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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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