77 T.C. 1221, 1237-1238 (1981). We further hold that RCR #4 and RCR #6 are not entitled to the depreciation deductions they claimed upon such breeding sheep for the years in issue.

With respect to OGT 90, we previously concluded that petitioners failed to offer sufficient evidence substantiating OGT 90's alleged acquisition of 1,301 breeding sheep during 1990. Consequently, we sustain respondent's determinations in the FPAA that OGT 90 is not entitled to a depreciation deduction with respect to such breeding sheep for 1991. See Rules 142(a), 240(a).

Issue 2. Interest Deductions

As discussed supra in connection with parts E and F of Issue 1, the Court has concluded that the purported recourse promissory notes RCR #4 and RCR #6, each issued to Barnes Ranches, were not a valid indebtedness. Accordingly, we hold that RCR #4 and RCR #6 are not entitled to the interest deductions they claimed for the years in issue.

Issue 3. Certain Farm Deductions 35

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35 On brief, petitioners conceded the deductions RCR #4, RCR #6, and OGT 90 claimed for drought and/or trichomoniasis.

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As discussed supra in connection with Issue 1, the Court has concluded that RCR #4 and RCR #6 did not acquire the benefits and burdens of ownership with respect to the breeding sheep each claimed to have acquired from Barnes Ranches. Accordingly, we hold that RCR #4 and RCR #6 are not entitled to the farm deductions they claimed for the years in issue.

As also discussed supra in connection with Issue 1, petitioners failed to substantiate OGT 90's alleged acquisition of 1,301 breeding sheep during 1990. Accordingly, we hold that OGT 90 is not entitled to the farm deductions it claimed for 1991.

Issue 4. Deductions for Guaranteed Payments

Petitioners assert that RCR #4, RCR #6, and OGT 90 each are entitled to deductions for the years in issue for certain guaranteed payments each partnership made to Mr. Hoyt during those years.

Section 707(c) allows a deduction to a partnership for guaranteed payments to partners. Such payments are determined without regard to the partnership income and are payments to a partner for services or the use of capital. See sec. 707(c). To be deductible by the partnership, the guaranteed payments must meet the requirements of section 162(a); they must be ordinary and necessary expenses, reasonable in amount, and incurred in a trade or business. See Durkin v. Commissioner [Dec. 43,548], 87 T.C. 1329, 1388 (1986), affd. on other issues [89-1 USTC ╤ 9277] 872 F.2d 1271 (7th Cir. 1989); sec. 1.707-1(c), Income Tax Regs.

In deciding whether the payments are deductible under section 162(a), the Court must look to the nature of the services performed by the general partners rather than to their designation or treatment by the partnership. See Durkin v. Commissioner, supra at 1388-1389. Payments allocable to organizational costs and syndication expenses must be capitalized. Organizational costs, if elected, are amortizable, but syndication costs are not amortizable. See secs. 263, 709. Petitioners have the burden of proving what portion of the fee is allocable to nondeductible capital portions and to deductible expense portions, and such allocation must reasonably comport with the value of the services performed. See Durkin v. Commissioner, supra at 1389. Any fee for services to be rendered in the future is not deductible in the year of expenditure. See id. Whether payments to a partner represent a reasonable compensation for services is a question of fact to be determined on the basis of the particular circumstances of each case. See id.

In the instant cases, the evidence presented on the payments these partnerships made to Mr. Hoyt during the years in issue is most unsatisfactory. The record includes only a copy of RCR #4's partnership agreement. It provides that the managing general partner, Mr. Hoyt, is to receive a fee equal to 15 percent of that partnership's profits upon the sale and distribution of all partnership assets. Copies of the partnership agreements of the other partnership are not in the record.

Mr. Hoyt testified that he received payments from each partnership, and that he reported these payments as income on his individual Federal returns. He further stated that these payments were of two types. According to him, the first type of payment he received was equal to 1 percent of a partnership's reported gross farm receipts. The second type of payment he received was equal to 1 percent of the capital gain income a partnership realized from its sale of sheep each year. He also added that while these payment made to him were credited to his capital account with that partnership, he was not allowed to withdraw the funds. He stated that he was required to leave the funds in the partnership because it had been agreed that this was the means by which he would establish a capital account in a partnership.

