Court Opinion

ID: 9447136
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:26:35.298225+00
Date Added: 2024-06-11T17:30:54.755500
License: Public Domain

WISDOM, Circuit Judge
(dissenting).
I respectfully dissent. As I see it, the majority reads more into the Abercrom-bie case than there is in that case.
Abercrombie holds that prior to re-coupment the carrier must exclude from his return the gross amount of income and expense attributable to the carried party’s fractional interest. I realize that implicit in the Abercrombie holding, as distinguished from the holding by the Tax Court in the instant case, is recognition of the carried party’s interest during the payout period as an economic interest. But during the payout Prater’s interest, economic or what-have-you, is not such an interest that entitles him to share in present production and he is under no obligation to share in present expenses. He looks to production sometime in the future for recovery of costs. In a system of tax accounting based on the taxpayer taking deductions for expenses in the year when he pays the expenses (if he is on a cash basis, as Prater is) or on taking deductions in the year when expenses become due (if he is on an accrual basis) — it is somewhat less than realistic to allow the taxpayer to deduct development costs before he has paid such expenses, before he owes such expenses (because the production income in the years in question did not exceed expenses), and when he might never pay such expenses (should there be no production or should production not exceed expenses).
The critical issue before us is, when may a carried party deduct his share of the expenses? That question was not reached in Abercrombie. And, an answer based on Abercrombie has no necessary relation to the critical issue. To my mind, Prater had no taxable income from production in the years in question, and therefore no deductible development costs for those years. If, as, and when the contingency should occur, that is the payout that would enable Prater to realize production against which he could offset expenses, then and then only should he be able to deduct expenses.
Again with deference, it seems to me that it is a pure figure of speech to say that Prater pledged his interest to secure the return of advances; or, that the losses were a charge against Prater’s interest just as much as if he had paid them out of pocket. Putting aside fictions, the plain fact is that there is no loan or pledge or charge equivalent to payment in cash — when the taxpayer has no firm obligation to repay the carrier’s advances (should there be insufficient production) and the carried interest has no value (if there should be no production).
*127I would hold that a carried party having no present right to share in current income, has no present right to share in current expenses; and, under these circumstances, that the carrying party has the right to deduct all the expenses.