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T.C. Memo. 2000-159

UNITED STATES TAX COURT

DURHAM FARMS #1, J.V., GARY L. BLACKBURN, TAX MATTERS PARTNER ET

AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Cases of the following petitioners are consolidated

herewith: Durham Farms #1, J.V., Gary L. Blackburn, Tax Matters

Partner, docket No. 2468-94; W.J. Hoyt Sons Management Company,

Gary L. Blackburn, Tax Matters Partner, docket No. 5104-94; W.J.

Hoyt Sons Management Company, Gary L. Blackburn, Tax Matters

Partner, docket No. 5105-94; W.J. Hoyt Sons Management Company,

Gary L. Blackburn, Tax Matters Partner, docket No. 5106-94;

Durham Genetic Engineering 1984-3, J.V., Gary L. Blackburn, Tax

Matters Partner, docket No. 9271-94; Shorthorn Genetic

Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters Partner,

docket No. 9752-94; Durham Genetic Engineering 1984-3, J.V., Gary

L. Blackburn, Tax Matters Partner, docket No. 9768-94; Shorthorn

Genetic Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters

Partner, docket No. 9814-94; Timeshares Breeding Service 1989-1,

J.V., Gary L. Blackburn, Tax Matters Partner, docket No. 1870794; W.J. Hoyt Sons Management Company, Gary L. Blackburn, Tax

Matters Partner, docket No. 18710-94; Durham Farms #1, J.V., Gary

L. Blackburn, Tax Matters Partner, docket No. 20957-94; Shorthorn

Genetic Engineering 1982-1, J.V., Gary L. Blackburn, Tax Matters

Partner, docket No. 22821-94; Shorthorn Genetic Engineering 19845, J.V., Gary L. Blackburn, Tax Matters Partner, docket No.

23429-94; Durham Genetic Engineering 1984-3, J.V., Gary L.

Blackburn, Tax Matters Partner, docket No. 23777-94; Durham Farms

#1, J.V., Gary L. Blackburn, Tax Matters Partner, docket No.

8175-95; Shorthorn Genetic Engineering 1982-1, J.V., Gary L.

Blackburn, Tax Matters Partner, docket No. 10053-95; Shorthorn

Genetic Engineering 1984-5, J.V., Gary L. Blackburn, Tax Matters

Partner, docket No. 11217-95; Durham Genetic Engineering 1984-3,

J.V., Gary L. Blackburn, Tax Matters Partner, docket No. 12500(continued...)

- 2 Docket Nos.

2465-94,

5104-94,

5106-94,

9752-94,

9814-94,

18710-94,

22821-94,

23777-94,

10053-95,

12500-95,

14712-95,

20868-95,

24241-95,

2468-94,

5105-94,

9721-94,

9768-94,

18707-94,

20957-94,

23429-94,

8175-95,

11217-95,

13236-95,

20843-95,

21629-95,

24643-95.

Filed May 18, 2000.

Michael D. Culy , for petitioners in docket Nos. 5104-94,

5105-94, 5106-94, 18710–94, and 22821-94.

Timothy G. Buck, for petitioners in docket Nos. 5104-94,

5105-94, 22821-94, and 23777-94.

Montgomery W. Cobb, for petitioners in docket Nos. 2465-94,

2468-94, 9721-94, 9752-94, 9768-94, 9814-94, 18707-94, 18710-94,

20957-94, 22821-94, 23429-94, 23777-94, 8175-95, 13236-95, 14712-

(...continued)

95; Durham Genetic Engineering 1986-2, J.V., Gary L. Blackburn,

Tax Matters Partner, docket No. 13236-95; Timeshares Breeding

Services 1989-1, J.V., Gary L. Blackburn, Tax Matters Partner,

docket No. 14712-95; Durham Farms #1, J.V., Dan C. Johnson, A

Partner Other Than the Tax Matters Partner, docket No. 20843-95;

Shorthorn Genetic Engineering 1984-5, J.V., Lawrence Dees, A

Partner Other Than the Tax Matters Partner, docket No. 20868-95;

Shorthorn Genetic Engineering 1982-1, J.V., Gary L. Blackburn,

Tax Matters Partner, docket No. 21629-95; Durham Genetic

Engineering 1984-3, J.V., Thomas Emerson, A Partner Other Than

the Tax Matters Partner, docket No. 24241-95; Timeshares Breeding

Services 1990-1, J.V., Edgar Marco, A Partner Other Than the Tax

Matters Partner, docket No. 24643-95. By Order dated Oct. 27,

1999, the Court removed Walter J. Hoyt III, as tax matters

partner in each of the consolidated cases. In that same Oct. 27,

1999, Order, the Court appointed Gary L. Blackburn as successor

tax matters partner of each partnership in the cases and also

permitted him to be intervening tax matters partner in those

cases commenced by a partner other than a partnership’s tax

matters partner.

- 3 95, 20843-95, 20868-95, 21629-95, 24241-95, and 24643-95.

Walter J. Hoyt III, pro se in docket Nos. 10053-95, 1121795, and 12500-95.2

Walter J. Hoyt III (participant), pro se in docket Nos.

20843-95, 20868-95, 24241-95, and 24643-95.3

Gerald W. Douglas, Ann M. Murphy, Wesley F. McNamara, Paul

Robeck, Kathy I. Shaw, Catherine Caballero, and Ralph W. Jones,

for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

These cases were assigned to Special Trial

Judge Stanley J. Goldberg, pursuant to Rules 180, 181, and 183.

All Rule references are to the Tax Court Rules of Practice and

Procedure.

Section references are to the Internal Revenue Code

in effect for the years in issue.

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 adjustment (FPAA) to each

partnership involved in these consolidated cases determining the

adjustments in the amounts and for the taxable years as set forth

After the trial was held and the parties filed their

posttrial briefs, Walter J. Hoyt III was allowed by the Court to

withdraw as tax matters partner from these cases.

See supra note 2.

- 4 in appendix A hereto.4

After concessions, the primary issues for decision are:

(1)

Whether each of seven of the eight partnerships in the instant

cases--Durham Farms #1, J.V., Gary L. Blackburn, Tax Matters

Partner (DF #1), Shorthorn Genetic Engineering 1982-1, J.V., Gary

L. Blackburn, Tax Matters Partner (SGE 82-1), Durham Genetic

Engineering 1984-3, J.V., Gary L. Blackburn, Tax Matters Partner

(DGE 84-3), Shorthorn Genetic Engineering 1984-5, J.V., Gary L.

Blackburn, Tax Matters Partner (SGE 84-5), Durham Genetic

Engineering 1986-2, J.V., Gary L. Blackburn, Tax Matters Partner

(DGE 86-2), Timeshares Breeding Services 1989-1, J.V., Gary L.

