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1993-251, affd. on this issue and revd. in part without published
opinion sub nom. Balboa Energy Fund 1981 v. Commissioner, 85 F.3d
634 (9th Cir. 1996), which held similarly structured oil and gas
partnerships--which used up-front accruals of minimum advance
royalties to generate claims for large tax deductions that were
never paid for--to be sham transactions. In Osterhout, we found
that “the objective of the * * * [partnerships at issue in that
case] was to help investors avoid taxes and to enrich the coffers
of the promoters”, including Meserve, a partner in the law firm
rendering the tax opinion for Stonehurst. There are striking
parallels between Osterhout and the case at hand.
In Osterhout, as in the case at hand, the promotional
material emphasized the tax benefits available to investors who
would benefit regardless of whether oil and gas were actually
discovered. An investor in Stonehurst could seemingly “win” by
receiving tax deductions far in excess of the amount paid for the
partnership interest even if no oil or gas was produced. See
Ferrell v. Commissioner, 90 T.C. at 1183; Osterhout v.
Commissioner, supra (citing Barnard v. Commissioner, 731 F.2d 230
(4th Cir. 1984), affg. Fox v. Commissioner, 80 T.C. 972 (1983)).
In cases such as Osterhout, where “the promised tax benefits
are suspiciously excessive and the transaction is carried out
with complete indifference to profit, it is clear the parties
intended to structure the transaction for the tax benefits.”
Osterhout v. Commissioner, supra (citing Flowers v. Commissioner,
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