                     110 T.C. No. 25



                 UNITED STATES TAX COURT



     UNION TEXAS INTERNATIONAL CORPORATION, f.k.a.
    UNION TEXAS PETROLEUM CORPORATION, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent


         UNION TEXAS PETROLEUM ENERGY CORPORATION
SUCCESSOR BY MERGER TO UNION TEXAS PETROLEUM CORPORATION,
  f.k.a. UNION TEXAS PROPERTIES CORPORATION, Petitioner
      v. COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 15182-94, 15183-94.            Filed May 21, 1998.


           R and P's predecessor, NP, executed a
      series of three Forms 872 for 1985. R did
      not know at the time of signing the Forms 872
      that NP had merged with P and that NP no
      longer had authority to extend the period of
      limitations after Dec. 31, 1991.

           Effective Dec. 31, 1982, P's
      predecessor, OP, entered into an agency
      agreement with PR, a sister company, to
      process and sell propane for OP and NP to
      unrelated third parties. OP and NP retained
      title to its propane until PR sold it to
      unrelated third parties. PR also sold its
      own propane to T, a related retailer.
                               - 2 -

               Ps assert that they should be permitted
          to use differing allocations for computing
          the Windfall Profit Tax (WPT) and Percentage
          Depletion Net Income Limitation (NIL).

          1. Held: P, Energy, is estopped to deny the
          validity of the Forms 872. Knowledge of the
          merger is not attributed to R's WPT agents;
          computerized information of the merger was
          not accessible to them.

          2. Held: Ps are independent producers,
          because they did not sell their propane to T.

          3. Held: Sec. 4988(b)(3)(A), I.R.C., requires
          Ps to compute the NIL in the same manner
          under sec. 4988(b)(3)(A), I.R.C. and sec.
          613, I.R.C.




     Jasper George Taylor III, Charles Washington Hall,

William H. Caudill, and John B. Kinchen, for petitioners.

     Sheri Wilcox, for respondent.


                              OPINION

     PARR, Judge:   In these consolidated cases, respondent

determined the following deficiencies in windfall profit tax

(WPT) for the taxable periods of 1983, 1984, and 1985,

respectively: $3,471,045, $3,060,042, and $2,109,854.    Respondent

determined the deficiencies against Union Texas Petroleum

International (International) for 1983 and 1984, and against

Union Texas Petroleum Energy (Energy) for 1985.   In their

petitions, petitioners raised an issue pursuant to section
                                - 3 -

6512(b)1, claiming overpayments of WPT for the taxable periods of

1983, 1984, and 1985, respectively, in the following amounts:

$6,107,901, $5,969,611, and $7,931,434, resulting from a

recomputation of the WPT net income limitation (NIL), or WPT NIL.

       After concessions by the parties2, the issues for decision

are:    (1) Whether petitioner, Energy, should be equitably

estopped to deny that the limitations period for the taxable

periods of 1985 were extended properly under section 6501(c)(4).

We hold it should.    (2) Whether, pursuant to section 613A(d)(2),

Union Texas Petroleum Corporation (Old Petroleum) and Union Texas

Petroleum Corporation (New Petroleum), f.k.a. Union Texas

Properties Corporation (Properties) were independent producers

during the taxable years in issue.      We hold they were.

(3) Whether petitioners are entitled to recompute Old Petroleum's

and New Petroleum's WPT NIL computations for the taxable periods

of 1983, 1984, and 1985, where the recomputations do not follow




1
     All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
2
     Subject to the issues discussed herein, including the
overpayment issue, petitioners conceded the remaining issues
raised in the notices of deficiency and petitions. Respondent
conceded that petitioners are entitled to exclude from gross
income a ratable portion of the lease bonus payments made with
respect to producing properties for purposes of computing the WPT
NIL and that petitioners are entitled to capitalize lease bonus
payments in determining "as if" cost depletion.
                               - 4 -

the percentage depletion calculations claimed on their original

Federal income tax returns.   We hold they are not.3

     Some of the facts have been stipulated and are so found.

