Blohm v. Commissioner, Docket No. 5741-89.
| Decision Date | 23 December 1991 |
| Docket Number | Docket No. 5741-89. |
| Citation | 62 T.C.M. 1586 |
| Parties | Nelson M. Blohm and Joann M. Blohm v. Commissioner. |
| Court | U.S. Tax Court |
Thomas Troy Zieman, Jr., and Jerome E. Speegle, for the petitioners. Robert W. West, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in Federal income tax of $133,749 and an addition to tax under section 6653(b)1 of $119,7252 for the taxable year 1981 for Nelson M. Blohm (petitioner) and JoAnn M. Blohm.3 The issues for decision are: (1) Whether the information on which the statutory notice of deficiency was based was so unreliable and unsupported as to cause the notice to be arbitrary and shift the burden of going forward with the evidence to respondent; (2) whether petitioner had unreported income from kickbacks relating to the purchase of certain oil and gas leases by the Marion Corporation (Marion), of which he was president in 1981, and, if so, in what amount; and (3) whether the doctrine of collateral estoppel applies to prevent petitioner from denying liability as to the addition to tax under section 6653(b), and, if not, whether respondent has proven that petitioner is subject thereto.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioners resided in Point Clear, Alabama, at the time the petition was filed in this case.
Before 1965, petitioner was the comptroller for Stickelber and Sons, a corporation engaged in the bakery equipment manufacturing business. Stickelber and Sons was named for Merlin A. Stickelber and his sons, David A. Stickelber and Merlin C. Stickelber. Merlin C. Stickelber is hereinafter referred to as Stickelber. In the mid-1960s, Stickelber and Sons was merged into Marion, which was formed to engage in the business of oil exploration. Following the merger, petitioner was comptroller and secretary-treasurer of Marion. At that time the Stickelber family owned 97 percent of Marion.
On March 7, 1970, petitioner executed a promissory note with a principal amount of $120,250, which was due by November 7, 1971, payable to David A. Stickelber and Stickelber, cotrustees of the Revocable Inter Vivos Trust of Merlin A. Stickelber (the trust).4 The March 7, 1970, note was in payment for the transfer by the trust of 25,000 shares of Marion stock to petitioner. On April 20, 1972, petitioner executed a promissory note with a principal amount of $162,500, which was due in 1974, payable to David A. Stickelber and Stickelber, cotrustees of the trust. The April 20, 1972, note was payment for the transfer by the trust of an additional 50,000 shares of Marion stock to petitioner. By October 10, 1973, letter, David A. Stickelber and Stickelber as cotrustees on behalf of the trust amended the liability on the March 7, 1970, and April 20, 1972, notes to be on a nonrecourse basis secured only by the Marion stock with payment due only from the net after-tax proceeds of the sale of the stock.
In 1978, petitioner became president of Marion and continued in that position through at least the taxable year 1981. Marion's headquarters was relocated to Daphne, Alabama, in 1980, and Marion engaged in the business of oil and gas exploration, production, sales, contract drilling, refining, coal exporting, and real estate investments. During 1981, Stickelber was chairman of the board of directors and chief executive officer, and Charles Ritchey (Ritchey) was vice president (Oil and Gas Division) of Marion. Ritchey was a geologist and a law school graduate.
By 1981, Marion was a publicly held corporation with stock listed on the over-the-counter exchange. During 1981, Marion was designated as a Fortune 500 corporation. Standard and Poor's reported that as of December 31, 1981, Marion had 11,765,000 shares of common stock issued and outstanding.
Stickelber owned about 3 percent of the outstanding shares of Marion stock and beneficially controlled about 10 to 12 percent thereof. During 1981, petitioner owned about 1 percent of the Marion stock.
Stickelber and petitioner were members of the Marion board of directors, but Ritchey was not. Stickelber and petitioner ran the operations of Marion largely in tandem and communicated on a constant basis about transactions affecting it.
Stickelber, Ritchey, and petitioner were members of the Marion exploration committee, whose function was to evaluate drilling prospects either submitted by third parties or in-house.
Stickelber and petitioner had two partnerships, in which they invested in several projects jointly.
In 1980, Marion stock split two-for-one so that the 25,000 and 50,000 shares which petitioner acquired from the trust became 50,000 and 100,000 shares, respectively. During 1980, petitioner sold 42,000 Marion shares. During 1981, petitioner sold 30,000 Marion shares5 and reported a gain therefrom of $348,191 (a gross sales price less selling expenses of $468,441.07 and a basis of $120,250).
