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T.C. Memo. 2024-55

GARY M. SCHWARZ AND MARLEE SCHWARZ,

Petitioners

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 12347-20.

Filed May 13, 2024.

—————

Ps have a history of conducting real estate activities

in South Texas, mostly involving ranch land. Through

entities they controlled, Ps bought 15,070 acres of land in

Zapata County in 2005 with the intent to improve and sell

it. Ps later decided to conduct ecotourism operations

consisting of hunting, fishing, and events on a portion of

the land.

In the years at issue, 2015–17, ecotourism in Zapata

County was conducted by TI, a partnership owned by Ps.

TI leased the Zapata County land from entities controlled

by Ps. TI also conducted farming and construction

operations on the Zapata County land and other properties

owned by Ps, related entities, and third parties.

TI filed Schedule F, Profit or Loss From Farming,

with its return for each year 2005–20. TI reported income

and expenses for both ecotourism and farming/construction

operations on Schedule F. TI reported Schedule F gross

income totaling over $14 million for years 2005–20.

However, large expenses resulted in TI’s reporting a

Schedule F net loss for each year. These net losses total

over $15 million for years 2005–20. TI’s Schedule F losses

flowed through to Ps, who used them to offset significant

taxable income.

Served 05/13/24

[*2]

R issued Ps a notice of deficiency for years 2015–17.

R determined that TI’s Schedule F activity was not

engaged in for profit pursuant to I.R.C. § 183. Multiple

adjustments flowed from this determination, including the

disallowance of deductions for TI’s Schedule F losses. R

also determined that a 20% accuracy-related penalty

applies for each year at issue.

Ps filed a Petition challenging R’s determinations.

Ps contend that TI’s Schedule F activity was engaged in for

profit and that it and the real estate activities that Ps and

related entities conducted are a single activity. Ps also

contend they have a reasonable cause defense to penalties.

Held: TI’s Schedule F activity and the real estate

activities are separate activities.

Held, further, TI’s Schedule F activity was not

engaged in with the intent to make a profit.

Held, further, accuracy-related penalties are not

applicable.

—————

Margarita L. Stone, Adam P. Sweet, Benjamin J. Peeler, and Kacie N.C.

Dillon, for petitioners.

Matthew R. Delgado, Audrey Marie Morris, and Roberta L. Shumway,

for respondent.

TABLE OF CONTENTS

FINDINGS OF FACT .............................................................................. 7

Petitioners’ Backgrounds .............................................................. 7

II.

Dr. Schwarz’s System to Grow Big Deer ...................................... 8

III. Real Estate Activities in General ............................................... 10

IV.

Tecomate Ranch Hunting Operation.......................................... 11

Heart Attack (the Buck) .............................................................. 12

VI.

TI, GMCP, and LSLP .................................................................. 12

TI ....................................................................................... 13

GMCP and LSLP .............................................................. 13

[*3] VII.

Creation of La Perla and Jalisco Ranches .......................... 14

2004–06: Overview of Land Transactions ....................... 14

2005 and 2006: Decision Not to Sell All the Land........... 15

Other Zapata County Transactions ................................. 16

VIII. TI’s Farming Activity: Early Operations and General

Information .................................................................................. 17

IX.

Early Farming Operations ............................................... 17

Farming Activity 2015–20: General Information............ 20

TI’s Farming Activity: Ecotourism ............................................. 21

Overview and Common Amenities................................... 21

Hunting Packages............................................................. 22

Deer Hunting ......................................................... 22

Exotics Hunting ..................................................... 25

Upland Bird Hunting ............................................. 25

Waterfowl Hunting ................................................ 26

Lakes, Fish, and Fishing Packages.................................. 26

Construction of Lakes ............................................ 26

Management/Upkeep of Lakes .............................. 28

Structure and Water ................................... 29

Predatory Animals ...................................... 30

Genetics ....................................................... 30

Food.............................................................. 32

Culling ......................................................... 33

XI.

XII.

Outcomes and Pricing ............................................ 33

Event Packages ................................................................. 35

TI’s Farming Activity: Custom Farming .................................... 36

TI’s Farming Activity Income and Expenses: Overview............ 37

Ecotourism: Analysis of Income and Expenses .......................... 40

Ecotourism: Gross Income ................................................ 40

Ecotourism: Lease Expenses ............................................ 43

Lease Expenses Overview ..................................... 43

LSLP and GMCP Leases: Terms ........................... 45

LSLP and GMCP Leases: Problems ...................... 46

[*4]

Double Counting Twin Lakes Ranch .......... 46

Leases for Grazing Rights........................... 47

Starr County Properties.............................. 47

Waterfowl Hunting Leases ......................... 48

Accounting/Payment Issues ........................ 48

Lease Expenses Tax Benefits ................................ 50

Ecotourism: “Wildlife Operations” Expenses .................. 50

Ecotourism: Income and Expense Conclusions ............... 52

XIII. Custom Farming: Financial Analysis ......................................... 53

XIV. Ranching and Other Operations: Financial and Other

Information .................................................................................. 55

XV. How Ecotourism Drove TI’s Schedule F Losses ......................... 56

XVI. Preparation of Returns................................................................ 58

XVII. Miscellaneous Facts .................................................................... 59

Personal Use of La Perla and Jalisco Ranches................ 59

Setbacks ............................................................................ 59

Petitioners’ Net Worth...................................................... 60

Notice of Deficiency and Petition ..................................... 60

XVIII. Expert Witness for Deer and Exotics Herds .............................. 60

XIX. Expert Witness for Property Valuation ...................................... 60

XX. Expert Witness for Business Valuation and Analysis ............... 62

OPINION ................................................................................................ 62

Burden of Proof............................................................................ 62

II.

Evidentiary Issues....................................................................... 63

III. Whether Any New Matters Were Raised After Trial ................ 63

IV.

The Parties’ Work, Petitioners’ Credibility, and Years After

2020 .............................................................................................. 65

VI.

The Parties’ Work ............................................................. 65

Petitioners’ Credibility ..................................................... 66

Years After 2020 ............................................................... 67

Issues with Dr. Hellickson’s Expert Report ............................... 68

Issues with Dr. Hakala’s Expert Report .................................... 71

Comparison of Income, Losses, and Gross Gains ............ 72

Step One: TI’s Income/Losses ................................ 72

[*5]

Step Two: LSLP, GMCP, & Lone Star La Cuesta 73

Step Three: Gross Property Gains ........................ 74

Unrealized Gains in LSLP Work ..................................... 80

Error Relating to Ownership of Jalisco Ranch ..... 80

Error Regarding Jalisco Ranch Value Used ......... 81

Errors Regarding TI’s Assets ................................ 82

Conclusion ......................................................................... 82

VII. Section 183 Issue: Introduction .................................................. 83

VIII. Section 183 Issue: Ascertaining the Activity at Issue ............... 84

IX.

Introduction and Case as a Whole ................................... 84

Treasury Regulation § 1.183-1(d)(1) and Caselaw

Considerations .................................................................. 86

Treasury Regulation § 1.183-1(d)(1) Test ............. 87

Treasury Regulation § 1.183-1(d)(1) and Caselaw

Factors .................................................................... 94

Degree of Organizational and Economic

Interrelationship of the Undertakings ....... 94

Business Purpose Served by Carrying On

the Undertakings Separately or Together . 98

Similarity of the Undertakings................... 98

Caselaw Factors .......................................... 99

Conclusion Regarding Activity at Issue......................... 100

Section 183 Issue: Whether TI’s Farming Activity Was

Engaged In for Profit................................................................. 101

Manner in Which Taxpayer Carries On the Activity .... 101

Expertise of Taxpayer or Advisers ................................. 103

Time and Effort Expended by Taxpayer in Carrying

On the Activity................................................................ 104

Expectation That Assets Used in Activity May

Appreciate in Value ........................................................ 105

Success of Taxpayer in Carrying on Similar or

Dissimilar Activities ....................................................... 107

Taxpayer’s History of Income or Losses with Respect

to the Activity ................................................................. 107

Amount of Occasional Profits, if Any ............................. 110

Financial Status of Taxpayer ......................................... 110

[*6]

Elements of Personal Pleasure or Recreation ............... 111

Conclusion Regarding Section 183................................. 112

XI.

Accuracy-Related Penalties ...................................................... 112

Conclusion ................................................................................. 116

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: Respondent determined the following

deficiencies and penalties with respect to petitioners’ federal income tax

for years 2015–17 (years at issue):

Year

Deficiency

Penalty § 6662(a) 1

2015

$496,754

$99,351

2016

637,924

127,585

2017

717,020

143,404

The issues for consideration are whether (1) the activity reported

on Schedules F, Profit or Loss From Farming (farming activity), engaged

in by petitioners’ partnership, Tecomate Industries, LLC (TI), 2 was a

for-profit activity in the years at issue and (2) petitioners are liable for

accuracy-related penalties for the years at issue. We hold that TI’s

farming activity was not engaged in for profit in the years at issue but

that petitioners are not liable for accuracy-related penalties.

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and

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

discussed are in the State of Texas. We round most monetary amounts to the nearest

dollar. Some amounts are slightly adjusted to account for rounding.

The acreage of most real properties will be rounded to the nearest whole acre.

Because of the numerous real property transactions and acreage measurements

performed, sometimes different acreages are listed on documents for a given property.

As a result, this Opinion may contain minor inaccuracies regarding acreage of

properties (or price per acre when discussing property transactions).

2 TI is not subject to the unified partnership audit and litigation procedures of

the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248,

§§ 401–407, 96 Stat. 324, 648–71. Before its repeal, TEFRA governed the audit and

litigation procedures for many partnerships (including entities that elected to be

treated as partnerships).

[*7] Many facts stipulated, alleged, argued, testified about, and

otherwise presented to the Court in this case are, or appear to be,

incorrect or misleading. The parties’ work occasionally reflected an

uninspired attitude toward developing, trying, and briefing this case. As

a result, many potentially relevant facts and arguments were

undeveloped, ignored, misrepresented, and/or missed. For example, the

parties did not develop or explain TI’s financial information sufficiently

for us to assign profit margins to different types of farming activity work.

The parties also failed to correctly represent where TI’s farming activity

primarily occurred from 2005 until around 2010.

We have endeavored to present a summation of the facts that is

both accurate and complete. Unfortunately, it is not always possible to

do both given the case presented to us. To ensure accuracy, portions of

this Opinion will be vague, and we will use more passive wording than

we otherwise would.

The parties also failed to specify what income and expenses

shown in TI’s financial records are attributable to non-Schedule F items.

The parties agree that the only deficiency issue in dispute is whether

TI’s farming activity was a for-profit activity in the years at issue.

However, TI’s financial records do not clearly separate Schedule F and

non-Schedule F income and expense items. 3 In certain instances, we

have been unable to tell whether items shown on financial records are

Schedule F items (and therefore relevant to the deficiency issue in

dispute) or are non-Schedule F items (and not relevant). To be

conservative, we will concentrate on gross income and expense items

that we are reasonably certain are Schedule F items.

FINDINGS OF FACT

Petitioners’ Backgrounds

Petitioners resided in Texas at all relevant times. They timely

filed joint returns for the years at issue.

3 TI reported comparatively small non-Schedule F income and expense items

on returns for many relevant years. Respondent did not propose significant

adjustments to these small items for the years at issue. Respondent proposed

adjustments for Schedule K, Partners’ Distributive Share Items, of $79 and $52 for

2015 and 2017, respectively, which the parties did not substantively address. These

adjustments may be computational; we will not discuss them further.

[*8] Petitioners were each born and raised in South Texas. One of Dr.

Gary Schwarz’s grandfathers was a cattle rancher. Dr. Schwarz’s

grandparents owned two ranches in South Texas, including one in Starr

County where the brush had not been cleared. As a result, deer 4 and

other native wildlife remained on this ranch, though in small numbers.

In his own words, Dr. Schwarz “fell in love” with deer after observing

them at his grandparents’ Starr County ranch. As a young man, Dr.

Schwarz dreamt of one day growing big deer in South Texas. He was

encouraged by his father, Marvin, who was a farmer. Dr. Schwarz would

later write: “My life long dream was to buy a South Texas ranch to

protect and enjoy the habitat and wildlife for myself and my future heirs

and friends.” He also later said that this goal “consumed” him.

Petitioners began dating in high school in 1969 and spent a

significant amount of time together watching wildlife in South Texas.

They also hunted together. Dr. Schwarz has hunted since he was young,

and Mrs. Marlee Schwarz began hunting in 1972.

Petitioners married in 1974, and each graduated from college in

1975. Mrs. Schwarz initially worked as a speech therapist but became a

homemaker when the first of petitioners’ three children was born in

1980. Dr. Schwarz graduated from dental school in 1978 and an oral

surgery program in 1983. He has worked as a dentist and oral surgeon

since the 1980s. In the years at issue he owned Valley Oral &

Maxillofacial Surgery, P.C. (VOMS), and received wages reported on

Forms W–2, Wage and Tax Statement, of $2,003,725, $2,200,681, and

$2,428,260. He worked roughly 40 hours a week for VOMS. He hired a

manager to run VOMS so that he could focus on dental work.

II.

Dr. Schwarz’s System to Grow Big Deer

Despite his success in dentistry, Dr. Schwarz has never forgotten

his love of deer. In the early 1980s he began to study deer and ranch

management. He learned that deer were more plentiful and larger in

Canada and the Midwest than in South Texas, largely because of a

comingling of farms and woods that provided food and habitat for deer.

Dr. Schwarz believed he could fulfill his dream to grow big deer in South

Texas by mimicking what was happening in Canada and the Midwest.

He hypothesized that areas of crops, which he called “food plots,” could

improve the nutrition available to deer, increasing both the number and

the size of deer on a South Texas ranch. He studied dry-land farming

4 All references to “deer” in this Opinion are to white-tailed deer.

[*9] and nutritious crops that would be more drought tolerant than

those grown in South Texas at the time.

Dr. Schwarz mostly studied legumes, because they contain

proteins that help bucks’ antlers (and deer in general) grow larger.

Larger antlers are important because bucks are generally judged on the

size of their antlers. Under the commonly used Boone and Crockett

scoring system, a gross score is assigned on the basis of how many inches

of antlers a buck has. Deductions for symmetry and other items are

made to reach a net score, though most hunters use the gross score.

Dr. Schwarz identified several crops that might grow well in

South Texas and looked for a ranch where he could test his food plot

hypothesis. In 1983 Dr. Schwarz and six other individuals bought 1,000

acres of land in Starr County. In 1986 they formed a partnership named

El Tecomate Ranch 5 and transferred the 1,000 acres to it. El Tecomate

Ranch purchased an additional 989 acres of contiguous land in 1986 and

named the combined 1,989 acres “Tecomate South Ranch.” 6

In the 1980s Dr. Schwarz hired a dry-land farmer, Rogelio

Guerra, to help grow food plots on Tecomate South Ranch. The two

started with cow peas and soybeans, and later mixed in legumes from

other continents. They also assessed various farming methods, including

skipping rows when planting. After several years they determined that

certain crops needed to grow a fair amount before deer browsed them,

or the deer would kill the young plants. To solve this problem, Dr.

Schwarz and Mr. Guerra invented a “reversible fence” that could be

raised or lowered by rolling and fastening portions of the fencing. They

thus gained control over when deer had access to food plots, allowing

plants to grow a sustainable amount and allowing ranchers to let deer

in at the time of year (generally the summer) when bucks need protein

5 “Tecomate” was the name of a dilapidated windmill on the 1,000 acres. The

word means “basket rack” in a Native American language. Dr. Schwarz chose to use

“Tecomate” in the name of the partnership and other endeavors because he believed it

added romance and intrigue to operations.

6 The parties stipulated that “[i]n 1986, petitioners and six partners bought

1,989.37 acres which petitioners call ‘Tecomate South Ranch.’” This is incorrect; the

evidence clearly shows that the first 1,000 acres were purchased in 1983. See

Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976) (holding that stipulated facts

can be superseded when they are clearly contrary to the record). Furthermore, Mrs.

Schwarz was not a partner in El Tecomate Ranch in 1986.

[*10] to grow large antlers. 7 This system worked; bucks shot on

Tecomate South Ranch began to win hunting competitions by the early

1990s.

The food plots plus reversible fencing combination became the

backbone of what Dr. Schwarz calls the “Tecomate System.” This system

(and to a lesser extent, petitioners’ donations of conservation easements

on some properties they owned) would turn Dr. Schwarz into a minor

celebrity among hunters and outdoor enthusiasts in Texas. In the 1990s

Dr. Schwarz and others wrote numerous magazine articles about the

Tecomate System, Dr. Schwarz, and/or petitioners’ family. Dr. Schwarz

also received several awards relating to conservation and gave

presentations regarding the Tecomate System.

Neither Dr. Schwarz nor Mr. Guerra patented the reversible fence

or the Tecomate System. However, Dr. Schwarz and others formed a

partnership named “Tecomate Seed Company” (Tecomate Seed) to sell

seeds. The partners freely disseminated information about the

Tecomate System. They hoped to promote Tecomate Seed and enlarge

the seed market. For example, Dr. Schwarz co-wrote magazine articles

detailing how to grow food plots and build reversible fences. The articles

included contact information for Tecomate Seed.

Tecomate Seed expanded nationwide, but the partners realized

that the seed business was brutally competitive, in part because

companies must state their seed formula on each bag sold. At an unclear

time, the partners branched out and formed Tecomate Wildlife Systems,

Ltd. (Tecomate Wildlife Systems). Tecomate Wildlife Systems sold food

plot equipment and consulting services and produced television shows

featuring deer hunts. Tecomate Seed became a division of Tecomate

Wildlife Systems.

Around 2016 Dr. Schwarz left Tecomate Wildlife Systems because

it had built up high levels of debt and the seed division was losing

money. Another partner continued to operate the company.

III.