The stipulated facts and the accompanying exhibits are

incorporated into our findings by this reference.      At the time

the petitions in these cases were filed, petitioners' principal

place of business was located in Houston, Texas.    For

convenience, we present a general background section and combine

our findings of fact with our opinion under each separate issue.

General Background

     Corporate Structure--1982 Reorganization

     Until December 31, 1982, Old Petroleum (Employer

Identification Number, hereinafter EIN XX-XXXXXXX), a Delaware

corporation, was a subsidiary of Allied Corporation (Allied), a

New York corporation.   Old Petroleum owned and operated 10

natural gas processing plants and held nonoperating interests in

additional gas processing plants.   During that time, Old

Petroleum owned 100 percent of the stock of Texgas Corporation

(Texgas), a Delaware corporation, which was in the business of

retailing propane.

     In a December 31, 1982, reorganization, Allied formed a new

corporation called Union Texas Petroleum Holdings, Inc.

(Holdings) (EIN XX-XXXXXXX) to serve as the parent of Old


3
     We have considered each of the remaining arguments of the
parties and, to the extent that they are not discussed herein,
find them to be unconvincing.
                               - 5 -

Petroleum and a new corporation called Union Texas Products

Corporation (Products), a Delaware corporation.4    Pursuant to the

reorganization, Old Petroleum contributed all of the assets of

its hydrocarbons division to Products, including its natural gas

gathering lines, gas processing plants, storage facilities,

contracts for the sale of petroleum products, and all of the

stock of Texgas.   In exchange, Old Petroleum received the stock

of Products, which it then distributed to Holdings.    Thereafter,

Products was a direct subsidiary of Holdings, Texgas was a direct

subsidiary of Products, and Old Petroleum did not own stock in

Products or Texgas.

     Corporate Structure--1984 Reorganization

     In a December 31, 1984, reorganization, Old Petroleum

transferred all of its domestic oil and gas properties to New

Petroleum (EIN XX-XXXXXXX), a Delaware corporation and subsidiary

of Holdings, then known as Properties.   On March 5, 1985, New

Petroleum changed its name from Union Texas Properties

Corporation to Union Texas Petroleum Corporation.    Old Petroleum,

presently known as International, currently exists as a Delaware

corporation and is the petitioner in the instant case with

respect to 1983 and 1984.

      Corporate Structure--1991 Reorganization

     On October 15, 1991, Holdings became the parent of a new

corporation called Union Texas Petroleum Energy Corporation, or

4
     Effective July 2, 1985, Allied sold one-half of the stock of
Holdings.
                               - 6 -

Energy (EIN XX-XXXXXXX), a Delaware corporation.    Effective

December 31, 1991, pursuant to Delaware Corporation Law, New

Petroleum merged into Energy and ceased to exist.    Energy was the

surviving corporation under Delaware law and is the petitioner in

the instant case with respect to 1985.5

Issue 1. Equitable Estoppel for the Taxable Periods of 1985


     1985 Forms 872--Consent To Extend the Time To Assess Tax

     In the 1984 reorganization, Old Petroleum transferred its

domestic oil and gas properties to New Petroleum, then known as

Properties.   Thus, the responsibility for filing WPT returns

shifted from Old Petroleum to Properties.   On March 5, 1985,

Properties changed its name to New Petroleum.   Despite the name

change, New Petroleum continued to file its Forms 720, Quarterly

Federal Excise Tax Returns (Forms 720), for the first three

taxable quarters of 1985 under the name of Properties.

