The Sisterson Energy Group has worked with a variety of clients in the industry for more than 35 years.
As a firm, Sisterson has had the opportunity to work with energy-related organizations, including oil and gas companies for a number of years. With the shale opportunities in our region, we are proud to be able to offer our expertise to energy and energy-related organizations.
- Audits and reviews of financial statements – GAAP and tax basis
- Agreed-upon procedures on matters such as contractual compliance, expenditures, operator overhead, allocations, payout calculations, vendor changes, etc.
- Performance of, or assistance with joint interest billing (JIB) audits
- Internal control reviews of operator/manager groups
- Field equipment, wellhead equipment and inventory observations
- Reconstruction of leasehold records
- Royal interest audits
- Corporate and partnership tax returns of E&P companies and investors
- Tax planning in connection with exploration and development projects, acquisitions and divestitures, joint ventures, and other major transactions
- Tax projections
- Energy industry tax issues including multi-state tax issues, alternative minimum tax, tax planning, depletion, and other industry-specific matters
- Entity structural planning
- Assistance with audits of E&P companies and investment entities by tax authorities
- Tax planning and compliance for landowners with oil and gas leases
- Acquisition and divestiture due diligence
- Assistance in preparing final closing statements for sellers of oil and gas properties
- Assistance in testing final closing statements for buyers of oil and gas properties
- Initial general ledger system setup
- Valuations of royalty interests, overriding royalty interests, and other property interests
- Advice to operators on joint interest billing practices
- Purchase price allocations
- Litigation services regarding matters such as disputes with operators, landowners and overriding royalty interests
- Business process review and optimization to utilize existing software applications
- Business operations system development to integrate and analyze the general ledger, budgets, forecasts and business metrics – from one centralized source of data
Recent Developments in the Industry
IRS Says Unamortized G&G Costs are Nondeductible
In FAA 20163501F (August 26, 2016), the IRS issued a field attorney advice memorandum in which it indicated that an integrated oil company could not deduct the unamortized portion of geological and geophysical (“G&G”) costs upon the disposition of the property with respect to which the costs were incurred. Moreover, such costs cannot be included in the basis of the disposed property. Rather, the unamortized portion of the costs must continue to be amortized over the remaining statutory amortization period.
Deductibility of G&G Costs not Dependent on Property Ownership
In CGG Americas, Inc. v. Commissioner, 147 T.C. No. 2 (July 21, 2016), the taxpayer was engaged in the business of conducting marine surveys in the Gulf of Mexico. The surveys employed geophysical techniques, such as seismic reflection, for detecting the presence of oil and gas. The taxpayer licensed the data from the surveys to its customers on a nonexclusive basis. The taxpayer’s customers used the data to drill for oil and gas in the Gulf of Mexico. The taxpayer did not own any of the oil & gas properties, but nonetheless treated its expenses in conducting the surveys as amortizable “geological and geophysical (G&G) expenses.” The IRS took the position on exam that the expenses were not G&G, since the taxpayer did not own the properties. The parties could not agree, and the matter proceeded to Tax Court, where the Court ruled that G&G expenses are not limited to expenses incurred by taxpayers that own oil and gas interests.
Court Applies Economic Interest Rule to Depletion Deduction
In Gaudreau v. United States, 2015-1 U.S.T.C. ¶50,126 (D.Kan. 2014), a married couple attempted to deduct depletion on property they did not own. The property belonged to the husband’s employer. However, they claimed that he had an "economic interest" in the oil and gas deposits and, therefore, they were entitled to depletion deductions. They argued that the husband’s time, skill and experience in locating properties for his employer constituted a capital investment for purposes of providing him with an economic interest. The IRS denied the deductions, and the District Court agreed. In order to have an economic interest in oil and gas deposits, a taxpayer must have made an investment of capital. The Court cited Regulation Section 1.611-1, which does not allow for the contribution only of time, skill, and expertise. The Court indicated that the use of the word “capital” clearly connotes an investment of property or money.
IRS Issues Ruling on PTPs and Qualifying Income
Publicly-traded partnerships (PTPs) are taxed as corporations unless their income is “qualifying income” under certain tests applicable to PTPs. In Private Letter Ruling 201633020 (April 18, 2016), the IRS ruled that a publicly-traded partnership engaged in fluid management and disposal services would not be treated as a corporation since its income was “qualifying income.” The taxpayer was also engaged in the sale of filtered hydrocarbons and other recoverable minerals that were collected as part of the disposal process. The IRS ruled that the income generated form these activities constituted qualifying income, since the sales were not to end users at the retail level.
Practice Area Leader
Joseph P. NicolaJoe leads the Sisterson Energy Team, a group of individuals from every area of our practice committed to supporting clients involved with the energy industry. Email Joe.
PA Income Tax Guide Taxation of Energy (PDF)