Stephen R. and Mary K. Herbel - Page 24

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             an obligation on Arkla to purchase any minimum quantity of               
             gas from Malibu.                                                         
                  According to petitioners, the effect of the Settlement              
             Agreement is to give “Arkla the option either to seek                    
             repayment by delivery of gas in kind or to forego recoup-                
             ment and await repayment in cash upon depletion of the                   
             Contract Wells.”  Petitioners argue that the Settlement                  
             Agreement “effected the creation of a loan in its                        
             traditional sense”.  In support of this argument,                        
             petitioners cite the opinion of the Supreme Court in                     
             Commissioner v. Indianapolis Power & Light Co., 493 U.S.                 
             203 (1990), and the opinions of this Court and its                       
             predecessor in Arlen v. Commissioner, 48 T.C. 640 (1967);                
             Veenstra & DeHaan Coal Co. v. Commissioner, 11 T.C. 964                  
             (1948); and Summit Coal Co. v. Commissioner, 18 B.T.A.  983              
             (1930).  Petitioners also argue that the Settlement                      
             Agreement is “a contingent and executory contract” and that              
             Malibu has no right to keep the settlement payment made                  
             thereunder until the condition set forth therein is                      
             satisfied; i.e., until, and to the extent, Arkla recoups                 
             the advance payment by purchasing gas under the contract.                
                  Respondent argues that in form and in substance the                 
             subject payment is not a loan but is a prepayment for                    
             natural gas.  Respondent notes that the Settlement                       
             Agreement itself describes the payment as a “prepayment in               






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