OPINION OF KUNZMAN & BOLLINGER, INC.
AS TO TAX MATTERS
KUNZMAN & BOLLINGER, INC.
ATTORNEYS-AT-LAW
5100 N. BROOKLINE, SUITE 600
OKLAHOMA CITY, OKLAHOMA 73112
Telephone (405) 942-3501
Fax (405) 942-3527
Exhibit 8
July 7, 1999
Atlas Resources, Inc.
311 Rouser Road
Moon Township, Pennsylvania 15108
RE: ATLAS-ENERGY FOR THE NINETIES-PUBLIC #8 LTD.
Gentlemen:
You have requested our opinions on the material federal income tax issues
pertaining to Atlas-Energy for the Nineties-Public #8 Ltd. (the "Partnership"),
a limited partnership formed under the Revised Uniform Limited Partnership Act
of Pennsylvania. We have acted as Special Counsel to the Partnership with
respect to the offering of interests in the Partnership. Atlas Resources, Inc.
will be the Managing General Partner of the Partnership. Terms used and not
otherwise defined herein have the respective meanings assigned to them in the
Prospectus under the caption "DEFINITIONS."
BASIS OF OPINION
Our opinions are based upon our review of: (1) a certain Registration
Statement on Form SB-2 for Atlas-Energy for the Nineties-Public #8 Ltd., as
originally filed with the United States Securities and Exchange Commission, and
amendments thereto, including the Prospectus, the Drilling and Operating
Agreement and the Amended and Restated Certificate and Agreement of Limited
Partnership for the Partnership (the "Partnership Agreement") included as
exhibits to the Prospectus; and (2) such corporate records, certificates,
agreements, instruments and other documents as we have deemed relevant and
necessary to review as a basis for the opinions herein provided.
Our opinions also are based upon our interpretation of existing statutes,
rulings and regulations, as presently interpreted by judicial and administrative
bodies. Such statutes, rulings, regulations and interpretations are subject to
change; and such changes could result in different tax consequences than those
set forth herein and could render our opinions inapplicable.
In rendering our opinions, we have obtained from you certain
representations with respect to the Partnership. Any material inaccuracy in such
representations may render our opinions inapplicable. Included among such
representations are the following:
(1) The Partnership Agreement will be executed by the Managing
General Partner and the Participants and recorded in all places
required under the Revised Uniform Limited Partnership Act of
Pennsylvania and any other applicable limited partnership act.
Also, the Partnership will be operated in accordance with the
terms of the Partnership Agreement, the Prospectus, and the
Revised Uniform Limited Partnership Act of Pennsylvania and any
other applicable limited partnership act.
(2) No election will be made by the Partnership to be excluded from
the application of the partnership provisions of the Code or
classified as a corporation for tax purposes.
(3) The Partnership will own legal title to the Working Interest in
all of its Prospects.
Atlas Resources, Inc.
July 7, 1999
Page 2
(4) The respective amounts that will be paid to the Managing General
Partner or its Affiliates pursuant to the Partnership Agreement
and the Drilling and Operating Agreement are amounts that would
ordinarily be paid for similar services in similar transactions
between Persons having no affiliation and dealing with each other
"at arms' length."
(5) The Partnership will elect to deduct currently all intangible
drilling and development costs.
(6) The Partnership will have a calendar year taxable year.
(7) The Drilling and Operating Agreement and any amendments thereto
entered into between the Managing General Partner and the
Partnership will be duly executed and will govern the drilling
and, if warranted, the completion and operation of the wells in
accordance with its terms.
(8) Based upon the Managing General Partner's experience and the
intended operations of the Partnership, the Managing General
Partner reasonably believes that the aggregate deductions,
including depletion deductions, and 350% of the aggregate
credits, if any, which will be claimed by the Managing General
Partner and the Participants, will not during the first five tax
years following the funding of the Partnership exceed twice the
amounts invested by the Managing General Partner and the
Participants, respectively.
(9) The Investor General Partner Units will not be converted to
Limited Partner interests before substantially all of the
Partnership Wells have been drilled and completed.
(10) The Units will not be traded on an established securities market.
In rendering our opinions we have further assumed that: (1) each of the
Participants has an objective to carry on the business of the Partnership for
profit; (2) any amount borrowed by a Participant and contributed to the
Partnership will not be borrowed from a Person who has an interest in the
Partnership (other than as a creditor) or a related person, as defined in
Section 465 of the Code, to a Person (other than the Participant) having such
interest and the Participant will be severally, primarily, and personally
liable for such amount; and (3) no Participant will have protected himself
from loss for amounts contributed to the Partnership through nonrecourse
financing, guarantees, stop loss agreements or other similar arrangements.
We have considered the provisions of the American Bar Association's
Revised Formal Opinion 346 on Tax Law Opinions ("ABA Opinion 346") and 31
CFR, Part 10, Section 10.33 (Treasury Department Circular No. 230) on tax law
opinions and we believe that this opinion letter addresses all material
federal income tax issues associated with an investment in the Units by an
individual Participant who is a resident citizen of the United States. We
consider material those issues which would affect significantly a
Participant's deductions, credits or losses arising from his investment in
the Units and with respect to which, under present law, there is a reasonable
possibility of challenge by the IRS, or those issues which are expected to be
of fundamental importance to a Participant but as to which a challenge by the
IRS is unlikely. The issues which involve a reasonable possibility of
challenge by the IRS have not been definitely resolved by statutes, rulings
or regulations, as interpreted by judicial or administrative bodies.
Subject to the foregoing, however, in our opinion it is more likely than
not that the following tax treatment will be upheld if challenged by the IRS and
litigated:
(1) PARTNERSHIP CLASSIFICATION. The Partnership will be classified as
a partnership for federal income tax purposes, and not as a corporation. The
Partnership, as such, will not pay any federal income taxes, and all items of
income, gain, loss, deduction, and credit of the Partnership will be reportable
by the Partners in the Partnership. (See "- Partnership Classification.")
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July 7, 1999
Page 3
(2) PASSIVE ACTIVITY CLASSIFICATION. The Partnership's oil and gas
production income, together with gain, if any, from the disposition of its
oil and gas properties, which is allocable to Limited Partners who are
individuals, estates, trusts, closely held corporations or personal service
corporations more likely than not will be characterized as income from a
passive activity which may be offset by passive activity losses (as defined
in Section 469(d) of the Code). Income or gain attributable to investments of
working capital of the Partnership will be characterized as portfolio income,
which cannot be offset by passive activity losses. Also, the passive activity
limitations on losses under Section 469, more likely than not, will not be
applicable to Investor General Partners prior to the conversion of Investor
General Partner Units to Limited Partner interests. (See "- Limitations on
Passive Activities.")
(3) NOT A PUBLICLY TRADED PARTNERSHIP. Assuming that no more than
10% of the Units are transferred in any taxable year of the Partnership
(other than in private transfers described in Treas. Reg. Section
1.7704-1(e)), it is more likely than not that the Partnership will not be
treated as a "publicly traded partnership" under the Code. (See "-
Limitations on Passive Activities.")
(4) AVAILABILITY OF CERTAIN DEDUCTIONS. Business expenses, including
payments for personal services actually rendered in the taxable year in which
accrued, which are reasonable, ordinary and necessary and do not include amounts
for items such as Lease acquisition costs, organization and syndication fees and
other items which are required to be capitalized, are currently deductible. (See
"-1999 Expenditures," "- Availability of Certain Deductions" and "- Partnership
Organization and Syndication Fees.")
(5) INTANGIBLE DRILLING AND DEVELOPMENT COSTS. Intangible drilling and
development costs ("Intangible Drilling Costs") paid by the Partnership under
the terms of bona fide drilling contracts for the Partnership's wells will be
deductible in the taxable year in which the payments are made and the drilling
services are rendered, assuming such amounts are fair and reasonable
consideration and subject to certain restrictions summarized below (including
basis and "at risk" limitations, and the passive activity loss limitation with
respect to the Limited Partners). (See "- Intangible Drilling and Development
Costs" and "- Drilling Contracts.")
(6) PREPAYMENTS OF INTANGIBLE DRILLING AND DEVELOPMENT COSTS.
Depending primarily on when the Partnership Subscription is received, the
Managing General Partner anticipates that the Partnership will prepay in 1999
most, if not all, of the intangible drilling and development costs related to
Partnership Wells the drilling of which will be commenced in 2000. Assuming that
such amounts are fair and reasonable, and based in part on the factual
assumptions set forth below, in our opinion such prepayments of intangible
drilling and development costs will be deductible for the 1999 taxable year even
though all Working Interest owners in the well may not be required to prepay
such amounts, subject to certain restrictions summarized below (including basis
and "at risk" limitations, and the passive activity loss limitation with respect
to the Limited Partners). (See " - Drilling Contracts," below.)
The foregoing opinion is based in part on the assumptions that:
(1) such costs will be required to be prepaid in 1999 for specified wells
pursuant to the Drilling and Operating Agreement; (2) pursuant to the Drilling
and Operating Agreement the wells are required to be, and actually are, Spudded
on or before March 30, 2000, and continuously drilled thereafter until
completed, if warranted, or abandoned; and (3) the required prepayments are not
refundable to the Partnership and any excess prepayments are applied to
intangible drilling and development costs of substitute wells.
(7) DEPLETION ALLOWANCE. The greater of cost depletion or percentage
depletion will be available to qualified Participants as a current deduction
against the Partnership's oil and gas production income, subject to certain
restrictions summarized below. (See "- Depletion Allowance.")
