                        T.C. Memo. 1997-432



                      UNITED STATES TAX COURT



      PELLE KARLSSON AND EVELYN T. KARLSSON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.   16542-86, 45989-86.    Filed September 23, 1997.



     Mark D. Pastor and Robert T. Leonard, for petitioners.

     Elizabeth Girafalco Chirich, Susan K. Greene, Karen M. Tate,

and Marion S. Friedman, for respondent.



                        MEMORANDUM OPINION


     SWIFT, Judge:   This matter is before us on our order to show

cause why resolution of the issues in these consolidated cases

should not be controlled by resolution of these same issues in

our test case opinion in Krause v. Commissioner, 99 T.C. 132
                                                     - 2 -


       (1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024

       (10th Cir. 1994).              Krause involved limited partnership

       investments related to and similar to those in which petitioners

       herein invested and which are at issue in these cases.

                Respondent determined deficiencies, increased interest, and

       additions to tax in petitioners’ Federal income taxes as follows:

                                              Increased Interest and Additions to Tax
                                                               Sec.
                              Sec.           Sec.           6653(a)/         Sec.          Sec.     Sec.
Year          Deficiency    6621(c)      6651(a)(1)        6653(a)(1)     6653(a)(2)       6659     6661

1979           $59,740         *          $14,935           $2,987           --            --        --
1980            64,707         *            6,471            3,235           --            --        --
1981            70,012         *           10,502            3,501           **          $21,004     --
1982            34,225         *           10,701            3,381           **           10,267   $3,423


         *     120 percent of interest accruing after Dec. 31, 1984, on portion of underpayment
               attributable to a tax-motivated transaction.

         **    50 percent of interest due on portion of underpayment attributable to negligence.



                On brief, respondent concedes the sections 6651 and 6659

       additions to tax.

                Unless otherwise indicated, all section references are to

       the Internal Revenue Code in effect for the years in issue, and

       all Rule references are to the Tax Court Rules of Practice and

       Procedure.

                Petitioners invested in Cromwell Oil and Gas Associates

       (Cromwell), a Utah limited partnership that was part of a group

       of tax-oriented limited partnerships that had the stated general

       objective of, among other things, investing in enhanced oil
                                - 3 -


recovery (EOR) technology for the recovery of oil and natural

gas.

       After settlement of some issues, the primary issues in these

cases are:    (1) Whether activities of Cromwell were engaged in

for profit under section 183; (2) whether stated debt obligations

of Cromwell constituted genuine debt obligations giving rise to

deductible interest; and (3) whether petitioners are liable for

increased interest under section 6621(c) and additions to tax

under sections 6653(a)(1) and (2) and 6661.

       In the Krause test case opinion and in Vanderschraaf v.

Commissioner, T.C. Memo. 1997-306, the first two of the above

primary issues were decided against the taxpayers, and the third

of the above primary issues was decided in favor of respondent as

to the increased interest and in favor of the taxpayers as to the

additions to tax.

       This Court uses show cause procedures in situations similar

to the instant cases where the disposition of pending cases may

be affected by a previously decided “test case”.    See Lombardo v.

Commissioner, 99 T.C. 342, 343-345 (1992), affd. sub nom. Davies

v. Commissioner, 68 F.3d 1129 (9th Cir. 1995); Gray v.

Commissioner, T.C. Memo. 1996-525; Finkelman v. Commissioner,

T.C. Memo. 1994-158; Iowa Investors Baker v. Commissioner, T.C.

Memo. 1992-490; Bokum v. Commissioner, T.C. Memo. 1990-21, affd.

992 F.2d 1136 (11th Cir. 1993).
                              - 4 -



Background

     At the time their petitions were filed, petitioners resided

in Santa Ana, California.

     In Sweden, petitioner Pelle Karlsson obtained the

approximate equivalent of a U.S. high school diploma.    In the

United States, petitioner Evelyn T. Karlsson obtained a high

school diploma through the general educational development exam.

Neither petitioner has a college degree, and neither petitioner

has been enrolled in any courses or received any training in

petroleum engineering, drilling technology, or geology.    Neither

petitioner has ever been employed in or had any professional

involvement in the oil and gas industry.

