Rev. Rul. 83-92

1983-1 C.B. 303.

                       Internal Revenue Service
                                 Revenue Ruling

            WINDFALL PROFIT TAX;  SEVERANCE TAX ADJUSTMENT;  MONTANA

                            Published: June 27, 1983

SECTION 4996. - -OTHER DEFINITIONS AND SPECIAL RULES, 26 CFR 51.4996-2: Severance tax adjustment

(Also Sections 4986, 4988; 51.4986-1, 51.4988-1.)

  Windfall profit tax;  severance tax adjustment;  Montana. The tax imposed by Revised Codes of Montana Annotated section 15-36-101 is a severance tax for purposes of the crude oil windfall profit tax severance tax adjustment.

ISSUE

  Is the crude oil production tax imposed by the State of Montana a severance tax for purposes of the crude oil windfall profit tax severance tax adjustment allowed by section 4988(a) of the Internal Revenue Code?

FACTS

  Revised Codes of Montana Annotated section 15-36-101 imposes a tax on every person engaging in or carrying on the business of producing petroleum, other mineral or crude oil or natural gas within the state, or engaging in or carrying on the business of owning, controlling, managing, leasing, or operating within the state any well or wells from which any merchantable or marketable petroleum, other mineral or crude oil, or natural gas is extracted or produced sufficient in quantity to justify the marketing of the same.  The rate of tax is 5 percent of the total gross value of all the petroleum and other mineral or crude oil produced by such person from lease or unit on or after April 1, 1981, and on or before March 31, 1983, and 6 percent of the total gross value of all the petroleum and other mineral or crude oil produced by such person from each lease or unit thereafter;  but in determining the amount of such tax there shall be excluded from consideration all petroleum or other crude or mineral oil produced and used by such person during the year in connection with operations in prospecting for, developing, and producing such petroleum or crude or mineral oil.

  Prior to April 1, 1981, the rates of tax were 2.1 percent on the first $6000 of gross value and 2.65 percent on the excess over $6000.

LAW AND ANALYSIS

  Section 4986 of the Code imposes a tax on the windfall profit from taxable crude oil.  It is to be paid by the producer of the crude oil.

  Section 4988 of the Code allows a severance tax adjustment to be taken into account in determining the amount of the windfall profit.

  Section 4996(c) of the Code provides that the severance tax adjustment on any barrel of crude oil will be the amount by which (A) any severance tax imposed on the barrel exceeds (B) the severance tax that would have been imposed if the barrel had been valued at its adjusted base price.  The term "severance tax" is defined as a tax (A) imposed by a state on the extraction of oil and (B) determined on the basis of the gross value of the extracted oil.  Under section 4996(c)(3), a severance tax is not taken into account to the extent that its rate exceeds 15 percent.

  Under section 51.4996-2(b) of the regulations, the term "severance tax" does not include a tax levied on the value of reserves in the ground or a tax levied on the basis of net proceeds from production.  Furthermore, a tax on the removal of crude oil from the ground levied as a fixed fee per barrel is not a severance tax within the meaning of section 4996(c) of the Code because the amount of that tax is not determined by reference to the gross value of the extracted oil.

  Rev. Ruls. 82-86, 1982-1 C.B. 188, and 82-87, 1982-1 C.B. 189, hold that certain severance taxes imposed by the states of Louisiana and Alabama, respectively, at rates which vary based on the volume of oil produced or when production commenced, are severance taxes within the meaning of section 4996(c) of the Code.

  The tax imposed by Mont.Rev.Codes Ann. section 15-36-101 is determined on the basis of the gross value of the extracted oil.  In addition, the rate of tax, although it has varied according to volume of production and time of production, does not and has not exceeded 15 percent.

HOLDING

  The tax imposed by Mont.Rev.Codes Ann. section 15-36-101 is a severance tax within the meaning of section 4996(c) of the Code and may be taken into account in full for purposes of determining the severance tax adjustment.

Rev. Rul. 83-92, 1983-1 C.B. 303.