UNITED STATES TAX COURT



                    S/V DRILLING PARTNERS,
SNYDER ARMCLAR GAS COMPANY, TAX MATTERS PARTNER, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 14163-98.               Filed February 23, 2000.


        Sec. 29, I.R.C., provides a credit for fuel
   produced from nonconventional sources, including gas
   produced from geopressurized brine, Devonian shale,
   coal seams, or a tight formation.

        In 1993 and 1994, S/V, a partnership, sold 32,410
   barrels of oil equivalent (BOE’s) of natural gas
   produced from nonconventional sources described under
   sec. 29, I.R.C. S/V sold 15,483 BOE’s of gas produced
   from a tight formation that was not Devonian shale and
   16,927 BOE’s of gas produced from both a tight
   formation and Devonian shale.

        Held: S/V is allowed a credit for 32,410 BOE’s of
   natural gas. The credit rate is (1) 15,483 times $3,
   and (2) 16,927 times $3 indexed as provided in the
   first sentence of sec. 29(b)(2), I.R.C.
                               - 2 -

     Dom W. Greco, for petitioner.

     Michael A. Yost, Jr. and Edward F. Peduzzi, Jr., for

respondent.

                              OPINION


     COLVIN, Judge:   On August 3, 1998, respondent issued two

notices of final partnership administrative adjustment to S/V

Drilling Partners (S/V), a partnership, in which respondent

determined adjustments to S/V’s partnership returns for the tax

years ending December 31, 1993 and 1994.   On August 18, 1998,

Snyder Armclar Gas Co. (Snyder), S/V’s tax matters partner,

petitioned the Court to redetermine respondent’s adjustments to

partnership items.

     In 1993 and 1994, S/V sold 32,410 barrels of oil equivalent

(BOE’s)1 of natural gas produced from nonconventional sources,

consisting of 15,483 BOE’s of gas produced from a tight formation

that was not Devonian shale and 16,927 BOE’s of gas produced from

both a tight formation and Devonian shale.

     The issue for decision is the amount of S/V’s section 29

credit.   We hold that S/V is allowed a section 29 credit equal to

(1) 15,483 times $3, and (2) 16,927 times $3 indexed as provided

in the first sentence of section 29(b)(2).


     1
        A barrel of oil contains about 5.8 million British
thermal units (Btu’s).
                                - 3 -

       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.

                             Background

       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

determinations.
                              - 4 -

     In 1993 and 1994, S/V sold 32,410 BOE’s of natural gas

produced from the wells to public utilities.   During these years,

15,483 BOE’s of natural gas sold by S/V were produced from a

tight formation that was not Devonian shale, and 16,927 BOE’s

were produced from a tight formation that was also Devonian

shale.

BOE’s of Natural Gas Produced by S/V From Nonconventional Sources
                   (rounded to the nearest BOE)

                      Produced from a           Produced from a
                    tight formation but         tight formation
Year      Total     not Devonian shale         and Devonian shale
1993     15,137           7,343                      7,794
1994     17,273           8,140                      9,133
 Total   32,410          15,483                     16,927

B.   S/V’s Tax Returns

     On its 1993 and 1994 partnership returns, S/V claimed a

credit under section 29 for 15,483 BOE’s of natural gas it

produced from a tight formation that was not Devonian shale and a

double credit (one equal to $3 per BOE, and one equal to $3

(indexed) per BOE) for the 16,927 BOE’s produced from a tight

formation that was also Devonian shale.   On its 1994 tax return,

S/V based its computation of the Devonian shale credit on the

1995 inflation adjustment factor.
                                   - 5 -

                                Discussion

     Petitioner contends that S/V is entitled to a credit under

section 292 for the 15,483 BOE’s of natural gas it produced from

     2
        SEC. 29. CREDIT FOR PRODUCING FUEL FROM A
NONCONVENTIONAL SOURCE.

     (a) Allowance of credit.