     To keep the period of limitations open while respondent

continued to conduct the WPT examination of New Petroleum for the

1985 taxable periods, respondent and New Petroleum began

executing a series of Forms 872, the last of which was meant to

extend the limitations period to June 30, 1994.    At that time,

what respondent's WPT revenue agents (WPT agents or agents) did



5
     When this opinion addresses the actions of the actual
parties to this litigation, the term "petitioners" refers to
Energy and International.
     When references in this opinion apply to all of the
affiliated Union Texas Petroleum corporate entities, either the
term Union Texas companies or affiliated corporations is used.
                               - 7 -

not know was that there had been another reorganization in which

New Petroleum merged with Energy, and as of December 31, 1991,

ceased to exist.   As a result of the merger, New Petroleum no

longer had authority to extend the period of limitations after

December 31, 1991.   Yet, New Petroleum, through its former

officers, Sanford M. Lobliner (Lobliner), and M.N. Markowitz

(Markowitz),6 executed the following three Forms 872 after it had

merged out of existence:

Extended Date   Date New Petroleum Signed   Date Respondent Signed
  6/30/93            7/22/92                       8/24/92
 12/31/93            1/14/93                       2/11/93
  6/30/94            7/27/93                       7/30/93

     Each of these three consents was prepared by respondent's

Appeals Office in Houston, Texas.   Each consent identified the

taxpayer as "Union Texas Petroleum Corporation (formerly Union

Texas Properties Corporation) (Successor to Union Texas Petroleum

Corporation XX-XXXXXXX)" and listed the EIN as XX-XXXXXXX.    The

consents should have identified the taxpayer for 1983 and 1984 as

Union Texas International Corporation, F.K.A. Union Texas

Petroleum Corporation, and for 1985 as Union Texas Petroleum

Energy Corporation, successor by merger to Union Texas Petroleum

Corporation, F.K.A. Union Texas Properties Corporation.   When New

Petroleum returned the consents to respondent, the Form 872

extending the assessment date to June 30, 1993, bore Lobliner's

signature, and the two Forms 872 extending the assessment dates

6
     In 1992 and 1993, respectively, Lobliner and Markowitz were
the vice presidents of Energy and would have had authority to
have properly prepared a Form 872 on petitioners' behalf.
                              - 8 -

to December 31, 1993, and June 30, 1994, respectively, bore

Markowitz's signature, both of whom signed as vice presidents of

New Petroleum.

     On March 9, 1992, respondent sent New Petroleum the revenue

agent's report for the taxable periods of 1985, addressed to

Union Texas Petroleum Corporation, F.K.A. Union Texas Properties

Corporation, as was the consent.   On April 24, 1992, in response

to the revenue agent's report, Lobliner submitted to respondent a

protest of respondent's determinations for 1985.   The protest was

on a preprinted letterhead styled Union Texas Petroleum.   The

case remained under consideration by respondent's Appeals Office

until May 26, 1994, when the notice of deficiency for 1985 was

issued.7

     At no time before the petitions in these cases were filed

did anyone representing New Petroleum or Energy directly inform

the agents conducting the WPT examination or the Appeals officers

considering the cases that New Petroleum was defunct and had no

authority to act, that Lobliner and Markowitz were not officers

of New Petroleum and did not have authority to execute the Forms

872 for the 1985 taxable periods, that future correspondence




7
     On May 26, 1994, respondent mailed two notices of deficiency
to petitioners' Houston address. The notice of deficiency for
1983 and 1984 was in the name of Old Petroleum with EIN 74-
6044301. Those years are not affected by the equitable estoppel
issue. The notice of deficiency for 1985 was in the name of New
Petroleum with EIN XX-XXXXXXX. This is the deficiency notice
subject to the equitable estoppel issue.
                                - 9 -

should be directed to Energy, or that future Forms 872 should be

executed by Energy.

     Discussion

     Respondent contends that Energy should be estopped to deny

the validity of the last three Forms 872 signed by Lobliner and

Markowitz on behalf of New Petroleum, because Energy, through its

officers, agents or employees, intentionally deceived respondent

by failing to disclose New Petroleum's merger into Energy,

thereby causing respondent to withhold assessment in reliance

upon the consents.    Energy asserts that it did not make any false

representations to, or maintain any misleading silences in

connection with, New Petroleum's merger into Energy.

