Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Wednesday, June 4, 2014

“Don’t Mess With Texas”: Texas Ranch Takes on IRS


In a recent Fifth Circuit decision, Burnett Ranches, Ltd. v. United States, Burnett Ranches was a family owned Texas livestock ranch that had been in operation for more than 150 years.  Anne Burnett Marion was the current descendant running the ranch, which is owned through a limited partnership, a trust and an S corporation. 

The issues of this case were whether the ranch was a “farming syndicate” tax shelter, and therefore required by Section 464 to use the accrual method of tax accounting, and whether the taxpayer and the ranch qualified for the Active Participation Exception of Section 464(c)(2)(A).

The Fifth Circuit found that the language of Section 464 should be interpreted broadly and that the Active Participation Exception was to apply to interests in a farming operation owned directly and indirectly by the participating taxpayers.  The court harshly characterized the Government’s position as a “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.”  Moreover, the taxpayer’s position would be exactly the same using the cash method of tax accounting regardless of the S Corporation being in the chain of title. 

The Court ruled in favor of the taxpayer, grounding its decision on the wording of Section 464 and ordinary rules of statutory construction.  Consequently, the taxpayers were not required to use the accrual method of accounting with respect to Burnett Ranches.  

See Ronald Levitt, IRS Plays “Gotcha” With the Wrong Texas Ranch Family, but the Fifth Circuit Rides to the Rescue (In Other Words, “Don’t Mess With Texas”), Sirote, May 30, 2014. 


Income Tax, New Cases | Permalink

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