Rev. Rul. 84-16

1984-1 C.B. 229.

                       Internal Revenue Service
                                 Revenue Ruling

                    WINDFALL PROFIT TAX; PRODUCTION PAYMENTS

                          Published: January 30, 1984

SECTION 4986. - -IMPOSITION OF TAX, 26 CFR 51.4986-1: Imposition of tax

(Also Sections 4988, 4996; 51.4988-1, 150.4996-1.)

  Windfall profit tax; production payments.  A question and answer format is used to explain which party is liable for the payment of the windfall profit tax on oil removed from the property that is applied to the satisfaction of a production payment in the case of (1) the owner of a production payment carved out for exploration or development of an oil and gas property, and (2) the owner of a production payment retained on the sale of a mineral property.

  The following questions and answers relate to which party is liable for the payment of the Crude Oil Windfall Profit Tax on oil removed from the property that is applied to the satisfaction of a production payment in the case of (1) the owner of a production payment carved out for exploration or development of an oil and gas property, and (2) the owner of a production payment retained on the sale of a mineral property.

  Q. 1 Is the owner of a production payment pledged for exploration or development, within the meaning of section 1.636-1(b)(1) of the Income Tax Regulations, liable for the windfall profit tax on the crude oil removed from the property applied to the satisfaction of the production payment?

  A. 1 Yes.  The owner of a production payment pledged for exploration or development is liable for the windfall profit tax on the crude oil removed from the property applied to the satisfaction of the production payment.  Section 51.4996-1(b)(1) of the Excise Tax Regulations provides that the owner of a production payment shall be treated as a producer only to the extent that the production payment is treated as an economic interest by section 636 of the Internal Revenue Code, taking into account the effective date of that section.

  The owner of a production payment pledged for exploration or development is treated, under section 636, as the owner of an economic interest in the oil in place.  The owner of an economic interest is a "producer" under section 4996(a) of the Code and section 51.4996-1(b)(1) of the regulations and is thus subject to tax.  Section 4988(b)(5) of the Code provides that for purposes of determining the net income limitation on the windfall profit tax under section 4988(b)(2), both parties to a production payment must include in their gross income from the property the gross income attributable to any portion of the crude oil removed from the property that is applied in discharge of the production payment.

  Q. 2 Is the owner of a retained production payment created after August 6, 1969, on the sale of a property liable for the windfall profit tax on any oil removed from the property?

  A. 2 No.  The owner of a production payment, created after August 6, 1969 and retained on the sale of a mineral property, is not liable for the windfall profit tax on any oil removed from the property.  Section 51.4996-1(b)(1) of the regulations provides that the owner of a production payment shall be treated as a producer only to the extent that the production payment is treated as an economic interest by section 636, taking into account the effective date of that section.  Under section 636 of the Code, a retained production payment, created after August 6, 1969, is treated as a purchase money mortgage loan (rather than as an economic interest in the mineral property).  Because the payor of the production payment owns the economic interest in the property, the payor is liable for the payment of the windfall profit tax on crude oil removed from the property.