          There shall be allowed as a credit against the tax
     imposed by this chapter for the taxable year an amount
     equal to--

          (1) $3, multiplied by

          (2) the barrel-of-oil equivalent of qualified
     fuels--

            (A) sold by the taxpayer to an unrelated person
     during the taxable year, and

            (B) the production of which is attributable to
     the taxpayer.

     (b) Limitations and adjustments.

               *    *       *      *       *   *   *

          (2) Credit and phaseout adjustment based on
     inflation.--The $3 amount in subsection (a) and the
     $23.50 and $6 amounts in paragraph (1) shall each be
     adjusted by multiplying such amount by the inflation
     adjustment factor for the calendar year in which the
     sale occurs. In the case of gas from a tight
     formation, the $3 amount in subsection (a) shall not be
     adjusted.

               *    *       *      *       *   *   *

     (c) Definition of qualified fuels.--For purposes of
     this section--

          (1) In general.       The term “qualified fuels” means--

                                                        (continued...)
                                     - 6 -

a tight formation that was not Devonian shale and a double credit

for the 16,927 BOE’s it produced from a tight formation that was

also Devonian shale.       Thus, petitioner, in effect, contends that

S/V produced 49,337 BOE’s (i.e., 15,483 plus (2 X 16,927)) of gas

qualifying for the credit under section 29.

     Respondent contends that S/V is entitled to a credit for

only 16,927 BOE’s of gas.         Respondent contends that S/V is

entitled only to the larger of:

     1.   A $3 per barrel credit for the 32,410 BOE’s of natural

gas S/V produced, or

     2.   A credit for the 16,927 BOE’s of natural gas S/V



     2
      (...continued)
            (A) oil produced from shale and tar sands,

            (B) gas produced from--

               (i) geopressured brine, Devonian shale, coal
          seams, or a tight formation, or

               (ii) biomass, and

            (C) liquid, gaseous, or solid synthetic fuels
     produced from coal (including lignite), including such
     fuels when used as feedstocks.

               *       *      *      *       *   *   *

     (d) Other definitions and special rules.

               *       *      *      *       *   *   *

          (5) Barrel-of-oil equivalent.--The term “barrel-
     of-oil equivalent” with respect to any fuel means that
     amount of such fuel which has a Btu content of 5.8
     million * * *.
                                - 7 -

produced from property qualifying both as a tight formation and

Devonian shale, at a rate of $3, indexed as provided in the first

sentence of section 29(b)(2).

     Since the latter amount is larger than the former,

respondent’s position, in effect, is that S/V is entitled to a

credit based on only 16,927 BOE’s.

     We agree and disagree in part with both parties.

A.   Credit for the 15,483 BOE’s of Natural Gas S/V Produced From
     a Tight Formation That Was Not Devonian Shale

     S/V produced 15,483 BOE’s of natural gas from a tight

formation which was not Devonian shale.   Section 29(b)(2) (second

sentence) provides that the $3 credit is not indexed for natural

gas produced from a tight formation.    Thus, S/V is entitled to a

credit of $3 per BOE on the 15,483 BOE’s of natural gas it

produced from a tight formation that was not Devonian shale.

B.   Credit for the 16,927 BOE’s of Natural Gas S/V Produced From
     Both a Tight Formation and Devonian Shale

     1.   Section 29

     S/V produced 16,927 BOE’s of fuel from a tight formation

that was also Devonian shale.    Section 29(a) limits the credit

for producing fuel from a nonconventional source to a fixed

dollar amount per BOE.   Section 29(d)(5) defines a BOE of fuel as

fuel with Btu content of 5.8 million.

     The Senate committee report accompanying enactment of

section 29 also clearly limits the credit to $3 per barrel of oil
                                - 8 -

equivalent (before any indexing for inflation).     That report

states in pertinent part that the credit:

     would be equal to $3 for the production of an amount of
     energy equivalent to that contained in a barrel of
     crude oil, and all energy equivalent measurements would
     be made on the basis of Btu content. Therefore, a $3
     credit would be allowed for the production of 5.8
     million Btu’s of energy.

