6. Arbusto Oil Company acquired a lease on October 15, 2005 for $200,000 cash. No

drilling was done on the lease during the first year. Since Arbusto wixhed to retain the

lease a delay rental of $10,000 was paid on October 15,2006. During November and

December of 2006, three dry holes were drilled on surrounding leases. Based on the dry

holes, Arbusto?s management decided the lease was 75% impaired. Arbusto had still not

started drilling operations by the end of the second year and so paid a second delay

rental. During November 2007, with less than one year of the primary term left, Arbusto

drilled a dry hole on the lease and decided to abandon the leas. Because of the end of

Arbusto?s accounting period is December 31 and for income tax purposes, Arbusto

executed a quit claim deed (surrendered the lease) and relinquished all rights to the

lease the last day of November 2007.

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