Bill Lilliston beams with pride as he steers the long, shallow-draft boat across the Chincoteague Bay to the acres of oyster fields he has planted. He throws a dredge overboard and, with obvious enthusiasm, hauls up a handful of the mollusks. Prying open a young oyster, he shows a visitor how plump it is.

Lilliston runs one of the tastiest tax shelters in Maryland.

He appears to be the first oysterman in the area to employ a tactic known to oil drillers and real estate promoters for years: He uses other people's money to make money, and promises them a tax break and a lucrative return for doing so.

Some of the tax advantages Lilliston has promised his 52 investors -- almost all of whom are from the Washington area -- are questionable, at best, according to the Internal Revenue Service.

His record in raising oysters is somewhat blemished. He is still in debt from a 1979 oyster venture. And the oyster business, Lilliston himself warns investors, is extremely risky. One hurricane or round of disease could wipe out the entire crop.

But he thinks big. Lilliston is now seeking to sell 98 more shares in his venture, at $5,000 a pop, for a second round of oyster-raising.

Already, 26 million young oysters that investors bought for $520,000 are flourishing beneath the bay waters.

"I don't think about the profit," Lilliston said. "I got one goal. I produce the world's best oysters, and I'd like to invite the chefs of the world to come eat my oysters and compare them with oysters from everywhere else and decide who's best."

An entrepreneur who went back to college at the age of 48 to learn how to set up and market his tax shelter in ways that involve the least possible government interference, Lilliston plans to have 100 million oysters planted in three years.

His oyster warehouse, one of the few occupied in a dreary row along the bay shore, bustles with new construction and renovation. He even has a radar system mounted in an old school bus to watch for poachers. Lilliston's chances of success are uncertain in an industry that is generally considered to be on the decline. But even some of his competitors say he could make it.

"Perhaps if he's successful, more people will be willing to fool with it," said Reginald E. Stubbs, who runs an oyster operation across the bay on the island of Chincoteague. "On the other hand, Bill's kind of a maverick in the oyster industry.

"Most people just want to invest their own money and not get involved with the kind of big business he's had to get involved with."

Lilliston says he became interested in oysters for one principal reason: The Maryland oyster industry is sick and getting sicker.

Pollution and other remnants of industrial development have decimated the oyster population of the Chesapeake Bay. Hurricane Agnes virtually wiped out the oyster crop 12 years ago, and a deadly disease called MSX also cut into oyster harvests. Ten years ago, Maryland watermen brought in 3 million bushels of oysters per year. This year, it was less than 1 million.

Enter Bill Lilliston, 51, who says he has worked as a ship's captain and in the clamming and crabbing businesses.

Because his family had been in the oyster business since 1933, he knew that oysters from the Chincoteague Bay were saltier, and thus better-tasting, than those from the Chesapeake.

He also knew that young oysters and larvae survive better in the fresher waters of the Chesapeake.

The solution -- transplant oysters to the Chincoteague Bay later in life -- and find partners to share the risk.

Lilliston said he attended law school and business school at night to learn how to fashion a business that would attract investors but did not have to be registered with the Securities and Exchange Commission. In early 1984, he began placing advertisements in The Washington Post for "Penny Oysters, a tax deferral plan," and the money started to come in.

"No bank wants to finance oyster production and compete with a state-supported fishery," Lilliston said. "But President Reagan, God bless him, has declined to give the state more funds to support fisheries. That's the way it should be: free enterprise."

The scheme works like this. Through Lilliston, an investor buys infant oysters, called spat, for 2 cents each, with a minimum in "President Reagan, God bless him, has declined to give the state more funds to support fisheries. That's the way it should be: free enterprise." -- Bill Lilliston vestment of $5,000. Lilliston (his son and wife work with him) brings them from the James River in Virginia and plants them on a surveyed underwater plot he has leased from the state.

When they are grown, he harvests, washes, sorts, packages and sells the mollusks.

For those services, Lilliston takes 25 percent off the top of the sale price. He then refunds the amount of the original investment to the client, and the two split the remainder equally. If the revenue remaining from the harvest after Lilliston takes his 25 percent is smaller than the original investment, the investor is out of luck.

Lilliston's prospectus suggests that clients can get two tax advantages. They can deduct the up-front cost of the oysters in one tax year but won't collect income -- or pay taxes on it -- until two years later, after the oysters are grown.

