Tax Farmers

The New Republic, September 2, 1972

OPTHALMOLOGY and orthopedics weren’t the only sub­jects at the recent conven­tion of the American Medical Association in San Francisco.  On the agenda one day, at the Fairmont Hotel were, among others, the follow­ing meetings: Tax Sheltered Invest­ment Financial in the Bali Room, Mountain Shadows Ranch Tax Shelter Investments in the Garden Room, and Gemini Finan­cial Tax Counsel in the Crocker Room.

Doctors who chose the Garden Room were greeted by Vincent Grillo, Jr., a handsome, fashionably dressed man in his 40s who is both a vice president of Computer Sciences Corp. and president of Moun­tain Shadows Ranch.  About four years ago, Grillo told the meeting, he found himself with a terrible problem: he had $390,000 in ordinary in­come which, unless he devised a timely dodge, would be heavily taxed by the federal government.  Then he discovered the myriad advantages of cattle ownership.

If you buy a herd of cattle, you become, by definition, a farmer.  You are then entitled to use the “cash basis” of ac­counting, a simplified method intended to ease real farmers’ bookkeeping chores.  Under this method you generally can deduct all expenses in the year they are incurred, even though you may be purchasing assets that are held for sale and income.  A popular tax deferral scheme is to purchase a large amount of cattle feed on or shortly before December 31.  The entire cost of the feed, including the interest paid on the money bor­rowed to buy it, can then be deducted from that year’s taxable income.

But it gets better.  If you buy a herd of cattle and hold it for two years or more, the money you receive upon selling it be­comes a “capital gain­.”  It is then taxable at only half the rate of ordinary income.  What’s more, for each year you own the herd, you may deduct from your taxable income an amount equal to the depreciation of your animals.  This deduction can be larger than the true depreciation (150 percent), and you can start it off with a 20 percent first year depreciation bonus.  Investing in a herd also makes you eligible for a seven percent “investment tax credit,” which is not merely a deduction from taxable income, but a credit you subtract directly from your federal tax payment.

These four features of the tax code — immediate deductibility of expenses, conversion of ordinary income to capital gains, accelerated depreciation and the investment tax credit—can be converted by the wealthy investor into a substantial windfall.  If the investor is in the 50 percent tax bracket or higher, he can sink $15,000 into a herd of cattle and save $16,000 in taxes in the first year alone.  In many ways this beats oil as a tax shelter, since beef prices are high and you don’t run the danger of drilling a dry hole.

To help doctors and others of comparable wealth take advantage of these back-door sub­sidies, Grillo created Mountain Shadows Ranch (it is actually “a corporation and a concept, not a place”).  Herds of 100 cattle are sold to tax-avoiding investors, branded with their chosen insignia, and fattened on leased land and feedlots.  The “ranch” super­vises the entire operation and receives a management fee.

SYNDICATES such as Mountain Shadows Ranch are increasingly popular these days.  During 1970, there were offerings by cattle management firms in excess of $175 million.  Oppenheimer Industries, Inc., one of the largest syndicators in the country, handles 140,000 head of cattle, including Governor Ronald Reagan’s.

Syndicates are also mov­ing into other sectors of agriculture, for reasons plainly set forth in an Oppen­heimer brochure: “Dairy pools serve the buyer looking principally for ordi­nary income.  Fruit and nut orchards provide opportunities for capital gain profit… Ranch land is a tax shelter providing a hedge against inflation.  Even row-crop farming, which in the past has been without allure to the average in­vestor, can provide both economic and tax shelter benefits.”

One of the most successful syndicators in California is Hollis Roberts, a close associate of San Diego financier C. Arnholdt Smith, a Nixon friend and booster.  Roberts manages farmland owned by Texaco, Getty Oil, Prudential Life and about 50 other absentee owners.  He recently purchased 25,000 acres from Tenneco, the Houston-based conglomerate that dom­inates the southern end of the San Joaquin valley, raising his total holdings of former Tenneco land to approximately 70,000 acres.  Roberts’ arrange­ment with Tenneco works to each party’s advantage.  Roberts receives a sub­stantial management fee for developing the land with capital raised from tax-avoiding inves­tors.  Tenneco makes a hefty profit from land sales, packaging and marketing, without putting up a penny of the capital needed to raise the crops.

Another new syndicator in California is the 295,000-acre Tejon Ranch, owned largely by the Chandler family, publishers of the Los Angeles Times.  The Tejon Ranch recently announced that it is offering $16 million of limited partnership units through Dean Witter and the First Boston Corp.  As with most offerings of this type, only persons in or above the 50 percent tax bracket, or with net worths of $200,000 or more, are eligible to participate.  That takes in a lot of doctors, lawyers and movie stars, but excludes most working people.