Blackburn, Tax Matters Partner (TBS 89-1), and Timeshares

Breeding Services 1990-1, J.V., Gary L. Blackburn, Tax Matters

Partner (TBS 90-1)--purchased and acquired ownership of breeding

cattle that are subject to an allowance for depreciation under

The years in issue for Durham Farms #1 are 1987, 1988, and

its years ended Sept. 30, 1989 through 1992. The years in issue

for Shorthorn Genetic Engineering 1982-1 are its years ended

Sept. 30, 1990 through 1992. The years in issue for Shorthorn

Genetic Engineering 1984-5 are 1987, 1988, and its years ended

Sept. 30, 1989 through 1992. The years in issue for Durham

Genetic Engineering 1984-3 are 1987, 1988, and its years ended

Sept. 30, 1989 through 1992. The year in issue for Durham

Genetic Engineering 1986-2 is 1991. The years in issue for

Timeshares Breeding Services 1989-1 are 1989 and 1991. The year

in issue for Timeshares Breeding Services 1990-1 is 1992. The

years in issue for W.J. Hoyt Sons Management Co. are its years

ended Sept. 30, 1987 through 1990. Respondent granted DF #1, SGE

82-1, SGE 84-5, and DGE 84-3, each permission to change to a

taxable year ended Sept. 30, beginning with that partnership’s

year ended Sept. 30, 1989.

- 5 section 167 for the years in issue; (2) whether those seven

cattle-breeding partnerships each have substantiated and are

entitled to their claimed depreciation deductions with respect to

their breeding cattle for the years in issue; (3) whether those

seven cattle-breeding partnerships are entitled to certain

interest deductions with respect to the promissory note each

partnership issued in connection with the purported acquisition

of its breeding cattle; (4) whether any of those seven cattlebreeding partnerships is entitled to farm, guaranteed payment,

and certain other deductions it claimed; (5) whether DGE 84-3 and

SGE 84-5 are entitled to an investment credit for 1987; (6)

whether some of those seven cattle-breeding partnerships had

certain additional farm income for some of the years in issue;

(7) whether the eighth partnership, W.J. Hoyt Sons Management

Co., Gary L. Blackburn, Tax Matters Partner (Management), is

entitled to certain credits and deductions it claimed for the

years in issue; and (8) whether Management had certain additional

farm and other income for the years in issue.

FINDINGS OF FACT

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,

- 6 DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, TBS 901, and Management each maintained its principal place of business

in Burns, Oregon.

Overview

Walter J. Hoyt III (Jay Hoyt) is a general partner of each

of the seven cattle-breeding partnerships that are involved in

the instant cases.

These seven cattle-breeding partnerships were

formed and began operating in the years indicated as follows:

Partnership

Year

DF #1

SGE 82-1

DGE 84-3

SGE 84-5

DGE 86-2

TBS 89-1

TBS 90-1

1973

1982

1984

1990

1989

1990

DF #1, SGE 82-1, DGE 84-3, and SGE 84-5 had each been formed as a

California or Nevada limited partnership.

Jay 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 by the late 1960's.

Before and after the father’s

death in early 1972, Jay Hoyt and other members of the Hoyt

family were extensively involved in organizing and operating

cattle-breeding partnerships.

From about 1971 through 1992, Jay

Hoyt organized, promoted to numerous investors, and operated as a

- 7 general partner a total of almost 100 cattle-breeding

partnerships.

Several of these earlier cattle-breeding partnerships,

including DF #1, were the subject of this Court’s opinion in

Bales v. Commissioner, T.C. Memo. 1989-568, wherein the years in

issue generally were 1977, 1978, and 1979.

The Hoyt family

originally through W.J. Hoyt & Sons had sold breeding cows or

heifers to these earlier partnerships for no money down and a

promissory note.

In general, the promissory note required a

partnership to pay the stated purchase price for its cattle over

a specified long-term period of 10 years or more.

For about the

first 5 years, no principal payments were required from the

partnership but only annual interest payments at a specified

interest rate per annum.

Over the remaining years, the

partnership was to pay the note’s full principal amount in equal

annual installments.

W.J. Hoyt & Sons was further granted a

security interest in the partnership’s breeding cattle, securing

payment on the partnership’s promissory note.

W.J. Hoyt & Sons

and the partnership concurrently also entered into a management

agreement, pursuant to which W.J. Hoyt & Sons obligated itself to

undertake all management with respect to a partnership’s breeding

cattle, pay all expenses, and provide stud bull services, in

exchange for receiving all calves produced and any culled cows

(the sharecrop agreement).

The sharecrop agreement further

- 8 obligated W.J. Hoyt & Sons to replace any partnership breeding

cow that could no longer serve as a breeding cow with another cow

of a specified quality.

In addition, W.J. Hoyt & Sons further

guaranteed that there would be a 10-percent annual increase in

the size of the partnership’s breeding herd.

Most of the cattle sold to these earlier partnerships were

represented to be registered Shorthorn heifers on the bills of

sale issued to the partnership.

and/or crossbred.

Others were appendix registered

Some were “grade” heifers.

All of the cattle

owned by the partnerships registered with the American Shorthorn

Association (ASA) were registered under the W.J. Hoyt & Sons

name, and not under a partnership’s name.

However, other of the

Shorthorn cattle sold to the partnerships were not registered

with the ASA.

Instead, these cattle were issued certificates by

the Hoyt family (Hoyt certificates).

As indicated previously, the Hoyt family through W.J. Hoyt &

Sons originally had (1) sold the breeding cattle to earlier

cattle-breeding partnerships they formed and promoted to

investors and (2) managed those partnerships’ breeding cattle

pursuant to a sharecrop agreement with each partnership.

These

arrangements somewhat changed over the years, in that the Hoyt

family conducted these activities through various entities.5

In Bales v. Commissioner, T.C. Memo. 1989-568 (wherein the

years in issue generally were 1977 through 1979), this Court,

(continued...)

- 9 some point before the years in issue, Jay Hoyt

decided that when

the Hoyt family sold breeding cattle to a cattle-breeding

partnership, he should not be negotiating as general partner of

that cattle-breeding partnership its purchase of those same

cattle and then managing that partnership’s cattle under a

sharecrop agreement between the partnership and W.J. Hoyt & Sons.

However, despite these different entities the Hoyt family

employed, Jay Hoyt continued to head the Hoyt organization and

was ultimately in charge of all of the Hoyt organization’s

operations.

All of the individuals managing various entities in

(...continued)

among other things, determined with respect to the transactions

of several earlier cattle partnerships (which the Hoyt family

organized and operated, including DF #1) that (1) those

partnerships had acquired the benefits and burdens of ownership

with respect to specific breeding cattle and (2) the promissory

notes they issued were valid recourse indebtedness. In addition,

Jay Hoyt (as tax matters partner) and respondent later concluded

settlements with respect to the years 1980 through 1986 of those

partnerships and a number of other cattle-breeding partnerships

the Hoyt family organized (including settlements for 1980 through

1986 for some of the seven cattle-breeding partnerships involved

in the instant cases). In the instant cases, which involve the

years 1987 through 1992 and concern transactions the seven

cattle-breeding partnerships in issue entered into after those in

Bales, however, the parties disagree whether these seven cattlebreeding partnerships obtained actual ownership of specific

breeding cattle and whether the promissory notes the partnerships

issued were valid indebtedness. The terms “sale”, “sold”,

“purchase”, “partnership’s cattle”, and similar terms, insofar as

relating to subsequent transactions now in issue, are used herein

for convenience and are not intended as ultimate findings or

conclusions concerning the partnerships’ acquisition of cattle.

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.

