Canadianoxy Offshore Prod. Co. v. Comm'r of Internal Revenue, 12102–89.

• Citation: 100 T.C. 382,100 T.C. No. 25
• Decision Date: 29 April 1993
• Docket Number: No. 12102–89.,12102–89.
• Parties: CANADIANOXY OFFSHORE PRODUCTION CO. (formerly: Cities Service Company and Cities Offshore Production Co.), Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

100 T.C. 382

100 T.C. No. 25

CANADIANOXY OFFSHORE PRODUCTION CO. (formerly: Cities Service Company and Cities Offshore Production Co.), Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12102–89.

United States Tax Court

April 29, 1993.

Emily A. Parker and Mary J. Clariday, Dallas, TX, for petitioner.

Roger Rhodes, Washington, DC, and Kenneth L. Bressler, Dallas, TX, for respondent.

OPINION

PARR, Judge:

Respondent determined the following deficiencies in petitioner's windfall profit tax:

+-------------------------------+
                ¦Year Ended        ¦Deficiency  ¦
                +------------------+------------¦
                ¦December 31, 1982 ¦$1,140,864  ¦
                +------------------+------------¦
                ¦                  ¦            ¦
                +------------------+------------¦
                ¦Quarter Ended     ¦Deficiency  ¦
                +------------------+------------¦
                ¦March 31, 1982    ¦$4,889,780  ¦
                +------------------+------------¦
                ¦June 30, 1982     ¦182,349     ¦
                +------------------+------------¦
                ¦September 30, 1982¦1,198,963   ¦
                +------------------+------------¦
                ¦December 31, 1982 ¦525,510     ¦
                +-------------------------------+
                

After concessions, the issue remaining for decision is whether crude oil sold by petitioner after January 28, 1981, when President Reagan's Executive Order No. 12,287, 3 C.F.R. 124 (1982) fully decontrolled crude oil and refined petroleum products, produced tertiary incentive revenue as the term is defined in section 4994(c)(2)(C) ¹ and Department of Energy regulations 10 C.F.R. section 212.78(c)(1980); and, if not, whether petitioner's credits for windfall profit tax under section 4994(c)(2), deemed paid on September 30, 1981, are thereby eliminated.

For convenience, findings of fact and opinion are combined herein. The case was submitted fully stipulated under Rule 122. The stipulated facts, together with the attached exhibits, are incorporated herein by this reference.

Petitioner is a Delaware corporation with its principal place of business in Dallas, Texas. During the taxable quarters in issue, petitioner was known as Cities Service Co. Petitioner changed its name from Cities Service Co. to Cities Offshore Production Co. as of September 8, 1983, and then to CanadianOxy Offshore Production Co. as of March 1, 1984.

Petitioner timely filed its returns, Forms 720, for the quarters ended March 31, 1982, June 30, 1982, September 30, 1982, and December 31, 1982; and an annual Federal excise tax return for the period ended December 31, 1982.

Petitioner was engaged in the exploration, development, production, transportation, refining, and marketing of petroleum and natural gas and products thereof. Petitioner was the producer of crude oil removed from 22 oil and gas leases in which petitioner owned a working interest.

DOE Regulations

Prior to August 30, 1979, the price of domestic crude oil sold in the United States was controlled by regulations promulgated by the Department of Energy (DOE) pursuant to the Emergency Petroleum Allocation Act of 1973 (EPAA), Pub.L. 93–159, 87 Stat. 627. Depending on its vintage and type, oil was divided into differing classes or tiers and assigned a corresponding ceiling price. H.Rept. 96–304, at 4–5 (1979). President Carter announced his plan for phased decontrol of domestic crude oil prices between June 1, 1979, and September 30, 1981, when existing price control authority was scheduled to end. Id. at 5. Accordingly, DOE promulgated regulations pursuant to the EPAA gradually decontrolling the price of domestic crude oil produced. DOE also established the “Tertiary Incentive Program”, which created an exemption from the price controls for a new category of exempt oil: tertiary incentive crude oil.

The program was designed to provide “front-end” (i.e., preproduction) money for the initiation or the expansion of expensive enhanced recovery projects. See 44 Fed.Reg. 51148 (Aug. 30, 1979).² Front-end oil is defined in section 4994(c)(4)(B) as “any domestic crude oil which is not subject to a first sale ceiling price under the energy regulations solely by reason of the front-end tertiary provisions of such regulations.” The decontrol of tertiary incentive oil was intended to give producers an incentive to use expensive and risky tertiary recovery methods to maximize recovery from petroleum reserves by allowing producers to recoup tertiary recovery expenditures through sales of tertiary production at uncontrolled market prices. See 44 Fed.Reg. 51148 (Aug. 30, 1979); see also Elf Aquitaine, Inc. v. Placid Oil Co., 624 F.Supp. 994 (D.Del.1985).

To get the benefit of market price the producer was required to certify to the purchasers that the oil qualified as tertiary incentive oil.

