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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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