The opinion
T.C. Memo. 1996-504
UNITED STATES TAX COURT
POISON CREEK RANCHES #1, LTD., POISON CREEK RANCHES #2, LTD.,
POISON CREEK RANCHES #3, LTD., POISON CREEK RANCHES #4, LTD.,
WALTER J. HOYT, III, TAX MATTERS PARTNER, ET AL.,1 Petitioner
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 28394-89, 28395-89, Filed November 7, 1996.
28396-89, 7561-90.
Walter J. Hoyt III (tax matters partner), pro se.
Margaret A. Martin, for respondent.
1
The following cases are consolidated herewith: Poison Creek
Ranches #1, Ltd., Poison Creek Ranches #2, Ltd., Poison Creek
Ranches #3, Ltd., Poison Creek Ranches #4, Ltd., Walter J. Hoyt
III, Tax Matters Partner, docket No. 28395-89; Poison Creek
Ranches #1, Ltd., Poison Creek Ranches #2, Ltd., Poison Creek
Ranches #3, Ltd., Poison Creek Ranches #4, Ltd., Walter J. Hoyt
III, Tax Matters Partner, docket No. 28396-89; Poison Creek
Ranches #1, Ltd., Poison Creek Ranches #2, Ltd., Poison Creek
Ranches #3, Ltd., Poison Creek Ranches #4, Ltd., Walter J. Hoyt
III, Tax Matters Partner, docket No. 7561-90.
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MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: These consolidated cases were assigned to
Special Trial Judge Stanley J. Goldberg pursuant to 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.
OPINION OF THE SPECIAL TRIAL JUDGE
GOLDBERG, Special Trial Judge: Respondent issued a notice
of final partnership administrative adjustments to each limited
partnership involved in these consolidated cases, determining
adjustments in the amounts and for the tax years set forth in the
Appendix.
Walter, J. Hoyt III (petitioner), the tax matters partner
for each limited partnership (partnerships) involved herein,
filed a petition for redetermination of the partnership
adjustments. Most issues have been settled by stipulations so
that the only remaining issues to be decided are: (1) Each
limited partnership's correct amount of Schedule F income, if
any, and (2) the proper allocation of partnership items to the
partners. At trial, respondent filed a "Motion for Entry of
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Decisions" and a proposed decision document in each case.
Respondent's motion was recharacterized as a motion for summary
judgment and filed as such. If we decide that the partnerships
recognized Schedule F income, then the parties agree the amounts
of Schedule F income reflected in the proposed decision documents
are correct. Further, if we find that respondent's method for
calculating the allocations is proper, then the parties agree
that the allocations shown on the proposed decision documents are
correct.
These consolidated cases involved adjustments to partnership
income of Poison Creek Ranches #1 through #4 for taxable years
ended December 31, 1983, 1984, 1985, and 1986. All the
partnerships are limited partnerships formed to engage in the
business of cattle breeding
The Court has previously considered the tax consequences of
the Hoyt family cattle breeding operations in Bales v.
Commissioner, T.C. Memo. 1989-568. The Bales case involved
deficiencies in Federal income taxes of individual limited
partners for the taxable years 1974 through 1980, who had
invested in Florin Farms #1, #2, #3, #4, and #5, Durham Farms #1,
#2, #3, and #4, and Washoe Ranches #1, #2, #3, #4, #5, and #6.
As a result of our opinion in Bales on May 20, 1993, Walter J.
Hoyt III, the general partner and tax matter partner, entered
into a settlement agreement (the agreement) with respondent's
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Sacramento, California, Appeals Office, setting forth the basis
of settling all Hoyt cattle partnership cases for the taxable
years 1980 through 1986.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated by this reference. The parties have agreed that
the testimony and transcripts of the proceedings in the cases at
docket No. 8916-89, Washoe Ranches #1, Ltd., et al., and related
cases, and docket No. 22003-89, Shorthorn Genetic Engineering
1982-1, Ltd., et al., and related cases, will be incorporated by
this reference into the record in these cases.
The partnerships purchased the cattle used in their breeding
operations from Hoyt & Sons Ranches (Ranches). In payment for
the cattle purchased, the partnerships executed promissory notes
payable to Ranches. Thereafter, the partners signed assumption
of liability agreements, thereby assuming personal liability for
these recourse partnership liabilities. Principal payments on
the notes became due starting in the sixth year after the notes
were signed.
