Reynolds v. Commissioner
| Decision Date | 26 May 1987 |
| Docket Number | Docket No. 8087-84. |
| Parties | Harold M. Reynolds v. Commissioner. |
| Court | U.S. Tax Court |
Thomas A. Caldwell and Joanne C. Beckman, 450 Maclellan Building, Chattanooga, Tenn., for the petitioner. Vallie C. Brooks, for the respondent.
Respondent determined deficiencies in petitioner's Federal income tax as follows:
Tax Year
Ended Deficiency
December 31, 1974 ......................... $ 28,790.00
December 31, 1977 ......................... 380,364.501
After concessions by petitioner, the sole issue for decision is whether and to what extent petitioner must recognize in 1977 a gain on the sale of certain mineral rights and leasehold interests.
This case was submitted for decision on fully stipulated facts pursuant to Rule 122.2 The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.3
At the time the petition was filed herein, petitioner resided in Signal Mountain, Tennessee. For each of the taxable years 1974, 1975, and 1976, petitioner filed a joint Federal income tax return with his then wife, Lohvlohn H. Reynolds ("Mrs. Reynolds"). Petitioner and Mrs. Reynolds each filed separated Federal income tax returns for the 1977 taxable year.
Petitioner was a businessman involved in the coal business during 1971, the year he first met Mrs. Reynolds. The two were married in that same year, and thereafter, Mrs. Reynolds terminated her employement in a chiropractor's office and began to assist petitioner in his business.
Around the time of the marriage, petitioner purchased a coal mining business for $550,000.4 To finance the purchase, petitioner secured the guaranty of two friends from Atlanta and organized Lucky Cumberland Mines Corporation ("Lucky Cumberland"). The stock of the corporation was originally placed in the name of Mrs. Reynolds and the two Atlanta friends. Mr. Reynolds later arranged for Lucky Cumberland to repurchase the stock from his friends, leaving Mrs. Reynolds as the sole stockholder. After "proving up" coal lands owned by Lucky Cumberland, petitioner sold the lands to Marquette Cement Corporation for $2,500,000.5
After the sale of the coal lands, on April 13, 1976, a partnership known as LHR & Associates ("LHR") was formed. Ownership of LHR was distributed between Darlene K. Johnston, Mrs. Reynolds' daughter from a previous marriage ("Ms. Johnston"), Mrs. Reynolds, and a trust that was also formed on April 13, 1976 and that named Mrs. Reynolds as trustee and petitioner as beneficiary (the "LHR Trust").6 The trust and partnership agreements indicate that Ms. Johnston, Mrs. Reynolds, and the LHR Trust owned LHR as follows:
Percent OwnershipInterest in profitsand losses of LHRPartner
10 ................................ Ms. Johnston
36 ............................... Mrs. Reynolds
54 .......................... LHR Trusts for the
benefit of petitioner
The LHR Trust instrument provides that the entire net income of the partnership attributable to the interest held in trust for petitioner is to be distributed currently and grants petitioner the right at any time to alter, amend, or terminate the trust and the right to replace the trustee.
On November 9, 1977, petitioner, Mrs. Reynolds, and LHR sold their interest in certain mineral rights and leasehold interests to Gold Fields Mining Corporation, a Delaware corporation ("Gold Fields"), pursuant to a document known as the Exclusive Exploration, Loan and Option Agreement (this sale will hereinafter be referred to as the Gold Fields Transaction). The sales price for the assets sold to Gold Fields under the terms of the Exclusive Exploration, Loan and Option Agreement was $10,000,000 which included the value of a tract of land to be received by petitioner valued at $117,000. Gold Fields paid the purchase price remaining after deduction of the value of the land, a total of $9,883,000, as follows:
Year Amount
1977 ........................ $7,383,000
1978 ........................ 500,000
1979 ........................ 1,000,000
1980 ........................ 1,000,000
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Total .................... $9,883,000
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The mineral rights included in the sale were held in trust pursuant to a trust agreement dated April 14, 1976 naming James W. Kelly as trustee, and petitioner and Mrs. Reynolds as beneficiaries (the "Kelly Trust"). The leases included in the sale were held by LHR.
