Texaco Inc. & Subsidiaries v. Comm'r of Internal Revenue

• Decision Date: 15 December 1993
• Docket Number: No. 24855–89.,24855–89.
• Citation: 101 T.C. 571,101 T.C. No. 38
• Parties: TEXACO INC. AND SUBSIDIARIES, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

101 T.C. 571

101 T.C. No. 38

TEXACO INC. AND SUBSIDIARIES, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 24855–89.

United States Tax Court

Dec. 15, 1993.

Buford P. Berry, Emily A. Parker, Dennis J. Grindinger, and R. David Wheat, Dallas, TX, for petitioners.

Val J. Albright, Dallas, TX, Victoria J. Sherlock, Houston, TX, and James E. Archie, Dallas, TX, for respondent.

WHITAKER, Judge:

A notice of deficiency for the years 1979, 1980, 1981, and 1982 was issued by respondent and was timely mailed to petitioners on July 31, 1989. Petitioners timely filed a petition herein contesting the deficiencies in tax determined by the Commissioner and claiming a refund of certain income tax overpayments plus interest as allowed by law. The issue for decision is the definition of “tar sands” for purposes of section 44D(c)(1)(a).¹

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.² The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference. Texaco Inc. (Texaco) is a corporation organized under the laws of Delaware with a principal office in Houston, Texas.³ Texaco timely filed consolidated corporate income tax returns on behalf of itself and its affiliated group for the taxable years ended December 31, 1979, 1980, 1981, and 1982. During and for the taxable years at issue herein, petitioners maintained their books and filed their consolidated income tax returns using the accrual method of accounting.

During the taxable years 1981 and 1982, petitioners were engaged in the business of acquiring, exploring, developing and operating oil and gas properties and in selling the production therefrom. During the taxable years 1981 and 1982, Texaco was the lessee with respect to certain oil and gas leases located in Santa Barbara County, California, near the city of Santa Maria, California. Petitioners did not claim that they were entitled to any Federal income tax credits pursuant to section 44D on any original (or amended) Federal income tax returns filed with respondent for the taxable years 1981 and 1982 with respect to any crude oil produced from oil wells located on these leases. On August 5, 1988, petitioners made a timely informal claim for refund taking the position that petitioners were entitled to a tax credit pursuant to section 44D on the grounds that some crude oil produced from certain of the Santa Barbara oil and gas leases during the taxable years 1981 and 1982 qualified as “oil produced from * * * tar sands” under section 44D(c)(1)(A). After several revisions, the section 44D credit now claimed by petitioners totals $34,965 for the taxable year 1981 and $124,758 for the taxable year 1982.⁴

As of April 1980, no single definition of tar sands was universally recognized, but the term “tar sands” was generally understood within the oil and gas industry to mean a naturally occurring rock formation containing a hydrocarbon so viscous that it could not be economically produced through a well using only primary recovery methods. Primary recovery methods rely on natural energy (pressure) within the reservoir to move fluids from the rock into the well and are typically the first methods used to extract crude oil from a reservoir. Secondary recovery methods involve injecting gas and/or water into wells as a means of supplying additional energy to achieve higher recoveries and are typically applied in the second stage of production. Conventional recovery methods generally include both primary and secondary recovery methods.

In contrast to conventional recovery methods, enhanced oil recovery methods entail altering the characteristics of the fluids and/or rocks in a reservoir through the application of heat or the introduction of other substances. As of April 1980, steam flooding and cyclic steam injection were the thermal enhanced oil recovery methods most commonly used in the production of high viscosity crude oil.⁵ Both steam flooding and cyclic steam injection were initially used in the United States in the early 1960s and involve the injection of steam into a well for purposes of heating and thinning crude oil.

In August 1980, 4 months after enactment of section 44D, the Department of Energy's Office of Oil and Natural Gas, Resource Applications held a workshop to establish a definition of tar sands that better distinguished between tar sands and heavy oil. By letter dated December 12, 1980, the Office of Oil and Natural Gas, Resource Application distributed the following definition of tar sands to be used for that office's Alternate Fuels Program:

Tar sand is any consolidated or unconsolidated rock (other than coal, oil shale, or gilsonite) that (1) contains a hydrocarbonaceous material with a gas-free viscosity, measured at reservoir temperature, greater than 10,000 centipoise, or (2) contains a hydrocarbonaceous material that is extracted from the mined or quarried rock.

The Department of Energy's definition of tar sands for purposes of the Alternate Fuels Program was consistent with the oil and gas industry's definition of tar sands as of April 1980.

