114 T.C. No. 4
UNITED STATES TAX COURT
S/V DRILLING PARTNERS,
SNYDER ARMCLAR GAS COMPANY, TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14163-98. Filed February 23, 2000.
Sec. 29, I.R.C., provides a credit for fuel
produced from nonconventional sources, including gas
produced from geopressurized brine, Devonian shale,
coal seams, or a tight formation.
In 1993 and 1994, S/V, a partnership, sold 32,410
barrels of oil equivalent (BOE’s) of natural gas
produced from nonconventional sources described under
sec. 29, I.R.C. S/V sold 15,483 BOE’s of gas produced
from a tight formation that was not Devonian shale and
16,927 BOE’s of gas produced from both a tight
formation and Devonian shale.
Held: S/V is allowed a credit for 32,410 BOE’s of
natural gas. The credit rate is (1) 15,483 times $3,
and (2) 16,927 times $3 indexed as provided in the
first sentence of sec. 29(b)(2), I.R.C.
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Dom W. Greco, for petitioner.
Michael A. Yost, Jr. and Edward F. Peduzzi, Jr., for
respondent.
OPINION
COLVIN, Judge: On August 3, 1998, respondent issued two
notices of final partnership administrative adjustment to S/V
Drilling Partners (S/V), a partnership, in which respondent
determined adjustments to S/V’s partnership returns for the tax
years ending December 31, 1993 and 1994. On August 18, 1998,
Snyder Armclar Gas Co. (Snyder), S/V’s tax matters partner,
petitioned the Court to redetermine respondent’s adjustments to
partnership items.
In 1993 and 1994, S/V sold 32,410 barrels of oil equivalent
(BOE’s)1 of natural gas produced from nonconventional sources,
consisting of 15,483 BOE’s of gas produced from a tight formation
that was not Devonian shale and 16,927 BOE’s of gas produced from
both a tight formation and Devonian shale.
The issue for decision is the amount of S/V’s section 29
credit. We hold that S/V is allowed a section 29 credit equal to
(1) 15,483 times $3, and (2) 16,927 times $3 indexed as provided
in the first sentence of section 29(b)(2).
1
A barrel of oil contains about 5.8 million British
thermal units (Btu’s).
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Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Background
The parties submitted this case fully stipulated under Rule
122. S/V’s principal place of business was Kittanning,
Pennsylvania, when the petition was filed.
A. S/V’s Natural Gas Production From a Tight Formation and
Devonian Shale
In 1992, S/V, a partnership composed of Snyder and Victory
Energy Corp. (Victory), drilled eight natural gas wells in
Armstrong and Indiana Counties, Pennsylvania. In December of
that year, Victory filed with the Pennsylvania Department of
Environmental Resources (DER) two classification requests for
each well, seeking determinations that these wells produced
natural gas from Devonian shale and from a tight formation. The
requests were made under section 503 of the Natural Gas Policy
Act of 1978 (NGPA), Pub. L. 95-621, 92 Stat. 3350, 15 U.S.C. sec.
3413 (1988) (repealed January 1, 1993, by the Natural Gas
Wellhead Decontrol Act of 1989, Pub. L. 101-60, sec. 3(b)(5), 103
Stat. 157, 159). DER approved Victory’s requests and determined
that the wells were producing natural gas from rock formations
that qualified as both Devonian shale and a tight formation. The
Federal Energy Regulatory Commission (FERC) approved DER’s
determinations.
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In 1993 and 1994, S/V sold 32,410 BOE’s of natural gas
produced from the wells to public utilities. During these years,
15,483 BOE’s of natural gas sold by S/V were produced from a
tight formation that was not Devonian shale, and 16,927 BOE’s
were produced from a tight formation that was also Devonian
shale.
