Substance over form - tax motivated transaction. It is well established that the tax consequences of transactions are governed by substance rather than form. Frank Lyon Co. v. United States [78-1 USTC ¶9370], 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. [39-2 USTC ¶9793], 308 U.S. 252, 255 (1939). If a transaction is devoid of economic substance, it is not recognized for Federal taxation purposes. Gregory v. Helvering [35-1 USTC ¶9043], 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 [Dec. 45,152], 91 T.C. 838, 854 (1988); Rose v. Commissioner [89-1 USTC ¶9191], 88 T.C. 386, 410 (1987), affd. [89-1 USTC ¶9191] 868 F.2d 851 (6th Cir. 1989).


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., v. Commissioner.

Dkt. Nos. 787-91 , 4876-94 , 9550-94 , 9552-94 , 9554-94 , 13595-94 , 13597-94 , 13599-94 , 14038-96 , TC Memo. 2007-171, July 2, 2007.

On remand from CA-9, 2005-1 USTC ¶50,239. [Appealable, barring stipulation to the contrary, to CA-9. --CCH.]

--
The period of limitations on assessment had not expired when notices of final partnership administrative adjustment (FPAAs) were issued. Consents to extend the periods of limitations were invalid because the tax matters partner (TMP) signed them while disabled by conflict of interests known to the IRS. However, the six-year period of limitations on assessment under Code Sec. 6229(c)(1) applied because of fraud. The record established that the TMP knew the partnership returns contained false and fraudulent deductions and that he intended income tax to be evaded at the partner level. On remand from CA-9, 2005-1 USTC ¶50,239. -


.

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*


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 [2005-1 USTC ¶50,239], 401 F.3d 1136 (9th Cir. 2005) (River City Ranches II), affg. in part, revg. in part and remanding [Dec. 55,165(M)] 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 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.


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 [Dec. 53,432(M)], 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 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 [78-1 USTC ¶9370], 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. [39-2 USTC ¶9793], 308 U.S. 252, 255 (1939). If a transaction is devoid of economic substance, it is not recognized for Federal taxation purposes. Gregory v. Helvering [35-1 USTC ¶9043], 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 [Dec. 45,152], 91 T.C. 838, 854 (1988); Rose v. Commissioner [89-1 USTC ¶9191], 88 T.C. 386, 410 (1987), affd. [89-1 USTC ¶9191] 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.

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 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 [Dec. 44,684], 90 T.C. 656, 677-678 (1988); Rose v. Commissioner, supra at 426; Zirker v. Commissioner [Dec. 43,473], 87 T.C. 970, 978-979 (1986).

We conclude that the partnerships' activities are tax-motivated transactions within the meaning of section 6621(c).

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.

*******

(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.

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 [2005-1 USTC ¶50,239], 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 [2002-1 USTC ¶50,103], 272 F.3d 1172 (9th Cir. 2001), affg. [Dec. 53,769] 114 T.C. 115 (2000), in which the Court of Appeals held that the 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 [2005-1 USTC ¶50,239], 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 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 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 [2005-1 USTC ¶50,239], 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 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, 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 [96-1 USTC ¶50,271], 83 F.3d 1410, 1414 (Fed. Cir. 1996), affg. [95-1 USTC ¶50,192] 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 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 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 [Dec. 53,883(M)], T.C. Memo. 2000-159, affd. [2003-1 USTC ¶50,391] 59 Fed. Appx. 952 (9th Cir. 2003), and River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], 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. 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, 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 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 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 [Dec. 55,818(M)], 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 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 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 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.

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 [Dec. 55,165(M)], T.C. Memo. 2003-150, affd. in part, revd. in part and remanded [2005-1 USTC ¶50,239] 401 F.3d 1136 (9th Cir. 2005).

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 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 In River City Ranches #1 Ltd. v. Commissioner [2005-1 USTC ¶50,239], 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 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 During the original proceedings, the Court took judicial notice of the facts and record in River City Ranches #4, J.V. v. Commissioner [Dec. 53,432(M)], T.C. Memo. 1999-209, affd. [2002-1 USTC ¶50,105] 23 Fed. Appx. 744 (9th Cir. 2001).

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.

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.

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.

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.

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.