                        T.C. Memo. 2000-15



                      UNITED STATES TAX COURT



                 JACK J. GRYNBERG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12918-91.                    Filed January 13, 2000.



     Jeffrey F. Reiman and Jeffrey M. Brenman, for petitioner.

     John A. Weeda and Frederick J. Lockhart, Jr., for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     FAY, Judge:   Respondent determined the following deficien-

cies in, and additions to, petitioner’s Federal gift taxes:
                                - 2 -

                                             Additions to Tax

Quarter Ending     Deficiency       Sec. 6651(a)(1)      Sec.
6653(a)

Mar. 31, 1980      $1,248,737           $312,184            $62,437
June 30, 1980         588,884            147,221             29,444
Sept. 30, 1980        158,804             39,701              7,940
Dec. 31, 1980         296,003             74,001             14,800
Mar. 31, 1981         611,271            152,818             30,564
  Total             2,903,699            725,925            145,185

     All section references are to the Internal Revenue Code in

effect for 1980 and 1981, and all Rule references are to the Tax

Court Rules of Practice and Procedure, unless otherwise noted.

     After concessions, the Court must decide:     (1) Whether

petitioner gifted coal, uranium, oil, and gas leases (collec-

tively, mineral leases), or overriding royalty interests,1 to his

wife; if so, (2) the value of such gifts; and (3) whether peti-

tioner is liable for additions to tax for not filing Federal gift

tax returns and for negligently or intentionally disregarding the

applicable rules and regulations.   Petitioner concedes that he

made completed gifts of overriding royalties to trusts for the

benefit of his children; the parties do not agree, however, on

royalty values for purposes of computing the gift tax.

                        FINDINGS OF FACT

     We incorporate in this opinion the parties’ stipulation of

facts, stipulation of settled issues, and exhibits.     Petitioner,

     1
      An overriding royalty represents the right to a fraction or
percentage of the lessee's share of the minerals removed, as
distinguished from the royalty interest retained by the lessor.
See William & Meyers, Manual of Oil and Gas Terms 765 (9th ed.
1994).
                                 - 3 -

who resided in Englewood, Colorado, when he petitioned the Court,

did not file Federal gift tax returns for the periods under

consideration.

     Petitioner is a professional petroleum engineer.   In 1955,

he started a consulting practice in petroleum and geophysical

engineering called Jack Grynberg & Associates (JGA).    Four years

later, he married Celeste Grynberg (Mrs. Grynberg); they have

three children.   Shortly after their marriage, Mrs. Grynberg

contributed $10,000 and several stocks to the business, which

petitioner used to convert the consulting firm to an independent

oil and gas operation, doing business as JGA.   From 1959 through

at least the periods in issue, the Grynbergs did not file Forms

1065, U.S. Partnership Return of Income, or have a written

partnership agreement.

     The couple began acquiring Federal mineral leases in 1959,

mainly by participating in a lottery conducted by the Bureau of

Land Management of the U.S. Department of the Interior.   Under

this system, the Federal Government leased the mineral rights of

its lands in a public drawing.    Each person wishing to obtain a

lease had to complete an application form and pay a filing fee;

no person, however, could lease more than 246,080 acres of

Federal land in each State, except Alaska.   Although each

applicant was limited to one application per lease, spouses could
                               - 4 -

apply simultaneously for the same parcel to increase their

chances of winning it.

     Because Mrs. Grynberg was not versed in matters of oil and

gas leasing——she was a psychiatric social worker by profession——

petitioner invariably handled the business of JGA with the help

of employees.   Acting on behalf of JGA, petitioner selected the

leases on which to file applications; the employees then prepared

and filed them under petitioner’s or his wife’s name.   If peti-

tioner deemed a lease particularly valuable, he would instruct

the staff to file two applications for it, one in each name.

Under the Federal lottery system, both petitioner and Mrs.

Grynberg won leases, all of which were similarly managed by JGA.

     JGA maintained one operating bank account, on which the

Grynbergs were signatories.   Any income and expenses attributable

to the leases were deposited into and paid out of that account.

