In Uncategorized on 09/14/2016 at 16:43

And this is what sinks the Barnhart guys when they claim they’re running the business just like they used to when they got a couple “no change” audits (hi, Judge Holmes).

This is Judge Cohen’s roundup, Barnhart Ranch, Co., et al., 2016 T. C. Memo. 170, filed 9/14/16.

Co was a C Corp that the Barnharts claimed was just an agent of theirs. So therefore there was no double taxation of their cattle-dealing profits. And they also claimed they kept on using their joint-interest accounting that carried over from their oil-drilling days.

Joint-interest billing is a method used on oil and gas exploration and production, but the Barnharts took Co out of everything but cattle.

Co ran the whole cattle operation, buying, selling, paying wages and payroll taxes. Co     “… bought and sold cattle under its own name during the years in issue. It also, in its own name and carrying out cattle operation business, held a bank account, purchased and held titles to vehicles, leased ranch property, and held ranch and workers’ compensation and employer’s liability insurance policies. [Co] paid for the services of a ranch manager and ranch hands, and it handled their employment tax and income tax documents.  Any control over these employees by the Barnhart brothers would presumably have been exercised by them not as individuals but in their roles as officers of [Co], and the record does not show otherwise.” 2016 T. C. Memo. 170, at p. 16.

And the Barnharts held out Co as an owner, despite claiming that everyone knew they were dealing with the Barnharts. OK, but if you choose an entity to conduct your business, you’re stuck with it.

The Barnharts want to avoid the chops by claiming they relied in good faith on the “no changes” of prior years. “A failure by the Commissioner to disallow similar deductions in a prior year’s audit of a taxpayer’s return may be a factor to be considered with respect to the imposition of the accuracy-related penalty.  See Stewart v. Commissioner, T.C. Memo. 2002-199, slip op. at 10; Sheehy v. Commissioner, T.C. Memo. 1996-334, slip op. at 6.  The 1995 audit of [Co’s] 1994 return, however, was conducted with respect to a taxpayer other than petitioners and included other businesses along with the cattle operation.  While the evidence suggests that the cattle operation was more or less run in a traditional manner over the years, they do not show that [Co’s predecessor]. and [Co] performed tax reporting in the same way.” 2016 T. C. Memo. 170, at p. 35.

Anyway, their accountant said she just took over the existing system. And the Barnharts are savvy businessmen, who could well have figured out that a Sub S would serve their turn better than a C Corp, or could have gone to competent professionals who would have told them so.

So Co is stuck with no hat and all cattle.


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