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October 27,  2008

Federal Headlines

2008 Adjustment Factor Published; Enhanced Oil Recovery Credit Phased Out (Notice 2008-72)

 

The IRS has issued the inflation adjustment factor for use in determining the enhanced oil recovery credit under Code Sec. 43. The inflation adjustment factor for calendar year 2008 is 1.4666. Because the reference price as determined under Code Sec. 45K(d)(2)(C) for 2007 ($66.52) exceeds $28 multiplied by the inflation adjustment factor for 2007 by $25.45, the enhanced oil recovery credit for qualified costs paid or incurred in 2008 is phased out completely. The GNP implicit price deflator to be used for calendar year 2008 is 119.656.

Notice 2008-72, 2008FED ¶46,635

Other References:

 

Code Sec. 43

 

CCH Reference - 2008FED ¶4387.021

 

CCH Reference - 2008FED ¶4387.07

 

CCH Reference - 2008FED ¶4387.30

 

Tax Research Consultant

 

CCH Reference - TRC BUSEXP: 54,302.05

 

CCH Reference - TRC BUSEXP: 54,554.15

Applicable Percentages for Depletion of Marginal Oil and Gas Properties Announced (Notice 2008-89)

 

For purposes of determining percentage depletion under Code Sec. 613A(c) for oil and gas produced from marginal properties, the IRS has released a table of the applicable percentages for marginal production that covers tax years beginning in calendar years 1991 through 2008. The applicable percentages are: 15 percent for calendar year 1991; 18 percent for calendar year 1992; 19 percent for calendar year 1993; 20 percent for calendar year 1994; 21 percent for calendar year 1995; 20 percent for calendar year 1996; 16 percent for calendar year 1997; 17 percent for calendar year 1998; 24 percent for calendar year 1999; 19 percent for calendar year 2000; and 15 percent for calendar years 2001 through 2008.

Notice 2008-89, 2008FED ¶46,636

Other References:

 

Code Sec. 613A

 

CCH Reference - 2008FED ¶23,988.044

 

CCH Reference - 2008FED ¶23,988.35

 

Tax Research Consultant

 

CCH Reference - TRC FARM: 15,216.05

State Headlines

Idaho --Corporate Income Tax: Loans Could Not Be Excluded From Apportionment Numerators

 

In an Idaho corporate income tax case involving loans that were secured by Idaho real property, the Tax Commission affirmed a deficiency notice, despite the taxpayer's claim that the transfer of the loans to related companies for securitization removed the loans from the Idaho apportionment numerators. The taxpayer argued that the loans should be excluded because the companies did not transact business in Idaho and, therefore, were not subject to Idaho income tax. In examining the safe harbor allowed for corporations conducting certain limited financial activities within Idaho, the Tax Commission noted that it is possible for a corporation to be maintaining an office in the state, based on activity being conducted on its behalf by affiliates or representatives, provided that such activity is more than just de minimis. In this case, the activities conducted at affiliated offices in Idaho exceeded the de minimis exception.

 

In addition, with respect to the property factor, the Tax Commission concluded that the intercompany transfer of the loans to related companies did not amount to a material change that would justify excluding the loans from the Idaho numerator. The taxpayer's exclusion of the loan interest from the Idaho sales factor numerator was also rejected.

 

The taxpayer also failed to establish that it should be allowed to change the assignment of certain other loans, based on a cost of performance analysis. In addition to solicitation occurring in Idaho, the loans in question were secured by Idaho real property, assigned to Idaho on regular business records, and assigned to Idaho in returns filed with other states.

 

Finally, although the taxpayer's substantive arguments were rejected, the Tax Commission recognized that the underlying legal issues were complex. Because the taxpayer acted in good faith and there was reasonable cause for the positions taken, the substantial understatement penalty was waived.

Decision No. 20555, June 24, 2008, received October 23, 2008, ¶400-594

 

Other References:

 

Explanations at ¶11-540

Oklahoma --Property Tax: Natural Gas Gathering Facility Not a Centrally Assessable Public Service Corporation

 

The Oklahoma Supreme Court has decided that the Oklahoma State Board of Equalization and the Oklahoma Tax Commission (hereinafter, the state revenue authorities) erroneously classified a natural gas gathering facility as a public service corporation and, accordingly, these state revenue authorities were without jurisdiction to assess the facility for purposes of Oklahoma ad valorem taxation. Instead, only the local county assessor had the jurisdiction to assess the facility's property. Furthermore, the court determined that a state statute relied upon by the state revenue authorities in taxing the facility was unconstitutional.

 
Public Service Corporation Issue

 

The facility, which moved natural gas from wells to the point of sale, and did not furnish gas directly to the general public, and whose rates were unregulated, was not a public service corporation assessable by the state revenue authorities because the facility was not authorized to exercise the right of eminent domain and did not have a franchise to use or occupy any right of way, street, alley, or public highway, whether along, over, or under the same, in a manner that was not permitted to the general public. The fact that the facility utilized statutory rights to obtain road crossing permits and to lay pipelines under public roadways pursuant to permits available to the general public was insufficient to make the facility a public service corporation. In fact, both the federal Natural Gas Act and the Oklahoma Production and Transportation Act clearly provided that a natural gas gathering facility may not exercise the power of eminent domain.

 
Constitutional Issue

 

In addition, the problematic statute relied upon by the state revenue authorities to tax the facility was unconstitutional. The statute was an impermissible special law relating only to natural gas gathering facilities that sought to extend the jurisdiction of the state revenue authorities and that also unreasonably and arbitrarily taxed similarly situated facilities differently simply on account of how the facilities were assessed in 2002. That is, the statute improperly provided that natural gas gathering facilities that were centrally assessed in 2002 would continue to be centrally assessed, and that such facilities that were locally assessed in 2002 would continue to be locally assessed. The court agreed with this facility that the method by which a natural gas gathering facility was assessed in 2002 was not a distinctive characteristic upon which different tax treatment could be reasonably founded.

EOG Resources Marketing v. Oklahoma State Board of Equalization, Oklahoma Supreme Court, No. 105860, October 21, 2008, ¶201-047.

 

Other References:

 

Explanations at ¶20-330
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