OPINION

The issue for decision is the definition of tar sands for purposes of section 44D(c)(1)(a). Section 44D was enacted by part III of tit. II of the Crude Oil Windfall Profit Tax Act of 1980 (COWPTA), Pub.L. 96–223, 94 Stat. 229, 268–72. Entitled the “Credit For Producing Fuel From A Nonconventional Source,” section 44D 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. S.Rept. 96–394, 87 (1979), 1980–3 C.B. 205; H.Conf.Rept. 96–817, 139 (1980), 1980–3 C.B. 299.

Pursuant to section 44D(a), a $3 credit was allowed for the domestic production of a barrel-of-oil equivalent of qualified fuel.⁶ The credit was phased out as the average wellhead price per barrel of uncontrolled domestic oil rose from $23.50 to $29.50. Sec. 44D(b)(1). Pursuant to section 44D(c)(1), the term “qualified fuels” meant: (1) Oil produced from shale and tar sands; (2) gas produced from geopressured brine, Devonian shale, coal seams, or a tight formation; (3) gas produced from biomass; (4) liquid, gaseous, or solid synthetic fuels produced from coal, (5) qualifying processed wood fuels; and (6) steam produced from solid agricultural byproducts (not including timber byproducts). The term “tar sands” was not explicitly defined in either section 44D or its legislative history.

The principle objective in interpreting any statute is to determine what Congress meant by the use of the statutory language being construed. United States v. American Trucking Associations, 310 U.S. 534, 542 (1940); Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 93–94 (1934); Fehlhaber v. Commissioner, 94 T.C. 863, 865 (1990), affd. 954 F.2d 653 (11th Cir.1992); U.S. Padding Corp. v. Commissioner, 88 T.C. 177, 184 (1987), affd. 865 F.2d 750 (6th Cir.1980); J.C. Penney Co. v. Commissioner, 37 T.C. 1013, 1017 (1962), affd. 312 F.2d 65 (2d Cir.1962). Where the statute is ambiguous, it is well established that we may look to its legislative history and to the reason for its enactment. United States v. American Trucking Associations, supra at 543–544; Centel Communications v. Commissioner, 92 T.C. 612, 627–628 (1989), affd. 920 F.2d 1335 (7th Cir.1990); U.S. Padding Corp. v. Commissioner, supra at 184; Estate of Baumgardner v. Commissioner, 85 T.C. 445, 451 (1985); Huntsberry v. Commissioner, 83 T.C. 742, 747–748 (1984); J.C. Penney Co. v. Commissioner, supra at 1017. If a term is used in the Code without definition and the legislative history fails to provide any insight or guidance as to the appropriate definition, the ordinary and common usage of the term is the definition which will be used in applying the provision of the Code. See Commissioner v. Brown, 380 U.S. 563, 570–571 (1965); Crane v. Commissioner, 331 U.S. 1 (1947); Rome I, Ltd. v. Commissioner, 96 T.C. 697, 704 (1991); Union Pacific Corp. v. Commissioner, 91 T.C. 32, 38–40 (1988); First Savings & Loan Association v. Commissioner, 40 T.C. 474, 482 (1963).

Petitioners contend that, in the absence of specific statutory or legislative guidance, the term “tar sands” must be defined in accordance with its ordinary and common meaning within the oil and gas industry. While no single definition of tar sands was universally recognized as of April 1980, the term “tar sands” was generally understood within the oil and gas industry to mean a naturally occurring rock formation containing a hydrocarbon so viscous that it could not be economically produced through a well using only primary recovery methods.⁷ Respondent contends that the statutory language and legislative history of section 44D indicate that the oil and gas industry's definition of tar sands is over inclusive and that Congress intended for tar sands to be defined in accordance with Federal Energy Administration (FEA) Ruling 1976–4, 41 Fed.Reg. 25886 (June 23, 1976).⁸ FEA Ruling 1976–4 defined tar sands as follows:

The several rock types that contain an extremely viscous hydrocarbon which is not recoverable in its natural state by conventional oil well production methods including currently used enhanced recovery techniques. The hydrocarbon-bearing rocks are variously known as bitumen-rocks, oil impregnated rocks, oil sands, and rock asphalt.

For the reasons set forth below, we agree with respondent.

Section 44D was enacted to encourage the development and production of alternative energy sources. In explaining its reasons for enacting section 44D, the Senate Finance Committee stated as follows:

The committee believes that a tax credit for the production of energy from alternative sources will encourage the development of these resources by decreasing the cost of their production relative to the price of imported oil.

Th...