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Issues » Fact Sheets
Tax/Capital Fact Sheets
Internal Revenue Code Section 29 Tax Credit Availability
Section 29 of the Internal Revenue Code provides a tax credit for production of certain nonconventional fuels including gas from coal seams, Devonian shales, and tight formations if produced and sold before Dec. 31, 2002 from a well drilled before 1993. The tax credit currently set at $1.00/Mcf, reduces the regular tax liability dollar-for-dollar and expires Dec. 31, 2002.
Section 29(c)(2)(A) provides that the determination of whether any gas is produced from coal seams, or a tight formation shall be made in accordance with Section 503 of the National Gas Policy Act of 1978 (NGPA). Under this provision, the Federal Energy Regulatory Commission (FERC) reviewed well determinations that were made by state jurisdictional agencies. The FERC review was not a condition precedent to the qualification of the well’s production, but could be obtained retroactively. The Natural Gas Wellhead Decontrol Act of 1989 repealed section 503 of the NGPA. This resulted in FERC’s determination that it lacked authority to review state determinations under Section 29.
In an effort to accommodate congressional intent, FERC extended its review process to May 1994 for determination requests filed before 1993. The IRS previous position in Rev. Rul. 93-54 found the drilling requirements to qualify for a section 29 credit were met if a taxpayer recompletes into a qualifying formation from a well-bore that was drilled before 1993 and produced from a deeper formation. However, at odds with this previous ruling and clear congressional intent is a judgment in the True Oil v. Commissioner of Internal Revenue case that a FERC determination is a prerequisite for a section 29 well determination.
On February 8, 2000, FERC proposed a rule to allow for determinations on well recompletions commenced after January 1, 1993, which comply with Rev. Rul. 93-54. IPAA filed comments with FERC in April 2000 urging expansion of its proposal to include all wells that would qualify under the scope of Section 29.
On July 14 FERC issued a final rule reinstating provisions for well category determinations for certain categories of high-cost gas under NGPA section 107 (Order No. 616). An NGPA determination will allow the gas to be eligible for a tax credit under section 29 of the Internal Revenue Code. The final rule adopts the IPAA position and extends the provisions to all wells spudded before January 1, 1993, and recompletions both before and after that date that could qualify for the section 29 tax credit. The rule also provides for the designation of new tight formations.
August 2000
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