- 38 -
or gas production--the remote likelihood of which in 1979 was
subsequently confirmed by the lack of any production from the
leasehold.
The form of the recourse notes indicates the remoteness of
any possibility of payment. In Osterhout v. Commissioner, supra,
the principal was not due and payable for 12 years, and the notes
themselves were interest free, a form “foreign to the business
world.” The principal on the Stonehurst note given to Craig was
not due for 15 years and was likewise interest free.
Stonehurst was formed solely to enrich the promoters and
provide claims to tax deductions for the limited partners. The
activities of Stonehurst served no viable economic or commercial
profit objective. While we realize that oil and gas exploration
is highly speculative and can yield large profits, that Congress
enacted certain tax measures to encourage oil and gas
exploration, and that the Stonehurst promotional materials
contained representations of profitability, the structure of
those materials, with their flawed assumptions, internal
inconsistencies, and the unbusinesslike structure of the so-
called minimum advance royalty, all demonstrate that any
possibility of profits was so remote as to be negligible.
Compare United States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955)
(for purposes of sec. 20.2055-2(b)(1), Estate Tax Regs., “so
remote as to be negligible” defined as the “chance which persons
generally would disregard as so highly improbable that it might
Page: Previous 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 NextLast modified: May 25, 2011