     In 1979, petitioners invested in Cromwell by transferring to

Cromwell $30,000 in cash and by executing in favor of Cromwell

promissory notes in the total face amount of $420,000.    On the

basis of such cash investment, the stated face amount of such

promissory notes, and petitioners’ stated obligation on

Cromwell’s debt obligations, petitioners claimed for the years in

issue the following tax losses (consisting largely of accrued
                              - 5 -


royalties, licensing fees, and stated interest) and credits on

their joint Federal income tax returns:


     Year           Losses Claimed           Credits Claimed

     1979              $119,481                   $ -
     1980               136,507                    132
     1981               130,215                    208


     In Krause v. Commissioner, 99 T.C. 132 (1992), we analyzed

in detail the various EOR technology license and lease agreements

and the purported partnership debt obligations relating thereto

that were entered into by various of the limited partnerships

(specifically including the license and lease agreements

Technology Oil and Gas Associates 1980 (Technology-1980) entered

into with Elektra Energy Corp. (Elektra) and with TexOil

International Corp. (TexOil)), and we analyzed the state of

development of the specific EOR technology involved in the

partnership license agreements.

     With regard to the excessive nature of the EOR technology

license and lease agreements, we concluded in Krause that --


     The stated consideration agreed to by the partnerships
     for the license of EOR technology and for the lease of
     tar sands properties bore no relation to the value of
     that which was acquired, did not conform to industry
     norms, and precluded any realistic opportunity for
     profit.

     * * * the estimates used by the partnerships for
     projected oil recovery from the use and application of
     the EOR technology licensed by the partnerships are not
                              - 6 -


     supported by credible expert testimony in this case and
     were not reasonable. [Id. at 169; citations omitted.]


     With regard to the lack of development of the EOR

technology, we stated in Krause that the --


     portfolio [of EOR technology] consisted of a package of
     vague, largely untested ideas, that, if and to the
     extent ever developed, would likely be available
     generally in the marketplace and on much more favorable
     terms than from the partnerships. We reject
     petitioners' argument that the portfolio of EOR
     technology obtained by the partnerships represented
     anything of any substantial value. The EOR technology
     license agreements entered into * * * were essentially
     valueless. [Id. at 175.]


     With regard to the lack of validity of the debt obligations

of the partnerships, we stated in Krause that --


          The multimillion dollar license fees and royalties
     * * * were excessive. They did not reflect arm's-
     length obligations, and they are not to be recognized
     as legitimate obligations of the partnerships. The
     debt obligations of the partnerships associated
     therewith did not constitute genuine debt obligations
     and are to be disregarded. [Id. at 175; citations
     omitted.]


     In summary, in Krause v. Commissioner, supra, among other

things, we concluded that the partnerships, the various license

and lease agreements, the EOR technology, and the purported debt

obligations of the partnerships constituted nothing more than an

elaborate tax shelter scheme, as follows:
                              - 7 -


          In summary, presented to us in this case is a
     chain or multilayered series of obligations, stacked or
     multiplied on top of each other via the numerous
     partnerships to produce debt obligations in staggering
     dollar amounts, using a largely undeveloped and
     untested product, in a highly risky, very speculative,
     and nonarm's-length manner in an attempt to generate
     significant tax deductions for investors. The
     transactions did not, and do not, constitute legitimate
     for-profit business transactions. [Id. at 175-176.]


     Based on our findings and opinion in Krause v. Commissioner,

supra, the affirmance thereof by the U.S. Court of Appeals for

the Tenth Circuit, and the denial of certiorari by the U.S.

Supreme Court, thousands of investors who had invested in

Technology-1980 and in other related limited partnerships,

including Cromwell, settled their Federal income tax liabilities

with respondent relating to these investments.   Petitioners

herein and respondent, however, have not been able to reach a

settlement agreement, and petitioners allege the existence of

material facts that they believe distinguish their limited

partnership investments in Cromwell from the investments that

were made by the taxpayers in Technology-1980 and that were

specifically addressed in Krause v. Commissioner, supra.

     We issued a show cause order, and we held an evidentiary

hearing in connection with our show cause order to give

petitioners an opportunity to establish how, for Federal income

tax purposes, their limited partnership investments in Cromwell

and how the activities of Cromwell are distinguishable from the
                                - 8 -


limited partnership investments in, and the activities of,

Technology-1980, as described and as found in our Krause v.

