Grynberg v. Commissioner
| Decision Date | 13 January 2000 |
| Docket Number | Docket No. 12918-91. |
| Citation | 79 T.C.M. 1355 |
| Parties | Jack J. Grynberg v. Commissioner. |
| Court | U.S. Tax Court |
Jeffrey F. Reiman, and Jeffrey M. Brenman, for the petitioner. John A. Weeda, and Frederick J. Lockhart, Jr., for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in, and additions to, petitioner's Federal gift taxes:
Additions to Tax
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Quarter Ending Deficiency Sec. 6651(a)(1) Sec. 6653(a)
Mar. 31, 1980 $1,248,737 $312,184 $62,437
June 30, 1980 588,884 147,221 29,444
Sept. 30, 1980 158,804 39,701 7,940
Dec. 31, 1980 296,003 74,001 14,800
Mar. 31, 1981 611,271 152,818 30,564
__________ ___________ __________
Total 2,903,699 725,925 145,185
All section references are to the Internal Revenue Code in effect for 1980 and 1981, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise noted.
After concessions, the Court must decide: (1) Whether petitioner gifted coal, uranium, oil, and gas leases (collectively, mineral leases), or overriding royalty interests,1 to his wife; if so, (2) the value of such gifts; and (3) whether petitioner is liable for additions to tax for not filing Federal gift tax returns and for negligently or intentionally disregarding the applicable rules and regulations. Petitioner concedes that he made completed gifts of overriding royalties to trusts for the benefit of his children; the parties do not agree, however, on royalty values for purposes of computing the gift tax.
We incorporate in this opinion the parties' stipulation of facts, stipulation of settled issues, and exhibits. Petitioner, who resided in Englewood, Colorado, when he petitioned the Court, did not file Federal gift tax returns for the periods under consideration.
Petitioner is a professional petroleum engineer. In 1955, he started a consulting practice in petroleum and geophysical engineering called Jack Grynberg & Associates (JGA). Four years later, he married Celeste Grynberg (Mrs. Grynberg); they have three children. Shortly after their marriage, Mrs. Grynberg contributed $10,000 and several stocks to the business, which petitioner used to convert the consulting firm to an independent oil and gas operation, doing business as JGA. From 1959 through at least the periods in issue, the Grynbergs did not file Forms 1065, U.S. Partnership Return of Income, or have a written partnership agreement.
The couple began acquiring Federal mineral leases in 1959, mainly by participating in a lottery conducted by the Bureau of Land Management of the U.S. Department of the Interior. Under this system, the Federal Government leased the mineral rights of its lands in a public drawing. Each person wishing to obtain a lease had to complete an application form and pay a filing fee; no person, however, could lease more than 246,080 acres of Federal land in each State, except Alaska. Although each applicant was limited to one application per lease, spouses could apply simultaneously for the same parcel to increase their chances of winning it.
Because Mrs. Grynberg was not versed in matters of oil and gas leasing — she was a psychiatric social worker by profession — petitioner invariably handled the business of JGA with the help of employees. Acting on behalf of JGA, petitioner selected the leases on which to file applications; the employees then prepared and filed them under petitioner's or his wife's name. If petitioner deemed a lease particularly valuable, he would instruct the staff to file two applications for it, one in each name. Under the Federal lottery system, both petitioner and Mrs. Grynberg won leases, all of which were similarly managed by JGA.
JGA maintained one operating bank account, on which the Grynbergs were signatories. Any income and expenses attributable to the leases were deposited into and paid out of that account. The sale proceeds of any leases were also transferred to the operating account. Except for 1981 and 1982, the Grynbergs have filed joint Federal income tax returns since 1959, reporting the income and expenses of JGA on Schedules C, Profit or Loss From Business.
During the quarters at issue, petitioner transferred mineral leases and overriding royalties (collectively, mineral interests) to his wife in an attempt to place the property beyond the reach of a plaintiff class suing petitioner. See Danzig v. Jack Grynberg & Associates, 208 Cal. Rptr. 336 (Ct. App. 1984) (the Danzig case). The story of that litigation began more than 20 years ago when petitioner publicly offered limited partnership interests in an oil exploration partnership in which JGA was the general partner. A dispute arose between the limited partners and the Grynbergs regarding mismanagement of the partnership and the status of certain oil and gas leases belonging to the Grynbergs that JGA purportedly contributed to the partnership. While the couple intended that title to the oil and gas leases would revert to their possession when the partnership terminated, the limited partners were led to believe that the leases were distributable assets of the partnership.
