Carl J.D. Bauman and Margaret A. Bauman - Page 21

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               We find neither argument persuasive.  Petitioners have                 
          failed to offer sufficient evidence to establish that the coal              
          property’s fair market value had so greatly appreciated to an               
          amount which would justify ERL’s agreement to pay $200 million in           
          minimum royalties during the initial 20-year period of its lease.           
          Rose v. Commissioner, supra at 412-419.  A grossly inflated price           
          is a hallmark of a sham transaction.  Sacks v. Commissioner, 69             
          F.3d 982 (9th Cir. 1995), revg. T.C. Memo. 1992-596.                        
          Additionally, the record establishes that McIntyre acted without            
          adequate information regarding the coal property when he executed           
          ERL’s lease with JAD.  Although McIntyre commissioned a firm to             
          prepare the Coal Reserve Report contained in the offering                   
          materials, the report is inherently flawed as the leased property           
          constitutes only a portion of the property covered by the report.           
          Furthermore, McIntyre’s actions and representations conflict with           
          the substance of the Coal Reserve Report.  That is, despite the             
          Coal Reserve Report’s conclusion that the property subject to its           
          scope could realistically be expected to produce 1 million tons             
          of raw coal annually, McIntyre represented in the offering                  
          materials that the coal property would yield annually 2 million             
          tons of marketable coal.  Moreover, the author of the report                
          cautioned McIntyre that the report was based upon insufficient              
          data and an additional in-depth study was necessary in order to             
          render a determination of probable profitability.  No additional            
          study was engaged.  See Rose v. Commissioner, 88 T.C. at 415.               




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