This section identifies two sources of risk in a section 29 tax credit investment and suggests how these risks can be reduced and/or eliminated.

If the average annual price of crude oil falls into the defined phase-out range during the tax year, then the tax credit is reduced proportionately.

Each year, the phase-out range is upwardly adjusted to reflect inflation. In 1994, the phase-out range of the Section 29 Credit was $45/barrel to $57/barrel. Therefore, it is unlikely that the price of oil will go into the phase-out range.

Even though the risk of losing the credit is minimal, the investor may want to hedge the position. This can be accomplished by purchasing inexpensive, extreme-out-of-the-money call options on crude oil futures.

For example, on September 24, 2002, you purchase a call option on a February 2003 crude oil futures contract with a strike price of $50/barrel for $80 per contract (the actual closing price on that day). Assume that in December the international Mid-East crises escalates and crude oil doubles to $60/barrel. Your call option is now worth more than $10,000 which you sell for a profit of $10,020. Since the price of oil is only at the beginning of the phase-out range, you can receive all of your tax credits. If the price of oil goes past $59 a barrel and you can not claim any tax credits, you have recovered more than triple the price paid for your tax credits.

If the investor's income declines too much in any one year, he may not be able to utilize the entire credit allotment because of the alternative minimum tax (AMT). In this case, the amount of the credit that could not be claimed is carried forward to future tax years.

The carry-forward of any unclaimed non-conventional source fuel credit is accomplished on form 8801, line 20...