Oil industry officials in the U.S. and their supporters in Congress have launched a barrage of criticism against the federal alternative minimum tax (AMT).
Phillips Petroleum Co. urged Congress not to limit AMT relief just to independent producers. Sen. Don Nickles (R-Okla.) cited data showing U.S. exploration activity would increase with AMT relief. And accounting firm Coopers & Lybrand said AMT burdens are putting U.S. independents out of business.
Although tax subcommittee chairman Sen. David Boren (D-Okla.) favors AMT relief for the oil industry, his legislation may not be included in an economic relief bill Congress is expected to pass this spring.
As currently structured, intangible drilling costs (IDCs) and independents percentage depletion are preference items for the AMT.
PHILLIPS' VIEW
Joseph O'Toole, Phillips vice-president and general tax counsel, told a Senate tax subcommittee hearing majors are also being hampered by the AMT. At a meeting of 18 major oil companies on the AMT issue, two-thirds indicated the AMT was a problem for them, he said.
O'Toole said his company has been in AMT status for 4 of the 5 years since the current AMT was enacted.
"Despite the fact that our domestic operations have had regular taxable and economic losses in recent years, we have still paid about $100 million of AMT in the past 3 years alone.
"The inability to take advantage of legitimate deductions such as depreciation and IDCs gives our competitors who are in a regular taxpaying status a significant edge.
"Nor does the AMT allow us to currently utilize legitimate tax incentives enacted by Congress such as the Section 29 and enhanced oil recovery credits even though we have undertaken such projects.
"In essence, a company must be profitable and in a regular taxpaying mode to take advantage of such incentives. The situation reminds me of the old saying that one must be able to show that he or she does not need money in order to get a loan.
"The cash drain from our AMT payments has aggravated Phillips' difficulties caused by current national economic conditions. The AMT as it is presently applied does, in fact, 'kick a company while it is down and discourages capital investment. The employee layoffs and asset sales we are undertaking are certainly related to the impacts which the AMT has had on cash flow."
O'Toole said to preserve the benefits of incentive items provided by Congress, such as Section 29 credits, Phillips has delayed deductions available for regular tax purposes and increased its AMT liability in the process. The AMT has limited Phillips' U.S. drilling.
"Phillips must make significant capital expenditures at its plants to protect the environment. More than 20% of our current budget is dedicated to environmental compliance. These investments do not produce economic return, yet they still produce an AMT burden."
O'Toole pointed out that Congress is considering legislating an investment tax credit to spark economic growth but warned, "It will be useless to that large sector of the business community paving the AMT unless the credit can be used to offset AMT liability."
NICKLES' VIEW
Nickles said, "I am convinced AMT relief is the single most important agenda item for the oil and gas industry. When a recession coincides with sustained low oil and gas prices, the AMT works like a severe penalty that gets progressively worse the longer the taxpayer falls under it. The longer prices are low and profits thin, the harsher is the AMT's impact."
Nickles said a preliminary University of Oklahoma study on the AMT's effect on the oil industry found that a more favorable AMT treatment would result in a 17-23% increase in exploratory drilling.
He said, "Under current law, when percentage depletion and IDCs are added back to income in calculating AMT tax liability, it can result in a 7080% effective tax rate for some producers.
"The result is indisputably punitive if not confiscatory.
"IDCs are the only out of pocket business expense in any industry or profession that are treated as a preference item in the AMT. Inclusion of IDCs was unfair and another example of treating the domestic oil industry as a cash cow to be milked every time revenue is needed,
COOPERS & LYBRAND VIEW
Coopers & Lybrand contends if a taxpayer pays enough tay AMT is not a problem.
"But for independents, whose lifeblood is drilling, the AMT is literally putting them out of business," said John Swords, national director of Coopers & Lybrand's energy taxation practice. "Very simply, the combination of low prices and the AMT have brought us to the point that we are about to eliminate America's independent oil and gas industry."
Swords contends AMT is too burdensome because it is difficult-if not impossible-to predict its effect, requires enormous amounts of bookkeeping and establishes a ceiling that removes any incentive for further activity.
The measures Congress passed in 1990 to provide partial AMT relief are extremely limited, and new rules to raise money for unemployment benefits have increased bookkeeping requirements, Swords said. In addition, the recent requirement to compute tax liability quarterly to file estimated tax payments requires added levels of bookkeeping.
"If it's not bad enough that producers must keep one set of books for regular income tax and another set for AMT, the adjusted current earnings line of the AMT return for corporations requires a third set of books," Swords said. "Accounting costs alone are prohibitive if an independent company is only marginally successful."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