Commissioner, supra, opinion.

     For the reasons stated below and based on the evidence

admitted at the hearing on the show cause order, we conclude

that, for Federal income tax purposes, the limited partnership

investments in Cromwell and the activities of Cromwell are not

distinguishable from the investments in and the activities of

Technology-1980 as described in the Krause v. Commissioner,

supra, opinion.


Discussion

     In late 1978, 1979, and early 1980's, Winsor Savery,

Richard B. Basile, E. Barger Miller, Werner Heim, Robert Shaftan,

William Conklin, and other tax shelter promoters, who had no

significant experience with oil and gas investments, participated

in the formation of tax shelter limited partnerships (including

Cromwell and Technology-1980) with the stated general investment

objectives of drilling for oil and natural gas and of obtaining

the rights to certain EOR technology that might be developed and

become valuable if oil prices continued to rise dramatically in

subsequent years.

     Louis Coppage, the individual general partner of Cromwell,

also had no experience with oil and gas exploration, production,
                               - 9 -


or investments.   Rather, his experience involved the promotion of

tax shelters.

     For the right to use certain allegedly extant EOR

technology, Cromwell agreed to pay Elektra fixed license fees of

$35,000 per year for 5 years for each limited partnership unit

sold to investors.   Based on the 51 limited partnership units in

Cromwell that were sold, Cromwell agreed to pay total fixed

license fees to Elektra of $8,925,000.

     Elektra, however, had obtained rights to use and license the

same technology that it had licensed to Cromwell for only running

royalties based on actual incremental increased recovery of oil

attributable to use of the technology.   Elektra was obligated to

pay no fixed license fees for the technology.

     Cromwell's license agreement with Elektra was not materially

different from the license agreements entered into by Technology-

1980 with Elektra.

     For the right to use EOR technology on specified tar sands

acreage in Utah and Wyoming, Cromwell agreed to pay TexOil a

fixed minimum royalty of $5,000 per year for 20 years for each

limited partnership unit sold to investors.   On the basis of the

51 limited partnership units in Cromwell that were sold, Cromwell

agreed to pay total minimum royalties to TexOil of $5,100,000.

     TexOil, however, had agreed to pay a total of $100 an acre

for the same tar sands acreage.   Acreage assigned to Cromwell was
                                - 10 -


not materially different or more valuable than acreage assigned

to Technology-1980.   Like the tar sands acreage assigned to

Technology-1980, none of the tar sands acreage assigned to

Cromwell had any reserves or value as of 1979.

     General explanatory material relating to the oil crisis of

the late 1970's and early 1980's and a detailed explanation of

the EOR technology involved in these cases are set forth in

Krause and will not be repeated herein.    See Krause v.

Commissioner, supra at 134-136, 157-165.

     Before investing in Cromwell, neither petitioners nor anyone

hired or otherwise engaged on petitioners' behalf visited or

inspected any of the Cromwell gas well sites in Louisiana or

Cromwell's tar sands properties.

     As in Krause, petitioners' experts rely on irrelevant

generalities and theoretical exercises, ignoring crucial facts or

making erroneous assumptions.    Some of the claimed differences

are based on pointless mathematical exercises.    For example,

petitioners' expert, Charles G. Bursell, calculates that, per

investor dollar, Cromwell received from its tar sands leases in

excess of three times the oil-in-place that Technology-1980

received.   Bursell's attempt to make Cromwell appear the better

investment simply fails to address the real problems in the

transaction between Cromwell and TexOil, including the fact that

the leased tar sands acreage had no value.
                             - 11 -


     In comparing the cost of investing in Cromwell and the cost

of investing in Technology-1980 and the due dates of the various

debt obligations, Bursell erroneously assumes that the $80,000

portion of Cromwell’s debt obligation for each partnership unit

that was reflected by a nonrecourse promissory note actually

would be paid.

     Bursell points out that Cromwell’s $120,000 promissory notes

are not due until 2007, while the promissory notes of Technology-

1980 were due between 1992 and 1995.   We agree with respondent

that this distinction is meaningless in the context of the tax

sheltered and speculative transaction before us.   If anything,

the extended due date for the Cromwell promissory notes suggests

that Cromwell’s promissory notes were even more contingent than

those of Technology-1980.

