Discussion #7

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Lone Star College System, Woodlands *

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Business

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Feb 20, 2024

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Chapter 5 Discussion #38: Differentiate between the Supreme Court’s overturning of a lower court’s decision and its denial of a writ of certiorari. In most cases the Supreme Court’s only deal with cases that involve an issue at conflict among the federal circuits or a tax issue of major importance. If the Supreme Court overturns a lower courts decision it means that they have reviewed and determined that the lower court’s rulings are inconsistent or unconstitutional. If the writ of certiorari is denied that means that the Supreme Court has decided not to review the case and that it is not important enough to be considered in their limited sessions. The lower court’s decision does stand, but one cannot infer that the decision necessarily is correct or that it should be followed in the future by other taxpayers whose situations are similar. https://ebooks.cenreader.com/#!/reader/74e4278a-8396-4f9e-a896-5c66c2f6372f/page/ d32de4683d142d75ab053a76f61fc307?search=overturning Chapter 5 Practice Research #55: Find the court decision located at 145 T.C. 145. Which court heard the case? United States Tax Court Who was the judge(s)? Opinion by Holmes, J. In what year was the case decided? 2015 What was the issue(s) involved? The issue that this court case deals with is the timing of when deductions for materials can be taken for field packing materials. https://checkpoint.riag.com/app/main/doc? usid=51cae7s28d04&DocID=ib16d89c9a80ae4259164fb9e2d63720f&collId=T0toc109&docTid=T0TCR42 %3A63293.1- 1&feature=tcheckpoint&lastCpReqId=34882a&searchHandle=i0ad69f8e0000018d6811b1aacd6b6406 Chapter 5 Read & Brief #67b Citation: 53 AFTR 2d 84-663, 725 F2d 1173, 84-1 USTC P 9194. Issues: The issues presented in this case is whether intangible drilling and development costs (IDC) prepaid by taxpayer Stephen A. Keller in 1973 are deductible in that year rather than in later years when the goods and services are rendered. The issue essentially concerns timing. Three things where considered: (1) whether the expenditure was a payment or a deposit, (2) whether the prepayment was made for a business purpose or for tax avoidance, and (3) whether the prepayment resulted in a material distortion of income. Facts: Taxpayer1 in 1973 invested $50,000 in a limited drilling partnership through Amarex, Inc., and its wholly owned subsidiary, Amarex Funds, Inc. The issue of tax liability in this case centers around the activities of the Drilling Partnership during late 1973. Keller purchased his subscription on July 31, 1973. The Drilling Partnership was formed on August 14, 1973, and commenced operation shortly thereafter. Ninety-eight investors, as limited partners of the Program Partnership, invested a total of $1,372,000 in the Drilling Partnership. The Drilling Partnership began drilling in August 1973, and completed 62 wells that year. Thereafter it completed 94 wells in 1974 and 25 wells after December 31, 1974. Of 182 wells altogether, located in fourteen states, 27 were oil wells, 40 were gas wells, one was an oil and gas well, and 114 were dry wells. Both the Program Partnership and the Drilling Partnership reported their incomes on a calendar year basis, using the cash receipts and disbursement method of accounting. On its 1973 partnership tax return, the Drilling Partnership reported an ordinary loss of $1,373,257. The Program Partnership reported a $1,372,000 ordinary loss on its 1973 partnership tax return as its distributive share of the Drilling Partnership's loss. Keller, in turn, deducted a $50,000 ordinary loss on his 1973 income tax return as his distributive share of the Program Partnership's loss. Holding: The tax court upheld the Commissioner's determinations of nondeductibility in 1973, except for those prepayments made pursuant to turnkey drilling contracts. The tax court found that prepayments made under the footage and daywork contracts and the third party well servicing contracts were refundable deposits, not payments. It further found no convincing business purpose for such prepayments. (TC at 47) The tax court determined that the prepayment of "well charges" to Amarex

Funds, regardless of whether they constituted payments or deposits, could not be deducted in 1973 because to do so would materially distort the partnership's income; no business purpose existed for prepaying the "well charges." (TC at 59-60) It found that IDC prepaid under turnkey contracts, however, were deductible in 1973. Such prepayments could not be refunded; hence they were payments, not deposits. (TC at 62) The tax court further found that turnkey contracts locked in prices, thus serving a valid business purpose, and therefore did not materially distort income because the partnership "effectively got its bargained for benefit in the year of payment." (TC at 65) Analysis: Taxpayer contends that the three-part test relied upon by the tax court does not properly apply to the timing of a deduction for prepaid IDC. Keller argues that Section 263(c) and its regulations supersede application of Section 446(b). Taxpayer argues that adoption of the three-part test in the context of prepaid IDC is inconsistent with the results of previous cases involving prepaid IDC. We agree that no court has heretofore adopted the entire test in the context of IDC; but no court has had occasion to do so. Furthermore, we do not believe the results under the three-part test to be inconsistent with previous prepaid IDC cases. https://checkpoint.riag.com/app/main/doc? usid=51cae7s28d04&DocID=id9ec9eee19fa11dc9b24c7f8ee2eaa77&docTid=T0AFTRS80%3A16026.1- 1&feature=tcheckpoint&lastCpReqId=348d5d&searchHandle=i0ad6ada60000018d681b88d08fe6da5a

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