Condor International, Inc. v. Commissioner Internal Revenue Service

In this case we are called upon to review a decision of the United States Tax Court (“Tax Court”) upholding the government’s assessment of various taxes and penalties against a husband, his wife, and their Delaware holding company formerly operating in the United States Virgin Islands (“USVI”). For the reasons which follow, we affirm the imposition of capital gains taxes against the husband and wife and the Delaware company, but reverse the assessed deficiencies.

FACTS AND PRIOR PROCEEDINGS

In 1958, James E. Welsh (‘Welsh”) founded Arlon Products, Inc. (“Arlon”), a California manufacturer of items using pressure-sensitive adhesives. Welsh’s intent in creating Arlon was to build a company that could eventually be sold at a profit. By the early 1980s, Arlon had grown to be a multi-million dollar entity. At that time, Welsh and his wife, Nancy (jointly, the Welshes”), still retained a controlling interest in the company, owning some 75% to 80% of Arlon’s outstand *1357 ing stock. 1 They held these shares as trustees of the Welsh Family Trust, a grantor trust in which the Welshes were the sole grantors, trustees, and beneficiaries.

By 1981, the Welshes had decided to sell Arlon,…