During the taxable years in issue, the partnerships
transferred cattle to Ranches in payment of principal and
interest due on the notes. The parties introduced documentary
evidence of each of these transactions: bills of sale from
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Ranches to the partnerships; promissory notes from the
partnerships to Ranches; and bills of sale from the partnerships
to Ranches.
The partnerships reported income recognized on the transfer
of cattle to Ranches in payment of principal and interest as gain
under section 1231. Respondent adjusted this item to zero on the
final partnership administrative adjustments issued to each
partnership.
Pursuant to the agreement, the numbers of cattle subject to
depreciation by the partnerships for the taxable years in issue
were reduced. All cattle were subject to revised valuation as
well. As a result, the amounts of principal due on the notes
payable to Ranches for the cattle purchased were treated as
reduced, and respondent recalculated the annual interest due
based on these amounts according to the provisions of the
agreement. This interest was to be computed on an original
principal balance of $4,000, the settled cost basis of the
breeding cattle per head, times the number of cattle in service
during the first year of each partnership. The agreement
provides that this new principal amount is the amount of
partnership debt to be treated as personally assumed by the
partners.
Schedule F Income
In part, the agreement provides:
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The primary purpose of this memorandum is to
memorialize the bases we reached for settling all cases
involving Hoyt Cattle partnerships for the years 1980
through 1986. It is our express intent to apply the
provisions specified in this memorandum to determine the tax
effects on partnership transactions and operations.
* * * * * * *
Satisfaction of obligations for interest, principal payments
and management fees by transferring calves and culled cows
will constitute ordinary income to the investor
partnerships. This convention is consistent with the Tax
Court's decision in Bales v. Commissioner, which provides
that
-- calves are not section 1231(a) property; and
-- although culled cattle are section 1231(a) property,
the gain on which may be long term capital gain
(depending on the holding period), depreciation allowed
must be recaptured as ordinary income under the
provisions of section 1245.
Principal payments equal to 10% of the face amount of the
notes payable to Ranches will begin according to terms of
the notes -- in the sixth year of the partnership * * *
The agreement includes a provision listing "the total number
of cattle in service and subject to depreciation by the investor
partnerships" for each of the taxable years 1980 through 1986.
The parties have stipulated:
All payments on the promissory notes made by the
partnerships to Hoyt & Sons Ranches beginning in the sixth
year after their respective notes were executed were paid by
transferring cattle with a zero basis, rather than cash.
* * *
The petitioners agree that all of the figures shown on
Schedules (Joint Exhibits 36-AJ through 39-AM) [schedules of
the interest and principal due for each of the years 1983
through 1986] are correct. The petitioners agree that all
of the interest and principal payments beginning in the
sixth year of the notes were made by the transfers of cattle
rather than cash. * * *
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Petitioner testified that the following terminology is used
in the cattle business. Cattle are classified as calves from
birth to weaning; heifer calves being female calves. After
weaning, females are referred to as heifers or yearling heifers.
A heifer that bears a calf is thereafter a cow. Culled cows are
cows which are removed from the breeding herd because they are
suffering performance problems, such as not producing milk or not
breeding. Cows may be culled due to age.
Allocations of Partnership Items
The agreement provides in part:
Each partner's profit and loss sharing percentage is
determined annually by comparing the partner's capital
account to the aggregate of the capital accounts of all
partners in the partnership. This determination is made
based on the total capital owned, not the total capital
originally subscribed.
* * * * * * *
The amount of liabilities assumed personally by the partners
during the first year of the partnership will be based on
original subscription agreements, and will be provided by
Walter J.
* * * * * * *
All partners who originally assumed personal liability for a
portion of the partnership debt during the first year of the
partnership -- whether they are now determined to be active
or inactive partners -- will be assigned a share of the
lower amount of recognized partnership debt described above.
Each partner's share will be the exact same percentage as
his/her share of the partnership debt originally assumed.
The agreement defines active partners as those who continue
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to honor their obligations to Ranches and continue to participate
in the partnership and inactive partners as those who have walked
away from their note obligations and/or no longer participate in
the partnership.
