River City Ranches 1 Ltd. v. Comm'r

T.C. Memo. 2007-171

UNITED STATES TAX COURT

RIVER CITY RANCHES #1 LTD., JEFFRY BERGAMYER, TAX MATTERS
PARTNER, RIVER CITY RANCHES #2 LTD., JEFFRY BERGAMYER,
TAX MATTERS PARTNER, RIVER CITY RANCHES #3 LTD., JEFFRY
BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #4 LTD.,
JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES #5
LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, RIVER CITY RANCHES
#6 LTD., JEFFRY BERGAMYER, TAX MATTERS PARTNER, ET AL.,1
Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*

1
Cases of the following petitioners are consolidated
herewith: River City Ranches #2, J.V., Jeffry Bergamyer, Tax
Matters Partner, docket No. 4876-94; River City Ranches #3, J.V.,
Jeffry Bergamyer, Tax Matters Partner, docket No. 9550-94; River
City Ranches #5, J.V., Stephen Hughes, Tax Matters Partner,
docket No. 9552-94; River City Ranches 1985-2, J.V., Jeffry
Bergamyer, Tax Matters Partner, docket No. 9554-94; River City
Ranches #3, J.V., Jeffry Bergamyer, Tax Matters Partner, docket
No. 13595-94; River City Ranches #5, J.V., Stephen Hughes, Tax
Matters Partner, docket No. 13597-94; River City Ranches 1985-2,
J.V., Jeffry Bergamyer, Tax Matters Partner, docket No. 13599-94;
River City Ranches No. 4, Ltd., Jeffry Bergamyer, Tax Matters
Partner, docket No. 14038-96.
*
This opinion supplements our previously filed Memorandum
Findings of Fact and Opinion in River City Ranches #1 Ltd. v.
Commissioner, T.C. Memo. 2003-150, affd. in part, revd. in part
and remanded 401 F.3d 1136 (9th Cir. 2005).
 - 2 -

Docket Nos. 787-91, 4876-94, Filed July 2, 2007.
9550-94, 9552-94,
9554-94, 13595-94,
13597-94, 13599-94,
14038-96.

Montgomery W. Cobb, for petitioners.

Terri A. Merriam, for participating partners in docket Nos.

9554-94 and 13599-94.

Catherine J. Caballero, Thomas N. Tomashek, Gregory M. Hahn,

Nhi Luu, and Dean H. Wakayama, for respondent.

SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: These cases are now before the Court on

remand from the U.S. Court of Appeals for the Ninth Circuit.

River City Ranches #1 Ltd. v. Commissioner, 401 F.3d 1136 (9th

Cir. 2005) (River City Ranches II), affg. in part, revg. in part

and remanding T.C. Memo. 2003-150 (River City Ranches I). The

Court of Appeals concluded that we erred in holding that we

lacked jurisdiction to make findings concerning the character of

the partnerships’ transactions for purposes of the penalty-

interest provisions of section 6621(c)2 and mandated that we make

such findings. The Court of Appeals also directed us to permit

2
Unless otherwise indicated, section references herein are
to the Internal Revenue Code in effect for the taxable years in
issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
 - 3 -

petitioners additional discovery limited to whether Walter J.

Hoyt III (Hoyt), then the tax matters partner (TMP), executed

consents to extend the limitations periods while disabled by

conflicts between his own interests and those of his partners,

and for any necessary retrial following such discovery.

Pursuant to the remand, petitioners deposed three present

and/or former employees of the Internal Revenue Service (IRS),

respondent made available to petitioners his entire store of

documents that had not been produced earlier, and the Court held

a second trial.

We must now decide two issues. First,3 in the following

cases, we must make factual findings regarding whether the sheep

partnership transactions were tax-motivated transactions (i.e.,

whether the transactions or the partnerships themselves were

shams and/or whether there were asset overvaluations and basis

overstatements) for purposes of the section 6621(c) penalty-

interest provisions:

3
Normally, before deciding other issues we would decide
whether the period of limitations on assessment had expired when
respondent issued the notices of final partnership administrative
adjustment (FPAAs). However, the parties agree that the FPAAs
for the partnerships’ 1986 taxable years were timely issued, and
we must decide the sec. 6621(c) penalty-interest issue for that
year in all events. Since findings as to whether the partnership
transactions or the partnerships themselves were shams and/or
whether there were asset overvaluations and basis overstatements
for purposes of the sec. 6621(c) penalty-interest provisions are
factors to be considered in deciding the limitations period
issue, we will decide the sec. 6621(c) issue first.
 - 4 -

Partnership Year Docket No.

River City Ranches #1, J.V.1 (RCR #1) 1986 787-91
River City Ranches #2, J.V. (RCR #2) 1986 787-91
1987 4876-94
River City Ranches #3, J.V. (RCR #3) 1986 787-91
1987 9550-94
River City Ranches #4, J.V. (RCR #4) 1984 14038-96
1986 787-91
River City Ranches #5, J.V. (RCR #5) 1986 787-91
1987 9552-94
1988 13597-94
River City Ranches #6, J.V. (RCR #6) 1986 787-91
River City Ranches 1985-2, J.V. (RCR 85-2) 1987 9554-94
1988 13599-94
1
Petitioners use the designations of “Ltd.” and “J.V.”
interchangeably. For convenience, we use J.V. as used by
the parties in their briefs.

Second, we must decide whether the period of limitations on

assessment had expired when the notices of final partnership

administrative adjustment (FPAAs) were issued in the following

cases:4

4
In River City Ranches #1 Ltd. v. Commissioner, 401 F.3d at
1144 n.5. (River City Ranches II), the Court of Appeals stated
that the record before it did not clearly identify which FPAAs
were filed within the default limitations periods and which were
filed under the disputed extensions. The parties agree that the
FPAAs in the above-listed dockets were issued after the
expiration of the 3-year default limitations period had expired.
FPAAs filed in other dockets before the Court of Appeals were
issued within the 3-year default limitations period.
 - 5 -

Partnership Year Docket No.

RCR #2 1987 4876-94
RCR #3 1987 9550-94
1989 13595-94
RCR #4 1984 14038-96
RCR #5 1987 9552-94
1988, 1989 13597-94
RCR 85-2 1987 9554-94
1988, 1989 13599-94

In deciding this issue we must decide whether the consents to

extend the periods of limitations were invalid because Hoyt

signed them while disabled by conflicts of interest known to

respondent. Alternatively, if the consents were invalid, we must

decide whether the 6-year period of limitations on assessment

under section 6229(c)(1) applies because of fraud.5

5
In the second amendment to the answer, respondent raised
the application of the 6-year period of limitations on assessment
under sec. 6229(c)(1) as an alternative to the argument that the
consents were valid. The issue was tried and briefed in River
City Ranches I. In River City Ranches I, we held that
petitioners did not prove that the consents were invalid and,
therefore, we did not decide whether the 6-year limitations
period under sec. 6229(c)(1) applied. The parties have briefed
the issue again on remand.
 - 6 -

FINDINGS OF FACT

We incorporate by reference the findings of fact contained

in River City Ranches I and River City Ranches #4, J.V. v.

Commissioner, T.C. Memo. 1999-209, affd. 23 Fed. Appx. 744 (9th

Cir. 2001).6 Some additional facts have been stipulated, and

they are so found. We incorporate by reference the Twelfth

Stipulation of Facts and the accompanying exhibits.

A. Formation and Operation of the Sheep Partnerships

From about 1971 through 1998, Hoyt organized, promoted to

thousands of investors, and operated as a general partner more

than 100 cattle breeding partnerships. Around 1978 or 1979, Hoyt

became interested in the possibility of organizing sheep breeding

partnerships similar to the cattle breeding partnerships.