- 10 the Hoyt organization answered to him.

At some point, W.J. Hoyt Sons Ranches (Ranches) (which

originally in the 1960's had been an oral partnership of Jay

Hoyt, his two brothers Ric Hoyt and Seth Hoyt, and their father)

was reformed and became the seller of the cattle to the cattlebreeding partnerships that Jay Hoyt and the Hoyt family organized

and operated.

After it was reformed, Ranches’ partners included

Betty Hoyt (Jay Hoyt’s wife), Ric Hoyt, and Steve Hoyt (another

of Jay Hoyt’s brothers).

Ranches operated until about the late

1980's, as the process of its liquidation was begun around 1987

or 1988.

During Ranches’ liquidation, some of Ranches’ former

operations continued to be carried out by Ranches Trust.

After

Ranches was liquidated, around 1992 W.J. Hoyt Sons Ranches MLP

became the seller of more cattle to certain of the cattlebreeding partnerships.

The promissory notes many of the cattle-

breeding partnerships previously had issued to Ranches were

transferred to W.J. Hoyt Sons Ranches MLP.

In addition, during 1976, Management (a Nevada limited

partnership that is one of the eight partnerships involved in the

instant cases) was formed to manage all of the cattle

collectively owned by a group of 17 cattle-breeding partnerships

that the Hoyt family had previously organized.

Jay Hoyt was

Management’s general partner, and its other limited partners

included the cattle-breeding partnerships whose cattle Management

- 11 managed.

Other cattle-breeding partnerships that Jay Hoyt

organized after 1976 also became partners in Management.

Each

cattle-breeding partnership and Management generally entered into

a sharecrop agreement similar to those previously entered into by

various cattle-breeding partnerships and W.J. Hoyt & Sons.

The Feedlot Co. partnership was composed of certain Hoyt

family members and Management.

Among other things, the Feedlot

Co. partnership was formed to obtain a line of credit from a

commercial lender to finance purchases of feed for the cattle the

Hoyt organization managed.

Timeshares Breeding Services is another operation that was

started by the Hoyt organization around the mid-1980's.

arranged leases of bulls ostensibly owned by the Timeshares

cattle-breeding partnerships the Hoyt family had organized and

promoted to numerous investors.

Unlike the earlier cattle-

breeding partnerships, which typically owned breeding cows or

heifers, the Timeshares partnerships owned breeding bulls.

These

breeding bulls typically would be leased to owners of commercialgrade cattle herds under the borrow-a-bull program Timeshares

Breeding Services conducted.

B. Changes in the Hoyt Organization’s Cattle Management and

Record-Keeping Practices

By at least the early 1980's, the Hoyt organization’s cattle

management and record keeping practices changed dramatically.

These changed management and record-keeping practices continued

- 12 during the period from 1987 through 1992.

The record in the

instant cases reflects that many of the documents, records, and

tax returns the Hoyt organization prepared relating to its

transactions with the cattle-breeding partnerships it formed are

inaccurate and unreliable.

For instance, the cattle-breeding partnerships the Hoyt

organization formed in 1983, 1984, 1985, and 1986 had no

specific breeding cattle assigned to them even as of 1987.6

This

is reflected in a report the Hoyt organization prepared with

respect to the 1986 operating results of cattle-breeding

partnerships it had formed.

This report, dated December 31,

1986, states that no operating results were reported on cattlebreeding partnerships formed in 1983, 1984, 1985, and 1986

because those partnerships were still “in the process of forming

their breeding herds * * * [in a selection process] which

Each of the breeding cattle a partnership acquired was

supposed to be listed and identified in the bill of sale Ranches

issued that partnership. According to Jay Hoyt, the Hoyt

organization’s original practice had been to attach copies of all

the animals’ registration certificates to the bill of sale. He

further indicated that after the Hoyt organization’s cattle

records were computerized around 1985, a Schedule A containing

all of this same information (including each individual animal’s

tag number, registration number, birth date, and sex, as well as

the respective registration numbers of its sire and dam) was

instead prepared and attached to the bill of sale. In addition,

although the sharecrop agreement that Management and a cattlebreeding partnership entered typically recognized that any

registration papers on a partnership’s breeding cattle would be

taken out in the Hoyt family’s name, the sharecrop agreement

required Management to know the identity and number of a

partnership’s breeding cattle at all times.

- 13 requires approximately 4 years to complete.”

It further states

that those partnerships’ operating results would be reported

annually only when “their investment period is completed.”

Similar statements are also made in an earlier 1984 Annual Report

Of Operating Results Of Cattle Breeding Partnerships that the

Hoyt organization prepared.

That report states that “No

partnership results have been shown for any partnerships formed

in 1983 and 1984.

They, like the 1982 partnerships, are still in

the process of forming their breeding herd through a selection

process requiring, approximately 3 years.”

Notwithstanding the Hoyt organization’s failure to provide

requisite numbers of specific breeding cattle to them, many of

these partnerships formed in 1982, 1983, 1984, 1985, and 1986

filed tax returns for those years claiming deductions with

respect to their “breeding cattle herds”.7

In addition, to

support the deductions the partnerships claimed, the Hoyt

organization issued bills of sale, annual herd recap sheets, and

The Hoyt organization prepared the tax returns for the

cattle-breeding partnerships it formed and operated. Jay Hoyt as

the managing general partner of a partnership typically signed

and filed that partnership’s return. For example, the

depreciation schedule included in DGE 84-3's 1988 return reflects

that it had “acquired” breeding herds for $4,759,500 on Feb. 1,

1984, and for $359,000 on Feb. 1, 1986, each of which it had been

depreciating over 5 years. Similarly, the depreciation schedule

included in SGE 84-5's 1987 return reflects that it had

“acquired” breeding herds for $4,826,000 on Apr. 1, 1984, and for

$350,000 on Feb. 1, 1986, each of which it had been depreciating

over 5 years.

- 14 other documents purporting to evidence that sales of large

numbers of specific cattle had been made to these partnerships in

those years.8

During the litigation in Bales v. Commissioner, T.C. Memo.

1989-568, the Hoyt organization scheduled the “herds” of some of

the earlier partnerships the Hoyt family had formed (including

those “herds” of Florin Farms #3 (FF #3) and Florin Farms #4 (FF

#4)) to be liquidated during 1984 and 1985.

In a memorandum

dated October 31, 1984, to his brother Ric Hoyt and other of the

Hoyt organization’s cattle managers, Jay Hoyt instructed them

that any cows they sold at certain public cattle sales during

1984 and 1985 would be attributed to specified partnerships, like

FF #3 and FF #4, to be liquidated.

The memorandum also stated

that immediately before record ownership of such cows was

transferred to their buyers, “ownership” of the cows would be

assigned to FF #3 and FF #4.

According to the memorandum, those

other partnerships “giving up” “their cows” to FF #3 and FF #4

For example, in evidence are two bills of sale both dated

Apr. 1, 1984, that the Hoyt organization issued to SGE 84-5. One

bill of sale reflects SGE 84-5 to have acquired 500 breeding cows

with calves at side on that date for a stated price of

$5,080,000. The other bill of sale reflects SGE 84-5 to have

acquired 269 head of breeding cows on that date for a stated

price of $5,080,000. Also in evidence is a 1984 herd recap sheet

for SGE 84-5 that reflects the partnership to have purchased 693

breeding cattle during 1984.