(8) MACRS. The Partnership's reasonable costs for recovery property
(tangible depreciable property used in a trade or business or held for the
production of income) which cannot currently be deducted but must be capitalized
("Tangible Costs") will be eligible for cost recovery deductions under the
Modified Accelerated Cost Recovery
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July 7, 1999
Page 4
System ("MACRS"), generally over a seven year "cost recovery period," subject
to certain restrictions summarized below (including basis and "at risk"
limitations, and the passive activity loss limitation in the case of Limited
Partners). (See "- Depreciation - Modified Accelerated Cost Recovery System
("MACRS").")
(9) TAX BASIS OF PARTICIPANT'S INTEREST. Each Participant's adjusted
tax basis in his Partnership interest will be increased by his total Agreed
Subscription. (See "- Tax Basis of Participants' Interests.")
(10) AT RISK LIMITATION ON LOSSES. Each Participant initially will be
"at risk" to the full extent of his Agreed Subscription. (See "- `At Risk'
Limitation For Losses.")
(11) ALLOCATIONS. Assuming the effect of the allocations of income,
gain, loss, deduction and credit (or items thereof) set forth in the Partnership
Agreement, including the allocations of basis and amount realized with respect
to oil and gas properties, is substantial in light of a Participant's tax
attributes that are unrelated to the Partnership, it is more likely than not
that such allocations will have "substantial economic effect" and will govern
each Participant's distributive share of such items to the extent such
allocations do not cause or increase deficit balances in the Participants'
Capital Accounts. (See "- Allocations.")
(12) AGREED SUBSCRIPTION. No gain or loss will be recognized by the
Participants on payment of their Agreed Subscriptions.
(13) PROFIT MOTIVE AND NO TAX SHELTER REGISTRATION. Based on the
Managing General Partner's representation that the Partnership will be
conducted as described in the Prospectus, it is more likely than not that the
Partnership will possess the requisite profit motive under Section 183 of the
Code and is not required to register with the IRS as a tax shelter. (See " -
Disallowance of Deductions Under Section 183 of the Code" and " - Lack of
Registration as a Tax Shelter.")
(14) IRS ANTI-ABUSE RULE. Based on the Managing General Partner's
representation that the Partnership will be conducted as described in the
Prospectus, it is more likely than not that the Partnership will not be
subject to the anti-abuse rule set forth in Treas. Reg. Section 1.701-2. (See
"- Penalties and Interest - IRS Anti-Abuse Rule.")
(15) OVERALL EVALUATION OF TAX BENEFITS. Based on our conclusion that
substantially more than half of the material tax benefits of the Partnership, in
terms of their financial impact on a typical Participant, more likely than not
will be realized if challenged by the IRS, it is our opinion that the tax
benefits of the Partnership, in the aggregate, which are a significant feature
of an investment in the Partnership by a typical original Participant more
likely than not will be realized as contemplated by the Prospectus. The
discussion in the Prospectus under the caption "TAX ASPECTS," insofar as it
contains statements of federal income tax law, is correct in all material
respects. (See "Tax Aspects" in the Prospectus.)
* * * * * * * * * * * * *
Our opinion is limited to the opinions expressed above. With respect to
some of the matters discussed in this opinion, existing law provides little
guidance. Although our opinions express what we believe a court would probably
conclude if presented with the applicable issues, there is no assurance that the
IRS will not challenge our interpretations or that such a challenge would not be
sustained in the courts and cause adverse tax consequences to the Participants.
It should be noted that taxpayers bear the burden of proof to support claimed
deductions and opinions of counsel are not binding on the IRS or the courts.
Atlas Resources, Inc.
July 7, 1999
Page 5
IN GENERAL
The following is a summary of some of the principal features under present
federal income tax law which will apply to the Partnership and typical
Participants. However, there is no assurance that the present laws or
regulations will not be changed and adversely affect a Participant. The IRS may
challenge the deductions claimed by the Partnership or a Participant, or the
taxable year in which such deductions are claimed, and no guaranty can be given
that any such challenge would not be upheld if litigated.
The practical utility of the tax aspects of any investment depends largely
on each Participant's particular income tax position in the year in which items
of income, gain, loss, deduction or credit are properly taken into account in
computing his federal income tax liability. In addition, except as otherwise
noted, different tax considerations may apply to foreign persons, corporations
partnerships, trusts and other prospective Participants which are not treated as
individuals for federal income tax purposes. EACH PROSPECTIVE PARTICIPANT SHOULD
SATISFY HIMSELF AS TO THE TAX CONSEQUENCES OF PARTICIPATING IN THE PARTNERSHIP
BY OBTAINING ADVICE FROM HIS OWN TAX ADVISOR.
PARTNERSHIP CLASSIFICATION
For federal income tax purposes, a partnership is not a taxable entity but
rather a conduit through which all items of income, gain, loss, deduction,
credit and tax preference are passed through to the partners. Thus, the
partners, rather than the partnership, receive any tax deductions and credits,
as well as the income, from the operations engaged in by the partnership.
Under the regulations, a business entity with two or more members is
classified for federal tax purposes as either a corporation or a partnership.
Treas. Reg. Section 301.7701-2(a). The term corporation includes a business
entity organized under a State statute which describes the entity as a
corporation, body corporate, body politic, joint-stock company or joint-stock
association. Treas. Reg. Section 301.7701-2(b). The Partnership was formed
under the Pennsylvania Revised Uniform Limited Partnership Act which
describes the Partnership as a "partnership." Consequently, the Partnership
will automatically be classified as a partnership unless it elects to be
classified as a corporation. In this regard, the Managing General Partner has
represented that no election for the Partnership to be classified as a
corporation will be filed with the IRS.
LIMITATIONS ON PASSIVE ACTIVITIES
Under the passive activity rules, all income of a taxpayer who is subject
to the rules is categorized as: (i) income from passive activities such as
limited partners' interests in a business; (ii) active income (e.g., salary,
bonuses, etc.); or (iii) portfolio income. "Portfolio income" consists of (i)
interest, dividends and royalties (unless earned in the ordinary course of a
trade or business); and (ii) gain or loss not derived in the ordinary course of
a trade or business on the sale of property that generates portfolio income or
is held for investment. Losses generated by "passive activities" can offset only
passive income and cannot be applied against active income or portfolio income.
The passive activity rules apply to individuals, estates, trusts, closely
held C corporations (generally, if five or fewer individuals own directly or
indirectly more than 50% of the stock) and personal service corporations (other
than corporations where the owner-employees together own less than 10% of the
stock). However, a closely held C corporation (other than a personal service
corporation) may use passive losses and credits to offset taxable income of the
company figured without regard to passive income or loss or portfolio income.
Passive activities include any trade or business in which the taxpayer
does not materially participate on a regular, continuous, and substantial basis.
Under the Partnership Agreement, Limited Partners will not have material
participation in the Partnership and generally will be subject to the passive
activity rules.
Investor General Partners also do not materially participate in the
Partnership. However, because Investor General
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July 7, 1999
Page 6
Partners do not have limited liability under the Revised Uniform Limited
Partnership Act of Pennsylvania ("Act") until they are converted to Limited
Partners, their deductions generally will not be treated as passive deductions
prior to the conversion. (See " - Conversion from Investor General Partner to
Limited Partner", below.) However, if an Investor General Partner invests in the
Partnership through an entity which limits his liability (e.g., a limited
partnership or S corporation), he will be treated the same as a Limited Partner
and generally will be subject to the passive activity limitations. Contractual
limitations on the liability of Investor General Partners under the Partnership
Agreement (e.g., insurance, limited indemnification, etc.) will not cause
Investor General Partners to be subject to the passive activity limitations.
Deductions disallowed by the at-risk limitation on losses under Section
465 of the Code become subject to the passive loss limitation only if the
taxpayer's at-risk amount increases in future years. A taxpayer's at-risk
amount is reduced by losses allowed under Section 465 even if the losses are
suspended by the passive loss limitation. (See "- `At Risk' Limitation For
Losses," below.) Similarly, a taxpayer's basis is reduced by deductions even
if the deductions are disallowed under the passive loss limitation. (See "-
Tax Basis of Participants' Interests," below.)
Suspended losses and credits may be carried forward (but not back) and
used to offset future years' passive activity income. A suspended loss (but not
a credit) is allowed in full when the entire interest is sold to an unrelated
third party in a taxable transaction and in part upon the disposition of
substantially all of the passive activity if the suspended loss as well as
current gross income and deductions can be allocated to the part disposed of
with reasonable certainty. In an installment sale, passive losses become
available in the same ratio that gain recognized each year bears to the total
gain on the sale.
Any suspended losses remaining at a taxpayer's death are allowed as
deductions on his final return, subject to a reduction to the extent the basis
of the property in the hands of the transferee exceeds the property's adjusted
basis immediately prior to the decedent's death. If a taxpayer makes a gift of
his entire interest in a passive activity, the donee's basis is increased by any
suspended losses and no deductions are allowed. If the interest is later sold at
a loss, the donee's basis is limited to the fair market value on the date the
gift was made.
PUBLICLY TRADED PARTNERSHIP RULES. Net losses and credits of a partner
from each publicly traded partnership are suspended and carried forward to be
netted against income from that publicly traded partnership only. In addition,
net losses from other passive activities may not be used to offset net income
from a publicly traded partnership. I.R.C. Sections 469(k)(2) and 7704. However,
in the opinion of Special Counsel it is more likely than not that the
Partnership will not be characterized as a publicly traded partnership under the
Code, so long as no more than 10% of the Units are transferred in any taxable
year of the Partnership (other than in private transactions described in Treas.