                *    *      *    *      *   *   *

     The credit would be $3 for the production of 5.8
     million Btu’s * * * .

S. Rept. 96-394, at 87, 89 (1979), 1980-3 C.B. 131, 205, 207.

     Similarly, the conference report states in pertinent part

that the “credit is $3 for the production of each unit of 5.8

million Btus of energy, the equivalent of one barrel of oil”.     H.

Conf. Rept. 96-817, at 140 (1980), 1980-3 C.B. 245, 300.

     The Senate bill also provided a formula to determine the

entitlement to the credit for taxpayers with a fractional

interest in the property:

     Production from a property shall be attributed to the
     taxpayer for the taxable year in an amount which bears
     the same ratio to the total sales during such year of
     qualified fuels from such property as the amount of the
     taxpayer’s gross income from such property for such
     year from such sales bears to the aggregate gross
     income from such property for such year from such
     sales. [Crude Oil Windfall Profit Tax Act of 1979,
     H.R. 3919, sec. 251, 96th Cong., proposing new I.R.C.
     sec. 44D(3)(3)(A).]

     Thus, the committee reports, as well as section 29, show

that Congress intended the credit to be based on the barrel of
                                - 9 -

oil equivalent of fuels produced.

     2.     Petitioner’s Argument

     Petitioner contends that, under a literal reading of section

29, S/V is entitled to a double credit for the 16,927 BOE’s of

natural gas it produced from a tight formation and from Devonian

shale.    Petitioner acknowledges that the legislative history

indicates that section 29 provides a fixed credit amount

(initially $3) per 5.8 million Btu’s of energy produced, but

contends that section 29, as enacted, does not.     Petitioner

contends that neither section 29 nor any other authority

prohibits a double credit.    We disagree.

     The credit under section 29(a) is $3 times the BOE of

“qualified fuels”. (Emphasis added.)     Section 29(c)(1) provides

that three fuels, i.e., oil, gas, and synthetic fuels, may

qualify for the credit.   Gas qualifies for the credit if it is

produced from geopressurized brine, Devonian shale, coal seams,

tight formation, or biomass.    See sec. 29(c)(1)(B).   Section 29

does not create a separate tight formation credit and Devonian

shale credit.   The definition of BOE in section 29(d)(5) provides

a uniform means of calculating the quantity of each qualified

fuel produced and sold.   S/V produced and sold a total of 32,410

BOE’s of qualifying natural gas in the tax years at issue.       Of

this total, S/V produced and sold 16,927 BOE’s of gas from both a

tight formation and Devonian shale.     Since gas produced from
                               - 10 -

those sources qualifies under section 29(c)(1), S/V is entitled

to claim a credit based on that 16,927 BOE’s of natural gas.

     A taxpayer may claim a section 29 credit only for

nonconventional fuel sold to an unrelated person during the

taxable year.    See sec. 29(a)(2)(A).    This requirement suggests

double credits are not allowed because a producer would not sell

the same fuel twice.   Similarly, section 29(d)(5) defines BOE as

an amount of fuel that contains 5.8 million Btu’s.      This

definition implies that double credits are not allowed for a BOE

of fuel because the effect would be to give a credit for each 2.9

million Btu’s.   Petitioner contends that the holding of True Oil

Co. v. Commissioner, 

(10th Cir. 1999), affg.

Nielson-True Partnership v. Commissioner, 

(1997), is

contrary to our conclusion.    We disagree.     True Oil Co. did not

involve whether the taxpayer was entitled to a double credit.

     Section 29(c)(2)(A) provides that FERC, under NGPA,

determines gas production classifications.      We held in True Oil

Co. v. 

, that FERC (not the taxpayer) must

determine gas production classifications.      Petitioner contends

that our result is inconsistent with the NGPA and True Oil Co. v.

.    We disagree.     We do not dispute that FERC

determines gas production classification.
                               - 11 -

     Petitioner cites Priv. Ltr. Rul. 86-42-052 (July 21, 1986)

for the proposition that the Commissioner has known for many

years that gas production can qualify for more than one NGPA

classification.   The fact that natural gas may qualify under more

than one NGPA classification does not entitle S/V to a double

credit under section 29.