- 15 were to receive back “other cows”.9

The numbers of cattle owned by the cattle-breeding

partnerships reflected in Management’s financial statements for

its fiscal years ended September 30, 1989 and 1990, were not

based upon cattle Management was actually managing.

Jay Hoyt had

assigned the preparation of Management’s 1989 and 1990 fiscal

year financial statements to another individual working in the

Hoyt organization.

From about the fall of 1989 through early

1991, this worker performed this and other related work with

respect to the fiscal year 1989 and 1990 financial statements.

In a memorandum dated October 24, 1989, to Jay Hoyt, the worker

(1) noted that in Management’s financial statements for prior

years the numbers of cattle reflected in the original bills of

sale the Hoyt organization had issued each cattle partnership

were used as the cattle counted in each partnership’s breeding

In the Oct. 31, 1984, memorandum, Jay Hoyt claimed that

these “cattle exchange transactions” between other partnerships

and FF #3 and FF #4 would be “tax free exchanges”. He further

maintained that the rationale for the “exchanges” was that the

other partnerships would be “receiving” a more mature, “proven

cow” from FF #3 or FF #4, in return for their “giving up” an

unproven, “glamor girl cow”. In fact, the 1984 and 1985

“dispersal sale cattle prices” that FF #3 and FF #4 “realized”

were later offered in evidence by the taxpayers in the Bales v.

Commissioner, T.C. Memo. 1989-568. This valuation evidence

ultimately was relied heavily upon by this Court in reaching its

conclusion that the stated sales prices the Bales cattle-breeding

partnerships had earlier agreed to pay the Hoyt family for their

breeding cattle were within a reasonable range of those cattle’s

fair market value. See id.

In further point of fact, as

discussed infra, FF #3 and FF #4 were not liquidated and never

received these “dispersal sale proceeds”.

- 16 herd and (2) asked whether the worker should adjust those cattle

numbers to allow for the 10-percent annual herd increase required

in the sharecrop agreements between the partnerships and

Management.

In his written response to the October 24, 1989,

memorandum, Jay Hoyt told the worker not to make allowances in

the cattle numbers for the 10-percent annual herd increase

requirement.

In a later memorandum dated December 31, 1990, to

Jay Hoyt, the worker stated that it was impossible to reconcile

Management’s financial statements with the tax returns the Hoyt

organization had prepared.

The worker added that Jay Hoyt was

right in previously stating Management’s financial statements to

be a “mess”.

In another memorandum to Jay Hoyt dated January 7,

1991, the worker raised certain questions with him concerning the

billing of cattle boarding expenses for the 1990 fiscal year to

the cattle-breeding partnerships.

Among other things, the worker

questioned why Florin Farms #1 (FF #1), FF #3, and FF #4 were to

be billed for such expenses, as the worker thought those

partnerships had been liquidated and had no cattle.

note 9.

See supra

In his written reply to the worker, Jay Hoyt stated that

the money to have been distributed to FF #1, FF #3, and FF #4,

had instead been used by him to pay attorney's fees.

He further

stated that all of the cattle collectively owned by the first 17

cattle-breeding partnerships the Hoyt family had organized had

been reallocated among each of those 17 partnerships during 1990,

- 17 and that now each partnership had cattle again.

In a memorandum dated February 4, 1991, issued to various

workers in the Hoyt organization, Jay Hoyt instructed them to

just the “live calves”.10

According to Jay Hoyt, this was

necessary in order to qualify for a lower registration fee rate

of $6 per animal.11

In his memorandum dated October 1, 1993, to the Hoyt

organization’s cattle managers, Jay Hoyt instructed them to

prepare herd recap sheets for the cattle-breeding partnerships up

through December 31, 1992.

He further advised them that, using

some of Management’s other cattle record information, they were

to “fill in” Management’s cattle records by recording specific

cattle as belonging to a particular partnership.

He commented

that all of the cattle a partnership was assigned must have

The ASA generally did not inspect or otherwise verify the

existence of the Shorthorn cattle registered with it, because it

generally accepted to be true the information concerning the

animal provided in the registration application a breeder

submitted. However, where an animal being registered was

produced through artificial insemination techniques, such as

embryo transplanting, the ASA’s rules required that the animal’s

asserted parentage be established through a blood test.

At about this time, the Hoyt organization proposed to

Roger Hunsley (Mr. Hunsley) (who had been the ASA’s executive

director since about 1983 and an expert witness for the taxpayers

in Bales v. Commissioner, supra,) that it be allowed to register

calves for a lower registration fee of $6 per animal, in return

for its promising to register a minimum of 4,000 calves annually

for 1991 and 1992. Mr. Hunsley accepted this proposal.

- 18 something in common that would make those cattle different from

cattle assigned to other partnerships.

He then suggested

possible groupings the managers might use in assigning cattle

among the partnerships, including common sires, common

grandsires, common cow families, just bulls, just females, ASA

appendix registry cattle, full blood cattle, etc.

C. Transactional Documentation Relating to the Seven CattleBreeding Partnerships’ Purchases of Cattle From 1987 Through 1992

The record contains almost no transactional documentation

relating to DF #1’s, SGE 82-1’s, DGE 84-3’s, SGE 84-5’s, DGE 862’s, TBS 89-1’s, and TBS 90-1’s purchases of breeding cattle

during 1987 through 1992.

Unlike Bales v. Commissioner, T.C.

Memo. 1989-568,12 among other things, there is no (1) bill of

sale issued by Ranches or its successors to each of the seven

cattle-breeding partnerships listing and identifying the

individual breeding cattle sold to each partnership, (2) ?Full

Recourse Promissory Note” issued by each partnership for its

cattle, and (3) sharecrop agreement between Management and each

partnership.

The record contains documentation relating only to

transactions some of these seven partnerships entered into before

1987.

The record also includes certain annual herd recap sheets

the Hoyt organization issued concerning the breeding cattle of

See also River City Ranches #4, J.V. v. Commissioner, T.C.

Memo. 1999-209 (involving similar sheep-breeding partnerships Jay

Hoyt organized and operated).

- 19 each partnership.

These herd recap sheets are discussed more

fully infra.

Some Investors’ Failure To Make Payments

During the period from 1987 through 1992, a large number of

investors in the cattle-breeding partnerships the Hoyt

organization had formed (including some investors in certain of

the seven cattle-breeding partnerships in the instant cases)

failed to continue making the specified payments required of

them, including paying their pro rata share of the payments

required under their partnership’s “Full Recourse Promissory

Note”.

The Hoyt organization never sought to enforce and 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 “Full Recourse Promissory

Note”.

E. DF #1's, SGE 82-1's, DGE 84-3's, SGE 84-5's, DGE 86-2's, TBS

89-1's, and TBS 90-1's Respective Returns for the Years in Issue

DF #1's returns for some of the years in issue reflect that

it originally claimed depreciation on a “breeding herd” placed in

service in 1990, for which its cost or other basis was

$1,123,972.

DF #1 depreciated this breeding herd over 5 years.

