DocketNumber: Docket No. 4644-83.
Citation Numbers: 51 T.C.M. 284, 1986 Tax Ct. Memo LEXIS 588, 1986 T.C. Memo. 19
Filed Date: 1/15/1986
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM OPINION
FAY,
The issues are (1) whether petitioners may deduct certain claimed "advanced minimum royalties" under
The facts have been fully stipulated and are so found.
Petitioners, Daisho D. Miyagawa and Emiko A. Miyagawa, resided in Playa Del Rey, Calif., when they filed their petition herein.
*590 Petitioners timely filed a joint Federal income tax return for 1977 on which they listed their respective occupations as "Correctional Counselor" and "Fashion Designer." This case grows out of petitioners' involvement in a now familiar coal lease tax shelter involving "minimum annual royalty payments," most of which may be paid by means of nonrecourse notes which are exclusively payable from mining receipts. 2
*591 During November 1977, petitioners entered into a "Mining Lease" with Cambridge Corporation (herein, "Cambridge"). Under this lease, which was actually a sublease, petitioners were entitled to mine all of the economically recoverable coal at a specific location in Wyoming for a period of 5 years plus the remainder of 1977. Petitioners agreed to pay Cambridge a lease deposit of $100.00 and a royalty of $2.50 per net ton of the initial $24,000 tons of cal sold or mined, removed and marketed. petitioners further agreed to pay Cambridge a minimum annual royalty payment of $24,000.00. The minimum royalty payment was to be recoverable out of the amount received from coal sold or mined, removed and marketed. The lease provided that in the event petitioners sold coal in place by means of a carved out production payment or otherwise, they would be obligated to pay a royalty to Cambridge to the same extent as if coal had been mined removed and marketed. Petitioners and Cambridge also executed an "Addendum to Mining Lease," under which petitioners, as lessees, were given the option of paying the minimum annual royalty payments due on December 31, 1978 and thereafter either in cash or by nonrecourse*592 note. If payment by nonrecourse note was desired, petitioners were to pay Cambridge from all coal mined from the leased premises in excess of the initial 15,600 tons. Petitioners also entered into a "Contract for the Sale of Coal" with Poly-Tex International Inc. (herein, "Poly-Tex"), under which they purported to sell 15,600 tons of economically recoverable coal reserves to Poly-Tex at $3.50 per ton, for a total purchase price of $54,600.00. Of this amount, $27,000.00 was to be paid in cash, while the remaining $27,600.00 was evidenced by a promissory note payable on or before December 31, 1978. This sale was said to constitute the creation of a "carved out production payment."
During 1977, petitioners paid $12,000.00 to Cambridge by check, and also transferred to Cambridge an additional $27,000.00, representing the proceeds of the sale of coal to Poly-Tex, pursuant to an "Authorization to Negotiate."
No coal was produced during 1977 on the property leased by petitioners.
On their 1977 joint Federal income tax return, petitioners claimed a deduction of $39,000.00 for royalties in respect of the Cambridge lease. 3 In his notice of deficiency, respondent disallowed petitioners' *593 claimed royalty deduction in full.
The first issue is whether petitioners are entitled to a deduction for royalties during the year in issue. 4 Under
*594 Respondent contends that the amount claimed by petitioners as a deduction for royalties was not paid as a result of a minimum royalty provision with the meaning of
This Court has considered the issue raised herein in a number of cases involving substantially identical facts, most recently in
Petitioners contest the validity of
The second issue is whether petitioners are liable for an addition to tax under section 6653(a). That provision imposes an addition to tax equal to 5 percent of the underpayment if any part thereof is due to negligence or intentional disregard of rules and regulations. Petitioners bear the burden of proof on this issue.
The final issue is whether damages should be awarded under section 6673. Under that section, as applicable herein, the Court may award damages to the United States of up to $5,000.00*598 when the proceeding has been instituted or maintained by the taxpayer primarily for delay or if the taxpayer's position in such proceeding is frivolous or groundless. We conclude that the award of damages is appropriate in this case since, on this record, we find that petitioners' position is frivolous and groundless and that these proceedings have been maintained by petitioners primarily for delay.
Prior to the submission of this case for our consideration, this Court had considered the deductibility of royalty payments on facts substantially identical to those presented herein. See
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Except for differences in the amounts "invested," and minor variations in detail, the facts of this case are substantially similar to those in
3. Of the $39,000.00 amount, petitioners characterize $24,000.00 as payment of a minimum annual royalty and the remaining $15,000.00 as payment of their obligation under the mining lease to pay Cambridge a royalty payment to the same extent as if coal had been mined, removed and marketed, in the event they sold coal in place.↩
4. In their petition herein, petitioners sought an award of attorneys' fees. Given our disposition of this case, it is clear that any claim by petitioners for attorneys' fees is wholly lacking in merit. See sec. 7430. Moreover, Rule 34(b) provides that a claim for reasonable litigation costs shall not be included in the petition in a deficiency action. See also Rule 231. We thus do not consider any such issue to be properly before us.
In their petition, petitioners also asserted that the assessment and collection of tax for 1977 is barred by the statute of limitations. However, we assume that they have abandoned this contention, since they have presented no evidence with respect thereto, nor have they argued it on brief. Moreover, the parties have attached to the stipulation of facts a copy of Form 872, dated August 29, 1980, by which petitioners agreed pursuant to sec. 6501(c)(4) to extend the time for assessment of their 1977 Federal income tax to December 31, 1982, and a copy of a U.S. Postal Service Form 3877 dated December 30, 1982, indicating that the notice of deficiency upon which this case was based was sent to petitioners by certified mail on December 30, 1982. It would thus appear that the notice of deficiency, dated December 30, 1982, was timely issued prior to the expiration of the statute of limitations as thus extended, and that assessment and collection of the tax for 1977 is not barred thereby. See secs. 6501(a), 6501(c)(4), 6503(a). ↩
5.
The payor shall treat the advanced royalties paid or accrued in connection with mineral property as deductions from gross income for the year the mineral product, in respect of which the advanced royalties were paid or accrued, is sold. For purposes of the preceding sentence, in the case of mineral sold before production the mineral product is considered to be sold when the mineral is produced (i.e., when a mineral product first exists). However, in the case of advanced mineral royalties paid or accrued in connection with mineral property as a result of a minimum royalty provision, the payor, at his option, may instead treat the advanced royalties as deductions from gross income for the year in which the advanced royalties are paid or accrued. See section 446 (relating to general rule for methods of accounting) and the regulations thereunder. For purposes of this paragraph,
6. See
7. We note that the brief submitted by petitioners in this case appear to be a prepackaged, pro forma presentation substantially identical to those briefs filed by taxpayers in other cases involving coal lease tax shelters, most notably Wyoming and Western Coal Reserves, Inc. In fact, petitioners' brief erroneously asks us to find as a fact that petitioners "entered into a coal lease with Wyoming and Western Coal Reserves, Inc." Cf.