Sharon Lee Bartlett, F.K.A. Heitzman - Page 36

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          as “a very unusual deal.  I’ve never quite seen one put together            
          like this before.”  Bowers’ conclusion is supported by the                  
          extremely remote possibility that any oil production that could             
          pay the minimum annual royalty would result from the exploratory            
          drilling on the leasehold.                                                  
               The fees paid to the promoters and the overriding production           
          royalty due to Craig, the sublessor, which were 67 percent of the           
          gross revenues before any expenses, are also unreasonable,                  
          especially in light of Stonehurst’s highly restricted mineral               
          rights under the lease.  According to the Memorandum, Craig was             
          also to receive 8 percent of the initial capital contribution as            
          a “consulting fee”.  The Memorandum and the Meserve firm legal              
          opinion both disclosed interrelationships between the various               
          entities involved in Stonehurst, most notably that R.H. Energy              
          had assigned its rights in the sublease to Craig, and that the              
          Meserve firm was legal counsel to both Stonehurst and Craig.                
          While the record does not fully develop the scope of these                  
          interrelationships, this unanswered question is yet another                 
          indication of the indifference of Stonehurst and its principals             
          to the likelihood of any profit that would inure to the                     
          investors.15                                                                

               14(...continued)                                                       
          oil and gas matters since 1960.                                             
               15 We note in passing that the presence of the Meserve                 
          firm’s legal opinion does not alter our finding that Stonehurst             
          was a sham transaction that rendered the claimed deductions                 
                                                             (continued...)           


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