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transferred, Smokey Oil received depletable oil and gas leases
with the same cost basis as the nondepreciable ranchlands it had
transferred in the exchange with True Oil. This allowed Smokey
Oil to claim cost depletion deductions for the leases on its tax
returns for 1989 and 1990 under section 612, which, if sustained,
would have resulted in substantial income tax savings to the True
family. True Oil, on the other hand, received the nondepreciable
ranchlands with a zero basis because the oil and gas leases it
exchanged pursuant to section 1031 were fully cost depleted.
Through subsequent transfers, True Ranches acquired the
ranchlands with the same zero basis as True Oil’s oil and gas
leases. By so doing, the True family intended to reap the tax
benefits of turning nondepreciable assets (ranchlands) into cost-
depletable assets (oil and gas leases) in the hands of Smokey
Oil. In addition, the ranchland exchange transactions rid True
Oil of fully cost-depleted assets (oil and gas leases) and gave
True Ranches a zero basis in otherwise nondepreciable assets
(ranchlands).
If these transactions had been effective for income tax
purposes, they would also have created transfer tax benefits by
reducing the prices payable under the True Ranches and Smokey Oil
buy-sell agreements. They would have reduced the book value of
the ranchlands to zero and thereby reduced the book value formula
prices to be paid for partnership interests in True Ranches under
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