1The claims of several similarly-situated taxpayer plaintiffs are consolidated in this appeal. All

claims involve similar facts and identical legal issues, and we simplify our presentation of the case

by discussing these issues only in reference to Landreth. 

 

2Generally, an NPI, which derives from a working interest, entitles its owner to a percentage of

the net profits from the operation of the property to which it is attached. This means that the NPI

owner's share of contractually specified production expenses is subtracted from the owner's share

of oil sale proceeds before any distribution is made to the owner. However, the owner is not

liable for costs in excess of the percentage of oil sale revenues to which its interest is attached. 

See Christy E. Milner, Resolving Producer/Interest Questions Under the Crude Oil Windfall

Profit Tax, 37 TAX.L. 607 (1984). So the NPI interest owner receives credit for excess operating

expenses in any year in which these expenses exceed revenues, but remains conditionally obligated

to pay these expenses in a future year, if any, when proceeds exceed expenses. Landreth agrees

that an NPI is an interest subject to the windfall profit tax. 

United States Court of Appeals,

Fifth Circuit.

No. 91–1468.

William A. LANDRETH, Sr., Mary Adele Landreth Smith, Co–Trustees of W.A. Landreth, Jr.,

Trust, under the Will of Adele H. Landreth, et al., Plaintiffs–Appellants,

v.

UNITED STATES of America, Defendant–Appellee.

June 18, 1992.

Appeals from the United States District Court for the Northern District of Texas.

Before REAVLEY, JOLLY and HIGGINBOTHAM, Circuit Judges.

REAVLEY, Circuit Judge:

The Landreth trust (Landreth)1 received no cash distributions in 1981, 1982, or 1983 on its

net profits interest (NPI)2in certain oil properties operated by Amoco Oil Company (Amoco).

Landreth, a cash method taxpayer, argues that because it received no distributions, it had no gross

income and thus no net income for purposes of the windfall profit tax. So Landreth claims that it is

due a refund of all windfall profit tax paid for those tax years. The district court rejected Landreth's

arguments and dismissed its refund claim. Landreth v. United States, 756 F.Supp. 284

(N.D.Tex.1991). We affirm.
I. BACKGROUND

Landreth's interest exists under a contract with Amoco as operator of the oil properties as to

which Landreth claims refund. The contract requires Amoco each year to charge against Landreth's

interest alltaxes(other than income taxes) assessed upon the properties, current-year operating costs,

and unpaid operating costs incurred in any previous year when costs exceeded revenues. As a result

of these contractual charges, Landreth received no distributions under the contract in the years at

issue. Landreth filed a claim with the Internal Revenue Service (IRS), seeking refund of the windfall

profit tax that Amoco withheld and paid to the IRS on Landreth's account for those years.

Landreth's approach to windfall profit tax accounting would eliminate gross income in the

yearsin question bydeducting fromLandreth'sshare of oilsale proceedsthe amounts Amoco charged

for both windfall profit tax and unpaid operating expenses accumulated from prior years. And with

no gross income, Landret h could have no net income for purposes of computing the net income

limitation to the windfall profit tax, and thus could have no windfall profit tax liability. The IRS,

however, decided that Landreth was not entitled to deduct from gross income either the windfall

profit tax or the excess production expenses Amoco charged from prior taxable periods. That

decision prompted this suit.

The district court agreed that Landreth received no cash distribution during the relevant tax

periods because the amount of windfall profit tax that Amoco withheld, plus the operating expenses

that Amoco carried over from prior accounting periods, exceeded oil sale proceeds. Landreth, 756

F.Supp. at 286. However, the court concluded that, "[b]ecause the Code does not provide for the

deduction of either amount ..., [Landreth is] liable for windfall profit taxes." Id. at 287. Landreth

appeals.

II. DISCUSSION

Congress enacted the Crude Oil Windfall Profit Tax Act of 1980 (the Act), I.R.C. §§
 

3Profits are taxed as income under I.R.C. § 63. 