The sale proceeds of any leases were also transferred to the

operating account.   Except for 1981 and 1982, the Grynbergs have

filed joint Federal income tax returns since 1959, reporting the

income and expenses of JGA on Schedules C, Profit or Loss From

Business.

     During the quarters at issue, petitioner transferred mineral

leases and overriding royalties (collectively, mineral interests)

to his wife in an attempt to place the property beyond the reach

of a plaintiff class suing petitioner.   See Danzig v. Jack
                               - 5 -

Grynberg & Associates, 208 Cal. Rptr. 336 (Ct. App. 1984) (the

Danzig case).   The story of that litigation began more than 20

years ago when petitioner publicly offered limited partnership

interests in an oil exploration partnership in which JGA was the

general partner.   A dispute arose between the limited partners

and the Grynbergs regarding mismanagement of the partnership and

the status of certain oil and gas leases belonging to the

Grynbergs that JGA purportedly contributed to the partnership.

While the couple intended that title to the oil and gas leases

would revert to their possession when the partnership terminated,

the limited partners were led to believe that the leases were

distributable assets of the partnership.

The Danzig Case

     In March 1975, the limited partners filed a class action in

the Superior Court of California, Alameda County (superior

court), against JGA and the Grynbergs, alleging breach of

fiduciary duty and fraud and seeking rescission of their limited

partnership agreements.   Within weeks of commencing suit, the

plaintiffs filed notices of lis pendens in local recording

offices to warn prospective purchasers that title to the oil and

gas leases was in dispute and subject to the outcome of the

litigation.

     The Danzig case was finally brought to trial in February

1980.   In September 1980, the superior court filed its notice of
                                 - 6 -

intended decision that the class was entitled to rescission and

compensatory and punitive damages; judgment was entered against

petitioner on January 2, 1981, for $6,742,994.2   To create a lien

on his property, the plaintiffs (sometimes called the Danzig

claimants) filed transcripts of the judgment in various counties

in which petitioner owned real estate (judgment liens).

     Shortly after the superior court issued its notice of

intention, the plaintiffs discovered that petitioner had been

transferring mineral interests to his wife since the trial in the

Danzig case had ended.   In what they called a “consistent pattern

of transfers” designed to make “enforcement of the California

judgment extremely difficult”, the plaintiffs motioned the

superior court to amend its judgment to include Mrs. Grynberg,

relieving the plaintiffs of the burden and expense of litigating

fraudulent conveyance actions.    On February 4, 1981, the superior

court granted the motion, nunc pro tunc, and entered judgment

against Mrs. Grynberg for $6,322,546.

     The Danzig case generated many motions and appeals in what

had become a bitterly contested action.   On February 20, 1981,

before the class members could collect on the judgment, the

Grynbergs each filed a chapter 11 petition for reorganization in

the U.S. Bankruptcy Court for the District of Colorado.   The



     2
      Dollar amounts are rounded to the nearest dollar.
                                 - 7 -

bankruptcy court granted the Grynbergs leave to proceed with

their appeal of the superior court’s judgment.       That appeal,

however, was ultimately unsuccessful:       the California Court of

Appeal affirmed the judgment, and the U.S. Supreme Court denied

certiorari.

     In his bankruptcy filings, petitioner listed his intrafamily

transfers of mineral interests made in the preceding year and

named the United States as a disputed creditor for gift taxes.

Petitioner never filed Federal gift tax returns on these trans-

fers, contending that they were not taxable gifts.3

     Throughout the bankruptcy proceedings, the court observed

many times that, although Mrs. Grynberg “claims an interest in

the Lease, * * * [petitioner] also asserts a contingent

beneficial interest in the Lease.”       In April 1982, the court

approved a joint plan of reorganization and treated the couple’s

property as common assets from which all liabilities would be

paid.    The Danzig claimants eventually received the full amount

of their judgment against the Grynbergs, plus accrued interest.

     As required by law, the Grynbergs filed separate Federal

income tax returns for calendar years 1981 and 1982, the years in

which they were in bankruptcy.    On their separate Schedules C

attached thereto, they divided the income and expenses of JGA



     3
      Petitioner now concedes that his assignments of overriding
royalties to his children’s trusts were completed gifts subject
to tax.
                                - 8 -

equally, whether or not any asset was titled in the name of one

or the other spouse.

