Stephen R. and Mary K. Herbel - Page 4

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             in which respondent determined the following deficiency in,              
             and additions to, their 1988 tax:                                        
                                      Additions to Tax                                
                  Deficiency     Sec. 6653(a)(1)     Sec. 6661(a)                     
                  $366,244       $18,312             $91,561                          

             All petitioners resided in Shreveport, Louisiana, at the                 
             time they filed their petitions with this Court.                         
                  Petitioners owned all of the outstanding stock of                   
             Malibu Petroleum, Inc. (Malibu).  Malibu had been                        
             incorporated under Texas law on or about February 18, 1988,              
             to engage in the business of exploring for and producing                 
             oil and natural gas.  During 1988, petitioners Stephen and               
             Mary Herbel owned 10 percent of Malibu's outstanding stock,              
             and petitioners Jerry and Carolyn Webb owned 90 percent of               
             Malibu's stock.  Mr. Herbel was Malibu's president.                      
                  For Federal income tax purposes, Malibu was an S                    
             corporation within the meaning of section 1361(a)(1).                    
             Malibu and each petitioner reported income and deductions                
             for Federal income tax purposes using the cash receipts                  
             and disbursements method of accounting.                                  
                  At various times during 1988, Malibu acquired the                   
             interests of Regency Exploration, Inc. (Regency), and                    
             others in certain gas wells located in Sebastian County,                 
             Arkansas, that were covered by a gas purchase contract                   
             dated January 2, 1981, between Revere Corp., an Arkansas                 




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