Stephen R. and Mary K. Herbel - Page 1

                                   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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