Carl J.D. Bauman and Margaret A. Bauman - Page 20

                                       - 20 -                                         
          issues properly characterized as benefits ensuing from the                  
               Respondent argues that ERL entered into the lease agreement            
          with JAD without regard to whether the royalty obligations were             
          commensurate with the fair market value of the coal that could              
          reasonably be extracted from the leased property.  Petitioners              
          contend that respondent fails to understand the complexities of             
          the financial transaction as structured by McIntyre.  In light of           
          the evidence contained in the record, however, we agree with                
          respondent and conclude that the royalty obligations at issue               
          substantially exceed the fair market value of ERL’s rights under            
          its lease with JAD.  See Coggin v. Commissioner, supra.                     
          Petitioners have failed to establish that ERL’s purported royalty           
          obligations of $200 million were reasonably commensurate with the           
          fair market value of the coal underlying the leased property.               
          Perhaps the most compelling fact rendering support to this                  
          conclusion is that JAD acquired the land covered by the lease for           
          $3,750,000 on July 30, 1977, approximately 3 years prior to ERL’s           
          execution of the lease with JAD for the same property.  Id.                 
          Petitioners attempt to address this disparity in two ways.                  
          First, they advance a misguided argument based on the concept of            
          present valuation analysis.  Petitioners also argue that                    
          subsequent to JAD’s acquisition of the subject property, the                
          infrastructure of the property underwent extensive development.             

Page:  Previous  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  29  Next

Last modified: May 25, 2011