Durkin v. Comm'r of Internal Revenue (In re Estate of Durkin)

Decision Date18 November 1992
Docket NumberNo. 47036–86.,47036–86.
Citation99 T.C. 561,99 T.C. No. 30
PartiesESTATE OF James J. DURKIN, Sr., Deceased, James J. Durkin, Jr., Personal Representative, and Anna Jean Durkin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Thomas W. Ostrander, Mark E. Cedrone, and Joshua Sarner, for petitioners.

Linda S. Bednarz and Ruth Spadaro, for respondent.

COLVIN, Judge:

Respondent determined deficiencies in petitioners' Federal income tax of $75,293 for 1973, $244,229 for 1974, $4,234,380 for 1975, $124,345 for 1976, $72,325 for 1977, and $95,160 for 1978.

Following concessions, a conditional settlement of various issues, and our opinion in Estate of Durkin v. Commissioner, T.C.Memo. 1992–325, the sole remaining issue for decision is whether petitioners' bargain purchase of culm banks on June 26, 1975, resulted in a constructive dividend to petitioners. We hold that it did.

In Estate of Durkin v. Commissioner, supra, filed June 8, 1992, we decided that the fair market value of culm banks acquired by petitioners on June 26, 1975, was $7.25 million, and that petitioner Anna Jean Durkin is not an innocent spouse under section 6013(e). A culm bank is a refuse pile produced as a byproduct of anthracite coal mining. Culm banks are sometimes reprocessed to produce additional coal. Estate of Durkin v. Commissioner, supra.

All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. All facts found in Estate of Durkin v. Commissioner, supra, are incorporated herein by reference. The following facts are restated for the reader's convenience.

1. Petitioners

James J. Durkin, Sr., and Anna Jean Durkin (petitioners) resided in Dallas, Pennsylvania, when the petition was filed. James J. Durkin, Sr., died on June 30, 1989. James J. Durkin, Jr., and Edward E. Durkin are petitioners' sons. References to the Durkins are to petitioners and their sons.

2. The Entities

Raymond Colliery Co., Inc. (Raymond Colliery), owned all the stock of Blue Coal Corp. (Blue Coal), and Olyphant Premium Anthracite, Inc. (Olyphant), as of April 1973. Petitioners purchased Blue Coal, Raymond Colliery, Olyphant, and various subsidiaries in November 1973 through a holding company called the Great American Coal Co. (GACC).

James Riddle Hoffa (Hoffa), the former general president of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (Teamsters), and James J. Durkin, Sr., sought a $13 million loan from the Teamsters' Central States, Southeast, and Southwest Areas Pension Fund (Central States Pension Fund) and the Mellon Bank to finance the stock purchase. The loan was not made.

Hoffa brought Hyman Green (Green), a wealthy entrepreneur, into the transaction. Green sought a loan from Institutional Investors Trust (IIT), which gave GACC a commitment for a loan of about $8.5 million.

Fifty percent of the stock of GACC was issued to Green and 50 percent was issued to petitioners. Between November 1973 and June 26, 1975, petitioners each owned 25 shares of the stock of GACC constituting 50 percent of the total authorized outstanding shares. Green owned the other 50 shares. Hoffa, Green, and James Durkin, Sr., had an understanding under which GACC stock ownership would be 50 percent for Hoffa, 40 percent for petitioners, and 10 percent for Green. However, the stock was not transferred because of restrictions imposed by IIT.

James J. Durkin, Sr. was president and assistant treasurer, and Anna Jean Durkin was secretary and treasurer of GACC from April 13, 1973, to June 26, 1975. By July 15, 1974, Green was chairman of the board. James C.B. Millard, Jr. (Millard), Green's attorney, was executive vice president.

James J. Durkin, Sr. was a director of Raymond Colliery and president, assistant secretary, and a director of Blue Coal. Anna Jean Durkin was secretary and a director of Raymond Colliery; vice president, secretary, treasurer, and a director of Blue Coal; and secretary of Olyphant. Petitioners received substantial salaries from Blue Coal between November 1973 and June 26, 1975.

James J. Durkin, Sr. became president of Blue Coal after GACC acquired Blue Coal. James J. Durkin, Jr. was Blue Coal's vice president. Green initially had little involvement in Blue Coal's operations.

Frank Dougher, the comptroller for Blue Coal; Gene Zafft, Hoffa's attorney; Charles Parente, the accountant for petitioners and their businesses; and Anna Jean Durkin were not aware of any animosity between James J. Durkin, Sr., and Hoffa.