 

4We note, however, that the windfall profit tax is similar to an income tax in its "structure and

computation." See Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey Dep't of

Treasury, 490 U.S. 66, 109 S.Ct. 1617, 1623 n. 9, 104 L.Ed.2d 58 (1989), quoting I.R.S. Manual

Supplement—Windfall Profit Tax Program, 42 RDD–57 (Rev. 3) para. 2.01 (August 28, 1987),

reprinted in II CCH Internal Revenue Manual—Audit, p. 7567. Presumably because of this

similarity, Landreth correctly places controlling emphasis on the distinction "between the income

of the Taxpayers from the properties and the income of the properties themselves." 

 

5Taxation under the Act depends only upon the classification of oil, the type of producer, and

the selling price of the oil. See Paul Mangum, Evolution of the Crude Oil Windfall Profit

Tax—An Examination of Recent Changes, 13 ST.MARY'S L.J. 767, 768 (1982) (explaining basis

of windfall profit taxation). 

4986–98, in conjunction with its deregulation of oil prices. The Act's title is misleading. The tax

imposed by the Act is not a tax on profits or income,3as is the federal income tax that is codified in

I.R.C.subtitle A,4and therefore liability under the Act does not directly depend upon the profitability

or income of the producer or interest owner.5 Rather, it is an excise tax, a tax that burdens the

exercise of one or more of the powers incident to ownership. See Bromley v. McCaughn, 280 U.S.

124, 137–38, 50 S.Ct. 46, 48, 74 L.Ed. 226 (1929); Mangum, supra note 5, at 768.

Congress levied this tax on the difference between the deregulated sale price of oil and the

regulated price that would have applied had deregulation not occurred. Amerada Hess, 109 S.Ct.

at 1619; see also Barry R. Miller & Dan G. Easley, The Windfall Profit Tax—An Overview, 12

ST.MARY'S L.J. 414, 415 & n. 2 (1980). The Act taxes the producer's right to sell oil for more than

the regulated price by taxing the removal of oil from the producer's property. I.R.C. § 4986(a); see

Mangum, supra note 5 at 767–68, n. 4. The Act includes a provision, called the "net income

limitation," which prevents production from being taxed beyond the point of profitability. The net

income limitation has the effect of capping taxable windfall profit at ninety percent of the net income

from the property, as net income is defined for purposes ofsection 4988(b)(1). See Rev.Rul. 85–79,

1985–1 C.B. 337 (explaining operation of net income limitation).

Section 4988(b)(2) defines net income per barrel as "the taxable income derived from the oil
 

6The Act provides for a deduction of the windfall profit tax from income. Pub.L. No. 96–223,

§ 101(b), 94 Stat. 229 (1980); see S.REP. No. 394, 96th Cong., 2nd Sess. 30 (1980), reprinted in

1980 U.S.C.C.A.N. 410, 439. 

removed from a particular property for a given year divided by the number of barrels from that

property taken into account for that year." Treas.Reg. § 51.4988–2(b)(1)(ii) requires that taxable

income be computed according to I.R.C. section 613(a), subtracting certain expenses from the

property's gross income. Gross income from the property is the amount for which the taxpayer sells

the oil in the immediate vicinity of the well, minus any rents or royalties paid or incurred by the

taxpayer in respect to the property. Treas.Reg. § 1.613–3(a).

A. DEDUCTIBILITY OF THE WINDFALL PROFIT TAX

The net income limitation circumscribes windfall profit tax liability according to the

profitability of production. Landreth would define income under the net income limitation as it is

defined under I.R.C. subtitle A, which codifiesthe taxesimposed on income. Indeed, for the purpose

of the tax on income, the windfall profit tax is already deductible under I.R.C. section 164.6 The

I.R.C. provisions governing computation of the windfall profit tax, however, and the associated

regulationsinterpreting the net income limitation, dispose of Landreth's contention that the tax itself

is deductible from section 4988 income.

Section 4988(b)(3)(B) states that, in calculating taxable income from the property, "[n]o

deduction shall be allowed for ... the tax imposed by section 4986," the windfall profit tax. And the

associated Treas.Reg. § 51.4988–2(b)(1)(ii) computes taxable income by reducing the property's

grossincome "byall allowable deductions attributable to the production oftaxable crude oil ... except

windfall profit tax " (emphasis added). See also Rev.Rul. 85–79, 1985–1 C.B. 337 (explaining

rationale for nondeductibility of windfall profit tax in computing section 4988 net income). I.R.C.

provisions and regulations pertaining specifically to the windfall profit tax ofI.R.C.subtitle D govern

the definition of income for the purposes of that tax. Those regulations are set forth in Treas.Reg.