Reg. Section 1.7704-1(e)).
CONVERSION FROM INVESTOR GENERAL PARTNER TO LIMITED PARTNER. Investor
General Partner Units will be converted to Limited Partner interests after
substantially all of the Partnership Wells have been drilled and completed,
which the Managing General Partner anticipates will be in the late summer of
2000. Thereafter, each Investor General Partner will be deemed a Limited Partner
in the Partnership and will enjoy the limited liability provided to limited
partners under the Revised Uniform Limited Partnership Act of Pennsylvania with
respect to his interest in the Partnership.
Concurrently, the Investor General Partner will become subject to the
passive activity limitations. However, because an Investor General Partner
will have a non-passive loss in 1999 as a result of the Partnership's
deduction for Intangible Drilling Costs, his net income from Partnership
Wells following the conversion will continue to be characterized as
non-passive income which cannot be offset with passive losses. An Investor
General Partner's conversion of his Partnership interest into a Limited
Partner interest should not have any other adverse tax consequences unless
the Investor General Partner's share of any Partnership liabilities is
reduced as a result of the conversion. Rev. Rul. 84-52, 1984-1 C.B. 157 and
Prop. Reg. Section 1.1254-2. A reduction in a partner's share of liabilities
is treated as a constructive distribution of cash to the partner, which
reduces the basis of the partner's interest in the partnership and is taxable
to the extent it exceeds such basis.
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July 7, 1999
Page 7
TAXABLE YEAR
The Partnership intends to adopt a calendar year taxable year. I.R.C.
Section 706(b). The taxable year of the Partnership is important to a
prospective Participant because the Partnership's deductions, income and
other items of tax significance must be taken into account in computing the
Participant's taxable income for his taxable year within or with which the
Partnership's taxable year ends. The tax year of a partnership generally must
be the tax year of one or more of its partners who have an aggregate interest
in partnership profits and capital of greater than 50%.
1999 EXPENDITURES
The Managing General Partner anticipates that all of the Partnership's
subscription proceeds will be expended in 1999 and that the income and
deductions generated pursuant thereto will be reflected on the Participants'
federal income tax returns for that period. (See "Capitalization and Source of
Funds and Use of Proceeds" and "Participation in Costs and Revenues" in the
Prospectus.)
Depending primarily on when the Partnership Subscription is received, the
Managing General Partner anticipates that the Partnership will prepay in 1999
most, if not all, of its intangible drilling and development costs for wells the
drilling of which will be commenced in 2000. The deductibility in 1999 of such
advance payments cannot be guaranteed. (See " - Drilling Contracts," below.)
AVAILABILITY OF CERTAIN DEDUCTIONS
Ordinary and necessary business expenses, including reasonable
compensation for personal services actually rendered, are deductible in the
year incurred. Treasury Regulation Section 1.162-7(b)(3) provides that
reasonable compensation is only such amount as would ordinarily be paid for
like services by like enterprises under like circumstances. The Managing
General Partner has represented to Special Counsel that the amounts payable
to the Managing General Partner and its Affiliates, including the amounts
paid to the Managing General Partner or its Affiliates as general drilling
contractor, are the amounts which would ordinarily be paid for similar
services in similar transactions. (See " - Drilling Contracts," below.)
The fees paid to the Managing General Partner and its Affiliates will not
be currently deductible to the extent it is determined that they are in excess
of reasonable compensation, are properly characterized as organization or
syndication fees, other capital costs such as the acquisition cost of the
Leases, or not "ordinary and necessary" business expenses, or the services were
rendered in tax years other than the tax year in which such fees were deducted
by the Partnership. (See " - Partnership Organization and Syndication Fees,"
below.) In the event of an audit, payments to the Managing General Partner and
its Affiliates by the Partnership will be scrutinized by the IRS to a greater
extent than payments to an unrelated party.
INTANGIBLE DRILLING AND DEVELOPMENT COSTS
Assuming a proper election and subject to the passive activity loss
rules in the case of Limited Partners, each Participant will be entitled to
deduct his share of intangible drilling and development costs which include
items which do not have salvage value, such as labor, fuel, repairs, supplies
and hauling necessary to the drilling of a well. Treas. Reg. Section
1.612-4(a). (See "Participation in Costs and Revenues" in the Prospectus and
"- Limitations on Passive Activities," above.) These deductions are subject
to recapture as ordinary income rather than capital gain upon the disposition
of the property or a Participant's interest in the Partnership. (See " - Sale
of the Properties" and " - Disposition of Partnership Interests," below.)
Also, productive-well intangible drilling and development costs may subject a
Participant to an alternative minimum tax in excess of regular tax unless an
election is made to deduct them on a straight-line basis over a 60 month
period. (See "- Minimum Tax - Tax Preferences," below.)
In preparing the Partnership's informational tax returns, the Managing
General Partner will allocate Partnership costs among Intangible Drilling Costs,
Tangible Costs, Direct Costs, Administrative Costs, Organization and Offering
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July 7, 1999
Page 8
Costs and Operating Costs based upon guidance from advisors to the Managing
General Partner. The Managing General Partner has allocated approximately 76.12%
of the footage price paid by the Partnership for a completed well in the
Appalachian Basin to intangible drilling and development costs ("Intangible
Drilling Costs") which are charged 100% to the Participants under the
Partnership Agreement. The IRS could challenge the characterization of costs
claimed by the Managing General Partner to be deductible intangible drilling and
development costs and recharacterize such costs as some other item which may be
non-deductible however, this would have no effect on the allocation and payment
of such costs under the Partnership Agreement.
In the case of corporations, other than S corporations, which are
"integrated oil companies," the amount allowable as a deduction for
intangible drilling and development costs in any taxable year under Section
263(c) of the Code is reduced by 30%. I.R.C. Section 291(b)(1). Integrated
oil companies are (i) those taxpayers who directly or through a related
person engage in the retail sale of oil or gas and whose gross receipts for
the calendar year from such activities exceed $5,000,000, or (ii) those
taxpayers and related persons who have refinery production in excess of
50,000 barrels on any day during the taxable year. Amounts disallowed as a
current deduction are allowable as a deduction ratably over the 60-month
period beginning with the month in which the costs are paid or incurred.
DRILLING CONTRACTS
The Partnership will enter into the Drilling and Operating Agreement with
the Managing General Partner or its Affiliates, as a third-party general
drilling contractor, to drill and complete the Partnership's Development Wells
on a footage basis of $37.81 per foot for each well that is drilled and
completed in the Appalachian Basin, and at a competitive rate for wells, if any,
drilled in other areas of the United States. Under the footage drilling
contracts for wells situated in the Mercer County area of the Appalachian Basin,
the Managing General Partner anticipates that it will have reimbursement of
general and administrative overhead of $3,600 per well and a profit of
approximately 15% per well assuming the well is drilled to 5,950 feet. However,
the actual cost of the drilling of the wells may be more or less than the
estimated amount, due primarily to the uncertain nature of drilling operations.
The Managing General Partner believes the Drilling and Operating Agreement
is at competitive rates in the proposed areas of operation. Nevertheless, the
amount of the profit realized by the Managing General Partner under the drilling
contract, if any, could be challenged by the IRS as unreasonable and disallowed
as a deductible intangible drilling and development cost. (See " - Intangible
Drilling and Development Costs," above, and "Proposed Activities" and
"Compensation" in the Prospectus.)
Depending primarily on when the Partnership Subscription is received, the
Managing General Partner anticipates that the Partnership will prepay in 1999
most, if not all, of the intangible drilling and development costs for drilling
activities that will be conducted in 2000. In KELLER V. COMMISSIONER, 79 T.C. 7
(1982), aff'd 725 F.2d 1173 (8th Cir. 1984), the Tax Court applied a two-part
test for the current deductibility of prepaid intangible drilling and
development costs: (1) the expenditure must be a payment rather than a
refundable deposit; and (2) the deduction must not result in a material
distortion of income taking into substantial consideration the business purpose
aspects of the transaction. The drilling partnership in KELLER entered into
footage and daywork drilling contracts which permitted it to terminate the
contracts at any time without default by the driller, and receive a return of
the prepaid amounts less amounts earned by the driller. The Tax Court found that
the right to receive, by unilateral action, a refund of the prepayments on such
footage and daywork drilling contracts rendered such prepayments deposits
instead of payments. Therefore, the prepayments were held to be nondeductible in
the year they were paid to the extent they had not been earned by the driller.
The Tax Court further found that the drilling partnership failed to show a
convincing business purpose for prepayments under the footage and daywork
drilling contracts.
The drilling partnership in KELLER also entered into turnkey drilling
contracts which permitted it to stop work under the contract at any time and
apply the unearned balance of the prepaid amounts to another well to be drilled
on a turnkey basis. The Tax Court found that such prepayments constituted
"payments" and not nondeductible deposits, despite the right of substitution.
Further, the Tax Court noted that the turnkey drilling contracts obligated "the
driller to
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July 7, 1999
Page 9
drill to the contract depth for a stated price regardless of the time,
materials or expenses required to drill the well," thereby locking in prices
and shifting the risks of drilling from the drilling partnership to the
driller. Since the drilling partnership, a cash basis taxpayer, received the
benefit of the turnkey obligation in the year of prepayment, the Tax Court
found that the amounts prepaid on turnkey drilling contracts clearly
reflected income and were deductible in the year of prepayment.
In LEONARD T. RUTH, TC Memo 1983-586, a drilling program entered into nine
separate turnkey contracts with a general contractor (the parent corporation of
the drilling program's corporate general partner), to drill nine program wells.
