106 T.C. No. 22
UNITED STATES TAX COURT
STEPHEN R. AND MARY K. HERBEL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
JERRY R. AND CAROLYN M. WEBB, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 22079-93, 22080-93. Filed June 5, 1996.
M, a subch. S corporation, purchased working
interests in various gas wells that were subject
to a gas purchase contract with A. To avoid
litigation over a so-called take or pay provision
in the contract, M and A entered into a Settle-
ment Agreement under which A paid $1,850,000 to
M in 1988 but reserved the right to recoup the
payment from future gas purchases under the
contract. The Settlement Agreement further
provided that M would pay any unrecouped amount
to A in cash in the event that it terminated the
contract or the wells became substantially
depleted. M did not report the payment as income
in 1988. R determined that A's payment to M was
an advance payment for gas, and is includable in
M's income in 1988, the year received. Sec.
1.451-1(a), Income Tax Regs.
Ps, shareholders of M, filed a motion for
summary judgment in which they argue that, under
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