Burnett Ranches, Ltd. Ex Rel. Tax Matters Partner v. United States , 753 F.3d 143 ( 2014 )

Case: 13-10403 Document: 00512639017 Page: 1 Date Filed: 05/22/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 13-10403
Fifth Circuit
FILED
Summary Calendar May 22, 2014
Lyle W. Cayce
BURNETT RANCHES, LIMITED, Clerk
by and through its Tax Matters Partner,
Plaintiff-Appellee,
v.
UNITED STATES OF AMERICA,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Texas
Before WIENER, OWEN, and HAYNES, Circuit Judges.
WIENER, Circuit Judge.
The United States of America (“the government”) appeals the district
court’s Final Judgment of February 13, 2013, which rejected the government’s
efforts to tax Burnett Ranches, Limited (“Burnett Ranches”) as a “farming
syndicate” tax shelter per § 464 of the Internal Revenue Code of 1986
(“I.R.C.”). 1 The government targeted the super-majority interest of Anne
Burnett Windfohr Marion (“Ms. Marion”) in Burnett Raches, title to which she
held in the name of her wholly owned subchapter S corporation (“S. corp.”),
1 26 U.S.C. § 464.
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Burnett Ranches, Inc. (“B.R., Inc.”). If the government’s efforts had been
successful, Burnett Ranches would have been required to report its income as
accrued (“accrual method”) rather than as received, on the cash-receipts-and-
disbursements method (“cash method”).
Burnett Ranches insisted that it is exempt from such treatment because
Ms. Marion “actively participated” in the management of its ranching business
for more than five years prior to the tax years at issue here, and her “interest”
in Burnett Ranches is “attributable” to her management. This, Burnett
Ranches argued, qualified it for the exception set forth in § 464(c)(2)(A) (the
“Active Participation Exception”).
The district court denied the government’s motion for summary
judgment and granted Burnett Ranches’s cross-motion. The court postponed
the effect of its judgment, however, when it granted the government’s motion
under Federal Rule of Civil Procedure 56(d) to allow it time to conduct
discovery regarding Ms. Marion’s active participation.
Following extensive discovery, the government conceded, by stipulation,
that (1) Ms. Marion did indeed “actively participate” in the management of
Burnett Ranches’s agricultural business for not less than five years previously,
and (2) her interest in Burnett Ranches is “attributable to” her active
participation. Based on the government’s stipulated concession, the district
court lifted the stay of its final judgment which held that Burnett Ranches
qualified for the Active Participation Exception to § 464’s farming syndicate
rule, irrespective of the fact that, during the tax years in question, title to Ms.
Marion’s limited partner’s interest in Burnett Ranches stood in the name of
her S corp., B.R., Inc. We affirm both the district court’s denial of the
government’s motion for summary judgment and its judgment in favor of
Burnett Ranches.
2
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I. FACTS AND PROCEEDINGS
A. Background
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.
The most recent operator—as the government now concedes—is Ms.
Marion. She was designated Operations Manager of Burnett Ranches’s entire
ranching business years ago. She is the sole owner of the Four Sixes Ranch,
where some aspects of Burnett Ranches’s livestock business are conducted, and
she is half owner, individually and through the Tom L. and Anne W. Burnett
Trust (the “TLAB Trust”) 2 of Dixon Creek Ranch, where other facets of that
business are conducted.
The record does not reflect the business or legal reasons behind the
structuring of Ms. Marion’s ownership of, and Burnett Ranches’s operation on,
the Four Sixes Ranch and Dixon Creek Ranch through the combination of a
2 The TLAB Trust is Burnett Ranches’s tax matters partner.
3
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limited partnership, a trust, and an S corp. But neither the government nor
anyone else contends that tax sheltering or minimization had anything
whatsoever to do with that arrangement. 3 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
§ 464 was enacted to thwart. In fact, her and her family’s uninterrupted
history with the farming operations and the lands on which they are conducted
could be the poster child for Congress’s inclusion of the Active Participation
Exception in § 464 to exempt such entities and their substantial hands-in-the-
dirt owners and operators from that section’s reach.