Hoyt did not have a separate prospectus for each of the

sheep partnerships. Instead, he used the same promotional

materials he had prepared for the cattle partnerships. And the

promotional materials used to market the investments focused

heavily on the investors’ tax savings. One brochure titled “The

1,000 lb Tax Shelter” highlighted the investors’ writeoffs,

referred to the investment as a tax shelter, and emphasized that

the primary return on an investment in a Hoyt partnership would

6
During the original proceedings, the Court took judicial
notice of the facts and record in River City Ranches #4, J.V. v.
Commissioner, T.C. Memo. 1999-209, affd. 23 Fed. Appx. 744 (9th
Cir. 2001).
 - 7 -

be from the tax savings. Another brochure, bearing the heading

“Harvesting Tax Savings by Farming the Tax Code”, also emphasized

tax savings and explained that the investment could be financed

from the investors’ tax savings, which the investors otherwise

would have paid to the IRS.

The partnership interest and the resulting flowthrough

partnership deductions were “purchased” with 75 percent of the

individual’s tax savings resulting from the flowthrough

partnership deductions. The 75-percent tax savings were

determined by first computing an individual’s tax liability

without participation in a Hoyt partnership and then computing

the individual’s tax savings using the Hoyt partnership loss.

The difference in the two calculations was the individual’s tax

savings, of which 75 percent was paid to the Hoyt organization

and 25 percent was to be retained by the individual. In

addition, in the initial year of investment, amended returns

claiming refunds were often filed for the individual’s prior 3

taxable years. The Hoyt organization received 75 percent of such

refunds, and the individual retained 25 percent. Each year the

individual’s payment to the Hoyt organization was adjusted to

reflect the 75/25 split. Because the investment was based on

“tax savings” and not on original cash outlay, Hoyt’s partnership

scheme essentially paid for itself.
 - 8 -

The partners’ individual income tax returns were often

prepared first by the Hoyt Tax Office to claim partnership

deductions or credits sufficient to eliminate or substantially

reduce partners’ tax liabilities. Subsequently, the partnership

returns were prepared to reflect the amounts reported on the

partners’ individual income tax returns. The promotional

materials explained that, beginning in 1982, other members of the

Hoyt Tax Office would sign the individual partners’ tax returns

as preparers instead of Hoyt. The materials further stated that

the preparers would assist each partner in claiming all

nonpartnership tax deductions and credits available to the

partner before claiming any flowthrough deductions from the

partnership. If a partner needed more or less partnership loss

in any year, the Hoyt Tax Office arranged the increase quickly

without requiring the partner to pay a higher fee to an outside

return preparer. Hoyt routinely had the individual’s Federal

income tax returns prepared and filed claiming large partnership

losses before the Form 1065, U.S. Partnership Return of Income,

was prepared and filed. Sometimes this would result in an

inconsistency between the loss shown on an individual return and

the amount shown on the partner’s Schedule K-1, Partner’s Share

of Income, Credits, Deductions, Etc.

From 1981 through 1991, Hoyt formed eight of the nine sheep

partnerships at issue pursuant to the laws of California. RCR
 - 9 -

85-2 was formed pursuant to the laws of Nevada. From their

inception, all nine sheep partnerships were operated from the

Hoyt office in Elk Grove, California. Several of the

partnerships did not have signed partnership agreements or had no

partnership agreements at all.

From the time each Hoyt sheep partnership was formed through

1998, Hoyt was the general partner responsible for all the

management, operation, and promotion functions, and he made all

major decisions. He was also the TMP of each partnership.7

In the early 1980s, Hoyt had formed so many investor

partnerships that the documents, records, and tax returns of the

partnerships were inaccurate, unreliable, and in many instances

falsified. For the years at issue, often no records were kept.

As the general partner managing each sheep partnership, Hoyt

was responsible for and directed the preparation of the tax

returns of each partnership, and he typically signed and filed

each tax return. However, Hoyt did not maintain separate bank

accounts or bookkeeping and accounting records for each of the

sheep partnerships. From 1981 until sometime in 1990, checks

from the sheep partners were deposited in one checking account.

7
By orders of the Tax Court issued from June 22, 2000,
through May 15, 2001, Hoyt was removed as TMP from the sheep
partnerships. Hoyt was also a licensed enrolled agent who
represented many of the investor-partners before the IRS. In
1997, the IRS removed Hoyt as an enrolled agent for alleged
improprieties relating to his individual income tax returns.
 - 10 -

The account was in the name of River City Ranches. Sometime in

1990, Hoyt discontinued using that account. He implemented a new

business practice of commingling all Hoyt organization funds in

one checking account referred to as the pooling account. This

account was in the name of W.J. Hoyt Sons Ranches MLP (MLP). The

funds in the pooling account were then allocated to the various

Hoyt entities on the basis of a percentage determined by Hoyt.

David Barnes (Barnes), a longtime sheep breeder and Hoyt’s

childhood friend, owned and operated a sheep breeding business

called Barnes Ranches. From April 1981 through February 1987,

Hoyt, representing the Hoyt sheep partnerships, entered into

agreements with Barnes Ranches. Some of the sheep partnerships

did not have all of the principal documents evidencing their

purported sheep sale agreements with Barnes Ranches. Each

partnership allegedly purchased breeding ewes from Barnes Ranches

and concurrently entered into a 15-year management or sharecrop

agreement with Barnes Ranches. The purported sheep breeding

activities of the partnerships were not arm’s-length transactions

because Hoyt and the Barnes family were not independent parties

acting at arm’s length. Neither Barnes Ranches nor the

partnerships adhered to the contractual terms of the agreements

for the purported purchase of breeding ewes by the sheep

partnerships. In actuality, the sheep partnerships acquired none

of the benefits or burdens of ownership of any of the sheep.
 - 11 -

Under the agreements, the partnerships were to purchase the

sheep by issuing promissory notes to Barnes Ranches. The notes

were then personally assumed by the partners of the partnership

under an assumption agreement signed by Hoyt. The promissory

notes that the sheep partnerships issued for the purchase of the

sheep did not represent bona fide recourse debt. The security

interests granted to Barnes Ranches by the partnerships to secure

payment on the partnership promissory notes were not valid.

Barnes Ranches never requested payment from the partnerships or

the individual partners on the promissory notes, and the

partnerships were not obligated to pay their promissory notes.

The individual partners of the partnerships were not personally

liable for the promissory notes to Barnes Ranches and never

directly paid Barnes Ranches on the notes. The assumption

agreements that Hoyt signed on behalf of individual partners with

respect to the partnerships’ promissory notes were not legally

enforceable against the individual partners. Consequently, the

promissory notes were not bona fide recourse debt, were not valid

indebtedness, and were illusory, having no practical economic

effect.

The purchase price of the flock purportedly sold to each

partnership exceeded the value of each partnership’s flock, and

many of the sheep purportedly sold did not exist. The bills of

sale that Barnes Ranches issued the sheep partnerships listed
 - 12 -

large numbers of individual breeding sheep that did not exist.

The flock recap sheets prepared by Hoyt contained false

information and did not represent the sheep purportedly owned by

each partnership. Sheep purportedly sold to the partnerships

were not of the quality represented on the bills of sale.

Further, the total purchase price that each partnership agreed to

pay for each sheep was much greater than the fair market value of

similar quality sheep. The average purported purchase price per

ewe paid by the sheep partnerships ranged from $1,135 to $2,126,

but these purchase prices were not within a reasonable range of

value. The sheep that Barnes Ranches sold for $400 or more

typically had been judged champions or had won some other awards

at national shows, but the sheep purportedly sold to the sheep

partnerships were nowhere near the quality of breeding sheep sold

for $400 or more.

