American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.


The past 2 years have seen significant legislative, administrative, and judicial developments that have had significant direct and indirect impact on the taxation of the oil and gas industry. It is the purpose of this outline to review such developments in the following order.

  1. The Tax Reform Act of 1976

  2. The Tax Reduction Act of 1975

  3. Current Developments in Oil and Gas Farm-Out Arrangements

  4. Revenue Agent Guide - Guidelines for Examination of Drilling Funds

  5. The Limited Partnership - Pre- and Post-Larson and Zuckman Post-Larson and Zuckman

  6. Recent Administrative Rulings and Judicial Decisions - Other than Larson and Zuckman


TRA contains a number of significant changes specifically affecting the oil and gas industry. As indicated below, the changes raise serious questions as to whether oil and gas exploration and development activities should (or, in fact, can economically) be carried on in noncorporate form.

The law may represent the culmination of an effort on the part of certain government officials to cause oil and gas activities to be carried on in corporate form. For the past 32-years, the solution to substantially all punitive tax reform proposals aimed at oil and punitive tax reform proposals aimed at oil and gas operations has been to incorporate. This attitude, to some degree, now has been formalized in the law.

Perhaps the most far-reaching change affecting corporate and noncorporate taxpayers engaged in the oil and gas business is the new requirement (reflected in new Section 1254 of the Internal Revenue Code of 1954*) that, upon disposition of oil and gas properties (domestic or foreign) after Dec. 31, 1975, taxpayers will be required to recapture all or some part of the intangible drilling and development costs (IDC) paid or incurred after Dec. 31, 1975, as paid or incurred after Dec. 31, 1975, as ordinary income to the extent that the property is disposed of at a gain (or is deemed to have been disposed of at a gain).

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