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. Yet, after it was forced to stipulate that, for
purposes of § 464’s farming syndicate rules, (1) Ms. Marion was an active
participant in the farming operations at all relevant times, and (2) her interest
in the limited partnership was attributable to her active participation, the
government’s sole basis for continuing to assert that millions of dollars of
additional tax are owed through the accrual method of accounting has been the
3Indeed, if the government were pursuing a tort or contract claim against Ms. Marion,
it would likely seek to pierce the S corp.’s veil to hold it the alter ego of Ms. Marion.
4
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presence of her S corp. Whether that exceedingly slender reed can prop up the
government’s case is the only question presented in this appeal.
B. Proceedings
The government determined that Burnett Ranches could not file income
tax returns on the cash method of accounting for tax years 2005, 2006, and
2007. The reason given was that Burnett Ranches was a tax shelter under
I.R.C. § 448 by virtue of being a “farming syndicate” under § 464 and therefore
had to employ the accrual method of tax accounting. Burnett Ranches
challenged that determination by filing the instant action in the district court
after Ms. Marion provided substantial funds against the government’s tax
assessment.
Each party filed a motion for summary judgment on the issue whether
Ms. Marion’s management of the ranching operation qualifies Burnett
Ranches for the Active Participation Exception. The government ultimately
stipulated to her requisite participation in management and to her interest in
Burnett Ranches being attributable to that participation, thereby eliminating
any genuine issues of material fact. The government nevertheless insisted,
and continues do so on appeal, that Ms. Marion’s ownership of her interest in
Burnett Ranches through BR, Inc. blocked Burnett Ranches’s qualification for
the Active Participation Exception and thus required it to use the accrual
method of accounting for tax purposes. The district court rejected the
government’s position, lifted the stay of its earlier ruling, and made final its
judgment in favor of Burnett Ranches. The government timely filed a notice
of appeal.
5
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II. ANALYSIS
A. Standard of Review
We review the grant of summary judgment de novo, applying the same
standards as the district court. 4 “Summary judgment is warranted if the
pleadings, the discovery and disclosure materials on file, and any affidavits
show that there is no genuine [dispute] as to any material fact and that the
movant is entitled to judgment as a matter of law.” 5 When, as here, the
opposing parties file cross-motions for summary judgment, we review “each
party’s motion independently, viewing the evidence and inferences in the light
most favorable to the nonmoving party.” 6
B. Issue on Appeal
Given the government’s stipulations, this appeal implicates no issues of
fact and but a single question of law: Does Ms. Marion’s ownership of her
interest in Burnett Ranches through B.R., Inc., her wholly owned S corp.,
rather than directly in her own name, render nugatory Burnett Ranches’s
invocation of the Active Participation Exception, which unquestionably would
apply if Ms. Marion held title to her limited partnership interest in Burnett
Ranches in her own name?
C. Discussion
The income tax loophole that Congress sought to close in adopting § 464
was the practice of forming limited partnerships and similar investment
entities to acquire interests in agricultural trades or businesses that had large
tax operating losses, then selling fractional interests in such investment
entities to sophisticated passive “investors” who had nothing whatsoever to do
4 Duval v. N. Assurance Co. of Am., 722 F.3d 300, 303 (5th Cir. 2013).
5 Id. (quoting DePree v. Saunders, 588 F.3d 282, 286 (5th Cir. 2009).
6 Ford Motor Co. v. Tex. Dep’t of Transp., 264 F.3d 493, 498 (5th Cir. 2001).
6
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with farming but who had large taxable incomes. Such “limited entrepreneurs”
would offset their respective shares of the farm’s tax losses against their
unrelated taxable incomes.
