      Case: 16-60834          Document: 00514280054              Page: 1   Date Filed: 12/20/2017




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT


                                            No. 16-60834
                                                                                United States Court of Appeals
                                                                                         Fifth Circuit

                                                                                       FILED
BARNHART RANCH COMPANY,                                                         December 20, 2017
                                                                                  Lyle W. Cayce
                 Petitioner - Appellant                                                Clerk

v.

COMMISSIONER OF INTERNAL REVENUE,

                 Respondent - Appellee

-------------------------------------------------------------

L. IRVIN BARNHART, Deceased; PAUL F. BARNHART, JR., Independent
Executor,

                 Petitioners - Appellants

v.

COMMISSIONER OF INTERNAL REVENUE,

                 Respondent - Appellee

--------------------------------------------------------------

PAUL F. BARNHART, JR.; KAROL ANN BARNHART,

                 Petitioners - Appellants

v.

COMMISSIONER OF INTERNAL REVENUE,

                 Respondent - Appellee
     Case: 16-60834       Document: 00514280054         Page: 2     Date Filed: 12/20/2017

                                       No. 16-60834




                              Appeal from the Decision
                          of the United States Tax Court
                       TC Nos. 19458-14, 19459-14, 19460-14


Before BARKSDALE, DENNIS, and CLEMENT, Circuit Judges.
PER CURIAM: *
       In two of these three consolidated cases, taxpayers Paul and Karol
Barnhart, and Irvin Barnhart (collectively Barnharts) challenge the tax court’s
affirming the Commissioner of Internal Revenue’s assessment of income-tax
deficiencies and penalties against them, stemming from income-tax reporting
for their cattle operation. Primarily at issue is whether the Barnharts waived
their claim on appeal for avoiding tax liability by failing to present it to the tax
court. Also at issue is whether the tax court clearly erred in its assessment of
deficiencies and penalties. AFFIRMED.
                                              I.
       Brothers Paul Barnhart, Jr., (Paul Barnhart) and Irvin Barnhart own
cattle, land, and oil operations in Texas. A 2014 IRS audit for tax-years 2010–
12 revealed Paul Barnhart (filing jointly with his wife Karol Barnhart) and
Irvin Barnhart reported cattle-operation losses on their personal returns.
Concluding the losses should have been reported on the corporate returns of
Barnhart Ranch Company (BRC), the Barnhart brothers’ jointly-held
corporation, the Commissioner assessed a deficiency and imposed penalties
against Paul and Karol Barnhart, Irvin Barnhart, and BRC.                              After
consolidating the three cases, the tax court affirmed the deficiencies and



       * Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5th Cir.
R. 47.5.4.
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                                 No. 16-60834
penalties assessed against the Barnharts, but, pursuant to the parties’
stipulations, vacated those against BRC.
      Paul and Irvin Barnhart inherited various business interests from their
father, Paul Barnhart, Sr., who began acquiring cattle, land, and oil-and-gas
resources in the 1950s. In so doing, he formed Barnhart Co., a corporation, to
pursue his oil-and-gas, land, and cattle enterprises.     For these activities,
Barnhart Co. adopted a “joint interest accounting system”, as described infra.
      Paul Barnhart, Sr., conveyed cattle to the Barnhart brothers beginning
in 1979, so that, by 1994, all cattle operations were under their control. BRC
was created in 1994 solely for their cattle operation; and they adopted and used
the joint-interest accounting system for BRC. Before Irvin Barnhart’s death
in 2015, Paul and Irvin Barnhart were BRC’s only shareholders, each owning
one-half of its shares.     In addition, they were partners, members, or
shareholders in many partnerships, limited partnerships, LLCs, and other
corporations.
      The scope of BRC’s corporate activities and functions with respect to the
cattle operation are in dispute, as discussed infra. The cattle operation had 17
employees, all of whom were paid by BRC. One of those employees was Donald
Sronce, the cattle manager and supervisor, who, inter alia: gathered cattle,
separated and penned them, worked them down chutes, inventoried them,
gave them vaccinations, built fences, repaired equipment, and dealt with
contractors.
      In addition, BRC held workers’-compensation and employers’-liability
policies for the cattle operation, and purchased farm and ranch insurance in
its own name. Moreover, BRC purchased assets, such as a buckskin gelding,
utility-task vehicle with winch, and several other vehicles; and BRC was the
recorded buyer and seller of the cattle, as shown by bills of sale.       Those