Each contract identified the prospect to be drilled, stated the turnkey price,
and required the full price to be paid in 1974. The program paid the full
turnkey price to the general contractor on December 31, 1974; the receipt of
which was found by the court to be significant in the general contractor's
financial planning. The program had no right to receive a refund of any of the
payments. The actual drilling of the nine wells was subcontracted by the general
contractor to independent contractors who were paid by the general contractor in
accordance with their individual contracts. The drilling of all wells commenced
in 1975 and all wells were completed that year. The amount paid by the general
contractor to the independent driller for its work on the nine wells was
approximately $365,000 less than the amount prepaid by the program to the
general contractor. The program claimed a deduction for intangible drilling and
development costs in 1974. The IRS challenged the timing of the deduction,
contending that there was no business purpose for the payments in 1974, that the
turnkey arrangements were merely "contracts of convenience" designed to create a
tax deduction in 1974, and that the turnkey contracts constituted assets having
a life beyond the taxable year and that to allow a deduction for their entire
costs in 1974 distorted income. The Tax Court, relying on KELLER, held that the
program could deduct the full amount of the payments in 1974. The court found
that the program entered into turnkey contracts, paid a premium to secure the
turnkey obligations, and thereby locked in the drilling price and shifted the
risks of drilling to the general contractor. Further, the court found that by
signing and paying the turnkey obligation, the program got its bargained-for
benefit in 1974, therefore the deduction of the payments in 1974 clearly
reflected income.
The Partnership will attempt to comply with the guidelines set forth in
KELLER with respect to prepaid intangible drilling and development costs. The
Drilling and Operating Agreement will require the Partnership to prepay in 1999
intangible drilling and development costs for specified wells the drilling of
which will be commenced in 2000. Although the Partnership is not required to
prepay completion costs of a well prior to the time a decision has been made to
complete the well, the Managing General Partner anticipates that all Partnership
Wells will be required to be completed before an evaluation can be made as to
their potential productivity. Prepayments should not result in a loss of current
deductibility where there is a legitimate business purpose for the required
prepayment, the contract is not merely a sham to control the timing of the
deduction and there is an enforceable contract of economic substance. The
Drilling and Operating Agreement will require the Partnership to prepay the
intangible drilling and development costs of the wells in order to enable the
Operator to commence site preparation for the wells, obtain suitable
subcontractors at the then current prices and insure the availability of
equipment and materials. Under the Drilling and Operating Agreement excess
prepaid amounts, if any, will not be refundable to the Partnership but will be
applied to intangible drilling and development costs to be incurred in drilling
substitute wells. Under KELLER, such a provision for substitute wells should not
result in the prepayments being characterized as refundable deposits.
The likelihood that prepayments will be challenged by the IRS on the
grounds that there is no business purpose for the prepayment is increased in the
event prepayments are not required with respect to 100% of the Working Interest.
It is possible that less than 100% of the Working Interest will be acquired by
the Partnership in one or more wells and prepayments may not be required of all
holders of the Working Interest. However, in the view of Special Counsel, a
legitimate business purpose for the required prepayments may exist under the
guidelines set forth in KELLER, even though prepayment is not required, or
actually received, by the drilling contractor with respect to a portion of the
Working Interest.
In addition to the foregoing, a current deduction for prepaid intangible
drilling and development costs is available only if the drilling of the wells is
commenced before the close of the 90th day after the close of the taxable year.
The
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July 7, 1999
Page 10
Managing General Partner will attempt to cause prepaid Partnership Wells to
be Spudded on or before March 30, 2000. However, the Spudding of any Partnership
Well may be delayed due to circumstances beyond the control of the Partnership
or the drilling contractor. Such circumstances include the unavailability of
drilling rigs, weather conditions, inability to obtain drilling permits or
access right to the drilling site, or title problems. Due to the foregoing
factors no guaranty can be given that all prepaid Partnership Wells required by
the Drilling and Operating Agreement to be Spudded on or before March 30, 2000,
will actually be commenced by such date. In that event, deductions claimed in
1999 for prepaid intangible drilling and development costs would be disallowed
and deferred to the 2000 taxable year.
No assurance can be given that on audit the IRS would not disallow the
current deductibility of a portion or all of any prepayments of intangible
drilling and development costs under the Partnership's drilling contracts,
thereby decreasing the amount of deductions allocable to the Participants for
the current taxable year, or that such a challenge would not ultimately be
sustained. In the event of disallowance, the deduction would be available in the
year the work is actually performed.
DEPLETION ALLOWANCE
Proceeds from the sale of the Partnership's oil and gas production will
constitute ordinary income. A certain portion of such income will not be taxable
by virtue of the depletion allowance which permits the deduction from gross
income for federal income tax purposes of either the percentage depletion
allowance or the cost depletion allowance, whichever is greater. These
deductions are subject to recapture as ordinary income rather than capital gain
upon the disposition of the property or a Participant's interest in the
Partnership. (See " - Sale of the Properties" and " - Disposition of Partnership
Interests," below.)
Cost depletion for any year is determined by dividing the adjusted tax
basis for the property by the total units of gas or oil expected to be
recoverable therefrom and then multiplying the resultant quotient by the number
of units actually sold during the year. Cost depletion cannot exceed the
adjusted tax basis of the property to which it relates.
Percentage depletion generally is available to taxpayers other than
integrated oil companies. (See "- Intangible Drilling and Development Costs.")
Percentage depletion is based on the Participant's share of the Partnership's
gross income from its oil and gas properties. Generally, percentage depletion is
available with respect to 6 million cubic feet of average daily production of
natural gas or 1,000 barrels of average daily production of domestic crude oil.
Taxpayers who have both oil and gas production may allocate the production
limitation between such production. The rate of percentage depletion is 15%.
However, percentage depletion for marginal production increases 1% (up to a
maximum increase of 10%) for each whole dollar that the domestic wellhead price
of crude oil for the immediately preceding year is less than $20 per barrel
(without adjustment for inflation). The term "marginal production" includes oil
and gas produced from a domestic stripper well property, which is defined as any
property which produces a daily average of 15 or less equivalent barrels of oil
(90 MCF of natural gas) per producing well on the property in the calendar year.
The rate of percentage depletion for marginal production in 1999 is 24%. (See
the model decline curve included in the United Energy Development Consultants,
Inc. Geological Report in "Proposed Activities - Information Regarding Currently
Proposed Prospects" in the Prospectus.)
Also, percentage depletion may not exceed 100% of the net income from each
oil and gas property before the deduction for depletion and is limited to 65% of
the taxpayer's taxable income for a year computed without regard to percentage
depletion, net operating loss carry-backs and capital loss carry-backs. With
respect to marginal properties, however, the 100% of net income property
limitation is suspended for 1999.
AVAILABILITY OF THE PERCENTAGE DEPLETION ALLOWANCE AND LIMITATIONS THEREON
MUST BE COMPUTED SEPARATELY FOR EACH PARTICIPANT AND NOT BY THE PARTNERSHIP, OR
FOR PARTICIPANTS AS A WHOLE. POTENTIAL PARTICIPANTS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THE AVAILABILITY OF THE PERCENTAGE DEPLETION
ALLOWANCE TO THEM.
Atlas Resources, Inc.
July 7, 1999
Page 11
DEPRECIATION - MODIFIED ACCELERATED COST RECOVERY SYSTEM ("MACRS")
Tangible Costs and the related depreciation deductions are allocated and
charged under the Partnership Agreement 43.75% to the Managing General Partner
and 56.25% to the Participants. These deductions are subject to recapture as
ordinary income rather than capital gain upon the disposition of the property or
a Participant's interest in the Partnership. (See " - Sale of the Properties"
and " - Disposition of Partnership Interests," below.) The cost of most
equipment placed in service by the Partnership will be recovered through
depreciation deductions over a seven year cost recovery period using the 200%
declining balance method, with a switch to straight-line to maximize the
deduction. I.R.C. Section 168(c). An alternative depreciation system is used to
compute the depreciation preference subject to the alternative minimum tax
(using the 150% declining balance method, switching to straight-line, for most
personal property). (See "- Minimum Tax - Tax Preferences," below.) All property
assigned to the 7-year class is treated as placed in service (or disposed of) in
the middle of the year and in the case of a short tax year the MACRS deduction
is prorated on a 12-month basis. The half-year convention effectively adds
another year onto the cost recovery period. No distinction is made between new
and used property and salvage value is disregarded.
LEASEHOLD COSTS AND ABANDONMENT
The costs of acquiring oil and gas Lease interests, together with the
related cost depletion deduction and any abandonment loss, are allocated under
the Partnership Agreement 100% to the Managing General Partner, which will
contribute the Leases to the Partnership as a part of its Capital Contribution.
TAX BASIS OF PARTICIPANTS' INTERESTS
A Participant's distributive share of Partnership loss is allowable only
to the extent of the adjusted basis of the Participant's interest in the
Partnership at the end of the Partnership's taxable year. The adjusted basis for
federal income tax purposes of a Participant's interest in the Partnership will
be adjusted (but not below zero) for any gain or loss to the Participant from a
disposition by the Partnership of an oil or gas property, and will be increased
by: (i) his cash subscription payment; (ii) his share, if any, of Partnership
debt; and (iii) his share of Partnership income. (See " - Partnership
Borrowings," below.) The adjusted basis of a Participant's interest in the
Partnership will be reduced by: (i) his share of Partnership losses; (ii) his
share of Partnership expenditures that are not deductible in computing its
taxable income and are not properly chargeable to capital account; (iii) his
deduction for depletion for any partnership oil and gas property (but not below
zero); and (iv) cash distributions from the Partnership to him.