SGE 82-1's returns for some of the years in issue reflect

that it originally claimed depreciation on a “breeding herd”

placed in service in 1990, for which its cost or other basis was

$1,923,810.

SGE 82-1 depreciated this breeding herd over 12

- 20 years.

DGE 84-3's returns for some of the years in issue reflect

that it originally claimed depreciation on a “breeding herd” it

placed in service on February 1, 1984, for which its cost or

other basis was $4,759,500, and on a “breeding herd” it placed in

service on February 1, 1986, for which its cost or other basis

was $359,000.

DGE 84-3 depreciated each breeding herd over 5

years.

SGE 84-5's returns for some of the years in issue reflect

that it original claimed depreciation on a “breeding herd” it

placed in service on April 1, 1984, for which its cost or other

basis was $4,826,000, and on a “breeding herd” it placed in

service on February 1, 1986, for which its cost or other basis

was $350,000.

SGE 84-5 depreciated each breeding herd over 5

years.

DGE 86-2's returns for 1991 reflect that it originally

claimed depreciation on a “breeding herd” placed in service in

1991, for which its cost or other basis was $4,312,237.

DGE 86-2

depreciated this breeding herd over 5 years.

TBS 89-1's returns for 1989 and 1991 reflect that it

originally claimed depreciation on a “breeding herd” placed in

service on March 1, 1989, for which its cost or other basis was

$5,250,000, and on a “breeding herd” placed in service on January

1, 1991, for which its cost or other basis was $2,775,994.

TBS

- 21 89-1 depreciated each breeding herd over 5 years.

TBS 90-1's return for 1992 reflects that it originally

claimed a $2,174,204 depreciation deduction on a “bull breeding”.

F. Respondent’s Examinations of the Returns of Many CattleBreeding Partnerships and Certain Entities in the Hoyt

Organization; the FPAA’s Issued in the Instant Cases; and

Petitioners’ Respective Petitions

Respondent commenced examinations of returns for the years

1987 through 1992 that had been filed by (1) numerous cattlebreeding partnerships the Hoyt organization had formed (including

DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and TBS

90-1) and (2) certain Hoyt organization entities (including

Management).

During these examinations, respondent asked the

cattle-breeding partnerships and their representatives, among

other things, to substantiate the depreciation and other

deductions claimed on those partnerships’ returns.

During the examinations conducted, respondent noted a number

of inconsistencies between the deductions claimed on the cattlebreeding partnerships’ returns and various documents the

partnerships and their representatives provided.

In addition,

respondent received bills of sale for some 26 newly formed

partnerships (where the 1987 return for each partnership was the

first return that partnership had filed) that reflected those

partnerships to have collectively purchased over 13,000 breeding

cattle during 1987.

Only the bills of sale for 21 of the 26

newly formed partnerships had a Schedule A listing and

- 22 identifying the individual animals a partnership had allegedly

purchased.

The bills of sales for these 21 partnerships

reflected them to have collectively purchased more than 10,000

breeding cattle during 1987.

Similarly, certain 1991 herd recap

sheets respondent received reflected 18 partnerships, including

DGE 86-2, as each purchasing 500 to 600 breeding cows during

1991.

For instance, the 1991 herd recap sheet for DGE 86-2

reflects the partnership to have purchased 545 breeding cows

during 1991.13

During the examination, respondent issued numerous

administrative summonses to the cattle-breeding partnerships and

certain entities in the Hoyt organization, pursuant to which

respondent sought information and documents relating to the

cattle breeding partnerships’ alleged cattle purchases from the

Hoyt organization.

Among other things, respondent sought to

inspect and count the breeding cattle allegedly purchased and

owned by the cattle-breeding partnerships.

The Hoyt organization

As indicated previously, the record contains no bills of

sale relating to DF #1's, SGE 82-1's, DGE 84-3's, SGE 84-5's, DGE

86-2's, TBS 89-1's, and TBS 90-1's purchases of breeding cattle

during 1987 through 1992. Indeed, the revenue agent who examined

the returns covering the period from 1987 through 1992 of all the

cattle-breeding partnerships the Hoyt organization had formed

(including the returns of the seven partnerships involved in the

instant cases) testified that no bills of sale were provided to

respondent for any breeding cattle purchases any of the

partnerships allegedly made from 1988 through 1991. Yet, in his

testimony, Jay Hoyt claimed that all of the bills of sale

relating to the partnerships’ alleged breeding cattle purchases

from 1988 through 1992 had been provided to respondent.

- 23 initially failed to provide much of this information, resulting

in respondent’s commencing a summons enforcement proceeding in

the U.S. District Court for the District of Oregon.

On July 17,

1992, the District Court ordered Jay Hoyt to provide certain

information and allow respondent to inspect and count the “Hoyt

cattle” (which was defined to be the various cattle owned,

maintained, or under the custody or control of any of the 92

partnerships that were the subject of the summons enforcement

proceeding).

To comply with this July 17, 1992, Order,

respondent and Jay Hoyt executed an October 30, 1992, memorandum

of understanding concerning the cattle count to be conducted by

respondent’s expert Ron Daily (Mr. Daily).

In his signed

statement also dated October 30, 1992, Jay Hoyt further provided

information as to 11 specified locations at which the “commingled

Hoyt cattle herd” was kept.

Among other things, Jay Hoyt, in

this signed statement, represented there to be an estimated

16,075 to 16,775 cattle (including some calves that might later

be born) at the 11 locations.

He further stated these 11

locations to be all of the locations for the Hoyt herd cattle as

of October 28, 1992.

In the cattle count he performed from fall 1992 through

spring 1993, Mr. Daily determined there were a total of 7,993

cattle.

Of the 7,993 total cattle he counted, 4,764 were mature

breeding cattle.

At every location that he visited and counted

- 24 cattle, Mr. Daily asked the ranch manager to sign a statement

agreeing or disagreeing with the numbers of cattle Mr. Daily

determined were present.

With just a few exceptions, all of the

ranch managers at each location agreed with Mr. Daily’s cattle

numbers.

During the cattle count he conducted, Mr. Daily further

had asked Jay Hoyt to disclose whether there were any additional

locations where other cattle might be located.

However, in his

witness statement submitted to the District Court on or about

January 23, 1993, Jay Hoyt maintained that the specific locations

for the cattle had been provided to respondent and indicated that

he saw no reason why the cattle count could not go on.

In the respective FPAA’s issued to DF #1, SGE 82-1, DGE 843, SGE 84-5, DGE 86-2, TBS 89-1, and TBS 90-1, respondent, among

other things, determined that the partnerships had failed to

substantiate many of their claimed deductions.

For instance,

with respect to the depreciation deduction DF #1 claimed on its

breeding cattle for its year ended September 30, 1991, the FPAA

issued to DF #1 for that year states, in pertinent part:

It has been determined that * * * [DF #1] is not

entitled to the depreciation deduction claimed on its

Schedule F because the partnership has not established:

(1) That it possessed depreciable assets which it used

for the production of income or in carrying on a trade

or business; (2) the accumulated depreciation and

depreciable basis of its assets; and (3) the relevant

date and proper computation method.

