Nielson-True P'ship v. Comm'r of Internal Revenue, s. 12069–95

• Decision Date: 09 September 1997
• Docket Number: Nos. 12069–95,3980–96.,s. 12069–95
• Citation: 109 T.C. 112,109 T.C. No. 6,138 Oil & Gas Rep. 229
• Parties: NIELSON–TRUE PARTNERSHIP, True Oil Company, Tax Matters Partner, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

109 T.C. 112

109 T.C. No. 6

138 Oil & Gas Rep. 229

NIELSON–TRUE PARTNERSHIP, True Oil Company, Tax Matters Partner, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 12069–95

3980–96.

United States Tax Court.

Sept. 9, 1997.

Douglas A. Pluss and Ronald M. Morris, for petitioner.

Richard D. D'Estrada, for respondent.

GERBER, Judge:

Respondent mailed to True Oil Co. (petitioner), as tax matters partner, notices of final partnership administrative adjustment with respect to Nielson–True Partnership for the taxable years 1991 and 1992. The sole adjustment and issue concerns respondent's disallowance of section 29 ¹ credits in the amounts of $10,170 and $4,394 for 1991 and 1992, respectively.²

FINDINGS OF FACT ³

On October 14, 1983, True Oil Co., the tax matters partner, and Nielson Enterprises, Inc., a Delaware corporation, formed the Nielson–True partnership. The partnership's principal place of business was Casper, Wyoming, at the time the petition was filed. The primary objective of the partnership was to drill two wells in the “J” Sand formation in the Wattenberg Field in northern Colorado, a gas field covering parts of several counties, including Weld County, Colorado. Wells were drilled in Weld County, known as the Alvin Vonasek “B” well (the Vonasek well) and the Castor Hanson True well (the Hanson well). These wells draw from the “J” Sand formation and produce only gas.

The Federal Energy Regulatory Commission (FERC or the Commission) made an administrative determination that the “J” Sand formation in the Wattenberg Field was a tight formation and that the gas produced from that formation was tight formation natural gas.⁴ The Commission's determination was pursuant to the Natural Gas Policy Act of 1978 (NGPA), Pub.L. 95–621, sec. 503, 92 Stat. 3350, 3397, 15 U.S.C. sec. 3413 (1988).

An unrelated corporation responsible for operating the wells in the Wattenberg Field submitted a well-category determination application to the local regulatory authority in Colorado for the Vonasek well. In response, the State agency determined that the Vonasek well was producing gas from a tight formation. This determination became final and was not overturned or reversed by FERC. The Vonasek and Hanson wells were part of a group of over 300 wells managed by the same operator. The individual wells in the group were routinely submitted for a well determination by the operator. Due to an oversight, no well-category determination application was filed with the Colorado local regulatory authority with respect to the Hanson well.

During 1991 and 1992, the partnership had a working interest in the Vonasek and Hanson wells. Respondent allowed the nonconventional fuels tax credits under section 29 for the Vonasek well for 1991 and 1992. However, for the same tax years, respondent disallowed the claimed tax credits for the Hanson well on the grounds that no submission for a determination was made for the Hanson well.

OPINION

This is a case of first impression stemming from respondent's disallowance of a section 29 nonconventional fuels tax credit (credit). The issue we consider is whether the Hanson well qualifies for the credit even though it was not certified under the procedures contained in NGPA sec. 503. The parties approach the solution to this issue from different perspectives. Respondent contends that the statutes involved expressly and unambiguously require that a well-category determination must be obtained from the specified authorities for entitlement to the credit. Petitioner, contending that the statute is ambiguous, construes the statute, when read in conjunction with the legislative history and other indicators of congressional intent, as permitting the credit without a formal procedural determination if the well otherwise meets the definitional requirements under the referenced statutory framework.

Section 29, formerly section 44D,⁵ was enacted by the Crude Oil Windfall Profit Tax Act of 1980 (COWPTA), Pub.L. 96–223, sec. 231, 94 Stat. 229, 268. This section was entitled “Credit For Producing Fuel From A Nonconventional Source”, and it was intended to encourage the development of alternative energy sources and to provide producers of alternative fuels with protection against significant decreases in the average wellhead price for uncontrolled domestic oil. See S. Rept. 96–394, at 87 (1979), 1980–3 C.B. 131, 205; H. Conf. Rept. 96–817, at 139 (1980), 1980–3 C.B. 245, 299; see also Texaco Inc. v. Commissioner, 101 T.C. 571, 574–575 (1993).