The reduction in a Participant's share of Partnership liabilities, if any,
is considered a cash distribution. Participants will not be personally liable on
any Partnership loans; however, Investor General Partners will be liable for
other obligations of the Partnership. (See "Risk Factors - Special Risks of the
Partnership - Risk of Loss Because of Unlimited Liability of Investor General
Partners" in the Prospectus.) Should cash distributions exceed the tax basis of
the Participant's interest in the Partnership, taxable gain would result to the
extent of the excess. (See "- Distributions From a Partnership," below.)
"AT RISK" LIMITATION FOR LOSSES
Subject to the limitations on "passive losses" generated by the
Partnership in the case of Limited Partners and a Participant's basis in the
Partnership, each Participant may use his share of the Partnership's losses to
offset income from other sources. (See "- Limitations on Passive Activities" and
"- Tax Basis of Participants' Interests," above.) However, any taxpayer (other
than a corporation which is neither an S corporation nor a corporation in which
five or fewer individuals own more than 50% of the stock) who sustains a loss in
connection with his oil and gas activities may deduct the loss only to the
extent of the amount he has "at risk" in such activities at the end of a taxable
year. The "at risk" limitation applies to each activity engaged in and not on an
aggregate basis for all activities.
Atlas Resources, Inc.
July 7, 1999
Page 12
The amount "at risk" is limited to the amount of money and the adjusted
basis of other property the taxpayer has contributed to the activity, and any
amount he has borrowed with respect thereto for which he is personally liable
or with respect to which he has pledged property other than property used in
the activity; limited, however, to the net fair market value of his interest
in the pledged property. I.R.C. Section 465(b)(1) and (2). However, amounts
borrowed will not be considered "at risk" if the amounts are borrowed from
any person who has an interest (other than as a creditor) in the activity or
from a related person to a person (other than the taxpayer) having such an
interest.
"Loss" is defined as being the excess of allowable deductions for a
taxable year from an activity over the amount of income actually received or
accrued by the taxpayer during the year from the activity. The amount the
taxpayer has "at risk" may not include the amount of any loss that the taxpayer
is protected against through nonrecourse loans, guarantees, stop loss
agreements, or other similar arrangements. The amount of any loss that is
disallowed in any taxable year will be carried over to the first succeeding
taxable year, to the extent a Participant is "at risk." Further, a taxpayer's
"at risk" amount in subsequent taxable years with respect to the activity
involved will be reduced by that portion of the loss which is allowable as a
deduction.
Participants' Agreed Subscriptions are funded by a payment of cash
(usually "at risk"). Since income, gains, losses, and distributions of the
Partnership affect the amount considered to be "at risk," the extent to which a
Participant is "at risk" must be determined annually. Previously allowed losses
must be recaptured (included in gross income) if the "at risk" amount is reduced
below zero. The amount included in income under this recapture provision may be
deducted in the first succeeding taxable year to the extent of any increase in
the amount which the Participant has "at risk."
DISTRIBUTIONS FROM A PARTNERSHIP
Generally, a cash distribution from a partnership to a partner in
excess of the adjusted basis of the partner's interest in the partnership
immediately before the distribution is treated as gain from the sale or
exchange of his interest in the partnership to the extent of the excess.
I.R.C. Section 731(a)(1). No loss is recognized by the partners on these
types of distributions. I.R.C. Section 731(a)(2). No gain or loss is
recognized by the Partnership on these types of distributions. I.R.C. Section
731(b). If property is distributed by the Partnership to the Managing General
Partner and the Participants, certain basis adjustments may be made by the
Partnership, the Managing General Partner and the Participants.
[Partnership Agreement, Section 5.04(d).] I.R.C. Sections 732, 733, 734, and
754. Other distributions of cash, disproportionate distributions of property,
and liquidating distributions may result in taxable gain or loss. (See " -
Disposition of Partnership Interests" and " - Termination of a Partnership,"
below.)
SALE OF THE PROPERTIES
Generally, net long-term capital gains of a noncorporate taxpayer on the
sale of assets held more than a year are taxed at a maximum rate of 20% (10% if
they would be subject to tax at a rate of 15% if they were not eligible for
long-term capital gains treatment). These rates also apply for purposes of the
alternative minimum tax. (See " - Minimum Tax - Tax Preferences," below.) The
annual capital loss limitation for noncorporate taxpayers is the amount of
capital gains plus the lesser of $3,000 ($1,500 for married persons filing
separate returns) or the excess of capital losses over capital gains.
Gains and losses from sales of oil and gas properties held for more than
twelve months generally will be treated as a long-term capital gain, while a net
loss will be an ordinary deduction, except to the extent of depreciation
recapture on equipment and recapture of any intangible drilling and development
costs, depletion deductions and certain losses on previous sales, if any, of the
Partnership's assets as discussed below. Other gains and losses on sales of oil
and gas properties will generally result in ordinary gains or losses.
Atlas Resources, Inc.
July 7, 1999
Page 13
Intangible drilling and development costs that are incurred in connection
with an oil and gas property may be recaptured as ordinary income when the
property is disposed of by the Partnership. Generally, the amount recaptured is
the lesser of:
(1) the aggregate amount of expenditures which have been deducted as
intangible drilling and development costs with respect to the
property and which (but for being deducted) would be reflected in
the adjusted basis of the property; or
(2) the excess of (i) the amount realized (in the case of a sale,
exchange or involuntary conversion); or (ii) the fair market
value of the interest (in the case of any other disposition) over
the adjusted basis of the property. I.R.C. Section 1254(a).
(See " - Intangible Drilling and Development Costs," above.)
In addition, the deductions for depletion which reduced the adjusted basis
of the property are subject to recapture as ordinary income, and all gain on
disposition of tangible personal property is treated as ordinary income to the
extent of MACRS deductions claimed by the Partnership. (See " - Depletion
Allowance" and " - Depreciation - Modified Accelerated Cost Recovery System
("MACRS")," above.)
DISPOSITION OF PARTNERSHIP INTERESTS
The sale or exchange, including a repurchase by the Managing General
Partner, of all or part of a Participant's interest in the Partnership held
by him for more than twelve months will generally result in a recognition of
long-term capital gain or loss. However, previous deductions for
depreciation, depletion and intangible drilling and development costs may be
recaptured as ordinary income rather than capital gain. (See " - Sale of the
Properties," above.) In the event the interest is held for twelve months or
less, such gain or loss will generally be short-term gain or loss. Also, a
Participant's pro rata share of the Partnership's liabilities, if any, as of
the date of the sale or exchange must be included in the amount realized.
Therefore, the gain recognized may result in a tax liability greater than the
cash proceeds, if any, from such disposition. In addition to gain from a
passive activity, a portion of any gain recognized by a Limited Partner on
the sale or other disposition of his interest in the Partnership will be
characterized as portfolio income under Section 469 to the extent the gain is
itself attributable to portfolio income (e.g. interest on investment of
working capital). Treas. Reg. Section 1.469-2T(e)(3). (See " - Limitations on
Passive Activities," above.)
A gift of an interest in the Partnership may result in federal and/or
state income tax and gift tax liability of the Participant, and interests in
different partnerships do not qualify for tax-free like-kind exchanges.
I.R.C. Section 1031(a)(2)(D). Other dispositions of a Participant's interest,
including a repurchase of the interest by the Managing General Partner, may
or may not result in recognition of taxable gain. However, no gain should be
recognized by an Investor General Partner whose interest in the Partnership
is converted to a Limited Partner interest so long as there is no change in
his share of the Partnership's liabilities or certain Partnership assets as a
result of the conversion. Rev. Rul. 84-52, 1984-1 C.B. 157.
A Participant who sells or exchanges all or part of his interest in the
Partnership is required by the Code to notify the Partnership within 30 days or
by January 15 of the following year, if earlier. I.R.C. Section 6050K. After
receiving the notice, the Partnership is required to make a return with the IRS
stating the name and address of the transferor and the transferee and such other
information as may be required by the IRS. The Partnership must also provide
each person whose name is set forth in the return a written statement showing
the information set forth on the return.
If a partner sells or exchanges his entire interest in a partnership, the
taxable year of the partnership will close with respect to that partner (but not
the remaining partners) on the date of sale or exchange, with a proration of
partnership items for the partnership's taxable year. If a partner sells less
than his entire interest in a partnership, the partnership year will not
terminate with respect to the selling partner, but his proportionate share of
items of income, gain, loss,
Atlas Resources, Inc.
July 7, 1999
Page 14
deduction and credit will be determined by taking into account his varying
interests in the partnership during the taxable year. Deductions or credits
generally may not be allocated to a partner acquiring an interest from a
selling partner for a period prior to the purchaser's admission to the
partnership. I.R.C. Section 706(d).
NO DISPOSITION OF AN INTEREST IN THE PARTNERSHIP (INCLUDING REPURCHASE OF
THE INTEREST BY THE MANAGING GENERAL PARTNER) SHOULD BE MADE BY ANY PARTICIPANT
PRIOR TO CONSULTATION WITH HIS TAX ADVISOR.
MINIMUM TAX - TAX PREFERENCES
With limited exceptions, all taxpayers are subject to the alternative
minimum tax. If the alternative minimum tax exceeds the regular tax, the excess
is payable in addition to the regular tax. The alternative minimum tax is
intended to insure that no one with substantial income can avoid tax liability
by using deductions and credits. The alternative minimum tax accomplishes this
objective by not treating favorably certain items that are treated favorably for
purposes of the regular tax, including the deductions for intangible drilling
and development costs and accelerated depreciation.