     The distinction that Glenda Exploration and Development

Corp. (GEDCO) was the managing general partner of Cromwell but

only the cogeneral partner of Technology-1980 is not significant.

GEDCO's role in all of the related partnerships effectively was

the same.

     The fact that Cromwell offered fewer partnership units than

Technology-1980 is meaningless.   All of the partnerships offered

different numbers of partnership units.

     Petitioners inaccurately allege that Cromwell was not

restricted in its use of the EOR technology on the leased tar
                              - 12 -


sands properties and that Cromwell had a unique relationship with

Todd Doscher, an internationally recognized expert in EOR

technology.   To the contrary, only Technology-1980's license had

any provision for using the technology on additional property it

might acquire, and any expertise that Todd Doscher had to offer

would benefit all of the partnerships equally.

     Petitioners argue that Cromwell’s license for EOR technology

reflected significantly more favorable terms than Technology-

1980's license.   As persuasively established, however, by

respondent's expert, John R. Dosher of The Pace Consultants,

Inc., in spite of nominal differences, the licenses of the

various partnerships contained no material differences.

Cromwell’s license committed Cromwell to unjustified, fixed fees

that were linked to the number of partnership units sold, and to

an additional royalty on actual production.

     Technology-1980’s license provided the option for

Technology-1980 to terminate its license and limit the fixed

fees.   Cromwell’s license did not have this option.

     While Cromwell’s license provided for a reduction of the

fixed fees based on production royalties actually paid, this

provision would be meaningful only in the event of commercial

production.   Considering the unlikely chance that production

would occur, any benefit from this provision is illusory.
                              - 13 -


     Petitioners' experts emphasize that under Technology-1980's

development license, Technology-1980 was obligated to pay $20,000

as an advance process royalty for each oil recovery installation

that was actually constructed.   Petitioners' experts, however,

neglect the provision that would allow Technology-1980 to apply

any such advance process royalty paid to reduce or offset the

production royalty that would become due.

     Petitioners emphasize that Cromwell agreed to pay a fourth

for its license of EOR technology of what Technology-1980 agreed

to pay.   The only reason, however, that Cromwell was obligated to

pay less for its license of EOR technology was that Cromwell sold

fewer partnership units to investors.   As stated, total license

fees due from the partnerships were based on the number of

partnership units sold.

     Because the evidence establishes that the fixed license fees

that were agreed to were not justified at all, that they did not

bear any relationship to what was acquired, and that they were

not normal in the oil and gas industry, nominal differences

between Cromwell’s stated license fees and Technology-1980's

stated license fees do not constitute a material distinguishing

fact.

     Petitioners' expert, Bursell, testified that Cromwell's

license fees for EOR technology were not particularly excessive

in amount.   Bursell, however, did not even know what Cromwell had
                               - 14 -


agreed to pay for the technology, and Bursell had no experience

in the licensing of technology.    Bursell never considered the

fact that Cromwell could have obtained a license for the

technology for a significantly reduced price and that Cromwell

could have acquired the technology for only a running royalty.

       Bursell made no economic analysis, and he did not opine as

to whether Cromwell could have made a profit.      He merely

testified vaguely that technology in general could be costly.        He

gave no opinion as to whether Cromwell's license had value or

whether the price agreed to by Cromwell for the technology was

reasonable.

       Jerry D. Ham, another of petitioners’ experts, did not

testify that Cromwell agreed to pay a fair market value price for

the license of the EOR technology.      Ham was unclear as to what

technology, in 1979, was included in the portfolio, and he could

not explain why Cromwell purchased the technology from Elektra or

what Elektra was obligated to provide in return for the license

fee.    Also, Ham was not aware of what Elektra had agreed to pay

for the technology it licensed to Cromwell.      Ham's opinion as to

the reasonableness of the license fee has no credibility.1

       As respondent’s expert explained in his testimony, the

license fees for which Cromwell became obligated with respect to

1
     Interestingly, Ham’s ultimate conclusion seems to be that,
as a working interest owner who had hired an operator, there was
really no need for Cromwell to license technology at all.
                              - 15 -


the EOR technology were excessive, unreasonable, and valueless.