In the FPAA’s issued to Management for its years ended

September 30, 1987 through 1990, respondent, among other things,

- 25 determined that Management had failed to report tens of millions

of dollars of income from (1) cattle purportedly transferred to

it by numerous cattle-breeding partnerships as management fees

under the sharecrop agreements between them and Management and

(2) large numbers of those same cattle Management then

purportedly transferred to Ranches in payment for feed,

management, consulting, freight services, and other goods and

services provided by Ranches.

DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, TBS

90-1, and Management filed respective petitions seeking review of

the FPAA’s that had been issued to them.

In their respective

petitions or amended petitions, these partnerships have modified

the depreciation and other deductions being claimed by them for

the years in issue.

The total depreciation, other deductions,

and other adjustments now in issue are given infra in appendix B

to this Memorandum Opinion.

OPINION

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, 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

- 26 the applicable statutes permitting those deductions.

See New

Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934); Karme v.

Commissioner, 673 F.2d 1062, 1065 (9th Cir. 1982), affg. 73 T.C.

1163 (1980).

Issue 1. Depreciation Deductions Claimed by the Seven CattleBreeding Partnerships in the Instant Cases

Section 167 generally allows as a depreciation deduction a

reasonable allowance for exhaustion and 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 and wear and tear of

business property or property held for the production of income

is the one entitled to the depreciation deduction.

See Helvering

v. F. & R. Lazarus & Co., 308 U.S. 252, 254 (1939).

In the instant cases, petitioners and respondent recognize

that for DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1,

and TBS 90-1 to be entitled to their claimed depreciation and

other deductions, each partnership must be the owner for tax

purposes of the specific numbers of breeding cattle that it

allegedly purchased and placed in service during the years in

issue.

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

- 27 each partnership’s stated purchase price approximated the then

fair market value of the cattle.

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, 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,

114 F.2d 706, 709-710 (6th Cir. 1940), revg. on other grounds 38

B.T.A. 43 (1938); Harmston v. Commissioner, 61 T.C. 216, 228-229

(1973), affd. 528 F.2d 55 (9th Cir. 1976).

to be considered are:

Some of the factors

(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 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, 89 T.C. 986, 996997 (1987).

- 28 A. Whether DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2,

TBS 89-1, and TBS 90-1 Acquired the Benefits and Burdens of

Ownership as to Specific Breeding Cattle

For DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1,

and TBS 90-1 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 cattle making up its alleged breeding herd.

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

cattle.

Indeed, the evidence petitioners presented to

substantiate and identify the specific individual breeding cattle

these partnerships “owned” is considerably lacking, exhibits

major shortcomings, and, at times, is directly contradicted by

the Hoyt organization’s own internal documents.

Certain of these

internal documents raise serious doubts in the Court’s mind as to

whether large numbers of the breeding cattle allegedly sold these

partnerships, in fact, existed.

No registration papers with respect to specific breeding

cattle were obtained in any partnership's name.

Rather, any

registration certificates reflect only the Hoyt family to be the

owner of those registered cattle.14

Unlike the parties in River City Ranches #4, J.V. v.

Commissioner, T.C. Memo. 1999-209 (a case involving similar

(continued...)

- 29 Petitioners further acknowledge that there are some problems

regarding the records they have offered in evidence to

substantiate the depreciation and other deductions claimed by the

partnerships.

Petitioners also have indicated that the

depreciation deductions to which the partnerships are entitled

likely will be less than what the partnerships originally had

claimed.

On brief, however, petitioners argue that sufficient

breeding cattle existed in each year during the period from 1987

through 1992 to have been purchased by all of the cattle-breeding

partnerships the Hoyt organization formed (including by the seven

partnerships in the instant cases).

Petitioners claim this has

been established by (1) the bills of sale and annual herd recap

sheets the Hoyt organization issued (which petitioners maintain

were accurate and contemporaneous documents)15 and (2) their

(...continued)

sheep-breeding partnerships Jay Hoyt formed and operated), the

parties in the instant cases did not introduce in evidence

detailed information from numerous individual animal registration

certificates.

On brief, petitioners further cite the cattle count

performed during the litigation of Bales v. Commissioner,

T.C. Memo. 1989-568, pursuant to which there were estimated to be

6,500 adult cows in the herds of 29 cattle-breeding partnerships.

The Court notes that this previous count was done in 1985.

Moreover, not all of the estimated 6,500 cattle were actually

examined and counted. Rather, cattle were counted in randomly

selected portions of 7 out of 26 fields or pastures. From the

250 to 400 cows counted in what was thought was a representative

sampling, a statistician extrapolated that there were a total of

(continued...)

- 30 witness Norm Favre’s (Mr. Favre) conclusion there were a total of

26,205 cattle in the Hoyt universal herd pursuant to the cattle

count he performed from fall 1992 through spring 1993.16

(...continued)

approximately 6,500 adult cows present. It is further to be

noted that following 1985, the Hoyt organization claimed that

thousands of breeding cattle that it managed on behalf of

numerous cattle-breeding partnerships died as a result of drought

and disease. In fact, many of the cattle-breeding partnerships

claimed deductions on their returns for their alleged large

cattle losses from drought and disease. Although petitioners

have now conceded the loss deductions for drought and disease

originally claimed by the partnerships in the instant cases, the

Hoyt organization’s prior position was that thousands of breeding

cattle were lost during 1987 through 1992 to drought and disease.

In addition, the record also contains evidence indicating that,

following 1985, the Hoyt organization may have sold off a large

number of breeding cattle which had been assigned to the cattlebreeding partnerships. These cattle loss claims, as well as the

Hoyt organization’s possible sale of breeding cattle previously

assigned to the partnerships, are discussed more fully notes 30

and 31. At any rate, the figure of 6,500 cattle estimated in the

previous 1985 cattle count is neither conclusive nor unequivocal

evidence establishing the numbers of breeding cattle that

actually might have been present during the 1987 through 1992

period.

The Hoyt organization hired Mr. Favre to conduct this

cattle count. Originally, Mr. Favre was supposed to count the

cattle together with respondent’s expert Mr. Daily. However,

because of disagreements between Mr. Daily and the Hoyt

organization concerning (1) the procedures to be used in

performing the count and (2) scheduling the counts at various

locations, Mr. Favre and Mr. Daily conducted their respective

cattle counts separately. It is further to be noted that unlike

Mr. Daily (who testified in the instant cases as an expert

witness on cattle counting and cattle appraisal), Mr. Favre did

not testify as an expert. Rather, Mr. Favre testified as a fact

witness, and his cattle count report was entered in evidence as a

business record of the Hoyt organization.

- 31 B. The Bills of Sale and Herd Recap Sheets Issued by the

Hoyt Organization

As indicated previously, petitioners argue that various

bills of sale and annual herd recap sheets the Hoyt organization

issued substantiate the depreciation deductions on breeding

cattle being claimed for the years in issue in the instant cases

by DF #1, SGE 82-1, DGE 84-3, SGE 84-5, DGE 86-2, TBS 89-1, and

TBS 90-1.17

They maintain that these bills of sale and herd

recap sheets are reliable and contemporaneous documents

evidencing the alleged specific individual breeding cattle each

partnership purportedly purchased and owned from 1987 through

1992.

In making this contention, petitioners heavily rely on the

testimony of Jay Hoyt.