BOE’s of Natural Gas Produced by S/V From Nonconventional Sources
(rounded to the nearest BOE)
Produced from a Produced from a
tight formation but tight formation
Year Total not Devonian shale and Devonian shale
1993 15,137 7,343 7,794
1994 17,273 8,140 9,133
Total 32,410 15,483 16,927
B. S/V’s Tax Returns
On its 1993 and 1994 partnership returns, S/V claimed a
credit under section 29 for 15,483 BOE’s of natural gas it
produced from a tight formation that was not Devonian shale and a
double credit (one equal to $3 per BOE, and one equal to $3
(indexed) per BOE) for the 16,927 BOE’s produced from a tight
formation that was also Devonian shale. On its 1994 tax return,
S/V based its computation of the Devonian shale credit on the
1995 inflation adjustment factor.
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Discussion
Petitioner contends that S/V is entitled to a credit under
section 292 for the 15,483 BOE’s of natural gas it produced from
2
SEC. 29. CREDIT FOR PRODUCING FUEL FROM A
NONCONVENTIONAL SOURCE.
(a) Allowance of credit.
There shall be allowed as a credit against the tax
imposed by this chapter for the taxable year an amount
equal to--
(1) $3, multiplied by
(2) the barrel-of-oil equivalent of qualified
fuels--
(A) sold by the taxpayer to an unrelated person
during the taxable year, and
(B) the production of which is attributable to
the taxpayer.
(b) Limitations and adjustments.
* * * * * * *
(2) Credit and phaseout adjustment based on
inflation.--The $3 amount in subsection (a) and the
$23.50 and $6 amounts in paragraph (1) shall each be
adjusted by multiplying such amount by the inflation
adjustment factor for the calendar year in which the
sale occurs. In the case of gas from a tight
formation, the $3 amount in subsection (a) shall not be
adjusted.
* * * * * * *
(c) Definition of qualified fuels.--For purposes of
this section--
(1) In general. The term “qualified fuels” means--
(continued...)
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a tight formation that was not Devonian shale and a double credit
for the 16,927 BOE’s it produced from a tight formation that was
also Devonian shale. Thus, petitioner, in effect, contends that
S/V produced 49,337 BOE’s (i.e., 15,483 plus (2 X 16,927)) of gas
qualifying for the credit under section 29.
Respondent contends that S/V is entitled to a credit for
only 16,927 BOE’s of gas. Respondent contends that S/V is
entitled only to the larger of:
1. A $3 per barrel credit for the 32,410 BOE’s of natural
gas S/V produced, or
2. A credit for the 16,927 BOE’s of natural gas S/V
2
(...continued)
(A) oil produced from shale and tar sands,
(B) gas produced from--
(i) geopressured brine, Devonian shale, coal
seams, or a tight formation, or
(ii) biomass, and
(C) liquid, gaseous, or solid synthetic fuels
produced from coal (including lignite), including such
fuels when used as feedstocks.
* * * * * * *
(d) Other definitions and special rules.
* * * * * * *
(5) Barrel-of-oil equivalent.--The term “barrel-
of-oil equivalent” with respect to any fuel means that
amount of such fuel which has a Btu content of 5.8
million * * *.
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produced from property qualifying both as a tight formation and
Devonian shale, at a rate of $3, indexed as provided in the first
sentence of section 29(b)(2).
Since the latter amount is larger than the former,
respondent’s position, in effect, is that S/V is entitled to a
credit based on only 16,927 BOE’s.
We agree and disagree in part with both parties.
A. Credit for the 15,483 BOE’s of Natural Gas S/V Produced From
a Tight Formation That Was Not Devonian Shale
S/V produced 15,483 BOE’s of natural gas from a tight
formation which was not Devonian shale. Section 29(b)(2) (second
sentence) provides that the $3 credit is not indexed for natural
gas produced from a tight formation. Thus, S/V is entitled to a
credit of $3 per BOE on the 15,483 BOE’s of natural gas it
produced from a tight formation that was not Devonian shale.
B. Credit for the 16,927 BOE’s of Natural Gas S/V Produced From
Both a Tight Formation and Devonian Shale
1. Section 29
S/V produced 16,927 BOE’s of fuel from a tight formation
that was also Devonian shale. Section 29(a) limits the credit
for producing fuel from a nonconventional source to a fixed
dollar amount per BOE. Section 29(d)(5) defines a BOE of fuel as
fuel with Btu content of 5.8 million.