     Petitioner contends that Congress intended to provide

multiple incentives for natural gas production.     Despite this, we

conclude that Congress did not provide double credits under

section 29 for the same natural gas.

     Petitioner contends that we must liberally construe section

29, citing Miller v. Standard Nut Margarine Co., 

,

501 (1932).   We disagree.   The U.S. Supreme Court stated in

Standard Nut Margarine Co. that definitions of things subject to

be taxed may not be extended beyond their clear import.    See 

does not define things subject to tax.    The denial of

double credits under section 29 is consistent with the long-

standing judicial preference for interpreting tax statutes,

absent a clear declaration of congressional intent, not to allow

double credits.   See United States v. Skelly Oil Co., 

(1969); Charles Ilfeld Co. v. Hernandez, 

(1934);

United Telecomms, Inc. v. Commissioner, 

(10th Cir.

1978), affg. 

(1977) and 

(1975).
                              - 12 -

     3.   Respondent’s Argument

     Respondent contends that S/V is entitled to a credit under

section 29 equal to the larger of (a) $3 times 32,410 or (b) $3

(indexed) times 16,927.   Respondent points out that section

101(b)(5) of the NGPA of 1978 provided that if any natural gas

qualified under more than one provision of the NGPA, the

provision which allowed the highest price applied.   S/V would be

entitled to a larger credit if the credit were based on 16,927

times $3 (indexed) than if it were based on 32,410 times $3

(unindexed).   Thus, respondent contends that allowing a credit

based only on S/V’s gas production from Devonian shale is

consistent with the NGPA.   Respondent offers no explanation for

the fact that under that theory S/V would, in effect, be entitled

to a credit for only 16,927 BOE’s of gas.

     We disagree with respondent and conclude that S/V is

entitled to a credit for all of the qualified fuel that

petitioner produced and sold; i.e., 32,410 BOE’s of gas.

     4.   Whether the $3 Credit for the 16,927 BOE’s of Natural
          Gas S/V Produced From a Tight Formation and Devonian
          Shale Is Indexed Under Section 29(b)(2)

     Section 29(b)(2) indexes the $3 credit for gas produced from

Devonian shale, but it does not index the credit for gas produced

from a tight formation.   Since S/V produced 16,927 BOE’s of gas

from both a tight formation and Devonian shale, question may
                              - 13 -

arise whether the $3 should be indexed for that fuel.   The

parties did not brief this issue.

     The first of respondent’s two alternative positions is that

S/V qualifies for a credit based on the 16,927 BOE’s of gas S/V

produced from a source that was both Devonian shale and a tight

formation at a rate of $3 (indexed).   It is inherent in that

position that respondent accepts that the $3 credit is indexed

for gas produced from both a tight formation and Devonian shale.

Indeed, respondent has made no argument that the credit should

not be indexed for the natural gas S/V produced from Devonian

shale even though it was also from a tight formation.   Under

these circumstances, we consider respondent to have conceded this

issue.   See Askew v. United States, 

, 1208 n.2 (8th

Cir. 1982); Levin v.   Commissioner, 

, 722-723 (1986),

affd. 

(7th Cir. 1987); Zimmerman v. Commissioner, 

, 104 n.7 (1976).

C.   Conclusion

     We hold that petitioner is entitled to a credit of (1) $3

per BOE on 15,483 BOE’s of natural gas produced from a tight

formation, and (2) $3 (indexed) per BOE on 16,927 BOE’s of

natural gas produced from both Devonian shale and a tight
                              - 14 -

formation, for a total of 32,410 BOE’s.3

     To reflect concessions and the foregoing,


                                           Decision will be entered

                                   under Rule 155.

     Reviewed by the Court.

     COHEN, CHABOT, PARR, WELLS, RUWE, WHALEN, BEGHE, CHIECHI,
LARO, GALE, THORNTON, and MARVEL, JJ., agree with this majority
opinion.