The partnerships never acquired control over the ewes

allegedly purchased, nor did they obtain the benefits and burdens

of ownership of any breeding ewe. Barnes Ranches purportedly

managed the partnerships’ breeding sheep in a commingled flock

with Barnes’s own sheep. No sheep registration certificates were

issued in the name of any of the partnerships. Neither Hoyt nor

Barnes Ranches kept any records that adequately identified the

breeding sheep owned by each partnership. The partnerships could

not identify the specific breeding sheep they purchased, nor
 - 13 -

could they identify the specific breeding sheep they owned during

the periods at issue. No sheep were transferred to the

partnerships from Barnes Ranches.

Under the sharecrop operating agreements, Barnes Ranches was

to manage and pay all expenses with respect to each partnership’s

breeding sheep. However, Barnes Ranches did not provide the

partnerships with the management services required under the

agreements. Barnes Ranches did not, as required under the

sharecrop agreement, maintain adequate records allowing it to

identify at all times the breeding sheep owned by each

partnership. Barnes Ranches did not increase the number of

breeding sheep owned by the partnerships by a net 5 percent per

year as required by the sharecrop agreement. Barnes Ranches did

not replace ewes purportedly owned by the partnerships that could

no longer serve as breeding ewes with other ewes as required

under the sharecrop agreement, nor did the partnerships receive

any other benefit from the fertility warranty in the sharecrop

agreement.

The sheep partnership transactions were shams and lacked

economic substance. The partnerships themselves were shams and

lacked economic substance. The partnerships had no business

purpose beyond the generation of tax benefits.
 - 14 -

B. Partnership Returns

For the years at issue, the partnerships reported total

deductions and credits attributable to nonexistent and overvalued

sheep, interest deductions for illusory indebtedness, and false

deductions for farm expenses and guaranteed payments as follows:

Partnership Year Deductions Docket No.

RCR #1 1986 $87,123 787-91

RCR #2 1986 203,544 787-91
1987 43,277 4876-94

RCR #3 1986 207,064 787-91
1987 220,723 9550-94
1989 56,184

RCR #4 1984 376,605 14038-96
1986 642,267 787-91

RCR #5 1986 575,083 787-91
1987 833,605 9552-94
1988 516,657 13597-94
1989 958,120

RCR #6 1986 560,341 787-91

RCR 85-2 1987 888,875 9554-94
1988 404,680 13599-94
1989 1,363,974 13599-94

Hoyt signed, was responsible for, and directly participated

in the preparation of each of the following sheep partnership tax

returns (RCR tax returns): RCR #2 for 1987; RCR #3 for 1987 and

1989; RCR #4 for 1984; RCR #5 for 1987, 1988 and 1989; and RCR

85-2 for 1987, 1988, and 1989. The RCR tax returns identified
 - 15 -

the principal business activity of the partnerships as “ranching”

and the principal product of the partnerships as registered

sheep. The RCR tax returns included false or fraudulent

depreciation deductions and credits attributable to nonexistent

and overvalued sheep, interest deductions for illusory

indebtedness, and false deductions for farm expenses and

guaranteed payments.

On Schedules F, Farm Income and Expenses, of the RCR tax

returns, the partnerships reported the following false and

fraudulent deductions pertaining to the purported ranching and

registered sheep activities of the partnerships:

RCR #2 Partnership

Deductions 1987

Interest $40,195
Guaranteed payments 3,082
Total 43,277

RCR #3 Partnership

Deductions 1987 1989

Depreciation $149,759 $5,063
Interest 27,607 29,041
Other farm deductions 40,875 19,861
Guaranteed payments 2,482 2,219
Total 220,723 56,184
 - 16 -

RCR #4 Partnership

Deductions 1984

Depreciation $272,729
Boarding fees 103,876
376,605

RCR #5 Partnership

Deductions 1987 1988 1989

Depreciation $729,088 $457,032 $754,673
Interest 18,817 3,308 161,310
Other farm deductions 81,746 52,727 39,719
Guaranteed payments 3,954 3,590 2,418
Total 833,605 516,657 958,120

RCR 85-2 Partnership

Deductions 1987 1988 1989

Depreciation $796,472 $346,875 $1,135,605
Interest 10,657 2,605 188,252
Mortgage interest1 -0- 2,068 -0-
Other farm deductions 81,746 52,572 39,719
Guaranteed payments -0- 560 398
888,875 404,680 1,363,974
1
On the 1989 return, mortgage interest was included in the
other farm deductions amount.

C. Examination of Returns

Since approximately 1980, the IRS had regularly examined

many of the partnership returns of the Hoyt cattle partnerships

and the individual returns of their partners. The IRS also

examined the sheep partnerships’ returns and the individual

returns of their partners. Because Hoyt did not maintain
 - 17 -

separate bank accounts and accurate accounting records for each

of the sheep partnerships, the IRS audited the partnership tax

returns as a group. The IRS generally disallowed the partnership

tax benefits that each cattle and sheep partnership and their

respective partners claimed, resulting in those partnerships’ and

partners’ commencing numerous cases in this Court.

After the initial IRS examinations of the many cattle and

sheep partnerships, several investigations by various Government

agencies were commenced relating to Hoyt’s activities.

From 1984 through 1986, the IRS’s Criminal Investigation

Division (CID) conducted an investigation of Hoyt for allegedly

backdating documents to enable 12 investor-partners to claim

improper deductions and credits for 1980, 1981, and 1982. On

July 31, 1986, the IRS District Counsel’s Office in Sacramento,

California, referred the matter to the Department of Justice

(DOJ) for prosecution. The DOJ then forwarded the matter to the

U.S. Attorney’s Office in Sacramento for review and

consideration. On August 12, 1987, the U.S. Attorney’s Office

declined to prosecute Hoyt.

In July 1989, a member of the IRS Examination Division team

(which had been examining the returns of many of the cattle and

sheep partnerships for the 1983 through 1986 taxable years)

recommended that the IRS’s CID investigate Hoyt for allegedly

making and/or assisting in fraudulent or false tax return
 - 18 -

statements in connection with his promotion and operation of the

cattle partnerships. In his referral report to the CID, this

team member concluded that Hoyt was selling to some partnerships

cattle that had already been sold to other partnerships and that

he was depreciating cattle that did not exist. The CID then

conducted an investigation of the alleged nonexistent cattle and

Hoyt’s represented value for them.8 The CID conducted two other

investigations of Hoyt but did not recommend that Hoyt be

prosecuted.

With many cows and sheep spread over many facilities, the

IRS had difficulty proving that the partnerships were shams. On

October 19, 1989, the IRS suffered a major setback when this

Court filed its opinion Bales v. Commissioner, T.C. Memo.

1989-568, wherein this Court found that the Bales partnerships

had acquired the benefits and burdens of ownership with respect

to specific breeding cattle, that the purchase prices for the

partnership cattle did not exceed their fair market value, and

that the promissory notes the partnerships issued were valid

recourse indebtedness.

8
On Oct. 13, 1989, during the CID’s above-mentioned
investigation, the U.S. Attorney’s Office in Sacramento requested
that the CID review certain information and determine whether IRS
special agents from the CID should join in an ongoing grand jury
investigation of Hoyt for possible violations of the internal
revenue laws. On Nov. 3, 1989, the IRS Regional Counsel’s Office
requested that IRS special agents be authorized to participate in
the grand jury investigation. On Oct. 2, 1990, the U.S.
Attorney’s Office ended the grand jury investigation of Hoyt
without an indictment.
 - 19 -

On May 14, 1990, respondent assessed penalties of $90,000

under section 6701 against Hoyt. Hoyt filed a refund claim in

July 1990. In November 1990, respondent’s counsel advised the

IRS that, in the light of the Bales opinion, it was unlikely that

imposition of the penalties ultimately would be sustained. The

IRS abated the $90,000 of section 6701 penalties in early 1991.

