Burditt II v. Commissioner
| Decision Date | 06 April 1999 |
| Docket Number | Docket No. 916-96. |
| Citation | 77 T.C.M. 1767 |
| Parties | Allen Burditt II and Sarah Maunee S. Burditt v. Commissioner. |
| Court | U.S. Tax Court |
Respondent determined the following deficiencies, addition to tax, and accuracy-related penalties for the taxable years 1991, 1992, and 1993:
Addition to Tax Penalty
Sec
Year Deficiency Sec. 6651(a) 6662(b)(1),(2)
1991 ................................ $ 72,523 -- $ 7,570
1992 ................................ 258,998 $89,391 11,918
1993 ................................ 31,871 -- 6,356
After concessions, the remaining issues for decision are: (1) Whether amounts received by petitioners in 1992 pursuant to settlement agreements were damages received on account of personal injuries under section 104(a)(2),1 and (2) whether petitioners are liable for a section 6662(a) penalty for 1992.
Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts, the first supplemental stipulation of facts, and the attached exhibits.
At the time of the filing of their petition, petitioner Allen Burditt II resided in Houston, Texas, and petitioner Sarah Maunee S. Burditt resided in Sante Fe, New Mexico.
Hereinafter, we shall refer to petitioner Allen Burditt II as "petitioner" or "Mr. Burditt", and references to "petitioners" are to Allen Burditt II and Sarah Maunee S. Burditt.
From 1988 through 1993, petitioner was the president of Carancahua Resources, Inc. (CRI), a Texas corporation, and petitioners held a controlling interest in the corporation that owned 80 percent of CRI's stock. In 1988, CRI acquired the lease covering a previously completed oil and gas well and obtained authorization to reenter the well.
Before perforating the well, CRI needed certain items to complete the well, including a "packer". A packer is an expandable device that is run either in an open well, in a cased hole, or in tubing to counteract pressure exerted by underground oil and gas and prevent such fluids from flowing vertically. CRI purchased the packer from Lindsey Completion Services, Inc. ("Lindsey"). The Lindsey packer did not function effectively. On October 3, 1988, after attempts to obtain a pressure test of its seals were unsuccessful, the Lindsey packer was removed from the well. Lindsey then provided a replacement packer, which was placed in the well.
On October 4, 1988, CRI perforated the well at 9:30 a.m. At approximately 11:00 a.m., the well developed a gas leak at the wellhead,2 which indicated that high pressure was being exerted from the production zone below. As a result of this leak, gas and liquid began escaping into the atmosphere in an uncontrolled manner, a condition referred to as a "blowout". The well emitted large quantities of gas and oil, placing the lives of the 20 to 30 workers in the surrounding area, as well as Mr. Burditt's, at imminent risk due to the possibility that a spark from static electricity would ignite the oil and gas. CRI ordered four truck loads of "heavy mud", which is used to contain uncontrolled wells by pumping it into the well bore to offset the pressure of the escaping oil and gas. CRI also contacted a company that had the necessary tools and equipment to pump the heavy mud to control the well, but after surveying the scene, that company's manager decided it was too dangerous and departed with his crew. CRI then telephoned Halliburton Services, Inc. ("Halliburton"), and Halliburton personnel agreed on the phone to control the well. Halliburton personnel arrived at the well site at approximately 4:00 p.m. However, Halliburton's supervisory employee in charge at the well site, Mr. Ken Weitzel, refused to allow Halliburton's employees or equipment to get any closer than approximately 200 yards from the wellhead. As a result, Mr. Burditt and volunteers from the other work crews had to assemble the pipeline from Halliburton's equipment to the wellhead. Mr. Burditt and the volunteers had to do this while being simultaneously sprayed by the erupting oil and gas, which was so cold that it caused gloves to freeze, and by hoses of fresh water to reduce the risk of ignition. It took approximately 30 to 45 minutes to perform the hookup task under these conditions. When the hookup was completed, Mr. Weitzel then refused to start pumping the heavy mud until Mr. Burditt could produce a check for $30,000, which amount Halliburton believed CRI owed it for past services. A CRI employee wrote a personal check in that amount, and Halliburton started pumping the heavy mud. Soon thereafter, Mr. Weitzel demanded a corporate check from CRI, which petitioner could not produce at that time. Although the well had not been controlled, Mr. Weitzel ordered the pumps stopped. Mr. Weitzel forced petitioner to hand over his car keys and wallet, and to sign over his residence (on a handwritten document prepared by Mr. Weitzel) before he agreed to start pumping again. Mr. Weitzel stopped and started pumping twice more, starting only after first demanding a check for $30,000 brought by Mrs. Burditt on CRI's behalf, and then after forcing petitioner to sign an indemnity agreement that Halliburton had delivered to its employees at the well site. In each instance, the pumping was stopped by Mr. Weitzel when the intensity of the oil and gas eruption had lessened, and the pumps remained off until the intensity of the eruption had resumed significantly. The indemnity agreement contained language releasing Halliburton from all liability stemming from contractual, negligence, or strict liability claims that CRI could assert relating to Halliburton's efforts to control the well. Eventually, Halliburton completed the pumping and "killed the well".