Jay Hoyt specifically testified that the bills of sale and

annual herd recap sheets the Hoyt organization issued to the

cattle-breeding partnerships were reliable and contemporaneous

documents.

Although he acknowledged occasional but inadvertent

In their brief, petitioners contend that the annual herd

recap sheets in evidence reflect that, collectively, all of the

cattle-breeding partnerships (which in some years may have

included perhaps almost 100 separate partnerships) owned the

following total numbers of cattle on the dates indicated:

Date

Total Number of Cattle

1-1-87

1-1-88

1-1-89

1-1-90

1-1-92

22,457

25,613

23,418

17,336

22,148

- 32 accounting and/or clerical errors may have been made in compiling

the cattle records the Hoyt organization maintained, he asserted

the annual herd recap sheets were at least 95 percent accurate.

He explained the process by which the annual herd recap sheets

were prepared.

According to Jay Hoyt, the Hoyt organization had

computerized its cattle records around 1985.

During each year,

the cow hands and cattle managers maintained notebooks and other

papers containing pertinent information on individual cattle they

managed (country records).

In general, in the fall the cattle

would be rounded up and brought to winter pasture.

The cattle

managers near the end of the year would then submit these country

records on all the cattle to other Hoyt organization personnel to

have the information entered onto the Hoyt organization’s

computerized cattle record keeping system.

From this information

that the cattle managers submitted, a cattle-breeding

partnership’s herd recap sheet for that year would be prepared.

Jay Hoyt related that the herd recap sheets for each year would

be prepared by the early part of the following year.

He added

that once the data from the original country record source

documents had been entered, all of the country records were

typically destroyed, as it was no longer necessary to maintain

those documents because the information on them had been entered

into and was contained in the Hoyt organization’s computerized

records.

- 33 The Court finds substantial portions of Jay Hoyt’s testimony

evasive and less than forthright.

His claims regarding the

contemporaneous nature and reliability of the bills of sale and

herd recap sheets are directly contradicted by substantial other

convincing evidence in the record.

The Court considers highly

suspect the herd recap sheets and other documents the Hoyt

organization prepared during the period from 1987 through 1992.

Indeed, as the Court indicated supra, by the early 1980's the

Hoyt organization’s cattle management and record-keeping

practices had changed dramatically.

As a result, many of the

documents, records, and tax returns the Hoyt organization

subsequently prepared regarding transactions between itself and

the many cattle-breeding partnerships (which it had formed,

promoted to numerous investors, and managed) were inaccurate and

unreliable.

Contrary to petitioners’ and Jay Hoyt’s contentions, the

Court does not believe that the 1987 through 1992 annual herd

recap sheets in evidence are contemporaneous documents.

Among

other things, if the 1988, 1989, and 1990 herd recap sheets had

existed and been available during the fall 1989 through early

1991 period, the Hoyt organization worker preparing Management’s

financial statements for its fiscal years ended September 30,

1989 and 1990, would then have consulted those herd recap sheets

to find out each cattle-breeding partnership’s “breeding herd

- 34 numbers”.

Instead, as reflected by the worker’s questions to Jay

Hoyt and Jay Hoyt’s responses (which we have previously noted), a

far different process was employed to prepare Management’s 1989

and 1990 fiscal year financial statements.18

The Court would further note (as was stated supra) that the

record includes none of the bills of sale that purportedly were

issued to cattle-breeding partnerships from 1988 through 1992,

notwithstanding that a number of these partnerships (including

several of the seven cattle-breeding partnerships in the instant

cases) reported on their tax returns purchasing breeding cattle

during this period for which they are claiming deductions.

revenue agent for respondent testified that no bills of sale for

any cattle-breeding partnerships were furnished for years after

1987.

Yet, Jay Hoyt testified that he provided to respondent

such bills of sale for the years from 1988 through 1992.19

It is further to be noted that following Mr. Favre’s

completion of his cattle count in about spring 1993 (which count

was mentioned supra note 16, and is discussed in more detail

infra), Jay Hoyt, in a memorandum dated Oct. 1, 1993, instructed

the Hoyt organization’s cattle managers to prepare herd recap

sheets for the cattle-breeding partnerships up through Dec. 31,

1992. See supra note 17.

We do not find to be credible this and other similar

assertions of Jay Hoyt regarding these bills of sale. Respondent

had been requesting them from Jay Hoyt, the cattle-breeding

partnerships, and the Hoyt organization since at least about 1992

(when respondent actively started examining many of the returns

filed by the partnerships and certain Hoyt organizations for the

years covering the 1987 through 1992 period). Jay Hoyt testified

these alleged 1988 through 1992 bills of sale had been provided

(continued...)

- 35 With respect to some of the bills of sale and herd recap

sheets issued before 1988 that are in evidence, there are a

number of discrepancies and inconsistencies.

For instance, two

bills of sale both dated April 1, 1984, were issued by the Hoyt

organization to SGE 84-5.

One bill of sale reflects SGE 84-5 to

have acquired 500 breeding cows with calves at side on that date

for a stated price of $5,080,000.

The other bill of sale

reflects SGE 84-5 to have acquired 269 breeding cows on that date

for a stated price of $5,080,000.

Also, only one of these bills

of sale includes a Schedule A listing and describing the specific

individual cattle SGE 84-5 acquired.

Moreover, the 1984 herd

recap sheet for SGE 84-5 reflects it to have acquired 693

breeding cattle during 1984.

See supra note 8.

At trial, Jay Hoyt testified that the above two bills of

sale covered a single April 1, 1984, transaction in which 769

breeding cows and 500 calves were sold to SGE 84-5 for a total

(...continued)

by him to respondent. He maintained that respondent had been

given access to everything the Hoyt organization had. He also

asserted that many of the Hoyt organization’s records later

became unavailable, because those records had been seized by

postal inspectors from the Hoyt organization’s offices in June

1995. However, the postal inspector who conducted the seizure

testified that shortly after effecting the seizure, he had

provided Jay Hoyt with an inventory of the seized documents.

This postal inspector also related that, in response to Jay

Hoyt’s and the Hoyt organization representatives’ later requests,

he had offered them access to the documents that had been seized.

According to the postal inspector, Jay Hoyt had also been

provided with copies of all the seized documents.

- 36 price of $5,080,000.

He further claimed that the Schedule A to

one bill of sale (listing and identifying the specific 269

individual breeding cows the partnership purportedly acquired)

had been lost.

In his testimony, Jay Hoyt further acknowledged

SGE 84-5's 1984 herd recap sheet (reflecting the partnership to

have purchased 693 breeding cattle during 1984) to be

inconsistent with the two April 1, 1984, bills of sale.

However,

he asserted that Management’s practice, in preparing the herd

recap sheets for a cattle-breeding partnership’s first year of

operations, had been to reflect the net number of cattle later on

hand at yearend as the number of cattle a cattle-breeding

partnership purchased.

He further specifically testified that

the prospective breeding cows SGE 84-5 was to purchase had been

identified in 1983 and that he reviewed a list of the cows in

early 1984.

He added that between the April 1, 1984, purchase

date and December 31, 1984, some of the cows SGE 84-5 had

purchased possibly might have been lost, causing those cows not

to be reflected in SGE 84-5's 1984 herd recap sheet.