When it adopted § 464, however, Congress recognized that the tax
loophole it was seeking to close was not one employed by individuals, families,
and entities legitimately and directly engaged in agricultural enterprises.
That is why Congress included subsection (c)(2) in § 464, viz., to identify and
define—in sub-subsections (A) through (E)—five categories of taxpayers whose
bona fide interests in agricultural endeavors Congress meant to exempt from
the coverage of § 464 because such interests are attributable in substantial part
to long-term, active management of such farming enterprises. For today’s
purposes, § 464—which defines “farming syndicate” and refers to the
congressionally targeted high-income, non-farmer investors as “limited
partners” or “limited entrepreneurs”—also defines, in sub-subsection (A) of
subsection (c)(2), the particular category of bona fide farmers like Ms. Marion
who are not covered by § 464, to wit:
Holdings attributable to active management. . . . [T]he
following shall be treated as an interest which is not
held by a limited partner or a limited entrepreneur:
(A) In the case of any individual [viz., Ms.
Marion] who has actively participated (for a
period of not less than five years) in the
management of any trade or business of farming
[viz., Burnett Ranches’s livestock business], any
interest in a partnership or other enterprise
[viz., Ms. Marion’s interest in the limited
partnership, Burnett Ranches, that she held in
the name of BR, Inc.] which is attributable to
such active participation[.] 7
7 26 U.S.C. § 464(c)(2)(A) (emphasis and bracketed identifications added). Written
with a bit less convolution, subsection (c)(2)(A) might read:
7
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Congress thus expressly provided that any interest in an agricultural venture
that is “attributable to” an individual’s “active participation” in the
“management” of the farming activity for more than five years is not to be
treated as the interest of a proscribed limited partner or limited entrepreneur.
Importantly, Congress did not restrict sub-subsection (A)’s particular exception
to interests of which such an actively participating manager holds legal title in
his or her name.
To accept the government’s overly expansive reading of § 464 by
crediting its overly narrow reading of the Active Participation Exception would
be to sanction “administrative legislation” by an Article II executive agency. 8
This we decline to do, agreeing instead with the district court that the
government’s efforts fail, grounded as they are in nothing more than the fact
that legal title to Ms. Marion’s interest in Burnett Ranches stands in the name
of her S corp. Indeed, this is a classic example of a difference that does not
constitute a distinction.
We repeat for emphasis that, given the government’s stipulations, there
are no genuine disputes of material fact and only one question of law, viz.,
whether the interposition of Ms. Marion’s S corp. changes the result of this
case. As an issue of first impression, our decision begins—and ends in this
case—with statutory interpretation.
Any interest in a partnership or other enterprise that is
attributable to the active participation of any individual (for a
period of not less than five years) in the management of any
farming trade or business of such entity shall not be treated as
an interest held by a limited partner or limited entrepreneur.
8U.S. Const. art. I, § 1 (“All legislative Powers herein granted shall be vested in a
Congress.”); Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 472 (2001).
8
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In our de novo interpretation of § 464, we look first and foremost to the
plain meaning of each word; to each word’s meaning relative to the other words
of the statute; and to such meaning in the context of the statute’s structure,
word sequence, grammar, punctuation, syntax, inclusion or omission of words
and phrases, and the like. 9 Although the I.R.C is less than pellucid on first
reading, as it contains many cross-references, is structured with convoluted
syntax, and is anything but “simple and direct,” we still give each word its
ordinary meaning unless it is a term of art expressly defined in the statute; 10
and we will find no word or phrase ambiguous unless it is susceptible of more
than one reasonable interpretation. 11 With these familiar precepts of statutory
construction in mind, we start with the district court’s analysis of the farm
syndicate provision of § 464 in general and its Active Participation Exception
in particular.