As an alternative, respondent made a settlement offer to the
partners on an individual basis. The terms of the offer provided
generally that a partner who accepted would be allowed a
deduction for any cash paid to the "Hoyt Organization" in the
year of payment. The partner would not be allowed any other
deductions or credits nor be required to recognize any income
related to the partnerships. The record does not indicate how
many partners accepted this settlement offer (referred to as the
out-of-pocket settlement).
Respondent's spreadsheets calculating the partners'
interests in the partnerships have been stipulated and have been
received into evidence. For the first year, respondent allocated
a portion of the partnership debt, which consisted of the reduced
amount of the notes to Ranches, to each of the partners who
assumed personal liability. The allocation was based on the
original percentages of partnership liabilities assumed as
reflected in the partnerships' books and records. The resulting
amounts represented each partner's beginning capital account
balance. Each year respondent adjusted these balances for actual
capital contributions made to the partnerships and for increases
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and decreases in liabilities assumed. These adjusted balances
were used to determine the proportionate share of partnership
items to be allocated to each partner. The capital account
balances were then adjusted to reflect the partnership items so
allocated and these balances were carried over to the next year.
All of the partners included in respondent's proposed
decision documents had personally assumed partnership liabilities
as reflected in the partnerships' books and records and on the
Federal income tax returns filed by the partnerships throughout
the taxable years in issue. Furthermore, petitioner agrees that
respondent's calculations are consistent with the books and
records of the partnerships.
Several documents relating to one of the partnerships,
Poison Creek Ranches #1, have also been stipulated to and
received into evidence. The partnership was formed as a limited
partnership under the laws of the State of Nevada in 1980.
The partnership agreement provides in pertinent part:
2. Each Limited Partner's interest in his share of the
Partnership assets, profits and losses shall be the
proportion which his capital contribution bears to the
aggregate capital contributions of all Limited Partners.
* * *
* * * * * * *
(a) The right to expel any Limited Partner who may fail or
refuse to pay into the capital of the Partnership the entire
amount of his subscription within thirty (30) days after its
due date, or who may attempt to participate in or interfere
in any way with the management of the Partnership's affairs,
is hereby expressly reserved to the General Partner in its
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sole and absolute discretion.
OPINION
At trial, respondent filed a motion for summary judgment in
these consolidated cases. Given the disposition of the issue on
the merits as discussed below, we do not find it necessary to
address respondent's motion for summary judgment, and it will be
denied.
Schedule F Income
Under section 6224 a settlement agreement between respondent
and a tax matters partner related to the determination of
partnership items for any partnership taxable year is binding on
the parties to the agreement with respect to the determination of
partnership items for such partnership taxable year unless there
is a showing of fraud, malfeasance, or misrepresentation of fact.
Sec. 6224(c). Petitioner and respondent both assert that the
agreement is clear and unambiguous, and neither party seeks to
have it set aside. However, the parties do not agree on the
proper interpretation and enforcement of the agreement.
Petitioner argues that the settlement memorandum was a
complete integration of the agreement between petitioner and
respondent and that respondent is precluded from relying on facts
not contained therein. Petitioner argues that because the
agreement limited the number of cattle subject to depreciation,
the agreement failed to provide for the cattle necessary for the
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partnerships to make the payments of principal and interest to
Ranches by the transfer of cattle. Petitioner contends that the
provision in the settlement agreement requiring payments of
principal on the notes must be read to include petitioner's
intention to have the partnerships make such payments by the
transfer of registered shorthorn heifers. Petitioner further
contends that the "cattle" transferred in payment of the notes,
as stipulated, were not calves or culled cattle but registered
shorthorn heifers. Petitioner argues that the Bales v.
Commissioner, supra, decision and the agreement do not apply to
the type of cattle transferred.
Respondent argues that the terms of the agreement are clear,
limiting only the number of cattle subject to depreciation, not
the total number of cattle. Because petitioner has stipulated
that all principal and some interest payments on the notes were
made by transferring cattle with a zero basis, respondent claims
that these cattle would be nondepreciable or fully depreciated
and not limited in number by the terms of the agreement.
Respondent argues that the partnerships must recognize ordinary
income in the amount of those payments by the terms of the
agreement.
The settlement of tax cases is governed by general
principles of contract law. We interpret the proper meaning of
the terms of the agreement by looking at the language of the
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agreement and the circumstances surrounding its execution.
Robbins Tire Co. v. Commissioner, 52 T.C. 420, 435-436 (1969).
