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On the basis of the entire record, we are convinced tt not
merely in form, but in substance, Products acted as an agent for
Petroleum and pursuant to the service agreement did not purchase
any of the propane that it marketed for Petroleum. We note that
Petroleum's production was not necessary for Products to meet its
supply obligations to Texgas because Products was able to obtain
all the propane it needed from sources other than Petroleum.
Furthermore, it was Petroleum, not Products, that bore the risk
of loss if any propane bills remained unpaid. Thus, as discussed
supra, we find as a fact that Petroleum, under the service
agreement, retained title to its propane until Products sold the
propane on Petroleum's behalf. Accordingly, we hold that
Products did not acquire Petroleum's propane for resale to
Texgas, and that Petroleum, pursuant to section 613A(d)(2)(A) and
section 1.613A-7(r)(2), Income Tax Regs., is not deemed to be
selling its propane through Texgas, a retail outlet operated by
Products, a related person. Therefore, Petroleum qualifies as an
independent producer for the taxable years in issue.
Issue 3. Recomputation of Petroleum's WPT NIL Computations
Background
On its original Federal income tax returns for each of the
taxable years in issue, Petroleum claimed percentage depletion as
an independent producer. With certain statutory modifications,
Petroleum's original percentage depletion NIL calculations
paralleled its original WPT NIL calculations. When calculating
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