Petitioners have failed to establish that the alleged payments each of these partnerships made to Mr. Hoyt are deductible under section 162(a) by that partnership. Petitioners provided scant information concerning (1) the nature of the services Mr. Hoyt performed for that partnership and (2) whether the payments represented reasonable compensation for such services Mr. Hoyt rendered. Thus we hold that RCR #4, RCR #6, and OGT 90 are not entitled to the deductions for guaranteed payments they claimed for the years in issue. 36 See Durkin v. Commissioner, supra at 1388-1389.

**********

36 It is thus unnecessary for the Court to decide whether, for purposes of sec. 707(c), the payments Mr. Hoyt received were determined without regard to partnership income, an issue upon which the parties disagree.

**********

Issue 5. IRA Deductions

RCR #4 and RCR #6 each claimed deductions for some of the years in issue for alleged Individual Retirement Account (IRA) contributions they made for certain of their partners.

On brief, petitioners concede that no evidence was offered to substantiate these claimed IRA deductions.

Consequently, we sustain respondent's determinations in the FPAA's that RCR #4 and RCR #6 are not entitled to their claimed IRA deductions for the years in issue. See Rules 142(a), 240(a).

Issue 6. Capital Gains and/or Additional Farm Income

In the respective FPAA's issued to RCR #4 and RCR #6 for the tax years 1990 and 1991, respondent determined that (1) each partnership had additional farm income from its transfer to Barnes Ranches of lambs produced by that partnership's breeding flock, and (2) the income each partnership reported from the sale of some of its breeding sheep was ordinary income, rather than capital gains.

As discussed supra in connection with Issue 1, the Court has determined that RCR #4 and RCR #6 did not acquire the benefits and burdens of ownership with respect to the breeding sheep they purportedly acquired from Barnes Ranches. As a result, RCR #4 and RCR #6 never owned for tax purposes any breeding sheep to generate this income respondent determined they had for the years in issue. Accordingly, we hold that the fiscal year capital gains and/or other farm income adjustments for 1990 and 1991 respondent determined against RCR #4 and RCR #6 cannot be sustained.

To reflect the foregoing and the parties' concessions,

Decisions will be entered under Rule 155.

APPENDIX A≈FPAA Adjustments

APPENDIX B≈Petitioners' Corrected RCR #6 Bill of Sale

BILLS OF SALE SORTED BY PARTNTERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

BILLS OF SALE SORTED BY PARTNERSHIP

APPENDIX C≈Petitioners' Corrected RCR #6 Bill of Sale

BILLS OF SALE SORTED BY PARTNERSHIP

APPENDIX D ≈ Information From Certain American Suffolk Sheep Society Registration Certificates

APPENDIX E ≈ Depreciation And Other Deductions In Issue

Appendix F≈1981 through 1991 Annual Flock Recap Sheets

[SHEEPBOK XLW] RCR1981.XLS

APPENDIX G≈Comparison Of Certain RCR #6 Original Bill Of Sale Entries To Hampshire Association Certificates To Which They Were Matched

APPENDIX H≈Tag Numbers Of Certain Rambouillets And Suffolks Listed In Petitioners' Corrected RCR #4 Bill Of Sale That ARE Shown As Being Born To A Dam With Registration Number 772871

__________

* Certificate Match

Appendix I≈Certain Rambouillets And Suffolks Listed In Petitioners' Corrected RCR #6 Bill Of Sale That Are Shown As Being Born To A Dam With Registration Number 772871

__________

* ≈Certificate Match

APPENDIX J≈Quarduplet-Or-Better Sibling Breeding Sheep Listed In Petitioners' Corrected RCR #4 Bill Of Sale

__________

* ≈Certificate Match

APPENDIX K≈Quadruplet-Or-Better Sibling Breeding Sheep Listed In Petitioners's Corrected RCR #6 Bill Of Sale

__________

* ≈Certificate Match

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