Generally, extrinsic evidence will not be admitted to expand,
vary, or explain the terms of a written agreement unless the
agreement is ambiguous. Rink v. Commissioner, 100 T.C. 319, 325
(1993), affd. 47 F.3d 168 (6th Cir. 1995); Woods v. Commissioner,
92 T.C. 776, 780-781 (1989). Petitioner bears the burden of
proving that his interpretation of any ambiguous contract
language is correct. Rule 142(a); Rink v. Commissioner, supra at
326.
The settlement agreement provides that the partnerships must
recognize ordinary income in the amount of any interest and
principal payments made by the transfer of calves. In addition,
the partnerships must recognize income on the transfer of any
culled cattle in payment on the notes and such income will be
ordinary in character to the extent it represents depreciation
recapture. The stipulations provide that the partnerships
transferred cattle with a zero basis in payment on the notes in
amounts stipulated. We interpret this to mean that the
partnerships transferred calves, culled cattle, or some
combination thereof, to Ranches in payment of interest and
principal due on the notes. Thus we find that the agreement
applies to this transaction. Because the partnerships' bases in
these cattle were zero, petitioner must recognize ordinary income
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in a manner consistent with the decision in Bales v.
Commissioner, supra, as provided in the agreement and
stipulations. We believe that a reasonable person with knowledge
of the facts and circumstances surrounding the agreement would
interpret the agreement and stipulations in this manner. We hold
that the agreement provides for the inclusion of Schedule F
income in the amounts shown in respondent's proposed decision
documents.
Petitioner argues that this interpretation is inconsistent
with the other terms of the agreement. An agreement should be
interpreted as a whole and any writings that are part of the same
transaction should be interpreted together. 2 Restatement,
Contracts 2d, sec. 202 (1981). "An interpretation that gives a
reasonable meaning to all parts of the contract will be preferred
to one that leaves portions of the contract meaningless." Rink
v. Commissioner, 47 F.3d 168, 171 (6th Cir. 1995), affg. 100 T.C.
319 (1993); 2 Restatement, Contracts 2d, sec. 202 (1981); 4
Williston on Contracts, sec. 618 (3d ed. 1961).
Petitioner argues that the agreement limits the total number
and class of cattle held by the partnerships. The provision
establishing the number of cattle held by the partnerships
clearly applies, by its terms, only to depreciable cattle.
Petitioner argues that we should infer from this language that no
other cattle exist. We find this reading to be inconsistent with
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other provisions of the agreement.
For example, although not relevant to these cases, the
agreement provides that cattle owned by the partnerships as of
January 1, 1980, will be considered fully depreciated at the end
of 1981. Thus the agreement provides that there are cattle that
are no longer subject to depreciation.
In addition, as set out above, the agreement provides that
payments made by the partnerships to Ranches by transfer of
calves or culled cows will constitute ordinary income in a manner
consistent with the decision in Bales v. Commissioner, T.C. Memo.
1989-568. In that case the Court stated that dispositions of
breeding cattle, including culled cows, are taxed pursuant to
section 1231(a) subject to the recapture provisions of section
1245. The Court further stated that calves that are used for
payment on the notes are not held for breeding purposes and are
not accorded section 1231 treatment. Bales v. Commissioner,
supra. Such calves would not be subject to an allowance for
depreciation and thus would not be subject to the limitation on
depreciable cattle set forth above. Sec. 1.167(a)-6(b), Income
Tax Regs. If petitioner's reading were accepted, this provision
concerning calves would be rendered meaningless.
We note that the agreement is not completely clear in all of
its terms. In part, the agreement provides: "For Federal income
tax purposes, all the cattle are adult breeding cattle, each
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having an original depreciable basis of $4,000." We do not
believe this provision is clear and unambiguous because it could
be read on its own to limit the type of cattle held by the
partnerships. However, we interpret this paragraph as qualifying
the one directly proceeding it which limits the number of cattle
subject to depreciation for each year, and neither party has
suggested a different interpretation. After considering these
provisions and the agreement as a whole, we reject petitioner's
argument that the provision limiting the number of depreciable
cattle should be read to limit the total number of cattle held by
the partnerships.
Even if we found the agreement ambiguous as to this
provision, petitioner has offered no extrinsic evidence that
supports petitioner's position. We find that the agreement
limits only the number of cattle subject to depreciation, but
does not limit the number of nondepreciable cattle owned by the
partnerships.
