Rev. Rul. 86-19

Caution: Modified and Superseded by 86-127

CREDIT FOR PRODUCING FUEL FROM A NONCONVENTIONAL SOURCE

Published: February 18, 1986

Section 29-Credit for Producing Fuel from a Nonconventional Source

  Credit for producing fuel from a nonconventional source. After December 31, 1984, gas produced from a tight formation that also falls under any of the categories of gas specified in 18 CFR 272.103 (a) under the Natural Gas Policy Act of 1978 (NGPA) will no longer be eligible for the credit allowed by section 29 (formerly section 44D) of the Internal Revenue Code.

  Section 29(a) of the Code (formerly Section 44D(a)) provides a credit against income tax of $3 per barrel-of-oil equivalent of qualified fuels sold by the taxpayer during the taxable year, subject to stated conditions. Section 29(c)(1)(B) provides that the term 'qualified fuels' includes 'gas produced from . . . a tight formation.' However, section 29(c)(2)(B)(i) provides that the term 'gas produced from a tight formation' shall only include gas the price of which is regulated by the United States.

  Section 121 of the Natural Gas Policy Act of 1978, Pub. L. No. 95-621, 15 U.S.C. section 333 1(1982) (NGPA) eliminated price controls as of January 1, 1985, on certain categories of natural gas classified under section 102(c) and section 103(c) of the NGPA. The Federal Energy Regulatory Commission (FERC) has issued regulations concerning the types of gas that were deregulated by section

121. See 49 Fed. Reg. 46,874 (Nov. 29, 1984). These regulations include amendments to 18 C.F.R. section 272.103(a), which defines 'deregulated natural gas.' See 49 Fed. Reg. 46,884. The FERC also decided that gas is deregulated if it falls into two or more categories any one of which is a deregulated category. See 49 Fed. Reg. 46,877-79.

  Thus, gas produced and sold after December 31, 1984, that falls under any of the categories listed in 18 C.F.R. section 272.103(a) (as amended) is gas the price of which is not regulated by the United States. Gas produced from a tight formation is generally classified as section 107(c)(5) gas under the NGPA. However, a considerable amount of section 107(c)(5) gas also is classified as section 102 or 103 gas. Thus, if gas from a tight formation also qualifies under section 102 or 103, it is deregulated for purposes of the NGPA. In accordance with section 29(c)(2)(B)(i) of the Code, even if such gas would otherwise qualify as gas produced from a tight formation, it is not a qualified fuel under section 29(c), and producers of the gas are not eligible for the credit allowed by section 29(a).

Rev. Rul. 86-19, 1986-1 C.B. 4, 1986-7 I.R.B. 4.