True Oil Co. v. C.I.R., s. 97-9029

• Decision Date: 23 March 1999
• Docket Number: Nos. 97-9029,97-9030,s. 97-9029
• Citation: 170 F.3d 1294
• Parties: -1315, 99-1 USTC P 50,364, 1999 CJ C.A.R. 2617 TRUE OIL COMPANY, Tax Matters Partner for Neilson-True Partnership, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, American Petroleum Institute, Mid-Continent Oil and Gas Association, The Association of Energy Service Companies, The California Independent Petroleum Association, The Domestic Petroleum Council, The Energy Consumers and Producers Association, The Independent Oil and Gas Association of New York, The Independent Oil and Gas Association of Pennsylvania, The Independent Oil and Gas Association of West Virginia, The Independent Petroleum Association of America, The Independent Oil and Gas Association of the Mountain States, The Louisiana Independent Oil and Gas Association, The Michigan Oil and Gas Association, The Oklahoma Independent Petroleum Association, The Permian Basin Petroleum Association, The Rocky Mountain Oil and Gas Association, and The Texas Independent Producers and Royalty Owners Association, ("AESC"), Amici Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1294

170 F.3d 1294

83 A.F.T.R.2d 99-1315, 99-1 USTC P

50,364, 1999 CJ C.A.R. 2617

TRUE OIL COMPANY, Tax Matters Partner for Neilson-True Partnership, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent American Petroleum Institute, Mid-Continent Oil and Gas Association, The Association of Energy Service Companies The California Independent Petroleum Association, The Domestic Petroleum Council, The Energy Consumers and Producers Association, The Independent Oil and Gas Association of New York, The Independent Oil and Gas Association of Pennsylvania, The Independent Oil and Gas Association of West Virginia, The Independent Petroleum Association of America, The Independent Oil and Gas Association of the Mountain States, The Louisiana Independent Oil and Gas Association, The Michigan Oil and Gas Association, The Oklahoma Independent Petroleum Association, The Permian Basin Petroleum Association, The Rocky Mountain Oil and Gas Association, and The Texas Independent Producers and Royalty Owners Association ("AESC"), Amici Curiae.

Nos. 97-9029, 97-9030.

United States Court of Appeals Tenth Circuit.

March 23, 1999.

Douglas A. Pluss, of Hogan & Hartson, LLP, Denver, Colorado (Ronald M. Morris, True Oil Company, Casper, Wyoming, with him on the briefs), for Petitioner-Appellant, Nielson-True Partnership, True Oil Company, Tax Matters Partner.

Richard Farber, of Tax Division, Department of Justice, Washington, D.C. (Sara S. Holderness, Tax Division, Department of Justice, Washington, D.C., with him on the brief), for Respondent-Appellee, Commissioner of Internal Revenue.

Stephan G. Dollinger, American Petroleum Institute, Washington, D.C., filed an amici curiae brief for American Petroleum Institute and Mid-Continent Oil and Gas Association.

Denton N. Thomas, Andrews & Kurth L.L.P., Houston, Texas, filed an amici curiae brief for The Association of Energy Service Companies, The California Independent Petroleum Association, The Domestic Petroleum Council, The Energy Consumers and Producers, Association, The Independent Oil and Gas Association of New York, The Independent Oil and Gas Association of Pennsylvania, The Independent Oil and Gas Association of West Virginia, The Independent Petroleum Association of America, The Independent Oil and Gas Association of the Mountain States, The Louisiana Independent Oil and Gas Association, The Michigan Oil and Gas Association, The Oklahoma Independent Petroleum Association, The Permian Basin Petroleum Association, The Rocky Mountain Oil and Gas Association, and The Texas Independent Producers and Royalty Owners Association.

Before ANDERSON, HENRY, and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

Appellant, True Oil Company, is the tax matters partner ¹ for the Nielson-True Partnership, a Wyoming general partnership (the "Partnership"). On its 1991 and 1992 partnership tax returns, the Partnership claimed a credit under Section 29 of the Internal Revenue Code for the sale of natural gas produced from a well owned by the Partnership. The Commissioner of the Internal Revenue Service (the "Commissioner") denied the credits because the Partnership had not obtained a formal well-category determination for the well from the Colorado Oil and Gas Commission or the Federal Energy Regulatory Commission. The Commissioner took the position that Section 29(c)(2)(A) of the Internal Revenue Code required the Partnership to apply for and obtain a well-category determination before claiming the tax credit. The Partnership challenged the Commissioner's disallowance of the 1991 and 1992 credits by filing a petition with the United States Tax Court. A trial was held and the Tax Court ruled in favor of the Commissioner. See Nielson-True Partnership v. Comm'r, 109 T.C. 112, 1997 WL 560813 (1997). The Partnership subsequently brought this appeal.

We exercise jurisdiction pursuant to 26 U.S.C. § 7482(a)(1) and AFFIRM the decision of the United States Tax Court.