The fixed fees agreed to by Cromwell for license of the EOR

technology were not competitive in the industry and were contrary

to industry norms.   Further, a prudent investor would not agree

to pay substantial fixed fees for undeveloped, untested

technology that could be licensed directly from the inventors for

no fixed fees but for merely running royalties based on actual

incremental production attributable to the technology.

     Of petitioners' experts, only John Cayias attempts to

address the potential profitability of Cromwell and thereby to

justify Cromwell’s license fees.   Cayias’ speculative economic

projections, however, are not credible.   Cayias' projections

assume commercial development and a successful pilot of the

technology.   Cayias' projections do not account for the risk that

a pilot would be unsuccessful nor the multimillion dollar cost of

a pilot of the technology.   Cromwell had only $153,000 for use on

its tar sands properties, an amount totally deficient to fund the

resource definition, coring, pilot, and other steps required just

to get to the starting point of Cayias' projections.   Cayias'

failure to account for real costs and risks is inexcusable.

     Cayias errs in his assumption that Cromwell alone, and no

other partnership, would receive proceeds from development of the

Burnt Hollow acreage, one of the tar sands properties.    The

proceeds from development of any Burnt Hollow acreage would have
                                - 16 -


to be shared among all of the partnerships, each burdened by its

own debt obligations to Elektra and to TexOil.

     Cayias errs in his projection that 50 percent of the oil in

place would be recovered.   This projection or assumption, based

on Bursell's testimony, is not reasonable and is indefensible.

     Cayias seeks to justify the large technology license fees

for which Cromwell became obligated by a projection based on the

application of traditional steam flood technology rather than on

any technology licensed by Cromwell from Elektra.   Cayias'

analysis simply supports respondent's position that the license

of a portfolio of EOR technology was totally unnecessary and

unjustified.

     The evidence establishes that the technology license fees

for which Cromwell became obligated were not customary in the

industry and were grossly overvalued.    Petitioners have failed to

distinguish this case from Krause v. Commissioner, 99 T.C. 132

(1992), with regard to the license fees for the EOR technology.

     Petitioners also argue that Cromwell had a greater potential

for profit than Technology-1980 because Cromwell agreed to pay

less for its TexOil tar sands acreage than did Technology-1980.

As respondent's expert, Henry J. Gruy, explained, however, the

consideration agreed to by Cromwell with regard to the tar sands

acreage still exceeded fair market value because, absent any

reserves, its value was zero.
                              - 17 -


     Gruy analyzed empirical data available for the Burnt Hollow

area as of 1979 and established that the lighter oils in the

Burnt Hollow reservoir had been flushed out by underground water

over the course of geologic time.   His analysis included plotting

the porosity and oil saturation of a sample core from the

Exeter-Hudson Mahoney No. 1 well located near Cromwell's acreage.

His analysis of that sample revealed that the high porosity rock

had little remaining saturation of oil and that higher

saturations of oil were present only in poorer quality rock.

Thus, in any fluid injection project on such property, the fluid

would migrate to the better quality rock, bypassing the area of

higher tar saturation.

     Gruy's analysis is consistent with other wells drilled in

the vicinity of the Cromwell acreage, including the so-called Sun

State No. 2 (Sun) well from which flowed water, not oil.    In the

case of the Sun well, even steam heating of the reservoir yielded

only minute quantities of oil, confirming Gruy's conclusion that

these reservoirs were not amenable to steam injection recovery.

     Petitioners' expert, Bursell, did not make any reserve

analysis or predictions specific to Cromwell's properties.    His

reservoir analysis was limited solely to a review of the Sun

pilot well and the Exeter-Hudson Mahoney core hole.   Bursell

evidently did not review the additional core data discussed in

Gruy's report.   In analyzing the Exeter-Hudson Mahoney core,
                              - 18 -


Bursell makes the inappropriate assumption that lost portions of

this core contained oil bearing sands in the same proportion as

the portion of the core recovered.     Bursell's general testimony

provides no support for the large, fixed fees that Cromwell

agreed to pay.

     Moreover, Bursell emphasized activities and data from the

Kern River area in California.   Cromwell, however, had no rights

to acreage in the Kern River area, and Cromwell had no plans to

acquire any.   Also, the heavy oil located in the Kern River area

had viscosity levels of only 4,000 to 5,000 centipoise (cp) at

reservoir temperature and was not comparable to Cromwell's Burnt

Hollow property with oil viscosity levels of 1,000,000 cp at

reservoir temperature.

