Opinion ID: 4914
Heading Depth: 2
Heading Rank: 1

Heading: deductibility of the windfall profit tax

Text: 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 codifies the taxes imposed 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 regulations interpreting 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 gross income by all allowable deductions attributable to the production of taxable 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 of I.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 6 The 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. 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 premises in the taxable year, but is limited by the net income limitation to ninety percent of the 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. 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 of taxable income all items that constitute gross income are to be included fo r 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 oil sale 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. 7 Section 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. AFFIRMED.