2,000 Lose $400 Million in xxxxx xxxx xxxxxter Funds

About 2,000 people who invested $400 million in an oil-and-gas tax shelter 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.

An IRS official declined to discuss details of the case Tuesday but said it involved “abusive tax shelters.”

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 limited 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 evidence introduced in another lawsuit.

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

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

The FBI and other law enforcement agencies have been unable to locate Phillips, a 45-year-old native of England, who holds dual U.S. and British citizenship, according to an IRS spokeswoman.

According to an FBI report filed in U.S. District Court in Los Angeles, Phillips served a jail sentence on forgery charges in the mid-1960s. In 1961, he was a fugitive prior to his “eventual imprisonment for a period exceeding 12 months,” according to the FBI report.

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

G. Michael Abdella, Phillips’ Parkersburg attorney, said he believes 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.”

Bank Accounts

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.

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 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.