*287 P invests in a coal tax shelter where he signs a "Mining Lease," which is actually a sublease, affording P the option of paying the $67,500 royalty specified either by cash or a nonrecourse note. P simultaneously enters into a "Contract for the Sale of Coal" with C, giving a nonrecourse note to C in exchange for funds C made available to P, which P then turned over to lessor. No coal was mined or produced under the foregoing lease during 1977.
Held, minimum royalty provision in
Held further, advanced royalties petitioner "paid" in 1977 are not deductible because no coal was ever produced in 1977 and the royalties were not paid pursuant to a valid minimum royalty provision as provided in
Held Further, damages are awarded under
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent determined a deficiency of $33,892 in petitioners' 1977 Federal income*289 tax. The issues presented for consideration are: (1) Whether petitioners are entitled to deduct certain claimed "advanced minimum royalties" under
FINDINGS OF FACT
All of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated by this reference.
Petitioners, Vikram H. Kaji and Andrea L. Kaji, resided in Yardley, Pennsylvania, at the time they filed the petition in this case. Petitioners filed their 1977 joint Federal income tax return with the Internal Revenue Service Center in Philadelphia, Pennsylvania. On their return, petitioners described their occupations as "physician" and "nurse" and deducted royalties in the amount of $67,500 on Schedule C as lessees of a coal mine. References to petitioner in the singular will be to Vikram H. Kaji.
This case presents the now-familiar coal lease shelter with a minumum annual royalty payment, most of which*290 is "paid" by means of a nonrecourse note exclusively payable from mining receipts. On December 30, 1977, petitioner entered into a coal lease with Wyoming and Western Coal Reserves, Inc. (WW), which lease gave petitioner the right to mine merchantable coal at a specific location in Wyoming. In consideration for entering into the "Mining Lease," petitioner agreed to pay WW a $1,000 lease deposit and a minimum annual royalty payment of $67,500.The minimum annual royalty was to be paid out of the amount received from coal sold or mined, removed and marketed.
In addition to the "Mining Lease," petitioner entered into an "Addendum to Mining Lease" with WW. Pursuant to the Addendum, petitioner, as lessee, was given the option of paying the minimum annual royalties provided in the lease either by cash or nonrecourse note. If payment by note was desired, then the Addendum provided that petitioner was to pay WW on this nonrecourse note from all coal mined from the leased premises in excess of 54,000 tons. Total balance of principal and interest was due and payable on December 31, 1997.
Petitioner paid one-quarter ($16,875) of the 1977 "minimum annual royalty payment" with his own check*291 dated "December 6, 1977." Petitioner then borrowed the remaining amount ($51,625, which includes the $1,000 lease deposit) from Coal & Minerals Leasing & Development Corporation (CM). In exchange for petitioner's nonrecourse promissory note, CM issued a check to petitioner, which petitioner negotiated to WW pursuant to an "Authorization to Negotiate." Petitioner simultaneously entered into a "Contract for the Sale of Coal" with CM under which petitioner agreed to sell economically recoverable coal reserves to CM. Payment under the contract was to be made on December 31, 1987. However, CM was granted the right to extend this payment date until December 31, 1997. Payments of principal and interest prior to December 31, 1987, were to be made exclusively from receipts of coal mined, removed, and marketed. The contract also provided that as additional inducement for petitioner's entering into this contract, CM agreed to lend petitioner $51,625 to be repaid under the terms of the above promissory note and further agreed to lend another $50,625 to petitioner in 1978.
The transactional documents executed by petitioner, including the "Mining Lease," the "Addendum to Mining Lease," the*292 "Non-Recourse Promissory Note," the "Authorization to Negotiate" and the "Contract for the Sale of Coal," appear to be part of a preprinted promotional package. No coal was mined or sold on the property petitioner leased during the year 1977.
On their joint 1977 income tax return, petitioners attached a Schedule C for petitioner's coal mining business and claimed a deduction of $67,500 for 1977 as a minimum royalty with respect to the WW lease. Respondent, in his notice of deficiency, disallowed petitioner's claimed coal mining deduction in full.
OPINION
With the exception of the amounts "invested," the factual pattern in this case is identical to those in
This Court and two circuit courts of appeal have upheld the validity of amended
Petitioners attack the validity of the regulations but do not present any new or different arguments.For example, petitioners argue that the doctrine of legislative reenactment invalidates the regulations.2 Second, *294 petitioners argue that the regulations are invalid because the Internal Revenue Service failed to comply with the Administrative Procedures Act and the Service's own rules by establishing an effective date and suspending two revenue rulings in a news release, by not publishing the amended regulation at least 30 days before its effective date, by abusing its discretion under section 7805 and retroactively amending the regulations and by arguing that the general provisions of section 7805 control over a more specific section, such as section 612. Petitioners argue that all of these procedural attacks invalidate the regulations or that at least one of these attacks is sufficient to invalidate the regulations. This Court, however, has on several prior occasions confronted all of petitioners' arguments and has rejected them.