Petitioner further argues that the portion of the agreement
which provides that principal payments will begin in the sixth
year of the partnership should be enforced by including that such
payments are to be made by the transfer of registered shorthorn
heifers. The language of the agreement is silent as to the
method of payment.
Petitioner's proffered evidence, when considered in light of
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general contract principles, does not convince us that his
interpretation is correct. When the Court asked petitioner
whether he assumed or intended that the provision meant that
payment would be made by the transfer of registered shorthorn
heifers, he responded "I wouldn't characterize it that way". He
testified that he did not designate, in the provision of the
agreement, the class of cattle with which he intended to make
payment in the provision because he was focusing on trying to
draft a document for the basis of settlement. We find that,
although the agreement does not provide a specific method of
payment on the notes, the parties have stipulated that the
payments were made by the transfer of cattle.
Ordinarily, a stipulation of fact is binding on the parties,
and the Court is constrained to enforce it. Rule 91. The Court
will not permit a party to a stipulation to qualify, change, or
contradict the stipulation except where justice requires. Rule
91(e). The interpretation of a stipulation is determined
primarily by ascertaining the intent of the parties by applying
rules of contract law. Stamos v. Commissioner, 87 T.C. 1451,
1455 (1986).
As we understand petitioner's argument, petitioner claims
that the "cattle" transferred in payment on the notes as
stipulated were not culled cows or calves but were registered
shorthorn heifers, and, therefore, not covered by the agreement.
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Petitioner argues that there is no gain to be recognized from the
transfers because the Bales v. Commissioner, supra, decision does
not apply to this class of cattle. We disagree.
The language of the Bales v. Commissioner, supra, decision
is not as narrow as petitioner argues. The Court in Bales found
the following facts: "As for culled cattle used to pay principal
on the notes, we do have some indication that the partnerships
sold culled cows to Hoyt & Sons. These are cattle which did not
fit the program. Many were heifers which did not become
pregnant." Bales v. Commissioner, T.C. Memo. 1989-568. Thus the
terms "culled cattle" and "culled cows" as used in Bales included
heifers.
Moreover, petitioner has stipulated that the cattle
transferred had a zero basis. Thus the transfers result in
ordinary income to the partnerships regardless of whether the
cattle are heifers or culled cows and calves. A stipulation may
be set aside where it is clearly contrary to the facts disclosed
on the record. Cal-Maine Foods, Inc. v. Commissioner, 93 T.C.
181, 195 (1989). The evidence offered by petitioner consists of
bills of sale from the partnerships to the Ranches corresponding
to the cattle that petitioner claims were transferred in payment
on the notes. The bills refer to the cattle as "registered
shorthorn heifers." The bills of sale do not indicate the
partnerships' basis in any of the cattle. The facts on the
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record do not show that the partnerships made payment on the
notes with cattle other than those with a zero basis as
stipulated. Accordingly, the partnerships must recognize
ordinary income in the amounts of the payments of interest and
principal on the notes.
Petitioner's argument concerning the terms of the agreement
and stipulation is not entirely clear, and we will briefly
address the alternate argument we believe petitioner may be
attempting to make. The argument can be summarized as follows:
The agreement sets out the number of cattle subject to
depreciation on an annual basis; as stated in the petition, the
partnerships sold registered shorthorn heifers which had been
held for breeding purposes for over 24 months in payment of the
notes; these cattle would be depreciable; because the number of
cattle subject to depreciation does not decrease in correlation
to the cattle transferred in payment on the notes, the agreement
does not provide the partnerships with sufficient cattle to make
such payments. Therefore, the payments could not have been made
under the binding terms of the agreement.
We are not persuaded by this argument. Even if the cattle
transferred were depreciable, registered shorthorn heifers,
petitioner has stipulated that the cattle had zero basis, and as
explained above, we will not set aside this stipulation.
Therefore, the cattle would be fully depreciated and outside of
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the provision limiting the number of cattle held subject to
depreciation.
In the alternative, petitioner argues that because
respondent calculated lower interest payable by the partnerships
for the years in issue consistent with the agreement, the
partnerships paid cash to Ranches in excess of the amounts due in
some of the years. This cash, petitioner asserts, should be
applied to any future principal and interest due on the notes
payable to Ranches before the partnerships recognize any ordinary
income on the transfer of cattle in payment.
