Wesley v. Comm'r of Internal Revenue (In re Estate of Boyd)

Decision Date23 April 1981
Docket NumberDocket No. 8058-78.
Citation76 T.C. 646
PartiesESTATE of W. BURGESS BOYD, DECEASED, and MAXINE A. WESLEY (FORMERLY MAXINE A. BOYD), PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

In 1974, Boyd subscribed for units in a limited partnership the purpose of which was to purchase and operate producing oil and gas properties. The subscriptions were closed and the partnership was formed on Dec. 31, 1974. The general partner was Patrick Oil & Gas Corp. An interest in a producing oil and gas property was sold to the partnership by the parent of Patrick Oil sometime in 1975. Pursuant to the partnership agreement, on Dec. 31, 1974, the partnership paid Patrick Oil $516,450, covering a contribution fee of 15 percent, a management fee of 8.5 percent, and an overhead fee of 6.5 percent, based on the total subscriptions. On the partnership return for 1974, no income was reported but a deduction was claimed for all except $10,675 of the total fees paid, thus producing a loss. Petitioners failed to prove with reasonable certainty the nature of the undertakings or services rendered or to be rendered by the general partner for the various fees paid or the proper allocation of the fees to those undertakings or services. Since most of the services rendered or to be rendered appear to be related to the organization of the partnership, the acquisition of its capital assets, and the management of the partnership after it commenced business, no amount of the fees was deductible by the partnership in 1974 and petitioners are not entitled to a loss deduction. Paul D. Ritter, Jr., for the petitioners.

Stuart B. Kalb, for the respondent.

DRENNEN , Judge:

Respondent determined a deficiency in petitioners' income tax for the calendar year 1974 in the amount of $15,048.

The sole issue to be decided is whether a limited partnership, of which W. Burgess Boyd was a limited partner, incurred a loss in 1974, so that W. Burgess Boyd would be entitled to deduct his aliquot share. Whether the partnership incurred a loss in 1974 is dependent upon whether it is entitled to a deduction under sections 162 and 707 or 165, I.R.C. 1954,1 for certain payments made in 1974 to the general partners of the partnership.

FINDINGS OF FACT

Some of the facts were stipulated and they are so found. The stipulation of facts, the first supplemental stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

W. Burgess Boyd (hereinafter Boyd) and Maxine A. Wesley (formerly Maxine A. Boyd) were husband and wife during the taxable year in issue. Boyd died on April 19, 1975. Petitioner Maxine A. Wesley (hereinafter petitioner) is the personal representative of the Estate of W. Burgess Boyd, and she is a petitioner in this case in her individual capacity and as personal representative of the Estate of W. Burgess Boyd. Petitioner resided in Sarasota, Fla., at the time of the filing of the petition herein. Petitioner, individually and as surviving spouse, filed joint original and amended income tax returns for 1974 for herself and Boyd with the Office of the Director, Internal Revenue Service Center, Chamblee, Ga.

Background Facts

In 1974, Patrick Oil & Gas Corp. (hereinafter sometimes referred to as Patrick Oil) was the wholly owned subsidiary of Patrick Petroleum Corp. of Michigan (hereinafter Patrick of Michigan). Patrick of Michigan was the wholly owned subsidiary of Patrick Petroleum Co. (hereinafter Patrick). (Sometimes hereinafter Patrick, Patrick of Michigan, and Patrick Oil will be referred to collectively as the Patrick group.)

Patrick, Patrick of Michigan, and Patrick Oil comprise an independent oil and gas operation. As of November 15, 1974, the Patrick group had approximately 95 employees, including a professional staff of 36 engineers, geologists, and landmen. The employees were located at the Patrick group home office in Jackson, Mich., and at various offices in Texas, Kansas, Louisiana, Kentucky, West Virginia, Mississippi, Oklahoma, and Canada.

The exact areas of operations and activities of each of the members of the Patrick group, and the lines of demarcation (if any) between those areas, were never specifically detailed. Apparently, Patrick of Michigan is the entity actively engaged in the acquisition and sale of oil and gas properties. During the normal course of its operations, Patrick of Michigan purchases producing oil and gas properties and holds such properties in its inventory. Many properties are evaluated by Patrick of Michigan for possible acquisition, not all of which are acquired. In addition to having its own employees evaluate various properties, Patrick of Michigan has independent consultants evaluate properties which Patrick of Michigan is considering acquiring.