     3
        In computing its credit for the 16,927 BOE’s of gas
produced from both Devonian shale and a tight formation,
petitioner used the 1995, rather than the 1994, inflation
adjustment factor. See sec. 29(d)(2); I.R.S. Notice 96-29, 1996-
1 C.B. 377; I.R.S. Notice 95-26, 1995-1 C.B. 305. Accordingly,
petitioner overstated its 1994 credit for such gas by $639.
                               - 15 -

     FOLEY, J., dissenting:    The majority misconstrues the

unambiguous language of section 29.     See generally United States

v. Merriam, 

, 187 (1923) (stating that tax statutes

are not to be extended by implication beyond the clear import of

the language used).   Accordingly, I respectfully dissent.

1.   Number of Barrel-of-Oil Equivalents

     Section 29(a) allows taxpayers a credit equal to $3

multiplied by “the barrel-of-oil equivalent [BOE] of qualified

fuels” sold.   Citing the legislative history, the majority, in

essence, contends that a section 29 credit is based on the energy

content of the gas produced and sold.    Although the legislative

history states that the “credit is $3 for the production of each

unit of 5.8 million Btus of energy," H. Conf. Rept. 96-817, at

140 (1980), 1980-3 C.B. 245, 300 (emphasis added), Congress

enacted a different computation (i.e., the credit is $3

multiplied by the BOE of qualified fuels), and the legislative

history does not take precedence over the statute.

     The issue is: What was the BOE of the qualified fuels sold?

During 1993 and 1994, S/V sold approximately 179,000 mcf (i.e.,

thousand cubic feet) of gas.   The energy produced by this amount

of gas is equal to that produced by 32,410 barrels of oil (i.e.,

32,410 BOE).   Section 29, however, does not simply provide a

credit of $3 per BOE of energy.    The credit is calculated by

multiplying $3 by “the barrel-of-oil equivalent of qualified

fuels” sold.   Sec. 29(a) (emphasis added).   Pursuant to section
                                - 16 -

29, the 179,000 mcf of gas sold by S/V is equal to 49,337 BOE of

qualified fuels:   32,410 BOE of gas produced from a tight

formation and 16,927 BOE of gas produced from Devonian shale.

The sale of this gas meets the requirements of two different

categories of qualified fuels (i.e., gas produced from a tight

formation and gas produced from Devonian shale), and section 29

does not provide that the BOE's of dual qualified gas are counted

only once.   While subsections (b) and (e) list limitations

relating to the credit, none of these limitations are applicable.

2.   The Inflation Adjustment

     All of the gas sold by S/V was derived from rock formations

that qualified as both Devonian shale and a tight formation.     The

majority holds that a portion of S/V’s credit is calculated

(i.e., adjusted for inflation) pursuant to the rules applicable

to gas produced from Devonian shale.     This holding, however, is

contrary to section 29(b)(2), which explicitly provides that “In

the case of gas from a tight formation, the $3 amount in

subsection (a) shall not be adjusted.”     (Emphasis added.)   If the

credit is to be based on 32,410 BOE of gas, I agree with Judge

Vasquez that S/V is entitled to a credit of only $97,230 (i.e.,

$3 x 32,410 BOE) rather than the $143,964 allowed by the

majority.

     The majority sidesteps this issue by “[considering]

respondent to have conceded” that the credit should be indexed.

This is an inaccurate characterization of respondent’s position.
                               - 17 -

Respondent contends that S/V is entitled to the greater of either

a credit based on the rules applicable to gas produced from a

tight formation (i.e., $3 x 32,410 BOE) or a credit based on the

rules applicable to gas produced from Devonian shale (i.e., $3

(adjusted for inflation) x 16,927 BOE).   Indeed, respondent’s

alternative position1 is that if 32,410 BOE of S/V’s gas

qualifies for the credit, the credit is based on the rules

applicable to gas produced from a tight formation and, thus, not

adjusted for inflation.    In addition, why should respondent be

considered “to have conceded this issue” when the issue was not

briefed by either party?   In support of its conclusion, the

majority cites cases that are not applicable.   In these cases,

the courts appropriately concluded that a taxpayer made a

concession when the taxpayer failed to address an issue that

previously had been raised.2



       1
        In his opening brief, respondent states: “In the pursuit
of fairness, respondent allowed S/V Drilling the I.R.C. § 29
credit for Devonian shale gas, since this credit was inflation
adjusted and, consequently, greater in amount than the credit
provided for tight sands gas.”
   2
      See Askew v. United States, 