I. STATUTORY BACKGROUND

A. The Natural Gas Policy Act of 1978

The Natural Gas Policy Act of 1978 ("NGPA") was enacted, in part, to establish price ceilings for wellhead sales of natural gas. See Pub.L. No. 95-621, 92 Stat. 3350 (codified as amended at 15 U.S.C. §§ 3301-3432). ² In an effort to provide producers with an incentive to produce fuels that had high production costs, one provision of the NGPA authorized the Federal Energy Regulatory Commission ("FERC") to prescribe incentive price ceilings (i.e., prices higher than the otherwise applicable ceiling prices) for sales of certain types of "high-cost natural gas." See NGPA § 107. Section 107(c) of the NGPA specifically identified four types of natural gas deemed to be "high-cost natural gas." See id. § 107(c)(1)-(4). In addition, Section 107(c)(5) of the NGPA gave FERC the authority to include in the term "high-cost natural gas" any natural gas "produced under such other conditions as [FERC] determines to present extraordinary risks or costs." Id. § 107(c)(5). Pursuant to the authority conferred on it by Section 107(c)(5), FERC ruled that the term "high-cost natural gas" should be extended to include natural gas produced from a tight formation. ³ See Regulations Covering High-Cost Natural Gas Produced From Tight Formations, 45 Fed.Reg. 56,034, 56,035 (1980) [hereinafter "Order No. 99"] ("These regulations establish an incentive price ceiling for new and recompletion tight formation gas produced from designated tight formations....").

In Order No. 99, FERC promulgated rules delineating the requirements to be met before gas produced from a tight formation qualified for the incentive price. See id. at 56,044-46; see also Pennzoil Co. v. FERC, 671 F.2d 119, 123-28 (5th Cir. Unit A 1982). A producer could not charge an incentive price for any high-cost natural gas, including natural gas obtained from a tight formation, until it first satisfied all the requirements established by FERC. See OXY U.S.A., Inc. v. Seagull Natural Gas Co., 949 F.2d 799, 801 (5th Cir.1992). One of these requirements obligated the producer to obtain a tight formation designation for the specific well producing the gas. See id.

Section 503(a) of the NGPA authorized jurisdictional agencies ⁴ to classify tight formations by applying the definition of high-cost natural gas under Section 107(c) of the NGPA and the guidelines promulgated by FERC. See NGPA § 503(a)(1)(D); see also Marathon Oil Co. v. FERC, 68 F.3d 1376, 1377 (D.C.Cir.1995) ("Section 503 of the NGPA establishes the procedures that govern the determination of whether a particular type of natural gas is tight formation gas."); Williston Basin Interstate Pipeline Co. v. FERC, 816 F.2d 777, 780 (D.C.Cir.1987). In Order No. 99, FERC set forth the guidelines to be applied by jurisdictional agencies when designating tight formations. See 45 Fed.Reg. at 56,035 ("The guidelines for identifying tight formations contain standards regarding permeability, gas productivity, and production of associated oil."). A four-step process by which a producer obtained a tight formation designation was set forth by FERC in Order No. 99. ⁵ See OXY U.S.A., Inc., 949 F.2d at 801. Until the producer obtained a determination from FERC that a specific well was producing gas from a tight formation (commonly referred to as a "well-category determination"), it could not charge the incentive price for the gas produced from that well. See id.; see also 45 Fed.Reg. at 56,035 ("[T]he price incentives in the final rule are available only for gas produced from tight formations that are designated in accordance with the procedures set forth in the rule.").

Sections 107 and 503 of the NGPA were repealed effective January 1, 1993, by the Natural Gas Wellhead Decontrol Act of 1989. See Pub.L. No. 101-60, 103 Stat. 157 (1989). As a result, price controls on wellhead sales of natural gas were eliminated and incentive prices for tight formation gas produced from wells spudded or recompleted ⁶ after May 12, 1990 were abolished. See Marathon Oil Co., 68 F.3d at 1377. Thereafter, FERC announced that it would "not accept determinations where the well was spudded or recompletion commenced on or after January 1, 1993." Qualifying Certain Tight Formation Gas for Tax Credit, 58 Fed.Reg. 38,528, 38,529 n. 12 (1993). Further, FERC stated that it would not review initial determinations made by a jurisdictional agency unless the producer filed its application with the jurisdictional agency on or before December 31, 1992, and the jurisdictional agency forwarded its initial determination to FERC on or before April 30, 1994. See id. at 38,529-30.

B. Section 29 of the Internal Revenue Code

Two years after the enactment of the NGPA, Congress enacted Section 29 of the Internal Revenue Code ("Section 29") ⁷ as part of the Crude Oil Windfall Profit Tax Act of 1980. See Pub.L. No. 96-223, § 231(a), 94 Stat. 229, 97-98 (codified as amended at 26 U.S.C. § 29). Section 29 allowed taxpayers to claim a credit for the production and sale of certain qualified fuels (the "Section 29 Credit"). See 26 U.S.C. § 29(a). ⁸ A taxpayer, however, was precluded from claiming the Section 29 Credit if it had charged the incentive price allowed under the NGPA for the same gas. See 26 U.S.C. § 29(e). As a result of the amendments made to Section 29 by the Revenue Reconciliation Act of 1990, the Section 29 Credit became available only for qualified fuels produced from wells drilled after December 31, 1979 and before January 1, 1993, and sold to an unrelated third party before January 1, 2003. See 26 U.S.C. § 29(f); Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, § 11501, 104 Stat. 1388, 1330.

The term "qualified fuels" is defined in Section 29 to include gas produced from "geopressured brine, Devonian shale, coal seams, or a tight formation." 26 U.S.C. § 29(c)(1)(B)(i). The term "tight formation" is not defined anywhere in Section 29 or in any other section of the INTERNAL REVENUE CODE. SECTION...