Petitioners next argue that the royalties were paid pursuant to a minimum royalty provision as provided in
*297 Respondent argues that, because petitioner was not required to make annual royalty payments in the absence of mineral production, the payment by petitioner does not satisfy the requirements set forth in
On several occasions we have addressed the question of whether a nonrecourse note constitutes payment for purposes of the minimum royalty provision under
In adopting the Government's position that the provision in question did not constitute a valid "minimum royalty provision," we stated in
To qualify for the deduction, the petitioner must meet the terms of the regulation, which*299 sets out that a minimum royalty provision must require payment at least annually. That the note may in fact be paid at some later date is not sufficient to establish the existence of such a requirement.
Our holdings and logic in Wing,Maddrix, and Vastola are squarely on point and clearly apply to the instant case. The "Addendum to Mining Lease" executed by the parties authorized the payment of all future annual minimum royalties for 1977 and subsequent years by means of nonrecourse notes due on December 31, 1997, with payment required only when coal in excess of the initial 54,000 tons was produced. Thus, regardless of the likelihood of the eventual satisfaction of such notes, the "Addendum to Mining Lease" permitted deferral of the minimum annual royalties provided for in the "Mining Lease" for the years 1977 and thereafter so that payment was not required to be made at least annually. Consequently, the $67,500 "payment" made by petitioner in 1977 was not made pursuant to a valid "minimum royalty provision" in accordance with valid
The next issue we must decide is whether damages shall be awarded under
*301 Petitioners present the same material facts dealing with WW that this Court has previously and frequently decided.
It is apparent from the facts of this case that petitioners were involved in an abusive*302 tax shelter.Essentially, petitioners have claimed a 4-to-1 "leveraged" deduction based upon nonrecourse financing which is payable out of production, if any. This is tantamount to purchasing a $4 tax deduction with every dollar paid to a promoter who provides a facade of a legitimate enterprise to satisfy the form of the transaction. This type of arrangement frustrates the congressional purpose inherent in the deductions that we here disallow to petitioners. In spite of numerous Court opinions squarely on point, petitioners have forced an already overburdened Court and tax system to unnecessarily consume precious resources. Petitioners, and others who participate in specious tax strategems, must accept the consequences of their actions.
The conferees in discussing damages under
We also have stated in
Upon review of this record, we find petitioners' positions frivolous and groundless and that this proceeding was instituted and maintained primarily for delay. *304 We admonish other petitioners and their counsel not to maintain frivolous proceedings before this Court or to maintain them primarily for delay. On respondent's motion, we award damages to the United States under
To reflect the foregoing,
An appropriate order will be entered on respondent's motion for damages and a decision will be entered for respondent.
Footnotes
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable year at issue.↩
2. Petitioners argue that administrative practice reflected in the regulation prior to its 1977 amendment had acquired the force of law and, by virtue of the legislative reenactment doctrine, could not be altered without congressional action. We have held, however, that the legislative reenactment doctrine does not bar respondent from amending the regulation.
Wing v. Commissioner,81 T.C. 17">81 T.C. 17 , 35-36 (1983);Wendland v. Commissioner,79 T.C. 355">79 T.C. 355 , 383-385 (1982), affd. per curiam739 F.2d 580">739 F.2d 580 (11th Cir. 1984), affd. sub nom.Redhouse v. Commissioner,728 F.2d 1249">728 F.2d 1249 (9th Cir. 1984);Surloff v. Commissioner,81 T.C. 210">81 T.C. 210 (1983); and several Memorandum Opinions of this Court, e.g.,Gibson v. Commissioner,T.C. Memo. 1984-616 , andChidness v. Commissioner,T.C. Memo. 1984-612↩ .3.
Sec. 1.612-3(b)(3) provides in pertinent part: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, a minimum royalty provision requires that a substantially uniform amount of royalties be paid at least annually either over the life of the lease or for a period of at least 20 years, in the absence of mineral production requiring payment of aggregate royalties in a greater amount. For purposes of the preceding sentence, in the case of a lease which is subject to renewal or extension, the period for which it can be renewed or extended shall be treated as part of the term of the original lease. * * *
4. This Court on numerous occasions has held that the contingent nature of nonrecourse notes does not establish an enforceable requirement that substantially uniform minimum royalties be paid annually, regardless of annual production.
Wing v. Commissioner,supra ;Surloff v. Commissioner,supra ;Maddrix v. Commissioner,83 T.C. 613">83 T.C. 613 , 620-626 (1984);Vastola v. Commissioner,↩ 84 T.C. , (May 21, 1985) (Slip Opinion at pages 11-12).5.
SEC. 6673 . DAMAGES ASSESSABLE FOR INSTITUTING PROCEEDINGS BEFORE THE TAX COURT PRIMARILY FOR DELAY, ETC.Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary and shall be collected as a part of the tax. ↩
6. John Patrick Kelly is also counsel for taxpayers in several cases before this Court at this time. For example,
Nichols v. Commissioner,T.C. Memo 1985-338">T.C. Memo 1985-338 ,Rosebrough v. Commissioner,T.C. Memo 1985-339">T.C. Memo 1985-339 , andKing v. Commissioner,T.C. Memo 1985-340">T.C. Memo 1985-340 . Nichols and Rosebrough↩ concern the same arrangements with Wyoming and Western Coal Reserves, Inc.7. In many tax shelters similar to this one, Joseph R. Laird, Jr., Attorney at Law, who is also President of WW, encloses a letter in the documents stating that he personally guarantees that legal representation will be provided to "investors" such as petitioners in this case in the event that the Internal Revenue Service attacks the projected tax treatment.↩