The Mineral Leases

     The nearly 600 mineral leases involved here, all of which

petitioner acquired during marriage, covered lands located in

Colorado, Michigan, Mississippi, Montana, North Dakota, Oklahoma,

Utah, Wyoming, and in the community property States of Arizona

and New Mexico.   The leased lands were not in active production

when petitioner assigned his leasehold or overriding royalty

interests to Mrs. Grynberg.   None of the properties was connected

to a pipeline, and on only one or two had wells been drilled;

hence, the properties’ values, for the most part, were

speculative.

     Given the then-undeveloped state of the leases, petitioner

feared that the Danzig claimants would seize them, sell them on

foreclosure for nominal prices far below their supposed future

values, and hold petitioner liable for the deficiency.   In an

effort to prevent such conduct and acting on his own initiative,

petitioner launched his series of assignments to Mrs. Grynberg,

which he duly recorded and for which she paid nothing.   At his

office, however, petitioner kept blank assignment forms bearing

his wife’s signature as assignor, permitting retransfer of the

mineral interests to himself.
                               - 9 -

     In the statutory notice, respondent treated petitioner’s

intrafamily transfers as gifts valued at $9,309,593.   Before

trial, the parties agreed to have an arbitration panel decide the

value of these interests at the time of transfer, without regard

to any encumbrances on the properties.   The parties have called

upon this Court to decide whether (and, if so, by how much)

adverse claims of title would affect the panel’s appraisals of

value.   The panel, made up of two partisan arbitrators who chose

a third neutral one, fixed the unencumbered values of these

interests at $1,455,914; i.e., the mineral leases transferred to

Mrs. Grynberg were $1,404,902, the overriding royalties assigned

to the children’s trusts were $50,412, and the overriding

royalties assigned to his wife were $600.   Approximately 11

percent of the total value of mineral interests assigned was

subject to judgment liens or lis pendens.

                              OPINION

The Spousal Assignments

     The first issue is whether any of the transfers to Mrs.

Grynberg were gifts giving rise to Federal gift taxes.   We note

that the transfers took place before the advent of the unlimited

marital deduction under section 2523(a) (as amended and in effect

currently).4


     4
      The Economic Recovery Tax Act of 1981, Pub. L. 97–34, sec.
403(b)(1), 95 Stat. 172, 301, broadened the gift tax marital
                                                   (continued...)
                               - 10 -

     Section 2501(a)(1) imposes a tax on individuals who directly

or indirectly transfer property by gift.   See sec. 2511(a).   In

order for the transfer to be complete, however, the donor must

surrender dominion and control of the property.   See Estate of

Sanford v. Commissioner, 308 U.S. 39 (1939); Burnet v.

Guggenheim, 288 U.S. 280 (1933); sec. 25.2511–2(b), Gift Tax

Regs.    In evaluating whether a donor has made a gift, we look to

the “objective facts of the transfer and the circumstances under

which it is made,” sec. 25.2511–1(g)(1), Gift Tax Regs., bearing

in mind that petitioner carries the burden of proof, see Rule

142(a).

     Petitioner advances four arguments as to why he is not

subject to gift taxes.   He first claims that JGA, a joint

venture, owned all the leases, such that neither spouse could

have given them to anyone without the other’s consent.   He

reasons further that, since the couple treated the mineral leases

as jointly owned following his purported assignments, no gifts

were made.

     Petitioner’s second argument rests on the premise that he

and Mrs. Grynberg owned some of the mineral leases in community.

He claims that he did not convert community into separate

property when he assigned his one–half interest in the leases to


     4
      (...continued)
deduction to make interspousal transfers fully deductible,
effective for tax years beginning after Dec. 31, 1981.
                              - 11 -

his wife, because both of them continuously held the properties

jointly.

     In any event, he argues next, Mrs. Grynberg’s signature on

blank assignment forms proves that he reserved the power to

revoke the transfers at any time, rendering the conveyances

incomplete for gift tax purposes.   And, finally, petitioner

alleges that, even if he gifted the properties, they had no

realistic values because the Danzig case cast a cloud on title.