In October 1990, the IRS issued Hoyt a summons for the sheep

partnerships’ 1987 tax year. At the time, respondent was also

seeking documents to prepare for trials pending in this Court

regarding cattle partnerships’ 1980-86 taxable years. Hoyt

informed respondent that he was unable to simultaneously produce

documents for the docketed cattle cases and the sheep

partnerships’ 1987-90 taxable years.

Hoyt and the IRS executed Forms 872-P, Consent to Extend the

Time to Assess Tax Attributable to Items of a Partnership,

extending the period of limitations on assessments for certain

taxable years of RCR #2, RCR #3, RCR #4, RCR #5, and RCR 85-2.

Hoyt executed each of the extension agreements as TMP for the

various sheep partnerships. The partnership taxable year

involved, the date upon which the partnership return was deemed

filed, the date the original 3-year period for assessing a

deficiency would expire, the IRS extension form used, the date

upon which the IRS executed the form, and the date to which Hoyt

and the IRS (in the form) agreed to extend the period of

limitations were as follows:
 - 20 -

3-Year Date
Taxable Date Return Expiration Executed Expiration
Partnership Year Ended Filed Date Form Hoyt IRS Date

RCR #2 12/31/1987 5/19/1988 5/19/1991 872-P 2/15/1991 2/27/1991 12/31/1992
872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/29/1993 12/31/1993
RCR #3 12/31/1987 10/20/1988 10/20/1991 872-P 2/15/1991 2/22/1991 12/31/1992
872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
9/30/1989 4/15/1990 4/15/1993 872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
RCR #4 12/31/1984 10/18/1985 10/18/1988 872-P 8/1/1987 8/1/1987 Indefinite
RCR #5 12/31/1987 10/21/1988 10/21/1991 872-P 2/15/1991 2/22/1991 12/31/1992
872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
12/31/1988 10/17/1989 10/17/1992 872-P 2/15/1991 2/22/1991 12/31/1992
872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
9/30/1989 4/15/1990 4/15/1993 872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
RCR 85-2 12/31/1987 10/20/1988 10/20/1991 872-P 2/15/1991 2/22/1991 12/31/1992
872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
12/31/1988 10/17/1989 10/17/1992 872-P 2/15/1991 2/22/1991 12/31/1992
872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
9/30/1989 4/15/1990 4/15/1993 872-P 7/25/1992 8/26/1992 6/30/1993
872-P 3/6/1993 3/30/1993 12/31/1993
 - 21 -

On December 12, 1991, the IRS met with Hoyt and requested

extensions of the limitations periods for the 1987 and 1988 tax

years for the partnerships. In a letter also dated December 12,

1991, the IRS informed Hoyt that it was considering imposing

return preparer penalties. On December 13, 1991, Hoyt faxed a

letter to the IRS stating that he would agree to sign the

extensions if, and only if, the IRS would agree to extend the

period for assessing any penalties against Hoyt and the other

return preparers. In a letter dated December 18, 1991, the IRS

informed Hoyt that it would not agree to postpone preparer

penalty considerations in exchange for extensions for the

partnerships.

On May 21, 1992, the IRS sent a letter to Hoyt reconfirming

its understanding that Hoyt would not consent to extend the

assessment periods for the various partnerships unless “some way

can be found to extend the assessment period for preparer

penalties currently proposed.”

In June 1992, the IRS and Hoyt reached an agreement whereby

Hoyt consented to extend the limitations periods for the tax

years 1987 though 1989, and the IRS agreed to delay assessing any

preparer penalties for those same years until an FPAA was issued.

After the Bales setback, the IRS decided to conduct a full

headcount of the Hoyt livestock to prove that Hoyt was selling

cattle and sheep to some partnerships that had already been sold
 - 22 -

to other partnerships and that he was depreciating livestock that

did not exist. By February 1993, although the IRS’s inspection

and livestock count were not fully completed,9 IRS personnel

concluded that Hoyt had greatly overstated the number of breeding

animals that these partnerships claimed to own and had grossly

overvalued the livestock upon which the partnerships were

claiming tax benefits. As a result of the count and inspection,

the IRS believed by February 1993 that it possessed sufficient

evidence to support the issuance of prefiling notices and

freezing tax refunds claimed by the partners.

On the basis of the above conclusions from its count of the

cattle and sheep, the IRS, beginning in February 1993, generally

froze and stopped issuing income tax refunds to partners in the

cattle and sheep partnerships.10 The IRS issued prefiling

notices to the investor-partners advising them that, starting

with the 1992 taxable year, the IRS would: (1) Disallow the tax

9
The IRS retained cattle expert Ron Daily to conduct a
physical count of all cattle held by the Hoyts as of yearend
1992. The count was conducted with Hoyt personnel from October
1992 through April 1993. Martinez v. United States, 341 Bankr.
568, 571 (Bankr. E.D. La. 2006).
10
Following the IRS’s freezing in February 1993 of tax
refunds to partners in the cattle and sheep partnerships, the
Hoyt organization experienced financial difficulties. Freezing
the tax refunds greatly diminished the amount of money the Hoyt
organization obtained from new and existing partners. An
increasing number of investor-partners became disgruntled with
Hoyt and the Hoyt organization. Many partners stopped making
their partnership payments and withdrew from their partnerships.
 - 23 -

benefits that the partners claimed on their individual returns

from the cattle and sheep partnerships; and (2) not issue any tax

refunds these partners might claim attributable to such

partnership tax benefits.

Following respondent’s issuance of prefiling notices to the

partners in February 1993 and the completion of the count and

inspection of the livestock in May or June 1993, the Examination

Division on or about December 30, 1993, issued letters to all the

partners in which it warned them that IRS personnel had concluded

and determined that: (1) A number of fictitious breeding cattle

and sheep had been sold to the Hoyt cattle and sheep

partnerships; and (2) Hoyt and the Hoyt organization had

overstated both the numbers and value of the purported livestock

that the partnerships allegedly owned.

Respondent eventually issued: (1) Notices of deficiency to

numerous investor-partners for the 1980, 1981, and 1982 tax

years, in which respondent determined that none of the tax

benefits the partners claimed from the cattle and sheep

partnerships were allowable; and (2) FPAAs to many of the cattle

and sheep partnerships for the taxable years 1983, 1984, 1985,

and 1986, in which respondent disallowed the tax benefits these

partnerships claimed. On December 20, 1993, respondent issued

FPAAs to RCR #2 for its tax year ending December 31, 1987, to RCR

#3 for its tax years ending December 31, 1987, and September 30,
 - 24 -

1989, and to RCR #5 and RCR 85-2 for their tax years ending

December 31, 1987 and 1988, and September 30, 1989. On March 24,

1996, respondent issued an FPAA to RCR #4 for its tax year ending

December 31, 1984.

D. Hoyt’s Criminal Conviction

From 1993 through 1998, governmental agencies other than the

IRS, including the Securities and Exchange Commission (SEC), the

U.S. Postal Service (USPS), and the U.S. Trustee, also

investigated Hoyt. As a result of a referral for further

investigation from the U.S. Attorney’s Office in Seattle,

Washington, to the USPS, postal inspectors in late 1993 began an

investigation of Hoyt and the Hoyt organization for possible mail

fraud violations.