Real Estate Activities in General

After seeing the Tecomate System begin to work by the late

1980s, Dr. Schwarz was interested in purchasing additional ranch land

7 Bucks shed their antlers each year and grow new ones before deer hunting

season. In counties relevant to this case, deer hunting season runs from early

November to late January. See 31 Tex. Admin. Code § 65.42(b)(1) (2024).

[*11] in South Texas. Petitioners began to purchase and sell land,

mostly through entities they partially or wholly owned (Affiliated

Entities). Petitioners and Affiliated Entities have bought and sold over

20,000 acres of land since 1983, almost entirely ranch land in South

Texas. At the time of trial they owned over 5,000 acres of land. They also

purchased two condominium units, one of which was rented out during

portions of the years at issue.

Petitioners and Affiliated Entities have used a variety of methods

to sell land at a profit. For most ranch acreage they would buy cheap

land, improve it (often by implementing the Tecomate System), and then

attempt to quickly resell it. They also often broke up ranches into

smaller tracts that could be sold at a higher price per acre.

For example, Dr. Schwarz bought 1,598 acres called Novillos

Ranch in 1995 for $514 per acre. In 1996, before implementing the

Tecomate System, Dr. Schwarz sold tracts of 392 acres, 273 acres, and

(again) 273 acres at an average price of $1,286 per acre. He then

implemented the Tecomate System and sold another 169.61 acres for

$2,063 per acre during 2001. 8 The final 491 acres were transferred to an

Affiliated Entity (G. Morgan Capital Partners, Ltd., discussed infra

Findings of Fact (FoF) Part VI.B) and sold in 2006 for $3,900 per acre.

For other ranches, petitioners and Affiliated Entities divided the

acreage into “ranchettes” of only a few acres. One of the Affiliated

Entities, Lone Star La Cuesta, sold owner-financed ranchettes, lending

its own money to fund purchases by third parties and generating

interest income as loans were repaid (in addition to profits from sales).

IV.

Tecomate Ranch Hunting Operation

By 1994 petitioners and Affiliated Entities owned around 4,000

acres of land in Starr County near Tecomate South Ranch. This included

1,266 acres owned by Dr. Schwarz named “Tecomate Ranch.” Petitioners

sold deer hunts on Tecomate Ranch and other acreage in Starr County

that they owned and leased (Tecomate Ranch hunting operation).

Petitioners and their family also used Tecomate Ranch. Both the family

and paying hunters stayed at a lodge on or near the property.

8 The parties stipulated that Dr. Schwarz sold “166.62 acres for $349,902” in

2001. The settlement statement showing the $349,902 figure clearly states that 169.61

acres were sold. The parties’ stipulation is incorrect.

[*12] The Tecomate Ranch hunting operation was not profitable. The

reason(s) it was unprofitable was not established. However, in 1997 Dr.

Schwarz wrote an article in which he stated:

I have no concept of proper budgetary restraint! Never

have I even come close to breaking even in my ranch

activities as my sweet and patient wife, Marlee, is quick to

point out. I can tell you how to grow big deer. Although I

think it can be done, I can’t tell you that I have done it at

the level I have and made it pay. . . .

My other great weakness in life besides fiscal

irresponsibility is organization. I can’t stand paper work!

The Tecomate Ranch hunting operation ran until 2011. At an

unclear time, Dr. Schwarz transferred Tecomate Ranch to an entity or

entities. Tecomate Ranch was sold by one of the entities in 2011. These

facts will be discussed further infra FoF Part VIII.A.

Heart Attack (the Buck)

In 1993 Dr. Schwarz and Marvin were on a property owned by an

Affiliated Entity when they saw the biggest buck they had ever seen.

They named this buck “Heart Attack.” Marvin wanted to catch Heart

Attack and breed him, but Dr. Schwarz believed that doing so was not

legal under Texas state law. Dr. Schwarz later learned of a state

program to replenish the deer population on ranches where it had

declined. Using the program, Dr. Schwarz transferred Heart Attack and

another buck to Novillos Ranch with 40 does for breeding.

Heart Attack lived a long life and died of natural causes.

Petitioners by then had numerous of his descendants that were moved

to other ranches in which petitioners owned interests.

VI.

TI, GMCP, and LSLP

Petitioners created or repurposed several entities around 2005

that they used in various activities, including farming.

[*13] A.

Petitioners formed G. Morgan Company, LLC, in 1997 and in

2001 renamed it TI. 9 TI was a general partnership; petitioners were

managing members and each owned 50% at all relevant times. TI’s

stated business purpose was “custom farming, hunting, fishing and

ecotourism operation.”

TI was not noteworthy in the years 2002–04. For years 2002–04

TI reported no receipts and small losses (mostly or entirely from small

interests it held in various other entities) of less than $2,500 each year.

TI’s financial information for years before 2002 was not presented. In

2005 TI stepped up its operations. It began farming operations and

reporting Schedule F losses that flowed through to petitioners in years

2005–20. 10 TI’s Schedule F losses pertain to the primary issue in this

case; they will be discussed infra FoF Parts XI–XV.

To clarify, when we refer to “Affiliated Entities” throughout this

Opinion, we are not including TI.

GMCP and LSLP

Petitioners formed Tecomate Capital Partners, Ltd., as a

partnership in 2002 and in 2007 renamed it G. Morgan Capital

Partners, Ltd. (GMCP). 11 Petitioners each owned 49.5% and TI owned

1% of GMCP at all relevant times. TI was GMCP’s general partner and

petitioners were limited partners.

Lone Star La Perla, LP (LSLP), was formed as a partnership in

2005. At all relevant times TI owned 0.25% of LSLP and was its tax

matters partner. Dr. Schwarz’s brother, Brad Schwarz, owned 20% of

LSLP in 2005 and 2006, but GMCP acquired his interest in 2007. GMCP

owned 79.75% of LSLP in 2005 and 2006 and 99.75% of LSLP in 2008–

20.

9 All references to TI include G. Morgan Company, LLC.

10 TI’s returns and most other records for years after 2020 were not introduced

into evidence.

11 All references to GMCP include Tecomate Capital Partners, Ltd.

[*14] Both GMCP and LSLP bought and sold real estate, almost

entirely in South Texas. They also each filed Schedules F for years 2008–

12, discussed further infra FoF Part VIII.A.

VII.

Creation of La Perla and Jalisco Ranches

2004–06: Overview of Land Transactions

In 2004 petitioners agreed to purchase contiguous tracts of land

totaling 15,070 acres in Zapata County. A series of closings occurred in

2005; LSLP purchased 6,564 acres and GMCP purchased 8,506 acres.

The average price paid per acre was $546 (about $8.2 million total).

Petitioners (through GMCP and LSLP) purchased the land as

investment property; they intended to improve it and sell it for a profit.

LSLP and GMCP were able to purchase the land for a low price

because it was in a state of disrepair. The land had been overgrazed by

cattle, and large portions had no access to water. A rundown lodge on

the land “smelled like death,” as Mrs. Schwarz testified.

Petitioners began to improve the land soon after each tract was

purchased. 12 Petitioners cleaned and refurnished the lodge, while using

controlled burns and roller chopping to improve the quality of the flora.

To fix the water access issue petitioners placed a large submersible

pump in a six-acre lake 13 near the lodge (named “House Lake”) and laid

a pipe (connected to the pump) in an enormous oval to give water access

to tracts on the outside of the oval. The lodge sat on 3,030 acres of land

within the oval.

Petitioners’ vision for the land was attractive to buyers even

before the improvements were completed. In 2005 (with one sale in

2006 14) GMCP sold all 8,506 acres it had purchased and LSLP sold 4,828

acres of the 6,564 acres it had purchased, retaining 1,736 acres that had

the lodge and House Lake on it, all inside the oval. The sale price of a

1,362-acre tract is unclear, but petitioners received an average of $783

per acre for the other 11,972 acres that were sold. Profits from the 11,972

12 The parties failed to make a clear record regarding which people/entities did

what work on which tracts for many years, especially before 2010. Because the record

is not clear, we will simply refer to “petitioners” in most of this FoF Part VII.

13 Witnesses used the terms “lake” and “pond” somewhat interchangeably. We

will use “pond” only when referencing forage ponds (discussed infra FoF Part IX.C.2.d).

14 The sale in 2006 was 181 acres of land sold by LSLP. LSLP repurchased the

acreage in 2007 and sold it (again) in 2013. These 181 acres are not especially relevant.

[*15] acres sold were about $2.8 million (excluding all expenses/

improvement costs).

2005 and 2006: Decision Not to Sell All the Land

On April 12, 2005, LSLP and GMCP closed on tracts that included

all 3,030 acres within the oval. Of these 3,030 acres, GMCP purchased

1,294 acres and sold them to La Perla Negra Investment Group, Inc. (La

Perla Negra), also on April 12, 2005. In addition to cash, GMCP received

a 14.285% interest in La Perla Negra as part of the sale.

In April 2005 petitioners planned to have LSLP retain its 1,736

acres for about three years before selling them. In these three years

petitioners planned to let third parties that had purchased tracts

surrounding the 3,030-acre oval stay in the lodge while they were

building their own lodges.

Around April 2005 petitioners built a fence around the oval. Dr.

Schwarz was building another fence to separate LSLP’s 1,736 acres from

the other 1,294 acres within the oval (now owned by La Perla Negra),

when he discovered three gorges that needed to be filled in. The gorges

were created by flowing water. Petitioners could add concrete culverts

to fill the gorges and still let water pass through the area, or they could

build a lake to halt the flow of water by giving it a place to collect. They

chose to build a lake.

Dr. Schwarz began to study lakes and fish, especially bass. 15 In

May 2005 he met with Bob Lusk, who ran a lake management company.

Mr. Lusk gave Dr. Schwarz advice about lake construction. Petitioners

started construction of the lake in June 2005 and finished in 2006. They

named the 23-acre lake “Waterworld.”

Around the time of his meeting with Mr. Lusk, Dr. Schwarz

decided not to sell LSLP’s 1,736 acres within the oval. 16 Instead, he

decided to perform hunting, fishing, and event operations (ecotourism)

on the land, and, in his words, “have a chance to make a profit.” Dr.

Schwarz knew the Tecomate Ranch hunting operation was unprofitable

and that he would have a “hard time” profiting from deer hunting.

All references to “bass” in this Opinion are to largemouth bass unless

otherwise indicated.

16 Evidence shows that Dr. Schwarz made major decisions largely on his own

starting with this change of mind.

[*16] However, he wanted to try a ranch operation with a more diverse

income stream (fishing, events, and hunting of various animals). He

knew that if ecotourism was not profitable, the land would very likely

appreciate anyway. Ecotourism will be discussed at length infra FoF

Part IX.

At an unclear time, Dr. Schwarz decided to conduct ecotourism on

all 3,030 acres within the oval. In May 2006 LSLP purchased 502 acres

from La Perla Negra which were combined with the 1,736 acres already

owned by LSLP. Petitioners named this 2,238-acre property “La Perla

Ranch.” 17 In December 2006 GMCP purchased 792 acres from La Perla

Negra, which petitioners named “Jalisco Ranch.” 18 GMCP contributed

Jalisco Ranch to LSLP in 2015. 19

Other Zapata County Transactions

The final relevant property in the 15,070 acres originally

purchased is Twin Lakes Ranch. This ranch is 1,362 acres, sold by

GMCP to a third party in 2005. Marvin traded land he owned to acquire

Twin Lakes Ranch, then sold it to Twin Lakes, LLC, in 2011 for

$1,974,610. Twin Lakes, LLC, was owned by GMCP in 2011–14, then

merged into LSLP in 2015. GMCP acquired Twin Lakes Ranch to obtain

a pumping system and then flip the property. GMCP and LSLP tried to

sell Twin Lakes Ranch for years, but it languished on the market until

it was finally sold in two parcels in 2019 for a total of $2,977,950.

Both as part of and separate from land transactions, in 2005–14

LSLP amassed a sizable amount of rights to water out of the Rio Grande

River to use on Zapata County properties. In 2015 LSLP purchased

additional water rights for $560,450, which Dr. Schwarz funded by

withdrawing funds from his section 401(k) plan at VOMS.

17 The 502 acres were sometimes identified as a separate tract of land called

“La Perla Negra,” but we will call all 2,238 acres “La Perla Ranch.”

18 The word “Jalisco” is from the name of a song that, when translated, contains

the phrase “never give up.” As he did with “Tecomate,” Dr. Schwarz chose to use

“Jalisco” because he believed it added romance to operations.

19 As discussed infra OPINION Part VI.B.1, GMCP may have reacquired

Jalisco Ranch from LSLP in 2016.

[*17] VIII. TI’s Farming Activity: Early Operations and General

Information

In this FoF Part VIII we will discuss TI’s early farming operations

and then general information about TI’s farming activity in 2015–20.

Early Farming Operations

In 2005–08 TI’s farming activity took place primarily in Starr

County, where TI took over the Tecomate Ranch hunting operation in

2005 and ran it until Tecomate Ranch was sold in 2011. In 2005–08

LSLP conducted most of the farming operations in Zapata County. TI

began to take over the Zapata County operations around 2009 and 2010,

though it conducted some hunting operations in Starr County until

2011. LSLP conducted some Schedule F operations on La Perla and

Jalisco Ranches as late as 2012. A sample of facts supporting these

findings follows: 20

•

TI’s gross income from hunting in 2005–07 was higher than

hunting revenue for any other three-year period in 2005–20. This

shows that TI took over an established hunting operation in 2005

and was not building one from scratch in Zapata County. Charts

showing hunting income by year are presented infra FoF Part

XII.

•

TI’s financial records show that it paid a total of $293,969 to rent

land in Starr County in 2005–08. 21 TI continued to rent land in

Starr County in 2009, 2010, and 2011, though the amounts paid

in those years are unclear.

•

Returns for LSLP and GMCP 22 show that TI did not rent La Perla

and Jalisco Ranches in 2007 or 2008. TI paid a small amount of

money to rent land from LSLP and/or GMCP in 2005 and 2006,

though this was not developed, and it is unclear what land was

20 The parties overlooked these facts and made numerous incorrect claims as a

result. These discrepancies are discussed further infra OPINION Part IV.

TI’s profit and loss statements for 2005–08 show expenses for “Hunting

Lease SR 6300 ACRES.” “SR” stands for “San Roman [Ranch].” Tecomate South Ranch

was once part of the San Roman Ranch in Starr County. Dr. Schwarz had a long-term

lease on thousands of acres of San Roman Ranch dating back to at least the 1990s.

22 GMCP’s 2005 return is not in evidence because neither party could find it.

[*18] rented. Both LSLP and GMCP owned land in Starr County in

2005 and 2006.

•

TI’s 2005–12 books and records show that it owned a portion of

Tecomate Ranch and other land in Starr County. Ownership of

the land was transferred to GMCP in 2013. 23

•

GMCP sold Tecomate Ranch to a third party in late 2011 (see

discussion supra note 23). The contract of sale and an addendum

provide that TI had a lease on thousands of acres of land around

Tecomate Ranch that the buyer would sublease. The addendum

provides that there were fifteen booked “management buck hunts

that [were] to occur during the 2011/2012 hunting season” and

that the buyer would be responsible for conducting the hunts. TI

was also required to plant winter crops on Tecomate Ranch and

leased acreage in late 2011.

•

Though TI’s invoices for years before 2010 were not introduced

into evidence, invoices from 2010 show that TI sold at least two

deer hunts on Tecomate Ranch in 2010. Another invoice from

October 2011 is labeled “Hunts Booked at San Roman” and shows

several hunts booked. Many invoices do not reference the ranch

23 The accounting with respect to the land ownership and transfer(s) appears

to be erroneous in two primary ways, which we will summarize.

First, TI’s depreciation schedules indicate that it owned (at least a portion of)

a 541.57-acre tract that was part of Tecomate Ranch. However, GMCP’s financial

records also reflect ownership of this tract until the tract was sold in 2011. TI’s

depreciation schedules (for years before 2013) show the name of the tract, followed by

“541.57 Acres.” GMCP’s balance sheets (for years before 2011) show the name of the

tract, followed by “541.57AC.” GMCP’s balance sheets also state that it has “100%

Ownership” of the tract. Why TI ever reported an ownership interest in the tract is

unclear. It is even more puzzling why TI continued to report an ownership interest in

the tract after GMCP sold the tract (and the remainder of Tecomate Ranch) in 2011.

Second, TI’s 2005–12 balance sheets show a total basis in land it owned of

$445,961.38. Land was transferred to GMCP in 2013, and GMCP’s 2013 balance sheet

shows a basis in “Tecomate South 1000AC” of $545,961.38. This is up from $100,000

the year before. Confusingly, GMCP counted the entire $445,961.38 as part of its basis

in Tecomate South Ranch even though other properties once owned by TI contributed

to the $445,961.38. It is also unclear why GMCP’s balance sheets reflect an ownership

interest in Tecomate South Ranch at all. If anything, the balance sheets should show

an interest in El Tecomate Ranch partnership.

We found apparent errors such as these throughout TI’s (and Affiliated

Entities’) books and records, which often made them difficult to decipher.

[*19] on which hunts took place, but other exhibits indicate that TI sold

other hunts that took place in Starr County in 2010 and 2011.

•

TI’s depreciation schedules for many years included depreciation

from Starr County assets. Depreciation from some Starr County

assets was even reported for the years at issue, contributing to

large Schedule F losses. Assets depreciated in the years at issue

include one labeled “Carpet Hooterville Cabins.” Hooterville was

the name of the camp that contains the lodge used for the

Tecomate Ranch hunting operation.

•

LSLP attached Schedule F to each of its 2008–12 returns. The

Schedules F report the principal farming activity was “ranching,

deer and wildlife.” LSLP reported Schedule F losses totaling

$2,714,992 for the five years combined. 24 LSLP also reported

Schedule F gross income from hunting and “continuing education”

as late as 2010. TI later ran continuing education courses on La

Perla and Jalisco Ranches. TI took over ecotourism on La Perla

and Jalisco Ranches that was already being conducted by LSLP.