Furthermore, Energy claims that when the last three Forms 872

were signed respondent not only knew of New Petroleum's merger,

but had a convenient means of acquiring such knowledge.    Finally,

Energy contends that in preparing and executing the last three

Forms 872, respondent did not rely on any acts or statements made

by Energy's representatives, because respondent's agents prepared

the Forms 872 by looking only at prior Forms 872 and New

Petroleum's Federal income tax return for the year in issue.

     Pursuant to section 6501(c)(4) a taxpayer and the Secretary

or his delegate, before the expiration of the period provided by

statute for assessment and collection of income tax, may consent

in writing to an extension of that period, and further extensions

may be made by subsequent written agreements entered into before

the expiration of the period previously agreed upon.
                               - 10 -

     Respondent concedes that because the Forms 872 were signed

by Lobliner and Markowitz on behalf of New Petroleum after it had

merged out of existence, and not on behalf of Energy, they were

invalid.   Thus, respondent further concedes that since the notice

of deficiency for Energy's 1985 taxable periods was mailed more

than 3 years after Energy filed its Federal income tax return for

that year, assessment and collection of a deficiency for 1985 are

barred, unless we hold that the last three Forms 872 signed by

Lobliner and Markowitz are valid extensions of the statute of

limitations.   Sec. 6501(a).

     Generally speaking, equitable estoppel precludes a party

from denying that party's own acts or representations which

induced another to act to the other's detriment.    Graff v.

Commissioner, 74 T.C. 743, 761 (1980), affd. per curiam 673 F.2d

784 (5th Cir. 1982).   The doctrine of equitable estoppel is based

on the grounds of public policy, fair dealing, good faith, and

justice, and is designed to aid the law in the administration of

justice where without its aid injustice might result. Id.      The

elements of equitable estoppel have been variously described, but

for our purposes they may be stated as follows:    (1) There must

be a false representation or wrongful misleading silence by the

party against whom the estoppel is claimed; (2) the error must

originate in a statement of fact, not in opinion or a statement

of law; (3) the party claiming the benefits of the estoppel must

have actually and reasonably relied on the acts or statement of
                               - 11 -

the party against whom the estoppel is claimed, and as a

consequence of that reliance must be adversely affected by the

acts or statements of the one against whom an estoppel is

claimed; and (4) the party claiming the benefits of estoppel must

not know the true facts.    Century Data Sys., Inc. v.

Commissioner, 86 T.C. 157, 165 (1986); Graff v. Commissioner,

supra at 761; Steiner v. Commissioner, T.C. Memo. 1995-122.       The

party affirmatively asserting an estoppel has the burden of

proving all the essential elements constituting the estoppel.

Steiner v. Commissioner, supra.    Accordingly, respondent bears

the burden of proving each of the above elements.    Rules 39,

142(a).

       1. Misrepresentation or Misleading Silence

       To sustain equitable estoppel, respondent must show that

Energy took "some action" which misled respondent.       Century Data

Sys. Inc. v. Commissioner, supra at 166.    Respondent contends

that Energy made false representations or wrongful misleading

silences, when it did not tell respondent that New Petroleum had

merged out of existence, and that its officers had no power to

act.    Respondent further contends that the representations were

part of a pattern of false representations and misleading

silences that caused respondent to believe mistakenly that the

period of limitations had been extended.    Respondent argues that

these material misrepresentations were bolstered by Energy's

continuing relations with respondent's Appeals officers, where 25
                                - 12 -

items of correspondence were sent and received during the audit

process in the name of Union Texas Petroleum Corporation, without

any mention of a change in corporate structure.      Respondent

further argues that Energy was aware of respondent's concern with

the accuracy of the name and signature on the Forms 872.      In

fact, once respondent learned that Properties had changed its

name to New Petroleum, respondent immediately sought new Forms

872, reflecting the new name.      Moreover, respondent notes that

during the examination of the taxable periods of 1983 and 1984,

Union Texas Petroleum's Chief Executive Officer gave respondent a

letter certifying Lobliner's authority to execute consents for

those years.    Respondent contends that Energy's failure to inform

respondent that Lobliner, and subsequently Markowitz, no longer

had authority to act on behalf of New Petroleum was clearly

disingenuous.