During 1993 and 1994, the SEC conducted an ongoing

investigation of Hoyt, but the SEC eventually closed its

investigation and deferred to the USPS’s investigation of Hoyt

that had been commenced in late 1993. In June 1995, postal

inspectors seized numerous documents and records from the offices

of the Hoyt organization pursuant to a search warrant.

On or about June 8, 1995, in the 32d Judicial District Court

for the Parish of Terrebonne, State of Louisiana, a group of

investors obtained an $11 million default judgment against Hoyt,

Management, MLP, and several cattle breeding partnerships for

fraud and other violations. See Mabile v. Hoyt, No. 95-112222.
 - 25 -

On November 24, 1998, the Government filed an indictment in

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

and several other persons who had worked for or engaged in

transactions with the Hoyt organization, including Barnes and his

wife, charging them with numerous counts of conspiracy and mail

fraud. Shortly thereafter, respondent moved this Court to remove

Hoyt as TMP in many of the cattle and sheep partnership cases

pending before it.11 In orders issued from June 22, 2000,

through May 15, 2001, this Court removed Hoyt as TMP in numerous

cattle and sheep partnership cases, pursuant to Rule 250(b).

On February 12, 2001, Hoyt was convicted of 1 count of

conspiracy to commit fraud, 31 counts of mail fraud, 3 counts of

bankruptcy fraud, and 17 counts of money laundering. See United

States v. Barnes, No. CR 98-529-JO-04 (D. Or. Feb. 12, 2001),

affd. sub nom. United States v. Hoyt, 47 Fed. Appx. 834 (9th Cir.

2002). The U.S. District Court sentenced Hoyt to 235 months of

imprisonment and ordered him to pay restitution of over $102

million to the individual victims of his crimes. This $102

million figure represented the total amount that the Government

(using Hoyt organization records) determined was paid to the Hoyt

organization from 1982 through 1998 by investor-partners in the

11
On June 2, 1999, the Government filed a superseding
indictment against the same defendants, which, among other
things, charged Hoyt with 54 counts of conspiracy to commit
fraud, mail fraud, bankruptcy fraud, and money laundering.
 - 26 -

cattle partnerships, the sheep partnerships, and other similar

partnerships that Hoyt promoted. The fraud perpetrated by Hoyt

“impacted over 4,000 people and had actual and intended losses

exceeding $200 million.” United States v. Hoyt, supra at 837.

OPINION

Issue 1. Whether Partnership Transactions and the Sheep
Partnerships Lacked Economic Substance and Were Shams,
and Whether There Were Partnership Asset Overvaluations
and Basis Overvaluations

The Court of Appeals reversed our holding in River City

Ranches I that we lacked jurisdiction to make factual findings as

to whether the partnerships’ transactions were tax-motivated for

purposes of imposing section 6621(c) penalty-interest against

investor-partners. Thus, the Court of Appeals remanded for us to

make such findings. We have done so in our supplemental factual

findings set forth herein.

We point out that many of the key facts have been stipulated

by the parties and are so found. Furthermore, our prior opinion

in River City Ranches #4, J.V. v. Commissioner, T.C. Memo. 1999-

209, supports the conclusion that the activities of these

partnerships lacked economic substance and were shams for each of

the years of their existence. The findings in that case are

equally applicable to these cases because the facts and evidence

with respect to these partnerships’ breeding activities are the

same as the facts and evidence considered there. While the

proceeding in River City Ranches #4, J.V. involved only three of
 - 27 -

the sheep breeding partnerships, the Court considered evidence

pertaining to all of the sheep partnerships. And all the sheep

breeding partnerships were operated in the same manner.

Section 6621(c) provides for an increased rate of interest

with respect to any substantial underpayment of tax in any

taxable year attributable to a tax-motivated transaction.

Section 6621(c)(3)(A) generally lists the types of transactions

which are considered “tax-motivated transactions”. A tax-

motivated transaction includes any valuation overstatement within

the meaning of section 6659(c), and such a valuation

overstatement exists, among other situations, if the adjusted

basis of property claimed on any return exceeds 150 percent of

the correct amount of basis. Secs. 6621(c)(3)(A)(i), 6659(c). A

tax-motivated transaction further includes “any sham or

fraudulent transaction.” Sec. 6621(c)(3)(A)(v).

It is well established that the tax consequences of

transactions are governed by substance rather than form. Frank

Lyon Co. v. United States, 435 U.S. 561, 573 (1978). When

taxpayers resort to the expedient of drafting documents to

characterize transactions in a manner which is contrary to

objective economic realities and which has no significance beyond

expected tax benefits, the particular forms they employ are

disregarded for tax purposes. Id. at 572-573; Helvering v. F. &

R. Lazarus & Co., 308 U.S. 252, 255 (1939). If a transaction is
 - 28 -

devoid of economic substance, it is not recognized for Federal

taxation purposes. Gregory v. Helvering, 293 U.S. 465 (1935).

Determining the economic substance of a transaction requires

an analysis of several objective factors: (1) Whether the stated

price for the property was within reasonable range of its value;

(2) whether there was any intent that the purchase price would be

paid; (3) the extent of the taxpayer’s control over the property;

(4) whether the taxpayer would receive any benefit from the

disposition of the property; (5) whether the benefits and burdens

of ownership passed; (6) the presence or absence of arm’s-length

negotiations; (7) the structure of the financing; (8) the degree

of adherence to contractual terms; and (9) the reasonableness of

the income and residual value projections. Levy v. Commissioner,

91 T.C. 838, 854 (1988); Rose v. Commissioner, 88 T.C. 386, 410

(1987), affd. 868 F.2d 851 (6th Cir. 1989).

Our findings reflect the consideration of these objective

factors. The partnerships had no business purpose beyond

generating tax benefits. The facts show that the partnerships

themselves were shams and lacked economic substance. They were

merely a facade used by Hoyt to provide the tax benefits he

promised in his promotional materials. They had no independent

economic substance beyond the purported sheep breeding

transactions which were also illusory and had no economic effect.
 - 29 -

The only purported business purpose of these partnerships

was their sheep breeding activities. Yet, as we have found, the

partnerships never acquired the benefits and burdens of

ownership, the promissory notes did not evidence valid

indebtedness, and Barnes Ranches never performed under the

sharecrop agreement. Consequently, they could not, and did not,

conduct any economic activities.

There are a number of other facts supporting our conclusion

that the partnerships lacked economic substance and were shams.

For example, there were many irregularities in the partnerships’

documents. Several of the partnerships did not have signed

partnership agreements or had no partnership agreements at all.

There was no separate prospectus for each of the sheep

partnerships; instead Hoyt used the promotional materials he had

prepared for the cattle partnerships. And not all of the sheep

partnerships had all of the principal documents to evidence their

purported sheep sale agreements with Barnes Ranches.

The traditional books and records expected of a partnership

that has economic substance were lacking. The sheep partnerships

did not maintain separate books, records, or assets. None of

them had separate bank accounts.

We are persuaded that all of the above facts support our

conclusion that the partnerships and their purported sheep
 - 30 -

breeding activities lacked economic substance, were shams, and

existed only to provide tax benefits.

