INTERIOR: NO ROYALTY PAYMENTS DUE ON TAX CREDITS

The U.S. Interior Department has decided gas producers do not owe royalties on the value of Section 29 tax credits, which are available for gas produced from coal seams and tight formations. Interior's solicitor's office told the Minerals Management Service an audit report by Interior's inspector general last August, which criticized MMS for failing to collect $70 million in royalties on Section 29 credits, was based on an incorrect interpretation of the law.

Dec. 27, 1993

2 min read

The U.S. Interior Department has decided gas producers do not owe royalties on the value of Section 29 tax credits, which are available for gas produced from coal seams and tight formations.

Interior's solicitor's office told the Minerals Management Service an audit report by Interior's inspector general last August, which criticized MMS for failing to collect $70 million in royalties on Section 29 credits, was based on an incorrect interpretation of the law.

The Natural Gas Supply Association said the decision "moves us toward a positive resolution of one of several potentially explosive royalty issues pending at the Interior Department."

The Independent Petroleum Association of America said, "Many of our members can't even use the credits because of the alternative minimum tax.

"Furthermore, we felt the idea of collecting royalties for the federal government on these tax credits went counter to congressional intent, which was to provide federal tax incentives to stimulate natural gas production from nonconventional formations."

Section 29 credits were created by the 1980 windfall profits tax and retained after most of that tax was repealed. The measure provided for a credit against income taxes of $3 multiplied by the barrel of oil equivalent of the fight sands or coal seam gas.

CONFLICTING VIEWS

The inspector general's audit report viewed the tax credits as part of a lessee's gross proceeds from a lease and said they should be royalty bearing.

However, the solicitor's office said Congress sought to stimulate production with the tax credit, and it had nothing to do with royalties.

The solicitor's office said "Simply stated, tax increases do not reduce royalty, and tax reductions do not increase it.

"Section 29 is a change by the government in the tax levy itself and therefore does not affect royalty.

"Contrary to the office of inspector general's arguments, Section 29 tax credits are not similar to reimbursements for severance taxes. Nor is there any substantive difference between Section 29 tax credits and other reductions in tax liability such as depletion allowances and investment tax credits. Moreover, gross proceeds are not derived from sources other than the marketplace."

The opinion said the tax credit does not increase the sale price for gas, although it may increase the profitability of gas produced from a qualifying source--as Congress intended.