3. The June 26, 1975, Transactions: Petitioners' Purchase of Culm Banks From GACC and Sale of GACC Stock to Greena. Overview

On June 26, 1975, petitioners purchased the Blue Coal culm banks from GACC and sold their GACC stock to Green. Petitioners also agreed to terminate their employment with Blue Coal. Green negotiated the transactions over a period of several months with James J. Durkin, Jr., who acted on behalf of petitioners. The transactions ended petitioners' ownership of GACC stock and transferred coal properties from GACC to petitioners.

Petitioners (through James J. Durkin, Jr.) and Green both exercised control over the transactions. The parties consulted with attorneys and accountants and attempted various structures before arriving at the final form. Tax effects were considered during the negotiations.

b. Sale of Blue Coal Culm Banks to the Durkins and the Durkins' GACC Stock to Green

Early in 1975, James J. Durkin, Jr., began negotiating with Green to buy the Blue Coal culm banks. Green sought to buy the Durkins' stock in Blue Coal on February 27, 1975, for $1.205 million and to have the Durkins resign their positions as officers and directors of GACC and its subsidiaries. On May 28, 1975, petitioners agreed to purchase certain culm banks' access easements and a breaker site from Blue Coal, Raymond Colliery, and Olyphant for $2.97 million and a $1 per ton royalty. Also, on May 28, 1975, petitioners and Millard (acting in his capacity as GACC's executive vice president) signed an agreement that petitioners' culm bank purchase would be conditioned on the fact that, at the time of closing, neither petitioner would own or have an option to purchase any GACC stock. The May 28, 1975, purchase agreement was superseded by a June 26, 1975, agreement (the culm agreement), and modified on January 28, 1976.

In the June 26, 1975, agreement, petitioners purchased the culm banks in issue. The purchase price of the assets sold under the June 26, 1975, agreement was $4.17 million and a $1 per ton royalty. The $4.17 million consideration was composed of:

+-------------------------------------------------------------------+
                ¦$ 254,000 ¦Certified check                                         ¦
                +----------+--------------------------------------------------------¦
                ¦400,000   ¦Promissory note                                         ¦
                +----------+--------------------------------------------------------¦
                ¦2,333,920 ¦Cancellation of indebtedness by the Durkins             ¦
                +----------+--------------------------------------------------------¦
                ¦610,000   ¦Assumption of GACC debts by the Durkins                 ¦
                +----------+--------------------------------------------------------¦
                ¦572,080   ¦Promissory note from petitioners, cosigned by their sons¦
                +----------+--------------------------------------------------------¦
                ¦$4,170,000¦                                                        ¦
                +-------------------------------------------------------------------+
                

On June 26, 1975, the board of directors of Blue Coal adopted a resolution to convey parcels of land and the culm material to petitioners. Petitioners, Green, and Millard were the members of the board of directors of Blue Coal who authorized the resolution.

c. Sale of Petitioners' GACC Stock to Green

On June 26, 1975, petitioners entered into an agreement to sell their GACC stock to Green for $205,000, to cancel all indebtedness owed to them from GACC, and to resign as officers, directors, and employees of GACC and its subsidiaries. On June 26, 1975, petitioners resigned as officers of GACC and its subsidiaries. On their 1975 Federal income tax return, petitioners reported that they sold their GACC stock and reported their basis in the GACC stock to be $205,000, thus resulting in no gain or loss on the stock sale. They also reported that they purchased the culm banks, and that the purchase was conditioned on the fact that, at the time of closing, petitioners would own no capital stock or options to buy capital stock in GACC.

In Estate of Durkin v. Commissioner, T.C.Memo.1992–325, we found that the fair market value of the culm banks was $7.25 million on June 26, 1975.

OPINION

The issue for decision is whether petitioners received a constructive dividend as a result of their bargain purchase of culm banks from GACC on June 26, 1975. Petitioners argue that their June 26, 1975, culm bank purchase and stock sale to Green should be taxed as if it had been structured as a redemption, citing Zenz v. Quinlivan, 213 F.2d 914 (6th Cir.1954). Respondent argues that in Zenz the taxpayer consistently sought to have the transaction taxed based on its form, unlike petitioners here, who disavow the form they chose, and that a taxpayer's ability to disavow the form it has chosen for a transaction is circumscribed, especially in the United States Court of Appeals for the Third Circuit, to which this case is appealable. Commissioner v. Danielson, 378 F.2d 771 (3d Cir.1967), revg. 44 T.C. 549 (1965). We agree with respondent.

1. Essential Nature of Petitioners' Culm Bank Purchase and GACC Stock Sale Transaction

Petitioners and Green negotiated at arm's length to terminate petitioners' interest in GACC. Petitioners argue that they lacked the ability to control this transaction...

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