The government’s contention that Ms. Marion’s holding of her share of
Burnett Ranches in the name of her S corp. prevents its qualifying for the
Active Participation Exception is based on the use of the word “interest,” both
in subsection 464(c)(2) and in its sub-subsection (A). The government insists
9 Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 251 (2010) (“When faced with
questions of statutory construction, we must first determine whether the statutory text is
plain and unambiguous and, if it is, we must apply the statute according to its terms. The
plainness or ambiguity of statutory language is determined by reference to the language
itself, the specific context in which that language is used, and the broader context of the
statute as a whole. If the statutory text is unambiguous, our inquiry begins and ends with
the text.”) (internal quotation marks, citations and brackets omitted).
10 Kaltenbach v. Richards, 464 F.3d 524, 528 (5th Cir. 2006) (“It is a cardinal principle
of statutory construction that a statute ought, upon the whole, to be so construed that, if it
can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.”)
(internal quotation marks and citations omitted).
11 In re Rogers, 513 F.3d 212, 226 (5th Cir. 2008) (“For the language to be considered
ambiguous, . . . it must be susceptible to more than one reasonable interpretation or more
than one accepted meaning. However, a statute is not ambiguous simply because it is
inartfully drafted.”) (internal citations omitted).
9
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that “an interest” in subsection (c)(2) and “any interest” in sub-subsection (A)
must be narrowly construed as synonymous with legal title or direct
ownership. But in the statute itself, neither of these uses of “interest” is thus
restrictively modified. And, without a narrowing modifier, “interest” is not
restricted to an ownership formally vested by legal title: It must be construed
in the broader dictionary sense of involvement with or participation in
something; a right, claim, or share in something; or “something in which such
a right, claim, or share is held.” 12 Similarly, “interest” includes “the fact or
relation of having a share or concern in, or a right to, something. . . . A thing
which is to the advantage of someone”. 13
Not having expressly limited the use of “interest” in § 464(c)(2) to formal,
legal title, and having expansively referred to “any interest” in sub-subsection
(A), Congress must be deemed to have used the word in its broadest, generic
sense, with no intention of narrowing the meaning of “interest” to cover only
technically titled ownership. Thus, under sub-subsection (A), five years of
active participation in farm management qualifies “any” interest in the
partnership or enterprise for the exception as long as it is attributable to such
participation: not just interests that are legally held or titled, but also indirect
or beneficial interests.
Additionally, in relying solely on the interposition of the S corp. between
Ms. Marion and Burnett Ranches to prevent it from qualifying for the Active
Participation Exception and thereby bring Burnett Ranches under § 464, the
government fails to connect the dots with § 464(c)(1)(B), in which Congress
expressly eliminates an “S corporation” from the types of legal entities which
12 The Am. Heritage Dictionary of the English Language 683 (William Morris ed.,
1976).
13 1 The New Shorter Oxford English Dictionary on Historical Principles 1393 (4th ed.
1993).
10
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that subsection subjects to farming syndicate status. In so doing, Congress at
least implicitly recognized the tax status of S corps. as purely flow-through
entities. Surely, S corps. cannot be recognized as being outside the pale in
defining farming syndicates, only to be treated as preventing active-
participation status in a partnership or enterprise in which the interest of the
active participant happens to be held in a S corp. for some reason unrelated to
taxes.
As the district court cogently emphasized, the statutory language of the
Active Participation Exception applies to “any interest” that is attributable to
the individual’s active participation in management. We embrace the district
court’s observation that there is “no meaningful basis for distinguishing
between the partnership interest of a rancher who has structured his business
as a sole proprietorship and a rancher who has structured his business as [a
subchapter S] corporation.” This is underscored by the fact that “individual”
is used in subsection § 464(c)(2) and in its sub-subsection (A), in reference to
the providing of active management services, not in reference to the technical
method of having an interest in the venture.