     Significantly, Bursell neither opines as to whether Cromwell

paid fair market value for its tar sands acreage nor as to the

reasonableness of the specific transactions that Cromwell entered

into.

     Walter Austin, another of petitioners' experts, regarding

Cromwell's lease of tar sands acreage incorrectly assumes that

Cromwell was only obligated to pay the $610 cash portion of the

royalties due per unit for the first 3 years.    He viewed the

remainder of Cromwell's royalty obligation as contingent.    Austin

never opines that Cromwell's annual 20-year, $5,000 per unit

stated royalty obligation to TexOil represented fair market
                                  - 19 -


value.    Austin's understanding of this transaction was minimal,

and his testimony provides no credible support for petitioners'

position in these cases.

     Petitioners have established no credible differences between

Cromwell's tar sands acreage and Technology-1980's tar sands

acreage.    Both are worthless.

     It is clear that the Cromwell and Technology-1980

limited partnerships share the same flaws.      The consideration

that was agreed to for the EOR technology licenses and for the

tar sands acreage bore no relation to the value of that which was

acquired, did not conform to industry norms, and precluded any

realistic opportunity for profit.      Cromwell's stated debt

obligations relating to the multimillion dollar license fees and

royalties that Cromwell agreed to pay were excessive.      They did

not reflect arm’s-length obligations, and they do not constitute

valid debt obligations.    Krause v. Commissioner, 99 T.C. at 169.

No material differences have been established or even marginally

corroborated, and no credible arguments have been presented that

distinguish these cases from Krause.

     In addition to attempting to distinguish Cromwell factually

from Technology-1980, petitioners affirmatively attack as

erroneous a number of our specific findings of fact in Krause.

Contrary to the Krause findings, petitioners affirmatively

allege:    (1) The Burnt Hollow acreage constituted a heavy oil
                             - 20 -


property, not a tar sands property; (2) the Carmel VaporTherm

technology was unique, and water for its use would be available

at low cost; (3) testing is not critical to a determination of

the usefulness of a particular technology; (4) it was not

unreasonable to project that world oil prices would continue to

rise; (5) the Monroe field was not 90 percent depleted; (6)

Elektra had available the expertise of Todd Doscher, whose

expertise alone made the EOR technology licensed by Cromwell

valuable; (7) during the 1980's, there existed no industry norm

for the license of EOR technology; (8) there existed proven ways

to recover oil from tar sands properties, and the tar sands

properties licensed by Cromwell had reserves of oil; and

(9) Cromwell's estimates for recovery of oil from tar sands

properties using the licensed EOR technology were reasonable.

     We address each of petitioners' allegations in order.

     (1) Bursell's and Ham's bald opinions that Burnt Hollow does

not constitute a tar sands property are unsubstantiated and

conflict with industry definitions.   The Burnt Hollow property

has an API gravity of 2 degrees and a viscosity of 1,000,000 cp

at reservoir conditions, making this property a tar sands

property under any recognized definition.   Further, whether Burnt

Hollow constitutes a heavy oil property or a tar sands property

does not change the fact that Cromwell's acreage had no reserves.
                              - 21 -


     (2) With regard to the Carmel VaporTherm technology, it is

sufficient to reiterate that it was not known whether such

technology would work on Cromwell's acreage, and Cromwell could

have licensed the technology directly from the inventor for no

fixed fees.

     (3) The credible evidence establishes that pilot tests are

necessary when there is not enough information available to know

whether and how well a proposed technology and project would

work.   This was Cromwell's situation.   It licensed untested,

unknown technology, and it had always planned to do a pilot.     Any

argument against the need for a pilot to test the usefulness of

EOR technology conflicts both with respondent's experts and

recognized industry practice and is not credible.

     (4) Regarding energy price predictions, there is no dispute

that many people expected oil prices to rise.    Respondent's

experts took price increases into account in their analyses.     In

Krause v. Commissioner, supra, we recognized the anxiety that

existed in the late 1970's and early 1980's concerning future oil

prices, and we still concluded that the stated consideration for

the license from Elektra of EOR technology and for the lease from

TexOil of tar sands acreage was unjustified.    The U.S. Court of

Appeals for the Tenth Circuit reviewed our findings in this

regard and found no error.   Hildebrand v. Commissioner, 28 F.3d

at 1027-1028.
                              - 22 -


     (5) Petitioners dispute that the Monroe field in Texas was

90 percent depleted when Cromwell acquired interests therein.

