- 36 -
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...)
Page: Previous 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 NextLast modified: May 25, 2011