The Hoyt organization’s above-asserted “accounting practice”

is contrary to standard accounting principles because its herd

recap sheets show each partnership’s breeding herd to have had no

cattle born, no cattle culled, and no deaths or disappearances.

It is extremely unlikely that the breeding herd each of these

partnerships purportedly acquired would, in fact, have produced

- 37 no calves during that partnership’s first year of operations.

Presumably, an important incident of breeding herd ownership is

the right to benefit from any calves produced by that herd.

(The

sharecrop agreements provided that a partnership would still

retain the breeding value certificates (i.e., essentially the

rights to any registration papers) on any calves produced by its

breeding herd, even though, pursuant to the sharecrop agreement,

all calves were to belong to the Hoyt organization entity that

managed the partnership’s breeding herd.)

For instance, SGE 84-5

(according to Jay Hoyt) entered into its transaction to acquire

769 breeding cows on April 1, 1984.

At least 269 of SGE 84-5's

“breeding cows” (the Schedule A to the bill of sale that should

have listed and specifically identified these 269 cows allegedly

having been lost) are reflected as producing no calves during

1984.

Similarly, another important incident of breeding herd

ownership would be the detriment suffered from losses to that

herd.20

The Hoyt organization issued certain warranties to the

cattle-breeding partnerships that entered transactions with it.

For instance, Ranches (as the “seller” of the breeding cattle)

generally agreed to replace any cattle that could no longer serve

as breeding cattle during a 10-year period. Similarly,

Management (which managed a partnership’s “breeding herd”)

further guaranteed there would be a 10-percent annual increase in

the size of the partnership’s “breeding herd”. However,

according to certain Hoyt organization records, the Hoyt

organization for a number of years had been greatly “in arrears”

on its “warranty obligations” to the cattle-breeding partnerships

and by about 1990 “owed” over 5,000 breeding cattle to the

(continued...)

- 38 Neither does the Court believe these and other accounting

deficiencies were inadvertent and attributable to a lack of

proper accounting training on the part of Jay Hoyt and other

individuals preparing these records.

Several former Hoyt

organization workers testified that, over the years, substantial

fictitious cattle information was created and entered in the Hoyt

organization’s computerized cattle records.

included:

These

witnesses

(1) Robert Baker, who was hired by Jay Hoyt in June

1984 to design a computerized cattle record keeping system for

the Hoyt organization and then established and managed the Hoyt

organization’s computerized cattle record keeping system from

about 1985 through 1987,21 (2) Terry Hawkins (Mr. Hawkins), who

(...continued)

partnerships. These “warranty obligations” apparently were never

satisfied.

Mr. Baker testified that, because of the Bales case

litigation, he had been given a May 1985 deadline to establish

the Hoyt organization’s computerized cattle records. See Bales

v. Commissioner, T.C. Memo. 1989-568. As a result, he began by

entering information and generating computer records “capturing”

the Hoyt family’s and Hoyt organization’s past 32 years of cattle

operations. He related that Jay Hoyt had also furnished him with

a list of random sires to use in assigning specific sires to many

individual cattle whose sires, in fact, were unknown. He added

that he had been instructed by Jay Hoyt to follow a similar

procedure in “capturing” the Hoyt organization’s subsequent

“cattle inventories” and in registering large numbers of cattle

with the ASA. He stated that he attempted to match and attribute

each calf to a “random sire” that had the same matching physical

characteristics. He further acknowledged that the Hoyt

organization’s registering of calves from unknown sires as being

offspring of known sires violated the ASA’s registration rules,

as the random sires he assigned to calves, in many cases, were

(continued...)

- 39 from around 1987 through 1992 helped to maintain many of the Hoyt

organization’s cattle records (including obtaining information on

cattle kept at numerous locations), and (3) Donna Schnitker (Mrs.

Schnitker), who as Management’s cattle marketing director handled

Management’s cattle sales to third parties.

The Court found the

testimony of these individuals to be credible and trustworthy.22

(...continued)

unrelated, nonsibling bulls. In addition, Mr. Baker testified

that sometimes, when the Hoyt organization would be selling an

animal to a third party, he had been instructed to fabricate a

false pedigree for that animal, which he did.

Indeed, much of these witnesses’ testimony regarding the

Hoyt organization’s deceptive cattle marketing practices and its

fabrication of pedigree and other cattle record information is

corroborated by Jay Hoyt’s own May 27, 1987, written comments to

an Apr. 22, 1987, memorandum that Mr. Baker had submitted to Ric

Hoyt. The following is an excerpt of some of Jay Hoyt’s comments

to certain of the complaints expressed in Mr. Baker’s memorandum:

[Mr. Baker’s first complaint]: Louie’s [a cattle

manager handling public cattle sales to third parties]

‘special’ deals are starting to mess up the SPR [i.e.,

Shorthorn performance records] side of cattle office.

[Jay Hoyt’s comment]:

percent - etc.

What percentage?

100

[Mr. Baker’s next complaint]: I created a paper

for Louie because the dam had to be by Instant Replay

so the calf could be registered sired by Copyright.

The calf is rejecting on the SPR weaning sheet because

the dam is not enrolled in SPR and is not in computer.

I don’t want her in the computer because she doesn’t

exist.

[Jay Hoyt’s comment]: How does R.W. [Mr. Baker]

know she does not exist. R.W. just knows she

disappeared. She might be at Mayo’s, left in

California, etc.

(continued...)

- 40 -

(...continued)

[Mr. Baker’s next complaint]: We have to go in

and change birth weights in the calf file because

they’re too high.

[Jay Hoyt’s comment]: That’s R.W.’s job - He

doesn’t deal with customers and know what they want.

[Mr. Baker’s next complaint]: Louie takes a bull

paper or steer paper that died or was slaughtered and

uses them for bulls he’s selling without regard of what

it does to me.

[Jay Hoyt’s comment]: What it does to R.W. is

gives him a job. He has absolutely no understanding

where the money comes from to run his office. This is

our fault. He had a chance to turn a paper into cash

that would not have been if he had his way. That

should be a success and not a problem.

[Mr. Baker’s next complaint]: The progeny history

of the cow doesn’t match, a true picture of the cow’s

history can never be assured because we don’t know if

its her real calf or not, and when we get slaughter

information back we can’t put it in on the right animal

because he’s a bull and was sold.

[Jay Hoyt’s comment]: What percentage? This one

is sad. It shows how serious the problem is. The

carcass data should just be attached to a copy of the

paper and entered. The bull goes in the sale DATA.

The data is STILL included in every place needed for

Seth [Jay Hoyt’s brother] and I. We don’t need the

original paper to do our tracking. All that must be

done is to record what happened on the copy of the

paper.

[Mr. Baker’s next complaint]: That messes up what

I tell you, USDA, and Seth. I have to take up untold

hours finding red calves that have red sires and red

dams, knowing full well the sire has to be taken with a

grain of salt. All of these things are easy for Louie

(continued...)

- 41 The record further includes a February 4, 1991, memorandum of Jay

Hoyt to certain workers in the Hoyt organization, instructing

them not to include information on cattle deaths in the cattle

inventory records and to place such information under a “new

smoke screen file name”.23