•

GMCP also attached Schedule F to each of its 2008–12 returns,

though it reported Schedule F losses totaling only $53,759. The

Schedules F reported that the principal activity was “crop

farming.”

•

When asked how TI’s operations changed after he was hired in

2008, TI’s bookkeeper testified that “[t]he only thing that changed

was the once–[LSLP] was one of the entities that [TI] bought. The

La Perla property, fishing was added to the hunting sales.” The

bookkeeper was then asked: “So when you first worked at [TI], did

La Perla Ranch exist?” He responded: “That’s correct. It didn’t.”

•

For each year 2005–20 LSLP’s returns report that its principal

business activity is “Ranching” and that its principal product or

service is “Animals.” LSLP never updated its activity and product

after TI took over operations on La Perla and Jalisco Ranches.

24 LSLP’s returns suggest that it could or should have filed Schedules F for

earlier years, as its 2005–07 returns show other expenses claimed on Form 1065, line

20, including feed, chemicals, “hunt expense,” “fish expense,” and/or “seed.” Such

expenses were deducted on Schedules F for 2008–12.

[*20] B.

Farming Activity 2015–20: General Information

Unless otherwise indicated, the facts stated in this FoF Part

VIII.B pertain to 2015–20. For the most part, TI’s work in 2015–20 can

be divided into three categories: (1) ecotourism, (2) custom farming, and

(3) Ranching/Other operations. These operations will be discussed

further infra FoF Parts IX–XIV.

TI had six full-time employees and also paid independent

contractors including a chef, hunting/fishing guides, and seasonal farm

workers. TI properly issued tax reporting forms regarding employees

and contractors.

One of TI’s employees was petitioners’ son, Blair Schwarz, an

experienced outdoorsman. Blair Schwarz became TI’s ranch manager,

huntmaster, and fishmaster in 2015. In these roles he was always on La

Perla and Jalisco Ranches when customers were present to tend to them.

Despite his relationship to petitioners, Blair Schwarz was not overpaid.

Another of TI’s employees, from 2008, was a bookkeeper and

financial manager named Chris Yelland. Mr. Yelland kept books and

managed the finances for TI and most Affiliated Entities, including

GMCP and LSLP. Affiliated Entities did not pay TI for Mr. Yelland’s

work. It was not established who kept books and records before 2008.

Although its employees oversaw TI’s day-to-day operations, Dr.

Schwarz made all major decisions. Petitioners spent most weekends on

La Perla and Jalisco Ranches, which were about a three-hour drive from

petitioners’ home. When petitioners were on the ranches, Mrs. Schwarz

made sure that the lodge was clean and sometimes helped prepare food.

She also oversaw decorating of the lodge. Dr. Schwarz often did manual

labor on the ranches. In 2012 he suffered a major injury when he fell

and hit his head on a bulldozer. Fortunately, he fully recovered.

TI operates a website displaying photographs and descriptions of

the various activities on La Perla and Jalisco Ranches, pricing and

contact information, and an online store with La Perla Ranch-branded

products. The logos on some products and on the website show a

silhouette of Heart Attack. TI also promotes its ecotourism using

brochures, magazine articles and advertisements, hunting and fishing

excursions filmed for episodes of television shows, and social media

platforms. Many of the magazine articles focus on Dr. Schwarz’s quest

to grow large deer and bass. The television shows include those produced

[*21] by Tecomate Wildlife Systems, 25 as well as two other shows that

have no connection to petitioners. TI partially or fully comps hunting

and fishing excursions featured on television shows.

TI paid for farm liability, property, boat, worker’s compensation,

vehicle, and crop insurance policies in the years at issue.

IX.

TI’s Farming Activity: Ecotourism

Unless otherwise indicated, the facts stated in this FoF Part IX

pertain to 2015–20. Before the years at issue (and especially before

2010) it is often unclear what operations TI was conducting on

properties in Zapata County. Because the evidence shows that Dr.

Schwarz had made all major decisions for/pertaining to TI, La Perla

Ranch, and Jalisco Ranch since around May 2005, we will tend to use

his name when we are unsure who/what entity made a decision or took

an action.

Overview and Common Amenities

TI’s ecotourism includes sales of hunting packages (for deer,

exotic mammals, and birds), fishing packages, and event packages. TI

also generates a small amount of income from birdwatching tours, but

this will not be discussed further.

TI began to sell hunting packages in 2005, when it took over the

Tecomate Ranch hunting operations. By 2015 nearly all TI’s ecotourism

was conducted on La Perla and Jalisco Ranches, with limited ecotourism

conducted on Twin Lakes Ranch until that property was sold in 2019.

TI leased La Perla, Jalisco, and Twin Lakes Ranches (and other

properties) from LSLP and/or GMCP in the years at issue to conduct

ecotourism. These leases are discussed further infra FoF Part XII.B.

Whether a customer purchased a hunting, fishing, or event

package, there were numerous common elements. After a date was

selected, TI sent the primary customer a contract, liability release, and

invoice. The customer completed the contract and liability release, then

returned them to TI with a 50% deposit toward the package price to

complete the booking. The remaining 50% of the package price was due

30 days before the starting date. On the starting date customers were

25 These shows are titled “The Bucks of Tecomate” and “Tecomate Whitetail

Nation.” The shows have been successful and have each aired for more than a decade,

most recently on the Outdoor Channel.

[*22] greeted by Blair Schwarz (or his predecessor) at La Perla Ranch,

checked into their rooms, signed any additional liability releases, and

reviewed the ranch rules. Hunters attended safety meetings and had

their hunting licenses verified.

Customers stayed at the lodge on La Perla Ranch. Before 2017

the lodge had eight bedrooms and four bathrooms. The lodge was

remodeled in 2017 to add ten bedrooms and give each bedroom an

adjoining bathroom. The lodge had a large living room with a projector

screen, an outdoor firepit, a commercial kitchen, and other

accommodations. A full football field was maintained near the lodge for

customers to use. The chef cooked meals for customers, which often

included meat from animals shot on the ranches.

Other common amenities (some with additional fees) on La Perla

and Jalisco Ranches included (1) rifle and pistol ranges, with an optional

shooting expert to train customers; (2) skeet shooting; (3) a peninsula on

one of the lakes with palapas, televisions, bathrooms, and a bar;

(4) nighttime hunting of coyotes and pigs; (5) a golfing range with

targets; (6) a butterfly garden; (7) fishing, but only for non-trophy-class

bass and fish other than bass (unless the customer purchased a fishing

package); (8) biking and hiking; and (9) use of off-road vehicles.

Hunting Packages

Deer Hunting

TI constantly prepared for deer hunting season by (1) growing

food plots, (2) stocking deer feeders, (3) monitoring trail cameras,

(4) completing an annual deer survey, (5) maintaining ranches in

general, (6) breeding deer, (7) ensuring guides were available to escort

customers, (8) determining how many hunts to sell, (9) booking hunts,

(10) culling excess deer to avoid overpopulation, and (11) ensuring that

all State licensing/regulatory requirements were met. We will elaborate

on many of these items.

TI’s main goal regarding deer was to grow bucks with large

antlers on La Perla and Jalisco Ranches. When customers booked a deer

hunt, they selected the class of buck they wanted to hunt for. There were

three classes, determined using Boone and Crockett gross scores.

“Management” bucks had 130 through 139 inches of antlers and cost

$3,000 in the years at issue. “Classic” bucks had 140 through 149 inches

of antlers and cost $3,000 plus $200 for each inch above 140 in the years

at issue. “Trophy” bucks had 150 or more inches of antlers and cost

[*23] $5,000 plus $250 for each inch above 150 in the years at issue. TI

later raised its prices by about 20%. Prices for TI’s deer hunting

packages were competitive with those of nearby ranches that sell deer

hunts.

Before we discuss the hunts, we will address how TI attempted to

grow bucks with large antlers. This began with genetics. Dr. Schwarz

brought some of Heart Attack’s descendants to La Perla and Jalisco

Ranches. TI built and used breeding pens on the ranches starting in

2013. Three pens were used at first, though this was later increased to

six. TI caught a superior buck (or purchased a “breeder buck” from a

third party) and enclosed it with 20 does in a pen. Because does often

give birth to twins, this resulted in about 30 fawns per pen, per year that

TI could determine the parentage of. The pens protected fawns from

predation and were stocked with food, improving a fawn’s odds of

surviving to maturity. After about 11 months in the pens, deer were

released onto La Perla and Jalisco Ranches.

TI used the Tecomate System and supplementary deer feeders to

improve nutrition. TI also maintained land in a manner that ensured

brush and other elements favorable to deer existed. TI kept the deer it

grew on La Perla and Jalisco Ranches by maintaining a high fence

around the ranches. Even though the deer were retained on land owned

by LSLP/GMCP, they were owned by the State of Texas. See Tex. Parks

& Wild. Code Ann. § 1.011(a) (West 2015). In addition, because bucks

shot in high-fenced areas were not eligible for the Boone and Crockett

Record Book, bucks shot on La Perla and Jalisco Ranches were

ineligible. All deer-hunting customers were aware of this fact.

Before deer hunting season each year, a helicopter survey was

conducted to count deer. Deer counted were divided into buck, doe, and

fawn groups. The bucks were further divided by age and antler size. The

number of deer in the groups were estimates, as not all deer were seen

from the helicopter and some deer were misclassified. Dr. Mickey

Hellickson, a wildlife biologist, used survey data to complete a harvest

recommendation each year. Harvest recommendations listed how many

bucks in each class and age group should be sold for hunts (or culled), 26

as well as how many does should be culled to prevent overpopulation.

Because the State of Texas owned the deer, the Texas Parks and Wildlife

26 Trophy and classic bucks should not be harvested until they are at least five

years old because bucks’ antlers reach their maximum size when bucks are five to

seven years old. Bucks with smaller antlers can be harvested or culled at younger ages.

[*24] Department

(TPWD) had to approve

each harvest

recommendation. After hunting season TI reported the number and

types of deer shot to the TPWD; this included both culled deer and deer

shot by customers.

Because there was no market to sell hunts for does and smaller

bucks to be culled, TI’s employees and their families culled deer

themselves. Petitioners and their family, including their grandchildren,

were allowed to hunt for deer to be culled. Every year one grandchild

was also allowed to shoot a management buck. Dr. Schwarz, petitioners’

three children, and two of petitioners’ children-in-law have each shot a

trophy buck on film for television shows.

Once a customer was on the ranch, they were assigned a guide.

The guides were TI’s employees or independent contractors hired by TI

for about $250 per day. Each guide took their customer to a hunting

blind and used a deer feeder and/or corn to attract deer. The guide

examined bucks that came within range and estimated whether any

buck was within the customer’s booked class. The guides were quite

accurate in their estimates, but occasionally made mistakes regarding

the class of a buck. If a customer shot a buck that was smaller than the

booked class, the customer did not get a refund for the difference in

price. If a customer shot a buck that was bigger than the booked class,

the customer had to pay the higher price for the larger deer. Customers

were aware that the ultimate decision to pull the trigger was theirs and

that they were responsible for any increase in price.

When a buck estimated to be within a customer’s booked class

approached, the customer could shoot it. The guide and the customer

would then wait about an hour before approaching the area where the

deer was shot. This was because a deer might not immediately die, and

if a person approached a mortally wounded deer, it might get up and run

for several miles. Once the guide and the customer approached the area,

if the deer was not there, they would attempt to follow any trail of blood

to find the deer. If that did not succeed, the customer had the option to

pay for an independent contractor with hunting dogs to come help find

the deer. Most deer were found, but a few were not.

Once the trigger was pulled the deer was considered dead unless

it was seen to be alive and healthy afterward. This was because there

were occasions where a guide thought a customer missed a buck, which

then ran away and was found dead several weeks later. Customers were

aware of this rule.

[*25] After the customer shot and the deer was found, the customer

would pose for photographs with the deer. TI’s employees would then

break down the deer. Customers usually wanted the head to go to a

taxidermist, which TI could facilitate. If the customer wanted the meat,

they would take it home when they left; if not, TI used what they could

for meals and donated the rest to charity. Meat from culled deer was

similarly used in meals and donated.

TI had a near 100% success rate in getting customers the

opportunity to shoot a buck estimated to be in their booked class. On the

rare occasion that a customer did not get such an opportunity, the

customer did not get a refund.

Deer hunting packages included a three-night stay at the lodge.

After a hunter shot a deer, they could stay on the ranch until the end of

their booking and enjoy the common amenities. Hunters could also bring

nonhunter guests with them for $200 per guest per day in the years at

issue, which was later increased to $350 per day. For safety reasons, the

maximum number of people hunting deer on La Perla and Jalisco

Ranches at the same time was eight. In the years at issue TI fully booked

its available deer hunts and had a waiting list.

Exotics Hunting

In 2017 Dr. Hellickson advised TI to stock and sell hunts for exotic

antelopes (exotics), including oryx, blackbuck, and nilgai. These are

primarily grazing animals, so there would not be much competition with

deer for food. Dr. Hellickson believed that exotics could improve TI’s

income by offering customers horned mammals to hunt year round, as

there was no specific season for hunting exotics. TI purchased and

released several dozen exotics on La Perla and Jalisco Ranches in 2017.

TI sold hunting packages for exotics for $4,500 per animal. There

is little evidence regarding the hunting and management of exotics. The

exotics began to reproduce on La Perla and Jalisco Ranches, but TI’s

financial records reflect that only one or two exotics hunts were sold in

each year 2017–20. At some point petitioners began to let one grandchild

shoot one exotic each year.

Upland Bird Hunting

TI’s upland bird hunts were for quail and dove. Both packages

included cleaning and packaging of birds shot. Up to 24 people could

hunt for quail or dove on La Perla and Jalisco Ranches at the same time.

[*26] Dove hunts constituted most of TI’s bird hunts. In South Texas,

dove-hunting season is from early September to late October/early

November; then it reopens for a month or so in mid-December. See 31

Tex. Admin. Code § 65.314 (2024). For dove hunts TI charged $850 per

hunter for a two-night stay for a minimum group of ten hunters. Doves

are migratory birds with a predictable flight pattern. TI knew that there

would be large groups of doves stopping in fields on La Perla and Jalisco

Ranches each year. TI planted corn food plots each year and scattered

seeds before hunts to attract doves.

Quail-hunting season is from late October to late February. See

31 Tex. Admin. Code § 65.62 (2024). Quail hunts were also for two nights

but cost $1,000 per hunter for a minimum group of ten. Little

preparation occurred before quail hunting season. Although some quail

lived on La Perla and Jalisco Ranches, quail are easily depleted by

hunting. Therefore, TI usually bought pen-raised quail and released

them in a field before a hunt.

Waterfowl Hunting

TI’s waterfowl hunts were for ducks and geese, though TI

conducted no waterfowl hunts in 2015–20. Little evidence was presented

regarding waterfowl hunting that occurred before 2015, with that

evidence pertaining almost entirely to ducks. Like doves, ducks are

migratory birds. Unlike doves, ducks have a flight pattern dependent on

rainfall. There were two successful duck-hunting seasons on La Perla

and Jalisco Ranches before a drier year caused ducks to migrate along

the coast instead of through Zapata County. Hunts are usually booked

months before hunting season, but at that time one cannot predict

whether ducks will migrate through Zapata County. This uncertainty

led TI to cease regular waterfowl hunting around 2014.

Lakes, Fish, and Fishing Packages

Construction of Lakes

Around the time Waterworld was completed in 2006 a fisheries

expert named John Jones became the primary advisor to Dr. Schwarz

regarding lakes and fish. Mr. Jones visited La Perla Ranch in 2006 and

examined Waterworld and a new lake that was beginning to be

constructed named “La Perla Lake.” Mr. Jones was informed that Dr.

Schwarz wanted to create a world-class bass fishing destination, which

meant growing bass that could break the Texas state bass record. At the

time of trial, the record of 18.18 pounds had stood since 1992.

[*27] Waterworld was too small and shallow to grow huge bass, so Dr.

Schwarz chose to construct La Perla Lake. Mr. Jones gave Dr. Schwarz

many recommendations regarding how to construct La Perla Lake to

grow huge bass, such as making the lake deeper (to withstand drought

and give bass a cool refuge from high surface temperatures) and adding

more shoreline to increase fishing areas and fish habitats. Dr. Schwarz

followed 80% or more of Mr. Jones’s recommendations over the years.

TI constructed at least part of La Perla Lake, though LSLP also

worked on the project. The intent was to save money by not hiring a

third party. As will be discussed further infra FoF Part XIII, TI charged

LSLP millions of dollars for construction work on La Perla Lake and

other lakes in 2010–20.

La Perla Lake was constructed in sections. Following Mr. Jones’s

advice, Dr. Schwarz stocked a completed section of the lake with pure

Florida bass (the largest type of bass) and other fish to support the

ecosystem around 2007, when the entire lake was only 20%–30%

complete. When other sections were completed, a trench would be cut to

connect sections. The young bass thus grew as the lake did.

Construction of La Perla Lake was completed in 2010. It had

about 75 acres of surface area, plus 10 acres of forage ponds (discussed

infra FoF Part IX.C.2.d). The maximum depth was 15 to 20 feet, and the

average depth was about 8 feet.

Around 2010 a new lake was built on La Perla Ranch and named

“Trophy Lake.” Trophy Lake was expanded by TI in 2015 to have about

18 acres of surface area with an unspecified substantial average depth.

Dr. Schwarz intended for Trophy Lake to contain only a small number

of huge bass but, as Blair Schwarz testified, “we had plans to develop it

into another fishing lake, and we just never did.”

