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such mineral in place." Sec. 1.636-3(a)(1), Income Tax
Regs.
Petitioners never explicitly argue that section 636
governs the settlement between Malibu and Arkla. However,
they argue at length that the definition of production
payment set forth in section 1.636-3(a), Income Tax Regs.,
is "inconsistent with the express language of Section 636
* * * [and] with the legislative history" of section 636 to
the extent that it limits the definition to cases in which
the right to production is "an economic interest in such
mineral in place." Sec. 1.636-3(a)(1), Income Tax Regs.
According to petitioners, no such limitation was intended
by Congress, and section 1.636-3(a), Income Tax Regs.,
"must be declared invalid." In making this argument,
petitioners in effect concede that Arkla's right of
recoupment under the Settlement Agreement is not an
economic interest in the minerals in place, but they argue
that it should nevertheless be treated as a mortgage loan
pursuant to section 636(a).
We agree with the proposition, implicit in
petitioners' argument, that Arkla's right of recoupment or
refund is not "an economic interest in such mineral in
place", as required by section 1.636-3(a)(1), Income Tax
Regs. Generally, courts have applied a two-part test for
determining whether there is an economic interest. See,
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