# United States Tax Court > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A579f8273b19444bb ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text United States Tax Court T.C. Memo. 2024-55 GARY M. SCHWARZ AND MARLEE SCHWARZ, Petitioners v. 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 [*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 I. 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 V. Heart Attack (the Buck) .............................................................. 12 VI. TI, GMCP, and LSLP .................................................................. 12 A. B. TI ....................................................................................... 13 GMCP and LSLP .............................................................. 13 3 [*3] VII. Creation of La Perla and Jalisco Ranches .......................... 14 A. B. C. 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 A. B. IX. Early Farming Operations ............................................... 17 Farming Activity 2015–20: General Information............ 20 TI’s Farming Activity: Ecotourism ............................................. 21 A. B. Overview and Common Amenities................................... 21 Hunting Packages............................................................. 22 1. Deer Hunting ......................................................... 22 2. Exotics Hunting ..................................................... 25 3. Upland Bird Hunting ............................................. 25 4. Waterfowl Hunting ................................................ 26 C. Lakes, Fish, and Fishing Packages.................................. 26 1. Construction of Lakes ............................................ 26 2. Management/Upkeep of Lakes .............................. 28 a. Structure and Water ................................... 29 b. Predatory Animals ...................................... 30 c. Genetics ....................................................... 30 d. Food.............................................................. 32 e. Culling ......................................................... 33 3. D. X. 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 A. B. Ecotourism: Gross Income ................................................ 40 Ecotourism: Lease Expenses ............................................ 43 1. Lease Expenses Overview ..................................... 43 2. LSLP and GMCP Leases: Terms ........................... 45 3. LSLP and GMCP Leases: Problems ...................... 46 4 a. b. c. d. e. [*4] 4. C. D. 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 A. B. C. D. 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 I. 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 A. B. C. V. 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 A. Comparison of Income, Losses, and Gross Gains ............ 72 1. Step One: TI’s Income/Losses ................................ 72 5 2. 3. [*5] Step Two: LSLP, GMCP, & Lone Star La Cuesta 73 Step Three: Gross Property Gains ........................ 74 B. Unrealized Gains in LSLP Work ..................................... 80 1. Error Relating to Ownership of Jalisco Ranch ..... 80 2. Error Regarding Jalisco Ranch Value Used ......... 81 3. Errors Regarding TI’s Assets ................................ 82 C. Conclusion ......................................................................... 82 VII. Section 183 Issue: Introduction .................................................. 83 VIII. Section 183 Issue: Ascertaining the Activity at Issue ............... 84 IX. A. B. Introduction and Case as a Whole ................................... 84 Treasury Regulation § 1.183-1(d)(1) and Caselaw Considerations .................................................................. 86 1. Treasury Regulation § 1.183-1(d)(1) Test ............. 87 2. Treasury Regulation § 1.183-1(d)(1) and Caselaw Factors .................................................................... 94 a. Degree of Organizational and Economic Interrelationship of the Undertakings ....... 94 b. Business Purpose Served by Carrying On the Undertakings Separately or Together . 98 c. Similarity of the Undertakings................... 98 d. Caselaw Factors .......................................... 99 C. Conclusion Regarding Activity at Issue......................... 100 Section 183 Issue: Whether TI’s Farming Activity Was Engaged In for Profit................................................................. 101 A. B. C. D. E. F. G. H. 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 [*6] I. J. Elements of Personal Pleasure or Recreation ............... 111 Conclusion Regarding Section 183................................. 112 X. 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 [*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 I. 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 [*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 [*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 [*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 [*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 [*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. V. 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 [*13] A. TI 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. B. 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 [*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 A. 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 [*15] acres sold were about $2.8 million (excluding all expenses/ improvement costs). B. 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. 15 16 Evidence shows that Dr. Schwarz made major decisions largely on his own starting with this change of mind. 16 [*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 C. 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 [*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. A. 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. 21 22 GMCP’s 2005 return is not in evidence because neither party could find it. 18 [*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 [*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 [*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 [*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. A. 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 [*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. B. Hunting Packages 1. 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 [*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 [*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 [*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. 2. 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. 3. 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 [*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. 4. 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. C. Lakes, Fish, and Fishing Packages 1. 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 [*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 [*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. 2. 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 [*29] (3) growing pure Florida bass, (4) having plenty of food, and (5) culling undersized bass. We will discuss each of these items. a. 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 [*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. b. 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. c. 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 [*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 [*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. d. 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 e. [*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. 3. 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 [*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 [*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. D. 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 [*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 X. 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 [*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 [*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 [*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 [*40] XII. A. 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 N/A $20,850 $182,300 2006 155,800 N/A N/A 29,000 184,800 2007 188,971 N/A N/A (8,850) 180,121 2008 135,213 N/A N/A N/A 135,213 2009 113,850 N/A N/A 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 [*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 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 [*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 Not specified Not specified 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 [*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. B. 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. 1. 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 [*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 [*45] 2. 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 [*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. 3. LSLP and GMCP Leases: Problems Numerous problems with TI’s leases with LSLP/GMCP resulted in TI’s substantially overpaying LSLP and GMCP. a. 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 [*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 b. 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. c. 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 [*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. d. 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. e. 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 [*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 4. [*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. C. 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 [*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 [*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. D. 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. 53 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 [*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 [*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 [*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 expla [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A579f8273b19444bb. Public record. Not legal advice.