The Senate committee report accompanying enactment of
section 29 also clearly limits the credit to $3 per barrel of oil
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equivalent (before any indexing for inflation). That report
states in pertinent part that the credit:
would be equal to $3 for the production of an amount of
energy equivalent to that contained in a barrel of
crude oil, and all energy equivalent measurements would
be made on the basis of Btu content. Therefore, a $3
credit would be allowed for the production of 5.8
million Btu’s of energy.
* * * * * * *
The credit would be $3 for the production of 5.8
million Btu’s * * * .
S. Rept. 96-394, at 87, 89 (1979), 1980-3 C.B. 131, 205, 207.
Similarly, the conference report states in pertinent part
that the “credit is $3 for the production of each unit of 5.8
million Btus of energy, the equivalent of one barrel of oil”. H.
Conf. Rept. 96-817, at 140 (1980), 1980-3 C.B. 245, 300.
The Senate bill also provided a formula to determine the
entitlement to the credit for taxpayers with a fractional
interest in the property:
Production from a property shall be attributed to the
taxpayer for the taxable year in an amount which bears
the same ratio to the total sales during such year of
qualified fuels from such property as the amount of the
taxpayer’s gross income from such property for such
year from such sales bears to the aggregate gross
income from such property for such year from such
sales. [Crude Oil Windfall Profit Tax Act of 1979,
H.R. 3919, sec. 251, 96th Cong., proposing new I.R.C.
sec. 44D(3)(3)(A).]
Thus, the committee reports, as well as section 29, show
that Congress intended the credit to be based on the barrel of
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oil equivalent of fuels produced.
2. Petitioner’s Argument
Petitioner contends that, under a literal reading of section
29, S/V is entitled to a double credit for the 16,927 BOE’s of
natural gas it produced from a tight formation and from Devonian
shale. Petitioner acknowledges that the legislative history
indicates that section 29 provides a fixed credit amount
(initially $3) per 5.8 million Btu’s of energy produced, but
contends that section 29, as enacted, does not. Petitioner
contends that neither section 29 nor any other authority
prohibits a double credit. We disagree.
The credit under section 29(a) is $3 times the BOE of
“qualified fuels”. (Emphasis added.) Section 29(c)(1) provides
that three fuels, i.e., oil, gas, and synthetic fuels, may
qualify for the credit. Gas qualifies for the credit if it is
produced from geopressurized brine, Devonian shale, coal seams,
tight formation, or biomass. See sec. 29(c)(1)(B). Section 29
does not create a separate tight formation credit and Devonian
shale credit. The definition of BOE in section 29(d)(5) provides
a uniform means of calculating the quantity of each qualified
fuel produced and sold. S/V produced and sold a total of 32,410
BOE’s of qualifying natural gas in the tax years at issue. Of
this total, S/V produced and sold 16,927 BOE’s of gas from both a
tight formation and Devonian shale. Since gas produced from
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those sources qualifies under section 29(c)(1), S/V is entitled
to claim a credit based on that 16,927 BOE’s of natural gas.
A taxpayer may claim a section 29 credit only for
nonconventional fuel sold to an unrelated person during the
taxable year. See sec. 29(a)(2)(A). This requirement suggests
double credits are not allowed because a producer would not sell
the same fuel twice. Similarly, section 29(d)(5) defines BOE as
an amount of fuel that contains 5.8 million Btu’s. This
definition implies that double credits are not allowed for a BOE
of fuel because the effect would be to give a credit for each 2.9
million Btu’s. Petitioner contends that the holding of True Oil
Co. v. Commissioner, 170 F.3d 1294 (10th Cir. 1999), affg.
Nielson-True Partnership v. Commissioner, 109 T.C. 112 (1997), is
contrary to our conclusion. We disagree. True Oil Co. did not
involve whether the taxpayer was entitled to a double credit.
Section 29(c)(2)(A) provides that FERC, under NGPA,
determines gas production classifications. We held in True Oil
Co. v. Commissioner, supra, that FERC (not the taxpayer) must
determine gas production classifications. Petitioner contends
that our result is inconsistent with the NGPA and True Oil Co. v.
