Rollins v. C.I.R., 123093 FEDTAX, 7673-76

Docket Nº:7673-76, 1518-77, 8200-77, 11119-77, 11864-77, 13848-79, 13209-80, 13210-80, 13211-80, 13212-80, 22950-81, 23449-81 and 7971-82.
Opinion Judge:DAWSON, Judge: CANTREL, Special Trial Judge:
Party Name:John W. ROLLINS and Linda S. Prickett (Formerly Linda S. Rollins), et al. [1] Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:Johannes R. Krahmer, Thomas Reed Hunt, Jr., Edmond D. Johnson, and John S. McDaniel, for petitioners. Janet A. Engel and Joellyn R. Cattell, for respondent.
Case Date:December 30, 1993
Court:United States Tax Court
 
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66 T.C.M. (CCH) 1869

John W. ROLLINS and Linda S. Prickett (Formerly Linda S. Rollins), et al. [1] Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 7673-76, 1518-77, 8200-77, 11119-77, 11864-77, 13848-79, 13209-80, 13210-80, 13211-80, 13212-80, 22950-81, 23449-81 and 7971-82.

United States Tax Court

December 30, 1993

Johannes R. Krahmer, Thomas Reed Hunt, Jr., Edmond D. Johnson, and John S. McDaniel, for petitioners.

Janet A. Engel and Joellyn R. Cattell, for respondent.

