Obering v. Commissioner
| Decision Date | 01 August 1984 |
| Docket Number | Docket No. 7727-78,4778-79. |
| Citation | 1984 TC Memo 407,48 TCM (CCH) 733 |
| Parties | Estate of Ernest A. Obering, Helen Bailey Obering, Executrix v. Commissioner. Helen Bailey Obering v. Commissioner. |
| Court | U.S. Tax Court |
Stanley L. Drexler, Michael J. Abramovitz, Kathryn A. Tistinic, and Sam L. Leopold, 210 University Blvd., Denver, Colo., for the petitioners. Mark H. Howard and Glen D. Wilkinson, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases respondent determined deficiencies in Federal estate tax and in Federal gift taxes in the following amounts:
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Date or
Petitioner Docket No. Tax Period Ended Deficiency
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Estate of Ernest A. Obering ......... 7727-78 Estate 1/23/751 $1,585,702.35
Helen B. Obering .................... 4778-79 Gift 12/31/75 291,240.64
12/31/76 480,186.64
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Subsequent to trial, respondent amended his answer to seek increases in deficiencies and additions to tax in the following amounts:
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Date of Increased Sec. 6653(a)2
Petitioner Docket No. Period Ended Deficiency Additions
___________________________________________________________________________________________________
Estate of Ernest A. Obering ...... 7727-78 1/23/75 $ 676,712.35
Helen B. Obering ................. 4778-79 12/31/75 357,778.65 $ 32,450.96
12/31/76 1,886,280.77 118,323.37
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After concessions by the parties, the issues remaining for decision are: (1) what was the fair market value for certain shares of Warrior Oil Company: (a) that were owned by Ernest A. Obering at the time of his death, and (b) that were gifted by Helen B. Obering; and (2) whether the section 6653(a) additions to tax pertaining to the gift transfers should apply.
Some of the facts have been stipulated. The stipulation and attached exhibits are incorporated herein by reference.3
Ernest and Helen Obering were husband and wife and maintained their residence in Oklahoma City, Oklahoma. Ernest Obering (Ernest) died on July 23, 1974. Included in the assets of his estate were 45 shares of stock of Warrior Oil Company (WOC) representing 20 percent of WOC's 225 issued and outstanding shares. At all times herein pertinent the other owners of WOC stock were Helen B. Obering (Helen); Joseph and William Obering, who were Ernest and Helen's sons; and Alden Obering O'Brien, Helen and Ernest's daughter. Petitioner estate of Ernest A. Obering (the estate) elected to value the estate's assets as of the alternate valuation date of January 23, 1975.4 The estate filed a Federal estate tax return on April 23, 1975, with the office of the District Director in Oklahoma City, Oklahoma.
The 45 shares of WOC stock owned by the estate were distributed to Helen as beneficiary. Helen subsequently gifted a total of 15 shares of WOC stock to her three children on October 10, 1975. Fourteen months later, on December 22 and 23, 1976, Helen gave a total of 30 shares of WOC stock, divided equally, to two trusts for the benefit of her grandchildren.5 A quarterly gift tax return for the period ended December 31, 1975 was filed with the District Director in Oklahoma City, Oklahoma. A quarterly gift tax return for the period ended December 31, 1976, was filed with the Internal Revenue Service Center in Austin, Texas.
On its return, the estate listed and valued all of Ernest's assets, and ascribed a value of $221,201 to the 45 shares of WOC stock. This total was computed using a value of approximately $7,000 per share, less a 30 percent discount for minority interest. In his notice of deficiency respondent determined that the value of the 45 shares of WOC stock was $3,452,049, or $4,315,061, less a 20 percent discount in value for minority interest, marketability, and a stock restriction agreement. At the close of trial, respondent moved to file an amendment to his answer to conform the pleadings to the proof (the amendment). We granted his motion. In the amendment, respondent determined that the fair market value of the 45 shares of WOC stock was $4,606,875 (or $102,375 per share).6 The parties agree to the value of the other assets of the estate. The sole issue, then, is what value should be ascribed the 45 shares of WOC stock on January 23, 1975.