       We agree with respondent.   We are not persuaded by

petitioner's attempt to obfuscate this issue with the testimony

of Joseph Wayne Cliett (Cliett), who was the supervisor of tax

audits for Old Petroleum, New Petroleum, Energy, and the other

affiliated corporations at the time of trial and during the

taxable years in issue.    Cliett, as tax supervisor of the Union

Texas companies, knew of the tax returns being filed by each of

the different Union Texas companies.      Moreover, he was

responsible for obtaining the appropriate signatures on the Forms

872.    Cliett testified that upon receiving the first of the last
                               - 13 -

three Forms 872 from the Internal Revenue Service (IRS) which

extended the assessment date to June 30, 1993, Cliett presented

it for signature to Lobliner, his supervisor during 1992.     Upon

receiving the last two Forms 872 which extended the assessment

date to December 31, 1993, and June 30, 1994, respectively,

Cliett presented them for signature to Markowitz, who became his

supervisor sometime in 1993.   Cliett alleges, however, that when

he presented the last three Forms 872 for signature to Lobliner

and Markowitz he did not know that New Petroleum had dissolved.

Cliett claims that he was not aware of the merger, because his

payroll checks failed to identify the specific entity for which

he worked, and he did not pay "much attention" to the Forms W-2

that he received.

     We find Cliett's testimony to be implausible given his

extensive tax and accounting background, coupled with his vast

knowledge of petitioners' business organization and operations.

Cliett testified that he has worked nearly 30 years for

petitioners or one of their affiliated corporations, that he is

the supervisor for tax audits, and he is familiar with the

business organization and operations of the Union Texas

companies.   At trial, Cliett was easily able to identify each

Union Texas company, to delineate the various departments within

each corporation, and to describe the primary functions of each

division within the various corporate departments.   Thus, it is

most difficult to believe that at the time the last three Forms
                                - 14 -

872 were signed, Cliett did not know of New Petroleum's

dissolution or did not know that Lobliner and Markowitz no longer

had authority to sign the Forms 872 on behalf of the defunct

corporation.

     Assuming arguendo, that Energy knew of the error contained

in the last three Forms 872 (which it does not concede), Energy,

in reliance on Century Data Sys., Inc. v. Commissioner, supra at

170, asserts that it was under no affirmative duty to bring

respondent's mistakes to respondent's attention.    We disagree and

find Energy's reliance on Century Data Sys., Inc. v. Commissioner

to be misplaced.   Energy fails to mention this Court's

qualification of that proposition; namely, that there is no

obligation to correct respondent's mistakes provided the

"petitioner did nothing to encourage the faulty assumption." Id.

at 171.   Here, Energy's entire course of conduct encouraged

respondent's faulty belief that New Petroleum existed at the time

the last three Forms 872 were signed.    When Lobliner and

Markowitz signed the last three consents Energy knew that New

Petroleum did not exist, and that Lobliner and Markowitz were not

officers of that corporation.    Energy not only failed to call

this error to respondent's attention, but intentionally fostered

it by continuing to communicate to the IRS through correspondence

that bore the name and EIN of the dissolved corporation.     Thus,

based on the record and the facts discussed herein, we find that
                               - 15 -

respondent has met his burden of proving that these actions

satisfy the first element of equitable estoppel.

     2. Fact or Law

     For equitable estoppel to apply, the misrepresentation or

wrongful misleading silence generally must originate in a

statement of fact and not in an opinion or a statement of law.

Graff v. Commissioner, 74 T.C. at 761.

     While it could be argued that the effect of New Petroleum's

merger into Energy is a legal question, the misrepresentations or

silence relate to the facts herein; namely, that at the time the

last three Forms 872 were signed New Petroleum existed, and that

the individuals signing the consents were its properly authorized

officers.   Given that Energy's misrepresentations or wrongful

misleading silences clearly originate in a statement of fact, we

find respondent has met his burden with respect to the second

element of equitable estoppel.