     Respondent claims that, although petitioner intended by his

actions to defraud the Danzig claimants, his act of executing and

recording the assignments in Mrs. Grynberg’s name, ipso facto,

created gifts.   In asserting that the evidence is insufficient to

prove the existence of blank assignment forms, respondent

concludes that petitioner relinquished his entire interest in the

properties to his wife, and that, consequently, “[Mrs. Grynberg]

could have done what she wanted with the leases and overrides.”

     Lastly, respondent maintains that the gross value of the

mineral interests should not be reduced by any debt encumbering

the properties because a “willing buyer with knowledge of

relevant facts would know that the Danzig plaintiffs would not

stand in the way of a purchase which would pay them full value”.

We reject respondent’s contentions and hold that petitioner did

not make gifts of mineral interests to his wife.
                              - 12 -

     Often, State law affects the tax treatment of a transaction.

See, e.g., Morgan v. Commissioner, 309 U.S. 78, 80 (1940) (State

law creates legal rights in property, and Federal law controls

the taxation of those rights); Blair v. Commissioner, 300 U.S. 5

(1937); Bedford v. Commissioner, 5 T.C. 726 (1945).   Indeed,

notwithstanding that petitioner acquired leases of Federal lands,

we refer to State law in our analysis of whether he surrendered

ownership of his interests.   See Wallis v. Pan Am. Petroleum

Corp., 384 U.S. 63, 67 (1966) (applying State law in a dispute

between private parties involving assignments of Federal oil and

gas leases).

     The mineral leases covered lands in 10 different States.

Fortunately, the law of these States is substantially the same on

the issues framed here.   Under each State’s law, a mineral lease

is considered realty;5 thus, under traditional choice of law

principles, the law of the situs State governs questions of valid



     5
      See Arizona State Real Estate Dept. v. American Standard
Gas & Oil Leasing Serv. Inc., 580 P.2d 15 (Ariz. Ct. App. 1978);
Hagood v. Heckers, 513 P.2d 208 (Colo. 1973); Jaenicke v. David-
son, 287 N.W. 472 (Mich. 1939); Bailey v. Federal Land Bank, 40
So. 2d 173 (Miss. 1949); Stokes v. Tutvet, 328 P.2d 1096 (Mont.
1958); State ex rel. Rausch v. Amerada Petroleum Corp., 49 N.W.2d
14 (N.D. 1951); Bolack v. Hedges, 240 P.2d 844 (N.M. 1952);
Harris v. Tucker, 296 P. 397 (Okla. 1931); Chase v. Morgan, 339
P.2d 1019 (Utah 1959); Hageman & Pond, Inc. v. Clark, 238 P.2d
919 (Wyo. 1951).
     Most States which classify a mineral lease as real property
also treat an overriding royalty as an interest in land. See 2
Williams & Meyers, Oil and Gas Law, sec. 418.1, at 351 (1998).
                               - 13 -

property transfers.   See 2 Restatement, Conflict of Laws 2d, sec.

223 (1971).

     When petitioner assigned his mineral interests to Mrs.

Grynberg, fraudulent transfer statutes existed under prior

enactments in all 10 States.   See, e.g., Colo. Rev. Stat. sec.

38–10–117 (1973) (“Every conveyance or assignment in writing * *

* of any * * * interest in lands * * * made with the intent to

hinder, delay, or defraud creditors or other persons of their

lawful suits, damages, * * * debts, or demands * * * shall be

void.”).6   The object of these laws is to protect creditors by

invalidating transfers that would otherwise render the debtors’

assets unreachable.

     The parties have stipulated that petitioner’s sole purpose

in making the transfers was to prevent the Danzig claimants from

gaining possession of those assets.     As far as form of the

transfers is concerned, it is true that they were effected by

proper deeds; title to the mineral interests was, indeed, in Mrs.