In 1981, Marion Coal Company (Marion Coal) was organized as a Cayman Islands S.A. subsidiary of Marion for the purpose of exporting coal from Alabama to Europe or Asia. Marion Coal was operated by Ronald L. Standridge, its president, and Scott Armstrong, its secretary, treasurer, and vice president.
During 1983, Marion underwent a reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. secs. 1101-1174 (1988).
On their amended Federal income tax return for the taxable year 1983, which was filed in December 1985, petitioners reported "forgiveness of indebtedness" income totaling $282,750 from the trust.
During 1981, Jon J. Nelson (Nelson) and Henry J. Prevost (Prevost) were independent oil and gas operators and landsmen operating mostly in Texas. An oil and gas landsman obtains oil and gas leases from various land owners and leasehold owners in an area with production potential and sells the leases to an oil exploration company.
During 1981, Jerry W. Wooten (Wooten) was an oil and gas geologist working principally in Texas. In this capacity, he analyzed seismic and other data from a geographic area to determine the potential for oil and gas production.
In early 1981, Nelson, Prevost, and Wooten (the Texas Group collectively) approached Ritchey with a proposal for Marion to buy a group of leases known as the Jourdanton Prospect. As part of the proposal, at least one-half of the purchase price was to be paid in the Cayman Islands through Marion Coal, which portion of the price the Texas Group would share with representatives of Marion. Ritchey brought the proposal to Stickelber and he agreed to it. On the same day, Stickelber discussed the proposal with petitioner and he agreed to it.
Marion agreed to purchase the Jourdanton Prospect from the Texas Group for $2,578,825. On February 10, 1981, Nelson executed a contract to sell one-half of his interest in the Jourdanton Prospect to Marion Coal for $1,289,412.50.6 The contract of sale was signed by Ronald L. Standridge as president of Marion Coal and Nelson.
By check dated February 13, 1981, which was signed by Stickelber and Scott Armstrong, Marion paid Nelson $1,289,412.50 for its one-half of his interest in the Jourdanton Prospect.
On February 17, 1981, Stickelber, Ritchey, and the Texas Group flew to the Cayman Islands and met with attorneys at W.S. Walker & Company, Barristers & Solicitors (Walker), George Town, Grand Cayman, Cayman Islands. It was anticipated that the amount of the purchase price to be paid the Texas Group in the Cayman Islands would have been wire transferred so that the distribution could have been completed within 1 day. However, the amount had not been transferred by February 17, 1981. As a result, Stickelber made several telephone calls to ensure that the amount would be wire transferred by the next day, February 18, 1981.
On February 18, 1981, the attorneys at Walker established three corporations — San Pedro Finance Company (San Pedro), St. Lucy Investment Co., Ltd. (St. Lucy), and Linfield Investment, Ltd. (Linfield). San Pedro was owned by the members of the Texas Group, Stickelber, Ritchey, and petitioner. St. Lucy was owned one-third each by Stickelber, Ritchey, and petitioner, and Linfield was owned by the Texas Group.
On February 18, 1981, a wire transfer from Marion was received by The Bank of Nova Scotia, Cayman Islands, for the account of Marion Coal in the amount of $1,289,412.50. On February 19, 1981, the $1,289,412.50 was transferred by intrabank advice from the Marion Coal account to the San Pedro account. On February 19, 1981, the following amounts were transferred by intrabank advice from the account of San Pedro to the accounts of St. Lucy and Linfield, respectively:
1. From San Pedro to St. Lucy ...... $ 429,374.36
2. From San Pedro to Linfield ...... 860,038.14
Total ........................ $1,289,412.50
The $429,374.26 payment transferred to St. Lucy is sometimes referred to herein as the Cayman Islands Kickback.
On February 18, 1981, the Texas Group and Stickelber and Ritchey left the Cayman Islands. During 1981, petitioner did not travel to the Cayman Islands.
The purchase of the Jourdanton Prospect was the single largest purchase made by Marion at that time.
Each of the members of the Texas Group, Stickelber, Ritchey, and petitioner as the beneficial owners (shareholders) of San Pedro signed an indemnity agreement in favor of Cayman Corporate Services Ltd. as agent for San Pedro. Stickelber, Ritchey, and petitioner as the beneficial owners (shareholders) of St. Lucy each signed an indemnity agreement in favor of Cayman Corporate Services Ltd. as agent for St. Lucy.
The funds in the St. Lucy account were invested in a series of short-term (62 days or less) certificates of deposit in The Bank of Nova Scotia, Cayman Islands, and remained there for about one...
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