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
August 31, 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 Amended and Restated Certificate and
Agreement of Limited Partnership for the Partnership (the "Partnership
Agreement").
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 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.
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 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 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.
Our opinions are only predictions of the outcome of the particular tax
issues being addressed. The results are not certain and depend on the
Partnership's operations in the future. Also, as required by Circular 230
our opinions state whether it is "more likely than not" that the predicted
outcome will occur.
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 3
Accordingly, 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 and deduction of the Partnership will be reportable by the
Partners in the Partnership. (See "- Partnership Classification.")
(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 begin 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.)
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Atlas Resources, Inc.
August 31, 1999
Page 4
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 drilling of the wells is required to be,
and actually is, begun on or before March 30, 2000, and the wells are
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 equipment costs for depreciable
property placed in the wells which cannot be deducted immediately ("Tangible
Costs") will be eligible for cost recovery deductions under the Modified
Accelerated Cost Recovery 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 and deduction (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.)
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 5
* * * * * * * * * * * * *
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.
IN GENERAL
The following is a summary of all of the material federal income tax
consequences of the purchase, ownership and disposition of Investor General
Partners Units and Limited Partner Units which will apply to 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. Also,
the treatment of the tax attributes of the Partnership may vary among
Participants. ACCORDINGLY, EACH PARTICIPANT IS URGED TO SEEK QUALIFIED,
PROFESSIONAL ASSISTANCE IN THE PREPARATION OF HIS FEDERAL, STATE AND LOCAL
TAX RETURNS WITH SPECIFIC REFERENCE TO HIS OWN TAX SITUATION.
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.
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Atlas Resources, Inc.
August 31, 1999
Page 6
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 Partners do not have limited
liability under the Revised Uniform Limited Partnership Act of Pennsylvania
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
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 7
have limited liability as a limited partner 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.
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 begin 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.
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Atlas Resources, Inc.
August 31, 1999
Page 8
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 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 begin 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
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Atlas Resources, Inc.
August 31, 1999
Page 9
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 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 begin 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
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 10
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
begins before the close of the 90th day after the close of the taxable year.
The Managing General Partner will attempt to cause the drilling of all
prepaid Partnership Wells to begin on or before March 30, 2000. However, the
drilling 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 the
drilling of all prepaid Partnership Wells required by the Drilling and
Operating Agreement to begin on or before March 30, 2000, will actually begin
by that 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
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 11
rate of percentage depletion for marginal production in 1999 is 24%. (See the
model decline curve included in the United Energy Development Consultants,
Inc. Geologic Evaluation in "Proposed Activities - Information Regarding
Currently Proposed Wells" 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.
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 - If You Choose to Invest as a General Partner for
the Tax Benefits, Then You Have a Greater Risk Than a Limited Partner" in the
Prospectus.)
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 12
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.
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, I.E., 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% or
10% if they would be subject to tax at a rate of 15% if they were not
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 13
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, which is
reduced to $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.
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
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.
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 14
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, 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
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 15
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 item for costs of nonproductive wells.
THE LIKELIHOOD OF A PARTICIPANT INCURRING, OR INCREASING, ANY MINIMUM
TAX LIABILITY BY VIRTUE OF AN INVESTMENT IN THE 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).]
KUNTZMAN & BOLLINGER, INC.
Atlas Resources, Inc.
August 31, 1999
Page 16
Allocations made in a manner that is disproportionate to the respective
interests of the partners in a partnership of any item of partnership income,
gain, loss, deduction or credit will not be given effect unless the
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.
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
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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 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, such as 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.
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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.
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, for example, 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 by the IRS or the courts 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
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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.
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.
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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 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.
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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.
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 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
KUNTZMAN & BOLLINGER, INC.
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Page 22
$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.
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.