Commissioner, supra. We disagree. We do not dispute that FERC
determines gas production classification.
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Petitioner cites Priv. Ltr. Rul. 86-42-052 (July 21, 1986)
for the proposition that the Commissioner has known for many
years that gas production can qualify for more than one NGPA
classification. The fact that natural gas may qualify under more
than one NGPA classification does not entitle S/V to a double
credit under section 29.
Petitioner contends that Congress intended to provide
multiple incentives for natural gas production. Despite this, we
conclude that Congress did not provide double credits under
section 29 for the same natural gas.
Petitioner contends that we must liberally construe section
29, citing Miller v. Standard Nut Margarine Co., 284 U.S. 498,
501 (1932). We disagree. The U.S. Supreme Court stated in
Standard Nut Margarine Co. that definitions of things subject to
be taxed may not be extended beyond their clear import. See id.
Section 29 does not define things subject to tax. The denial of
double credits under section 29 is consistent with the long-
standing judicial preference for interpreting tax statutes,
absent a clear declaration of congressional intent, not to allow
double credits. See United States v. Skelly Oil Co., 394 U.S.
678 (1969); Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934);
United Telecomms, Inc. v. Commissioner, 589 F.2d 1383 (10th Cir.
1978), affg. 67 T.C. 760 (1977) and 65 T.C. 278 (1975).
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3. Respondent’s Argument
Respondent contends that S/V is entitled to a credit under
section 29 equal to the larger of (a) $3 times 32,410 or (b) $3
(indexed) times 16,927. Respondent points out that section
101(b)(5) of the NGPA of 1978 provided that if any natural gas
qualified under more than one provision of the NGPA, the
provision which allowed the highest price applied. S/V would be
entitled to a larger credit if the credit were based on 16,927
times $3 (indexed) than if it were based on 32,410 times $3
(unindexed). Thus, respondent contends that allowing a credit
based only on S/V’s gas production from Devonian shale is
consistent with the NGPA. Respondent offers no explanation for
the fact that under that theory S/V would, in effect, be entitled
to a credit for only 16,927 BOE’s of gas.
We disagree with respondent and conclude that S/V is
entitled to a credit for all of the qualified fuel that
petitioner produced and sold; i.e., 32,410 BOE’s of gas.
4. Whether the $3 Credit for the 16,927 BOE’s of Natural
Gas S/V Produced From a Tight Formation and Devonian
Shale Is Indexed Under Section 29(b)(2)
Section 29(b)(2) indexes the $3 credit for gas produced from
Devonian shale, but it does not index the credit for gas produced
from a tight formation. Since S/V produced 16,927 BOE’s of gas
from both a tight formation and Devonian shale, question may
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arise whether the $3 should be indexed for that fuel. The
parties did not brief this issue.
The first of respondent’s two alternative positions is that
S/V qualifies for a credit based on the 16,927 BOE’s of gas S/V
produced from a source that was both Devonian shale and a tight
formation at a rate of $3 (indexed). It is inherent in that
position that respondent accepts that the $3 credit is indexed
for gas produced from both a tight formation and Devonian shale.
Indeed, respondent has made no argument that the credit should
not be indexed for the natural gas S/V produced from Devonian
shale even though it was also from a tight formation. Under
these circumstances, we consider respondent to have conceded this
issue. See Askew v. United States, 680 F.2d 1206, 1208 n.2 (8th
Cir. 1982); Levin v. Commissioner, 87 T.C. 698, 722-723 (1986),
affd. 832 F.2d 403 (7th Cir. 1987); Zimmerman v. Commissioner, 67
T.C. 94, 104 n.7 (1976).
C. Conclusion
We hold that petitioner is entitled to a credit of (1) $3
per BOE on 15,483 BOE’s of natural gas produced from a tight
formation, and (2) $3 (indexed) per BOE on 16,927 BOE’s of
natural gas produced from both Devonian shale and a tight
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formation, for a total of 32,410 BOE’s.3
To reflect concessions and the foregoing,
Decision will be entered
under Rule 155.
Reviewed by the Court.