§ 51.4988–2(b)(1)(ii) and, by reference, I.R.C. § 613–3(a). We find no evidence that Congress
intended for the net income limitation either to change the windfall profit tax from an excise tax to

an income tax, or to incorporate the definition of income from I.R.C. subtitle A provisions that

concern taxes imposed on income.

Nor do we find Rev.Rul. 83–185, 1983–2 C.B. 200, applicable. That ruling only addresses

the question of how a cash method taxpayer is to account for barrels of oil removed in one year and

sold in the next, and holds that the windfall profit tax applies to all of the oil removed from the

premisesin the taxable year, but islimited by the net income limitation to ninety percent ofthe income

from oil actually sold from the property in the taxable year, regardless of when removed. Landreth

does not raise an issue regarding the timing of the removal and sale of oil from the property.

B. DEDUCTIBILITY OF EXPENSES FROM PREVIOUS TAX PERIODS IN COMPUTING WINDFALL PROFIT

TAX

Landreth also seeks to deduct previous tax period expenses carried forward into the tax

periods at issue in this case in computing taxable income for purposes of the net income limitation

to the windfall profit tax. The district court rejected Landreth's claim to this deduction, holding that:

[i]n determining windfall profit taxes, the Code first requires a determination of taxable

income from the property for the taxable year attributable to taxable crude oil. I.R.C. §

4988(b)(2) ... makes clear that the only relevant time period is the taxable year. Taxable

income is determined under I.R.C. § 613(a), which does not allow a net operating loss under

§ 172 of the Code to be deducted from gross income from the property in determining a

taxpayer's taxable income from the property. Moreover, Treasury Regulation §

51.4988–2(b)(1)(ii) makes clear that amounts deductible in determining taxable income from

the property must be attributable to taxable crude oil removed during that particular taxable

year.

Landreth, 756 F.Supp. at 287–88 (citations omitted). The district court understood section

51.4988–2(b)(1)(ii) correctly. A cash-method taxpayer loses the windfall profit tax deduction for

production costs incurred during previous tax periods, to the extent that those costs exceed gross

revenues from that period's production. The I.R.C. provides for the deduction of those costs under

the income tax provision of section 172.
 

7Section 51.4988–2(b)(1)(ii) specifically requires that we "[d]etermine the taxpayer's taxable

income from the property attributable to taxable crude oil for the taxable year by reducing the

taxpayer's gross income from the property determined under paragraph (b)(1)(i) of this section by

all allowable deductions attributable to the production of taxable crude oil that would be

subtracted in determining taxable income from the property under section 613(a) allowable for the

taxable year." 

Rev.Rul. 83–185, 1983–2 C.B. 200, suggests that this deduction is not permissible for a

cash-basis taxpayer:

[G]enerally, under the cash receipts and disbursements method, in the computation oftaxable

income all items that constitute gross income are to be included for the tax year in which

actually or constructively received. Expenditures are to be deducted for the taxable year in

which actually made.

Landreth did not actually pay out production expenses, and the contract did not obligate Landreth

to do so, at least to the extent those expenses exceeded oil sale revenues. At the same time, Amoco

charged Landreth's interest with those prior years' excess expenses in years when Amoco took in

sufficient oilsale revenues. Therefore Landreth paid, according to its contract, prior excess expenses

in the first year when revenues were sufficient, regardless of the year in which the excess expenses

were generated. Under this rationale, Landreth claims the deduction of prior years' expenses. But

we must also reject this argument.

Treas.Reg. § 51.4988–2(b)(1)(ii) specifies the method for determining each year's taxable

income from a particular property's production for purposes of the net income limitation. Taxable

income results from subtracting all deductible production expenses for that year from the gross

income associated with production from t he property for that year. The Regulation so states.7

Section 51.4988–2(b)(1)(ii) facially supplies no basis for deducting the allowable costs attributable

to the production from earlier taxable years. While unpaid excess operating losses from one tax

period generally may be carried forward into a subsequent period for purposes of federal income tax

under I.R.C. § 172, we find no parallel provision that allows Landreth to carry forward excess

operating expenses for purposes of the windfall profit tax net income limitation.
AFFIRMED.