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                                 No. 16-60834
purchases and sales were in the name of “Barnhart Ranch Company”,
“Barnhart Ranch Co.”, and “Barnhart Ranch”.
      As noted, BRC adopted the “joint-interest accounting” system used by
Barnhart Co., the corporation formed by Paul Barnhart, Sr. In the Barnharts’
opening statement at trial, their counsel explained joint-interest accounting:
“[It] is a common practice in the oil and gas industry based on the concept of
agency”, because, due to the high costs and risks incident to oil-and-gas
exploration, it is often economically advantageous for numerous entities to
combine their capital investments on one play; and, because the size of
investments and interests vary, the joint-interest system efficiently bills
investors according to their ownership interest, and “reduce[s] the complexities
of distributing income and expense among joint owners”.
      Using the joint-interest accounting system, BRC paid expenses for, inter
alia, feed and other ranch supplies, the payroll of the 17 employees,
maintenance and repairs, and lease rentals on acreage used for the cattle
operation. The accounting system issued monthly invoices reflecting each
brother’s one-half share of the expenses. Likewise, when BRC sold cattle,
proceeds were deposited in BRC’s account, with monthly profits payable to
Paul and Irvin Barnhart.
      Drought in 2010–12 caused the cattle operation to suffer. BRC reported
no gross receipts or taxable income for 2012–13, while Paul and Irvin Barnhart
collectively reported net losses of $860,000 in 2010, $685,000 in 2011, and
$970,000 in 2012 on their personal returns, all stemming from their cattle
operation.
      In the 2014 IRS audit for tax years 2010–12, the Commissioner took
issue with the cattle-operation’s reporting, finding cattle-operation losses
should have been reported by BRC, not the Barnharts. The Commissioner also
audited BRC’s corporate returns for tax years 2012–13. In three cases against
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                                 No. 16-60834
Paul and Karol Barnhart, Irvin Barnhart, and BRC, respectively, the
Commissioner assessed deficiencies and penalties under 26 U.S.C. § 6662(a).
Paul Barnhart became executor of Irvin Barnhart’s estate upon his death in
2015.
        Although it vacated the Commissioner’s assessment against BRC, the
tax court affirmed those against the Barnharts, rejecting their position that
“BRC was nothing more than a ‘joint interest accounting agent’”, while the
brothers were the actual owners of the cattle. Despite the Barnharts’ claiming
BRC was only an accounting agent, the tax court found BRC’s “overall business
purpose [was] to manage the cattle operation”. (Emphasis added.) The tax
court found BRC held itself out as owning the cattle and exercised “significant
control” over them by, inter alia, buying and selling cattle in its own name,
paying expenses, paying employees, maintaining insurance policies in its own
name, and distributing net proceeds from sales to the two shareholders, Paul
and Irvin Barnhart.
        Citing Moline Properties v. Commissioner, 319 U.S. 436, 438–39 (1943),
the tax court stated: “The Barnhart brothers . . . chose to do business using a
separate corporate entity; they benefited from that choice, e.g., limited
liability; therefore, they may not disregard the corporation whenever it is
beneficial for them to do so”.    The tax court reasoned the cattle and the
resulting losses from the cattle operation were, therefore, BRC’s for tax
purposes.
        The tax court also affirmed the Commissioner’s accuracy-related
penalties under 26 U.S.C. § 6662(a) for substantial understatement of tax
liability, and negligence or disregard for the regulations. In doing so, the tax
court rejected the Barnharts’ substantial-authority and reasonable-cause
defenses.