In March 1975, the limited partners filed a class action in the Superior Court of California, Alameda County (superior court), against JGA and the Grynbergs, alleging breach of fiduciary duty and fraud and seeking rescission of their limited partnership agreements. Within weeks of commencing suit, the plaintiffs filed notices of lis pendens in local recording offices to warn prospective purchasers that title to the oil and gas leases was in dispute and subject to the outcome of the litigation.
The Danzig case was finally brought to trial in February 1980. In September 1980, the superior court filed its notice of intended decision that the class was entitled to rescission and compensatory and punitive damages; judgment was entered against petitioner on January 2, 1981, for $6,742,994.2 To create a lien on his property, the plaintiffs (sometimes called the Danzig claimants) filed transcripts of the judgment in various counties in which petitioner owned real estate (judgment liens).
Shortly after the superior court issued its notice of intention, the plaintiffs discovered that petitioner had been transferring mineral interests to his wife since the trial in the Danzig case had ended. In what they called a "consistent pattern of transfers" designed to make "enforcement of the California judgment extremely difficult", the plaintiffs motioned the superior court to amend its judgment to include Mrs. Grynberg, relieving the plaintiffs of the burden and expense of litigating fraudulent conveyance actions. On February 4, 1981, the superior court granted the motion, nunc pro tunc, and entered judgment against Mrs. Grynberg for $6,322,546.
The Danzig case generated many motions and appeals in what had become a bitterly contested action. On February 20, 1981, before the class members could collect on the judgment, the Grynbergs each filed a chapter 11 petition for reorganization in the U.S. Bankruptcy Court for the District of Colorado. The bankruptcy court granted the Grynbergs leave to proceed with their appeal of the superior court's judgment. That appeal, however, was ultimately unsuccessful: the California Court of Appeal affirmed the judgment, and the U.S. Supreme Court denied certiorari.
In his bankruptcy filings, petitioner listed his intrafamily transfers of mineral interests made in the preceding year and named the United States as a disputed creditor for gift taxes. Petitioner never filed Federal gift tax returns on these transfers, contending that they were not taxable gifts.3
Throughout the bankruptcy proceedings, the court observed many times that, although Mrs. Grynberg "claims an interest in the Lease, * * * [petitioner] also asserts a contingent beneficial interest in the Lease." In April 1982, the court approved a joint plan of reorganization and treated the couple's property as common assets from which all liabilities would be paid. The Danzig claimants eventually received the full amount of their judgment against the Grynbergs, plus accrued interest.
As required by law, the Grynbergs filed separate Federal income tax returns for calendar years 1981 and 1982, the years in which they were in bankruptcy. On their separate Schedules C attached thereto, they divided the income and expenses of JGA equally, whether or not any asset was titled in the name of one or the other spouse.
The nearly 600 mineral leases involved here, all of which petitioner acquired during marriage, covered lands located in Colorado, Michigan, Mississippi, Montana, North Dakota, Oklahoma, Utah, Wyoming, and in the community property States of Arizona and New Mexico. The leased lands were not in active production when petitioner assigned his leasehold or overriding royalty interests to Mrs. Grynberg. None of the properties was connected to a pipeline, and on only one or two had wells been drilled; hence, the properties' values, for the most part, were speculative.
Given the then-undeveloped state of the leases, petitioner feared that the Danzig claimants would seize them, sell them on foreclosure for nominal prices far below their supposed future values, and hold petitioner liable for the deficiency. In an effort to prevent such conduct and acting on his own initiative, petitioner launched his series of assignments to Mrs. Grynberg, which he duly recorded and for which she paid nothing. At his office, however, petitioner kept blank assignment forms bearing his wife's signature as assignor, permitting retransfer of the mineral interests to himself.
In the...
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