Rev. Rul. 86-45

1986-1 C.B. 340, 1986-13 I.R.B. 36.

WINDFALL PROFIT TAX; SEVERANCE TAX ADJUSTMENT; WYOMING

Published: March 31, 1986

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; Wyoming. The taxes imposed under Wyo. Stat. sections 39-6-302(g) and (h) are severance taxes within the meaning of section 4996(c) of the Code. The state portion of the tax imposed under Wyo. Stat. section 39-2-402 is also a severance tax within the meaning of section 4996(c). Rev. Rul. 82-87 amplified.

ISSUE

  Do the crude oil production taxes imposed by Wyoming Statutes sections 39-6-

302(g) and (h) and 39-2-402 qualify as severance taxes for purposes of the crude oil windfall profit tax severance tax adjustment allowed by section

4988(a) of the Internal Revenue Code?

FACTS

  Rev.Rul. 82-87, 1982-1 C.B. 189, holds, in part, that the tax imposed by Wyo. Stat. section 30-5-116 and two taxes imposed by Wyo. Stat. sections 39-6-302(a) and (b) (as in effect for removal years after 1980) on the production of crude oil are severance taxes for purposes of the crude oil windfall profit tax severance tax adjustment.

  Wyo. Stat. section 39-6-302(g) (1985), added by 1981 Wyoming Session Laws Chapter 49, section 1, and amended by 1985 Wyoming Session Laws Chapter 182, section 1, imposes, except as otherwise provided in Wyo. Stat. section 39-6-

302(h), an additional tax of 2 percent of the value of the gross product on the privilege of severing or extracting oil and gas.

  Wyo. Stat. section 39-6-302(h), added by 1985 Wyoming Session Laws Chapter

182, Section 1, levies an excise tax of 1-1/2 percent of the value of the gross product on the privilege of severing or extracting oil and gas from collection wells prior to January 1, 1990. That section further provides that the taxes imposed by Wyo. Stat. sections 39-6-302(a), (b), and (g) do not apply to oil and gas subject to the tax imposed by section 39-6-302(h) but do apply to oil and gas extracted from collection wells on and after January 1, 1990. Wyo. Stat. section 39-6-301(a)(v) defines 'collection wells' as meaning reservoir access holes drilled from underground shafts or tunnels from which oil or gas is produced.

  Under Wyo. Stat. sections 39-6-301(a)(iv) and 39-6-304, the taxes imposed by section 39-6-302 for removal year after 1980 are computed based on actual production during each calendar quarter.

  Wyo. Stat. section 39-2-402(a) authorizes the levy of property taxes for state purposes. Wyo. Stat. sections 39-2-402(b) through (f) authorize the levy of property taxes by counties, incorporated cities and towns, and other special districts. Under Wyo. Stat. sections 39- 2-201 and 202, the State Board of Equalization is to value mines and mining claims for taxation based on the gross product for the preceding calendar year and certify the valuation to the county assessor.

  Under Wyo. Stat. section 39-1-304(a), the State Board of Equalization is to annually certify the amount of the tax levy for state purposes to each County Board of Commissioners, and, under Wyo . Stat. section 39-2-403, the county board is to enter the requisite levy of record on or before the first Monday in August.

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 is 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 Excise Tax Regulations under the Crude Oil Windfall Profit Tax Act of 1980, 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.

  The taxes imposed by Wyo. Stat. sections 39-6-302(g) and (h) are imposed by the state on the basis of the gross value of the extracted oil. Furthermore, when these taxes are added to the Wyoming severance taxes discussed in Rev. Rul. 82-87, the aggregate rate of tax does not exceed 15 percent.

  The tax imposed under Wyo. Stat. section 39-2-402 is based on the gross value on the production of the calendar year preceding the year in which the tax is imposed. For example, the tax imposed in 1985 is based on 1984 production. For purposes of the windfall profit tax, therefore, producers may not deduct against 1985 production the section 39-2-402 that is imposed in 1985. The deduction is not allowed because there is no correspondence between the two amounts. Under section 4996(c) of the Code, the adjustment is the different between the severance tax imposed and the severance tax that would have been imposed if the barrel had been valued at its adjusted base price. The difference between the tax actually imposed in any year by Wyo. Stat. section

39-2-402 and the tax that would have been imposed if the oil sold in that year and been valued at its adjusted base price will always be zero. The severance tax imposed in 1985 is based on the value of production in 1984 and will be the

same regardless of the price of the oil or the number of barrels sold in 1985.

  The severance tax offset is lost if it is not associated with the production of a particular period. In this case, if the severance tax is not associated with the production of the year preceding the imposition of the tax, a producer would be perpetually denied the effects of the severance tax adjustment with respect to Wyo. Stat. section 39-2-402, even though the rise in the price of oil due to decontrol raises the producer's severance tax liability. Further, a producer knows at the end of a calendar year the amount of production and the rate at which the tax will be assessed under Wyo. Stat. section 39-2-402. Therefore, to avoid the loss of the adjustment, the producer may take the severance tax adjustment in the current year in anticipation of the tax that will be assessed in the following year and that otherwise qualifies under section 4996(c) of the Code. This advance adjustment based on the following year's severance tax applies only for purposes of the windfall profit tax. For income tax purposes, a deduction for the severance tax may be taken only when the tax has been paid or accrued.

  The tax imposed under Wyo. Stat. section 39-2-402 is not entirely a tax imposed by the state. Rather, it is a combination of taxes, some of which are imposed by the state and some of which are imposed by the counties (or other local governments). Although the tax is mandated by state statute and the rates for the state portion are set statewide, there is no requirement that any county have a tax for county purposes. Therefore, since section 4996(c) of the Code requires that a qualifying severance tax be a state tax, the adjustment must be limited to that portion of the tax imposed by the state, currently 4.3 percent. When this tax is added to the taxes discussed in Rev. Rul. 82-87 and the taxes imposed by Wyo. Stat. sections 39-6-302(g) and (h), the aggregate rate of tax does not exceed 15 percent. Therefore the state tax portion of the tax imposed by Wyo. Stat. section 39-2-402 may be taken into account for purposes of determining the severance tax adjustment.

HOLDING

  The taxes imposed under Wyo. Stat. sections 39-6-302(g) and (h) are severance taxes within the meaning of section 4996(c) of the Code and may be taken into account in determining the severance tax adjustment.

  The state portion of the tax imposed under Wyo. Stat. section 39-2-402 is a severance tax within the meaning of section 4996(c) of the Code and may be taken into account in determining the severance tax adjustment in the production year to which the tax relates.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 82-87 is amplified.

Rev. Rul. 86-45, 1986-1 C.B. 340, 1986-13 I.R.B. 36.