Respondent argues that the stipulation clearly negates any
claim that the partnerships made payments on the notes with cash
and that petitioner is bound by the stipulation.
The Court will hold the parties bound by a stipulation
unless justice requires otherwise. Rule 91(e). The Court may
modify or set aside a stipulation that is clearly contrary to the
facts revealed on the record. Cal-Maine Foods v. Commissioner,
supra.
Petitioner attached schedules entitled "Partnerships Cash
Reconciliation" to petitioner's posttrial brief for each of the
years 1980 through 1986. This exhibit is not considered to be
evidence. Rule 143(b). Petitioner also argues that the
stipulations entered in two other cases are evidence in support
of his position. Stipulations have effect in the cases in which
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they are entered only and are not binding for any other purpose.
Rule 91(e). Therefore, the stipulations from the other cases are
not evidence in these cases.
Petitioner has offered no other evidence to show that any
cash was paid to Ranches. The only evidence introduced by
petitioner is the bills of sale detailing the number of cattle
transferred as payment on the notes. Moreover, petitioner
stipulated that the payments at issue were made by transferring
cattle, not cash. This stipulation is not clearly contrary to
the facts disclosed on the record. Therefore, we find that the
partnerships made interest and principal payments beginning in
the sixth year of the notes payable by transferring cattle. The
partnerships must recognize ordinary income on the transfer of
cattle in the amounts stipulated.
Allocations of Partnership Items
When a petition for readjustment of partnership items has
been filed properly, this Court has jurisdiction to decide all of
the partnership items of the partnership and the proper
allocation of these items to the partners for the partnership
taxable year at issue. Sec. 6226(f). Partnership items are
those items required to be taken into account for the
partnership's taxable year under subtitle A which are to the
extent provided by the regulations "more appropriately determined
at the partnership level than at the partner level." Sec.
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6231(a)(3). The regulations provide that such items include:
(1) The partnership aggregate and each partner's share
of each of the following:
(i) Items of income, gain, loss, deduction, or
credit of the partnership;
* * * * * * *
(v) Partnership liabilities (including determinations
with respect to the amount of liabilities, whether
liabilities are nonrecourse, and changes from the preceding
taxable year); and
* * * * * * *
(4) Items relating to the following transactions, to
the extent that a determination of such items can be made
from determinations that the partnership is required to make
with respect to an amount, the character of an amount, or
the percentage interest of a partner in the partnership, for
purposes of the partnership books and records or for
purposes of * * * furnishing information to a partner:
(i) Contributions to the partnership;
(ii) Distributions from the partnership; and
(iii) Transactions to which section 707(a) applies
(including the application of section 707(b)).
Sec. 301.6231(a)(3)-1(a), Proced. & Admin. Regs.
All partners who held an interest in the partnership for the
taxable year at issue generally will be treated as parties to a
partnership action. Sec. 6226(c). However, a partner is not a
party if he or she does not have an interest in the outcome of
the proceeding because such partner's partnership items have
become nonpartnership items pursuant to subsection (b) of section
6231. Sec. 6226(d). A partner's partnership items will be
treated as nonpartnership items as of the date on which the
partner enters into a settlement agreement with the respondent
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with respect to such items. Sec. 6231(b)(1)(C). The
classification of items as partnership or nonpartnership items is
significant because the audit and litigation procedures provided
in sections 6221 through 6230 apply to partnership items.
Nonpartnership items are subject to the rules for judicial and
administrative resolution of the partner's tax liability and
cannot be the subject of a partnership proceeding. See, e.g.,
Maxwell v. Commissioner, 87 T.C. 783, 788-789 (1986).
Petitioner has made various arguments based on an assumption
that respondent included partners who have accepted the out-of-
pocket settlement in her calculations on which the proposed
decision documents are based. Petitioner bears the burden of
proof in these cases. Rule 142. We begin by noting that there
is no evidence in the record concerning partners who have
accepted the out-of-pocket settlement. Therefore, we have no
indication that any such partners were included in respondent's
calculations. We will, however, further address petitioner's
arguments.
Petitioner argues that the partnership income, losses,
credits, and liabilities calculated pursuant to the agreement
should be allocated to a limited group of partners. Petitioner
contends that any partners who have accepted the out-of-pocket
settlement offer from respondent are not parties to this
proceeding pursuant to section 6226. Therefore, petitioner
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argues, the Court is prohibited from allocating partnership items
to those partners because we do not have jurisdiction to do so.
