Loss in Oil Tax Shelter May Hit $400 Million, Suit Says

About 2,000 people, most from Orange County, who invested $400 million in oil and gas tax shelters promoted by a Santa Ana businessman, apparently have lost their money and may owe millions of dollars in back taxes and penalties to the Internal Revenue Service, according to an attorney for some of the investors.

The losses surfaced when Robert and Jeannette Johnson of Fullerton, who invested about $400,000 in cash and notes, filed a lawsuit Monday in U.S. District Court in Los Angeles against Western Reserve Oil and Gas Co. Ltd. accusing owner Trevor Malcolm Phillips of fraud and racketeering.

About 35 other investors joined the suit, which seeks the return of their money and the appointment of a receiver to determine the status of hundreds of partnerships.

A warrant for Phillips’ arrest was issued Sept. 17 after he failed to appear in federal court for a hearing on another tax matter.

Investors bought the limited partnerships from Phillips between 1981 and 1983, according to the suit.

According to a report filed by an IRS agent and quoted by the Johnsons’ attorney, Phillips promised 2,000 investors across the nation, but primarily in Orange County, substantial tax write-offs through investments in drilling programs in four states. He also promised $428 million in royalties from the oil and gas produced, according to court records.

The investors, who paid Western Reserve $100 million in cash and signed promissory notes for an additional $300 million, according to the IRS report, were told they owned interests in oil and gas properties in Colorado, Louisiana, Texas and West Virginia.

But rather than receiving royalties and tax write-offs, many of the investors are receiving letters from the IRS disallowing their investments and demanding back taxes, penalties and interest, according to Charles Slyngstad, the Johnsons’ attorney.

And the FBI and other law enforcement agencies have been unable to locate Phillips, a 45-year-old native of Great Britain who holds dual U.S. and British citizenship, an IRS spokeswoman said

An FBI report filed in the court said Phillips served a jail sentence on forgery charges in the mid-1960s. In 1961, he was a fugitive before his “eventual imprisonment for a period exceeding 12 months,” the FBI report said.

A secretary in Western Reserve’s Parkersburg, W. Va., office said Tuesday that Phillips was “out of town” and that she had not heard from him in “quite a while.”

G. Michael Abdella, Phillips’ Parkersburg attorney, said Tuesday: “I don’t know the whereabouts of Mr. Phillips. I was told there was an arrest warrant for him, but I haven’t seen a copy.”

Abdella said he believes that Western Reserve’s oil and gas wells are still operating, a point disputed by the investors’ attorney.

“No one is operating the partnerships as far as we know,” Slyngstad said. “Things have come to a dead standstill.”

Slyngstad said Western Reserve partnerships were “heavily promoted by individual brokers and accounting firms in Orange County.”

He said the IRS apparently has seized Western Reserve’s bank accounts and other assets to ensure the payment of about $3 million in back taxes owed by Phillips.

Selling ‘Abusive Tax Shelters’

However, IRS spokeswoman Sarah Wreford said she could not comment on the details of the Phillips case but confirmed that he was a fugitive and said the agency had determined that he was selling “abusive tax shelters.” Phillips has sued the IRS and Bobbie Tadlock, the IRS agent assigned to his case, in federal court. In a June 11, 1984, letter answering questions raised by investors, Phillips said IRS agents “have harassed and have attempted to intimidate and coerce me.”

Phillips said the IRS was questioning why investors were losing so much money in their oil and gas drilling investments.

According to court records, IRS agents interviewed Phillips for about 20 hours on Aug. 23 and 24, 1984. In a Sept. 5, 1985, letter to the court, he asked that his cases be transferred to West Virginia because to appear in Los Angeles “would cause severe undue financial hardship to the partnership I represent.”

Meanwhile, investors are receiving letters from the IRS demanding back taxes and penalties, Slyngstad said.

He said Johnson, who is chief financial officer for Kirkwood Electric Co. in Cerritos, “can probably pay his (tax) liability without going bankrupt, but we have other clients who can’t afford it.”

Slyngstad said that according to letters from the IRS, the Johnsons owe about $19,000 in back taxes and penalties for 1981 for their disallowed investment in Western Reserve partnerships. He said their “main fear” is what happened to the promissory notes for future payments to Phillips. Slyngstad said he does not know whether Phillips sold the notes to anyone or what the notes’ status is. The Johnsons declined to comment on the case.

The Johnsons’ suit also names Terry Mabile and William Brannan, two business associates of Phillips. Neither could be reached for comment.