Greenspun v. Comm'r of Internal Revenue
| Decision Date | 28 August 1979 |
| Docket Number | Docket No. 4602-73. |
| Citation | 72 T.C. 931 |
| Parties | HERMAN M. and BARBARA J. GREENSPUN, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In late 1966, Howard R. Hughes (Hughes) moved to Las Vegas, Nev., where he resided until sometime in 1970. Shortly after his arrival, Hughes undertook to make substantial investments and acquisitions in and around the Las Vegas area. To offset anticipated opposition to many of his acquisitions, Hughes sought to acquire a large part of the newspaper, radio, and television interests in the Las Vegas area. His intentions in doing so were to acquire the means through which he could create a favorable public image of himself at this time was the owner, publisher, and editor of the Las Vegas Sun (Sun), a daily Las Vegas newspaper. Petitioner also owned KLAS-TV Channel 8 in Las Vegas. In early 1967, Hughes approached petitioner with an offer to purchase the Sun and KLAS-TV. Although willing to sell his interest in KLAS-TV, petitioner informed Hughes that under no circumstances would he agree to sell the Sun. Realizing he could not acquire control of the Sun directly, Hughes set out to control it indirectly. To this end, he learned that petitioner was very much in need of cash. To fulfill this need for cash, Hughes offered to make an interest-free loan of $4 million to petitioner. In return for his making the loan, Hughes, among other things, fully expected petitioner to provide friendly press coverage. Concerned that the Internal Revenue Service might question the making of such a loan, the parties eventually per annum for an 8-year term beginning in 1967. The minimum rate at which petitioner could have borrowed a like amount from a lending institution would have been 6 percent. From 1967 through 1969, petitioner published a number of editorials and articles in the Sun in which he lavishly praised Hughes and many of his acquisitions. In addition, petitioner appeared before the Nevada Gaming Policy Board (board) in defense and support of Hughes' multiple casino ownership. Petitioner's position before the board on Hughes' behalf was directly contrary to a prior position of petitioner opposing multiple casino ownership. In 1969, the term of the loan was extended from 8 years to 35 years.
1. Held, the granting of the loan at a preferential rate of interest represented consideration given by Hughes in exchange for a quid pro quo from petitioner.
2. Held, further, under the facts of this case, petitioner realized no taxable income from receipt of (1961), followed.
Edward P. Morgan and Michael H. Singer, for the petitioners.
Dennis C. DeBerry and Charles S. Triplett, for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax as follows:
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¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1967 ¦$469,613.77 ¦
+------+-------------¦
¦1969 ¦1,157,956.19 ¦
+--------------------+
We have been asked to decide the extent to which, if any, petitioners realized income subject to taxation upon their receipt of a loan in the amount of $4 million at 3-percent interest for a period of years.
All of the facts have been stipulated and are so found.
At the time of filing their petition herein, Herman M. and Barbara J. Greenspun, husband and wife, resided in Las Vegas, Nev. petitioner) has been the editor and publisher of the Las Vegas Sun (Sun), a Las Vegas daily newspaper, which he founded. At all times relevant herein, ownership of the newspaper was held by Las Vegas Sun, Inc., a Nevada corporation, more than 80 percent of the outstanding stock of which was owned directly and constructively by petitioner.
In addition to his interest in the newspaper, petitioner owned the Paradise Valley Country Club (PVCC), approximately 2,000 acres of vacant land in and around PVCC, and together with Las Vegas Sun, Inc., all of the stock of Las Vegas Television, Inc., licensee of KLAS-TV, Channel 8, in Las Vegas (KLAS-TV).
In the latter part of November 1966, Howard R. Hughes (Hughes) came to Las Vegas where he resided until sometime in 1970. Petitioner first made Hughes' acquaintance in the late 1940's when petitioner was employed at the Flamingo Hotel in Las Vegas. Since that time, he followed Hughes' career until Hughes' death in 1976.
When Hughes moved to Las Vegas in 1966, he took up residency in the penthouse at the Desert Inn Hotel and was an occasional telephone call to his officers and agents. It was at this time that he renewed his friendship with petitioner. Hughes valued petitioner's opinion and advice to the extent of having a private telephone installed in petitioner's home so that Robert Maheu (Maheu), an “independent contractor” employed by Hughes and Hughes Tool Co. (Toolco), and who acted as Hughes' “alter ego,” could contact him at any time when petitioner was not in his office. Although his acquaintance with Hughes predated the time when Hughes apparently became a “recluse,” petitioner never spoke directly to Hughes during Hughes' entire residency in Las Vegas from 1966 to 1970.
