Sharon Lee Bartlett, F.K.A. Heitzman - Page 33

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          132, 169-170 (1992), affd. sub nom. Hildebrand v. Commissioner,             
          28 F.3d 1024 (10th Cir. 1994); see also Tallal v. Commissioner,             
          T.C. Memo. 1984-486, affd. 778 F.2d 275 (5th Cir. 1985).                    
               The Memorandum used three critically flawed assumptions to             
          support the economic projections of Stonehurst’s asserted                   
          profitability after having paid a 67-percent production royalty.            
          The first was the assertion in the Coburn report of a 90-percent            
          chance of finding oil with the projected drilling program, which            
          as we have found, was completely unwarranted and invalidates the            
          economic projections.  The Memorandum projected as many as 23               
          wells producing 5 barrels a day in 1981 out of a total of 25                
          wells drilled.  A 10-percent likelihood of finding oil at all               
          renders virtually nil the possibility that Stonehurst could pay             
          the minimum annual royalty.  This flawed assumption also                    
          highlights internal inconsistencies in the Memorandum, which, on            
          one page, disavowed any intention to conduct exploratory                    
          drilling, while on another page, warned of the risks involved in            
          “exploration” for oil.                                                      
               The second flawed assumption was the projected size of the             
          reserves.  The Coburn report estimated that only 518,400 barrels            
          of oil would be produced over a 15-year period, while the                   
          economic projections in the Memorandum projected, without any               
          additional support, that 757,700 barrels would be produced over a           
          similar period.  Neither the Coburn report nor the Memorandum               
          cited any justification for either estimate.  These projected               



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