On November 14, 1977, a Distribution and Settlement Agreement ("the Distribution and Settlement Agreement") dividing the proceeds from the Gold Fields Transaction was entered into between petitioner and Mrs. Reynolds. The Distribution and Settlement Agreement, which was consented to by Ms. Johnston, first lists certain obligations which were to be satisfied out of the proceeds of the Gold Fields Transaction and then divides the remaining proceeds among Ms. Johnston, Mrs. Reynolds, and petititioner, purportedly in accordance with their ownership of LHR and the LHR and Kelly Trusts. Pursuant to the Distribution and Settlement Agreement, the 1977 payment by Gold Fields, after the deduction of certain items not relevant here, was to be $7,383,000, divided as follows:
Petitioner ......................... $3,763,000.00
Mrs. Reynolds ...................... 3,071,545.50
Ms. Johnston ....................... 397,553.00
The following amounts were reported as gross sales proceeds by the respective parties on their 1977 Federal individual income tax returns as a result of the Gold Fields Transaction:
Petitioner .......................... $3,763,000.00
Mrs. Reynolds ....................... 3,222,447.007
Ms. Johnston ........................ 397,553.00
Mrs. Reynolds disappeared after she received her share of the 1977 payment. Petitioner did not see or hear from her again until December 9, 1977 when he was served with a complaint for divorce and property settlement filed by Mrs. Reynolds in the Circuit Court for Hamilton County, Tennessee. On January 5, 1978, petitioner filed an answer and counterclaim in the divorce suit wherein he denied that Mrs. Reynolds was entitled to a divorce for his cruel treatment and alleged that he was the wronged party entitled to divorce. He further alleged that Mrs. Reynolds held title to certain properties solely as the trustee of resulting and constructive trusts of which he was the beneficiary, and that he was the equitable owner of the properties. Petitioner also claimed equitable ownership in the entire proceeds from the sales price of the Gold Fields Transaction, including those amounts already distributed to Mrs. Reynolds and Ms. Johnston.
In her answer to the counterclaim, filed March 31, 1978, Mrs. Reynolds alleged that as a result of the Distribution and Settlement Agreement she was assigned $3,000,000 from the Gold Fields Transaction.
On April 18, 1979, the Circuit Court of Hamilton County filed its opinion in the divorce suit wherein the court found in favor of petitioner. As to the Distribution and Settlement Agreement the court stated:
The court awarded Mrs. Reynolds $2,000,000 as her share of marital property but awarded petitioner a judgment against Mrs. Reynolds for $1,008,891.24 which represented the amount of cash in excess of the $2,000,000 that Mrs. Reynolds and Ms. Johnston had received from the proceeds of the sale in the Gold Fields Transaction.8
In an opinion filed on September 12, 1980, the Court of Appeals of Tennessee, Eastern Section, affirmed the judgment of the trial court in the divorce action. In its opinion the court of appeals specifically addressed and affirmed the trial court on each of the following issues: (1) Whether the trial court should have granted a divorce to petitioner rather than Mrs. Reynolds; (2) whether Mrs. Reynolds was awarded her equitable share of the marital property; and (3) whether the trial court was correct in declaring the Distribution and Settlement Agreement void. As to the third issue, the court found that because all of the elements of fraud were present it was proper for the trial court to void the agreement.
By order dated November 24, 1980, the Supreme Court of Tennessee denied the application of Mrs. Reynolds for permission to appeal the decision of the court of appeals. On April 6, 1981, the United States Supreme Court denied a petition for writ of certiorari filed by Mrs. Reynolds.
On April 9, 1981 petitioner filed an involuntary petition in bankruptcy against Mrs. Reynolds in the United States Bankruptcy Court for the Eastern District of Tennessee, Southern Division. On April 17, 1981, Mrs. Reynolds filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division.9 Petitioner filed a complaint against Mrs....
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