Ownership of Oil and Gas Properties Not Required to Claim Benefit of §167(h) for Geological and Geophysical Expenses

The IRS argued before the Tax Court that in order to be treated as incurring “geological and geophysical expenses” that are eligible for preferential treatment under IRC §167(h) the taxpayer must actually own oil and gas interests. However the Tax Court did not accept that view, allowing the treatment to the taxpayer in the case of CGG Americas, Inc. v. Commissioner, 147 TC No. 2.

IRC §167(h) provides the following:

(h) Amortization of geological and geophysical expenditures

(1) In general

Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.

The taxpayer in this case conducted marine surveys of the Outer Continental Shelf using geophysical techniques that suggested the presence of oil and gas in the areas. The taxpayer obtained raw acoustic data and then processed the data to create maps of the area below the earth’s surface. It then licensed such data to customers engaged in oil and gas development. These customers had no use for the data other than for the exploration, development and production of oil and gas in the area.

The IRS noted, though, that the taxpayer did not actually own any oil and gas properties and argued the special treatment under §167(h) is strictly limited to taxpayers that actually owned such properties. The IRS heavily relied upon information in the legislative record created upon the enactment of §167(h), pointing out that Congress intended to free up capital for oil and gas exploration by those owning such properties by allowing the rapid write off. This means the expenses do not meet the definition of “geological and geophysical expenses” found in §167(h) in the IRS’s view.

The Tax Court, however, notes that what Congress put in the law is what controls, not what they may or may not have intended, noting:

Accepting that Congress intended section 167(h) to apply to owners of mineral interests, this does not dispose of the question of whether nonowners are governed by section 167(h). Congress’s principal concern when it enacted section 167(h) may have been owners. But that does not mean that section 167(h) covers owners and no other types of taxpayers. A law can achieve effects different than those that Congress principally intended to achieve in enacting the law. As the Supreme Court held in Oncale v. Sundowner Offshore Servs., Inc., 523 U.S. 75 (1998), "[i]t is ultimately the provisions of our laws rather than the principal concerns of our legislators by which we are governed." Id. at 79.

The IRS argued, in the alternative, that even if they were “geological and geophysical expenses” as defined in §167(h), they were not incurred “in connection with the exploration for, or development of, oil or gas” since the taxpayer itself did not undertake such work—it merely provided data that could be used by taxpayers actually involved in such work.

The Tax Court also rejected this view:

The surveying done by CGGA was integral to the process of finding oil and gas deposits. CGGA conducted the surveys, which detected or suggested the presence of oil and gas, in order to license the resulting data to customers that used the data to drill for oil and gas. Without CGGA’s performing the surveys, CGGA’s customers would have had to do the surveys themselves. The relationship between the surveys and oil and gas exploration is sufficient for us to conclude that the costs of the surveys borne by CGGA were incurred in connection with the exploration for, or development of, oil and gas.

The case provides insight into the limited usefulness of legislative history when interpreting a statute. Generally such history is only useful in interpreting a clear ambiguity in the law. In this case Congress could have easily inserted language requiring ownership of oil and gas properties to use this provision but failed to do so, either in the initial law or at any time after enactment. That silence was read by the Tax Court as allowing the taxpayer in this case to claim the benefit of §167(h). If Congress does not agree with that result, the Court’s view is that Congress should act to make the ownership requirement explicit.