Patrick and Patrick Oil restrict their activities to organizing, establishing, and operating (as general partners) various types of limited-partnership programs for investing in oil and gas properties. Limited partnership interests are then sold to the public. Once a limited partnership is formed, producing oil and gas properties purchased by Patrick of Michigan are made available for acquisition by the limited partnership.

Limited Partnership Formation

On September 12, 1974, Patrick Oil (as general partner and managing partner) and Patrick (as additional general partner) filed Registration Statement No. 2-51930 with the Securities and Exchange Commission to register for sale units in the Patrick Oil and Gas Corp.—-1975 Income Program. The registration statement became effective November 15, 1974. Under this income program, a series of limited partnerships were to be formed to acquire and operate producing oil and gas properties. The prospectus prepared in connection with the registration statement provided that at least one, but not more than four, limited partnerships would be formed.

The minimum amount necessary to form one limited partnership was $500,000 and the general partner guaranteed to make sufficient capital contributions or purchase sufficient limited partnership units to ensure the receipt of at least $500,000 for the first limited partnership. In addition, the general partner had the sole discretion to close sales for a limited partnership after the minimum amount necessary to form a limited partnership had been subscribed.

Between November 15, 1974, and December 31, 1974, 3,443 units in the Patrick Oil & Gas Corp.—-1975 Income Program were sold, with total subscriptions equaling $1,721,500. As of December 31, 1974, units were owned by 199 record holders. On that date, sales of units in Patrick Oil & Gas Corp.—-1975 Income Program, Limited Partnership No. 1 (hereinafter LP-1 or limited partnership) were closed and a limited partnership was formed under the laws of the State of Michigan. A certificate of formation for LP-1 was filed in the Office of Jackson County Clerk, Jackson, Mich., on December 31, 1974.

Boyd subscribed to purchase 200 units of LP-1 at $500 per unit, and he paid a total subscription price of $100,000 to the partnership in 1974. His aliquot share of all items of limited partnership income, loss, deduction, or credit in 1974 was 5.808888 percent of the total of such items.

The limited partnership agreement for LP-1 provided that the purpose of the limited partnership was “to purchase and operate producing oil and gas properties and to conduct all other operations relating thereto.” The limited partnership would not engage in exploratory or developmental drilling for oil and gas. Profits and losses were to be determined according to the cash basis of accounting. As general and managing partner, Patrick Oil was to conduct and manage the activities of LP-1 and was given authority “to do any and all things necessary or appropriate in order to accomplish the purposes” of the limited partnership. Patrick Oil and Patrick were also given the right of first refusal with regard to sales of LP-1 units by the limited partners. Dissolution of LP-1 would be effected upon the occurrence of a number of specified events, but in any event it would terminate on April 30, 2021.

The limited partnership agreement, to a brief extent, provided that producing oil and gas properties could be purchased from entities affiliated with Patrick Oil. More detailed information concerning the acquisition of producing properties was provided in the prospectus prepared in connection with the sale of the limited partnership units in Patrick Oil & Gas Corp.—-1975 Income Program. In the prospectus it was stated:

Acquisition of Properties

The Partnerships will not engage in drilling. Their activities will be limited to purchasing, holding, operating and disposing of producing oil and gas properties. The Partnerships may purchase any kind of interest in a producing oil and gas property. In most cases a working interest will be acquired which will consist of all or part of the rights and obligations under an oil and gas lease. Occasionally a Partnership may purchase overriding royalty interests, production payments or royalty interests.

As has been the practice in all previous programs the Partnership will purchase all of their interests in producing oil and gas properties from Patrick Petroleum Corporation [of Michigan] or Patrick Petroleum Company, parents of the General Partner which may purchase them from individuals, independent oil companies, major oil companies, estates, trusts, partnerships including Partnerships in other Patrick Oil and Gas Corp. programs or other entities. *ss

Possible producing oil and gas properties to be purchased by the Partnerships will be located through the ten exploration offices maintained by Patrick Petroleum Corporation [of Michigan] and through contacts developed by the General Partner and its affiliates during the past 11 years of operation with lease brokers, individuals, banks, and others who may have knowledge of properties for sale. No finders...

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