It is also significant in these cases that for section

6621(c) penalty-interest purposes the partnerships overvalued

their assets and overstated their bases therein. The parties

have stipulated facts that support findings of partnership asset

overvaluations and basis overstatements. For example, they

stipulated that: (1) The purchase prices exceeded the value of

each partnership’s flock because many of the sheep purportedly

sold did not exist; (2) sheep sold to the partnerships for

average prices ranging from $1,135 to $2,126 were nowhere near

the quality of breeding sheep Barnes Ranches sold for $400 or

more; (3) the partnerships never acquired the benefits and

burdens of ownership; and (4) the promissory notes used to

purchase the sheep did not represent valid indebtedness. Because

we have determined that the partnership transactions lacked

economic substance and are shams and that the partnerships never

acquired the benefits and burdens of ownership, it follows that

the adjusted bases in the sheep are zero. Clayden v.

Commissioner, 90 T.C. 656, 677-678 (1988); Rose v. Commissioner,

supra at 426; Zirker v. Commissioner, 87 T.C. 970, 978-979

(1986).

We conclude that the partnerships’ activities are tax-

motivated transactions within the meaning of section 6621(c).
 - 31 -

Issue 2. Whether the Period of Limitations on Assessment Had
Expired When the FPAAs Were Issued

The period for making assessments of tax attributable to a

partnership item or affected item is set forth in section 6229.

Section 6229 provides in pertinent part:

SEC. 6229. PERIOD OF LIMITATIONS FOR MAKING
ASSESSMENTS.

(a) General Rule.--Except as otherwise provided in
this section, the period for assessing any tax imposed
by subtitle A with respect to any person which is
attributable to any partnership item (or affected item)
for a partnership taxable year shall not expire before
the date which is 3 years after the later of--

(1) the date on which the partnership return
for such taxable year was filed, or

(2) the last day for filing such return for
such year (determined without regard to
extensions).

(b) Extension by Agreement.--

(1) In general.--The period described in
subsection (a) (including an extension period
under this subsection) may be extended--

* * * * * * *

(B) with respect to all partners, by an
agreement entered into by the Secretary and
the tax matters partner (or any other person
authorized by the partnership in writing to
enter into such an agreement),

before the expiration of such period.

* * * * * * *
 - 32 -

(c) Special Rule in Case of Fraud, Etc.--

(1) False return.--If any partner has, with
the intent to evade tax, signed or participated
directly or indirectly in the preparation of a
partnership return which includes a false or
fraudulent item--

(A) in the case of partners so signing
or participating in the preparation of the
return, any tax imposed by subtitle A which
is attributable to any partnership item (or
affected item) for the partnership taxable
year to which the return relates may be
assessed at any time, and

(B) in the case of all other partners,
subsection (a) shall be applied with respect
to such return by substituting “6 years” for
“3 years.”

Respondent issued the FPAAs at issue after the normal 3-year

periods for assessment had expired. With regard to these FPAAs,

however, Hoyt, as TMP, had executed consents extending the

limitations periods. The partnerships argue that the extensions

are invalid because Hoyt executed them while disabled by

conflicts between his own interests and those of his partners.

Respondent argues that the consents were valid and,

alternatively, if the waivers are invalid, the 6-year limitations

period under section 6229(c)(1) applies.

In River City Ranches I, we found that the partnerships did

not present evidence sufficient to show that Hoyt executed the

consents under disabling conflicts of interest. We concluded,

therefore, that the FPAAs were timely issued.
 - 33 -

In River City Ranches II, the Court of Appeals held that the

partnerships were entitled to discovery of respondent’s central

Hoyt files to find out the facts concerning Hoyt’s interests in

his dealings with respondent and what respondent knew about

Hoyt’s interests and his treatment of the partners’ interests.

River City Ranches #1 Ltd. v. Commissioner, 401 F.3d at 1141,

1143.

Pursuant to the mandate of the Court of Appeals, we granted

petitioners’ motions to take the depositions of Jill Page, Sue

Hullen, and Norman Johnson, present or former IRS employees whom

petitioners had called as witnesses during the 2001 trial of

these cases. Petitioners took their depositions in April 2006.

In order to make further information available to petitioners,

respondent went beyond the Court of Appeals’ direction regarding

limited additional discovery and made available to petitioners

his entire store of documents that had not been produced earlier.

This consisted of approximately 160 boxes of documents and 700

linear feet of IRS central Hoyt files.

After the discovery sought by petitioners was completed, the

Court held a second trial on September 11 and 12, 2006.

A. Waivers Executed by Hoyt in March 1993 Are Invalid

In River City Ranches I, we analogized these cases to

Phillips v. Commissioner, 272 F.3d 1172 (9th Cir. 2001), affg.

114 T.C. 115 (2000), in which the Court of Appeals held that the
 - 34 -

mere existence of past criminal investigations of a TMP does not

prove a disabling conflict of interest. We found that, as in

Phillips, Hoyt was not under active criminal investigation by the

IRS when he signed any of the extensions.

In River City Ranches #1 Ltd. v. Commissioner, 401 F.3d at

1142, the Court of Appeals limited the application of Phillips,

stating:

The comparison to Phillips is unilluminating, however,
because in Phillips “[t]he facts were stipulated by the
parties in skeletal form sufficient to provide, without
much flesh, what was necessary to raise the single
issue relied on by Phillips.” Id. at 1173. The lesson
of Phillips is that the sole fact of past criminal
investigations does not establish a disabling conflict
of interest. But there is more to the partnerships’
assertion of a disabling conflict than past criminal
investigations, and the record before us in this case
is not a bare skeleton.

Respondent suspected that Hoyt was selling cattle to some

partnerships that had already been sold to other partnerships and

that he was depreciating cattle that did not exist. Although

Hoyt was not under active criminal investigation by the IRS when

he signed any of the consents, at various times from 1984 through

1990 Hoyt was investigated by the CID, the DOJ, and the U.S.

Attorney’s Office.

Hoyt signed the consents between February 1991 and March

1993, during the period when respondent was first seeking and

then performing the headcount that would prove Hoyt’s crimes.

Hoyt’s unwillingness in late 1991 and early 1992 to consent to
 - 35 -

extensions of the limitations period for the partnerships unless

the IRS delayed assessing the preparer penalty until the FPAAs

were issued also indicated that Hoyt was allowing his personal

interests to interfere with his fiduciary duty to the

partnerships.

As early as mid-1989, the IRS suspected that Hoyt had not

purchased the sheep reportedly owned by the partnerships, in

breach of his fiduciary duty to the partnerships. By February

1993, the ongoing inspection and livestock count confirmed

respondent’s suspicion that Hoyt had greatly overstated the

number of breeding animals the partnerships claimed to own and

had grossly overvalued the livestock upon which the partnerships

were claiming tax benefits. By February 1993, as a result of the

count and inspection, respondent possessed sufficient evidence to

support the issuance of prefiling notices and freezing tax

refunds claimed by partners. Beginning in February 1993,

respondent generally froze and stopped issuing income tax refunds

to partners in the cattle and sheep partnerships and issued

prefiling notices to the investor-partners advising them that,

starting with the 1992 taxable year, the IRS would: (1) Disallow

the tax benefits that the partners claimed on their individual

returns from the cattle and sheep partnerships; and (2) not issue

any tax refunds these partners might claim attributable to such

partnership tax benefits. Respondent did not directly inform the
 - 36 -

investor-partners that Hoyt had greatly overstated the number of

breeding animals the partnerships claimed to own and had grossly

overvalued the livestock upon which the partnerships were

claiming tax benefits until the Examination Division issued

warning letters to all the partners on December 30, 1993 (shortly

after the FPAAs were issued).

“Trust law, generally, invalidates the transaction of a

trustee who is breaching his trust in a transaction in which the

other party is aware of the breach.” Phillips v. Commissioner,

supra at 1175. By February 1993, respondent knew that “Hoyt had

been taking money for non-existent cows and sheep--for which Hoyt

presumably knew he was vulnerable to criminal prosecution.”

