81 T.C. 210 (1983)
ARTHUR B. SURLOFF AND CHERI SURLOFF, Petitioners
COMMISSIONER OF INTERNAL REVENUE, Respondent
Nos. 7306-80, 7319-80, 7324-80, 7326-80, 7338-80, 7344-80, 7353-80, 7361-80, 7379-80, 16025-80, 18308-80, 19379-80, 19381-80, 8360-81, 22074- 81, 22075-81.
United States Tax Court
August 31, 1983
Petitioners were limited partners in one of eight different limited partnerships formed in 1976 to lease and mine the coal in two tracts of land in Kentucky and Tennessee. The partnership interests were promoted and sold to petitioners by Finkel, who was the general partner in all of the partnerships, and his attorney, Beck. The petitioners paid cash for their partnership interests. The coal leases entered into by the partnerships required them to pay advanced royalties for most, if not all, of the coal thought to be recoverable from the properties, parts of which were payable in cash and much larger parts of which were payable with nonrecourse notes executed by the partnerships. The partnership agreements provided that most of the cash contributed by the partners would be paid up-front in commencement fees to the general partners, attorney fees to Beck, offeree-representative fees, and advanced royalties.
1. Held: The partnerships were not engaged in a business with the primary objective and intent of making a profit so the advanced royalties are not deductible under section 162(a), I.R.C. 1954.
2. Held: The fees paid to the general partner are not deductible by the partnerships.
3. Held: Accounting fees paid on behalf of the limited partners for preparation of their tax returns are deductible by the partners under section 212(3), 1954 Code.
4. Held: Deduction for interest accrued on the non-recourse notes are not allowable.
5. Held: Fees paid to offeree-representatives are not deductible by the partnerships. Petitioners failed to prove that such fees are deductible under section 162(a) or 212(3), I.R.C. 1954.
6. Held: Petitioners failed to prove that any part of the attorney fees paid to Beck are deductible under section 162(a) or 212(3), I.R.C. 1954.
Charles L. Ruffner and Jerome J. Caplan, for the petitioners.
Kenneth W. Gideon and Roger D. Osburn, for the respondent.
Respondent determined deficiencies in Federal income tax for the following taxpayers and for the taxable years as follows:
| Docket No.
|| Arthur B. and Cheri Surloff
|| Irwin M. and Linda Potash
|| Sanford and Lyndol Siegal
|| Albert H. and Jane D. Nahmad
|| Norman C. and Nancy Liebman
|| Robert B. and Arlyn Katims
|| Herbert H. and Vivian M. Green
|| Harold and Vivian Beck
|| Sidney and Florence Fox
|| Richard S. and Harriet Wolfson
|| Lawrence M. and Roberta Marks
|| Howard L. and Carol Silverstein
|| Melvin M. and Inez Lesser
|| Morton and Brenda Korn
|| Hugh J. and Cheryl L. Connolly
|| Louis and Marilyn Perry
After concessions, the issue for decision
is the amount, if any, that petitioners, as limited partners, are entitled to deduct as their distributive share of the losses and interest claimed by the respective partnerships in which they were limited partners. Resolution of this issue is dependent upon the following: (1) Whether the partnerships are entitled to advanced royalty deductions, (2) Whether the partnerships are entitled to deductions for amounts paid to the general partner, (3) Whether the partnerships are entitled to deductions for amounts paid to an accounting firm to prepare its income tax returns, (4) Whether the partnerships are entitled to interest deductions, Page 213
(5) Whether the partnerships are entitled to deductions for amounts paid to offeree representatives, and, (6) Whether the partnerships are entitled to a deduction for amounts paid for certain tax advice. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by reference. All of the petitioners herein were residents of Florida at the time their petitions were filed. The income tax returns for the periods involved were filed by each of the petitioners with the Office of the Internal Revenue Service at Chamblee, Ga. This case involves eight limited partnerships, four of which subleased coal bearing property located in Bell County, Ky., and are therefore sometimes hereinafter referred to as the Bell County partnerships, and four of which subleased coal bearing property located in Knox County, Ky., and are therefore sometimes hereinafter referred to as the Knox County partnerships. Each of the partnerships was on the accrual basis of accounting, and each petitioner was a limited partner in one of the partnerships.
