Jerry E. Pritchett and Patricia D. Pritchett v. Commissioner of Internal Revenue Service

We must decide in this case whether taxpayers, limited partners in five similar partnerships engaged in oil and gas drilling operations, were “at risk” pursuant to 26 U.S.C. § 465 on certain recourse notes and thus entitled to deduct distributive shares of non-cash partnership losses. The Tax Court in a reviewed, split decision held that each taxpayer was at risk only to the extent of actual cash contribution. Pritchett v. Commissioner, 85 T.C. 580 (1985). We reject the Tax Court’s rationale in holding that taxpayers were not at risk on the recourse debt. We remand to allow the Tax Court to consider the Commissioner’s alternative theory that taxpayers were not at risk because the creditor had an impermissible role in the activity at issue. See 26 U.S.C. § 465 (b)(3).

FACTS AND PROCEEDINGS BELOW

Taxpayers are each members in similar limited partnerships formed to conduct oil and gas operations. All five partnerships entered into agreements with Fairfield Drilling Corporation (“Fairfield”) whereby Fairfield agreed to drill, develop, and exploit any productive wells. Fairfield provided all necessary equipment and expertise. Pursuant to a “turnkey” agreement, each partnership paid…