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of any favorable tax considerations and it is the
objective of the General Partner to realize such a
profit.
The opinion letter claimed that the Coburn report provided a
basis for concluding that Stonehurst had the requisite profit
motive under section 183 to support the deduction of trade or
business expenses.
The opinion letter concluded that the limited partners would
have sufficient amounts “at risk” under section 465 to be
entitled to the deductions projected for 1979 when Stonehurst
incurred liability upon execution of the turnkey contract with
R.H. Energy and execution of the sublease with Craig. The
opinion letter analyzed various aspects of the minimum annual
royalties, concluding that they met the requirements of “Rev.
Rul. 77-789”,8 because they were nonrefundable, and were
deductible under sec. 1.612-3(b), Income Tax Regs., as
“substantially uniform payments” because the accruals were
properly considered “payments”. The opinion letter also
concluded, provided drilling was completed within 12 months of
Stonehurst’s incurring liability under the turnkey contract, that
the entire intangible drilling cost accrued in 1979 would be
deductible by the partnership. Despite the air of certitude of
the opinion letter, the Memorandum warned that the tax returns of
8 This was a typographical error in the opinion letter. The
Internal Revenue Service had issued Rev. Rul. 77-489, 1977-2 C.B.
177.
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