In February 1989, CRI and petitioner, as joint plaintiffs, filed a lawsuit in the District Court of Jefferson County Texas, naming various defendants including Lindsey and Halliburton.
In the original petition, CRI alleged that Lindsey provided defective equipment and services. CRI also claimed that Lindsey's actions caused a blowout at the well, and as a result, CRI (but not petitioner individually) suffered significant economic damages. The petition did not state any claims against Lindsey that were personal to petitioner. With respect to Halliburton, however, the petition did assert claims that were personal to petitioner. CRI and petitioner alleged that Halliburton entered into an agreement to provide emergency services at the well site and then ceased the performance of its obligations under their agreement, thereby contributing to the damage of the well. The petition claimed that these actions by Halliburton caused both CRI and petitioner economic damages, and in addition caused petitioner severe embarrassment and mental anguish. CRI and petitioner subsequently filed first, second, third, and fourth amended petitions in March 1989, January 1990, September 1991, and October 1991, respectively. Mr. Burditt's allegations in his personal capacity against Halliburton did not change in the amended petitions. However, certain of the amended petitions did contain new allegations of personal injury. In the second and third amended petitions, an unidentified "plaintiff" — that is, either petitioner or CRI — alleged a claim under the Texas Deceptive Trade Practice Act — Consumer Protection Act, Tex. Bus. & Com. Code sec. 17.50 (Vernon 1989), against Lindsey. Subsequently, the fourth amended petition alleged that "plaintiffs" — that is, both petitioner and CRI — suffered mental anguish, torment, and heartache. Lindsey filed a motion to strike the fourth amended petition because it was filed 22 days late under the trial court's docket control order. The trial court granted this motion and struck the fourth amended petition in January 1992.
In the second and third amended petitions, CRI and petitioner claimed $10 million in actual damages and $5 million in punitive damages.
Lindsey, and CRI and petitioner, retained expert witnesses to give testimony regarding the economic damages resulting from the well blowout. An expert for CRI and petitioner estimated the total losses as a result of damage to the well and lost production capacity at a present value of more than $3 million in March of 1991. An expert for Lindsey concluded that the well had never been commercially viable. No experts were retained to testify with respect to personal injuries of petitioner. However, CRI and petitioner did take the deposition of at least five eyewitnesses to Halliburton's actions at the blowout. Neither Lindsey or Halliburton deposed petitioner.
On or about April 24, 1989, Halliburton served CRI and petitioner with interrogatories, to which they jointly responded. The interrogatories and responses included the following:
7. Please state all facts which support your contention that Halliburton's actions contributed to damage the Davis No. 1 well.
Answer: A deep hackberry well is an extremely volatile situation which requires precise control. When this well blew-out, the damage was being done to well formation on a continuous basis. The longer the damage was allowed to continue, the greater the damage would be. Since Halliburton could have controlled the well very quickly had it performed its obligations as promised, the damage which was done to the formation may very well have been minimized, if not eliminated. Accordingly, Halliburton's failure to control the well in an expeditious and professional manner probably contributed to the full extent of the damage that occurred to the formation.
8. Please state the damages...
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