Krause v. Comm'r of Internal Revenue, s. 16425–86

Citation99 T.C. No. 7,99 T.C. 132
Decision Date29 July 1992
Docket Number33231–86.,Nos. 16425–86,s. 16425–86
PartiesGary E. KRAUSE, Tax Matters Partner, Barton Enhanced Oil Production Income Fund, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.R.A. HILDEBRAND and Dorothy A. Hildebrand Wahl, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Kenneth M. Barish, for petitioner at docket No. 16425–86.

Jeffrey P. Berg, for petitioners at docket No. 33231–86.

Stephen M. Miller, Marion S. Friedman, and Elizabeth Girafalco Chirich, for respondent.SWIFT Judge:

At docket No. 33231–86, with respect to petitioners Dorothy A. Hildebrand Wahl and R.A. Hildebrand, respondent determined deficiencies in Federal income tax, increased interest, and additions to tax for 1980, 1981, and 1982, as follows:

+----------------------------------------------------------------------------------------------------+
                ¦Petitioners at Docket No. 33231–86                                                                ¦
                +----------------------------------------------------------------------------------------------------¦
                ¦Dorothy A. Hildebrand Wahl                                                                          ¦
                +----------------------------------------------------------------------------------------------------¦
                ¦Increased Interest and Additions to Tax  ¦            ¦         ¦         ¦            ¦            ¦
                +-----------------------------------------+------------+---------+---------+------------+------------¦
                ¦                                         ¦Sec.        ¦Sec.     ¦Sec.     ¦            ¦            ¦
                ¦                                         ¦            ¦Sec.     ¦         ¦            ¦            ¦
                +-----------------------------------------+------------+---------+---------+------------+------------¦
                ¦Year                                     ¦Deficiency  ¦6621(c)  ¦6653(a)  ¦6653(a)(1)  ¦6653(a)(2)  ¦
                +-----------------------------------------+------------+---------+---------+------------+------------¦
                ¦1980                                     ¦$39,359     ¦*        ¦$1,968   ¦...         ¦...         ¦
                +-----------------------------------------+------------+---------+---------+------------+------------¦
                ¦1981                                     ¦48,027      ¦*        ¦...      ¦$2,464      ¦**          ¦
                +----------------------------------------------------------------------------------------------------+
                
+---------------------------------------------------------------------------------------------------------+
                ¦R.A. Hildebrand                                                                                          ¦
                +---------------------------------------------------------------------------------------------------------¦
                ¦Increased Interest and Additions to Tax  ¦            ¦         ¦            ¦            ¦       ¦      ¦
                +-----------------------------------------+------------+---------+------------+------------+-------+------¦
                ¦                                         ¦Sec.        ¦Sec.     ¦Sec.        ¦Sec.        ¦       ¦      ¦
                ¦                                         ¦            ¦Sec.     ¦            ¦            ¦       ¦      ¦
                +-----------------------------------------+------------+---------+------------+------------+-------+------¦
                ¦Year                                     ¦Deficiency  ¦6621(c)  ¦6653(a)(1)  ¦6653(a)(2)  ¦6659   ¦6661  ¦
                +-----------------------------------------+------------+---------+------------+------------+-------+------¦
                ¦1982                                     ¦$71,463     ¦*        ¦$3,573      ¦**          ¦$15,731¦$1,903¦
                +---------------------------------------------------------------------------------------------------------¦
                ¦**120 percent of the interest accruing after Dec. 31, 1984, on the portion of                            ¦
                ¦the underpayment attributable to a tax-motivated transaction.                                            ¦
                +---------------------------------------------------------------------------------------------------------¦
                ¦**50 percent of the interest due on the portion of the underpayment                                      ¦
                ¦attributable to negligence.                                                                              ¦
                +---------------------------------------------------------------------------------------------------------+
                

At docket No. 16425–86, with respect to Barton Enhanced Oil Production Income Fund, a Kansas limited partnership, and petitioner Gary E. Krause as tax matters partner, and by notice of final partnership administrative adjustment (FPAA), respondent disallowed Barton's ordinary losses for 1982 and 1983 in the respective amounts of $504,972 and $500,341.

Respondent also determined increased interest and additions to tax under sections 6621(c),1 6659, and 6661 with respect to petitioner Gary E. Krause's 1982 and 1983 individual Federal income tax liabilities.

These consolidated cases are test cases for over 2,000 related cases and for a number of related TEFRA partnerships. Alleged total tax deficiencies at issue in connection with this group of related cases and TEFRA partnerships are in excess of $2 billion.

