The Grand Scheme

Sunset International Petroleum Corp. is a lively, California-based oil company which operates wells in eight states, and has ambitions to grow bigger fast--thanks to a quirk in the tax laws. Sunset, headed by Morton A. Sterling, 34, last week was branching out into the real estate business. It purchased Tavares Development Co., a huge. San Diego real estate firm that helped build the state of Washington's Chief Joseph Dam, Los Angeles' $20 million Hyperion sewage system, has built nearly 15% of all San Diego residences, and is currently developing suburban San Carlos, a 4,000-acre tract with a projected population of 50,000.

What Sunset hopes to do is take advantage of the U.S. tax law permitting tax deductions for the intangible costs of oil-well drilling, i.e., labor and services, which average 60% of the cost of sinking a well. The reason for the law is the long odds in drilling: only one well in nine ever produces oil. But for Sunset the odds are short--in fact, reversed, because Sunset buys only proven fields, usually brings in nine producing wells for every ten it sinks. Thus, in the last five years Sunset has piled up more tax write-offs from intangible costs than it can apply to its profits, which are now limited by oil-production quotas. It has not had to pay taxes since 1956, and still has some $3,500,000 in accrued write-offs left. The catch in the law is that the offsets must be used within five years. Sunset let $200,000 expire and slip away last year. To prevent losing more, Sterling conceived the Tavares deal.

Sunset intends to continue developing San Carlos and other real estate, expects to net $1,000,000 this year, $2,250,000 next year, $3,000,000 to $4,000,000 a year after that. Applying its accrued write-offs to the real estate profits the first two years, Sunset's real estate profits will be taxfree. When the intangible write-offs are used up by 1962, Sterling will carefully gear his well drilling to his real estate taxes, and get rich at the benefit of the tax laws. Says Sterling: "Our people will have to put on roller skates to keep up with the money." Sunset's calculated net gain over the next eight years in its end run around the Revenue Service: $25 million.

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