Generally, the alternative minimum tax rate for individuals is 26% on
alternative minimum taxable income up to $175,000 ($87,500 for married
individuals filing separate returns) and 28% thereafter. See " - Sale of the
Properties," above, for the tax rates on capital gains. Individual tax
preferences may include, but are not limited to: accelerated depreciation,
intangible drilling and development costs, incentive stock options and passive
activity losses. The exemption amount is $45,000 for married couples filing
jointly and surviving spouses, $33,750 for single filers, and $22,500 for
married persons filing separately, estates and trusts. These exemption amounts
are reduced by 25% of the alternative minimum taxable income in excess of (1)
$150,000 for joint returns and surviving spouses; (2) $75,000 for estates,
trusts and married persons filing separately, and (3) $112,500 for single
taxpayers. Married individuals filing separately must increase alternative
minimum taxable income by the lesser of: (i) 25% of the excess of alternative
minimum taxable income over $165,000; or (ii) $22,500. Regular tax personal
exemptions are not available for purposes of the alternative minimum tax.
The only itemized deductions allowed for minimum tax purposes are those
for casualty and theft losses, gambling losses to the extent of gambling
gains, charitable deductions, medical deductions (to the extent in excess of
10% of adjusted gross income), interest expenses (restricted to qualified
housing interest as defined in Section 56(e) of the Code and investment
interest expense not exceeding net investment income), and certain estate
taxes. The net operating loss for alternative minimum tax purposes generally
is the same as for regular tax purposes, except: (i) current year tax
preference items are added back to taxable income, and (ii) individuals may
use only those itemized deductions (as modified under Section 172(d))
allowable in computing alternative minimum taxable income. Code sections
suspending losses, such as Sections 465 and 704(d), are recomputed for
minimum tax purposes and the amount of the deductions suspended or recaptured
may differ for regular and minimum tax purposes.
For taxpayers other than integrated oil companies (see "- Intangible
Drilling and Development Costs"), the 1992 National Energy Bill repealed: (1)
the preference for excess intangible drilling and development costs; and (2) the
excess percentage depletion preference for oil and gas. The repeal of the excess
intangible drilling and development costs preference, however, may not result in
more than a 40% reduction in the amount of the taxpayer's alternative minimum
taxable income computed as if the excess intangible drilling and development
costs preference had not been repealed. Under the prior rules, the amount of
intangible drilling and development costs which is not deductible for
alternative minimum tax purposes is the excess of the "excess intangible
drilling costs" over 65% of net income from oil and gas properties. Net oil and
gas income is determined for this purpose without subtracting excess intangible
drilling and development costs. Excess intangible drilling and development costs
is the regular intangible drilling and development costs deduction minus the
amount that would have been deducted under 120-month straight-line amortization,
or (at the taxpayer's election) under the cost depletion method. There is no
preference for costs of nonproductive wells.
THE LIKELIHOOD OF A PARTICIPANT INCURRING, OR INCREASING, ANY MINIMUM TAX
LIABILITY BY VIRTUE OF AN INVESTMENT IN THE
Atlas Resources, Inc.
July 7, 1999
Page 15
PARTNERSHIP, AND THE IMPACT OF SUCH LIABILITY ON HIS PERSONAL TAX SITUATION,
MUST BE DETERMINED ON AN INDIVIDUAL BASIS, AND REQUIRES CONSULTATION BY A
PROSPECTIVE PARTICIPANT WITH HIS PERSONAL TAX ADVISOR.
LIMITATIONS ON DEDUCTION OF INVESTMENT INTEREST
Investment interest is deductible by a noncorporate taxpayer only to
the extent of net investment income each year (with an indefinite
carryforward of disallowed investment interest). I.R.C. Section 163. Interest
subject to the limitation generally includes all interest (except consumer
interest and qualified residence interest) on debt not incurred in a person's
active trade or business, provided the activity is not a "passive activity"
under the passive loss rule. Accordingly, an Investor General Partner's share
of any interest expense incurred by the Partnership will be subject to the
investment interest limitation. In addition, an Investor General Partner's
income and losses (including intangible drilling and development costs) from
the Partnership will be considered investment income and losses for purposes
of this limitation. Losses allocable to an Investor General Partner will
reduce his net investment income and may affect the deductibility of his
investment interest expense, if any.
Net investment income is the excess of investment income over
investment expenses. Investment income includes: gross income from interest,
dividends, rents, and royalties; portfolio income under the passive activity
rules (which includes working capital investment income); and income from a
trade or business in which the taxpayer does not materially participate if
the activity is not a "passive activity." In the case of Investor General
Partners, this includes the Partnership prior to the conversion of Investor
General Partner Units to Limited Partner interests. Investment expenses
include deductions (other than interest) that are directly connected with the
production of net investment income (including actual depreciation or
depletion deductions allowable). No item of income or expense subject to the
passive activity loss rules of Section 469 of the Code is treated as
investment income or investment expense.
In determining deductible investment expenses, investment expenses are
subject to a rule limiting deductions for miscellaneous expenses to those
exceeding 2% of adjusted gross income, however, expenses that are not investment
expenses are intended to be disallowed before any investment expenses are
disallowed.
ALLOCATIONS
The Partnership Agreement allocates to each Partner his share of the
Partnership's income, gains, credits and deductions (including the deductions
for intangible drilling and development costs and depreciation). Allocations of
certain items are made in ratios that are different than allocations of other
items. (See "Participation in Costs and Revenues" in the Prospectus.) The
Capital Accounts of the Partners are adjusted to reflect these allocations and
the Capital Accounts, as adjusted, will be given effect in distributions made to
the Partners upon liquidation of the Partnership or any Partner's interest in
the Partnership. Generally, the basis of oil and gas properties owned by the
Partnership for computation of cost depletion and gain or loss on disposition
will be allocated and reallocated when necessary in the ratio in which the
expenditure giving rise to the tax basis of each property was charged as of the
end of the year. [Partnership Agreement, Section 5.03(b).]
Special allocations (those made in a manner that is disproportionate to
the respective interests of the partners in a partnership), among partners of
any item of partnership income, gain, loss, deduction or credit will not be
given effect unless the special allocation has "substantial economic effect."
I.R.C. Section 704(b). An allocation generally will have economic effect if
throughout the term of the partnership:
(1) the partners' capital accounts are maintained in accordance with
rules set forth in the regulations (generally, tax accounting
principles);
(2) liquidation proceeds are distributed in accordance with the
partners' capital accounts; and
(3) any partner with a deficit balance in his capital account
following the liquidation of his interest in the partnership is
required to restore the amount of the deficit to the partnership.
Atlas Resources, Inc.
July 7, 1999
Page 16
Generally, a Participant's Capital Account is increased by the amount of money
he contributes to the Partnership and allocations to him of income and gain, and
decreased by the value of property or cash distributed to him and allocations to
him of loss and deductions. The regulations also require that there must be a
reasonable possibility that the allocation will affect substantially the dollar
amounts to be received by the partners from the partnership, independent of tax
consequences.
Although Participants are not required to restore deficit balances in
their Capital Accounts beyond the amount of their agreed Capital
Contributions, an allocation which is not attributable to nonrecourse debt
will be considered to have economic effect to the extent it does not cause or
increase a deficit balance in a Participant's Capital Account, if
requirements (1) and (2) described above are met and the partnership
agreement provides that a partner who unexpectedly incurs a deficit balance
in his Capital Account because of certain adjustments, allocations, or
distributions will be allocated income and gain sufficient to eliminate such
deficit balance as quickly as possible. Treas. Reg. Section
1.704-l(b)(2)(ii)(d). (See Section 5.03(h) of the Partnership Agreement.)
Special provisions apply to deductions related to nonrecourse debt. If
the Managing General Partner or an Affiliate makes a nonrecourse loan to the
Partnership ("partner nonrecourse liability"), Partnership losses,
deductions, or Section 705(a)(2)(B) expenditures attributable to the loan
must be allocated to the Managing General Partner, and if there is a net
decrease in partner nonrecourse liability minimum gain with respect to the
loan, the Managing General Partner must be allocated income and gain equal to
the net decrease. (See Section 5.03(i) of the Partnership Agreement.)
In the event of a sale or transfer of a Partnership Unit or the admission
of an additional Participant, Partnership income, gain, loss, deductions and
credits generally will be allocated among the Partners on a daily basis
according to their varying interests in the Partnership during the taxable year.
In addition, in the discretion of the Managing General Partner Partnership
property may be revalued upon the admission of additional Participants, or if
certain distributions are made to the Partners, to reflect unrealized income,
gain, loss or deduction inherent in the Partnership's property for purposes of
adjusting the Partners' Capital Accounts.
It should also be noted that each Partner's share of Partnership items of
income, gain, loss, deduction and credit must be taken into account whether or
not there is any distributable cash. A Participant's share of Partnership
revenues applied to the repayment of loans or the reserve for plugging wells,
for example, will be included in his gross income in a manner analogous to an
actual distribution of the income to him. Thus, a Participant may have tax
liability on taxable income from the Partnership for a particular year in excess
of any cash distributions from the Partnership to him with respect to that year.
To the extent the Partnership has cash available for distribution, however, it
is the Managing General Partner's policy that Partnership distributions will not
be less than the Managing General Partner's estimate of the Participants' income
tax liability with respect to Partnership income.