, 1208 n.2 (8th
Cir. 1982) (stating that taxpayer “apparently concedes this point
because he makes no argument on appeal” relating to a fact that
the Government had established at trial); Levin v. Commissioner,

, 722-723 (1986) (stating that “petitioners have made
no argument with respect to the other deductions” disallowed in
notices of deficiency), affd. 

(7th Cir. 1987);
Zimmerman v. Commissioner, 

, 104 n.7 (1976) (stating
that petitioners made an allegation in their petition, but “at
trial and on brief they made no argument in this regard and we
deem them to have conceded this issue”).
                             - 18 -

     In sum, the majority’s holding is contrary to section 29(a)

and (b)(2), not supported by case law,3 and premised on a

mischaracterization of respondent’s position.   We “are not at

liberty * * * to add to or alter the words employed to effect a

purpose which does not appear on the face of the statute.”

Hanover Bank v. Commissioner, 

, 687 (1962).

Petitioner is entitled to a total credit of $148,011 (i.e., $3 x

49,337 BOE) rather than the $143,964 allowed by the majority.




     3
        As support for the holding, the majority cites United
States v. Skelly Oil Co., 

(1969), Charles Ilfeld Co.
v. Hernandez, 

(1934), and United Telecomms., Inc. v.
Commissioner, 

(10th Cir. 1978). These cases,
however, are distinguishable because the applicable statutes or
regulations prohibited double deductions or credits. See United
States v. Skelly Oil Co., supra at 682-683 (reasoning that the
applicable sections of the Code and the case law developed under
those sections prohibited double deductions); Charles Ilfeld Co.
v. Hernandez, supra at 67 (concluding that the regulations
prohibited double deductions); United Telecomms., Inc. v.

at 1387-1388 (concluding that the applicable
legislative regulations prohibited double credits); cf. Transco
Exploration Co. v. Commissioner, 

, 387 (1990) (holding
that, based on plain language of the statute, the taxpayer was
entitled to a double benefit), affd. 

(5th Cir.
1992).
                                - 19 -

     VASQUEZ, J., dissenting: I agree with the majority’s

conclusion that (1) there are 32,410 BOE of natural gas which

constitute “qualified fuels” under section 29(c)(1) eligible for

the credit–-15,483 BOE solely attributable to the tight formation

and 16,927 BOE from Devonian shale and the tight formation; and

(2) petitioner is entitled to one credit for the 16,927 BOE of

natural gas produced from both Devonian shale and the tight

formation.    I, however, disagree with the majority’s holding that

(1) respondent has conceded that the credit should be indexed

under section 29(b)(2) for the 16,927 BOE of natural gas produced

from Devonian shale and the tight formation; and (2) pursuant to

the concession, petitioner is entitled to index the credit.

Accordingly, I respectfully dissent.

             Section 29(b)(2) generally provides for an inflation

adjustment to the credit.     Within that section, the statute

further provides that “In the case of gas from a tight formation,

the $3 [credit] amount * * * shall not be adjusted [for

inflation].”     It is a commonplace of statutory construction that

a specific provision will not be controlled or nullified by a

general one, particularly when the two provisions are

interrelated and closely positioned.     See HCSC-Laundry v. United

States, 

, 6, 8 (1981).     If gas is derived from a tight

formation, the statute specifically does not allow for indexing

of the credit.     The 16,927 BOE of natural gas were produced, in

part, from a tight formation; therefore, petitioner is not

entitled to index the credit associated with this natural gas.