In explaining its judgment in favor of Burnett Ranches, the district court
summed up the gist of its decision as follows:
[T]he language in subsection 464(c)(2)(A) does not
restrict application of the Active-Participation
Exception to individuals. Rather, the statutory
language indicates that the exception applies to any
interests in a partnership that is attributable to an
individual’s active participation in the management of
a farming business for more than five years. . . . This
interpretation of Section 464(c)(2)(A) maintains
consistency with the purpose of the farming-syndicate
rules without needlessly expanding their scope. . . .
Congress did not intend to deprive genuine farmers or
ranchers of their previously enjoyed tax benefits.
11
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In support of the district court’s statutory interpretation of the Active
Participation Exception for persons in Ms. Marion’s position, Burnett Ranches
notes that the government ignores a telling difference between the two
exceptions respectively identified in sub-subsections (A) and (E) of subsection
§ 464(c)(2). Sub-subsection (A)’s exception applies to “any interest in a
partnership” while sub-subsection (E)’s exception applies to “any interest held
by a member of the family. . . of a grandparent of an individual.” This
difference is a prime example of the “well-established principle of statutory
construction that where Congress includes particular language in one section
of a statute but omits it in another section of the same Act, it is generally
presumed that Congress acts intentionally and purposely in the disparate
inclusion or exclusion.” 14 As it did in sub-subsection (E), Congress could have
limited sub-subsection (A) to “any interest held by” the individual who actively
participated in the management of the farming enterprise. Instead, however,
it specified that sub-subsection (A)’s exception applies to “any interest in [such]
a partnership or other enterprise.” That difference cannot be ascribed to
inadvertence.
The government attempts to dissuade us from adopting this reading of
§ 464 by pointing to the purported administrative burdens our decision will
engender. It contends that, in cases when the tiered ownership structure is
more complicated than Ms. Marion’s full ownership of B.R., Inc., such as an S
corp. with multiple shareholders, it will be put in the position of “having to
trace the indirect ownership of a partnership interest through a potential
labyrinth of pass-through” entities. First, our holding today is limited to the
facts before us: an interest in a pass-through entity solely owned by the
14 Kashanchi v. Tex. Commerce Med. Bank, N.A., 703 F.2d 936, 939 (5th Cir. 1983)
(internal quotation marks omitted) (quoting United States v. Wong Kim Bo, 472 F.2d 720,
722 (5th Cir. 1972)).
12
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individual who has actively participated in the management of a farming
business. Second, we doubt that our interpretation of § 464 will stymie the
I.R.S., an agency tasked with uncovering abusive tax-avoidance schemes of
myriad forms, not just those in the nature of a farming syndicate. The
government’s duty is to determine whether to require proof that the Active
Participation Exception in fact applies. 15 Therefore, if it doubts that an
interest is attributable to an individual who has actively participated in the
management of a farming business, the government may place the burden on
the individual to establish that he or she satisfies § 464(c)(2)(A). 16
By now, our admittedly belabored point should be obvious: Even though
it is held in the name of B.R., Inc., Ms. Marion’s interest in Burnett Ranches is
directly attributable to her long-term active participation in the management
of the agricultural business of that entity. We deem it beyond peradventure
that her limited partnership interest in Burnett Ranches is excepted from
§ 464’s primary thrust of requiring farming syndicates to employ the accrual
basis for accounting.
In summary, we agree with the district court that an otherwise qualified
individual who has participated in management of the farming operations for
not less than five years comes within the Active Participation Exception
embodied in § 464(c)(2)(A), irrespective of the fact that the legal title of such
individual’s attributable interest happens to be held in the name of her wholly
owned S corp. rather than in her own name. Accordingly, the district court’s
Final Judgment is, in all respects,
15See, e.g., Sw. Life Ins. Co. v. United States, 560 F.2d 627, 635 (5th Cir. 1977) (“The
presumption of correctness that follows the deficiency notice places the burden on the
taxpayer of establishing all matters necessary to show that it does not owe the taxes in
question.”).
16 Id.13
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AFFIRMED.
14