If any allocation under the Partnership Agreement is not recognized for
federal income tax purposes, each Participant's distributive share of the items
subject to such allocation generally will be determined in accordance with his
interest in the Partnership, determined by considering relevant facts and
circumstances. To the extent such deductions as allocated by the Partnership
Agreement, exceed deductions which would be allowed pursuant to such a
reallocation, Participants may incur a greater tax burden. However, assuming the
effect of the special allocations set forth in the Partnership Agreement is
substantial in light of a Participant's tax attributes that are unrelated to the
Partnership, in the opinion of Special Counsel it is more likely than not that
such allocations will have "substantial economic effect" and will govern each
Participant's distributive share of such items to the extent such allocations do
not cause or increase deficit balances in the Participants' Capital Accounts.
PARTNERSHIP BORROWINGS
Under the Partnership Agreement, the Managing General Partner and its
Affiliates may make loans to the Partnership. The use of Partnership revenues
taxable to Participants to repay Partnership borrowings could create income tax
liability for the Participants in excess of cash distributions to them, since
repayments of principal are not deductible for federal income tax purposes. In
addition, interest on the loans will not be deductible unless the loans are
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July 7, 1999
Page 17
bona fide loans that will not be treated as Capital Contributions. In Revenue
Ruling 72-135, 1972-1 C.B. 200, the IRS ruled that a nonrecourse loan from a
general partner to a partnership engaged in oil and gas exploration
represented a capital contribution by the general partner rather than a loan.
Whether a "loan" to the Partnership represents in substance, debt or equity
is a question of fact to be determined from all the surrounding facts and
circumstances.
PARTNERSHIP ORGANIZATION AND SYNDICATION FEES
Expenses connected with the issuance and sale of interests in a
partnership (I.E., promotional expense, selling expense, commissions,
professional fees and printing costs) are not deductible. However, expenses
incident to the creation of a partnership may be amortized over a period of not
less than 60 months. Such amortizable organization expenses will be paid by the
Managing General Partner as part of the Partnership's Organization and Offering
Costs and any related deductions, which the Managing General Partner does not
anticipate will be material in amount, will be allocated to the Managing General
Partner. I.R.C. Section 709; Treas. Reg. Sections 1.709-1 and 2.
TAX ELECTIONS
The Partnership may elect to adjust the basis of Partnership property
on the transfer of an interest in the Partnership by sale or exchange or on
the death of a Partner, and on the distribution of property by the
Partnership to a Partner (the Section 754 election). The general effect of
such an election is that transferees of the Partnership interests are
treated, for purposes of depreciation and gain, as though they had acquired a
direct interest in the Partnership assets and the Partnership is treated for
such purposes, upon certain distributions to Partners, as though it had newly
acquired an interest in the Partnership assets and therefore acquired a new
cost basis for such assets. Any such election, once made, may not be revoked
without the consent of the IRS. The Partnership may also make various
elections for federal tax reporting purposes which could result in various
items of income, gain, loss, deduction and credit being treated differently
for tax purposes than for accounting purposes.
Code Section 195 permits taxpayers to elect to capitalize and amortize
"start-up expenditures" over a 60-month period. Such items include amounts:
(1) paid or incurred in connection with: (i) investigating the creation or
acquisition of an active trade or business, (ii) creating an active trade or
business, or (iii) any activity engaged in for profit and for the production
of income before the day on which the active trade or business begins, in
anticipation of such activity becoming an active trade or business; and (2)
which would be allowed as a deduction if paid or incurred in connection with
the expansion of an existing business. Start-up expenditures do not include
amounts paid or incurred in connection with the sale of partnership
interests. If it is ultimately determined that any of the Partnership's
expenses constituted start-up expenditures and not deductible expenses under
Section 162 of the Code, the Partnership's deductions would be reduced.
DISALLOWANCE OF DEDUCTIONS UNDER SECTION 183 OF THE CODE
Under Section 183 of the Code, a Participant's ability to deduct his
share of the Partnership's losses on his federal income tax return could be
lost if the Partnership lacks the appropriate profit motive as determined
from an examination of all facts and circumstances at the time. Section 183
creates a presumption that an activity is engaged in for profit, if, in any
three of five consecutive taxable years, the gross income derived from the
activity exceeds the deductions attributable to the activity. Thus, if the
Partnership fails to show a profit in at least three out of five consecutive
years, this presumption will not be available and the possibility that the
IRS could successfully challenge the Partnership deductions claimed by a
Participant would be substantially increased.
The fact that the possibility of ultimately obtaining profits is
uncertain, standing alone, does not appear to be sufficient grounds for the
denial of losses under Section 183. (See Treas. Reg. Section 1.183-2(c),
Example (5).) Based on the Managing General Partner's representation that the
Partnership will be conducted as described in the Prospectus, in the opinion
of Special Counsel it is more likely than not that the Partnership will
possess the requisite profit motive.
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July 7, 1999
Page 18
TERMINATION OF A PARTNERSHIP
Pursuant to Section 708(b) of the Code, the Partnership will be
considered as terminated for federal income tax purposes if within a twelve
month period there is a sale or exchange of 50% or more of the total interest
in Partnership capital and profits. The closing of the Partnership year may
result in more than twelve months' income or loss of the Partnership being
allocated to certain Partners for the year of termination (i.e., in the case
of Partners using fiscal years other than the calendar year). Under Section
731 of the Code, a Partner will realize taxable gain on a termination of the
Partnership to the extent that money regarded as distributed to him exceeds
the adjusted basis of his Partnership interest. The conversion of Investor
General Partner Units to Limited Partner interests, however, will not result
in a termination of the Partnership. Rev. Rul. 84-52, 1984-1 C.B. 157.
LACK OF REGISTRATION AS A TAX SHELTER
Section 6111 of the Code generally requires an organizer of a "tax
shelter" to register the tax shelter with the Secretary of the Treasury, and
to obtain an identification number which must be included on the tax returns
of investors in the tax shelter. For purposes of these provisions, a "tax
shelter" is generally defined to include investments with respect to which
any person could reasonably infer that the ratio that:
(1) the aggregate amount of the potentially allowable deductions
and 350% of the potentially allowable credits with respect to
the investment during the first five years of the investment
bears to;
(2) the amount of money and the adjusted basis of property
contributed to the investment;
exceeds 2 to 1. Temporary Regulations promulgated by the IRS provide that the
aggregate amount of gross deductions must be determined without reduction for
gross income to be derived from the investment.
The Managing General Partner does not believe that the Partnership will
have a tax shelter ratio greater than 2 to 1. Also, because the purpose of the
Partnership is to locate, produce and market natural gas on an economic basis,
the Managing General Partner does not believe that the Partnership will be a
"potentially abusive tax shelter." Accordingly, the Managing General Partner
does not intend to cause the Partnership to register with the IRS as a tax
shelter.
If it is subsequently determined that the Partnership was required to be
registered with the IRS as a tax shelter, the Managing General Partner would be
subject to certain penalties, including a penalty of 1% of the aggregate amount
invested in the Units of the Partnership for failing to register and $100 for
each failure to furnish a Participant a tax shelter registration number, and
each Participant would be liable for a $250 penalty for failure to include the
tax shelter registration number on his tax return, unless such failure was due
to reasonable cause. A Participant also would be liable for a penalty of $100
for failing to furnish the tax shelter registration number to any transferee of
his interest in the Partnership. However, based on the representations of the
Managing General Partner, Special Counsel has expressed the opinion that the
Partnership, more likely than not, is not required to register with the IRS as a
tax shelter.
Issuance of a registration number does not indicate that an investment or
the claimed tax benefits have been reviewed, examined, or approved by the IRS.
INVESTOR LISTS
Section 6112 of the Code requires that any person who organizes a tax
shelter required to be registered with the IRS or who sells any interest in
such a shelter must maintain a list identifying each person who was sold an
interest in the shelter and setting forth other required information. For the
reasons described above, the Managing General Partner does not believe the
Partnership is subject to the requirements of Section 6112. If this
determination is wrong, Section 6708 of the Code provides for a penalty of
$50 for each person with respect to whom there is a failure to meet any
requirements of Section 6112, unless the failure is due to reasonable cause.
Atlas Resources, Inc.
July 7, 1999
Page 19
TAX RETURNS AND AUDITS
IN GENERAL. The tax treatment of all partnership items is generally
determined at the partnership, rather than the partner, level; and the
partners are generally required to treat partnership items on their
individual returns in a manner which is consistent with the treatment of the
partnership items on the partnership return. I.R.C. Sections 6221 and 6222.
Regulations define "partnership items" for this purpose as including
distributive share items that must be allocated among the partners, such as
partnership liabilities, data pertaining to the computation of the depletion
allowance, and guaranteed payments. Treas. Reg. Section 301.6231(a)(3)-1.
Generally, the IRS must conduct an administrative determination as to
partnership items at the partnership level before conducting deficiency
proceedings against a partner, and the partners must file a request for an
administrative determination before filing suit for any credit or refund. The
period for assessing tax against a Partner attributable to a partnership item
may be extended as to all partners by agreement between the IRS and the Managing
General Partner, which will serve as the Partnership's representative ("Tax
Matters Partner") in all administrative and judicial proceedings conducted at
the partnership level. The Tax Matters Partner generally may enter into a
settlement on behalf of, and binding upon, partners owning less than a 1%
profits interest in partnerships having more than 100 partners. In addition, a
partnership with at least 100 partners may elect to be governed under simplified
tax reporting and audit rules as an "electing large partnership." These rules
also facilitate the matching of partnership items with individual partner tax
returns by the IRS. The Managing General Partner does not anticipate that the
Partnership will make this election. By executing the Partnership Agreement,
each Participant agrees that he will not form or exercise any right as a member
of a notice group and will not file a statement notifying the IRS that the Tax
Matters Partner does not have binding settlement authority.
