Stephen R. and Mary K. Herbel - Page 27

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             successor corporation, NorAm Gas Transmission Co. (NorAm),               
             and one by an attorney for NorAm.                                        
                  The issues in this case involve the tax treatment                   
             of the consideration paid by Arkla under the Settlement                  
             Agreement, as opposed to Arkla's right of recoupment set                 
             forth in paragraph 2 of the Settlement Agreement.  However,              
             the first issue presented by petitioners' motion for                     
             summary judgment is whether Arkla's right of recoupment is               
             a carved-out production payment, as described by section                 
             636(a), such that the settlement transaction must be                     
             treated as a mortgage loan on the mineral property.                      
             Section 636(a) provides as follows:                                      

                       SEC. 636(a).  Carved-out Production Payment.                   
                  --A production payment carved out of mineral                        
                  property shall be treated, for purposes of this                     
                  subtitle, as if it were a mortgage loan on the                      
                  property, and shall not qualify as an economic                      
                  interest in the mineral property.  In the case of                   
                  a production payment carved out for exploration                     
                  or development of a mineral property, the pre-                      
                  ceding sentence shall apply only if and to the                      
                  extent gross income from the property (for                          
                  purposes of section 613) would be realized, in                      
                  the absence of the application of such sentence,                    
                  by the person creating the production payment.                      

             The regulations promulgated under section 636(a) define the              
             term “production payment” to mean "in general, a right to a              
             specified share of the production from mineral in place                  
             (if, as, and when produced), or the proceeds from such                   
             production.  Such right must be an economic interest in                  






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