Petitioner also argues that pursuant to section 6231, the
partnership items of the partners who have accepted the out-of-
pocket settlement have been converted to nonpartnership items.
As a result, petitioner argues that these partners have no
partnership interest.
Respondent argues that the Court has jurisdiction to
determine the allocation of items at issue in these cases because
the items are partnership items. Respondent contends that in
order to determine the allocations to be made to the partners who
have not settled on an individual basis, it is necessary for the
Court to consider the capital accounts of all of the partners.
Respondent argues that the TEFRA provisions are procedural,
and affect only the type of proceeding which may be brought, but
do not alter the substantive law of partnerships. Thus,
respondent argues, the provisions do not have the effect of
removing partners from the partnership.
The items at issue fall within the definition of partnership
items. The determination of the allocation of partnership items
to the parties to this action requires that we consider the
partnership aggregate of each item including partnership capital.
A partner's allocable interest in each item is determined based
on the share of total partnership capital contributed by the
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partner.
The effect of a partner's accepting the out-of-pocket
settlement is that the partner and respondent have agreed on the
treatment of the partner's share of partnership items for Federal
tax purposes. Under sections 6226 and 6231, such partner is not
a party to this partnership action and is not bound by our
determinations. However, the partner is still a party to the
partnership agreement and retains his interest as partner in the
partnership. Thus, the allocations of partnership items must be
computed by including the interests of all partners, including
any who have accepted the out-of-pocket settlement.
Petitioner also contends that by the terms of the
partnership agreement, the tax matters partner has the authority
to accept the out-of-pocket settlement on behalf of individual
partners, that he has exercised such authority with respect to
certain partners, and that these partners are no longer parties
to this action. Because we have held that the status of the
partners with respect to these cases does not affect our
jurisdiction to determine the allocation of partnership items
above, we find no merit in this argument. In addition, the
partnership agreement for Poison Creek Ranches #1 does not
contain any provisions with respect to the tax matters partner,
his rights, or his duties.
In the alternative, petitioner argues that the proper
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interpretation of the agreement supports his contention that the
partnership items should be allocated to a limited number of
partners.
First, petitioner asserts, on brief, that the tax matters
partner believed that pursuant to the Code provisions, partners
who settled on an individual basis should be excluded from
allocations to be determined under the agreement because such
partners are no longer parties to this action.
Respondent argues that even assuming that the tax matters
partner believed the calculations under the agreement would be
made by applying its provisions only to the partners who are
parties to this action, such belief is a mistake of law, and thus
it does not preclude enforcement of the agreement.
Assertions made in briefs do not constitute evidence. Rule
143(b). There is no evidence on the record to support
petitioner's assertion as to the belief of the tax matters
partner at the time the agreement was made. Further, we agree
with respondent that the tax matters partner's asserted belief is
mistaken, and, whether the mistake is of fact or law, it is not
grounds for rescinding an agreement under section 6224. Korff v.
Commissioner, T.C. Memo. 1993-33. Therefore, the agreement is
enforceable.
In the alternative, petitioner argues that by its terms the
agreement does not apply to partners who have settled with the
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respondent on an individual basis. Petitioner relies on the
following language: "The primary purpose of this memorandum is
to memorialize the bases we reached for settling all cases
involving Hoyt partnerships for the years 1980 through 1986."
Petitioner argues that the agreement therefore has no relevance
for partners who are not parties to this action.
Again, we note, that there is no evidence in the record
concerning the extent to which respondent's calculations include
partners who have accepted the out-of-pocket settlement. In any
event, we find that the language of the agreement providing for
the calculation of the allocations of partnership liabilities and
other items to the partners is clear. Each section refers to
"the partners" or "all partners". Therefore, we find that
inclusion of all partners in the calculations is appropriate.
In the alternative, petitioner argues that the terms of the
partnership agreements control these allocations and that
respondent's calculations are inconsistent with the requirements
of the partnership agreements. Petitioner contends that the
provisions of the partnership agreements require that partnership
items be reallocated in accordance with the partner's real
interests in the partnership. Petitioner argues that the
allocations of partnership items are to be made pursuant to the
partnership agreements under section 704(a). Petitioner asserts
that certain partners defaulted on the notes to Ranches.