On May 11, 1989, prior to trial, we issued an opinion in these consolidated cases with respect to the parties' cross motions for partial summary judgment which decided a number of legal issues. See Krause v. Commissioner, 92 T.C. 1003 (1989).

The particular limited partnerships that are involved in these test cases (namely, Technology Oil and Gas Associates 1980 (Technology–1980) and Barton Enhanced Oil Production Income Fund (Barton)) were part of two groups of limited partnerships that are referred to in this opinion at various times as the “Manhattan Partnerships”, the “Wichita Partnerships”, and occasionally as “the partnerships”. The partnerships had the stated general objective of, among other things, investing in enhanced oil recovery (EOR) technology for the recovery of oil and natural gas.

Respondent disallowed substantial losses claimed by the limited partners of the partnerships for 1980 and 1981, and claimed by the partnerships for 1982 and 1983. These test cases raise the following primary issues: (1) Whether the investments in and the activities of the partnerships were entered into and engaged in with actual and honest profit objectives, and (2) whether the stated debt obligations of the partnerships constituted genuine debt obligations, or whether they constituted contingent, sham debt obligations, lacking in economic substance.

Resolution of the issues in these cases is complicated by the extensive record. Trial of these cases lasted 15 weeks. The trial transcript consists of 8,361 pages. Over 1,500 multi-page exhibits were admitted into evidence, and a total of 46 fact witnesses and 28 expert witnesses testified.

FINDINGS OF FACT

Some of the relevant facts were stipulated and are so found.

Petitioner R.A. Hildebrand (Hildebrand) resided in Denver, Colorado, and petitioner Dorothy A. Hildebrand Wahl (Wahl) resided in Lakewood, Colorado, at the time their joint petition was filed. Barton's principal place of business was in Wichita, Kansas, at the time the petition was filed.

Throughout the mid to late 1970s and early 1980s, world oil markets were destabilized by war in the Middle East, by the Iranian revolution, by production and export quotas of oil exporting countries, and by other actions of the Organization of Petroleum Exporting Countries (OPEC). During these years, certain segments of the public, of the oil industry, and of governmental organizations responsible for energy policy reflected a certain hysteria about the worldwide energy crisis and about oil prices.

From 1978 to 1979, the average domestic crude oil price fluctuated from $12.70 per barrel to $34.35 per barrel and peaked in March of 1981 at $34.70 per barrel. In August of 1980, spot oil prices for Saudi light crude oil reached approximately $46 per barrel, and as of the end of 1980, the price of Saudi light crude oil was $38 per barrel.

A 1980 report of the U.S. Department of Energy (DOE) and various studies published by oil industry representatives indicated that oil prices by 1990 could go as high as $123 per barrel. The table below indicates the mid-level crude oil price projections for 1980 to 1995 that were set forth in the 1980 DOE report, in 1979 dollars and in projected inflated dollars, as follows:

+---------------------------------+
                ¦In Constant 1979 Dollars ($/bbl) ¦
                +---------------------------------¦
                ¦           ¦1980  ¦1985¦1990¦1995¦
                +-----------+------+----+----+----¦
                ¦Low price  ¦32.66 ¦32  ¦32  ¦32  ¦
                +-----------+------+----+----+----¦
                ¦Midprice   ¦32.66 ¦37  ¦41  ¦50  ¦
                +-----------+------+----+----+----¦
                ¦High price ¦32.66 ¦43  ¦49  ¦70  ¦
                +---------------------------------+
                
In Projected Inflated Dollars ($/
                bb1)
                              1980    1985 1990 1995
                Low price     37.24   53   77   106
                Midprice      37.24   61   98   165
                High price    37.24   71   117  231
                

In the late 1970s, as a result of the energy crisis of the 1970s, the Carter Administration announced a new national goal for the United States within a decade to achieve energy independence. See President James E. Carter, The Energy Problem, Address to the Nation, 13 Weekly Comp.Pres.Doc. 560 (April 18, 1977); President James E. Carter, Energy and National Goals, Address to the Nation, 15 Weekly Comp.Pres.Doc. 1235 (July 15, 1979). This goal was to be achieved by increasing the supply of domestic crude oil, by developing new alternate sources of energy, and by conserving existing energy resources. Numerous energy related research and development facilities were established, funded, or subsidized by the Government. Billions of dollars were spent directly by the Federal Government or indirectly through tax incentives to accelerate the development of synthetic fuels, fossil energy research, and EOR technology.

Specifically, regarding the...

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