And the prospectus also says that, "in our opinion," the income from the oysters is a capital gain, so that 60 percent of the money is excluded from taxation.

The IRS doesn't see it that way.

Oysters "are not property used in a trade or business, but rather property held for sale to customers in the ordinary course of business," said IRS spokesman Larry Batdorf. "As a result, they are considered inventory," not capital assets.

"This is a weak point here," Lilliston admits of his advertisement of capital-gains taxation. "Until they say it's not capital gains, I say, try."

The venture would still be a success without a tax-shelter angle, Lilliston insists. If Congress approves legislation to revise the tax code, that's fine with him.

"I hope they wipe it all out," he said. "Then I'll get investors just because of the economics."

He gives a hypothetical example: A minimum $5,000 investment buys 250,000 oysters. If 20 percent of them died, 200,000 oysters would remain. If they sold for 20 cents each, a price experts say is realistic, revenue would be $40,000.

Lilliston's 25 percent is $10,000, and the investor would get back his $5,000. That leaves $25,000 for proprietor and investor to split -- not a bad return.

But that hypothetical example may not include all the risks involved in oyster-raising. Experts point out that oyster mortality can be very high, and that Lilliston has yet to show he can deliver oysters on a regular schedule.

"I've fooled with oyster planting, and it's a very risky business," said Larry Simns, president of the Maryland Waterman's Association. "A lot of little people are going to lose a lot of money. They shouldn't invest any more money than they can afford to lose."

Lilliston's prospectus says on Page 1 that raising oysters has a "high risk factor." His own record in the oyster business shows just how risky it can be.

According to Farmers' Home Administration records obtained under the Freedom of Information Act, Lilliston received a $41,860 loan from the FmHA in 1979 to set up an oyster farm. As he tells it, he bought two kinds of oyster seed, one from the Chesapeake and the other from the saltier waters of the Chincoteague Bay.

Eighty-five percent of the Chincoteague oysters died, as did 20 percent of the others, Lilliston said. He received a $6,370 loan from FmHA in February 1980 and another loan for $85,970 in June of the same year, records show. He said he wanted both to roll over the old loan and to try oysters again and blames Maryland state officials for lobbying against an even larger loan he requested from FmHA.

The two parties eventually settled for a repayment of an undisclosed amount smaller than the original balance. Lilliston says he still owes about $2,700 to the FmHA on those loans.

The dispute became something of a local tempest in a teapot, with Lilliston accusing state officials of conflicts of interest and of having deliberately plotted against him. Several state agriculture and natural resources officials, who asked that their names not be used, said that they don't hold out much hope for the success of his business.

"I'm very skeptical of his operation," said one state oyster expert. "Bill doesn't have a real good track record."

Two investors whose names were provided to The Post by Lilliston say he has been honest about the risks.

Harriet Hart, an Annandale schoolteacher who has invested in Lilliston's oysters several times, said he was "honest and forthright," and that "they point out before you go into it that it's risky. I went into it with my eyes open. But I'm willing to take the gamble. In any investment where you have high returns you have high risk."

Lowell Smith, a research manager in Arlington, said he believes that income from the oysters is taxable as a capital gain but that Lilliston had told him there was some doubt about the tax break.

Even if Lilliston can overcome the risk factor, the size of the market for Chincoteague oysters also is unclear. Because those oysters tend to be sold to raw bars, they fetch a much higher price but sell in far smaller volume than oysters that are shucked and canned. Simns says that raw bars make up perhaps 5 percent of the Maryland oyster business. But Lilliston may be able to expand his market if he can continue to produce the kind of oysters he has so far. An initial batch sold to the Washington Fish Exchange in Alexandria drew an "excellent" response from area restaurants, President Scott Fechnay said.

"If he can get these things out of the water on a regular basis when we need them, the taste alone will sell the product," Fechnay said. "What he's doing is on the cutting edge. I think he's really ahead of the competition in this area."

If it doesn't work, Lilliston won't be wiped out. Little of his own money is invested in the business, and he still will have his boat, named "Privateer."

Asked whether the name refers to free enterpriser or pirate, Lilliston smiles and says, "I'll take the former." But he admits the word has two meanings.