     3. Detrimental Reliance

     "It is fundamental to the doctrine of estoppel that the

party raising the issue must have been misled in reliance upon

the representations of his opponent." Century Data Sys., Inc. v.

Commissioner, 86 T.C. at 166; see also Atlas Oil & Ref. Corp. v.

Commissioner, 22 T.C. 552, 559 (1954) (taxpayer must be shown to

have taken some action which led Commissioner to postpone until

after the period of limitations expired the issuance of a notice

of deficiency that he was otherwise prepared to mail on a timely

basis).
                              - 16 -

     Here, Energy's critical act was to sign the consents without

informing respondent that the individuals signing them were not,

as they represented themselves to be, officers of New Petroleum.

Had respondent known that Lobliner and Markowitz were not

officers of New Petroleum and that the corporation did not exist,

respondent could have obtained either a correct consent from

Energy or issued a notice of deficiency before the period of

limitations expired with respect to 1985.   Accordingly, we find

that respondent reasonably relied to his detriment on

petitioner's misrepresentations or silences with respect to the

merger transaction.

     4. Knowledge of the Facts

     To meet the fourth prong of equitable estoppel, the

Government must prove not only that respondent was "'destitute of

knowledge of the real facts as to the matter in controversy, but

should also have been without convenient or ready means of

acquiring such knowledge.'"   Southwestern Inv. Co. v.

Commissioner, 19 B.T.A. 30, 47 (1930) (citing Brant v. Virginia

Coal and Iron Company, et. al, 93 U.S. 326, 337 (1876)).

     Respondent contends that neither the agents nor Appeals

officers involved with the WPT audit had actual knowledge of New

Petroleum's dissolution at the time the last three Forms 872 were

signed.   Moreover, respondent points to the fact that petitioners

stipulated that both Energy and New Petroleum failed to inform

the WPT agents of the true situation regarding the merger.
                               - 17 -

     Energy asserts that even if the WPT agents did not have

actual knowledge of the merger (a fact which it does not

concede), numerous documents submitted to respondent's service

center constituted sufficient notice to respondent that New

Petroleum had ceased to exist at the time New Petroleum signed

the last three Forms 872, on July 22, 1992, January 14, 1993, and

July 27, 1993, respectively.   It is stipulated that no later than

May 11, 1992, more than 3 months before the first Form 872 was

signed, the Austin Service Center received New Petroleum's final

quarterly employment tax return (Form 941) marked "cancel

corporation merged out of existence."   Energy further points out

that respondent stipulated that no later than September 8, 1992,

respondent's Austin Service Center received copies of a statement

of merger as required under section 1.368-3, Income Tax Regs.,

and a certificate of merger of New Petroleum into Energy,

respectively, that were attached to the 1991 consolidated Federal

income tax return (Form 1120), filed by Holdings, New Petroleum's

parent company.   Finally, in reliance on Badger Materials, Inc.

v. Commissioner, 40 T.C. 725, 733, withdrawn and modified in part

by Badger Materials, Inc. v. Commissioner, 40 T.C. 1061 (1963)

(not affecting this issue), Energy contends that as of December

17, 1991, when the certificate of merger was filed with the

Delaware secretary of state indicating that as of December 31,

1991, New Petroleum would cease to exist, such information became

a matter of public record and readily available to respondent.

Accordingly, petitioner contends that respondent not only had
                              - 18 -

actual knowledge of the merger, but also had the means by which

respondent's WPT agents could have readily acquired such

knowledge.   Southwestern Inv. Co. v. Commissioner, supra.

     In Paramount Warrior, Inc. v. Commissioner, T.C. Memo. 1976-

400, affd. without published opinion 608 F.2d 522 (5th Cir.