By the end of 2010 La Perla Ranch had four lakes: House Lake,

Waterworld, La Perla Lake, and Trophy Lake. TI started selling fishing

packages in 2011, but only La Perla Lake was used for fishing-package

customers in the years at issue.

Jalisco Ranch had a lake named “Lake Louise” that existed before

2005. Dr. Schwarz changed the name to “Lake Marvin” after Marvin

died in 2012, and later changed the name again to “Jalisco Lake.” 27

27 All references to Jalisco Lake include Lake Louise and Lake Marvin.

[*28] In 2011 Dr. Schwarz decided to significantly expand Jalisco Lake

because, at an unclear time, he went against Mr. Jones’s

recommendation and added bass with hybrid genes to La Perla Lake to

improve catch rates. The hybrid bass interbred with the pure Florida

bass in La Perla Lake. This was detrimental to Dr. Schwarz’s efforts to

create a world-class bass fishing destination because only a pure Florida

bass has a realistic chance of breaking the state bass record. As stated

in a 2014 article about Dr. Schwarz’s fish exploits, Dr. Schwarz

“believe[d] that stocking hybrid bass was an insurmountable mistake to

realize his fevered passion to build the world’s biggest bass. So, he

decided to dig another lake . . . .” The article quoted Dr. Schwarz as

saying: “What I wouldn’t do to go back in time and reverse that decision

[to add hybrid bass]!”

Like La Perla Lake, Jalisco Lake was built in sections. The

construction was entirely, or almost entirely, completed by TI. In 2014

the lake was 15%–20% complete, at which time it was stocked with

specially bred pure Florida bass (discussed infra FoF Part IX.C.2.c).

Jalisco Lake was completed in 2017; it had about 60 acres of surface area

and 25.5 acres of forage ponds. The maximum depth was 20 feet or more,

with an average depth around 8 feet. TI began using Jalisco Lake for

fishing-package customers in 2020 or 2021.

Management/Upkeep of Lakes

TI did little management/upkeep work on House Lake. This is not

unexpected, as House Lake is not used to grow large bass. The work that

was done includes installing pipes and fish feeders and building a pier.

TI did slightly more work on Trophy Lake and Waterworld, installing a

pier and fish feeders for each. On several occasions TI also paid Mr.

Jones to analyze the water and to conduct bass surveys. These surveys

were done by using electricity to stun fish in an area of the lake, then

measuring, weighing, and (optionally) taking genetic samples from bass

that floated to the surface. The bass could be returned to the lake

unharmed, or, if their weight-to-length ratio was low, they could be

culled (discussed infra FoF Part IX.C.2.e).

TI has performed far more work on La Perla and Jalisco Lakes

than on other lakes. TI paid Mr. Jones to make regular visits to La Perla

and Jalisco Lakes to monitor progress toward the goal of growing recordsetting bass. The path to accomplish this goal included (1) having lakes

with good structure and water, (2) dealing with predatory animals,

[*29] (3) growing pure Florida bass, (4) having plenty of food, and

(5) culling undersized bass. We will discuss each of these items.

Structure and Water

The structure of La Perla and Jalisco Lakes has been discussed

in part above. Both lakes contained deep water with plenty of shoreline

and areas for bass and their prey, such as bluegill, to spawn. However,

there were problems with the water. The lakes had issues with salt

accumulation for years. About one-third of an inch of water evaporated

off each lake every day, but salt and other substances were left behind.

Over time this buildup caused harmful changes in water chemistry. The

bass also expended more calories to live in salty water, which caused

them to grow more slowly in later years. Even when TI replaced

evaporated water with water from the Rio Grande River (using LSLP’s

water rights), it diluted the salt and substances only temporarily. The

most effective long-term solution for salt/substance accumulation is

regular flushing events, typically from rainfall causing a lake to

overflow, with the overflowing water carrying salt/substances to a river

or neighboring property.

TI performed salt wicking in 2016 to remove salt from La Perla

and Jalisco Lakes, but it did not help nearly as much as anticipated. In

a 2017 report for TI, Mr. Jones stated: “Salt content continues to be high

(and is getting worse each year) . . . and will limit the potential of these

fisheries long term. . . . Solutions are not easy or inexpensive but we

must continue to explore new ideas and other options to reduce salt

levels.” Mr. Jones advised Dr. Schwarz for years to lower the spillway

on the lakes so they would overflow more easily, but Dr. Schwarz refused

to do so because he did not want to do anything that would cause water

to pass through the properties. Dr. Schwarz later recognized that he

“should have listened to” Mr. Jones.

La Perla and Jalisco Lakes eventually experienced fish kills,

which occur when many or all of the fish in a lake die in a short time.

Possible reasons for fish kills are a buildup of salt or chemicals from

fertilizers, or toxic algae blooms (which can be sustained by high salt

levels). In 2020 La Perla Lake experienced a partial fish kill. Then, in

2022, La Perla Lake experienced a complete fish kill in the same month

that a partial fish kill occurred in Jalisco Lake. Trophy Lake and

Waterworld also experienced fish kills at unspecified times.

[*30] House Lake never experienced a fish kill. House Lake never had

a problem with salt/substance levels because its water was pumped out

for use in the lodge and on properties surrounding La Perla and Jalisco

Ranches, then replaced with water from the Rio Grande River. This

caused the water in House Lake to be flushed regularly. After the 2022

fish kills TI took steps to flush water in other lakes by adding pumps

and pipes, using the water for crop irrigation.

Although it failed to prevent the fish kills, TI took other measures

to improve and maintain the water in La Perla and Jalisco Lakes. TI

paid for the lakes to be chemically treated to improve water clarity.

Clear waters help bass see prey and lures, improving both size and catch

rates. In addition, TI does not permit customers to use boats or fishing

lines that have been used in other lakes. This is to prevent the spread of

harmful flora and fauna into La Perla and Jalisco Lakes. Finally, TI has

paid for aeration systems to be installed in the lakes and several forage

ponds to improve water quality by boosting oxygen levels.

Predatory Animals

La Perla and Jalisco Lakes were not stocked with animals that

eat bass. In addition, in 2011 Dr. Schwarz began obtaining state

depredation permits that allowed employees on La Perla and Jalisco

Ranches to kill double-crested cormorants. These are predatory birds

that eat fish and travel in large flocks. Around 2016 Texas stopped

issuing the depredation permits as the result of a federal lawsuit. See

Pub. Emps. for Env’t Resp. v. U.S. Fish & Wildlife Serv., 189 F. Supp.

3d 1 (D.D.C. 2016). This had an adverse impact on TI’s fishing

operations.

Genetics

As previously stated, Dr. Schwarz stocked hybrid bass in La Perla

Lake, against Mr. Jones’s recommendation to grow pure Florida bass.

However, TI used “filter socks” to ensure water pumped into La Perla

Lake from the Rio Grande River contained no fish or fish eggs that would

otherwise dilute the bass genetics or introduce other unwanted species.

TI also used these filters for Jalisco Lake. In a 2017 report for TI, Mr.

Jones stated that “poor filter sock management practices” led to white

bass being introduced into Jalisco Lake. It was not established whether

white bass can breed with Florida bass, but they would compete for food

regardless. Carp (and possibly tilapia) were also found in Jalisco Lake,

and tilapia were found in La Perla Lake. In his 2017 report Mr. Jones

[*31] mentioned the carp and (possible) tilapia in Jalisco Lake, stating:

“Today there are not enough individuals of these species in the lake to

cause observable effects, however overtime [sic] it could create

problems,” presumably due to competition for food.

The Florida bass stocked in Jalisco Lake in 2014 were sourced

from the TPWD’s “ShareLunker Program.” This program was designed

to grow larger bass in Texas public lakes, with a long-term goal of

growing a world record-sized bass. 28 An angler who caught a 13-pound

bass or larger could alert the TPWD, who would pick up the fish and

genetically test it to ensure it was a pure Florida bass. If it was, the

TPWD might use the fish for breeding purposes before returning it to

the lake in which it was caught. Half of any offspring were stocked in

the lake where the bass was caught, while the remainder stayed with

the TPWD and/or were used to stock public lakes.

In early 2014 Dr. Schwarz learned that the TPWD was looking

for private lakes that it could stock with ShareLunker Program offspring

and study them as they aged. He contacted the TPWD about

participating in this study. By written agreement effective May 1, 2014,

Dr. Schwarz and the TPWD agreed that Jalisco Lake would be used to

conduct ShareLunker Program research. 29 The agreement was to last

15 years, in which time the TPWD would own all fish in Jalisco Lake

and no fishing could take place. 30 Although not stated in the agreement,

it was understood that Dr. Schwarz would incur expenses related to bass

food and lake upkeep. TI ultimately incurred these expenses.

The agreement could be terminated early by either party for

numerous reasons, including if “either party determines, in that party’s

sole discretion, that termination is in that party’s best interest.” If the

agreement was terminated early, the TPWD was permitted to access

Jalisco Lake and remove any fish that it wanted to. After the

28 As of 2014 the world record was over 22 pounds.

29 The agreement states that Dr. Schwarz is a party to the agreement. LSLP,

GMCP, and TI are not mentioned. Dr. Schwarz signed the agreement and listed his

title as “Owner – La Perla Ranch Jalisco Lake.” Despite this, the parties stipulated

that LSLP and the TPWD are the parties to the agreement.

30 The TPWD wanted the bass to be undisturbed (except by TPWD employees)

while they grew. TI may not have complied with the “no fishing” requirement; a 2017

report by Mr. Jones regarding bass in Jalisco Lake states: “Numerous hook marks were

observed . . . ; fishing pressure should be reduced considerably (ideally eliminated

completely).” The parties did not address this.

[*32] TPWD removed such fish, Dr. Schwarz would own all the

remaining fish.

About 7,000 ShareLunker Program offspring were stocked in

Jalisco Lake in 2014. From 2014 through 2016 or 2017 the TPWD

conducted yearly surveys of Jalisco Lake to monitor the growth of the

bass, which was faster than average. At the time, Jalisco Lake was one

of only three private lakes in Texas that the TPWD used for

ShareLunker Program research. Private lake owners could not

otherwise obtain ShareLunker Program bass from the TPWD (unless a

qualifying bass was donated and they received half of the offspring),

meaning that Jalisco Lake contained specially bred bass that were rare.

The TPWD ceased the yearly surveys at some point after the 2016

or 2017 survey. The ShareLunker Program study in Jalisco Lake was

terminated early by the TPWD in 2020 or 2021. The reasons for these

decisions are unclear. The TPWD removed some bass from Jalisco Lake,

though most remained in Jalisco Lake and became the property of Dr.

Schwarz/LSLP.

Food

Food is almost always the limiting factor when growing large bass

because (1) large quantities of food are expensive; (2) bass reproduce

heavily, with large female bass capable of laying tens of thousands of

eggs; (3) bass need 10 pounds of food to gain 1 pound of weight; and

(4) bass continue to grow until they die and will not reach their

maximum potential weight if they go through a period with little food.

Dr. Schwarz stocked La Perla and Jalisco Lakes with fathead

minnows, bluegill, threadfin shad, and other fish that are good prey for

bass. He also stocked fish feeders on the lakes and forage ponds to help

grow fish. Dr. Schwarz used forage ponds to grow additional food for

bass, such as freshwater crawfish. The forage ponds were periodically

drained into La Perla and Jalisco Lakes.

Growing prey in La Perla Lake, Jalisco Lake, and the forage

ponds was far more cost effective than purchasing prey from a retailer.

At the time of trial Mr. Jones charged $15 per pound of prey fish. It cost

about $0.75 per pound for Dr. Schwarz to grow his own. Still, this adds

up considering the “10 pounds of food for 1 pound of weight” rule and

the fact that there were over 6,000 bass in La Perla Lake in early 2016.

There were also thousands of bass in Jalisco Lake.

[*33]

Culling

Routine culling of undersized bass in a lake is extremely

important to grow large bass. If not culled, genetically smaller bass will

compete for food with larger bass. Because bass reproduce heavily, it

quickly becomes financially burdensome to provide adequate food if

culling is not regularly completed. While culling will greatly assist in

growing huge bass, it can reduce catch rates because there are fewer

bass in a lake and the bass that remain have more food and may not be

hungry enough to bite a lure.

Mr. Jones constantly urged Dr. Schwarz to cull more bass but

received pushback due to low catch rates. In a February 2016 report Mr.

Jones estimated that 95%–98% of prawns added to La Perla Lake were

eaten by bass that should be culled. Mr. Jones recommended culling

“6000 or more bass” from La Perla Lake as a result; it was not

established what number were actually culled. In an August 2017 report

Mr. Jones again recommended more culling in La Perla Lake.

A round of culling was carried out in Jalisco Lake in January

2016. 31 In an August 2017 report, Mr. Jones noted “signs of

overpopulation and consequently decline in the intermediate bass” in

Jalisco Lake. Mr. Jones stated that culling “will be the most impactful

management strategy to . . . get back to positive growth trends.”

Whether culling was sufficient after August 2017 was not established.

Outcomes and Pricing

It takes years to grow bass large enough that fishermen will pay

to fish on a lake. The average growth rate for bass in Texas is about one

pound per year, with exceptional growth rates being two to three and

one-half pounds per year. After being stocked around 2007, the bass in

La Perla Lake experienced exceptional growth rates, which allowed TI

to start offering fishing packages in 2011.

In 2013 bass above 12 pounds were found in La Perla Lake. On

February 19, 2015, Blair Schwarz caught a bass weighing 14.3 pounds,

which was still the largest bass caught in La Perla Lake as of

31 It was not established whether the TPWD approved any culling before the

ShareLunker Program agreement with Dr. Schwarz was terminated.

[*34] August 2022. 32 However, growth rates then significantly slowed.

As Mr. Jones stated in his August 2017 report:

[T]he younger bass in the lake are growing at the proper

rate. After four years of age growth rates become nonlinear and reach an asymptote (taper off). This obviously is

a negative relationship and suggests some factor (water

quality/competition) becomes so great as bass age, positive

growth trends essentially stop. . . .

The essentially year-round growing season and

physiologically demanding environment (high water

temperatures/high salt levels) is clearly taking a toll on the

bass population.[33]

Shortly before the 2022 fish kill that killed all bass in La Perla Lake, an

electrofishing survey found a bass weighing 16 to 16.5 pounds.

Less information was provided about the bass in Jalisco Lake.

They were growing exceptionally well as of January 2016, though there

was a “slight decline in relative weight” measured in a May 2017 survey.

The largest bass in the May 2017 survey weighed about 7.5 pounds.

In the years at issue, TI’s weekend fishing packages (two nights)

cost $3,500 to $4,000 per person depending on group size and the days

of the week. Packages included use of TI’s boats and a guide who could

identify the best areas to fish. As with hunters, fishing customers

enjoyed the common amenities and could bring nonfishing guests for the

same price as guests of hunters.

TI’s bass fishing was catch and release. All customers were aware

of this. If a customer caught a large bass, they could weigh it and take

photographs and detailed measurements. A taxidermist could use

measurements and photographs to recreate a likeness of the bass,

though this was not included in the fishing package price.

TI hoped that a state record bass would be grown and caught in

Jalisco or La Perla Lake, which TI could then capitalize on by raising

fishing package prices and/or seeing an increase in demand. There was

32 Blair Schwarz caught this bass while teaching his predecessor how to guide

fishing customers. It was not a personal activity.

33 Potential temperature issues in La Perla Lake were not elaborated on in the

report or addressed in depth by the parties.

[*35] also the opportunity for sponsorship deals with fishing equipment

manufacturers, or TI might have been able to sell the record bass’

offspring or sell the bass itself to a company for display. 34 Mr. Lusk

believed that offspring from a state record bass could sell for as much as

$20 each, a significant amount considering such a bass could lay tens of

thousands of eggs. 35

TI was not the only entity/person attempting to grow a state

record bass in a private lake in Texas. As Mr. Lusk testified: “It’s a

competitive thing, you know, among guys.” Despite the efforts of TI and

others, no state record bass had been caught in a private lake in Texas

at the time of trial. Part of the reason for this (aside from high expenses)

is the multitude of things that can go wrong before bass could grow that

large. As Mr. Jones testified:

[O]ur edict as a manager is try to, where possible, to

manage the risk of [adverse] events, but to grow a truly

large fish, you’re trying to not have a catastrophe for 10 or

12 years, not a single one. And you know, take any type of

work that you might do and not have this–with live

animals and not have any setback for that period of time is

very, very hard to do. It almost never happens really.

In addition, even if a bass grows to a state record size it needs to be

caught on a fishing line to set the record.

Petitioners’ family members are allowed to fish at House Lake

and Waterworld because these lakes do not have large bass. They are

also allowed to catch other types of fish, such as bluegill, from the piers

on La Perla and Jalisco Lakes.

Event Packages

A number of events took place on La Perla and Jalisco Ranches,

including company retreats, continuing education courses, and a football

camp. One of the continuing education courses was run by Dr. Schwarz

for dentists. This course occurred each year 2010–19, with VOMS paying

34 Dr. Schwarz testified that at some point the TPWD began to interpret an

existing regulation to prohibit selling bass but that Mr. Jones “feels certain that’s going

to change back in the near future.” It is not clear which regulation Dr. Schwarz was

referring to, nor whether it applies to the sale of young bass offspring.

35 Only female bass grow to a state record size. Male bass are much smaller.

[*36] TI an average fee of about $24,500 per year. VOMS also paid TI

$18,750 to host a two-night Christmas party at the ranches in 2012.

Pricing for events depended on several factors, including whether

persons in the group hunted. For example, a two-day football camp with

no noted hunting resulted in a payment of $4,000 to TI. When an event

guest hunted, sometimes TI counted the hunting portion charge as

hunting and/or other wildlife gross income, while other times the

hunting portion charge was counted as event gross income. 36

TI’s Farming Activity: Custom Farming

TI’s custom farming was essentially general farming and

construction work. This included clearing land, disking, plowing,

planting, constructing fencing, building roads, constructing lakes, etc.

