Peat Oil & Gas Assocs. v. Comm'r of Internal Revenue

Decision Date31 March 1993
Docket NumberNos. 30296–87,20081–88,20130–88,820–96,24514–91 and 30440–91.,s. 30296–87
Citation100 T.C. 271
PartiesPEAT OIL AND GAS ASSOCIATES, James Karr, Partner Other Than the Tax Matters Partner, et al.,1 PetitionersvCOMMISSIONER OF INTERNAL REVENUE, Respondent,
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Dennis N. Brager, Los Angeles, CA, and Jackson D. Hamilton, Asheville, NC., for petitioners.

Debra K. Estrem, San Francisco, CA, for respondent.

COHEN, Judge:

Respondent sent Notice of Final Partnership Administrative Adjustments (FPAA) disallowing certain deductions claimed on partnership returns of three partnerships. Petitions were filed for the years in issue as follows:

+--------------------------------------------------+
                ¦Docket  ¦                                  ¦Tax   ¦
                +--------+----------------------------------+------¦
                ¦Number  ¦Partnership                       ¦Year  ¦
                +--------+----------------------------------+------¦
                ¦30296–87¦Peat Oil and Gas Associates (POGA)¦1983  ¦
                +--------+----------------------------------+------¦
                ¦20081–88¦Syn–Fuel                          ¦1982  ¦
                +--------+----------------------------------+------¦
                ¦        ¦Associates                        ¦1983  ¦
                +--------+----------------------------------+------¦
                ¦        ¦1982 (SFA–1982)                   ¦1984  ¦
                +--------+----------------------------------+------¦
                ¦        ¦                                  ¦1985  ¦
                +--------+----------------------------------+------¦
                ¦20130–88¦POGA                              ¦1984  ¦
                +--------+----------------------------------+------¦
                ¦820–91  ¦POGA                              ¦1986  ¦
                +--------+----------------------------------+------¦
                ¦24514–91¦Syn–Fuel                          ¦1983  ¦
                +--------+----------------------------------+------¦
                ¦        ¦Associates                        ¦1984  ¦
                +--------+----------------------------------+------¦
                ¦        ¦(SFA)                             ¦1985  ¦
                +--------+----------------------------------+------¦
                ¦        ¦                                  ¦1986  ¦
                +--------+----------------------------------+------¦
                ¦        ¦                                  ¦1987  ¦
                +--------+----------------------------------+------¦
                ¦30440–91¦POGA                              ¦1987  ¦
                +--------------------------------------------------+
                

The disputed items deducted on the partnership tax returns are as follows:

+-----------------------------------------------------+
                ¦           ¦      ¦           ¦Amount of¦Research and¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦Return¦Amount of  ¦Interest ¦Development ¦
                +-----------+------+-----------+---------+------------¦
                ¦Partnership¦Year  ¦License Fee¦Payment  ¦Expenses    ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦      ¦           ¦         ¦            ¦
                +-----------+------+-----------+---------+------------¦
                ¦POGA       ¦1983  ¦$7,752,875 ¦$ 943,086¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1984  ¦5,825,219  ¦1,334,470¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1986  ¦-          ¦1,569,093¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1987  ¦-          ¦1,570,124¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦      ¦           ¦         ¦            ¦
                +-----------+------+-----------+---------+------------¦
                ¦SFA–1982   ¦1982  ¦5,961,600  ¦2,492    ¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1983  ¦5,779,000  ¦399,938  ¦$658,000    ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1984  ¦5,783,400  ¦721,367  ¦162,000     ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1985  ¦4,467,150  ¦1,021,951¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦      ¦           ¦         ¦            ¦
                +-----------+------+-----------+---------+------------¦
                ¦SFA        ¦1983  ¦2,660,750  ¦323,666  ¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1984  ¦5,783,400  ¦721,367  ¦-           ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1985  ¦-          ¦538,719  ¦            ¦
                +-----------+------+-----------+---------+------------¦
                ¦           ¦1986  ¦-          ¦538,584  ¦-           ¦
                +-----------------------------------------------------+
                

These deductions were claimed in addition to expenses relating to the oil and gas activities of the partnerships, which are not disputed by respondent.

The parties have stipulated:

15. If a final determination of the Tax Court holds that venue on appeal in these cases lies to the Sixth Circuit, then decisions should be entered which reflect that the Partnerships' tax returns were correct as filed for each of the years at issue, pursuant to Golsen v. Commissioner, 54 T.C. 742 (1972), aff'd 445 F.2d 985 (10th Cir.1971), cert. denied, 404 U.S. 940 (1971).