Respondent's expert, Ronald Harrell, who has extensive experience

with the Monroe field, did a reserve study of the Monroe field as

of 1979 based on then available performance data from analogous

wells in the Monroe field.   This study establishes that

Cromwell's acreage in the Monroe field, like Technology-1980's

acreage, would not support economically viable oil leases.

     Petitioners' contention that the Monroe field was less than

60 percent depleted is not supported by any credible evidence.

Petitioners rely primarily on speculative testimony from Ham that

the Monroe field constitutes a condensate field in which fluid

buildup around the wells gives the false appearance that the

reservoir is depleted.   Ham presented absolutely no data or

testing to support his theory.   Respondent's expert, Harrell,

explained that the Monroe field was recognized throughout the

industry as not qualifying as a condensate field.   Petitioners'

claim that the Monroe field was not 90 percent depleted is not

supported by any credible evidence.

     (6) Petitioners' argument that the affiliation of Tom

Doscher, a renowned expert, with the partnerships justified the

large license fees is flawed in many respects.   First, in 1979

when Cromwell entered into the license agreements, Doscher was

not in any way affiliated with Elektra.   In 1981, when Doscher
                              - 23 -


did become somewhat involved with Elektra, he committed to

working for Elektra or the related partnerships only 10 hours per

calendar quarter.   Also, the various partnerships, including

Cromwell, were obligated to pay significant additional fees under

separate contracts for Doscher's services at Burnt Hollow.

Further, as of 1979, all of Doscher's technology patents had been

assigned to Shell Oil Co. and thus would not have been available

to the partnerships.   Doscher's services were not furnished under

the Elektra license.   Finally, during this time period, the

services of a number of qualified thermal experts, including

Doscher, were generally available.     Clearly, Cromwell's

exorbitant license fees are not justified merely because Doscher,

in 1981, became affiliated on a limited basis with the

partnerships.

     (7) Petitioners' contention that during 1979 through 1982

fixed fees for licenses of technology were not unusual is not

supported by any credible evidence.     Ham’s testimony is based

largely on irrelevant property transactions and drilling deals

and on incomplete information.   The fluidized bed technology that

he discusses does not even constitute an oil recovery technology.

Ham refers to up-front fees charged by Carmel Energy Corp., but

he ignores the fact that those fees represented a component for

engineering services, not a license for technology.     Ultimately,

Ham acknowledges that he was not aware of other transactions
                              - 24 -


involving EOR technology with terms similar to Cromwell's license

with Elektra that reflected substantial fixed fees for

technology.

     (8) Ham’s vague testimony regarding the existence of proven

methods of recovery of oil from the Utah and Wyoming tar sands is

not credible.   Ham incorrectly treats as a "proven" technology a

technology which is technically feasible, even if only minute

quantities of oil are recovered and regardless of the economics.

     Ham makes vague reference to tests in the Utah tar sands

conducted by Shell, Laramie Energy Research Center, and the

Energy Research and Development Administration, but he provides

no specifics as to the results of the tests so we can evaluate

their relevance to these cases.    In contrast, respondent's expert

Henry J. Gruy, provides specific details and analysis of four

Utah tar sand projects.   The evidence indicates that these

projects were not commercial successes.

     Petitioners challenge our finding in Krause v. Commissioner,

99 T.C. 132 (1992), that there were neither proven nor probable

reserves of oil on the leased tar sands properties and that

commercial development was highly speculative.   None of

petitioners' experts, however, did a reserve study for any of

Cromwell's tar sands properties.   Only Gruy completed reserve

studies, and his conclusions are consistent with the Court's

findings.
                               - 25 -


     Ham suggests that there were probable reserves on the Utah

tar sands properties, but Ham provides no reliable data or

support for this assertion.    At trial, Ham testified that the

Utah tar sands properties had possible reserves.     Regarding Burnt

Hollow, he speaks vaguely in terms of “secondary reserves” and “a

lot of reserves” without any greater precision.     Even

petitioners' other experts would not agree with Ham on this

matter.    Neither Austin, Bursell, nor Cayias makes similar

assertions or speaks in terms of reserves.     In fact, Cayias

characterizes Burnt Hollow as “an exploration type risk”.

