Rev. Rul. 86-2

1986-1 C.B. 3, 1986-2 I.R.B. 4.

CREDIT FOR PRODUCING OIL FROM A NONCONVENTIONAL SOURCE

Published: January 13, 1986

Section 29.-Credit for Producing Fuel from a Nonconventional Source

  Credit for producing oil from a nonconventional source. A taxpayer may receive the production credit on sales of gas during a calendar year in which the taxpayer also received the incentive price from the same wells under section 107 of the Natural Gas Policy Act of 1978(NGPA).

ISSUE

  Whether taxpayer is allowed the credit under section 29(a) of the Internal Revenue Code for producing fuel from a nonconventional source for sales of gas during part of a calendar year, notwithstanding that during the same calendar year other sales of gas from the same wells were made under the incentive pricing provisions of section 107 of the Natural Gas Policy Act of 1978 (NGPA).

FACTS

  During the first part of the 1983 calendar year, the taxpayer sold gas produced from a tight formation at an incentive price under section 107(b) of the NGPA. But for section 107 of the NGPA, the gas in question would qualify under section 103 (ceiling price for new, onshore production wells) of the NGPA. For the remainder of the calendar year, the taxpayer sold the gas at a price not higher than the maximum lawful price under section 103 of the NGPA. All sales were made to an unrelated person within the meaning of section

29(d)(8) of the Code.

LAW AND ANALYSIS

  Section 29(a) of the Internal Revenue Code (formerly section 44D, but renumbered by section 47(c)(1) of the Tax Reform Act of 1984, 1984-3 (Vol. 1) C.B. 1, 333) provides for a credit against income tax of an amount equal to $3 multiplied by the barrel of oil equivalent of qualified fuels which were sold by the taxpayer to an unrelated person during the taxable year, and the production of which is attributable to the taxpayer.

  Section 29(e) of the Code provides that subsection (a) applies with respect to natural gas that is produced from a tight formation and that is sold during the taxable year only if that natural gas is sold at a lawful price which is determined without regard to the provisions of section 107 of the NGPA of 1978 and subtitle B of title I of the NGPA.

  The provision now contained in section 29(e) was amended by section 611(a) of the Economic Recovery Tax Act of 1981 (ERTA) (1981- 2 C.B. 256, 343). Before this amendment, that provision had required that if the taxpayer made an election under section 107(d) of the NGPA to receive the incentive price, the taxpayer could not receive the credit provided by section 29(a) of the Code. This was an irrevocable election that, according to the NGPA, had to be made either before the well was drilled or within 30 days after the passage of any Act providing a tax credit. Because Congress recognized that fluctuating market conditions might cause variation in whether the incentive price or the production credit was more advantageous, what is now section 29(e) was amended to allow the taxpayer to use either one, so long as both are not used for the same gas.

HOLDING

  The taxpayer is allowed the production credit under section 29(a) of the Code for sale of gas during part of a calendar year, notwithstanding that during the same calendar year other sales of gas from the same wells were made under the incentive pricing provisions of section 107 of the NGPA.

Rev. Rul. 86-2, 1986-1 C.B. 3, 1986-2 I.R.B. 4.