TI owned equipment and vehicles that it used to complete this work,

including trucks, tractors, commercial mowers, etc. Most work was

completed by TI’s employees, though TI occasionally hired outside

experts to do specific jobs, such as digging underneath gas lines. Most of

TI’s custom farming work in and after 2010 was completed for LSLP and

GMCP, such as building lakes and other improvements on La Perla and

Jalisco Ranches. Affiliated Entities also paid TI for custom farming work

completed on other properties those entities owned. Several third

parties also hired TI for custom farming work. More information about

custom farming and an overview of payments TI received for custom

farming work in the years at issue are included infra FoF Part XIII.

36 For example, in 2015 a third party paid TI $30,681 for an event that included

dove hunting. In TI’s accounting records, $20,075 (for bird hunting and an early arrival

fee) was attributed to bird hunting gross income, $4,166 (for ammo, menu upgrade,

gas, and motivational books) was attributed to “Other” hunting gross income, $440 (for

shirts) was attributed to nonhunting wildlife gross income, and $6,000 (for range

shooting sports) was attributed to “Wildlife Revenue - Other” gross income.

Gross income allocation for similar events in 2019 changed. TI’s 2019 profit

and loss statement shows bird hunting gross income of $16,700. Invoices show that

two dove hunts of $5,500 and $11,200 (paid by two third parties) make up the $16,700.

However, three other third parties paid $17,250, $10,500, and $30,000, respectively,

for dove hunting that took place during events. It appears all $57,750 was attributed

to event package gross income (though a small portion may have been attributed to

another category such as “Other” ecotourism gross income; detailed accounting records

were introduced regarding only the years at issue).

[*37] XI.

TI’s Farming Activity Income and Expenses: Overview

TI’s Schedule F losses for years 2005–20 total $15,449,685, as

shown in the following table:

Year

Schedule F

Income

Schedule F

Expenses

Schedule F

Net Loss

2005

$585,805

$885,945

($300,140)

2006

844,616

1,537,315

(692,699)

2007

713,068

1,737,993

(1,024,925)

2008

528,166

1,841,740

(1,313,574)

2009

1,174,098

1,784,932

(610,834)

2010

980,428

1,912,028

(931,600)

2011

731,765

1,403,037

(671,272)

2012

1,642,047

1,828,800

(186,753)

2013

1,179,021

2,266,321

(1,087,300)

2014

1,520,652

2,532,491

(1,011,839)

2015

506,262

1,635,595

(1,129,333)

2016

708,958

2,185,470

(1,476,512)

2017

367,794

2,055,949

(1,688,155)

2018

790,741

2,020,889

(1,230,148)

2019

1,028,623

1,851,629

(823,006)

2020

1,036,524

2,308,119

(1,271,595)

Total

$14,338,568

$29,788,253

($15,449,685)

[*38] TI’s Schedule F gross income breaks down as follows: 37

Year

Ecotourism

Custom Farming

Ranching 38

Other

Total

2005

$182,300

Unspecified 39

$177,510

$225,995

$585,805

2006

184,800

$585,175

32,195

42,446

844,616

2007

180,121

203,750

Unspecified

329,197

713,068

2008

135,213

209,503

28,494

154,956

528,166

2009

113,850

902,945

19,172

138,131

1,174,098

2010

174,850

513,650

18,679

273,249

980,428

2011

143,745

462,860

11,991

113,169

731,765

2012

165,340

1,362,127

83,963

30,617

1,642,047

2013

207,329

750,356

178,367

42,969

1,179,021

2014

217,015

767,753

464,453

71,431

1,520,652

2015

274,974

156,450

42,527

32,311

506,262

2016

250,838

382,226

13,637

62,257

708,958

2017

224,528

77,664

13,050

52,552

367,794

2018

265,585

351,851

20,581

152,724

790,741

2019

319,650

494,369

119,936

94,668

1,028,623

2020

259,622

563,424

112,455

101,023

1,036,524

Total

$3,299,760

$7,784,103

$1,337,010

$1,917,695

$14,338,568

37 Most figures in the table are from TI’s profit and loss statements. For

numerous years we were unable to reconcile profit and loss statement figures to those

on Schedule F for the same year. In such instances, we used ecotourism, custom

farming, and ranching figures from profit and loss statements, then included

remaining Schedule F gross income in the “Other” category. The Other category

(discussed further infra FoF Part XIV) comprises mostly cattle sales income, crop

insurance proceeds, and dividend income.

38 The ranching category (discussed further infra FoF Part XIV) comprises

mostly gross income from consulting, fuel reimbursements, and sales of water.

39 Custom farming income was included in ranching and/or “Other Revenue”

on TI’s 2005 profit and loss statement. TI’s 2005 Schedule F indicates that the amount

of custom farming income was $147,500.

[*39] We are unable to break down TI’s expenses into the same

categories. Most expense categories shown on TI’s profit and loss

statements and returns (such as vehicles/machinery, wages/benefits,

and general/administrative) cannot be assigned solely to one income

category or properly divided among them, at least not with the

information in the record. A table showing the largest expense

categories from TI’s profit and loss statements follows: 40

Year

General & Ranching

Wildlife

Admin.

Operations Operations

Wages &

Benefits

Vehicles & Depreciation

Machinery

& Amort.

2005

$43,297

$85,214

$149,079

$161,212

$175,645

$169,886

2006

65,657

205,537

134,120

267,624

291,121

361,980

2007

65,631

205,894

187,301

294,258

260,942

454,593

2008

59,717

262,354

242,514

294,749

346,624

448,795

2009

36,430

356,278

132,429

287,767

399,008

430,835

2010

62,920

410,770

85,825

262,451

400,988

439,606

2011

65,445

238,946

112,470

228,441

365,967

279,548

2012

61,189

360,212

143,668

320,161

462,158

360,282

2013

82,307

535,121

199,747

355,689

471,526

220,825

2014

63,791

1,229,251

219,945

361,868

371,648

197,423

2015

57,644

641,271

223,006

289,315

182,098

194,824

2016

81,593

838,966

403,474

356,903

240,654

199,586

2017

69,057

732,909

290,192

339,728

236,652

324,235

2018

97,109

673,424

284,210

324,104

294,198

243,126

2019

119,427

383,082

315,197

450,860

269,769

245,682

2020

131,947

523,670

393,672

431,716

242,567

486,625

Total $1,163,161 $7,682,899 $3,516,849 $5,026,846 $5,011,565

$5,057,851

These expenses total $27,459,171. We will discuss some of TI’s

expenses further infra FoF Parts XII–XV.

40 A small percentage of these expenses may not be attributable to TI’s farming

activity.

[*40] XII.

Ecotourism: Analysis of Income and Expenses

Ecotourism: Gross Income

TI’s ecotourism gross income is from hunting packages, fishing

packages, event packages, and other items, as follows:

Year

Hunting

Packages

Fishing

Packages

Event

Packages

Other 41

Total

2005

$161,450

N/A

$20,850

$182,300

2006

155,800

N/A

29,000

184,800

2007

188,971

N/A

(8,850)

180,121

2008

135,213

N/A

135,213

2009

113,850

N/A

113,850

2010

130,700

N/A

$30,000

14,150

174,850

2011

113,050

$3,495

20,000

7,200

143,745

2012

102,114

5,371

56,750

1,105

165,340

2013

145,714

8,400

47,215

6,000

207,329

2014

131,747

N/A

70,002

15,266

217,015

2015

153,149

59,872

46,400

15,553

274,974

2016

147,916

32,604

51,300

19,018

250,838

2017

142,325

38,003

42,000

2,200

224,528

2018

137,663

14,550

109,873

3,500

265,585

2019

130,471

31,750

143,124

14,304

319,650

2020

186,179

27,800

44,201

1,442

259,622

Total

$2,276,312

$221,845

$660,865

$140,738

$3,299,760

There has been an upward trend in event package gross income;

the dip in 2020 was likely due to the COVID-19 pandemic. At least a

portion of this trend is due to a shift in accounting to assign more income

41 Other ecotourism income includes hunting rights lease income, various fees,

and other small items. These items are not particularly significant. The negative

amount for 2007 is entirely attributable to “Tips.”

[*41] to events that might instead be assigned to hunting packages

(especially for birds), discussed supra note 36.

TI broke down its hunting package income among deer, bird,

exotic, and “other” hunting package income, as follows:

Year

Deer

Bird

Exotic

Other 42

Total

2005

$125,300

Not specified

N/A

$36,150

$161,450

2006

33,250

Not specified

N/A

122,550

155,800

2007

25,500

$7,000

N/A

156,471

188,971

2008

Not specified

N/A

Not specified

135,213

2009

69,846

Not specified

N/A

44,004

113,850

2010

70,768

36,000

N/A

23,932

130,700

2011

48,667

61,500

N/A

2,883

113,050

2012

52,612

48,747

N/A

755

102,114

2013

88,209

41,700

N/A

15,805

145,714

2014

76,418

52,497

N/A

2,832

131,747

2015

93,568

48,092

N/A

11,489

153,149

2016

94,642

46,236

N/A

7,038

147,916

2017

64,811

64,190

$4,531

8,793

142,325

2018

109,189

18,150

6,269

4,054

137,662

2019

105,454

16,700

8,500

(183)

130,471

2020

143,366

29,314

6,600

6,900

186,180

Total

$1,201,600

$470,126

$25,900

$443,473

$2,276,312

42 Other hunting package income in the years at issue included some nonhunting guest fees, ammunition, other food and supplies, motivational books, and

other miscellaneous items. Most hunting package income in 2006 and 2007 was

included in other hunting package income for an unclear reason.

[*42] TI further broke down the deer hunting packages among

management, classic, and trophy buck hunts, as follows:

Year

Management

Classic

Trophy

Total

2005

$71,250

$40,400

$13,650

$125,300

2006

17,700

300

15,250

33,250

2007

16,200

9,300

N/A

25,500

2008

Not specified

2009

39,102

N/A

30,743

69,846

2010

42,571

N/A

28,197

70,768

2011

31,767

N/A

16,900

48,667

2012

18,165

3,068

31,379

52,612

2013

52,259

14,531

21,419

88,209

2014

50,715

16,519

9,184

76,418

2015

21,639

37,172

34,757

93,568

2016

37,605

16,527

40,510

94,642

2017

39,430

17,524

7,857

64,811

2018

57,196

22,693

29,300

109,189

2019

23,616

12,087

69,750

105,454

2020

19,272

29,000

95,093

143,366

Total

$538,487

$219,121

$443,989

$1,201,600

Several things stand out in the two prior tables. First, total

hunting gross income for years 2005–07 was higher than for any other

three-year period, likely because TI took over the established Tecomate

Ranch hunting operation in 2005. Second, hunting income has increased

since 2010. Third, bird hunting income fell after 2017, 43 though deer

hunting income rose after 2017. Fourth, increased income from trophy

43 This may be explained by some bird hunting income being classified as event

income in later years, as discussed supra note 36.

[*43] buck hunts in 2019 and 2020 indicates that the breeding pens TI

began using in 2013 were working. Finally, few exotic hunts were sold.

Ecotourism: Lease Expenses

Turning to TI’s ecotourism expenses, we will first discuss lease

expenses, as they alone are larger than gross income from ecotourism.

Lease Expenses Overview

TI rented the land on which it conducted ecotourism from

Affiliated Entities. 44 Expenses to rent land in Starr County constitute

most or all of the ecotourism lease expenses in 2005–08. TI also rented

La Perla and Jalisco Ranches from LSLP and GMCP beginning in

2009. 45 In 2012–20 almost all of TI’s ecotourism lease expenses were for

rents paid to LSLP and GMCP. Specific properties that TI rented from

LSLP and GMCP during the years at issue will be discussed later in this

FoF Part XII.B.

In many years between 2006 and 2020 TI paid a small amount of

rent (usually $5,000) to Mr. Guerra for hunting rights. 46 The rents paid

to Mr. Guerra were not explained.

44 TI’s profit and loss statements reflect two types of ecotourism-related lease

expenses, “Lease - Land” expenses and “Hunting Lease” expenses. There appear to be

no significant differences between the two, so we will combine them in the table on the

next page. A third type of lease expense pertained to Mr. Yelland’s home office. This

lease expense was not strictly an ecotourism expense, so we will not discuss it in this

FoF Part XII.B.

45 As discussed supra FoF Part VIII.A, TI paid a small amount to rent land

from LSLP and GMCP in 2005 and 2006, though it is unclear what land was rented.

46 After he helped develop the Tecomate System, Mr. Guerra worked for or with

petitioners for many years. He was an employee of TI in the years at issue.

[*44] The amounts of lease expenses (subtracting home office rents paid

to Mr. Yelland) are as follows: 47

Year

Ecotourism Lease Expenses

2005

$67,409

2006

85,460

2007

73,300

2008

112,200

2009

234,800

2010

273,174

2011

100,758

2012

85,550

2013

488,438

2014

908,612

2015

425,370

2016

497,981

2017

441,410

2018

309,886

2019

5,000

2020

105,326

Total

$4,214,674

Total ecotourism lease expenses of $4,214,674 for years 2005–20

are greater than all gross income from ecotourism in that time

($3,299,760). If we limit the years to 2010–20, the difference between

the numbers increases, with ecotourism lease expenses of $3,641,505

over $1 million higher than ecotourism gross income of $2,503,476.

47 For most years, lease expenses shown in TI’s profit and loss statements

match lease expense deductions on Schedule F. However, there were discrepancies for

2013 and 2017. It is unclear why the discrepancies exist. For 2013 we find that the

Schedule F is correct. For 2017 we find that the profit and loss statement is correct.

Returns for LSLP and GMCP and TI’s 2017 general ledger support these findings.

[*45]

LSLP and GMCP Leases: Terms

As previously stated, almost all of TI’s ecotourism lease expenses

for years 2012–20 were for rents paid to LSLP and GMCP. TI entered

into written leases with LSLP and GMCP running from January 1,

2014, to December 31, 2023, which were introduced into evidence. 48 Dr.

Schwarz signed each lease for both the tenant (TI) and the landlord

(LSLP or GMCP). A brief description of each lease follows:

•

GMCP Lease #1: Deer hunting lease covering 2,153 acres in

Zapata County and 955 acres in Starr County 49 at $12.50 per acre

per year ($38,850 total per year).

•

GMCP Lease #2: Upland bird hunting lease covering 2,153 acres

in Zapata County and 955 acres in Starr County at $7.50 per acre

per year ($23,310 total per year).

•

GMCP Lease #3: Waterfowl hunting lease covering 1,362 acres in

Zapata County at $6 per acre per year ($8,172 total per year).

•

GMCP Lease #4: Fishing lease covering 1,362 acres in Zapata

County at $10 per acre per year ($13,620 total per year).

•

GMCP Lease #5: Livestock grazing lease covering 2,153 acres in

Zapata County and 955 acres in Starr County at $9.50 per acre

per year ($29,526 total per year).

•

LSLP Lease #1: Deer hunting lease covering 3,575.40 acres in

Zapata County and 140 acres in Starr County at $12.50 per acre

per year ($46,443 total per year).

•

LSLP Lease #2: Upland bird hunting lease covering 3,575.40

acres in Zapata County at $7.50 per acre per year ($26,816 total

per year).

•

LSLP Lease #3: Waterfowl hunting lease covering 3,005 acres in

Zapata County at $10 per acre per year ($30,050 total per year).

48 Written leases for years before 2014 were not introduced and may not exist,

even though TI paid rents to LSLP and GMCP before 2014.

49 The leases used only this “acreage and county” identification and did not

specify ranches by name. The ranches included are discussed infra FoF Part XII.B.3.

[*46] •

LSLP Lease #4: Fishing lease covering 3,005 acres in Zapata

County at $25 per acre per year ($75,125 total per year).

•

LSLP Lease #5: Livestock grazing lease covering 3,575.40 acres

in Zapata County and 140 acres in Starr County at $12.50 per

acre per year ($46,443 total per year).

•

LSLP Lease #6: Headquarters event use lease covering 1,711

acres in Zapata County at $17.50 per acre per year ($29,943 total

per year).

The differences between the GMCP and LSLP leases are

insignificant. Each lease (except LSLP Lease #6 covering event use)

provides that TI would supply 100% of the labor and materials “for

purposes of farming or agricultural operations.” TI was liable for all

expenses relating to hunting and fishing activities. TI was also required

to “care for and maintain the premises,” which included specific

obligations.

LSLP and GMCP Leases: Problems

Numerous problems with TI’s leases with LSLP/GMCP resulted

in TI’s substantially overpaying LSLP and GMCP.

Double Counting Twin Lakes Ranch

Twin Lakes Ranch is included in GMCP Leases #1, #2, and #5

regarding deer hunting, upland bird hunting, and livestock grazing

rights, as well as LSLP Leases #1, #2, and #5 regarding the same

rights. 50 TI thus paid twice for the same rights on Twin Lakes Ranch.

50 An explanation of the math follows:

LSLP and GMCP purchased 15,070 acres of land in Zapata County in 2005.

They initially sold all but 1,736 acres owned by LSLP. Most of this tract is identified

in LSLP Lease #6 as 1,711 acres. There is a 25-acre discrepancy because 25 acres

consist of a water line boundary and an access road that were not leased to TI.

After LSLP and GMCP repurchased land from La Perla Negra in 2006, La

Perla Ranch was 2,238.68 acres and Jalisco Ranch was 791.6 acres (3,030.28 acres

total). Zapata County acreage is stated to be 3,005 acres in some leases, which is

3,030.28 acres, rounded to 3,030 acres, minus the 25 acres not leased.

Twin Lakes Ranch is 1,361.8 acres, rounded in some leases to 1,362 acres.

