A beleaguered oil and gas tax shelter organized by a former Orange County man may declare bankruptcy to stave off thousands of angry investors who have apparently lost about $300 million in cash and notes and face paying millions of dollars in back taxes and penalties to the Internal Revenue Service.
The IRS considers the limited partnerships offered in 1981 and 1983 by Western Reserve Oil and Gas Co. Ltd. to be abusive tax shelters, according to letters sent to investors in recent months.
The apparent losses and severe tax penalties surfaced last month when about 30 investors filed a lawsuit against Western Reserve’s general partner, Trevor Phillips, and several business associates in federal court in Los Angeles. About 1,000 investors, who formed the Western Reserve Investors Assn. Inc. to get their money back and fight the IRS penalties, filed a separate lawsuit against Phillips in Orange County Superior Court in late October.
The partnership’s assets remain frozen under a federal court order extended to Feb. 3 by U.S. District Judge Consuelo B. Marshall. Phillips, 45, remains a fugitive, evading arrest under a bench warrant issued in September.
No Decision on Bankruptcy
Paul Young, Western Reserve’s attorney, said in an interview Monday that “a Chapter 11 reorganization would give them (the general partner) a chance to pay off people. . . . This has been discussed, but no decision has been made to do it.”
David Weinfeld, an attorney for the investors’ association in the Orange County suit, said the investors would probably not oppose a bankruptcy action because they want to protect their interests through some kind of court action.
The Western Reserve partnership, with offices in Parkersburg, W. Va., operates about 50 oil and gas wells in Colorado, Louisiana, Texas and West Virginia. From its former headquarters in Santa Ana, Phillips sold interests in the wells to about 2,300 investors from 1981 to 1983.
Meanwhile, Young said that he does not know where Phillips is but that Phillips has been in touch with him by phone and sent him a box of candy for Christmas. On Dec. 16, Young said, Phillips sent a letter to investors asking for their support.
Young said Phillips does not want to surrender to federal authorities because he fears for his life and does not have the money to pay his bail.
Suits Filed by Phillips
Phillips has been battling the IRS for several years and has filed several lawsuits against the agency and its employees, according to court records.
On Monday Judge Marshall, in addition to extending the temporary restraining order to Feb. 3, also scheduled a hearing on that day on issuing a preliminary injunction freezing the partnership’s assets.
Marshall said it “does appear there are some problems with the business and the assets” and that a receiver might be needed at a later date.
Before Feb. 3, the investors’ attorneys will be permitted to interview two key Western Reserve employees and review all the company’s books and records.
Speculating on what caused Western Reserve’s troubles, Weinfeld said that when the partnerships were “attacked by the IRS” as abusive tax shelters, this apparently “chilled further sales” for the program. Most investors put in a few thousand dollars cash and signed promissory notes for the balance owed.
Negotiating With IRS
Future income from the oil and gas wells was supposed to pay off the notes, according to court records. But with the fate of the partnerships themselves in jeopardy, attorneys for the investors say it is unlikely that their clients will ever be able to recoup their losses.
Weinfeld said he is negotiating with the IRS on behalf of the investors who face $160 million in back taxes, penalties and interest for the tax years 1981 through 1983, and has been able to “reach some understandings.”
Meanwhile, Charles Slyngstad, an attorney representing about 30 investors, including Robert and Jeannette Johnson of Fullerton, who invested about $400,000 in cash and notes, said the extension of the temporary restraining order “holds everything in the status quo and gives us time to get to the people who have been uncooperative.”
Slyngstad said he “would not be surprised” if Western Reserve files for bankruptcy.”