1. Warrior Oil Company. WOC was incorporated by Ernest in Colorado in the late 1940's to operate as a domestic oil and gas exploration and royalty company. WOC's headquarters are in Denver. In the 1950's and early 1960's, the company was a family business. Both Joseph and William Obering joined their father's company immediately upon their graduation from the University of Oklahoma in 1956 and 1957, respectively. Each received an AB degree in geology. The three Oberings plus an engineer, Tony DePrimo, constituted WOC's management team. WOC had limited success through the middle 1960's, enough to provide an adequate living to its owners. Paul O'Brien, the husband of Alden Obering O'Brien, served as a director of WOC beginning in the late 1960's. Mr. O'Brien is also a geologist. As will be illustrated later, WOC's financial affairs became more complicated in the later 1960's, and in 1970, WOC hired a certified public accountant, Steven Stientjes. In the early 1970's, the Oberings and Messrs. O'Brien, Stientjes, and DePrimo constituted the entire management personnel of WOC.
Don Todd and Larry Baker, like the Oberings, were operators of small, independent Rocky Mountain oil interests. Todd and Baker attempted to find other oil markets to develop and began discussions with the government of Indonesia, despite the fact that they had had no previous international experience. WOC and Carver-Dodge International Company (Carver-Dodge), a Delaware corporation that also has its principal offices in Denver, were very interested in joining Todd and Baker in an Indonesian venture. However, the Sukarno government in Indonesia at that time was antiwestern. Major oil companies were reluctant to develop the Indonesian market because of the threat of losing control of their operations. Following an abortive revolution in 1965-66, however, the Sukarno Government was replaced by the pro-western Suharto Government. WOC had studied the geology of Indonesia and decided to join the venture if the opportunity arose.
(a) Indonesian Agreements. Todd and Baker formed the Independent Indonesian American Petroleum Company (IIAPCO) and in 1966 IIAPCO entered into a production sharing contract with P.N. Pertambangan Minjak Nasional, the national oil company of Indonesia.7 Under the production sharing contract (which was scheduled to begin in January 1967) IIAPCO joined with Carver-Dodge and WOC to acquire for 30 years (subject to additional requirements) the exclusive rights to explore, develop and produce oil and gas in an initial area of 21,000 square miles offshore north and east of Jakarta and west of the island of Java (the Java contract). Originally, IIAPCO owned 65 percent, Carver-Dodge 25 percent, and WOC 10 percent of the Java production sharing contract. In September 1968 a production sharing contract arranged under terms similar to those in the Java contract was executed between IIAPCO and Pertamina involving 51,000 square miles off the southeast coast of Sumatra (the Sumatra contract). Under the Sumatra contract IIAPCO paid Pertamina $1,000,000 and obligated itself to spend $22,500,000 over a 10-year period in exploration of (and if discovered, the production of) oil and gas. Under the Java contract, IIAPCO was required to expend approximately $7,500,000 over a six-year period.
WOC organized the wholly-owned Warrior International Corporation (Warrior) to handle WOC's foreign operations. On the same day that IIAPCO entered into the Sumatra contract, IIAPCO assigned an undivided 22.685 percent interest in the Sumatra contract to Carver-Dodge and also assigned an undivided 9.074 percent interest to Warrior. Warrior also held WOC's interest in the Java contract. These contracts were Warrior's sole assets. As of the valuation dates the stock interest in Warrior held by WOC was WOC's most significant asset.8
Seismic data had shown the Java area to be promising, but the Sumatra area was still considered at that time to be a wildcat or high risk venture. Previous to entering into the Sumatra contract, IIAPCO, Carver-Dodge and Warrior collectively had engaged in exploration. The first well was drilled in late 1968 and its success was confirmed in early 1969.9 Since the three companies all lacked sufficient expertise in foreign offshore drilling and because Pertamina wished to speed development, they decided that a major oil company with an existing staff would be brought in to handle the operations. Sinclair Exploration Company (Sinclair) and Natomas International Corporation (Natomas) acquired an undivided 51 percent interest in the Java contract10 in exchange for Sinclair's and Natomas' promise to expend $4,000,000 of the next $5,000,000 in required expenditures.11 Because 51 percent was relinquished, this meant the original three...
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