1979), a case which is in many respects similar to the instant

case, we declined to decide whether the notification of a merger

in correspondence with one of respondent's service centers, or in

a parent company's consolidated return, constituted sufficient

knowledge on the part of respondent, because we found as a fact

that the field agents involved with the examination had actual

knowledge that the corporation, on whose behalf the Forms 872

were signed, had merged out of existence. Id.   In the instant

case, we are faced with precisely the question deferred in

Paramount Warrior.

     Energy asserts that the two groups of documents filed with

respondent's Austin Service Center should be considered notice of

New Petroleum's dissolution, and therefore such knowledge should

be attributable to the WPT agents who conducted the examination

and who drafted the last three Forms 872.   The first group of

documents on which Energy relies consists of the 1991

consolidated Form 1120 filed by Holdings along with the merger

documents attached thereto.   The second group of documents

consists of the 1991 employment tax returns (Forms 940 and 941)

filed in New Petroleum's name. Energy argues that the WPT agents
                               - 19 -

should be charged with knowledge of the information contained in

these documents.

     Respondent contends that the revenue agents and Appeals

officers involved in the WPT cases could not have been expected

to learn of New Petroleum's merger from the information submitted

to the Austin Service Center in Holding's 1991 Form 1120.    For

income tax purposes, New Petroleum was a member of a consolidated

group headed by Holdings.   Accordingly, the statement of merger

and certificate of merger which New Petroleum filed were attached

to Holdings' Form 1120 as pages 573 and 574, respectively, of a

632-page consolidated Federal income tax return.    The income tax

return was filed under the name and EIN of Holdings, which was

different from Energy's EIN.     Moreover, neither page 573 nor page

574 contained Energy's EIN.    Thus, respondent contends that the

computer transcripts requested by the WPT agents using New

Petroleum's EIN did not reflect the changes in its corporate

status shown on Holdings' Form 1120.

     We agree with respondent.    It is stipulated that the Austin

Service Center received Holdings' Form 1120 on September 8, 1992,

after the first of the three Forms 872 was signed.    However, an

inspection of the actual Form 1120 reveals that the return was

not surveyed by the income tax examination group until January

14, 1995, nearly 18 months after the last consent in issue was

signed.   Thus, based on the facts discussed herein, we shall not

attribute knowledge of New Petroleum's merger, which may have

been acquired by revenue agents conducting an unrelated income
                              - 20 -

tax audit of petitioners for the taxable years in issue, nearly

18 months after the last consent was signed, to the agents or

Appeals officers conducting the WPT examination.     Cf. King v.

Commissioner, 857 F.2d 676, 680 (9th Cir. 1988) (adopting general

theory that knowledge acquired by the IRS in unrelated

investigations is not necessarily imputed from one division to

another and citing United States v. Zolla, 724 F.2d 808, 810-811

(9th Cir. 1984)), affg. 88 T.C. 1042 (1987).   Furthermore, we

find that New Petroleum did not provide respondent with notice of

the merger by filing Forms 940 and 941 in 1991 (employment tax

filings), because, as in the income tax situation, those filings

address a different tax, a different form, and are subject to

review by a different IRS division. Id.

     With respect to the information available to the WPT agents

in the IRS' computer system, the record establishes that although

a computer updating procedure existed for income tax return

audits which would have reflected a change in New Petroleum's

corporate status, there was no such system in place for audits of

WPT or employment tax returns.   At trial, Revenue

Agent Bruce Rhames (Agent Rhames), the group manager assigned to

conduct the WPT examination for 1985, credibly testified that

where, as in the instant cases, the income tax returns were not

under his control and something changed which did not pertain

exactly to his taxpayer, such as a change in the taxpayer's name,

its EIN, or the amount of tax paid, he was not notified of the

change.   Rhames explained that New Petroleum's merger into Energy
                              - 21 -

was not reflected in the computer transcripts generated using New

Petroleum's EIN, which were used to confirm that the information

on the last three Forms 872 was correct.