[*47] The parties agree that Twin Lakes Ranch was incorrectly included

in the LSLP deer hunting, upland bird hunting, and livestock grazing

leases. Petitioners agree that TI overpaid LSLP $44,265 per year as a

result. 51

Leases for Grazing Rights

TI owed LSLP and GMCP a total of $75,969 per year for grazing

rights pursuant to GMCP Lease #5 and LSLP Lease #5. TI at one time

owned a large number of cattle, discussed further infra FoF Part XIV.

However, TI sold nearly all its cattle by early 2011. While the exotics

are primarily grazing animals, the exotics were not purchased until

2017 and thus do not explain why TI entered into livestock grazing

leases beginning January 1, 2014.

Starr County Properties

Tecomate Industries owed LSLP and GMCP $31,673 per year

pursuant to leases pertaining to three properties in Starr County:

(1) 140 acres known as the “Sullivan Tract” 52 is included in LSLP Leases

#1 and #5 and (2) 955 acres included in GMCP Leases #1, #2, and #5

comprises two properties known as “Tecomate West Ranch” 53 and

The GMCP deer hunting, upland bird hunting, and cattle grazing leases each

cover 2,153 acres in Zapata County. This is the 791.6 acres of Jalisco Ranch plus the

1,361.8 acres of Twin Lakes Ranch, rounded to the nearest acre.

The LSLP deer hunting, upland bird hunting, and cattle grazing leases each

cover 3,575.40 acres in Zapata County. This is the 2,238.68 acres of La Perla Ranch

(rounded down to reach 2,238.60 acres), minus the 25 acres not leased, plus the 1,361.8

acres of Twin Lakes Ranch.

51 On brief, petitioners agree that overpayments regarding Twin Lakes Ranch

in the three LSLP leases were $17,025, $10,215, and $17,025. Petitioners then

incorrectly added these figures, stating that “a total of $37,965 per year . . . was

overcharged.” Petitioners inverted two numbers and added $10,725 for one figure

instead of $17,025. We have fixed petitioners’ error.

52 LSLP purchased 3,204 acres of land in Starr County during 2005 and named

it “Sullivan Ranch.” LSLP then sold tracts of Sullivan Ranch to various buyers. The

remaining 141 acres still owned by LSLP is the Sullivan Tract. It was not established

why LSLP Leases #1 and #5 identified the property as only 140 acres.

53 GMCP purchased 498 acres of land in Starr County during 2006 and named

it “Tecomate West Ranch.” GMCP sold the property during 2021.

[*48] “Tecomate 457 Ranch.” 54 A portion of the amount owed on these

leases is due to livestock grazing rights already discussed.

While TI conducted hunting operations in Starr County beginning

in 2005, TI’s Starr County operations ended around the time Tecomate

Ranch was sold in 2011. There is no indication that TI conducted

ecotourism on the three leased Starr County properties in or after 2014.

This is true even though TI continued to show assets relating to Starr

County properties on its depreciation schedules for the years at issue (as

discussed supra FoF Part VIII.A). 55 In short, TI was paying for rights in

Starr County that it was not using.

Waterfowl Hunting Leases

TI owed LSLP and GMCP $38,222 per year for waterfowl hunting

rights pursuant to GMCP Lease #3 and LSLP Lease #3. As previously

stated, TI ceased regular waterfowl hunting before the years at issue.

The last TI invoice pertaining to waterfowl hunting is for a hunt that

occurred in January 2014, at least a portion of which did not even take

place in Zapata County. 56 Before the January 2014 hunt, the next-mostrecent waterfowl hunt was for the same customer in January 2013.

Considering the general lack of waterfowl hunting, TI should have

either (1) not entered into the waterfowl hunting leases or (2) sought to

modify or terminate these leases considering the lack of waterfowl

hunting in Zapata County.

Accounting/Payment Issues

In addition to problems with the leases themselves, TI’s

accounting for the leases is erroneous. In TI’s general ledgers for the

years at issue, the leases are misnamed and mispriced. For example, the

2015 general ledger contains an entry for a GMCP “2015 Hunting and

Grazing Lease 457, Tecomate [West]” lease in the amount of $27,240.

This is twice the amount ($13,620) of GMCP Lease #4 pertaining to

fishing rights on Twin Lakes Ranch. In the 2016 general ledger, there is

54 Petitioners purchased 457 acres of land in Starr County during 2003 and

named it “Tecomate 457 Ranch.” Petitioners transferred the property to GMCP during

2005 and GMCP sold the property during January 2016.

55 The depreciation issue is likely an accounting error or miscellaneous unsold

asset rather than an indication of where TI operated in and after 2014.

56 The invoice states that an “Extra leg – 1 day coastal duck hunt” would take

place in Arroyo City, Texas. We take judicial notice that Arroyo City is in Cameron

County, several counties southeast of Zapata County.

[*49] an entry for a “2015 Waterfowl Hunting Lease” of $60,100, which

is twice the amount ($30,050) of LSLP Lease #3 relating to waterfowl

hunting. There are numerous other such examples. In short, general

ledger entries do not match the actual leases.

TI owed LSLP/GMCP $368,296 per year pursuant to the written

leases. 57 However, TI’s books and records from 2014–20 show that it

actually paid the following rents:

Year

LSLP/GMCP Rents Paid

2014

$903,612

2015

420,370

2016

492,981

2017

436,410 58

2018

309,886

2019

–

2020

100,326

Total

$2,663,585

Forms 8825, Rental Real Estate Income and Expenses of a Partnership

or an S Corporation, for LSLP and GMCP roughly support these figures,

though those forms reflect slightly higher gross rents received each year.

The difference was not explained. It was not established why lease

payments to LSLP and GMCP decreased in 2018, were zero in 2019, and

remained low in 2020. 59

57 Per the written leases, this amount should have been reduced over the years

because Tecomate 457 Ranch was sold in January 2016 and Twin Lakes Ranch was

sold in December 2019. It is unclear whether any adjustments were actually made as

a result of these property sales. While Tecomate West Ranch was apparently sold in

2021, we will not address this property further because no returns for years after 2020

were introduced into evidence.

58 TI’s 2017 profit and loss statement indicates that it paid $441,410 in rents

to GMCP and LSLP. However, TI’s 2017 general ledger shows that $5,000 of the

$441,410 was actually rent paid to Mr. Guerra. TI’s 2017 profit and loss statement

erroneously shows zero paid to Mr. Guerra.

59 On brief, petitioners state that they “believe” prepayment of leases resulted

in the fluctuation of amounts paid. General ledgers contain some support for this

[*50]

Lease Expenses Tax Benefits

TI entered into overpriced and/or erroneous leases with LSLP and

GMCP. TI then paid even more than the total amounts provided for in

the leases. Unsurprisingly, petitioners were gaining a tax benefit from

this. GMCP and LSLP incurred rental real estate losses in many years

that flowed through to petitioners. These rental real estate losses were

passive losses for petitioners that were not fully deductible for the years

incurred and would be carried forward. When TI paid rent to GMCP and

LSLP, it reduced GMCP’s and LSLP’s rental real estate losses. This

effectively reduced petitioners’ passive losses. When TI paid rents to

LSLP and GMCP, TI incurred offsetting rental expenses. These rental

expenses were included in TI’s Schedule F losses, which flowed through

to petitioners as immediately deductible nonpassive losses.

In short, TI’s overpaying GMCP and LSLP effectively turned

passive rental real estate losses that would have been deferred into

immediately deductible losses on petitioners’ returns.

Ecotourism: “Wildlife Operations” Expenses

On TI’s profit and loss statements a group of expenses titled

“Wildlife Operations” pertains to ecotourism (almost entirely to hunting

and fishing operations). 60 It includes items such as food for animals,

helicopter surveys, guide fees, and hunting supplies. It also includes

many fishing expenses not related to the construction of lakes, such as

chow, tackle, forage, survey, and other expenses.

assertion for 2016 and 2017, but not 2015. In addition, the math as a whole does not

add up.

60 While wildlife operations expenses pertain to ecotourism, they are not the

only ecotourism expenses. For example, “Wages & Benefits” expenses are not part of

the wildlife operations expenses. A portion of the “Wages & Benefits” expenses is

attributable to ecotourism, though a portion is also attributable to custom

farming/ranching/Other operations. The parties did not provide us with sufficient

information to allocate “Wages & Benefits” (and most other expense categories) among

the various operations.

[*51] Wildlife operations expenses for 2005–20 are summarized in the

table below. We have separated fishing and nonfishing expenses and

subtracted certain ecotourism lease expenses already discussed.

Year

Fishing Expenses

Nonfishing Expenses

Total Wildlife

Operations Expenses

2005

$4,637

$94,833

$99,470

2006

2,369

66,291

68,660

2007

1,156

112,845

114,001

2008

10,076

120,238

130,314

2009

7,988

119,441

127,429

2010

7,663

73,162

80,825

2011

10,431

102,039

112,470

2012

38,647

100,021

138,668

2013

71,596

123,151

194,747

2014

74,361

140,584

214,945

2015

82,231

135,775

218,006

2016

231,656

166,818

398,474

2017

108,026

182,166

290,192

2018

36,136

248,074

284,210

2019

80,809

229,388

310,197

2020

84,345

304,327

388,672

Total

$852,127

$2,319,153

$3,171,280

Several things stand out in this data. First, total fishing expenses

for 2010–20 are substantially higher than total fishing package gross

income of $221,845. See table supra page 40. Second, total nonfishing

wildlife operations expenses for 2005–20 are higher than total hunting

package gross income of $2,276,312. See table supra page 40. Limiting

the years to 2010–20, the difference between the numbers increases,

with nonfishing wildlife operations expenses of $1,805,505 and hunting

package gross income of $1,521,028. In addition, from 2010 to 2020

nonfishing wildlife operations expenses increased significantly faster

than hunting package gross income increased. Hunting package gross

[*52] income increased from $130,700 in 2010 to $186,180 in 2020, a

42% jump. However, nonfishing wildlife operations expenses increased

from $73,162 in 2010 to $304,327 in 2020, a 316% jump.

Ecotourism: Income and Expense Conclusions

Summing things up regarding ecotourism gross income and

expenses, we note several facts pertaining to years 2015–17:

•

TI’s ecotourism gross incomes were $274,974, $250,838, and

$224,528.

•

Expenses for the leases with GMCP and LSLP were $420,370,

$492,981, and $436,410.

•

Fishing wildlife operations expenses of $82,231, $231,656, and

$108,026 dwarfed fishing package gross income of $59,872,

$32,604, and $38,003.

•

Nonfishing wildlife operations expenses of $135,775,

$166,818, and $182,166 increased, while hunting package

gross incomes of $153,149, $147,916, and $142,325 declined.

•

Event package gross income of $46,400, $51,300, and $42,000

was about flat.

Considering these notes and years 2010–20, we draw several factual

conclusions regarding TI’s ecotourism:

•

Considering only lease and wildlife operations expenses,

ecotourism had a profit margin of less than negative 100% for

2015 and less than negative 200% for 2016 and 2017.

•

Though hunting package gross income rose from 2010 to 2020

(up 42%), nonfishing wildlife operations expenses rose much

faster (up 316%). While gross income from trophy buck hunts

increased (especially in 2019 and 2020), increases in wildlife

operations expenses more than offset this gain.

•

Fishing was a significant drain on TI’s finances.

•

While growth in event package gross income was strong in

2018 and 2019, we have not attempted to extrapolate all

expenses related to event packages from the financial records.

The reason is that, unlike the clearly delineated wildlife

operations expenses, no such section exists regarding event

operations. 61

[*53]

•

Rents paid to LSLP and GMCP essentially guaranteed that

ecotourism could not be profitable.

TI is not a young company and Dr. Schwarz has had decades of

experience with hunting and ranches. However, even after significant

work on La Perla and Jalisco Ranches, there is no sign that TI’s

ecotourism will ever be profitable, even if lease problems are corrected.

XIII. Custom Farming: Financial Analysis

Considering the evidence presented, we are unable to complete an

in-depth financial analysis of TI’s custom farming. We will give a brief,

vague overview of custom farming gross income in this FoF Part XIII. It

is difficult to speak with certainty about certain points because some of

TI’s invoices are missing and general ledgers for years other than the

years at issue were not introduced into evidence. Unless otherwise

indicated, the facts stated in the remainder of this FoF Part XIII pertain

to years 2010–20.

A portion of TI’s custom farming work was smaller tasks such as

general farming work and maintaining ranches. TI seldom charged

LSLP or GMCP for these smaller tasks carried out on La Perla and

Jalisco Ranches. 62 TI also completed smaller custom farming tasks on

ranches owned by Affiliated Entities or third parties where it did not

conduct ecotourism. TI usually or always charged Affiliated Entities or

third parties for such work.

The other portion of TI’s custom farming work pertained to larger

projects, such as building lakes, the football field, and roads. Even when

these projects occurred on La Perla and Jalisco Ranches, TI usually or

always charged the relevant entity/party for this work.

61 There is an entry on profit and loss statements titled “Groceries for Ranch

Event,” but it appears this is all grocery expenses for hunting, fishing, and event

packages. For the years at issue, these expenses were $29,766, $23,311, and $39,967.

62 It is unclear exactly where ecotourism ended and custom farming began on

La Perla and Jalisco Ranches. Per the leases with GMCP and LSLP, TI was obligated

to care for and maintain leased properties.

[*54] In order for TI to bill the correct entity/party for custom farming

work, TI’s employees completed timesheets listing where they worked,

the hours worked, and the equipment used. The employees then sent

those timesheets to Mr. Yelland, who issued an appropriate invoice.

Lakes on La Perla and Jalisco Ranches were the largest custom

farming projects that TI worked on. TI’s invoices show that it charged

LSLP about $2.6 million for work on lakes in 2010–20. A portion of these

charges was for project administration fees and fuel expenses, which TI

often included in ranching income on its profit and loss statements

(discussed further infra FoF Part XIV). The project administration fees

are a means of providing some gain for TI on custom farming work. A

$384,773 custom farming invoice TI issued to LSLP in 2012 included a

$96,900 charge labeled “Project Administration Fees – profit 30%.”

Numerous other custom farming invoices contained 30% project

administration fees without the “profit” specification.

Several unrelated third parties hired TI to perform custom

farming work, though the amount of gross income TI earned from this

work was comparatively small in the years at issue.

A summary of the custom farming invoices that TI issued in the

years at issue follows:

•

Invoices for work on lakes and irrigation systems on La Perla

Ranch issued to LSLP total $304,500.

•

Invoices for various projects on Tecomate West Ranch issued to

GMCP total $148,018.

•

Invoices for farming and maintenance issued to “Tecomate South”

total $82,821. 63

•

Invoices for equipment use, cleaning, and supplies issued to

Rovan Texas (a company owned by Brad Schwarz) total $31,870.

•

Invoices for sales of “Black Buck Does” issued to two unrelated

third parties total $2,564.

63 There were additional, non-custom-farming charges on several of these

invoices; general ledgers support the $82,821 figure.

[*55] •

Invoices for unspecified work in Rio Grande City issued to

Hawk Oilfield (an unrelated third party) total $32,000.

•

A 2016 invoice for a 40-acre farm lease on the “Rio Hondo

Property” 64 to an unrelated third party for $3,200. 65

•

A 2016 invoice for a “Polaris EV” sale to an unrelated third party

for $3,000 (with only $2,000 actually paid). 66

These invoices total $607,973, which is lower than TI’s total custom

farming gross income for the years at issue of $616,340. This

discrepancy exists because not all invoices were paid in the year they

were issued, and some invoices are missing. 67

XIV. Ranching and

Information

Other

Operations:

Financial

and

Other

As shown in the table supra page 38, TI had gross income from

ranching operations of $1,337,010 for years 2005–20. For the same years

TI had gross income from Other operations of $1,917,695.

As with custom farming, the parties did not provide us with

sufficient information to perform a comprehensive financial analysis of

the ranching and Other operations. These operations were barely

discussed at all. A brief synopsis of some of the income attributable to

these operations follows.

The ranching income comprised largely consulting income, fuel

reimbursement income, and water sales. The consulting income was

mostly project administration fees that TI charged on top of many

64 A summary exhibit mentions the “Rio Hondo Tract” but does not cite any

admitted evidence in support of its purchase and sale information. LSLP’s returns and

balance sheets show that it somehow acquired the property in 2015 and sold it in 2020.

65 It is unclear why this was included in TI’s custom farming gross income or

what authority TI had to agree to a lease regarding this property.

66 It is unclear why TI classified this sale as part of its custom farming work.

On brief, petitioners state that the invoice “is not a custom [farming] invoice” without

addressing why the $2,000 paid was included in TI’s custom farming gross income.

67 For example, TI’s 2015 general ledger shows that LSLP made numerous

payments for custom farming work to TI in 2015, but there are no 2015 invoices issued

to LSLP in evidence. Only a portion of the 2015 payments is explained by earlier

invoices, including some payments to TI in December 2015 being attributable to an

invoice issued to LSLP in August 2013.

[*56] custom farming jobs. The fuel reimbursement income was charges

that TI added to custom farming jobs to recoup the cost of fuel used. The

water sales were charges to the ranches surrounding the oval on which

La Perla and Jalisco Ranch sit, for use of water from House Lake.

Schedule F income attributable to Other operations comprised

largely cattle sales income, 68 crop insurance proceeds, and dividend

income. The cattle were transferred to TI in 2005, were mostly or

entirely kept on Starr County properties, and were nearly all sold by

early 2011. General ledgers for the years at issue show crop insurance

proceeds paid by the company that issued TI’s crop insurance policies.

Those general ledgers also show dividend income mostly from “Texas

Farm Credit,” but this was not explained.

XV.

How Ecotourism Drove TI’s Schedule F Losses

As discussed supra FoF Parts XII and XIII, TI lost money on

ecotourism, but it is unclear whether TI lost any on custom farming or

how much. TI considered these operations to be part of the same farming

activity. In its books and records, TI separated gross income attributable

to ecotourism and custom farming but did not separate most expenses.