River City Ranches #1 Ltd. v. Commissioner, 401 F.3d at 1142.

It was in the partners’ interest for the FPAAs to be issued

sooner rather than later because the FPAAs provided the partners

a strong indication that Hoyt was looting the partnerships and

that the partners had in fact claimed tax benefits to which they

were not entitled. Delay would perpetuate Hoyt’s concealment of

his theft and result in greater penalties and interest when the

taxes were collected.

By contrast, extending the limitations periods within which

respondent could issue the FPAAs was in Hoyt’s interest because

it delayed discovery of his theft. Hoyt’s interests ran toward

delaying as long as possible any threat to the house of cards he
 - 37 -

had constructed “in the hope that it would put off the day of

reckoning--perhaps forever, if his long run of luck held out.”

Id. at 1143.

We find that by February 1993, respondent knew or had reason

to know that Hoyt’s interest in extending the period within which

respondent could issue the FPAAs was in conflict with the

investor-partners’ interest in not delaying the issuance of the

FPAAs. Thus we conclude that the consents to extend the

limitations period signed in March 1993 are invalid.12 Hoyt

signed the consent to extend indefinitely the assessment period

for RCR #4’s 1984 tax year on August 1, 1987, before respondent

knew or had reason to know that Hoyt’s interest in extending the

limitations period conflicted with the partners’ interests. The

consent is valid, and respondent timely issued an FPAA to RCR #4

for its 1984 tax year on March 24, 1996.

B. The 6-Year Limitations Period Under Section
6229(c)(1) Applies to the Sheep Partnership
Returns for the Years at Issue

Notwithstanding our conclusion that the consents to

extensions of the limitations periods executed by Hoyt, the TMP,

12
On Apr. 13, 2007, the U.S. Bankruptcy Court for the
Eastern District of Louisiana held that the consents to extend
the limitations period signed with respect to Hoyt cattle
partnerships were invalid for similar reasons. In re Martinez,
Bankr. , 99 AFTR 2d 2007-2375 (Bankr. E.D. La. 2007).
Apparently, the Government did not raise the application of the
6-year limitations period under sec. 6229(c)1)(B), and the
Bankruptcy Court held that the FPAAs were untimely.
 - 38 -

on March 6, 1993, and by the IRS on March 30, 1993, were invalid

because of Hoyt’s disabling conflicts of interests, we must still

decide the alternative issue asserted by respondent as to whether

the 6-year period for assessment provided in section

6229(c)(1)(B) applies because of fraud.

Petitioners contend that respondent failed to prove that

Hoyt had a specific intent to evade tax and that each sheep

partnership return included false or fraudulent items. They

assert that respondent cannot rely solely on petitioners’

admissions that there were false items on the partnership

returns. To the contrary, respondent contends that he has

clearly and convincingly carried his burden of proof and met all

of the necessary requirements of section 6229(c)(1)(A) and (B).

We agree with respondent.

The 6-year limitations period applies if four requirements

are met: (1) The entity is a partnership; (2) the partnership

return includes a false or fraudulent item; (3) a partner signed

or participated directly or indirectly in the preparation of the

return; and (4) the partner signed or participated with the

intent to evade tax. Sec. 6229(c)(1); Transpac Drilling Venture,

1983-2 v. United States, 83 F.3d 1410, 1414 (Fed. Cir. 1996),

affg. 32 Fed. Cl. 810 (1995); cf. Allen v. Commissioner, 128 T.C.

37 (2007). There is no requirement that the signer of the

partnership return intend to evade his own taxes. The 6-year
 - 39 -

statute is applicable to each partner if, in signing a false or

fraudulent partnership return, the signer intended to evade the

taxes of the other partners. Transpac Drilling Venture, 1983-2

v. United States, supra at 1414-1415. There is also no

requirement that the other partners have knowledge of the false

or fraudulent deductions claimed on a partnership return. The

intent of the signer of the partnership return to evade the taxes

of the other partners satisfies the intent element of the 6-year

statute of limitations for making additional assessments under

section 6229(c)(1), which applies when the partnership return

containing false or fraudulent items is signed with intent to

evade tax. Id. It is the fraudulent nature of the return that

extends the limitations period. Allen v. Commissioner, supra at

42.

In these cases there is no dispute that the first three

requirements are satisfied. Petitioners have not contested them.

Indeed, they have acknowledged by their stipulated admissions

that all the sheep partnership returns contained false and

fraudulent deductions, and the facts support those findings.

Likewise, the fact that Hoyt, as TMP, participated in the

preparation of the partnership returns and signed them with the

intent to evade the taxes of the partners is established by

petitioners’ admissions on the workings of Hoyt’s tax shelter

scheme, the sham nature of the transactions and their lack of
 - 40 -

economic substance, and the methods used in preparing the

individual and partnership returns. See Transpac Drilling

Venture, 1983-2 v. United States, 32 Fed. Cl. at 821 (where the

Court of Federal Claims looked at the sham nature of the

transaction in its analysis of the 6-year fraud statute set forth

in section 6229(c)(1)).

During the years at issue, Hoyt’s scheme was to sell tax

deductions using phoney partnerships that generated false and

fraudulent flowthrough tax deductions. As reflected in our

factual findings, the sheep partnership returns filed for the

periods 1984, 1987, 1988, and 1989 included the following false

or fraudulent items: (1) Depreciation deductions and credits

attributable to nonexistent and overvalued sheep, (2) interest

deductions for illusory indebtedness relating to nonexistent and

overvalued sheep, and (3) false deductions for farm expenses and

guaranteed payments.

Petitioners not only admitted in their pleadings that the

returns signed by Hoyt included false information, but they also

repeatedly referred to Hoyt’s fraudulent conduct and deception in

their other submissions to the Court.

We have examined the structure and workings of Hoyt’s cattle

and sheep partnerships in River City Ranches I, Durham Farms #1

v. Commissioner, T.C. Memo. 2000-159, affd. 59 Fed. Appx. 952

(9th Cir. 2003), and River City Ranches #4, J.V. v. Commissioner,
 - 41 -

T.C. Memo. 1999-209. River City Ranches #4, J.V. and Durham

Farms #1 were test cases for Hoyt cattle and sheep partnerships

tried and decided by this Court during 1996 and 1997. In 2001,

we heard the remaining sheep partnership cases that resulted in

our opinion in River City Ranches I, some of which are presently

before us on this remand from the Court of Appeals.

Basically, our findings in River City Ranches I mirror our

findings in the sheep partnership test cases in River City

Ranches #4, J.V., which explain how Hoyt’s scheme worked and show

that the partnership returns contained false and fraudulent

deductions and were prepared by Hoyt with the intent to evade the

tax liability of the partners. They are incorporated by

reference in our fact findings here.

There are several indicia of Hoyt’s fraudulent intent to

evade tax when, as a partner and TMP, he participated in the

preparation of the partnership returns and signed them.

The RCR returns reported depreciation of breeding flocks

calculated on cost bases that Hoyt knew were based on false and

fraudulent flock recap sheets that listed nonexistent sheep, on

purported purchase prices that were much greater than the fair

market value of similar quality sheep, and on promissory notes

that did not create bona fide indebtedness. Moreover, the entire

transaction was without substance, and the partnerships did not

acquire the benefits and burdens of ownership of the sheep.
 - 42 -

Similarly, Hoyt knew that other farm deductions claimed on the

partnership returns for such items as feed, freight, gasoline,

insurance, rent of farm pasture, repairs, supplies, utilities,

veterinary fees, contract labor, and advertising expenses were

false and fraudulent because the partnership did not have the

livestock to require these expenses.

