Understanding and Monetizing the Section 29 Credit
Twelve years ago, Congress passed (and the administration signed into law) an income tax credit which impacts the development of domestic energy reserves.1 During the period of its existence, the section 29 credit has stimulated increased production of gas from coal seams, Devonian shale and tight formations.2 There has not been an equivalent surge in production of oil from tar sands and shale due to the ambiguity caused by the ruling and audit positions of the Internal Revenue Service (the “Service”) regarding what type of oil production qualifies for this credit.3
The income tax credit set forth in section 29 of the Code4 arises from the sale of certain “qualified fuels” (originally enacted as section 44D of the Code).5 This credit was enacted to accomplish two purposes: (i) to protect producers of nonconventional fuels from decreases in the wellhead price (relative to the price of imported oil) which resulted from the decontrol of domestic oil and (ii) to stimulate the domestic production of alternate fuels by lowering the after-tax cost of their extraction.6 Since its enactment, Congress has amended section 29 several times to correct perceived technical flaws and to extend its applicability. Currently, the window for drilling wells in order to qualify production for the section 29 credit will end on December 31, 1992, and the period in which the section 29 credit
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