The research results are presented annually in a public symposium, which this year will be hosted by TAMU on Sept. 18-19 at Embassy Suites – San Antonio Riverwalk in San Antonio, TX. Order a book or learn more about the symposium that will focus on improvements of beef cow efficiency and profitability by intensive and semi-confined production systems.
Chapter 17 – Tax Shelter Feeding
No discussion of the 1970s would be complete without discussing tax shelter feeding programs. Maximum tax rates at that time were in the 70-90% range. Shelters varied in sophistication and complexity, but the basic concept was to buy a light calf, and prepay the entire feed bill of approximately $150-$200. The prepaid feed was tax deductible. Furthermore, financing for approximately 75% of the calf and all of the feed was usually available. So, for $25/head cash, the tax deduction result might be as much as $200.
Some of the financing was nonrecourse. A number of cattle feed programs in the early ’70s crashed and burned because of the drought and the market crash in ’74. To be fair, the same could be said for feeding programs that were not tax shelter-oriented. When times got tougher, participants were more desperate, and often their management had no real concept of the cattle business. The poem I wrote entitled “Phantom Cattle” (posted at the end of this article) is a pretty accurate portrayal of what happened with some of the programs.
In late December, just prior to the year’s end, the tax shelter business usually peaked. Between Christmas and New Year’s Day, my phone rang constantly with clients asking for projected feed usage, break evens and other information regarding various types of cattle. I thought it was exciting, but it didn’t make me popular with my family during the holidays.
My clients, Jack and Art Linkletter, had a tax shelter investment fund called Agrilink. I worked closely with Jack. He was a great guy. Jack took good care of himself but he died at age 70, while his Dad died at approximately age 95 and looked great to the end. It goes to show that you just never know.
One of my jobs for Jack was to approve feedyards for their cattle placement. This aggravated their comptroller who was from the East and had no real concept of the cattle business. He just didn’t like putting cattle on feed without knowing the exact cost; thus, he was always a sucker for any guaranteed gain deal. I told him that anyone who guaranteed the gains beforehand was suspect because good feeders didn’t need guaranteed gains to get cattle.
A large feedlot in Southern California was reopened around 1973 by a man with Hollywood connections, but he had no cattle experience. He contacted Agrilink and said he would guarantee gain costs for the placement of several thousand cattle. I convinced the Linkletters it was a bad idea.
Unbeknownst to me, however, one of my other California clients whose feedlot was full took the guaranteed gain proposition. They needed a place for about 10,000 extra cattle. The first I knew of this was when my client contacted me saying we needed to go check these cattle. We got there and the feed bunks were filled with a mixture of straw and manure. We asked the feedlot manager for an explanation and he told me there was research that proved this was a decent ration.
I knew Jim Elam was doing their consulting work, so I said, “This is new to me, but I’ll call Jim and confirm it.” The manager replied “No don’t do that, the real reason is the owner resold all of our good grain contracts, and now at higher grain prices he can’t afford to buy grain.”
We moved the cattle and it ended up in a big lawsuit which my clients won. A footnote here is that some years later I was told the defunct feedyard owner was found stabbed to death in an alley in the Central California Coast area. I often wondered if this was a random act of violence or some type of payback.
Another California tax shelter program got in serious trouble in 1974. They put feedlot cattle on manure and straw diets, and had starving cattle scattered throughout southern California. PGC of Amarillo owned a large grain elevator in Colten, CA, and the manager of the troubled feeding fund owed them for several thousand tons of grain. He also owed several California suppliers money. This is where it gets interesting.
I was doing the nutrition work for the PGC feedyards in the Texas Panhandle where Moody Taylor was the manager. Taylor was, to say the least, a very clever person. With approval of the feeding fund, he moved about 25,000 head of cattle from California to the PGC Texas feedyards before any California creditors knew about it. In a way, it was a humanitarian gesture because the cattle were starving, but obviously the California creditors were outraged.
PGC agreed to finish the cattle in Texas, sell them, and deduct the cost of the Texas feed plus the feed they were owed from California. The California creditors and investors would get the remainder. In the end, it was one of those programs that was “snake bit” from the first to the last bell.
We had a bad winter that the thin Holsteins didn’t tolerate well in Texas. When the final cattle were sold, they were bought by American Beef. About two weeks later, American Beef took bankruptcy and PGC assumed they had dodged a bullet and got in under the wire. Unfortunately, the bank did not clear the check promptly and it became part of the bankruptcy proceedings. I understand that eventually the bank was forced to make the check good. Regardless, a lot of lawsuits resulted from the original feeding fund investors and creditors that continued for the next 5-10 years.
I don’t want to leave the impression that tax-deferred feeding never worked, because sometimes it served investors well. Around 1980, I put together a cattle feeding program for investors in the 70%-80% tax bracket. The cattle made some money and we deferred their money over the next several years into a 45% tax bracket. It was obviously a net winner.
One last comment on Jack Linkletter. He was a bright fellow, fun to be with, and a pioneer innovator in many respects. Jack told me that his grandfather said, “You can always tell a pioneer because he’s the one with a lot of arrows in his ass.” After the mid-’70s wreck, Jack felt a lot of arrows in his backside.
It was late in 1973
Tax shelters were still the rage
But the cattle wreck had started
We were about to turn the page
Corporate lawyers & accountants
Were at a loss for words
While investors & their bankers
Kept searching for phantom herds
When short on numbers excuses varied
Like too much rain & the grass is too high
The cattle strayed when fences washed out
Some of them drown & some always die
Or, high country cattle are always wild as hell
With water they’re on the highest mountain
They’ll come back when the tanks are dry
Next year we’ll be able to count them
Near the end excuses became more exotic
Most of the tellers weren’t cattlemen
My favorite was about the herds, so wild
That there were no cattle left in them
While bankers tried to count phantom cattle
Some corporations had a trucking branch
To make up numbers the trucks came in handy
Hauling the same cattle from ranch to ranch
When it was over there was some good news
Because when the final story was told
The trucking company made lots of money
And the cattle knew how to load
Those involved have all scattered
You can find them in most states
Some are involved in telemarketing
Some learned to make license plates.