Grynberg’s name.   Our concern, however, lies not with


     6
      See also Ariz. Rev. Stat. sec. 44–1007 (1987) (repealed in
1990 and replaced with the Uniform Fraudulent Transfer Act
(UFTA)); Mich. Comp. Laws sec. 566.221 (1979); Miss. Code Ann.
sec. 15–3–3 (1972); Mont. Code Ann. sec. 31–2–314 (1989)
(repealed in 1991 with adoption of UFTA); N.M. Stat. Ann. sec.
56–10–7 (Michie 1978) (repealed in 1989 with adoption of UFTA);
N.D. Cent. Code sec. 13–01–05 (1981) (repealed in 1985 with
adoption of UFTA); Okla. Stat. tit. 24, sec. 105 (1971) (repealed
in 1986 with adoption of UFTA); Utah Code Ann. sec. 25–1–8 (1953)
(repealed in 1988 with adoption of UFTA); Wyo. Stat. Ann. sec.
34–14–108 (Michie 1999).
                               - 14 -

“refinements of title”, but with the realities of ownership.

Corliss v. Bowers, 281 U.S. 376, 378 (1930); see also Heyen v.

United States, 945 F.2d 359, 363 (10th Cir. 1991) (“[S]ubstance

over form analysis applies to gift tax, as well as to income tax,

cases.”); Chanin v. United States, 183 Ct. Cl. 840, 393 F.2d 972,

978–980 (1968); Estate of Murphy v. Commissioner, T.C. Memo.

1990–472.

     As judgment creditors, the Danzig claimants could have

brought suits in all 10 States to have these transfers set aside.

Instead, as an alternative remedy, they sought and obtained a

money judgment against Mrs. Grynberg, the transferee.      In so

doing, the Danzig claimants suffered no harm from the convey-

ances; once more, they could look to the assigned properties as a

source of payment.   Hence, by relegating his creditors to

Mrs. Grynberg for satisfaction of their claims against him,

petitioner continued to enjoy the mineral interests.      And, as we

have noted above, Congress does not treat as taxable gifts trans-

fers of property where the donor has not fully parted with his

interest therein.    See Estate of Sanford v. Commissioner, 308

U.S. at 43; sec. 25.2511–2(b), Gift Tax Regs.

     This Court made a similar ruling in Paolozzi v. Commis-

sioner, 23 T.C. 182 (1954).   There, the taxpayer transferred

property in trust, the income of which was distributable to her

in the discretion of the trustees.      Motivated by fear that the
                               - 15 -

Italian Government would seize her assets following her marriage

to an Italian citizen, she created the trust to protect her

property against confiscation.    On a Federal gift tax return, she

reported as a gift the value of the assets transferred less a

retained life estate.    The Commissioner determined that she made

a gift of the entire trust fund since she reserved only an

expectancy of income.    We rejected the latter contention and held

that the taxpayer properly deducted the value of a life estate

because, under State law, her creditors could reach the maximum

amount of the trust income.    Reasoning that the taxpayer could

borrow money and then relegate her creditors to the trust for

repayment, we noted that she “[obtained] the enjoyment and

economic benefit of the full amount of the trust income.”      Id. at

187.

       The facts in this case require a similar conclusion.    Under

State law, the Danzig claimants had several options to recover

the assets transferred.    As their form of relief, they sought a

money judgment against the transferee, permitting them to reach

the mineral interests.    Thus, like the taxpayer in Paolozzi v.

Commissioner, supra, petitioner continued to enjoy those

interests by forcing his creditors to look to the donee for

settlement of their claims.    In these circumstances, it is

apparent that petitioner did not surrender such dominion and

control over the properties as to result in taxable gifts.
                              - 16 -

     Notwithstanding our belief that petitioner did not make

gifts of mineral interests to his wife, we need not rest our

opinion solely on that ground.   Petitioner asserts, and we agree,

that Mrs. Grynberg signed assignment forms in blank so that

petitioner could revest himself with title to the mineral

interests.   At trial, respondent challenged the existence of such

forms on the grounds that petitioner failed to mention them to a

revenue agent during the audit process.   This allegation, which

calls into question petitioner’s credibility, is unfounded.

Petitioner, who appeared as a forthright and sincere witness, did

his best to recall and describe events as they occurred and

candidly acknowledged the occasional failure of memory.   We are

convinced that his testimony regarding the existence of blank

assignment forms, as corroborated by three former employees of

JGA, was truthful.   Indeed, respondent offered no evidence that

in any way contradicted petitioner’s testimony.