With the money raised from wealthy tax dodgers, the Tejon Ranch will plant 21,000 new acres of wine grapes, potatoes and other crops on land recently irrigated by the California Water Project, which runs through the Tejon property.  The total cost of the state water project, including financing, is more than $8 billion, a sum that includes a tidy subsidy from state taxpayers.  The Tejon Ranch was also the recipient last year of $88,566 in federal crop subsidies, despite the supposed $55,000 limit.

The Los Angeles Times loses all semblance of fair­ness on the subject of large landhold­ings and their subsidies.  The newspaper editorially promoted the state water project, making little or no mention of critics’ claims that it was not needed, too expensive, and would pass through the Tejon Ranch.  The Times led the attack on the recent Nader report on California land, highlighting its minor errors and obscuring its facts and arguments.  Last March, when Senator Fred Harris (D-Okla.) held a full-day hearing in Los Angeles on the subject of land monopoly, the Times sent two reporters but carried only a trivial three-paragraph story on a back page.  Perhaps to compensate, the Op Ed page editor, Ken Reich, asked Harris to write a column on land monopoly.  Harris submitted a piece that made no mention of the Tejon Ranch and its owners.  Reich was about to run it when he was told to wait for publisher Otis Chandler’s re­turn from a safari in Africa.  On Chandler’s return, the Senator’s column was killed.

Syndicates such as the Tejon Ranch’s are a prime cause of a rather strange phenomenon in American agriculture.  On the one hand, as Professor Charles Daven­port of the Uni­ver­sity of California at Davis has pointed out, the before-tax return on farm invest­ments has declined from about six percent to less than four per­cent during the last twenty years.  This compares with about ten percent for most manufacturing firms, and with more than five percent for simply leaving money in the bank.  On the other hand, investment in farm assets has increased by about 260 percent during the same 20-year period.  This is a most unusual situation: in­creasing investments on decreasing returns.

The explanation of the incongruity is that before-tax profits do not give a true picture of farm economics.  The massive new investments in land, cattle and crop production have been made largely by syndicates and corporations that could care less about farm income.  Their objective is to farm the public treasury, not the land.

A 1968 study by the US Department of Agricul­ture found that of the wealthiest 66,000 individuals filing farm tax returns in 1963, more than two-thirds reported a net farm loss.  Those who actually eked a profit out of farming, by contrast, were likely to be quite poor.  Another interesting pattern—casting doubt upon the notion of big-farm efficiency—was that the largest farms were frequent before-tax money losers.

THE IMPACT OF TAX-LOSS farming on real farmers and farmworkers can be seen most clearly in California, where subsidies for wealthy landowners are a vener­able tradition.  One of the latest and largest tax breaks for giant California landowners is the 1966 Williamson Act, a state law ostensibly designed to preserve open spaces.  As of 1971, approximately 9.5 million acres were receiving property tax reductions totaling more than $40 million annually.  More than a fourth of that acreage is owned by twelve large landholders, includ­ing Tenneco, the Tejon Ranch, the Southern Pacific, Standard Oil of California, J.G. Boswell and the Irvine Ranch.

Several years ago, two University of Cali­fornia economists, Gerald Dean and Gordon King, predicted that irrigation of new lands in the San Joaquin valley would lead to serious overproduction and a consequent drop in prices and income for real farmers.  It is now becoming clear that most of the new crop production in California will be devel­oped not only with subsidized water and on undertaxed land, but also with tax-dodging capital.  Meanwhile, some of the smaller farming communities in the valley are starting to die, as farmers who live on the land are replaced by corporations and investors who live hun­dreds of miles away.

Agricultural workers are likely to fare little better than small farm owners.  A statement from the prospec­tus of the Tejon Ranch syndication (which has no contract with any labor union) indicates what is in store: “Grapes and nut crops can be harvested mechan­ically; citrus crops can be harvested by hand over a relatively extended period.  These crops, which con­stitute approximately 67 percent of the total crops to be planted by 1976, are thus less likely to be adversely affected by labor disputes, stoppages or short­ages. ”

Four years ago, an effort was made by Senator Lee Metcalf (D-Mont.) and others to limit the amount of farm losses that non-farmers could deduct from other income.  That effort resulted only in some meaningless modifications of the Tax Reform Act of 1969.  What is needed now is more than a revision of the tax laws.  There must be a broad commitment by the federal government to assist agricultural workers, rather than doctors, in becoming farm owners.