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                                  No. 16-60834
                                        II.
      The Barnharts contend the tax court erred in ruling they wrongfully
reported cattle-operation losses on their personal returns rather than BRC’s
corporate returns.       Challenging the Commissioner’s accuracy-related
penalties, the Barnharts claim they reported the losses correctly on their
personal returns. In the alternative, they assert defenses under 26 U.S.C.
§§ 6662(d)(2)(B)(i) (penalty reduction when substantial authority supports tax
treatment) and 6664(c)(1) (penalty reduction when reasonable-cause and good-
faith).
                                        A.
      In claiming the tax court erred in ruling BRC should have reported
cattle-operation losses on its corporate return, the Barnharts contend that, as
individuals, they did not relinquish ownership of the cattle by utilizing BRC to
“manage” the cattle operation. The Barnharts assert the tax court “fail[ed] to
apply controlling law”, the “controlling law” being cattle ownership is retained
although a corporate entity manages the cattle operation. They cite four cases
for this proposition, three of which were not cited or argued to the tax court, as
discussed infra.
      “This Court applies the same standard of review to tax court decisions
and district court decisions: Findings of fact are reviewed for clear error and
issues of law are reviewed de novo.” Brinkley v. Comm’r, 808 F.3d 657, 664
(5th Cir. 2015) (citing Green v. Comm’r, 507 F.3d 857, 866 (5th Cir. 2007)). But,
this court “will not disturb [a] judgment based upon an argument presented
for the first time on appeal”. Pluet v. Frasier, 355 F.3d 381, 385 (5th Cir. 2004).
“A party raising an issue on appeal must have raised it before the [trial] court
‘to such a degree that the trial court [could] rule on it.’” Id. (quoting In re
Fairchild Aircraft Corp., 6 F.3d 1119, 1128 (5th Cir. 1993) abrogation on other
grounds recognized by Wilcox v. Wild Well Control, Inc., 794 F.3d 531 (5th Cir.
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                                  No. 16-60834
2015)). Along that line, “[c]iting cases that may contain a useful argument is
simply inadequate to preserve that argument for appeal; ‘to be preserved, an
argument must be pressed, and not merely intimated’”. In re Fairchild Aircraft
Corp., 6 F.3d at 1128 (quoting Hays v. Sony Corp. of Am., 847 F.2d 412, 420
(7th Cir. 1988)).
      This prohibition against claims not presented to the trial court is not
absolute: a party can “demonstrate ‘extraordinary circumstances’” to avoid
waiver. AG Acceptance Corp. v. Veigel, 564 F.3d 695, 700 (5th Cir. 2009)
(quoting N. Alamo Water Supply Corp. v. City of San Juan, 90 F.3d 910, 916
(5th Cir. 1996)). “Extraordinary circumstances exist when the issue involved
is a pure question of law and a miscarriage of justice would result from our
failure to consider it.” N. Alamo Water Supply Corp., 90 F.3d at 916. Our court
has refused to find extraordinary circumstances where a party’s “brief[] is
devoid of any argument that a miscarriage of justice would result”.             AG
Acceptance Corp., 564 F.3d at 700.
      The Barnharts did not present their “BRC as manager” claim to the tax
court “to such a degree that [it could] rule on it”. Pluet, 355 F.3d at 385 (quoting
In re Fairchild, 6 F.3d at 1128). Instead, they presented an entirely different
and inconsistent theory:      BRC was “nothing more than a ‘joint interest
accounting agent’” for the brothers’ cattle operation. Concomitantly, they fail
to cite any extraordinary circumstances permitting our considering their
waived legal theory.
      The Barnharts’ accounting-agent-only theory was prevalent throughout
the tax-court proceedings. In their pretrial motion, they stated BRC “would
hold title only as agent for Paul and Irvin (because that is the only role [BRC]
occupies in the operation of the cattle business)”. (Emphasis added.) In their
opening brief, they stated: “Paul and Irvin agreed from inception that [BRC]
would own neither the cattle nor the ranchland, and would act only as agent
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                                  No. 16-60834
on behalf of Paul and Irvin”, (emphasis added); and “[t]he only role [BRC]
occupied in the Cattle Operation was as joint interest accounting agent for
Paul and Irvin”, (emphasis added).
      Similarly, in their opening statement, their counsel predicted: “The
testimony and documents show that [BRC] is simply an accounting entity that
has always acted on behalf of Paul and Irvin and has never acted on its own
account”. (Emphasis added.) Likewise, Paul Barnhart testified he and Irvin
Barnhart “made an oral agreement that [BRC] would act only as our agent, it
would provide the accounting functions”. (Emphasis added.)
      By contrast, on appeal, the Barnharts assert the “BRC as manager”
theory.   In that regard, they cite four cases as “controlling law” for the
proposition that cattle ownership is not relinquished when another entity
manages day-to-day cattle operations: Alexander v. Comm’r, 194 F.2d 921, 925
(5th Cir. 1952); Phillips v. United States, 193 F.2d 132, 134 (5th Cir. 1951);
Alexander v. Comm’r, 190 F.2d 753, 755 (5th Cir. 1951); Jones Livestock
Feeding Co. v. Comm’r, 26 T.C. Memo. 1967-57, 1967 WL 789. Curiously, they
criticize the tax court for “contraven[ing] the controlling line of cases for
deciding who owns cattle for federal income tax purposes”. (Emphasis added.)
However, as discussed infra, they failed to present this “controlling line of
cases” to the tax court so that it could make its decision in the light of them.
      The Barnharts’ accounting-agent-only and “BRC as manager” theories
are inconsistent, to say the least. In tax court, for the “agent” theory, they
asserted BRC performed only accounting, shifting money behind the scenes:
“the Cattle Operation’s joint interest accounting system [functioned] by paying
expenses and accepting income on Paul and Irvin’s behalf and then promptly
passing the income and expenses on to them”. They cited the six-factor test
from Commissioner v. Bollinger, 485 U.S. 340, 346–47 (1988), and National
Carbide Corp. v. Commissioner, 336 U.S. 422, 435–36 (1949), claiming BRC
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                                 No. 16-60834
was merely a corporate agent, and contending, inter alia: “[BRC] automatically
transmits all the ranch income it receives to Paul and Irvin monthly”; and
“[BRC]’s sole business purpose is carrying on the normal duties of an agent. Its
only activities are collecting and paying funds and performing administrative
tasks on behalf of its principals”. (Emphasis added.)
      Those six factors from Bollinger do not appear in the Barnharts’ brief
here. Instead, they rely on their four “manager” cases and alter their facts:
“Just like the cattle managers in Alexander I and Jones Livestock, here, BRC
fed and worked the cattle with the cattle owners’ consent”. On appeal, the
Barnharts adopt the tax court’s list of tasks BRC performed, including buying,
selling, working, moving, vaccinating, and inventorying cattle. Between the
tax court and on appeal, BRC’s operations have changed greatly: in tax court
it was only moving money, and here it is moving cattle and performing all day-
to-day cattle operations, not just accounting.
      The Barnharts did cite Jones Livestock to the tax court, providing what
can only be liberally construed as a glancing blow to their “BRC as manager”
theory in a parenthetical citation.     The Barnharts’ tax-court proceeding
consisted of a full trial, complete with opening statements and closing
arguments, pretrial briefs, simultaneous opening briefs, and simultaneous
closing briefs; but the Barnharts’ “BRC as manager” theory was never
presented to the tax court. It goes without saying that one parenthetical
citation does not present a legal theory “to such a degree that the trial court
[could] rule on it”. Pluet, 355 F.3d at 385 (quoting In re Fairchild, 6 F.3d at
1128).   (Contrary to the position taken by the concurring opinion, the
Barnharts’ citation of Jones Livestock to the tax court for the proposition
that “managing income-producing property on another’s behalf is not the same
as ownership” does not prevent waiver here, because they never asserted to the
tax court that BRC was a manager of the cattle. Instead, they continually
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                                 No. 16-60834
stated: “The only role [BRC] occupied in the Cattle Operation was as joint
interest accounting agent” (Emphasis added.) As shown, manager and agent
are fundamentally different functions in the context of this case.)
                                       B.
      In contesting the Commissioner’s accuracy-related penalties under 26
U.S.C. § 6662, the Barnharts claim, as discussed supra, there was no
underreporting because they retained ownership of the cattle, although BRC
managed day-to-day cattle operations. Alternatively, they maintain the tax
court erred in rejecting their defenses to the penalties. First, they assert a
substantial-authority defense under 26 U.S.C. § 6662(d)(2)(B)(i), reiterating
Alexander I, Phillips, Alexander II, and Jones Livestock provide substantial
authority for their income-tax reporting. Second, they assert a reasonable-
cause and good-faith defense under 26 U.S.C. § 6664(c)(1), derived from
reliance on two prior audits, in 1995 and 2006.
      The Internal Revenue Code imposes a 20% penalty in proportion to any
underpayment of taxes, if, inter alia, the underpayment was (1) caused by the
taxpayer’s negligence or disregard of regulations, or (2) a substantial
understatement. 26 U.S.C. §§ 6662(a), & (b)(1)–(2). Negligence is defined as
“failure to make a reasonable attempt to comply”.          26 U.S.C. § 6662(c).
Disregard is defined as “any careless, reckless, or intentional disregard”. Id.
An understatement is “substantial” when it exceeds the greater of 10% of the
required reporting or $5,000. 26 U.S.C. § 6662(d)(1)(A).
      The tax court’s determination of negligence and assessment of defenses
are factual findings, reviewed for clear error. Streber v. Comm’r, 138 F.3d 216,
219 (5th Cir. 1998); Brinkley, 808 F.3d at 668. “Clear error exists when this
court is left with the definite and firm conviction that a mistake has been
made.”   Green, 507 F.3d at 866.       “Additionally, ‘[w]here there are two
permissible views of the evidence, the factfinder’s choice between them cannot
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                                  No. 16-60834
be clearly erroneous.’” Brinkley, 808 F.3d at 664 (quoting Anderson v. City of
Bessemer City, 470 U.S. 564, 574 (1985)). But, when the facts are not in issue,
“whether a taxpayer has ‘substantial authority’ for any tax treatment . . . is a
legal question reviewed de novo”. Stanford v. Comm’r, 152 F.3d 450, 455 (5th
Cir. 1998) (citing Westbrook v. Comm’r, 68 F.3d 868, 874, 881–82 (5th Cir.
1995); Little v. Comm’r, 106 F.3d 1445, 1449 (9th Cir.1997)).
      As reflected above, taxpayers may assert defenses to these penalties: a
substantial-authority defense and a reasonable-cause and good-faith defense.
Regarding the former, an understatement of taxes is reduced to the extent
“there is or was substantial authority for such [tax] treatment”. 26 U.S.C.
§ 6662(d)(2)(B)(i).
      The substantial-authority defense is law-based, and requires authority
in the form of a code section, regulation, case, or certain IRS administrative
pronouncements substantiating the taxpayer’s position. Treas. Reg. § 1.6662–
4(d)(3)(iii). The defense is applicable when “the weight of the authorities
supporting the [taxpayer’s] treatment is substantial in relation to the weight
of authorities supporting contrary treatment”. NPR Invs., L.L.C. ex rel. Roach
v. United States, 740 F.3d 998, 1012 (5th Cir. 2014) (citing Treas. Reg.
§ 1.6662–4(d)(3)(i)).
      A separate defense to penalties exists to the extent there was “reasonable
cause for” the underpayment of taxes and the taxpayers acted in good faith. 26
U.S.C. § 6664(c)(1); NPR Invs., LLC, 740 F.3d at 1014–15. “No penalty shall
be imposed under section 6662 or 6663 with respect to any portion of an
underpayment if it is shown that there was a reasonable cause for such portion
and that the taxpayer acted in good faith with respect to such portion.” 26
U.S.C. § 6664(c)(1).     In contrast to the substantial-authority defense, the
reasonable-cause good-faith defense is fact based. Treas. Reg. § 1.6664–4(b)(1).


