Originally published on Forbes.com May 27th, 2014
Anne W. Marion sounds like the heroine in one of the romantic mysteries my covivant likes to listen to when we are in her car. According to this account of the Four Sixes Ranch
Not since Burk Burnett founded and built the Four Sixes more than a century ago has any family member taken as much interest in the ranches as she, according to her long-time ranch manager, the late J.J. Gibson. At a young age, she spent the summers on the Four Sixes earning the respect of the cowboys as she learned to ride horses and do the things they did. Her strong will and determination have made her a fine leader, both in the ranching industry and the business world.
Ms. Marion is not quite as colorful as her great grandfather who founded Four Sixes. Apparently the story that the name of the ranch comes from the four of a kind hand that won Captain Samuel “Burk” Burnett his first cattle in a poker game is apocryphal, but it is such a good story that it gets repeated. The only way you could improve it is by having the cattle baron he was betting against holding aces over eights. Then there is his relationship with Quanah Parker, one of the last Comanche chiefs
The cattle baron had a strong feeling for Indian rights, and his respect for them was genuine. Where other cattle kings fought Indians and the harsh land to build empires, Burnett learned Comanche ways, passing both the love of the land and his friendship with the Indians to his family. As a sign of their regard for Burnett, the Comanches gave him a name in their own language: Mas-sa-suta, meaning “Big Boss”.
At any rate, heiresses who won the respect of the cowboys in their youth are not just the stuff of romantic mysteries. The real-life Anne Marion, who was in the Forbes Four Hundred as late as 2009, proved to the government what a real cowgirl – or at least ranch manager – she was. She did such a good job that it was stipulated leaving only a technical issue for the Fifth Circuit to decide in Burnett Ranches, Limited v United States of America.
Collateral Damage From The War Against Tax Shelters
The MIT Press has just published Confidence Games – Lawyers, Accountants, and the Tax Shelter Industry. It tells about the frenzy of greed that gripped the Big 4 Accounting firms and some prestigious law firms around the turn of the Millenium leading to what Jack Townsend called “a raid on the fisc”.
Abusive tax shelter activity at the turn of the twenty-first century cost the U.S. Treasury billions of dollars and sent a number of lawyers and accountants to prison
I’ll be writing more about “Confidence Games”, but what is relevant here is an observation that they make
Purveyors of the tax shelters of the 1970s and 1980s for the most part had been institutions on the margins of professional respectability.
That really hurt the feelings of this poor tax blogger who ran all the tax shelter work at Joseph B Cohan and Associates. The interesting thing about the seventies and eighties tax shelters were that they involved real businesses (well usually) that generated more favorable tax attributes than they could consume in the business. People facing high marginal rates were invited to use those excess benefits. Thus it is perfectly logical that JBC got into doing low-income housing deals, because we had many dentists as clients. Low-income housing was particularly blessed by the government since there was a real desire to get cheap capital into that business. Other industries were not so favored among them agriculture.
Congress was happy to have actual farmers and ranchers operate in a more benign tax milieu than dentists, but it did not want dentists to be putting money into the cattle industry to shelter the income from their dental practices. A classic quick deferral/conversion scheme involved “prepaid feed”. The legislative war on tax shelters proceeded over many years culminating in the Tax Reform Act of 1986, which pretty well killed traditional shelters. All the rules that were created added additional complexity that could trip up people not really trying to get away with anything.
Using Shelter Rules Against Somebody Not Sheltering
The cattle feeding shelters were attacked fairly early. Code Section 464 was part of the Tax Reform Act of 1976. It provided that a “farming syndicate” could not deduct feed, seed, fertilizer or other similar farm supplies until the supplies were actually used. Among the ways to be considered a farming syndicate is to have the entity owned 35% or more by limited partners. In figuring the percentage interests owned by people actively involved in the activity are not considered.
You Are Not Your S Corporation – Sometimes
Anne Marion did not invite a bunch of dentists to put their money into Burnett Ranches. Apparently, she is pretty much the 100% ultimate owner. There are however entities involved – a limited partnership, a trust, and an S corp. The Court noted:
But neither the government nor anyone else contends that tax sheltering or minimization had anything whatsoever to do with that arrangement. More to the point of this case, Ms. Marion’s business and ownership history with these ranches and their operations is the very antithesis of the “farming syndicate” tax shelters that Section 464 was enacted to thwart.
Actually, you could tell from the outset that the Fifth Circuit was going to look kindly on this taxpayer
The long and colorful history that culminates with Ms. Marion’s decades of active management of Burnett Ranches’s agricultural business is a classic example of the horse and cattle ranching history of the State of Texas. Ms. Marion is just the latest member of the Burnett family to oversee and manage their cattle and horse breeding operations, which are conducted principally on two ranches that have been owned by her and her predecessors for generations—the 6666 Ranch (“Four Sixes Ranch”) east of Lubbock, near Guthrie, Texas, and the Dixon Creek Ranch, northeast of Amarillo, near Panhandle, Texas. The former has been a stereotypical Texas working livestock ranch for more than 150 years and has been operated continuously by a series of direct descendants of Captain S. B. Burnett, who founded the Four Sixes Ranch sometime between the fall of the Alamo and the commencement of the Civil War.
When the judge starts with an Alamo reference you can pretty well figure things are going to go well for the West Texas cowgirl, billionaire or not. Being a federal judge and all he probably had to stick with Civil War, rather War of Northern Aggression.
There was really no sympathy for the government position
Regardless of the government’s last-ditch, “gotcha” contention that the interposition of Ms. Marion’s S corp. between her and Burnett Ranches stymies the latter entity from qualifying for the Active Participation Exception, there is no question that, for a cash-basis taxpayer, the income tax results would be exactly the same, with or without that S corp. in her chain of title. Whether Ms. Marion’s interest in Burnett Ranches were held in her own name or in the name of her wholly owned S corp. (which are universally recognized as being purely pass-through entities for federal income tax purposes), she would owe precisely the same income taxes.
So the Fifth Circuit upheld the previous district court decision that putting an S Corporation saddle between the rancher and the ranch did not poison the active participation that avoided definition as a syndicate.
Planning Note
There are other situations in which the identity between a taxpayer and an S corporation is not so absolute. Sometimes this is a benefit as in the SE tax arena. Other times it is a detriment as when the S corporation has debts that are personally guaranteed by the shareholder, but not included in her basis. If you want to be certain that an entity will be disregarded, consider a single-member LLC. That would have solved the problem for Ms. Marion without an expensive court battle.
You can follow me on twitter @peterreillycpa.