Stephen R. and Mary K. Herbel - Page 2

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                  general tax principles, the subject payment is                      
                  a deposit in the nature of a loan and is not                        
                  includable in income in 1988 under Commissioner                     
                  v. Indianapolis Power & Light Co., 493 U.S. 203                     
                  (1990).  Ps further argue that A's right of                         
                  recoupment is a production payment under sec.                       
                  636(a), with the result that the transaction                        
                  must be treated as a loan.  In support thereof,                     
                  Ps assert that sec. 1.636-3(a)(1), Income Tax                       
                  Regs., is invalid to the extent it limits the                       
                  definition of production payment to interests                       
                  which are economic interests in the mineral in                      
                  place.                                                              
                       Held:  A's payment is an advance payment                       
                  for the purchase of gas under the gas purchase                      
                  contract and is includable in M's income in                         
                  the year received.  Held, further, sec. 1.636-                      
                  (a)(1), Income Tax Regs., is valid and, A's right                   
                  of recoupment is not a production payment under                     
                  sec. 636(a).                                                        


                  Frederick R. Parker, Jr., and W. Deryl Medlin, for                  
             petitioners.                                                             
                  Martin M. Van Brauman and Josh O. Ungerman, for                     
             respondent.                                                              


                                       OPINION                                        
                  WHALEN, Judge:  These consolidated cases are before                 
             the Court to decide petitioners' motion for summary                      
             judgment.  The issue presented by petitioners' motion is                 
             whether a payment received in settlement of a contractual                
             dispute involving a so-called take or pay contract for                   
             the purchase and sale of natural gas is includable in                    
             petitioners' income in the year received, as respondent                  





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