Ted S. Finkel (Finkel) was the promoter of the Bell County partnerships. Finkel had obtained a copy of a coal tax shelter prospectus prepared by a New York law firm which indicated that investors could get multiple tax writeoffs from coal tax shelters. In March or April 1976, Finkel asked his attorney, Stanley H. Beck (Beck), to review the prospectus to determine whether it was correct regarding the availability of multiple Page 214
tax writeoffs. Beck agreed it was, so Finkel decided to proceed with the syndication of the limited partnerships.
Shortly thereafter, Finkel and Beck attempted to locate coal properties that could be leased by the prospective limited partnerships. Finkel asked a friend, Sanford Kaplan (Kaplan), to help him locate some coal properties. Finkel learned through a relative that 1,055 acres of property were available in Bell County, Ky. He directed Beck to meet with Herbert Sandov (Sandov), one of the co-owners of the property, to discuss its possible acquisition. At that time Sandov presented Beck with a copy of a coal report on the property which had been prepared by James H. Hagy (Hagy) in 1975.
Since it was determined the partnerships would not be entitled to royalty deductions if they purchased the property outright, it was decided the property should be subleased. National Coal Leasing Corp. (National), a corporation solely owned by Kaplan, was formed (by Beck) to lease the property. National in turn was to then sublease the property to the partnerships.
On July 5, 1976, National leased the 1,055 acres in Bell County, Ky. (hereinafter the Bell County property), from the owners.
National agreed to pay the lessors a royalty of $1 for each ton (2,000 pounds) of coal mined and removed from the property. National also agreed to pay a nonrefundable advanced royalty of $100,000. This advanced royalty was to be recouped and recovered by National at a rate of 50 cents per ton.
National had no obligation to mine coal or to pay additional royalties for a period of 4 years beginning on the Page 215
date of the lease. Thereafter National was required to pay a minimum royalty of $40 000 per year. The duration of the lease was 10 years and National had the option to extend the term for additional 1-year periods provided it paid a minimum royalty of $100,000 for each year with respect to which the term of the lease was extended. If National failed to pay the required royalties, the lessors at their option could declare the lease forfeited and retake possession of the leased property. By a " confidential offering memorandum" dated June 30, 1976, limited partnership interests in Amber Coal Co., Ltd. (Amber) were offered by Finkel to various investors. Although the " confidential offering memorandum" was dated June 30, 1976, Finkel actually began soliciting orders for limited partnership interests in Amber on June 4, 1976, which was prior to the time National had leased the Bell County property, and prior to the time Amber had subleased the property.
To become a limited partner in Amber, each prospective investor was required to have a net worth of at least $200,000 and an annual income that would be subject at least in part to tax in the 50-percent bracket. The offering memorandum provided that 15 limited partnership interests were to be sold to limited partners for $14,000 each, for a total of $210,000. The group of limited partners acquiring the limited partnership interests were to receive 90 percent of the net profits, losses, deductions, and credits of Amber. The general partner of Amber was Finkel Investment Service, which was wholly owned by Finkel, and it contributed $7,000 for the remaining 10 percent of the net profits, losses, deductions, and credits of Amber. Attached to the offering memorandum which was sent to the potential investors, were the following exhibits, each of which Page 216
will be discussed more fully herein: Report on coal property, proposed coal sublease agreement, tax opinion letter, and limited partnership agreement. The report on the coal property was based upon the coal report for the Bell County property, which had been prepared in 1975 by Hagy. The report estimated that the total recoverable coal reserves on the Bell County property were 4,239,029 tons,
of which 3,971,275 tons were considered recoverable by underground mining and the remainder were considered recoverable through strip mining and auger mining....