16. If a final determination of the Tax Court holds that venue on appeal lies anywhere but the Sixth Circuit, then decisions should be entered as shown on the following Exhibits, which reflect certain government concessions:

+--------------------------------------+
                ¦Partnership  ¦Tax Year  ¦Exhibit No.  ¦
                +-------------+----------+-------------¦
                ¦“SFA, 192”   ¦1982      ¦30–AD        ¦
                +-------------+----------+-------------¦
                ¦             ¦1983      ¦31–AE        ¦
                +-------------+----------+-------------¦
                ¦             ¦1984      ¦32–AF        ¦
                +-------------+----------+-------------¦
                ¦             ¦1985      ¦33–AG        ¦
                +-------------+----------+-------------¦
                ¦             ¦          ¦             ¦
                +-------------+----------+-------------¦
                ¦“POGA”       ¦1983      ¦34–AH        ¦
                +-------------+----------+-------------¦
                ¦             ¦1984      ¦35–AI        ¦
                +-------------+----------+-------------¦
                ¦             ¦1985      ¦36–AJ        ¦
                +-------------+----------+-------------¦
                ¦             ¦1986      ¦37–AK        ¦
                +-------------+----------+-------------¦
                ¦             ¦          ¦             ¦
                +-------------+----------+-------------¦
                ¦“SFA”        ¦1983      ¦38–AL        ¦
                +-------------+----------+-------------¦
                ¦             ¦1984      ¦39–AM        ¦
                +-------------+----------+-------------¦
                ¦             ¦1985      ¦40–AN        ¦
                +-------------+----------+-------------¦
                ¦             ¦1986      ¦41–AO        ¦
                +-------------+----------+-------------¦
                ¦             ¦1987      ¦42–AP        ¦
                +--------------------------------------+
                

In addition, the Court's decision should reflect its determination of the deductibility of the unagreed adjustments, as defined in paragraph 17, following.

17. Except as detailed in Exhibits 30–AD through 42–AP above, no adjustments are to be made to any items on any of the Partnerships' income tax returns for the years at issue, except as determined by the Court with respect to unagreed adjustments. Unagreed adjustments are those items disallowed in the FPAA's and not conceded by the government in Exhibits 30–AD through 42–AF above. Neither the petitioners nor the respondent concedes the unagreed adjustments.

* * *

20. The parties incorporate herein by reference the entire record of the proceeding in the cases of Karr v. Commissioner, Docket No. 309–87, and Smith v. Commissioner, Docket No. 48306–86, including the transcripts of the proceeding before the United States Tax Court, the Stipulation of Facts in those cases, and the Exhibits, as if they had been presented to the Tax Court in the cases captioned herein.

21. The events surrounding the formation and operation of “SFA, 1982 were so similar to the facts presented with respect to “SFA” and “POGA” at the Smith and Karr trials that the Court shall determine, except as specifically agreed herein, the issues in this case based upon the record in the Smith and Karr cases. To amplify, it is the belief of the parties that due to the similarity of factual circumstances no purpose would be served by presenting additional evidence (other than evidence presented herein) to the Court, and the Court may decide this case as if the evidence presented in the Smith and Karr cases were presented with regard to “SFA, 1982.”

In T.C. Memo.1993–130, filed this date, it has been found that the principal place of business of the three partnerships at the times the petitions were filed was in New York. Given that factual determination, appeal will lie to the Court of Appeals for the Second Circuit. Sec. 7482(b)(1)(E). The stipulation of the parties, therefore, requires that we again resolve the disputed deductions set forth above.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue and when the petitions were filed, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. The stipulation also incorporates the entire record in the cases of Smith v. Commissioner, 91 T.C. 733 (1988) ( Smith and Karr ), affd. sub nom. Karr v. Commissioner, 925 F.2d 1018 (11th Cir.1991) ( Karr ), and revd. by the Sixth Circuit in Smith v. Commissioner, 937 F.2d 1089 (6th Cir.1991) ( Smith ). The findings of fact in our prior opinion, 91 T.C. at 734–754, are attached to this opinion as an appendix and are hereby reaffirmed and incorporated in haec verba.

ULTIMATE FINDINGS OF FACT

The synthetic fuel activities of the partnerships lacked economic substance. The partnerships did not engage in those activities for the purpose of or with an actual and honest objective of making a profit.

OPINION

We “follow a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone.” Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir.1971)...

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