     Petitioner’s decision to have Mrs. Grynberg sign assignment

forms in blank is yet another manifestation of his control over

the mineral interests.   These forms, which gave petitioner power

to divest his wife of the properties, rendered the transfers

incomplete, for the law is settled that a gift, with power in the

donor to revoke it, is not a gift subject to the gift tax.     See

Smith v. Shaughnessy, 318 U.S. 176 (1943); Estate of Sanford v.

Commissioner, 308 U.S. 39 (1939); Burnet v. Guggenheim, 288 U.S.
                              - 17 -

280 (1933); Schwarzenbach v. Commissioner, 4 T.C. 179 (1944);

sec. 25.2511–2(c), Gift Tax Regs.   In light of our holding, we

decline to address petitioner’s alternative arguments regarding

joint or community ownership of the mineral leases.

Gifts to Trusts

     Petitioner concedes that he made completed gifts of over-

riding royalties to trusts for the benefit of his children.      The

parties disagree, however, on the value of those gifts.7   See

sec. 2512 (“If the gift is made in property, the value thereof at

the date of the gift shall be considered the amount of the

gift.”).   Although an arbitration panel fixed the unencumbered

fair market value of these interests at $50,412, disagreement

continues over whether the amount of the gifts should be reduced

to reflect encumbrances on the underlying leases or petitioner’s

involvement in the Danzig case.

     Petitioner claims that the overrides had little or no value

when he transferred them to the trusts because he conveyed less

than a good and marketable title.   Respondent maintains that

petitioner made a gift of their gross value, or $50,412, with no

discount on account of the Danzig case or any judgment liens or



     7
      Generally, the standard of valuation for Federal gift tax
purposes is fair market value; i.e., the price at which property
would change hands between a willing buyer and a willing seller,
both having reasonable knowledge of relevant facts and neither
being compelled to trade. See United States v. Cartwright, 411
U.S. 546, 550 (1973); sec. 25.2512–1, Gift Tax Regs.
                               - 18 -

lis pendens on the underlying leases.     To support his position,

each party proffered the testimony of expert witnesses.

     We will not, however, decide the value of the overrides for

gift tax purposes.    In this case, any gift tax payable on

petitioner’s overriding royalty assignments would be fully

absorbed by his unified credit, as petitioner made no taxable

gifts prior to the ones he concedes here.8     Accordingly, whether

the value of petitioner’s gifts is $50,412, as respondent

contends, or zero, as petitioner contends, the result is the

same:    the deficiency as redetermined for the quarters in issue

is zero.

     Although the correct value of the overrides continues to

divide the parties and may be the subject of future litigation,

this issue has absolutely no impact on the years before us.     Our

decision of no deficiency will be the same in any event.      Indeed,

as the Court has previously noted:      “A decision of no deficiency

* * * provides a complete victory for petitioner; a continuation

of the proceedings ‘cannot affect the result as to the thing in

issue’ * * * and can add nothing other than an advisory opinion”.


     8
      The Tax Reform Act of 1976, Pub. L. 94–455, sec.
2001(b)(3), 90 Stat. 1849, created the unified credit which
applies directly against estate and gift taxes. See secs.
2010(a), 2505(a).
     The credit amount in 1980 was $42,500, offsetting $161,563
of taxable transfers. See secs. 2001(c), 2502(a), 2505(b).
Under a phase–in schedule, the credit increased to $47,000 in
1981. See sec. 2505(a) and (b).
                             - 19 -

LTV Corp. v. Commissioner, 64 T.C. 589, 595 (1975) (quoting

California v. San Pablo & Tulare R.R. Co., 149 U.S. 308, 314

(1893)).

     Accordingly, we conclude that petitioner is liable for no

gift taxes on his transfers of overriding royalties to the

children’s trusts and that, moreover, he made no taxable gifts of

mineral interests to his wife.    Our ruling renders moot

respondent’s determination that petitioner is liable for

additions to tax under sections 6651(a)(1) and 6653(a).

     To reflect the foregoing,

                                      Decision will be entered

                                 for petitioner.