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The Barnharts, of course, bear the burden of proving their reasonable-cause
and good-faith defense. Brinkley, 808 F.3d at 668.
                                       1.
      The Barnharts assert that, because, under Alexander I, Phillips,
Alexander II, and Jones Livestock, they correctly reported losses for the cattle,
substantial authority supported their tax position. But, as discussed, the
Barnharts did not present their “BRC as manager” theory to the tax court;
therefore, they cannot now rely on those cases for their substantial-authority
defense.
      In addition, the tax court noted the Barnharts did not “articulate a
substantial authority argument other than referring to their reliance on prior
audits, which is also their [position] for having acted with reasonable cause
and in good faith”. Because prior audits were the only “authority” on which
the Barnharts relied, the tax court commented that “there appears to be no
authority supporting [the Barnharts’] tax treatment”. As noted supra, prior
audits are not the type of legal authority required for the substantial-authority
defense. Treas. Reg. § 1.6662–4(d)(3)(iii). Because the Barnharts presented
the tax court no authority within the meaning of 26 U.S.C. § 6662(d)(2)(B), the
tax court did not err in denying their substantial-authority defense.
                                       2.
      The Barnharts assert they had reasonable cause to report their income
from their cattle operation on their personal returns and acted in good faith in
so doing, because, as noted above, they relied on two prior audits. The IRS
conducted two audits tangentially related to the Barnharts’ tax liability for the
years in question: one of Barnhart Co. in 1995 (Paul Barnhart, Sr.’s,
corporation); and the other of Irvin Barnhart in 2006. In both instances, the
IRS imposed no deficiencies or penalties, issuing no-change letters.


