Kean v. Comm'r of Internal Revenue
| Decision Date | 08 September 1988 |
| Docket Number | Docket Nos. 19346-81,19347-81. |
| Citation | 91 T.C. 575,91 T.C. No. 37 |
| Parties | JAMES H. KEAN, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRICHARD L. GRAY, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
U, a corporation, was involved in the business of solid waste disposal and operated a landfill on certain leased land. M, a corporation, was to remove, process, and sell the gravel and sand located on this leased land before U would deposit the solid waste in the landfill. PRC, another group of companies, was to recycle the paper products disposed of in the landfill by U. Because an economic recession affected the paper products industry and the building industry, M and PRC suffered severe financial setbacks. In an effort to reverse this situation, petitioners decided to sell U's assets pursuant to a liquidation under sec. 337, I.R.C. 1954. About the time of the liquidation, U transferred funds to M and PRC, a significant portion of which funds were used to satisfy debts owed by M and PRC that had been guaranteed by petitioners K and (in some instances, coguaranteed by) G. K held a majority interest in U, M, and each of the PRC companies; G held a minority interest. M and PRC did not repay U.
HELD: (1) The transfers from U to M and PRC do not give rise to bona fide debts. Thus, U may not take bad debt deductions under sec. 166(a), I.R.C. 1954.
(2) K, as the majority shareholder of U, is deemed to have received constructive transfers from U to the extent K was relieved of his potential secondary liability on the guaranteed debts. K is a transferee of U (sec. 6901, I.R.C. 1954) and is liable for U's tax deficiency resulting from our conclusion in (1) above. However, G, as a minority shareholder of U, is not deemed to have received constructive transfers from U. Thus, G is not a transferee of U and is not liable for U's tax deficiency. John H. Birkeland and Neil M. Goff, for the petitioners.
Mark H. Howard, for the respondent.
Respondent determined that petitioners are liable as transferees of the assets of Urban Waste Resources Corporation (hereinafter sometimes referred to as ‘Urban‘) for a deficiency in Federal corporate income tax for Urban's taxable year 1975 1 in the amount of $34,032, 2 as follows:
+-----------------------------------------------+
¦Docket No.¦Petitioner ¦Transferee liability¦
+----------+---------------+--------------------¦
¦19346-81 ¦James H. Kean ¦$34,032 ¦
+----------+---------------+--------------------¦
¦19347-81 ¦Richard L. Gray¦34,032 ¦
+-----------------------------------------------+
These cases have been consolidated for trial, briefs, and opinion. After concessions by petitioners, the issues for decision 3 are as follows:
(1) Whether Urban is entitled to a bad debt deduction under section 166(a) 4 on account of certain transfers used to pay debts of related companies; and
(2) Whether petitioners are transferees of Urban under section 6901 and so are liable for Urban's income tax for Urban's taxable year 1975.
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference. When the petitions were filed in the instant cases, petitioner James H. Kean (hereinafter sometimes referred to as ‘Kean‘) and petitioner Richard L. Gray (hereinafter sometimes referred to as ‘Gray‘) resided in Boulder, Colorado.
These cases involve transfers of property or payments of money made by Urban to pay debts of one or more of the following related entities: Mesa Sand and Gravel, Inc. (hereinafter sometimes referred to as ‘Mesa‘), Products Recovery Corporation, Inc. (hereinafter sometimes referred to as ‘PRC ‘), Products Recovery Corp. — Boulder (hereinafter sometimes referred to as ‘PRC/Boulder‘), a small business corporation, Products Recovery Corp. — Ft. Collins (hereinafter sometimes referred to as ‘PRC/Ft. Collins‘), a small business corporation, Products Recovery Corp. — Denver (hereinafter sometimes referred to as ‘PRC/Denver‘), and Products Recovery Properties, Ltd. (hereinafter sometimes referred to as ‘Properties‘), a limited partnership. 5 During the period before us, Kean and Gray held ownership interests and corporate offices (where applicable), in these entities, as shown in table 1.