COHEN, CHABOT, PARR, WELLS, RUWE, WHALEN, BEGHE, CHIECHI,
LARO, GALE, THORNTON, and MARVEL, JJ., agree with this majority
opinion.
3
In computing its credit for the 16,927 BOE’s of gas
produced from both Devonian shale and a tight formation,
petitioner used the 1995, rather than the 1994, inflation
adjustment factor. See sec. 29(d)(2); I.R.S. Notice 96-29, 1996-
1 C.B. 377; I.R.S. Notice 95-26, 1995-1 C.B. 305. Accordingly,
petitioner overstated its 1994 credit for such gas by $639.
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FOLEY, J., dissenting: The majority misconstrues the
unambiguous language of section 29. See generally United States
v. Merriam, 263 U.S. 179, 187 (1923) (stating that tax statutes
are not to be extended by implication beyond the clear import of
the language used). Accordingly, I respectfully dissent.
1. Number of Barrel-of-Oil Equivalents
Section 29(a) allows taxpayers a credit equal to $3
multiplied by “the barrel-of-oil equivalent [BOE] of qualified
fuels” sold. Citing the legislative history, the majority, in
essence, contends that a section 29 credit is based on the energy
content of the gas produced and sold. Although the legislative
history states that the “credit is $3 for the production of each
unit of 5.8 million Btus of energy," H. Conf. Rept. 96-817, at
140 (1980), 1980-3 C.B. 245, 300 (emphasis added), Congress
enacted a different computation (i.e., the credit is $3
multiplied by the BOE of qualified fuels), and the legislative
history does not take precedence over the statute.
The issue is: What was the BOE of the qualified fuels sold?
During 1993 and 1994, S/V sold approximately 179,000 mcf (i.e.,
thousand cubic feet) of gas. The energy produced by this amount
of gas is equal to that produced by 32,410 barrels of oil (i.e.,
32,410 BOE). Section 29, however, does not simply provide a
credit of $3 per BOE of energy. The credit is calculated by
multiplying $3 by “the barrel-of-oil equivalent of qualified
fuels” sold. Sec. 29(a) (emphasis added). Pursuant to section
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29, the 179,000 mcf of gas sold by S/V is equal to 49,337 BOE of
qualified fuels: 32,410 BOE of gas produced from a tight
formation and 16,927 BOE of gas produced from Devonian shale.
The sale of this gas meets the requirements of two different
categories of qualified fuels (i.e., gas produced from a tight
formation and gas produced from Devonian shale), and section 29
does not provide that the BOE's of dual qualified gas are counted
only once. While subsections (b) and (e) list limitations
relating to the credit, none of these limitations are applicable.
2. The Inflation Adjustment
All of the gas sold by S/V was derived from rock formations
that qualified as both Devonian shale and a tight formation. The
majority holds that a portion of S/V’s credit is calculated
(i.e., adjusted for inflation) pursuant to the rules applicable
to gas produced from Devonian shale. This holding, however, is
contrary to section 29(b)(2), which explicitly provides that “In
the case of gas from a tight formation, the $3 amount in
subsection (a) shall not be adjusted.” (Emphasis added.) If the
credit is to be based on 32,410 BOE of gas, I agree with Judge
Vasquez that S/V is entitled to a credit of only $97,230 (i.e.,
$3 x 32,410 BOE) rather than the $143,964 allowed by the
majority.
The majority sidesteps this issue by “[considering]
respondent to have conceded” that the credit should be indexed.
This is an inaccurate characterization of respondent’s position.
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Respondent contends that S/V is entitled to the greater of either
a credit based on the rules applicable to gas produced from a
tight formation (i.e., $3 x 32,410 BOE) or a credit based on the
rules applicable to gas produced from Devonian shale (i.e., $3
(adjusted for inflation) x 16,927 BOE). Indeed, respondent’s
alternative position1 is that if 32,410 BOE of S/V’s gas
qualifies for the credit, the credit is based on the rules
applicable to gas produced from a tight formation and, thus, not
adjusted for inflation. In addition, why should respondent be
considered “to have conceded this issue” when the issue was not
briefed by either party? In support of its conclusion, the
majority cites cases that are not applicable. In these cases,
the courts appropriately concluded that a taxpayer made a
concession when the taxpayer failed to address an issue that
previously had been raised.2
1
In his opening brief, respondent states: “In the pursuit
of fairness, respondent allowed S/V Drilling the I.R.C. § 29
credit for Devonian shale gas, since this credit was inflation
adjusted and, consequently, greater in amount than the credit
provided for tight sands gas.”