In the event of an audit of the return of the Partnership, the Tax Matters
Partner, pursuant to advice of counsel, will take all actions necessary, in its
discretion, to preserve the rights of the Participants. All expenses of any
proceedings undertaken by the Tax Matters Partner, which might be substantial,
will be paid for by the Partnership. The Tax Matters Partner is not obligated to
contest adjustments made by the IRS.
TAX RETURNS. A Participant's income tax returns are the responsibility of
the Participant. The Partnership will provide each Participant with the tax
information applicable to his investment in the Partnership necessary to prepare
such returns. However, the treatment of the tax attributes of the Partnership
may vary among Participants. Consequently, the Managing General Partner, its
Affiliates and Special Counsel assume no responsibility for the tax consequences
of this transaction to a Participant, nor for the disallowance of any proposed
deductions.
EACH PARTICIPANT IS URGED TO SEEK QUALIFIED, PROFESSIONAL ASSISTANCE IN
THE PREPARATION OF HIS FEDERAL, STATE AND LOCAL TAX RETURNS.
PENALTIES AND INTEREST
IN GENERAL. Interest is charged on underpayments of tax and various civil
and criminal penalties are included in the Code.
PENALTY FOR NEGLIGENCE OR DISREGARD OF RULES OR REGULATIONS. If any
portion of an underpayment of tax is attributable to negligence or disregard of
rules or regulations, 20% of such portion is added to the tax. Negligence is
strongly indicated if a partner fails to treat partnership items on his tax
return in a manner that is consistent with the treatment of those items on the
partnership's return or to notify the IRS of the inconsistency. The term
"disregard" includes any careless, reckless or intentional disregard of rules or
regulations. There is no penalty, however, if the position is adequately
disclosed, or the position is taken with reasonable cause and in good faith, or
the position has a realistic possibility of being sustained on its merits.
Treas. Reg. Section 1.6662-3.
VALUATION MISSTATEMENT PENALTY. There is an addition to tax of 20% of the
amount of any underpayment of tax of $5,000 or more ($10,000 in the case of
corporations other than S corporations or personal holding companies) which is
attributable to a substantial valuation misstatement. There is a substantial
valuation misstatement if the value or
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July 7, 1999
Page 20
adjusted basis of any property claimed on a return is 200% or more of the
correct amount; or if the price for any property or services (or for the use
of property) claimed on a return is 200% or more (or 50% or less) of the
correct price. If there is a gross valuation misstatement (400% or more of
the correct value or adjusted basis or the undervaluation is 25% or less of
the correct amount) the penalty is 40%. I.R.C. Section 6662(e) and (h).
SUBSTANTIAL UNDERSTATEMENT PENALTY. There is also an addition to tax of
20% of any underpayment if the difference between the tax required to be
shown on the return over the tax actually shown on the return, exceeds the
greater of 10% of the tax required to be shown on the return, or $5,000
($10,000 in the case of corporations other than S corporations or personal
holding companies). I.R.C. Section 6662(d). The amount of any understatement
generally will be reduced to the extent it is attributable to the tax
treatment of an item supported by substantial authority, or adequately
disclosed on the taxpayer's return. However, in the case of "tax shelters,"
the understatement may be reduced only if the tax treatment of an item
attributable to a tax shelter was supported by substantial authority and the
taxpayer establishes that he reasonably believed that the tax treatment
claimed was more likely than not the proper treatment. Disclosure of
partnership items should be made on the Partnership's return; however, a
taxpayer partner also may make adequate disclosure on his individual return
with respect to pass-through items. Section 6662(d)(2)(C) provides that a
"tax shelter" is any entity which has as a significant purpose the avoidance
or evasion of federal income tax.
IRS ANTI-ABUSE RULE. Under Treas. Reg. Section 1.701-2, if a principal
purpose of a partnership is to reduce substantially the partners' federal
income tax liability in a manner that is inconsistent with the intent of the
partnership rules of the Code, based on all the facts and circumstances, the
IRS is authorized to remedy the abuse. For illustration purposes, the following
factors may indicate that a partnership is being used in a prohibited manner:
(i) the partners' aggregate federal income tax liability is substantially less
than had the partners owned the partnership's assets and conducted its
activities directly; (ii) the partners' aggregate federal income tax liability
is substantially less than if purportedly separate transactions are treated as
steps in a single transaction; (iii) one or more partners are needed to achieve
the claimed tax results and have a nominal interest in the partnership or are
substantially protected against risk; (iv) substantially all of the partners
are related to each other; (v) income or gain are allocated to partners who
are not expected to have any federal income tax liability; (vi) the benefits
and burdens of ownership of property nominally contributed to the partnership
are retained in substantial part by the contributing party; and (vii) the
benefits and burdens of ownership of partnership property are in substantial
part shifted to the distributee partners before or after the property is
actually distributed to the distributee partners. Based on the Managing General
Partner's representation that the Partnership will be conducted as described
in the Prospectus, in the opinion of Special Counsel it is more likely than not
that the Partnership will not be subject to the anti-abuse rule set forth in
Treas. Reg. Section 1.701-2.
STATE AND LOCAL TAXES
Under Pennsylvania law, the Partnership is required to withhold state
income tax at the rate of 2.8% of Partnership income allocable to Participants
who are not residents of Pennsylvania. This requirement does not obviate
Pennsylvania tax return filing requirements for Participants who are not
residents of Pennsylvania. In the event of overwithholding, a Pennsylvania
income tax return must be filed by Participants who are not residents of
Pennsylvania in order to obtain a refund.
The Partnership will operate in states and localities which impose a tax
on its assets or its income, or on each Participant. Deductions which are
available to Participants for federal income tax purposes may not be available
for state or local income tax purposes. A Participant's distributive share of
the net income or net loss of the Partnership generally will be required to be
included in determining his reportable income for state or local tax purposes in
the jurisdiction in which he is a resident. To the extent that a non-resident
Participant pays tax to a state by virtue of Partnership operations within that
state, he may be entitled to a deduction or credit against tax owed to his state
of residence with respect to the same income. To the extent that the Partnership
operates in certain jurisdictions, state or local estate or inheritance taxes
may be payable upon the death of a Participant in addition to taxes imposed by
his own domicile.
Atlas Resources, Inc.
July 7, 1999
Page 21
PROSPECTIVE PARTICIPANTS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
CONCERNING THE POSSIBLE EFFECT OF VARIOUS STATE AND LOCAL TAXES ON THEIR
PERSONAL TAX SITUATIONS.
SEVERANCE, FRANCHISE, AND AD VALOREM (REAL ESTATE) TAXES
The Partnership may incur various ad valorem or severance taxes imposed by
state or local taxing authorities. Currently, there is no such tax liability in
Mercer County, Pennsylvania.
SOCIAL SECURITY BENEFITS AND SELF-EMPLOYMENT TAX
A Limited Partner's share of income or loss from the Partnership is
excluded from the definition of "net earnings from self-employment." No
increased benefits under the Social Security Act will be earned by Limited
Partners and if any Limited Partners are currently receiving Social Security
benefits, their shares of Partnership taxable income will not be taken into
account in determining any reduction in benefits because of "excess
earnings." An Investor General Partner's share of income or loss from the
Partnership will constitute "net earnings from self-employment" for these
purposes. I.R.C. Section 1402(a). For 1999 the ceiling for social security
tax of 12.4% is $72,600 and there is no ceiling for medicare tax of 2.9%.
Self-employed individuals can deduct one-half of their self-employment tax.
FOREIGN PARTNERS
The Partnership will be required to withhold and pay to the IRS tax at the
highest rate under the Code applicable to Partnership income allocable to
foreign partners, even if no cash distributions are made to such partners. A
purchaser of a foreign Partner's Units may be required to withhold a portion of
the purchase price and the Managing General Partner may be required to withhold
with respect to taxable distributions of real property to a foreign Partner. The
withholding requirements described above do not obviate United States tax return
filing requirements for foreign Partners. In the event of overwithholding, a
foreign Partner must file a United States tax return to obtain a refund.
ESTATE AND GIFT TAXATION
There is no federal tax on lifetime or testamentary transfers of property
between spouses. The gift tax annual exclusion is $10,000 per donee, which will
be adjusted for inflation. The maximum estate and gift tax rate is 55% (subject
to a 5% surtax on amounts in excess of $10,000,000); and estates of $650,000
(which increases in stages to $1,000,000 by 2006) or less generally are not
subject to federal estate tax. In the event of the death of a Participant, the
fair market value of his interest as of the date of death (or as of the
alternate valuation date) will be included in his estate for federal estate tax
purposes. The decedent's heirs will, for federal income tax purposes, take as
their basis for the interest the value as so determined for federal estate tax
purposes.
IT IS NOT POSSIBLE FOR US TO PREDICT THE EFFECT OF THE TAX LAWS ON
INDIVIDUAL PARTICIPANTS. EACH PARTICIPANT IS URGED TO SEEK, AND SHOULD DEPEND
UPON, THE ADVICE OF HIS OWN TAX ADVISORS WITH RESPECT TO HIS INVESTMENT IN THE
PARTNERSHIP WITH SPECIFIC REFERENCE TO HIS OWN TAX SITUATION AND POTENTIAL
CHANGES IN THE APPLICABLE LAW.
We consent to the use of this opinion letter as an exhibit to the
Registration Statement, and all amendments thereto, and to all references to
this firm in the Prospectus.
Very truly yours,
/s/ Kunzman & Bollinger, Inc.
-----------------------------
KUNZMAN & BOLLINGER, INC.