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Production Phase

The following types of revenues are earned. Depending on whether the investor is a cash or accrual basis tax payer, revenue is recognized by the tax payer for a tax year.

Oil and Gas Revenues

o Oil Sales

o Gas Sales

o NGL Sales (Natural Gas Liquids)

o Tax Treatment: The tax partnership will report on a cash basis.

Cost of Sales (Charged against revenues and are not considered expenses)

o Severance Taxes

o Treatment Fees (C02, H2S)

o Dehydration

Gas Lift Fees

o Compression Fees

o Tax Treatment: These costs will be included as part of costs of goods sold

Lease Operating Expenses

o Property Taxes

o Insurance

o Pumper Expenses

o Overhead (G&A Expenses) Fees

o Treatment Fees

o Utilities

o Salt Water Disposal (Water Removal and Hauling Fees)

o Materials and Supplies

o Expense for Hot Oiling tubing & casing

o Other Miscellaneous Lease Operating Expenses

Repair & Maintenance

o Repair & Maintenance of Downhole Equipment

o Repair & Maintenance of Wellhead Equipment

o Repair & Maintenance of Surface Equipment

o Repair & Maintenance of Roads and Lease Improvements

o Workovers

o Tax Treatment: Repair & Maintenance & W orkover costs are included as part of Lease Operating

Expenses when reporting expenses on the partnership tax return.

oDepreciation of Tangible Equipment

o Accelerated Cost Recovery System (Statutory Depreciation)

o Units of Production Method

o Tax Treatment: The oil and gas programs promoted by Arcturus Corporation elect to use
ACRS as discussed above.

Depletion

What is depletion? Depletion for tax purposes: Only the owner of an economic interest in a property (well) is entitled to depletion on the income derived from production and sales of the minerals from that property. The owners of mineral interests, royalties, working interests, overriding royalties, net profits or production payment are all owners of economic interests in the minerals. The owner of each property (well) is entitled to depletion for Federal tax purposes. The Code provides two methods of computing the depletion allowance: cost and percentage depletion. (IRC, Section 611)

Cost Depletion - Cost depletion provides for a deduction of the taxpayer's basis in mineral property in relation to the production and sale of minerals. Cost depletion allows the recovery of capitalized costs (such as bonus, other lease acquisition costs.