2
See Askew v. United States, 680 F.2d 1206, 1208 n.2 (8th
Cir. 1982) (stating that taxpayer “apparently concedes this point
because he makes no argument on appeal” relating to a fact that
the Government had established at trial); Levin v. Commissioner,
87 T.C. 698, 722-723 (1986) (stating that “petitioners have made
no argument with respect to the other deductions” disallowed in
notices of deficiency), affd. 832 F.2d 403 (7th Cir. 1987);
Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976) (stating
that petitioners made an allegation in their petition, but “at
trial and on brief they made no argument in this regard and we
deem them to have conceded this issue”).
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In sum, the majority’s holding is contrary to section 29(a)
and (b)(2), not supported by case law,3 and premised on a
mischaracterization of respondent’s position. We “are not at
liberty * * * to add to or alter the words employed to effect a
purpose which does not appear on the face of the statute.”
Hanover Bank v. Commissioner, 369 U.S. 672, 687 (1962).
Petitioner is entitled to a total credit of $148,011 (i.e., $3 x
49,337 BOE) rather than the $143,964 allowed by the majority.
3
As support for the holding, the majority cites United
States v. Skelly Oil Co., 394 U.S. 678 (1969), Charles Ilfeld Co.
v. Hernandez, 292 U.S. 62 (1934), and United Telecomms., Inc. v.
Commissioner, 589 F.2d 1383 (10th Cir. 1978). These cases,
however, are distinguishable because the applicable statutes or
regulations prohibited double deductions or credits. See United
States v. Skelly Oil Co., supra at 682-683 (reasoning that the
applicable sections of the Code and the case law developed under
those sections prohibited double deductions); Charles Ilfeld Co.
v. Hernandez, supra at 67 (concluding that the regulations
prohibited double deductions); United Telecomms., Inc. v.
Commissioner, supra at 1387-1388 (concluding that the applicable
legislative regulations prohibited double credits); cf. Transco
Exploration Co. v. Commissioner, 95 T.C. 373, 387 (1990) (holding
that, based on plain language of the statute, the taxpayer was
entitled to a double benefit), affd. 949 F.2d 837 (5th Cir.
1992).
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VASQUEZ, J., dissenting: I agree with the majority’s
conclusion that (1) there are 32,410 BOE of natural gas which
constitute “qualified fuels” under section 29(c)(1) eligible for
the credit–-15,483 BOE solely attributable to the tight formation
and 16,927 BOE from Devonian shale and the tight formation; and
(2) petitioner is entitled to one credit for the 16,927 BOE of
natural gas produced from both Devonian shale and the tight
formation. I, however, disagree with the majority’s holding that
(1) respondent has conceded that the credit should be indexed
under section 29(b)(2) for the 16,927 BOE of natural gas produced
from Devonian shale and the tight formation; and (2) pursuant to
the concession, petitioner is entitled to index the credit.
Accordingly, I respectfully dissent.
Section 29(b)(2) generally provides for an inflation
adjustment to the credit. Within that section, the statute
further provides that “In the case of gas from a tight formation,
the $3 [credit] amount * * * shall not be adjusted [for
inflation].” It is a commonplace of statutory construction that
a specific provision will not be controlled or nullified by a
general one, particularly when the two provisions are
interrelated and closely positioned. See HCSC-Laundry v. United
States, 450 U.S. 1, 6, 8 (1981). If gas is derived from a tight
formation, the statute specifically does not allow for indexing
of the credit. The 16,927 BOE of natural gas were produced, in
part, from a tight formation; therefore, petitioner is not
entitled to index the credit associated with this natural gas.