Witnesses at trial did not provide comprehensive explanations for

TI’s history of Schedule F losses. 69 However, financial records and other

68 Some cattle sales income was reported on Forms 4797, Sales of Business

Property, and some was reported on Schedules F.

69 Petitioners’ accountant testified that

the years that we’re questioning now [there] was a drop in revenue,

and you know I asked Mr. Yelland about that, and I asked Dr. Schwarz

about that also, and they really couldn’t explain why we had that drop

in revenue in that period from [20]15 to [20]17, because our revenue

from [20]12 to [20]14 was pretty good, 1.1 million to about 1.6 million,

and then we had a drop off. We dropped off significantly . . ..

When asked why TI’s Schedule F income was lower in the years at issue, Dr. Schwarz

answered:

Because we–our biggest customer quit paying [TI]. Our biggest

customer was [GMCP or LSLP] whichever at–whoever owns those–

those entities drive me crazy. But I think the entity that owns La Perla,

the land, what used to be Tecomate Capital Partners, wasn’t paying

[TI], but that eventually led to markedly reduce[d] expenses that we

enjoyed this past couple of years.

[*57] evidence show that TI’s Schedule F losses were largely

attributable to ecotourism. The fact that ecotourism gross income for

years 2010–20 ($2,503,476) is significantly smaller than custom farming

gross income ($5,882,730) plus consulting and fuel reimbursement

portions of the ranching income ($474,716 and $475,668, respectively)

might suggest that most losses were attributable to custom farming. We

believe not, for several reasons. 70

First, profit margins for ecotourism were abysmal. Both for 2010–

20 (combined) and for the years at issue ecotourism had a profit margin

of less than negative 100% only considering wildlife operations and

ecotourism-related lease expenses. Specifically, this profit margin was

negative 151% for 2010–20 and negative 207% for the years at issue.

Sizable portions or most of the expenses in the following categories were

also attributable to ecotourism: (1) advertising & promotions,

(2) groceries, (3) cable/satellite TV, (4) chemicals and fertilizers,

(5) ranch repairs and maintenance, (6) seeds, (7) wages and benefits,

(8) other payroll expenses, (9) vehicles and machinery, (10) depreciation

and amortization, (11) electricity and gas, (12) liability/crop insurance,

and (13) miscellaneous other expenses (such as “La Perla Supplies”). For

2010–20 the expenses in these categories total over $13 million. Safe to

say, ecotourism actually had a profit margin far less than negative 151%

for years 2010–20.

Second, evidence indicates that profit margins for custom farming

were significantly better. TI charged 30% project administration fees on

many custom farming projects that represented (or were intended to

represent) profit for TI. TI also included fuel reimbursement charges on

many custom farming projects. Such practices helped to limit any losses

associated with custom farming.

Dr. Schwarz later clarified that the payments ceased because work on Jalisco Lake

was completed. However, Jalisco Lake was not completed until 2017. While Dr.

Schwarz’s answers might explain lower revenue and net income in 2017, they do not

explain TI’s history of losses.

70 The consulting and fuel reimbursement portions of the ranching income were

largely related to custom farming work, so we believe they should be included in this

analysis. We will leave out gross income attributable to Other operations and Ranching

operations other than consulting and fuel reimbursement, as they comprised mostly

sales of cattle, sales of water, crop insurance proceeds, and dividend income. These

gross income items are based on financial products and/or capital assets and appear to

have had comparatively low ongoing expenses associated with them.

[*58] Third, most of the custom farming plus consulting plus fuel

reimbursement income was attributable to custom farming work in

support of ecotourism, such as building lakes, deer breeding pens, and

other improvements for La Perla and Jalisco Ranches. Invoices for years

2010–20 show that TI billed LSLP about $3.7 million for custom farming

work (and related consulting and fuel reimbursement charges)

completed on La Perla Ranch, Jalisco Ranch, and a nearby airstrip that

TI’s customers could use. This was over half of TI’s total custom

farming/consulting/fuel reimbursement gross income for 2010–20 of

about $6.8 million. In addition, the $3.7 million amount is almost

certainly understated because of missing and unclear invoices.

We also note that multiple times during his testimony, Dr.

Schwarz mentioned how expensive building the lakes was. For example,

when asked why he “keep[s] with [TI],” Dr. Schwarz replied, in part: “I’m

through digging, that’s the main thing. Those–those lakes cost millions

of dollars.” Such testimony indicated that TI’s construction of the lakes

(used for ecotourism) resulted in large losses. Considering this, other

facts discussed in this FoF Part XV, and TI’s books and records, we find

that the large majority of TI’s Schedule F losses were attributable to

ecotourism and custom farming work in support of ecotourism.

XVI. Preparation of Returns

Petitioners’ returns for the years at issue were prepared by

Russell Guthrie. Mr. Guthrie was a certified public accountant (CPA)

with decades of experience, and he often did accounting work for

agriculture businesses. He had prepared returns for petitioners, TI,

LSLP, and GMCP since the mid-2000s. He did not prepare returns for

other Affiliated Entities.

Mr. Guthrie discussed TI’s profitability with petitioners and Mr.

Yelland on numerous occasions. His opinion was that TI’s farming

activity was engaged in for profit, which he communicated to petitioners

regarding each year at issue. As he testified at trial, Mr. Guthrie’s

opinion was based in part on his belief that TI “develop[ed] the value in

the real estate.” On Mr. Guthrie’s advice, petitioners filed a section 469

grouping election with their 2017 return, covering TI and GMCP (which

collectively owned 100% of LSLP). See Treas. Reg. § 1.469-4.

To prepare returns for petitioners, TI, LSLP, and GMCP, Mr.

Guthrie obtained general ledgers, balance sheets, profit and loss

statements, and other documents. Mr. Guthrie also asked various

[*59] questions of petitioners and Mr. Yelland. Mr. Guthrie was always

provided with all information that he asked for.

Mr. Guthrie knew that leases between TI and LSLP/GMCP

existed. However, he was not aware of a clause in each lease stating:

“Any and all buildings, fences, improvements, or other alterations

constructed or established upon the premises during the term of the

lease by the tenant shall constitute additional rent and shall become the

property of the landlord on expiration or termination of this lease.” The

leases were not provided to Mr. Guthrie, though he never asked for

them. This will be discussed further infra OPINION Part X.

XVII. Miscellaneous Facts

Personal Use of La Perla and Jalisco Ranches

Dr. Schwarz and many members of petitioners’ family hunted and

fished on La Perla and Jalisco Ranches. Articles about Dr. Schwarz and

members of petitioners’ family show they greatly enjoyed hunting. At

least two of petitioners’ children had hunted since they were young; in

1997 one of petitioners’ daughters shot a buck in a statewide hunting

contest that broke a youth division record previously held by her

brother, Blair Schwarz. Dr. Schwarz also enjoyed fishing; an April 2014

article about his quest to grow large bass described him as “an avid

angler [who] liked the idea of having a private lake where he and guests

could have fun catching bass.”

Petitioners designated the week between Christmas and New

Year’s Day a “family week” for them, their children, and their

grandchildren to stay at the lodge on La Perla Ranch. This week was

originally reserved for just family members, though at some point

customers began to come as well. The customers were informed when

making reservations that petitioners’ family would be there. Petitioners’

family also spent time at the ranches around other holidays, and one of

the grandchildren had a birthday party there around 2012.

Setbacks

Petitioners claim various setbacks affected TI’s ability to make a

profit. Alleged setbacks included a barn under construction burning

down in 2012, droughts, Dr. Schwarz’s 2012 bulldozer accident,

increasing illegal immigration, the fish kills, and the lawsuit that

resulted in no state permits being issued to kill double-crested

cormorants. They also included federal Medicaid fraud charges against

[*60] Dr. Schwarz, pertaining to his dental work. Dr. Schwarz was

acquitted after a trial in 2011. These matters will be discussed further

infra OPINION Part IX.F.

Petitioners’ Net Worth

In 2017 Dr. Schwarz applied for a loan and attached a balance

sheet showing that petitioners had assets of about $56 million, liabilities

of about $7 million, and a net worth of about $49 million. Most of the

assets pertained to ownership of TI (about $2.5 million), Affiliated

Entities (about $26 million), life insurance (about $16 million), and

VOMS ($6 million).

Notice of Deficiency and Petition

On July 14, 2020, respondent issued a notice of deficiency to

petitioners regarding the years at issue. Petitioners timely filed a

Petition contesting respondent’s determinations.

XVIII. Expert Witness for Deer and Exotics Herds

In addition to working with Dr. Schwarz and TI during the years

at issue, Dr. Hellickson acted as an expert witness for petitioners

regarding the deer and exotics on La Perla and Jalisco Ranches. Dr.

Hellickson concluded that (1) sales of exotics packages could greatly

increase in future years, (2) the deer herd on La Perla and Jalisco

Ranches was exceptionally well managed, and (3) the value of the deer

herd on La Perla and Jalisco Ranches was $628,000. We will discuss

issues with Dr. Hellickson’s report infra OPINION Part V.

XIX. Expert Witness for Property Valuation

Merrill Swanson acted as a property valuation expert for

petitioners. Five of Mr. Swanson’s reports were accepted into evidence.

Each report pertains to one or more properties/tracts owned by an

Affiliated Entity at the time of trial. Mr. Swanson valued each property

as of October 31, 2022.

Mr. Swanson’s valuations were provided in support of petitioners’

legal argument that appreciation in value of properties should be

considered in determining whether TI’s farming activity was engaged in

for profit in the years at issue. As discussed infra OPINION Part VIII,

we rule that TI’s farming activity and petitioners’/Affiliated Entities’

real estate activities (real estate activities) are separate activities. We

[*61] therefore need not determine whether Mr. Swanson’s valuations

are accurate. However, we will briefly describe two of Mr. Swanson’s

reports that cover La Perla and Jalisco Ranches to illustrate petitioners’

arguments and provide additional relevant facts.

Mr. Swanson chose to break up La Perla Ranch for valuation

purposes. In one report he valued a 703-acre “La Perla Headquarters

Tract,” plus a contiguous 500-acre “Tract 4,” plus 25 acres comprising

the water line boundary and the access road discussed supra note 50.

This is 1,228 total acres (collectively, La Perla HQ Tract). In another

report he separately valued the 802-acre Jalisco Ranch 71 and two other

500-acre tracts (these two, collectively, Lone-Star Tract).

In the first report, Mr. Swanson determined that the value of the

La Perla HQ Tract was $9,347,000 ($7,614 per acre), comprising (1) land

worth $3,392,000, (2) Waterworld and La Perla Lakes worth $3,392,000

(by making the land twice as valuable), 72 (3) irrigation systems and

“above standard improvements” worth $1,947,000, and (4) associated

water rights worth $616,000.

In the second report, Mr. Swanson valued Jalisco Ranch and the

Lone-Star Tract separately. Mr. Swanson determined that the value of

Jalisco Ranch was $4,765,000 ($5,941 per acre), comprising (1) land

worth $2,199,000, (2) Jalisco Lake worth $2,200,000 (by making the land

about twice as valuable), (3) irrigation systems worth $126,000, and

(4) associated water rights worth $240,000.

Mr. Swanson determined that the value of the Lone-Star Tract

was $2,650,000 ($2,650 per acre), comprising land worth $2,602,000 and

associated water rights worth $48,000. Although Trophy Lake sits on

the Lone-Star Tract, Mr. Swanson did not deem Trophy Lake large

enough to add a multiplier to the value of the land.

Mr. Swanson determined that the highest and best use of each of

the La Perla HQ Tract, Jalisco Ranch, and the Lone-Star Tract was

“recreational ranching” focused on game and fish. He believed the most

likely buyer for each property to be “a high wealth individual or

corporate investor desiring a South Texas ranch with ready to go”

71 After the years at issue 10 acres from the La Perla Ranch acreage were added

to Jalisco Ranch to build an access road. This brought Jalisco Ranch up to 802 acres.

72 House Lake also sits on the La Perla HQ Tract, though Mr. Swanson did not

consider it large enough to factor into the 2.0 multiplier.

[*62] hunting and current or potential fishing. For each property he

noted the quality of the deer genetics and “good exotic game herd.” He

described the management of Waterworld, Jalisco, Trophy, and La Perla

Lakes as fisheries and noted other improvements such as fencing,

breeding pens, and food plots. He found that each property had

“Exceptional recreational appeal” and made small positive adjustments

to property valuations in his comparable sales analysis due to the

recreational appeal. These adjustments increased property values by

about 2.2% on average. He noted maintenance costs for “extensive ranch

infrastructure” as a negative marketing feature for each property.

In each of Mr. Swanson’s five reports, he “Referenced the Trends

in Rural Land Market Data published by the Real Estate Center at

Texas A&M University.” Using the “Annual Compound 5-Year Growth

Rate” for 2021 from this data, Mr. Swanson applied time adjustments of

6.55% per year to transactions to account for the upward trending South

Texas market.

XX.

Expert Witness for Business Valuation and Analysis

Dr. Scott Hakala acted as a business valuation and analysis

expert for petitioners. His report is titled “Financial and Valuation

Analysis of [TI] and Affiliated Companies for the Tax Years 2015, 2016,

and 2017.” Dr. Hakala’s primary conclusion was that operating losses in

TI were more than entirely offset by realized and unrealized gains in

real property. We will discuss issues with Dr. Hakala’s report infra

OPINION Part VI.

OPINION

Burden of Proof

Generally, taxpayers bear the burden of proving, by a

preponderance of the evidence, that the Commissioner’s determinations

are incorrect. Welch v. Helvering, 290 U.S. 111, 115 (1933). In certain

circumstances, the burden of proof with respect to any factual issue may

be shifted to the Commissioner. § 7491(a). The parties disagree whether

petitioners have met the statutory requirements to shift the burden of

proof to respondent. However, because we decide all issues on the basis

of the preponderance of the evidence, we need not decide which party

bears the burden of proof. See Gaughf Props., L.P. v. Commissioner, 139

T.C. 219, 232 (2012) (citing Knudsen v. Commissioner, 131 T.C. 185

(2008), supplementing T.C. Memo. 2007-340), aff’d, 738 F.3d 415 (D.C.

Cir. 2013).

[*63] II.

Evidentiary Issues

We held a trial of this case in Houston, Texas, from January 30

through February 3, 2023. The parties were able to resolve many

evidentiary issues during the trial, but some remain outstanding.

Respondent reserved relevancy objections to numerous Exhibits.

We find those Exhibits to be relevant and overrule the relevancy

objections.

There are additional issues regarding Exhibit 635-P, of which

several pages constitute a summary of real estate transactions involving

petitioners and Affiliated Entities. The Exhibit also contains over 200

pages of supporting documents, which are mostly deeds and closing

statements. Respondent objects to the admission of Exhibit 635-P

because it contains inaccuracies. We overrule this objection. We agree

that the summary exhibit contains a few (mostly minor) inaccuracies,

but we are capable of identifying them.

On the first day of trial respondent also objected to a prior version

of Exhibit 635-P on grounds that it is a summary exhibit that contains

information not otherwise in evidence. The Court instructed petitioners

that the summary portion of the Exhibit must contain citations of the

record to support the transactions reflected in the Exhibit. Petitioners

added citations and additional supporting documents, then submitted

the current version of Exhibit 635-P. However, some of the transactions

in the current version do not have citations of the record. For many of

these transactions we have not found support in the record. While we

will not exclude the entirety of Exhibit 635-P, we sustain respondent’s

objection with respect to the few transactions shown in Exhibit 635-P

that are not supported by the record.

III.

Whether Any New Matters Were Raised After Trial

After opening and answering briefs were filed, we ordered the

parties to file supplemental briefs: (1) addressing issues with the leases

between TI and LSLP/GMCP, (2) addressing TI’s custom farming gross

income and expenses, and (3) addressing certain related points. We

ordered the parties to “address how the[se] matters . . . impact the

section 183 and section 6662 issues in this case.” At the parties’ request,

we also held a conference call with the parties on October 6, 2023, during

which we reiterated that we wanted the parties to address only the

existing section 183 and section 6662 issues.

[*64] Petitioners contend in their supplemental briefs that new matters

were raised and are not properly before the Court. Petitioners’

arguments include claims such as “[w]hether petitioners overcharged for

the leases involves a new matter regarding the deductibility of the lease

payments under I.R.C. § 162.” Petitioners cite our previous statement

that “[w]e’ve often held that we won’t consider issues that haven’t been

properly raised in the pleadings or by an amendment to the pleadings”

in support of their position. See Niemann v. Commissioner, T.C. Memo.

2016-11, at *14 (first citing Foil v. Commissioner, 92 T.C. 376, 418

(1989), aff’d per curiam, 920 F.2d 1196 (5th Cir. 1990); and then citing

Markwardt v. Commissioner, 64 T.C. 989, 997 (1975)). Petitioners admit

that “A ‘new matter’ is one that reasonably would change the evidence

required in the case. Alternatively, a ‘new theory’ is a new argument

about the existing evidence.” (Citations omitted.)

We disagree with petitioners’ position. No new matter exists. We

asked the parties to address how existing evidence affects the existing

section 183 and section 6662 issues. No section 162 issue exists.

The parties introduced leases between TI and LSLP/GMCP that

show that TI overpaid LSLP/GMCP. Respondent failed to notice obvious

flaws in the leases, and petitioners failed to notice them or chose not to

explain them. Like the flaws, tax benefits petitioners gained by TI’s

overpaying LSLP/GMCP are clear according to returns in evidence.

Though the parties did not address the flaws or consequences in their

opening and answering briefs, we had sufficient evidence to, and would

have, made findings regarding the flaws and consequences even if we

had not ordered supplemental briefing.

