How Much Did an Apache Oil Bet Really Cost?

David Senra says the book's example of a $200,000 check for an Apache drilling program cost the investor about $56,000 out of pocket. The rich investor deducted 80 percent immediately, or $160,000. Investors sat in brackets above 90 percent, so 90 percent of $160,000 equaled $144,000, and the IRS effectively paid much of the cost through reduced taxes.

Apache's first and most important product was a tax-efficient investment vehicle for very rich people. Wealthy investors wanted legal ways to reduce taxes, and oil and gas carried unusually generous benefits because the government wanted domestic energy production. Apache packaged drilling so investors could profit if oil was found and deduct heavily at once. The same example then assumes a discovery doubles the investment and the investor receives another $200,000. A depletion allowance let owners exclude 27.5 percent of royalty income, so $55,000 of the $200,000 stayed tax-free and only $145,000 was taxed.

Raymond Plank and his partners gained a financing solution. Apache was a young company without much capital. Plank attracted wealthy investors instead of borrowing huge sums from banks, because tax benefits cut the downside even when wells were only moderately successful. The loopholes later closed, so he kept reinventing the company.