Following his arrival in late 1966, Hughes undertook to make additional substantial investments in and around Las Vegas and in Nevada, generally, for himself as well as for Toolco. Previously, Hughes had made investments in substantial acres of underdeveloped real property in the Las Vegas area.
In the first half of 1967, Hughes was aware that petitioner, was in need of cash.1 It was about this time that Hughes expressed an interest in purchasing PVCC as an alternate site for the annual Tournament of Champions Golf Event.2 In addition, Hughes was also interested in purchasing from petitioner approximately 2,000 acres of vacant land in and around PVCC, the assets of KLAS-TV, and the Sun.3
While petitioner advised Hughes that under no circumstances would he agree to sell his interest in the Sun, he did indicate a willingness to sell the assets of PVCC and the surrounding acreage to Hughes. However, petitioner refused to remove the property from the market unless and until Hughes executed a to do. No agreement or understanding was reached between petitioner and Hughes in 1967 relative to the sale of PVCC, except that petitioner, acting under the belief that at a later date Hughes might desire to purchase the golf course and as much acreage surrounding the golf course as possible, proceeded to purchase an option on approximately 1,120 surrounding acres known as the “John Tom Ross Property.”
About this time in 1967, petitioner also had discussions with both Maheu and Roy Crawford (Crawford), another of Hughes' close employees and a member of a small group that had personal contact with Hughes, regarding the possibility of a loan from Hughes. During the course of their discussions, Maheu told petitioner that he had recommended to Hughes a loan of $3 million at 6-percent interest. However, at some point, any interest because, as petitioner understood it, of Hughes' passive income problems which would have a bearing on Toolco's tax liability. Later, petitioner was told by Richard Gray (Gray), Hughes' and Toolco's attorney-in-fact, that some interest would have to be charged because the Internal Revenue Service might otherwise question the transaction. In this connection, Gray told petitioner that in his opinion the lowest permissible rate would be 3 to 4 percent, whereupon petitioner agreed to an interest rate of 3 percent.
Although apparently not disclosed to petitioner, Hughes was interested in cultivating the friendship of petitioner from whom Toolco would have a friendly press and a strong ally if problems developed. As Maheu put it, Hughes “wanted (petitioner) perpetually beholden.”
During approximately the same time period that petitioner and Toolco were negotiating for the loan, discussions also were held concerning Toolco's purchase of KLAS-TV. These discussions culminated in an agreement between petitioner, Las Vegas Sun, Inc., and Toolco for the purchase and sale of of the Federal Communications Commission. The consideration for the sale of the television station consisted of a cash payment plus the assumption of certain liabilities of the corporate licensee as follows:
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¦Cash payment by Hughes to petitioner ¦$3,645,148¦
+------------------------------------------------------------------+----------¦
¦Net liabilities in excess of assets assumed by Hughes ¦400,217 ¦
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¦Total consideration paid by Hughes for fixed assets, licenses, ¦4,045,365 ¦
¦network affiliation, and goodwill of KLAS-TV ¦ ¦
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One or 2 days prior to August 5, 1967, the date of the agreement for the sale of KLAS-TV, Toolco, at the direction of Hughes, issued a commitment letter to petitioner for a $4 million loan. Additionally, and at the same time, Toolco deposited with petitioner the sum of $500,000 as advance advertising in the Sun. From Toolco's standpoint, Gray stated that the issuance of the loan commitment letter and the $500,000 advance advertising fee were intended to influence petitioner, as stockholder of Las Vegas Television, Inc., to consent to the sale of its corporate assets.4 However, petitioner stated that he considered the sale of the television station and the loan as separate and independent transactions. In any event, to obviate the impression that the loan and the sale of KLAS-TV were linked together, the commitment letter was backdated several months to May 15, 1967, at the request of petitioner's accountant.5
The commitment letter stated that a $4 million 3-percent loan for 8 years would be made, secured by (1) a pledge of all the capital stock of...
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