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e.g., Freede v. Commissioner, 864 F.2d 671, 673-674 (10th
Cir. 1988), revg. 86 T.C. 340 (1986); Christie v. United
States, 436 F.2d 1216, 1218 (5th Cir. 1971). In Freede v.
Commissioner, supra at 674, the court described the two-
part test as follows: "(1) there must be an interest,
acquired by capital investment, in the minerals in place;
and (2) the return on the investment must be realized
solely from the extraction of the minerals." In this case,
it is readily apparent that Arkla was not required to look
solely to the extraction of the minerals for a return of
its payment of $1,850,000. To the contrary, the Settlement
Agreement provides that Arkla would receive "the unrecouped
balance of the Prepayment" in the event that the Contract
were terminated by Malibu or the wells became substantially
depleted. Therefore, since Arkla is not required to look
solely to the extraction of the minerals for return of its
payment, Arkla's right of recoupment is not an economic
interest in minerals in place. See, e.g., Anderson v.
Helvering, 310 U.S. 404 (1940); Christie v. United States,
supra at 1220-1221; Commissioner v. Estate of Donnell, 417
F.2d 106, 115 (5th Cir. 1969), affg. in part and revg. in
part 48 T.C. 552 (1967). Accordingly, Arkla's right of
recoupment does not constitute a "production payment"
within the meaning of section 636. Sec. 1.636-3(a)(1),
Income Tax Regs.
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