+------------------------------------------------------------------+
¦TABLE 1 ¦
+------------------------------------------------------------------¦
¦Entity ¦Kean ¦ ¦Gray ¦
+---------------+--------------------------+-----+-----------------¦
¦Urban ¦54.00 President, Director ¦18.00¦Director ¦
+---------------+--------------------------+-----+-----------------¦
¦Mesa ¦55.50 Secretary, Treasurer¦18.80¦President ¦
+---------------+--------------------------+-----+-----------------¦
¦PRC/Boulder ¦63.00 President ¦7.00 ¦ ¦
+---------------+--------------------------+-----+-----------------¦
¦PRC/Ft. Collins¦63.00 President ¦7.00 ¦ ¦
+---------------+--------------------------+-----+-----------------¦
¦PRC/Denver ¦63.00 President ¦7.00 ¦ ¦
+---------------+--------------------------+-----+-----------------¦
¦PRC ¦72.22 President ¦11.11¦ ¦
+---------------+--------------------------+-----+-----------------¦
¦Properties6 ¦7 ¦7.00 ¦(limited partner)¦
+------------------------------------------------------------------+
Thus, Kean directly controlled Urban, Mesa, and each of the entities comprising the PRC Group, except for Properties (which Kean indirectly controlled through his ownership interest in PRC). Together with Douglas Smith (hereinafter sometimes referred to as ‘Smith‘) and Ray Meacham, Kean directed the day-to-day management of these entities. Gray devoted part of his time to PRC/Ft. Collins, PRC/Boulder, and PRC/Denver, but was not involved in the day-to-day management thereof. Both Kean and Gray made the final management decisions with respect to actions to be taken by Urban, Mesa, and the PRC Group. Urban, Mesa, and the PRC Group shared most of the same office staff. Separate books and records were maintained for each entity.
Before 1971, the Rich-Land Company (hereinafter sometimes referred to as ‘Rich-Land‘) engaged in solid waste disposal, including resource recovery work and composting, in Boulder County, Colorado. Rich-Land encountered financial difficulties. It then was acquired by petitioners and several other people. Rich-Land became Urban in 1971.
About 1971, Urban acquired a lease on a 320-acre tract of land (hereinafter sometimes referred to as ‘the 320-acre tract‘) southeast of Boulder, Colorado, and began operating a sanitary landfill on the westerly 80 acres of that tract. Because there were some water and drainage problems on the remainder of the 320-acre tract and because the existing landfill was nearly filled, Urban recognized a need for additional facilities. On December 18, 1972, Urban leased an additional 80-acre tract (hereinafter sometimes referred to as ‘the South Tract‘) that was adjacent to the 320-acre tract and south of the above-described landfill site. The lease to the South Tract was amended on August 3, 1973, to grant Urban the right to mine, remove, and dispose of the gravel or clay located on the South Tract.
Urban planned that the South Tract would have two uses, described in a Report on Gravel Mining and Sanitary Landfill Operations, prepared for Urban in 1973 by Black & Veatch, Consulting Engineers (hereinafter sometimes referred to as ‘the Black & Veatch Report‘), as follows:
The proposed site is planned to serve a dual purpose. Deposits of gravel are to be removed and processed for construction use and the void created, refilled by sanitary landfill of solid waste using on-site soils and screenings from the gravel processing for cover material. The two functions will proceed simultaneously but will be sufficiently separated to obviate operational problems.
Mesa was organized in 1973 to mine a vein of gravel located on the South Tract.
Pursuant to a Memorandum of Sublease and Agreement (hereinafter sometimes referred to as ‘the Sublease‘) dated December 14, 1973, Urban subleased the South Tract to Mesa with the understanding that Urban would conduct all the excavation on the leased premises in connection with its landfill operation. Mesa would then have the right to use the excavated material to extract the sand and gravel therefrom, to excavate additional sand and gravel from the South Tract, and to sell this sand and gravel. In consideration of the Sublease, Mesa agreed to pay Urban $350 per month during the initial lease term (January 1, 1974, through December 31, 1978) plus $.55 for each ton of refuse brought to and disposed of in Urban's landfill by commercial refuse haulers.
On January 3, 1974, the Board of County Commissioners of Boulder County approved Urban's and Mesa's application for a special use permit to mine sand and gravel and to conduct a sanitary landfill operation, and ancillary uses thereto, in accordance with the above- described plan.
Before Rich-Land was acquired by petitioners and other persons and transformed to Urban, Rich-Land was doing composting and resource recovery work at the then-operating landfill on the 320-acre tract. Both Boulder County and the City of Boulder wanted this work to be continued after Urban was formed and so the PRC Group was organized to recover and process waste paper from landfill sites and to sell it in baled and compressed form to markets in the Denver area. Specifically, the PRC Group was to collect, compress, and bale such items as...
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