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Income Tax Regs.12, Petroleum was not an independent producer,
because it sold propane through Texgas, a related retailer.
Petitioners assert that Petroleum qualifies as an independent
producer because it sold its propane in bulk to unrelated third
parties and in no year did its own sales exceed $5 million.
Respondent's argument is premised on the presumption that
the 1982 reorganization was a "scheme" developed by Petroleum's
tax department to allow Petroleum to qualify as an independent
producer for the taxable years in issue. To foster the illusion
that Petroleum's propane was being sold to unrelated third
parties, respondent argues, Old Petroleum entered into the
service agreement and exchange agreements with Products to
disguise the fact that Petroleum was selling propane through
Texgas. Thus, respondent contends that Products did not act as
Petroleum's agent, but that it acquired (took title to)
Petroleum's propane and subsequently sold the propane to Texgas.
11(...continued)
therefrom, for the taxable year of all retail outlets taken
into account for purposes of this paragraph do not exceed
$5,000,000. * * *
12 Sec. 1.613A-7(r)(2), Income Tax Regs., provides in pertinent
part:
(2) * * * A taxpayer shall be deemed to be selling oil or
natural gas (or a derivative product) through a retail
outlet operated by a related person in any case in which a
related person who operates a retail outlet acquires for
resale oil or natural gas (or a derivative product) which
the taxpayer produced or caused to be made available for
acquisition by the related person pursuant to an arrangement
whereby some or all of the taxpayer's production is
marketed. * * * [Emphasis added.]
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