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                                  No. 16-60834
      It was not clearly erroneous for the tax court to find the prior audits,
alone, could not provide reasonable cause, because the audits were of different
entities and reflected dissimilar tax treatment of the cattle operation. The
1995 audit of Barnhart Co. concerned a corporation handling a much broader
spectrum of the Barnhart family businesses than BRC; the 2006 audit was only
of Irvin Barnhart.
      In addition, the tax court found, and the record supports, that “notable
differences in tax reporting” between the prior audits and the instant audits
“undermine [the Barnharts’] position”. For example, Barnhart Co. reported
considerable income in 1994 ($775,000), but BRC reported little income in
2012–13 ($7,631 and $2, respectively).
      As noted by the tax court, the reasonable-cause and good-faith defense
is assessed “on a case-by-case basis, taking into account all pertinent facts and
circumstances”. Brinkley, 808 F.3d at 669 (citing Treas. Reg. §1.6664–4(b)(1)).
Because the defense is factor based, prior audits are but one factor in the
reasonable-cause and good-faith defense. See id. The most important factor is
the taxpayers’ good-faith efforts in assessing tax liability. Id.
      The tax court found the Barnharts were “savvy businessmen”,
experienced in complex business entities, yet they undertook no genuine
attempt to determine the correctness of their income-tax reporting. The record
reflects the Barnharts showed only their tax treatment of the cattle operation
was longstanding, not that it was correct. Because the record supports the tax
court’s ruling regarding the Barnharts’ reasonable-cause and good-faith
defense, those findings were not clearly erroneous.
                                       III.
      For the foregoing reasons, the decisions against the Barnharts are
AFFIRMED.


