## Facts

- Individual taxpayers invested as limited partners in oil-and-gas limited partnerships organized to pursue enhanced oil recovery (EOR) technology and related drilling operations.
- A group of substantially similar partnerships (including Technology-1980 and Barton) marketed investments through offering materials that emphasized projected tax losses and credits from relatively small cash contributions.
- The Commissioner issued deficiency notices disallowing partnership losses, interest deductions, and investment tax credits, and asserted additions to tax, including valuation overstatement additions under former I.R.C. § 6659.
- The cases were consolidated and tried as a test case; the Tax Court held an extensive trial with technical and economic evidence on feasibility and expected profitability.
- The record showed that the EOR technology was not fully tested; production and profit projections depended on faulty assumptions; license fees and royalties were not competitive and imposed excessive economic risk; and projections assumed rising oil prices contrary to contemporaneous government data.

## Issues

1. Whether the partnerships’ activities and transactions had economic substance and a bona fide profit objective, as opposed to being primarily tax-motivated arrangements.
2. Whether investors could claim partnership losses, interest deductions, and investment tax credits arising from the partnerships’ EOR-related transactions and financing.
3. Whether additions to tax applied, including whether the Commissioner abused discretion by refusing to waive valuation overstatement additions under former I.R.C. § 6659.

## Decision

- The Tax Court largely sustained the Commissioner’s determinations disallowing partnership losses, interest deductions, and investment tax credits.
- The court found the partnerships’ activities and transactions were primarily tax-motivated and lacked the requisite profit objective and economic substance.
- The court held the Commissioner’s refusal to waive former § 6659 valuation overstatement additions to tax was an abuse of discretion and required waiver on the record presented.

## Legal Principles

- Tax benefits (deductions and credits) may be denied where the underlying partnership activities and transactions lack objective economic substance and a bona fide profit objective independent of tax effects.
- In evaluating profit objective and economic substance, the court may examine technical feasibility, reasonableness of economic assumptions, the competitiveness of fees/royalties, and whether projections align with objective market information.
- Where a statute permits waiver of an addition to tax (such as former § 6659), the Commissioner’s refusal to waive is subject to judicial review for abuse of discretion.

## Conclusion

The Tax Court treated the EOR limited partnerships as tax-driven arrangements lacking economic substance and a genuine profit objective, disallowing the investors’ claimed losses, interest deductions, and credits, but ordered waiver of former § 6659 valuation overstatement additions because the Commissioner’s refusal to waive was an abuse of discretion on the facts presented.


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