Krause v. Comm'r of Internal Revenue, Docket Nos. 16425-86
| Court | United States Tax Court |
| Writing for the Court | SWIFT |
| Citation | 92 T.C. 1003,92 T.C. No. 63 |
| Parties | GARY E. KRAUSE, TAX MATTERS PARTNER, BARTON ENHANCED OIL PRODUCTION INCOME FUND, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Docket Number | Docket Nos. 16425-86,33231-86. |
| Decision Date | 11 May 1989 |
92 T.C. 1003
92 T.C. No. 63
GARY E. KRAUSE, TAX MATTERS PARTNER, BARTON ENHANCED OIL PRODUCTION INCOME FUND, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 16425-86
33231-86.
United States Tax Court
Filed May 11, 1989.
The parties cross move for partial summary judgment in these test cases involving partnership investments in oil and gas exploration and production. Assuming, for purposes of the instant motions only, that the partnership debt obligations are genuine, it is HELD: (1) That the limited partners' assumption of partnership debt obligations created amounts with respect to which the limited partners were at risk under sec. 465(b)(2), I.R.C. of 1954, but only to the extent of the fixed and definite accruals each year on the debt obligations and only to the extent of the limited partners' fixed and definite liability each year on the obligations; and (2) that the limited partners were not protected against loss under sec. 465(b)(4), I.R.C. of 1954, on the partnership debt obligations they personally assumed.
Other issues raised in the cross motions for summary judgment are denied as not ripe for summary disposition.
[92 T.C. 1003]
Kenneth M. Barish and Jeffrey P. Berg, for the petitioners.
Stephen M. Miller, Marion S. Friedman, and Elizabeth Girafalco Chirich, for the respondent.
This matter is before the Court on the parties' cross motions for partial summary judgment filed under Rule 121. 1 With one exception, the issues with respect to which each party seeks summary judgment are the same. Each party has filed an objection to the opposing party's motion for partial summary judgment on the merits of each of the issues raised therein, and each party objects to the opposing party's motion for partial summary judgment
[92 T.C. 1004]
as to certain issues on the ground that disputed material facts exist that make summary disposition of these issues in favor of the opposing party premature.
These consolidated cases are test cases for investors who were denied loss deductions for the years 1980, 1981, 1982, and 1983, relating to limited partnerships that invested in oil and gas exploration and production using advanced oil and gas technology. The two particular limited partnerships that are involved in these test cases (namely, Technology Oil and Gas Associates 1980 and Barton Enhanced Oil Production Fund) were part of two groups of limited partnerships referred to in this opinion as the ‘Manhattan-1980 Partnerships‘ and the ‘Wichita-1982 Partnerships.‘
The parties' cross motions for partial summary judgment raise the following primary issues: (1) Whether petitioners were personally liable within the meaning of section 465(b)(2)(A) with respect to their pro rata assumption of partnership debt obligations; (2) whether petitioners were protected against loss within the meaning of section 465(b)(4) with respect to partnership debt obligations; and (3) whether creditors associated with partnership debt obligations had continuing prohibited interests in the activity other than as creditors within the meaning of section 465(b)(3)(A).
Respondent's motion for partial summary judgment also raises an additional issue concerning the genuineness of the debt obligations of the partnerships. As we will explain, we regard that issue as not ripe for summary disposition, and respondent's motion as to that issue will be denied. In addressing the issues raised in these cross motions for partial summary judgment and for purposes of these motions only, we have assumed that the debt obligations of the partnerships are genuine.
The parties agree that certain other issues present in this case (e.g., whether the partnerships were engaged in activities for profit and whether petitioners' purported investments were shams) are not ripe for summary judgment, and the resolution of these issues along with the issue as to the genuineness of the partnership debt obligations has been held in abeyance until the instant motions are decided.
[92 T.C. 1005]
Many of the facts relevant to these motions have been stipulated.
Petitioners Hildebrand and Wahl invested in one of the Manhattan-1980 Partnerships known as Technology Oil and Gas Associates 1980 (‘Technology-1980 ‘). The general partners of each of the Manhattan-1980 Partnerships were Richard B. Basile (‘Basile‘) and Glenda Exploration and Development Corporation (‘GEDC‘), a Texas corporation.
Technology-1980 was formed in 1980 under the uniform limited partnership law of Utah. The sale of 250 partnership units in Technology-1980 was authorized by the general partners, and 211.5 units were sold to 142 limited partners.
The subscription price for each full limited partnership unit in Technology-1980 was $230,000, payable by each limited partner to Technology-1980 as follows: (1) $10,000 in cash or check; (2) two recourse promissory notes, each in the amount of $10,000 with simple interest at 10 percent, due respectively on March 1, 1981 and March 2, 1982; (3) a recourse debt obligation in the amount of $120,000; and (4) a nonrecourse, non-interest-bearing debt obligation in the amount of $80,000, due on December 31, 2005.