     (9)   Relying primarily on Bursell's estimates of a 50-

percent recovery rate, petitioners dispute our finding that

Cromwell's 20- to 70-percent oil recovery estimates were

unreasonable.   Bursell's 50-percent recovery estimate, however,

itself is flawed.   Bursell uses a hypothetical viscosity for

Burnt Hollow oil of 10,000 cp at 90 degrees Fahrenheit.     He then

plots this hypothetical viscosity on a laboratory-derived curve

correlating viscosity and recovery.     Bursell's theoretical

viscosity, however, for Burnt Hollow is incorrect.     Even at 102

degrees Fahrenheit, the viscosity of the tar at Burnt Hollow was

indicated at over 1,000,000 cp.    At 90 degrees Fahrenheit, the

tar would be even thicker, and the viscosity higher, nowhere near

the 10,000 cp that Bursell uses.    In making his calculations,

Bursell evidently did not have and did not consider the actual

data from Burnt Hollow.   Factoring in this data on Bursell's
                              - 26 -


correlation curve by plotting the actual 1,000,000 cp plus

viscosity of the tar at Burnt Hollow at 90 degrees Fahrenheit,

projected oil recovery approaches zero.

     Petitioners also dispute our findings in Krause v.

Commissioner, supra, that Cromwell's offering memorandum was

misleading and overly optimistic in describing the licensed EOR

technology.   Petitioners make reference to Government investment

in EOR technology and to projections of possible cumulative

production.   Petitioners make unsupported projections of

conceivable profit from a single EOR technology.   This is not

persuasive.   Petitioners make no attempt to tie any of this

general material into the specifics and reality of Cromwell's

activity.

     Similar to the offering memorandum of Technology-1980,

Cromwell's offering memorandum is not candid about the small

likelihood of successfully applying unconventional and

undeveloped EOR technology to properties with no history of

success and where the oil resource has not been defined.

     In summary, the material factual differences that

petitioners allege exist as between their investments in and the

activities of Cromwell and the investments in and activities of

Technology-1980, as found in Krause v. Commissioner, supra, are

not supported by any credible evidence.

     Petitioners make no explicit claim that we, in the Krause v.

Commissioner, supra, opinion, made any error of law, but
                              - 27 -


petitioners imply that profit motive should be analyzed at the

individual partner level, not at the partnership level.   We

recently held to the contrary in Vanderschraff v. Commissioner,

T.C. Memo. 1997-306.   We incorporate herein our analysis and

conclusion in Vanderschraaf on this legal issue.

     In light of our resolution of the above issues (namely, the

lack of profit objective of Cromwell and the nongenuine nature of

Cromwell’s debt obligations) on the bases explained, other

arguments made by respondent with regard to the disallowance of

Cromwell’s claimed losses and credits need not be addressed.

     With regard to the additions to tax under sections

6653(a)(1) and (2) and 6661, we incorporate herein our analyses

and findings as set forth in our Krause v. Commissioner, supra,

and Vanderschraff v. Commissioner, supra, opinions.    For the

reasons stated therein, we do not sustain respondent's imposition

of the additions to tax.

      As we explained in Krause v. Commissioner, supra at 180,

imposition of increased interest under section 6621(c), and its

predecessor section 6621(d), is more automatic.    Section 6621(c)

provided an increased rate of interest for substantial

underpayments attributable to tax-motivated transactions.

Substantial underpayments are defined as underpayments in excess

of $1,000.   By regulation, among the types of transactions that

are considered to be tax-motivated transactions within the

meaning of section 6621(c) are those with respect to which the
                               - 28 -


related tax deductions are disallowed under section 183 for lack

of profit objective.   Rybak v. Commissioner, 91 T.C. 524, 568

(1988); sec. 301.6621-2T, A-4(1), Temporary Proced. & Admin.

Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984).   In light of our

findings as to the lack of profit objective, petitioners are

liable for increased interest under section 6621(c).

     For the reasons stated,


                                         Appropriate orders and

                                    decisions will be entered.
