WATCHING WASHINGTON SMALL PRODUCER TAX BREAK?

If Congress passes a tax bill this session, chances appear good it may contain a sweetener for small U.S. oil producers.

Leaders of congressional tax writing committees have agreed on a tax simplification bill that would, among other things, reduce reporting requirements for oil and gas partnerships and facilitate such investments.

The Bush administration supports the legislation, if it can be kept revenue neutral. The congressional joint tax committee is analyzing the bill.

Industry's use of partnerships plummeted following the 1986 Tax Reform Act's sweeping changes in partnership taxation and a concurrent collapse in oil prices.

A ROUTE TO CAPITAL

Sen. David Boren (D-Okla.) observed at a recent hearing on the bill, "The oil and gas industry is badly in need of outside capital and investors."

Denise Bode, president of the Independent Petroleum Association of America, testified, "Partnerships have long been used by the oil and gas industry as a means of raising investment capital. A recent survey indicated 21% of independent producers have raised venture capital through the use of limited partnerships."

Although the bill would reduce data that must be reported, if large oil and gas partnerships chose to apply the simplified requirements they would be required to forego the benefits of percentage depletion and could deduct only cost depletion.

IPAA sees no valid reason for that. "Although percentage depletion now must be separately reported to partners, there is little reason this computation could not occur at the partnership level," Bode said.

IPAA also opposes provisions setting a deadline for reporting data to partners following the end of the partnership year, requiring data to be submitted electronically if the partnership was not using the simplified rules.

Sean Brennan, director of taxes for Mesa Limited Partnership, urged Congress to consider an amendment to allow a widely held partnership to make an election to report income and pay unrelated business income (UBI) tax on a composite basis for its tax exempt partners.

Brennan said, "Currently, UBI reporting is troublesome for all involved and more particularly for small partners such as Individual Retirement Accounts. The amendment would benefit the partners, as well as the Internal Revenue Service and the partnerships who seek tax exempt partners."

ORYX SUGGESTION

James Aughinbaugh, general tax manager for Oryx Energy Co., suggested another amendment. He said under current law, if an investor acquires a 5% interest in a producer while also holding a 5% interest in a refiner or a retailer, the producer is deemed to be an integrated oil company and would lose the tax advantages of an independent.

Aughinbaugh said, "These rules put the independent producer in the position of being deemed an integrated oil company without any action or knowledge on its part and make the independent producer completely subject to the investment decisions of an unrelated third party investor over whom it has no control. "

Aughinbaugh proposed changing the investment limit to 20%.