S/V Drilling Partners, Snyder Armclar Gas Company, Tax Matters Partners - Page 3

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               Unless otherwise indicated, section references are to the              
          Internal Revenue Code in effect for the years in issue, and Rule            
          references are to the Tax Court Rules of Practice and Procedure.            
               The parties submitted this case fully stipulated under Rule            
          122.  S/V’s principal place of business was Kittanning,                     
          Pennsylvania, when the petition was filed.                                  
          A.   S/V’s Natural Gas Production From a Tight Formation and                
               Devonian Shale                                                         
               In 1992, S/V, a partnership composed of Snyder and Victory             
          Energy Corp. (Victory), drilled eight natural gas wells in                  
          Armstrong and Indiana Counties, Pennsylvania.  In December of               
          that year, Victory filed with the Pennsylvania Department of                
          Environmental Resources (DER) two classification requests for               
          each well, seeking determinations that these wells produced                 
          natural gas from Devonian shale and from a tight formation.  The            
          requests were made under section 503 of the Natural Gas Policy              
          Act of 1978 (NGPA), Pub. L. 95-621, 92 Stat. 3350, 15 U.S.C. sec.           
          3413 (1988) (repealed January 1, 1993, by the Natural Gas                   
          Wellhead Decontrol Act of 1989, Pub. L. 101-60, sec. 3(b)(5), 103           
          Stat. 157, 159).  DER approved Victory’s requests and determined            
          that the wells were producing natural gas from rock formations              
          that qualified as both Devonian shale and a tight formation.  The           
          Federal Energy Regulatory Commission (FERC) approved DER’s                  

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