- 33 -
States, supra at 1219, 1221; Commissioner v. Estate of
Donnell, supra; Landreth v. Commissioner, 50 T.C. 803, 807
(1968).
In reviewing the above law in connection with its
consideration of the Tax Reform Act of 1969, Congress noted
that taxpayers were able to use carved-out production
payments to artificially advance the time income is
reported for tax purposes, thereby avoiding limitations
based upon net or taxable income, such as the 50-percent
limitation on taxable income from the property for
depletion purposes, the foreign tax credit, and the
limitations on carryover of net operating losses and
investment credits. S. Rept. 91-552, supra at 183,
1969-3 C.B. at 539; H. Rept. 91-413 (Part 1), at 139
(1969), 1969-3 C.B. 200, 287. The report of the Senate
Finance Committee states as follows:
The committee agrees with the House that there is no reason
why a person who, in effect, is the borrower in a
production payment trans-action should be allowed to pay
off the loan with tax-free dollars while a borrower of
funds in any other industry must satisfy the loan out of
taxed dollars. In addition, the committee agrees with the
House that Congress did not intend to permit the avoidance
of the limitation on depletion deductions and the
mismatching of income and expenses which creates artificial
tax losses by the use of production payments. Moreover,
there is a substantial revenue loss which results from the
use of production payments. It is estimated that the
combined revenue loss from ABC trans-actions and carved-out
production payments is between $200 and $350 million
annually. An acceleration of the revenue loss can be
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