TABLE OF CONTENTS
MEMORANDUM FINDINGS OF FACT AND OPINION 3
OPINION OF THE SPECIAL TRIAL JUDGE 3
FINDINGS OF FACT 7
A. Introduction 8
1. Petitioner 8
2. Rollins Leasing Corp. 8
3. Rollins, Inc. 9
4. Rollins Jamaica, Ltd. 9
5. Dover Downs, Inc. 10
6. Jefferic Enterprises, Inc. 10
7. John W. Rollins & Associates 10
8. Rollins Brothers Partnership 12
B. Stock Sales 12
1. Controlled Corporation Financing: 12
a. Rollins Jamaica.-i. Start Up Costs 12
ii. Bank Borrowing
iii. Petitioner's Loans
b. Dover Downs.-i. Start Up Costs 14
ii. Bank Borrowing
iii. Petitioner's Loans
c. Jefferic Enterprises 15
2. Economic Downturn: 16
a. U.S. Economy 16
b. Financial Overruns 17
c. Debt Servicing Problems 18
d. The Debt Workout 19
3. Mechanics of Stock Transfers: 21
a. Telephone Call. 22
b. Follow-up Procedures 24
c. Timing of Sales 25
d. Title and Authorization 26
i. Early years
(a) Petitioner's Authority 26
(b) Corporate Approval 29
(c) Return of Stock After Contribution 31
ii. Later Years
iii. Securities Exchange Commission Form Reporting
C. Application of Proceeds 35
1. Rollins Jamaica: 35
a. Stock Sales Summary 35
b. Petitioner Loan Payable Account 36
c. Rollins Jamaica's Bank Loan Payable Accounts 39
i. Williams & Glyn's Bank
ii. National Shawmut Bank
iii. National Bank of Washington
iv. Continental Bank & Trust
2. Dover Downs: 45
a. 1970-72 46
b. 1975 47
3. Jefferic Enterprises: 50
D. Rollins Brothers Partnership 51
ULTIMATE FINDINGS OF FACT 52
OPINION 53
A. Law 53
B. Analysis 73
1. The Early Years 1970-73 75
2. The Later Years 1975-78: 80
a. Rollins Jamaica and Dover Downs 81
b. Jefferic Enterprises 85
C. Rollins Brothers Partnership 88
MEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: These consolidated cases were assigned to Special Trial Judge Francis J. Cantrel pursuant to section 7443A(b)(4) and Rules 180, 181, and 183.[2] We agree with and adopt his opinion which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE CANTREL, Special Trial Judge: In the notices of deficiency, respondent determined deficiencies in and additions to Federal income taxes as follows:
John W. Rollins and Linda S. Prickett (Formerly Linda S. Rollins)
Date of Addition to Tax
Docket Notice of Taxable
Number Deficiency Year Income Tax Sec. 6653(b)
7673-76 6/30/76 1967 $ 410,229 $ 205,114
1968 574,812 287,406
1969 1,137,991 568,995
1970 709,935 354,967
1971 1,040,174 520,087
1518-77 1/14/77 1972 2,479,159 1,239.580
11864-77 9/9/77 1973 386,597 193,298
13848-79 8/13/79 1974 246,777 123,388
13209-80 6/13/80 1975 1,341,829 -0-
John W. Rollins
Date of Addition to Tax
Docket Notice of Taxable
Number Deficiency Year Income Tax Sec. 6653(b)
13211-80 6/13/80 1976 2,068,909 -0-
23449-81 7/30/81 1977 584,897.80 -0-
1978 359,423 -0-
Rollins Jamaica, Ltd.
Date of Addition to Tax
Docket Notice of
Number Deficiency FYE Income Tax Sec. 6653(b)
8200-77 4/28/77 9/30/72 291,542 -0-
11119-77 8/22/77 9/30/73 242,135 -0-
13212-80 6/13/80 9/30/76 1,204,130 -0-
9/30/77 1,333,142 -0-
7971-82 1/29/82 9/30/78 225,007 -0-
Jefferic Enterprises, Inc.
Date of Addition to Tax
Docket Notice of Taxable
Number Deficiency Year Income Tax Sec. 6653(b)
13210-80 6/13/80 1975 1,544 -0-
1976 2,112 -0-
22950-81 7/30/81 1977 96,047 -0-
Respondent, in the Amendment to Answer filed at docket No. 7673-76, raised sections 269 [3] and 482 and asserted an increased deficiency of $7,005 and an addition to tax under section 6653(b) of $3,503 for petitioners' 1970 taxable year. Respondent bears the burden of proof with respect to the new matter raised for the taxable years 1970 and 1971, and the increased deficiency for 1970. Rule 142(a); Achiro v. Commissioner, 77 T.C. 881, 891 (1981). By Amendment to Answer filed at docket No. 1518-77, respondent raised section 482 for petitioners' taxable year 1972 for which she bears the burden of proof for the reasons stated by the Court at trial. By Amendment to Answer filed at docket No. 8200-77, respondent asserted an increased deficiency for the fiscal year ended September 30, 1972, in the amount of $313, the burden of proof of which is upon respondent. Respondent, in the Amendment to Answer filed at docket No. 13209-80, refers to section 482 which was raised in the notice of deficiency. Consequently, the burden of proof remains on petitioner with respect to section 482. In the Second Amendment to Answer filed in that case, respondent asserted an increased deficiency for the taxable year 1975 in the amount of $306,445. Respondent concedes that she has the burden of proof on the increased deficiency. In the Amendment to Answer to Petition as Amended filed at docket No. 23449-81, respondent asserted an increased deficiency for the taxable year 1977 in the amount of $128,926.20. The burden of proof on the increased deficiency is upon respondent. After concessions, the issues for decision are (1) whether gains on stock sales reported by petitioner's controlled corporations during 1970-73 [4] and 1975-78 are properly attributable to petitioner under the substance over form doctrine, or alternatively, to clearly reflect income or prevent evasion of tax under section 482; and (2) whether nondeductible amounts paid by petitioner for airplane expenses during 1967 and 1968 to a partnership in which he held a 50-percent interest are income to the partnership in those years. In a memorandum of settlement filed with the Court prior to trial in these cases, the parties agreed that a 5 percent addition to tax under section 6653(a) applies to any deficiencies determined with respect to petitioner's taxable years 1967 through 1971. No other additions to tax shall apply to any of the taxable years 1967-78. FINDINGS OF FACT Many of the facts were stipulated and are so found. The stipulations of facts and attached exhibits are incorporated herein by this reference. At the time of filing the petitions herein, petitioners John W. Rollins and Linda S. Prickett (formerly Linda S. Rollins) resided at the addresses below:
John W. Rollins
Address Docket No.
2917 Palm-Aire Drive North 7673-76, 1518-77,
Pompano Beach, Florida 33060 11864-77
Owl's Nest Road, Greenville, 13848-79, 13209-80,
Wilmington, Delaware 19807 13211-80, 23449-81
Linda S. Prickett
Walnut Tree Road, R.D. # 3 7673-76, 1518-77
Newark, Delaware 19711 11864-77
Campbell Road, Greenville, 13848-79
Wilmington, Delaware 19807 13209-80
At the time of filing the petitions in Rollins Jamaica, Ltd. and Jefferic Enterprises, Inc., both corporations' principal places of business were located at One Rollins Plaza, Concord Pike, Wilmington, Delaware 19803. A. Introduction 1. Petitioner Petitioner John W. Rollins was lieutenant governor of the State of Delaware from 1953 to 1957. He ran for the office of governor in 1960. He is a man of modest beginnings and limited formal education, whose business acumen led him into a successful career of developing corporations. Petitioner began by working in and eventually managing various plants until the late 1940s when he acquired an automobile dealership and eventually started his own automobile leasing business. 2. Rollins Leasing Corp. Petitioner incorporated the automobile leasing business as Rollins Leasing Corp. in Delaware in the early 1950s. It went public in 1968, becoming Rollins International for a period of time, and is now known as RLC Corp. (RLC). RLC is headquartered in Wilmington, Delaware, and engaged in the transportation services business, primarily automobile and truck leasing. A portion of the stock sales in issue involve petitioner's RLC stock, which is listed on the American Stock Exchange. Petitioner has held various offices in RLC: president, chairman, and chief executive officer. At the time of the stock sales in issue, petitioner's basis in his RLC stock was virtually zero. 3. Rollins, Inc. In 1948, petitioner and his brother, O. Wayne Rollins, started Rollins Broadcasting, Inc., a communications business which grew out of the automobile leasing company's need for advertising. Rollins Broadcasting, Inc. acquired other businesses, went public in early 1960, and is now known as Rollins, Inc. (RI). RI is headquartered in Atlanta, Georgia, and is engaged in broadcasting as well as various service industries, at one time owning Orkin Exterminating. During the years at issue, petitioner held between 5-10 percent of RI's common stock and served on the board as a director. At various times he has served as its president, chairman, and chief executive officer. The majority of the stock sales in issue involve petitioner's RI stock, which is traded on the New York Stock Exchange. At the time of the stock sales, petitioner's basis in his RI stock was virtually zero. 4. Rollins Jamaica, Ltd. Petitioner incorporated Rollins Jamaica, Ltd. (Jamaica), a Delaware corporation, in 1965, as a U.S. holding company for Rose Hall, Ltd., a Cayman Islands corporation. Rose Hall, Ltd. in turn...

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