The parties made little effort to complete financial analyses of TI’s

operations. We were able to analyze TI’s ecotourism gross income and

some ecotourism expenses largely on our own but were unable to do the

same for custom farming. We ordered the parties to address custom

farming gross income and expenses in part to ensure that we were not

overlooking anything. The parties’ supplemental briefs confirm that no

detailed financial analysis of custom farming is possible on basis of the

evidence presented. 73

73 Without our asking them to, petitioners attempted to use information from

outside the record to complete tables in their supplemental opening brief regarding

custom farming financial information. Because petitioners’ tables are based on

information not in the record, we disregard them.

[*65] At no time did we request that the parties introduce new evidence

regarding the issues discussed in the supplemental briefs. We simply

asked the parties to respond to evidence already in the record. No new

matters were raised; this was only an opportunity for the parties to

clarify their existing positions.

IV.

The Parties’ Work, Petitioners’ Credibility, and Years After 2020

The Parties’ Work

The parties often provided misleading, incorrect, or undeveloped

factual claims to the Court. 74 Glaringly, the parties were mistaken about

where TI operated in 2005–08. The narrative presented by the parties

is roughly that “GMCP and LSLP bought land in Zapata County in 2005,

and TI conducted its farming activity on that land since 2005.” However,

as discussed supra FoF Part VIII.A, the evidence shows that TI operated

primarily in Starr County from 2005 to (at least) 2008 and did not

operate primarily in Zapata County until 2009 or 2010.

Incredibly, the facts discussed supra FoF Part VIII.A were not

developed or addressed by the parties. This failure is likely attributable

in part to TI’s and Affiliated Entities’ often unclear books and records,

as well as to the multiplicity of similarly named properties and entities

relevant to this case. However, the greater part is attributable to the

parties’ failing to pay enough attention to the evidence and seeming to

have little concern for accuracy. Many witnesses and the parties’

counsels were often confused or operating under faulty assumptions

during the trial. This often led to incorrect, confusing, and/or vague

testimony that counsel failed to correct, clarify, or develop through their

questioning. The parties then filed briefs that contained a multitude of

74 For example, the parties stipulated that “Petitioners’ son, Blair Schwarz, has

been [TI’s] ranch manager, huntmaster and fishmaster since 2005. He travels from

McAllen to La Perla Ranch on a weekly basis and returns home on his days off.”

However, Blair Schwarz testified that he started law school in 2006, worked for a law

firm for years after law school, and did not start to work full time for TI until after he

quit working for the law firm. Other evidence clearly shows that Blair Schwarz did not

become TI’s ranch manager, huntmaster and fishmaster until 2015. This did not stop

the parties from asking us to make findings of fact in accordance with the obviously

incorrect stipulation.

The parties also stipulated that two employees started working for TI in 1985

and 1991. This was in the same Stipulation of Facts in which the parties stipulated

that TI was not formed until 1997.

[*66] inaccurate, apparently inaccurate, and otherwise misleading

statements.

The unaddressed, undeveloped, misrepresented, and missing

facts pertain mostly to TI’s operations in Starr County and its 2005–13

ownership interest in real properties. See supra FoF Part VIII.A. We will

not concentrate on these and related facts. In OPINION Parts VIII and

IX, infra, we will focus on years 2010–20 and address only facts that the

parties failed to argue or develop as necessary.

Petitioners’ Credibility

We believe the parties’ failure to present accurate facts largely

falls on petitioners (specifically, on Dr. Schwarz). Surely Dr. Schwarz

was aware that TI took over the Tecomate Ranch hunting operation in

2005 and ran it until 2011. However, petitioners completely avoided this

topic in their briefs, as did Dr. Schwarz in his lengthy testimony.

Petitioners’ briefs demonstrate their cavalier approach to

accuracy: They routinely asserted demonstrably false/not credible

statements. For example, petitioners repeatedly claimed on brief that in

2005 they “separated” their business activities into TI as the “operating

entity” and numerous “real estate [holding] entities,” including LSLP.

Many of petitioners’ legal arguments rest on this claim that is simply

incorrect; LSLP’s 2008–12 Schedules F (and prior returns) show that it

conducted extensive operations. 75 Furthermore, Dr. Hakala based

Dr. Schwarz also gave misleading/incorrect testimony on this topic. He

testified that a tax attorney and Mr. Guthrie advised him to “have an operating entity

that became [TI], lease the property from the owner of the asset, which became

Tecomate Capital Partners, and Capital Partners doesn’t do anything but own, and

that reduces the risk of liability.” The implication was that TI leased La Perla and

Jalisco Ranches at all times. We note that GMCP (formerly Tecomate Capital

Partners) owned most of LSLP.

Other parts of Dr. Schwarz’s testimony lacked credibility. For example, he

testified that the written leases between TI and LSLP/GMCP were drafted by other

people, that he never read the leases, and that he “didn’t even know about the leases

on some of the” properties. He also testified that in the years at issue he had multiple

discussions with Mr. Yelland and Blair Schwarz about how to reduce TI’s expenses. He

testified that he cracked down on TI’s electricity use, food waste/grocery bills, and

vehicle repairs. However, these three items combined were substantially less than the

written lease totals, to say nothing of the higher rents TI actually paid in the years at

issue. Lease expenses alone averaged about $200,000 more per year than TI’s total

ecotourism gross income for the years at issue. Dr. Schwarz’s claim that he focused on

smaller expenses while not even reviewing lease agreements that he signed (twice) is

not credible.

[*67] analysis in his expert report (discussed further infra OPINION

Part VI) on similar incorrect claims and might have assigned fewer real

estate gains to TI’s work had accurate information been provided to him.

As another example, in their opening brief petitioners asked us to

find that TI “realized they were losing money trying to prepare for duck

hunts and they stopped offering them before the years at issue.” In their

answering brief petitioners twice asserted that duck/waterfowl hunting

was “abandoned.” Petitioners argued that these facts, which are

supported by evidence, show that they made changes to TI’s farming

activity in an attempt to make a profit. However, after we ordered

supplemental briefs addressing the LSLP/GMCP lease problems,

petitioners reversed their prior claims. In their supplemental opening

brief, petitioners instead asserted that TI “continues to offer waterfowl

hunts to its customers still today.” 76

As a third example, in their supplemental opening brief,

petitioners alleged that TI “maintained grazing leases to provide for

additional land for the nilgai it replaced the cows [that were sold in and

before 2011] with.” However, Dr. Hellickson did not suggest that TI

purchase nilgai or other exotics until 2017. Nilgai were not purchased

before 2017. Petitioners’ allegation that the grazing leases beginning in

January 2014 existed to provide for animals not purchased until 2017 is

not at all credible.

Most of the evidence in this case was presented or created by

petitioners (and/or affiliated persons/entities). However, petitioners put

forth an incomplete and often inaccurate set of facts. This was

ultimately to their detriment, as many of their arguments rest on

inaccurate claims.

Years After 2020

Petitioners included a graph in their opening brief purportedly

showing TI’s gross income for years 2021 and 2022. At trial Dr. Schwarz

testified that TI’s financials are improving and it “would have reached

profitability” in 2022 but for an alleged $400,000 expense related to the

fish kills. Dr. Schwarz further testified that he believed TI would be

profitable in 2023. These allegations are not supported by financial

76 Petitioners cited printouts from the La Perla Ranch website, which show

waterfowl hunts available in 2019, though this may have just been the result of lack

of updates to the website. Petitioners do not allege that any waterfowl hunts actually

took place in or after the years at issue.

[*68] records in evidence. The only financial records in evidence for

years after 2020 are invoices pertaining to 2021. These invoices are

inadequate to estimate TI’s profits or losses for 2021.

We do not find Dr. Schwarz’s/petitioners’ unsupported

testimony/graphs to be credible. TI’s expenses and gross income are, to

a significant extent, determined by Affiliated Entities (for example, how

much LSLP/GMCP charge for the leases and how much they pay for

custom farming work). Even if TI is moving toward profitability, we

would need financial records to analyze whether this is manufactured

on the backs of Affiliated Entities. If petitioners wanted to rely on

financial information for years after 2020, they should have introduced

adequate financial records pertaining to those years.

Dr. Schwarz also testified that (1) he decided “two or three years”

ago that LSLP will sell Jalisco Ranch to reduce TI’s expenses and (2) if

“I’m not profitable within two years, I’m selling the whole thing.”

Regarding the first point, Jalisco Ranch is allegedly still being prepared

for sale, and we do not find Dr. Schwarz’s unsupported statement of

intent, after many years of losses, to be credible. Regarding the second

point, this may be an admission that petitioners are not making an

overall profit from TI even when property appreciation is included,

though we will not treat it as one.

Issues with Dr. Hellickson’s Expert Report

As previously stated, in his expert report Dr. Hellickson

concluded that (1) sales of exotics packages could greatly increase in

future years, (2) the deer herd on La Perla and Jalisco Ranches was

exceptionally well managed, and (3) the value of the deer herd on La

Perla and Jalisco Ranches was $628,000. As discussed below, there are

numerous issues with Dr. Hellickson’s conclusions.

First, Dr. Hellickson briefly discussed the exotics on La Perla and

Jalisco Ranches. He concluded: “Based on the rapid growth in the exotic

wildlife industry in Texas during recent years, future income generated

from exotics on La Perla Ranch could rival revenues generated form [sic]

the white-tailed deer herd.” No information presented in Dr.

Hellickson’s report (or otherwise in this case) substantially supports the

position that there is rapid growth in the exotic wildlife industry in

Texas. Indeed, TI’s low sales for exotic hunts suggest otherwise. We

disregard Dr. Hellickson’s conclusions pertaining to the exotics.

[*69] Second, Dr. Hellickson opined that the “wildlife management

program on the La Perla Ranch has resulted in the best managed whitetailed deer herd that I am aware of in North America.” Dr. Hellickson

noted the following contributory factors: (1) nearly 300 acres of fenced

food plots, (2) year-round supplemental feeding, (3) use of breeding pens,

(4) culling of excess deer, and (5) management of the habitat. Even if

petitioners had not submitted Dr. Hellickson’s report, we would still

have found that the deer herd on La Perla and Jalisco Ranches is well

managed. But this superior deer herd has come at a cost. As previously

discussed, from 2010 to 2020 nonfishing wildlife operations expenses

increased by 316% but hunting package gross income increased only by

42%. While deer hunting package revenue increased by 103%, this was

far less than the increase in nonfishing expenses. There has been no

showing that the superior deer herd on La Perla and Jalisco Ranches

will result in profitable hunting, ecotourism, or overall operations for TI.

Third, Dr. Hellickson determined the value of the deer herd on La

Perla and Jalisco Ranches to be $628,000. Respondent argues that Dr.

Hellickson is not qualified to appraise the deer herd. We need not

address respondent’s argument because we find Dr. Hellickson’s

appraisal is flawed.

Dr. Hellickson began by using data from annual helicopter

surveys to estimate a deer population of 594, comprising 160 bucks, 218

does, and 216 fawns. He determined that the fawns were about half male

and half female, then “aged up” all deer by one year to get 268 bucks and

326 does. For the bucks, he used survey data to estimate that there were

108 bucks 1 year old, 60 bucks 2 years old, 51 bucks 3 or 4 years old, and

49 bucks 5 years or older (mature bucks). For the 49 mature bucks, he

used survey data to estimate that there were 26 trophy class bucks and

23 “cull & management bucks.” These 23 cull and management class

mature bucks include the classic deer class with 140 to 149 inches of

antlers.

To determine the value of the deer Dr. Hellickson used TI’s deer

hunting package prices during the 2020 to 2021 hunting season (equal

to the prices in the years at issue). Dr. Hellickson found the 23 cull and

management class bucks to be worth $3,000 each ($69,000 total). Using

[*70] an estimate of antler sizes for the 26 trophy class bucks, he found

them to be worth a total of $260,000. 77

Dr. Hellickson then turned to the younger bucks and does. He

stated that if these deer were killed “through hunter harvest,” the “closeout” values were $1,500 for each “yearling buck[],” $2,500 for each

“middle-aged buck[],” and $250 for each doe. Curiously, after aging up

the deer by a year to account for the 216 fawns, Dr. Hellickson showed

his math as follows:

60 yearling bucks @ $1,500 per buck = $90,000

51 middle-aged bucks @ $2,500 per buck = $127,500

326 adult does @ $250 per doe = $81,500

The 108 male fawns were mistakenly omitted, though the 108 female

fawns remain in the calculation. There should have been 111 middleaged bucks and 108 yearling bucks.

Adding the five group totals above ($69,000, $260,000, $90,000,

$127,500, and $81,500) equals $628,000. Dr. Hellickson determined that

this was the value of the deer herd on La Perla and Jalisco Ranches. We

do not believe this conclusion is reliable, for a number of reasons.

First, petitioners did not show that hunters will pay to hunt

does. 78 Second, Dr. Hellickson did not explain how he arrived at the

$1,500 and $2,500 values for yearling and middle-aged bucks,

respectively. Third, the “mature cull & management bucks” category

should have been broken down into cull, management, and classic class

bucks because cull class bucks have no marketable hunting value.

Fourth, there was no acknowledgment that TI’s deer hunting packages

include not only the deer; they also include three nights of lodging, food,

and amenities on La Perla and Jalisco Ranches. There are expenses

associated with both the hunts (such as guide fees) and the common

77 Dr. Hellickson’s math was not correct for groups of trophy bucks (grouped on

the basis of antler size). For example, he determined that two bucks with an average

of 190 inches of antlers were worth $27,500, when this should have been $30,000.

However, Dr. Hellickson separately calculated the total values for all trophy bucks

plus cull/management bucks and reached a $329,000 figure that is in accordance with

his stated methodology.

78 While does from a superior deer herd may have value to be used in breeding,

Dr. Hellickson’s conclusions are based on “hunter harvest” values.

[*71] amenities. Fifth, Dr. Hellickson’s math errors do not give us

confidence in his work generally.

Finally, Dr. Hellickson’s report does not address the fact that the

State of Texas owns the deer on La Perla and Jalisco Ranches. We

believe the “close-out harvest” method that Dr. Hellickson used to value

the herd is not appropriate, considering that the number of deer that

can be harvested must be approved by the state. On the basis of other

evidence in the record, it appears to be extremely unlikely that the state

would approve the harvesting of all deer on La Perla and Jalisco

Ranches. Dr. Hellickson’s report did not account for this or other factors

related to the state’s ownership of the deer.

We disagree with the $628,000 deer herd valuation reached by

Dr. Hellickson. Though the superior deer herd on La Perla and Jalisco

Ranches likely has some value, 79 there are too many variables for us to

estimate the value of the herd to TI. Consider that (1) the State of Texas

owns the deer, (2) the state must approve TI’s yearly deer hunting

proposals, (3) the deer live on land owned by LSLP that TI leases,

(4) whether TI can legally sell deer off the land is unclear as is the price

such deer might sell for, (5) no discount rate to value cashflows from

hunting over time was established, and (6) ecotourism is losing so much

money that it is unclear how much TI benefits from maintaining the

superior deer herd. 80

VI.

Issues with Dr. Hakala’s Expert Report

As previously stated, Dr. Hakala concluded that TI’s operating

losses were more than entirely offset by realized and unrealized gains

in real property. Dr. Hakala’s analysis was premised on petitioners’

argument that appreciation of real properties should be considered in

determining whether TI was a for-profit activity in the years at issue. 81

79 As stated supra FoF Part XIX, Mr. Swanson made small positive

adjustments to property valuations in his comparable sales analysis considering the

quality of animals on La Perla and Jalisco Ranches.

80 Even if we did value the deer herd as of 2022, that value alone would be of

little relevance. One factor in determining whether an activity is conducted for profit

is whether there is an expectation that assets used in the activity may appreciate in

value. However, petitioners never established a baseline estimate of the value of the

deer herd for us to estimate how much the herd has appreciated in value.

81 This is a legal issue to be decided by the Court. To the extent it opines on the

legal issue, we disregard Dr. Hakala’s opinion that “companies operating with the use

[*72] As discussed infra OPINION Part VIII, we reject petitioners’

argument. However, we will discuss the two major parts of Dr. Hakala’s

analysis 82 to give a more complete picture of petitioners’ argument. As

discussed below, there are numerous issues with Dr. Hakala’s

conclusion.

Comparison of Income, Losses, and Gross Gains

Most of Dr. Hakala’s work was an attempted comparison of losses

incurred by TI with selected income and losses of Affiliated Entities. As

part of this work, Dr. Hakala attempted to determine gains from sales

of properties and properties still owned by petitioners/Affiliated

Entities, then isolate the portions of the gains made in certain years that

TI existed/operated.

Step One: TI’s Income/Losses

Dr. Hakala began by attempting to calculate TI’s net

income/losses and cash operating income/losses for years 2005–17. He

restated TI’s profit and loss statements for years 2011–17 and provided

abbreviated restatements for 2005–10. These calculations and

restatements were often needlessly complex, not well explained, and full

of apparent errors. 83

Dr. Hakala chose to end his income analysis with the 2017 year.

This choice was not well explained, though at one point Dr. Hakala

mentioned “the relevant period from 2002 to 2017.” Regarding years

after 2017, Dr. Hakala stated that

Dr. Schwarz indicated in my interview that he had

some losses after 2017 due to fish kills and having to drain

of real estate in affiliated entities should be analyzed together with such entities and

not analyzed separately for valuation and income allocation or attribution purposes.”

82 Dr. Hakala’s analysis was lengthy and there are many minor points that we

find to be irrelevant or of questionable accuracy. We will not summarize such points.

83 For example, Dr. Hakala noted that TI “reported an operating profit in 2006

but that was due in part to the financial records not reserving for depreciation.” Dr.

Hakala’s abbreviated restatement for TI’s 2006 year lists no amount for depreciation.

Confusingly though, both TI’s 2006 profit and loss statement and its 2006 Schedule F

reflect depreciation of $361,980 and large operating losses. We see no indication that

TI treated depreciation for 2006 differently from that for other y

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