The interest deductions claimed on the partnership returns

were purportedly claimed with respect to the promissory note each

partnership issued in connection with the purported acquisition

of its breeding sheep. The interest deductions claimed on the

promissory notes were false and fraudulent because the promissory

notes the sheep partnerships issued for their breeding flocks

were not bona fide recourse debt. The notes had no economic

effect to the partnerships and were not valid indebtedness.

Finally, as this Court previously found in River City Ranches #4,

J.V. v. Commissioner, supra, the actions of the Barnes family and

Hoyt evidence that they themselves viewed the partnership notes

as essentially illusory and having no practical economic effect

and that the notes were merely a facade to support the tax

benefits that Hoyt had promised investors in the partnerships.

The guaranteed payments claimed on the partnership returns

purportedly pertain to payments made by the partnerships to Hoyt

as “sheep sales incentive”. However, since the partnerships

never acquired the benefits and burdens of its principal product,
 - 43 -

i.e., registered sheep, it follows that the deductions claimed

for guaranteed payments were false and fraudulent.

When the partnership returns were filed claiming the false

and fraudulent deductions, Hoyt was an enrolled agent before the

IRS. He was a sophisticated person preparing the partnership

returns who had demonstrated by obtaining his enrolled agent

status that he was aware of the return filing requirements and

the necessity of maintaining proper books and records.

Through participation in the Hoyt partnerships, the partners

received the benefits of the false and fraudulent partnership

deductions. A partnership is required to file an annual

information tax return even though it is not a taxable entity for

Federal income tax purposes. Secs. 701, 6031; sec. 1.701-1,

Income Tax Regs. Each partner is liable for income tax in his or

her individual capacity with respect to his or her share of

partnership items of income, loss, deduction, and credit. Sec.

701; sec. 1.702-1, Income Tax Regs. Thus, through such

participation in the Hoyt partnerships, each partner received

flowthrough partnership deductions that were false and fraudulent

and which reduced or eliminated the partner’s tax liability.

The falsity of the partnership deductions and Hoyt’s intent

to evade tax is further supported by the manner in which the

partners “purchased” their partnership interests and the focus of

the promotional materials. The partnership interest and the
 - 44 -

resulting flowthrough partnership deductions were “purchased”

with 75 percent of the partner’s tax savings resulting from the

flowthrough partnership deductions. The 75-percent tax savings

were determined first by computing the partner’s tax liability

without participation in a Hoyt partnership and then computing

the partner’s tax savings using the Hoyt partnership loss. The

difference in the two calculations was the partner’s tax savings,

of which 75 percent was paid to the Hoyt organization and 25

percent was to be retained by the partner. In addition, in the

initial year of investment, amended returns claiming refunds were

often filed for the partner’s prior 3 taxable years. The Hoyt

organization received 75 percent of such refunds, and the

partners retained 25 percent. Each year the partner’s payment to

the Hoyt organization was adjusted to reflect the 75/25 split.

Because the investment was based on “tax savings” and not on

original cash outlay, Hoyt’s partnership scheme essentially paid

for itself.

It is clear that the sheep partnerships were merely a facade

Hoyt used to provide the fraudulent tax benefits he promised to

the partnerships’ investors. Hoyt’s promotional materials so

indicate. Hoyt did not have a separate prospectus for each of

the sheep partnerships. Instead, he used the same promotional

materials he had prepared for the cattle partnerships. And the

promotional materials used to market the investments focused
 - 45 -

heavily on the investors’ tax savings. One brochure, titled “The

1,000 lb Tax Shelter”, highlighted the investors’ writeoffs,

refers to the investment as a tax shelter, and emphasizes that

the primary return on an investment in a Hoyt partnership would

be from the tax savings. See Van Scoten v. Commissioner, T.C.

Memo. 2004-275 (where the Tax Court made a similar finding based

on its review of the same Hoyt brochure), affd. 439 F.3d 1243

(10th Cir. 2006). In Van Scoten, we pointed out that the 1,000

lb Tax Shelter brochure spent numerous pages explaining the tax

benefits of investing in a Hoyt partnership and explaining why

investors should trust only Hoyt’s organization to prepare their

individual Federal income tax returns. Another brochure, bearing

the heading “Harvesting Tax Savings by Farming the Tax Code”,

also emphasized tax savings and explained that the investment

could be financed from the investors’ tax savings, which the

investors otherwise would have paid to the IRS.

The partners’ individual income tax returns were often

prepared first by the Hoyt Tax Office to claim partnership

deductions or credits sufficient to eliminate or substantially

reduce a partner’s tax liability. Subsequently, the partnership

returns were prepared to reflect the amounts reported on the

partners’ individual income tax returns. The promotional

materials explained that, beginning in 1982, other members of the

Hoyt Tax Office would sign the individual partners’ tax returns
 - 46 -

as the preparer instead of Hoyt. If a partner needed a greater

or lesser partnership loss in any year, the deductions that

flowed through from the partnership were quickly adjusted within

the Hoyt Tax Office without the partner’s having to pay a higher

fee to an outside return preparer. Hoyt routinely had the

individual’s Federal income tax returns prepared and filed

claiming large partnership losses before the Form 1065

partnership returns were prepared and filed. Sometimes this

would result in an inconsistency between the loss shown on the

individual return and the amount shown on the partner’s Schedule

K-1. We think the workings of this scheme show that the

partnership returns were signed with intent to evade the

partners’ individual tax liabilities through the use of false and

fraudulent flowthrough partnership losses.

In summary, the record establishes by clear and convincing

evidence that Hoyt knew the partnership returns contained false

and fraudulent deductions and that he intended income tax to be

evaded at the partner level. He was involved in every facet of

the partnerships. He formed and operated the partnerships. He

was involved in the alleged purchase of sheep by the partnerships

from Barnes Ranches. He was involved in the unusual manner in

which the partnership and individual returns were prepared. He

knew that the bills of sale which purportedly identified the

sheep purchased by each partnership listed large numbers of
 - 47 -

individual breeding sheep that did not exist. He knew that the

total purchase price each sheep partnership agreed to pay for its

sheep was far greater the fair market value of similar quality

sheep. He knew that the flock recap sheets identifying the

partnership sheep contained false information and that the

partnership records were maintained in an unreliable manner. He

knew that the deductions claimed on the partnership returns for

depreciation and other farm expenses relating to the alleged

sheep purchases were false and fraudulent. He knew that the

deductions claimed on the partnership returns for interest on the

partnership promissory notes were false and fraudulent. He knew

that the guaranteed payment deductions claimed on the partnership

returns were false and fraudulent. He knew that he was selling

the partners false and fraudulent deductions. And he knew all

these facts when he prepared and signed each of the partnership

returns.

Accordingly, we hold that the 6-year statute of limitations

on assessment was open under section 6229(c)(1)(B) for the 1987,

1988, and 1989 partnership returns at the time the FPAAs were

issued. The FPAAs were issued within the 6-year period for

assessing the tax. Therefore, it follows and we so hold that the

FPAAs were timely issued for the 1987, 1988, and 1989 returns.

With respect to Hoyt, a partner and the TMP, who signed and

participated in the preparation of the partnership returns
 - 48 -

containing false and fraudulent items with the intent to evade

tax, the periods for assessment against him individually of tax

liabilities attributable to the partnership items are open

indefinitely. See sec. 6229(c)(1)(A). Therefore, it follows,

and we so hold, that the FPAAs were timely issued as to Hoyt

individually for the 1984, 1987, 1988, and 1989 returns.

To reflect the foregoing,

Appropriate decisions will be

entered.