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                                 No. 16-60834
JAMES L. DENNIS, Circuit Judge, concurring in part and concurring in the
judgment:
            I write separately because I respectfully do not agree that the
Barnharts’ principal argument on appeal is materially different from the
argument they made before the tax court. In their briefing before the tax court,
the Barnharts argued that they, not BRC, owned the cattle for tax purposes
and that even if BRC technically owned the cattle, it did so as an agent of the
Barnharts. With respect to the issue of ownership, the Barnharts asserted
that they owned the cattle, pointing to purported indicia of ownership and
arguing that the Commissioner’s contention that BRC “managed” the cattle
did not defeat the Barnharts’ assertion of ownership. Among other things, they
cited Jones Livestock Feeding Co. v. Commissioner, 26 CCH T.C. Mem. 306,
1967 WL 789 (T.C. 1967), for the proposition that managing income-producing
property on another’s behalf is not the same as ownership of the income-
producing property. The Barnharts’ discussion of, and comparison to, Jones in
their opening brief in the tax court makes it evident that the Barnharts argued
below that they owned the cattle, irrespective of BRC’s actions. That is the
same argument they are advancing on appeal, notwithstanding their citation
to additional authorities or express abandonment of the agency theory. I
therefore would not resolve this issue on the ground that the Barnharts have
forfeited their only argument.
            Nonetheless, I concur in the judgment as to Part II.A. of the
opinion, as I see no clearly erroneous factual determination or reversible legal
error in the tax court’s conclusion that BRC, not the Barnharts, owned the
cattle for tax purposes. I also concur in the conclusion in Part II.B.1. that the
Barnharts forfeited their substantial authority argument, as they failed to
bring the authorities cited on appeal to the attention of the tax court.        I
otherwise concur in full.
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