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Petitioner contends that under the terms of the partnership
agreement the interests of these partners have been terminated.
Petitioner also contends that under the partnership agreement the
partners are to be treated as having never assumed these
obligations, and, therefore, they should not be allocated any
share of the partnership liabilities under the agreement.
Petitioner's contentions are not supported by the evidence
in the record. Petitioner has not produced any evidence that any
partners defaulted on the notes.
Even if we were to find that the partners defaulted on the
notes, the partnership agreement for Poison Creek Ranches #1 does
not support petitioner's argument. The partnership agreement
does not provide for the adjustment or reallocation of
partnership items to the limited partners. In addition, the
partnership agreement provides that a limited partner may be
expelled for defaulting on his or her subscribed contribution,
not for defaulting on partnership obligations. Nor does the
partnership agreement provide that an expulsion is retroactive to
the beginning of the partnership.
Moreover, the settlement agreement expressly provides for
the inclusion of partners who later default on their note
obligations to Ranches (inactive partners) in the original
allocations of the partnership debt. The agreement is binding on
the parties. Sec. 6224.
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Petitioner also makes the following secondary arguments:
(1) Various partners' interests have been terminated due to the
partners' actions or inactions; (2) a large number of partners
defaulted on the notes to Ranches in 1987, and their cattle have
been repossessed; therefore, these partners should not be
allocated any partnership debt; and (3) certain partners
terminated their interests in 1994 by letters alleging that the
partnerships were terminated shortly after inception.
Respondent objected to any evidence of these purported
actions or inactions as irrelevant because they were subsequent
to the taxable years at issue.
Evidence is relevant if it tends to make the existence of
any fact that is of consequence to the determination of the
action more probable or less probable than it would be without
the evidence. Fed. R. Evid. 401. Petitioner proffered evidence
of various livestock exhibitions, sales and programs, letter
writing campaigns from 1992 through 1994, and a management
agreement between Shorthorn Genetic Engineering 1983 #3 and W.J.
Hoyt Sons Management Co., Ltd., for years beginning with 1993, as
well as termination of interest letters from partners written in
1994. Petitioner has provided no explanation of the relevance of
these documents to the taxable years at issue. The evidence does
not tend to show that any partners withdrew from or had their
interests in any of the partnerships terminated during the
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taxable years at issue. Respondent's objection is sustained.
The only evidence in the record that any cattle were
repossessed is petitioner's own general testimony that cattle
were repossessed. Even if we believed that the cattle were
repossessed by Ranches, the repossession occurred after the
taxable years in issue and is not relevant to these cases.
To reflect the foregoing,
An appropriate order and decision
will be entered in each case.
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APPENDIX
Taxable Adjustments
Year Investment Ordinary Separately Stated
Docket No. Partnership Ending Tax Credit Income Partnership Items
28394-89 Poison Creek Ranches #1, LTD. 12/31/83 $0 $354,738 $21,250
Poison Creek Ranches #2, LTD. 12/31/83 0 334,265 12,950
Poison Creek Ranches #3, LTD. 12/31/83 0 360,477 12,900
Poison Creek Ranches #4, LTD. 12/31/83 0 353,515 19,275
28395-89 Poison Creek Ranches #1, LTD. 12/31/84 0 384,958 (99,645)
Poison Creek Ranches #2, LTD. 12/31/84 0 430,773 (51,500)
Poison Creek Ranches #3, LTD. 12/31/84 0 397,430 (16,993)
Poison Creek Ranches #4, LTD. 12/31/84 0 433,738 (21,900)
28396-89 Poison Creek Ranches #1, LTD. 12/31/85 11,895 242,256 0
Poison Creek Ranches #2, LTD. 12/31/85 11,896 210,763 22,000
Poison Creek Ranches #3, LTD. 12/31/85 11,895 190,511 24,000
Poison Creek Ranches #4, LTD. 12/31/85 11,896 344,461 24,000
7561-90 Poison Creek Ranches #1, LTD. 12/31/86 0 362,534 (230,498)
Poison Creek Ranches #2, LTD. 12/31/86 0 320,864 (291,693)
Poison Creek Ranches #3, LTD. 12/31/86 0 332,559 (271,656)
Poison Creek Ranches #4, LTD. 12/31/86 0 432,785 (356,201)