Egolf v. Comm'r of Internal Revenue
| Decision Date | 02 July 1986 |
| Docket Number | Docket No. 3640-83. |
| Parties | WILLIAM T. EGOLF and HARRYLOU EGOLF, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P is the general partner of a limited partnership engaged in oil and gas drilling. Pursuant to the partnership agreement, P, as general manager, provides management services to the partnership in exchange for a management fee. P paid various organization and syndication costs of the partnership and claimed them as ordinary and necessary expenses of his lease management business. HELD, the management fee P received is reimbursement for the organization and syndication expenses he paid on behalf of the partner-ship and he is not entitled to claim a deduction for those expenses.
Sec. 709(a), I.R.C. 1954. HELD FURTHER, the partnership may not amortize the portion of the management fee representing reimbursement of organization and syndication expenses under section 167. Sec. 709(a), I.R.C. 1954. HELD FURTHER, overpayments of management fees were not loans and P may not exclude those amounts from income for the taxable years 1978 and 1979. John J. Griffin, Sr. and Laurence J. Whalen, for the petitioners.
Manolo T. Rodriguez-Bird, for the respondent.
The Commissioner determined deficiencies in petitioners' Federal income taxes for the taxable years 1978 and 1979 in the amounts of $112,628.52 and $392,761.80, respectively. The issues for decision are: (1) whether petitioner properly deducted as ordinary and necessary business expenses amounts paid by him representing partnership organization and syndication costs; (2) whether the partnership may amortize organization and syndication expenses; and (3) whether management fee payments received by petitioner in excess of the amount provided in the partnership agreement represented loans.
Some of the facts have been stipulated. The stipulation of facts, attached exhibits, and the supplemental stipulation of facts are incorporated by this reference.
Petitioners William T. and Harrylou Egolf, 1 husband and wife, timely filed joint Federal income tax returns for the taxable years 1978 and 1979 with the Internal Revenue Service Center at Austin, Texas. Petitioners filed an amended Federal income tax return (Form l040X) for the taxable year 1979 on June 15, 1983. The Egolfs were residents of Oklahoma City, Oklahoma, at the time the petition was filed in this case.
Upon graduation from the University of Oklahoma in 1939, William T. Egolf (Egolf or petitioner) joined his father in the business of acquiring, developing, and operating oil and gas properties. He continued in this business after the death of his father in 1949. In 1969 he began organizing and promoting oil and gas drilling programs. In the course of this activity, he identified and obtained leases on several properties with the potential for the profitable production of oil and gas. Egolf then oversaw the drilling and the operation of the developed properties. He sponsored more than 30 such drilling programs between 1969 and 1984. Development of the properties acquired by Egolf was typically financed through the sale of limited partnership interests.
In the taxable year 1978, petitioner organized a drilling program that was financed by sales of limited partnership interests in Petroleum Investments, Ltd. - 1978 (). Although petitioner usually created a limited partnership to finance a single drilling program, three additional drilling programs were financed through additional subscriptions to the 1978-Partnership. The four drilling programs under the 1978- Partnership were designated as follows:
+--------------------------------------------------+
¦Program ¦Date organized¦
+-----------------------------------+--------------¦
¦Petroleum Investments, Ltd. - 1978 ¦Feb. 16, 1978 ¦
+-----------------------------------+--------------¦
¦Petroleum Investments, Ltd. - 1978A¦Oct. 28, 1978 ¦
+-----------------------------------+--------------¦
¦Petroleum Investments, Ltd. - 1979 ¦May 21, 1979 ¦
+-----------------------------------+--------------¦
¦Petroleum Investments, Ltd. - 1979A¦Oct. 1, 1979 ¦
+--------------------------------------------------+
A private placement memorandum was prepared for the initial solicitation of subscriptions to the 1978-Partnership and was supplemented for the subsequent solicitations for subscriptions used to finance the additional drilling programs.
Petitioner was the sole general partner of the 1978-Partnership. The limited partnership agreement of the 1978-Partnership (hereinafter referred to as the ‘1978-Partnership Agreement‘) provided that the agreement was to remain in effect for 20 years. The 1978-Partnership Agreement also provided that petitioner, as general partner, was to receive 10 percent of partnership revenue from oil and gas production. The remaining 90 percent of partnership revenue was to be shared among all partners in the ratio that each partner's subscription to the partnership bore to the total subscriptions. Because petitioner subscribed to the partnership individually, he was entitled to share in 90 percent of partnership revenue as a limited partner in addition to his 10-percent share as general partner.
The 1978-Partnership Agreement also provided that, in addition to his broad duties to acquire and oversee the development and operation of oil and gas properties for the drilling programs, 2 petitioner must bear all organization and syndication costs of the partnership. The 1978-Partnership Agreement provided:
* * *
3.6 PLAN OF DISTRIBUTION. Subscriptions and Additional Contributions shall be solicited on a ‘best efforts‘ basis by selected broker-dealers for commissions of 3% of amounts secured by them; provided, however, commissions shall be payable only upon amounts actually received by the Partnership at the time of such receipt. The General Partner shall bear all sales commissions. Subscriptions may also be solicited for the Partnership by William Egolf, but no commissions would be payable on sales made by him.
* * *
6.1 COSTS. All organizational and offering costs incurred in the offering and sale of Subscriptions and Additional Contributions, including sales commissions, shall be paid 100% by the General Partner. The General Partner shall also be charged with and shall bear 100% of all accounting costs, costs of preparing tax returns for the Partnership and operational overhead costs.
In addition, the offering circulars for the 1978-Partnership explicitly provided that the limited partner subscriptions would not be used for the organization and syndication expenses of the partnership. The offering circulars stated:
APPLICATION OF PROCEDURES
Limited partner subscriptions will not be used for the payment of costs incurred in organizing the Partnership or selling Units therein, but instead will be used in conducting Partnership operations. * * * The 1978-Partnership agreement summarized the division of costs and revenues between the general partner and limited partners as follows:
The 1978-Partnership Agreement also provided that petitioner, as general partner, would receive a ‘Management and Overall Supervision Fee.‘ The Amended 1978-Partnership Agreement described the management and overall supervision fee as follows:
4.2 COMPENSATION. For his services in managing the Partnership, the General Partner shall be entitled to receive a Management and Overall Supervision Fee equal to 5% of all costs incurred in drilling, completing, testing and equipping Partnership wells, but excluding all costs of acreage acquisition and operating costs.
The 1978-Partnership Agreement does not reveal whether the management fee was to compensate or reimburse petitioner for organization and syndication expenses of the...
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