The $120,000 recourse debt obligation associated with each limited partnership unit in Technology-1980 (item (3) above) was payable to Technology-1980 in four separate installments due on December 31, 1992, 1993, 1994 and 1995. The four installments were each in the amount of $30,000 and bore seven percent nonrecourse simple interest. Neither the principal amount of the $120,000 debt obligation nor the four installments due with respect thereto were evidenced by promissory notes, but the obligation and the installments were agreed to in the partnership subscription agreements.
The investment objectives of Technology-1980 were: (1) To drill for and sell oil and gas located in the Monroe, Louisiana gas field, as well as in other oil and gas fields (the ‘drilling program‘); (2) to improve the economics of recovering oil from heavy oil properties by developing or using special drilling technology (the ‘enhanced- oil-recovery program‘); and (3) to use a portion of the net cash flow of
[92 T.C. 1006]
the limited partnership to acquire additional oil and gas properties over a 15-year period (the ‘developmental-drilling program‘).
With regard to its drilling program, Technology-1980 entered into an agreement with Glenda Petroleum Corporation (‘GPC‘), an affiliate of GEDC. In 1980, GPC had approximately 5,000 acres under lease in the Monroe, Louisiana gas field, on a portion of which approximately 300 commercially productive wells already were drilled. Under the agreement, Technology-1980 acquired from GPC working or operating interests in drilling sites in this same gas field in Monroe, Louisiana. The owner of a working interest generally has the right to develop and exploit oil and gas on the leased property and is responsible for the cost of development and operation of wells that are drilled on the property.
DEBT OBLIGATIONS TO TEXOILIn order to achieve its second investment objective (the enhanced-oil-recovery program), Technology-1980 allegedly acquired from TexOil International Corporation (‘TexOil‘) working interests in heavy oil properties and from Elektra Energy Corporation (‘Elektra‘) the right to use special equipment and new technology in the recovery of oil. Heavy oil properties may be defined as properties that contain deposits of viscous and high pour-point crude oil. Technology-1980 acquired working interests in approximately 700 acres of heavy oil properties in Utah and Wyoming.
For the working interests in the heavy oil properties, Technology-1980 agreed to pay TexOil minimum annual royalties in the amount of $5,000 per partnership unit. These minimum annual royalties were due each year for 20 years. Technology-1980 agreed to pay the minimum annual royalties partly in cash and partly by means of a series of recourse promissory notes. In each of the first three years, Technology-1980 was to pay the $5,000 in minimum annual royalties due with respect to each partnership unit with cash in the amount of $440 and with a promissory note in the amount of $4,560. After the third year, Technology-1980 was to pay TexOil the $5,000 in royalties due each year with respect to each partnership unit by giving TexOil a promissory note in that total amount, bearing simple
[92 T.C. 1007]
interest at a rate of either 9.9 or 12 percent. All of the promissory notes associated with the minimum annual royalties were 20 to 25-year notes, and with the exception noted below the entire principal and interest on the notes were not due until December 31, 2005.
The total of all of the promissory notes executed by Technology- 1980 during the years 1980 through 1985 in favor of TexOil in payment of minimum annual royalties with respect to all of the partnership units sold are summarized below:
+-------------------------------------------------------+
¦ ¦Principal ¦ ¦ ¦
+-------------+------------------+--------+-------------¦
¦ ¦amount of notes ¦ ¦ ¦
+-------------+------------------+--------+-------------¦
¦ ¦(211.5 units times¦Interest¦ ¦
+-------------+------------------+--------+-------------¦
¦Date of notes¦$4,560 or $5,000) ¦rate ¦Date due ¦
+-------------+------------------+--------+-------------¦
¦Dec. 31, 1980¦$964,440 ¦9% ¦Dec. 31, 2005¦
+-------------+------------------+--------+-------------¦
¦Dec. 31, 1981¦964,440 ¦9 ¦Dec. 31, 2005¦
+-------------+------------------+--------+-------------¦
¦Dec. 31, 1982¦964,440 ¦12 ¦Dec. 31, 2005¦
+-------------+------------------+--------+-------------¦
¦Dec. 31, 1983¦1 964,440 ¦12 ¦Dec. 31, 2005¦
+-------------+------------------+--------+-------------¦
¦Dec. 31, 1984¦2 951,750 ¦9 ¦Dec. 31, 2005¦
+-------------+------------------+--------+-------------¦
¦Dec. 31, 1985¦2 951,750 ¦9 ¦Dec. 31, 2005¦
+-------------+------------------+--------+-------------¦
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