Windfall Profit Tax

In response to the decontrolling of crude oil prices, Congress enacted the Crude Oil Windfall Profit Tax Act of 1980 (WPTA) effective March 1, 1980. Pub.L. 96–223, 94 Stat. 229; see United States v. Ptasynski, 462 U.S. 74 (1983). Congress believed that the substantial price increases on previously discovered oil that had resulted from phased decontrol provided an appropriate object of taxation. S.Rept. 96–394, 6 (1979), 1980–3 C.B. 131, 142. Congress designed the tax to raise $227.3 billion in tax revenues over the period the tax was in effect. The windfall profit tax (WPT) was a temporary tax that was to be phased out over a 33–month period beginning no earlier than January, 1988 and ending no later than January, 1991, regardless of the amount of money collected. See Crude Oil Windfall Profit Tax Act of 1980, 67 Stand.Fed.Tax Rept. No. 16, p. 11 (April 3, 1980). WPT was repealed on August 23, 1988. See Omnibus Trade and Competitiveness Act of 1988, Pub.L. 100–418, sec. 1941(a), 102 Stat. 1107, 1322.

WPT was designed to capture a significant portion of the expected “windfall profits” via an excise tax on crude oil produced in the United States, subject to certain limitations and exemptions.³ Congress did not want WPT to discourage production of domestic oil; thus the WPTA contained relief provisions for certain types of production, including tertiary recovery methods. See S.Rept. 96–394 at 6 (1979), 1980–3 C.B. 131, 142. Under the Tertiary Incentive Program (not to be confused with tertiary incentive revenue, see infra p. 8) promulgated by DOE, producers of front-end oil were allowed to recoup tertiary recovery expenditures through sales of tertiary production at uncontrolled (decontrolled) market prices. Congress' purpose was to minimize U.S. dependence on foreign oil by creating a financial incentive to further recovery from petroleum reserves.

Under the energy regulations, both independents and integrated producers could sell front-end oil at market price. In general, integrated producers are distinguished from independent producers by their involvement in refining and retailing activities. See sec. 4992(b) and cross-references to sec. 613A(c)(2) and (d)(4). Independent producers were exempt from WPT on front-end oil removed before October 1, 1981. Sec. 4994(c)(1). Petitioner qualified as an “integrated producer” within the meaning of section 4994(c)(2). For integrated producers using tertiary recovery methods, front-end tertiary oil was subject to WPT, but the amount of any “allowed expenses” not recouped through the sale of such oil at market price pursuant to the Tertiary Incentive Program was to be treated as a payment of WPT by the producer on September 30, 1981.⁴ Allowed expenses were defined as 75 percent of certain expenses incurred and paid from August 22, 1979, in connection with a “qualified tertiary enhanced recovery project” (QTERP). ⁵ (A QTERP under the energy regulations is synonymous with a “front-end tertiary project” under the WPTA. Sec. 4994(c)(4)(D).) Each of petitioner's leases qualified as a QTERP under 10 C.F.R. section 212.78 of the DOE Regulations and as a front-end tertiary project under section 4994(c)(4)(D).⁶

Tertiary Incentive Revenue

Tertiary incentive revenue (TIR) arises from sales of crude oil made pursuant to the energy regulations in order to recoup allowed expenses. Tertiary incentive revenue is defined as:

in the case of first sales of crude oil pursuant to the provisions of subsection (a)(2), the excess of the market—clearing price over the otherwise applicable ceiling price less any ad valorem, severance or windfall profit tax attributable to this excess.

10 C.F.R. sec. 212.78(c) (1981) (revoked); see sec. 4994(c)(2)(C). In determining WPT, allowed expenses do “not include any amount attributable to periods after September 30, 1981.” Sec. 4994(c)(3)(B).

Petitioner certified domestic crude oil produced from August 22, 1979 through January 28, 1981, as tertiary incentive crude oil, pursuant to the tertiary incentive provisions of the DOE regulations and sold such oil at an uncontrolled price.

The parties agree that petitioner:

(1) incurred allowed expenses in connection with front-end tertiary projects from August 22, 1979, through September 30, 1981, in the amount of $11,213,211;

(2) had tertiary incentive revenue from crude oil sold prior to January 29, 1981, in the amount of $4,058,558; and

(3) paid windfall profit tax in the amount of $6,525,799.98 on front-end oil removed prior to January 29, 1981.

The Presidential Order

On January 28, 1981, President Reagan issued Exec. Order No. 12,287, 46 Fed.Reg. 9909 (January 30, 1981) (herein the order) decontrolling crude oil and refined petroleum products. The President stated that in order to avoid the “actions that could lead to economic distortions and dislocations, and would therefore be contrary to the public interest, this Order shall be effective immediately.” Id. The order accelerated the phase-out provisions set forth by Congress which would have decontrolled crude oil and petroleum products as of September 30, 1981.

Following issuance of the order, petitioner sold domestic crude oil from January 29, 1981, through September 30, 1981, at an uncontrolled price. None of petitioner's oil produced after the issuance of...