- 21 -
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.
Page: Previous 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 NextLast modified: May 25, 2011