- 23 -
1988 pursuant to the Settlement Agreement is includable
in Malibu’s gross income for 1988, as determined by
respondent. The payment was made by Arkla to settle a
contractual dispute between Malibu and Arkla over the
so-called take or pay provisions set forth in section 9 of
the Contract. Respondent determined in the subject notices
of deficiency that the settlement payment constituted
income to Malibu in 1988, and that each of Malibu’s
stockholders is required to include in income for 1988
his pro rata share of the payment, pursuant to the rules
applicable to S corporations. Sec. 1366(a).
Petitioners, Malibu’s stockholders, take the position
that the payment is in the nature of a deposit or loan
which will become income only as, and to the extent that,
Arkla chooses to recoup the payment by taking natural gas
produced from Malibu's interest in wells covered by the
Contract. In support of that position, petitioners argue
that the Settlement Agreement imposes on Malibu a “fixed
and unconditional obligation” to repay the full amount of
the payment to Arkla, and, under certain circumstances, it
requires Malibu to repay the unrecouped balance of the
payment in cash. Petitioners also argue that, while the
Settlement Agreement gives Arkla the right to recoup the
payment in kind from future production, it does not impose
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011