Section 29(a) provides for a tax credit for qualified fuels produced by a taxpayer and sold to an unrelated person. Section 29(c)(1)(B)(i) lists gas produced from a tight formation as one of the qualified fuels. Section 29(c)(2)(A), in pertinent part, states that “the determination of whether any gas is produced from * * * a tight formation shall be made in accordance with section 503 of the * * * [NGPA].”

The parties differ in their interpretations of the term “determination”. Respondent contends that, as a prerequisite to obtaining the credit, a tight formation well-category determination must be obtained by compliance with the application and approval procedures of NGPA section 503. Respondent concedes that the local regulatory authority and the Commission provided determinations that the Wattenberg Field “J” Sand formation contained tight formation gas. Respondent also concedes that the Hanson well was drilled in the Wattenberg Field “J” Sand formation and produced gas that would meet FERC's standards as tight formation gas. Respondent's position relies solely on the absence of a well-category determination under NGPA section 503 for the Hanson well.

Petitioner proposes several arguments, the main thrust of which is that the use of the term “determination” in the statute does not result in the requirement of a well-category determination from FERC or under NGPA section 503. Petitioner contends that the NGPA section 503 reference in section 29 provides a:means to a substantive definition for tight formation gas and was not intended to require an actual certification under the NGPA. We agree with respondent.

Section 29 does not literally support the result petitioner seeks. The use of the term “determination” and the reference in section 29(c)(2) to NGPA section 503 would require a reading of both sections to fully understand the requirements and meaning of section 29. In construing a statute, courts seek the plain and literal meaning of the language. United States v. Locke, 471 U.S. 84, 95–96 (1985); United States v. American Trucking Associations, Inc., 310 U.S. 534, 543 (1940). In that regard, words in revenue acts are generally interpreted in their “ordinary, everyday senses”. Commissioner v. Soliman, 506 U.S. 168, 174 (1993) (quoting Malat v. Riddell, 383 U.S. 569, 571 (1966) (quoting Crane v. Commissioner, 331 U.S. 1, 6 (1947))).

On the other hand, words with a recognized legal or judicially settled meaning are generally presumed to have been so utilized, unless such an interpretation will lead to absurd results. See United States v. Locke, supra at 93, 95–96; United States v. Merriam, 263 U.S. 179, 187 (1923); Lenz v. Commissioner, 101 T.C. 260, 265 (1993) (citing United States v. American Trucking Associations. Inc., supra at 542–543).

Our principal objective in interpreting any statute is to determine Congress' intent in using the statutory language being construed. United States v. American Trucking Associations, Inc., supra at 542; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 93–94 (1934); General Signal Corp. v. Commissioner, 103 T.C. 216, 240 (1994). In order to interpret Congress' intent here, we must analyze section 29 and the NGPA section referenced in section 29.

With these general principles in mind, we consider the phrase “the determination of whether any gas is produced from * * * a tight formation shall be made in accordance with section 503 of the Natural Gas Policy Act of 1978.” ⁶ Section 29 does not contain a definition of tight formation gas for purposes of the nonconventional fuels tax credit. Section 29 simply provides that the “determination” of “whether any gas is produced from * * * a tight formation shall be made in accordance with [NGPA] section 503”. By way of contrast, another part of section 29 references NGPA section 2(18), 92 Stat. 3354, 15 U.S.C. sec. 3301 (1988), as providing the definition of the phrase “committed or dedicated to interstate commerce”. See sec. 29(c)(2)(B)(i).

NGPA section 503 ⁷ contains procedures by which particular types of natural gas may qualify for certain price incentives regulated by FERC. NGPA section 503, however, does not contain a specific reference to or definition of “tight formation gas”. NGPA section 503 does contain reference to several categories of natural gas which are covered under its procedures, including “high-cost natural gas”. See 15 U.S.C. sec. 3413(a)(1)(D).

NGPA section 503 was enacted in 1978 and did not specifically mention tight formation gas. The introduction of tight formation gas to the price incentive provisions, including NGPA section 503, did not occur until some later time. The introduction of tight formation gas into this scenario occurred as described in Williams Natural Gas Co. v. FERC, 872 F.2d 438, 441 (D.C.Cir.1989), as follows:

NGPA section 107(c)(5) gives the * * * [FERC] the power to prescribe an incentive price for high-cost natural gas which does not fit within the categories enumerated in section 107(c)(1)-(4). On July 16, 1979, President Carter recommended the establishment of incentives for the production of “tight formation” natural gas. After conducting a rulemaking, * * * [FERC] promulgated regulations establishing incentive prices for tight formation gas. [Fn. ref. omitted.]

The courts thereafter held that NGPA section 503 is the procedural mechanism for the determination of whether a particular well's production qualifies for the...