     Respondent's argument rests on the premise that any

knowledge of New Petroleum's merger obtained by personnel at the

Austin Service Center should not be attributed to the WPT agents,

because respondent did not have a computer system in place at the

time the last three Forms 872 were drafted, which would have

enabled the agents to access this information easily.   We agree

with respondent.   See also Southwestern Inv. Co. v. Commissioner,

19 B.T.A. 30 (1930) (citing Brant v. Virginia Coal & Iron Co., 93

U.S. 326, 337 (1876); cf. Abeles v. Commissioner, 91 T.C. 1019

(1988).

     In Abeles v. Commissioner, supra at 1035, our decision

turned on the then-existing availability of computer-generated

information using the taxpayer's Social Security number.     There,

we held that for purposes of determining whether a notice of

deficiency has been properly mailed to the taxpayer's last known

address, an agent issuing a deficiency notice generally is

charged with knowledge of a taxpayer's last known address which

appears on the taxpayer's most recently filed tax return.    In

Abeles, we found as a fact that the then-existing computer

capabilities of the IRS were such that an agent responsible for

issuing a notice of deficiency had the ability to conduct, within

a few moments, a search of the IRS computer files for a more

recent address for the taxpayer. Id. at 1033-1035.   In so
                              - 22 -

holding, we noted that "the state of the IRS' computer

capabilities is such that a computer search of the information

retained with respect to a certain taxpayer, including their last

known address, may be performed by respondent's agent without

unreasonable effort or delay." Id. at 1033.

     Here, the IRS' computer system did not provide the ability

to conduct within a reasonable time a cross-check of the

taxpayer's income tax, WPT, and employment tax returns that would

have revealed the taxpayer's change in corporate status, using a

single EIN.   Thus, Abeles v. Commissioner, supra, while

analogous, is clearly distinguishable from the case at hand.

     Finally, we address Energy's argument that respondent easily

could have determined that New Petroleum had merged out of

existence by checking with the Delaware secretary of state, which

as of December 17, 1991, had the certificate of merger on file.

In making this argument, Energy relies on Badger Materials, Inc.

v. Commissioner, 40 T.C. 725, 733 (1963), withdrawn and modified

in part by Badger Materials, Inc. v. Commissioner, 40 T.C. 1061

(1963) for the proposition that filing of merger documents with

the secretary of state constitutes notice of merger to the IRS.

We disagree and find Energy's reliance on Badger Materials, Inc.

to be misplaced.   In Badger Materials, Inc., the taxpayer

corporation was dissolved and generally ceased to exist.

Following the dissolution, the treasurer of the defunct

corporation executed consents purporting to extend the period for

assessment of Federal income tax.   Within the period of
                                - 23 -

limitations as purportedly extended, the IRS issued a notice of

deficiency to the corporation and a notice of transferee

liability to the transferee of the corporation's assets.      The

corporation and the transferee denied the validity of the

consents on the ground that they were executed after the

corporation had been dissolved.    The IRS argued that the

corporation and transferee were equitably estopped from denying

the validity of the consent forms.       We disagreed and held for the

taxpayers.

     However, the facts in Badger Materials, are distinguishable

from the facts herein.   In Badger Materials, we found as fact

that there was no lack of knowledge of the corporation's

dissolution on the part of the IRS.      Energy argues that Badger

Materials stands for the proposition that the Government had

knowledge of the corporation's merger at the time the consent

forms were signed, because the corporation had filed articles of

dissolution with the secretary of state of Wisconsin, thus making

the matter "public record".   However, the filing of dissolution

documents was merely one fact that this Court relied on in

holding for the taxpayers.    There, the taxpayer corporation also

filed a final Federal income tax return with the IRS under its

own name and listing its EIN.    The return included a statement

concerning the liquidation and a copy of the minutes of the

stockholder's meeting adopting the plan of dissolution.      Here, as

previously discussed, the statement of merger and the certificate

of merger filed by New Petroleum were attached as pages 573 and
                              - 24 -

574 of a 632-page consolidated Federal income tax return filed by

Holdings, New Petroleum's parent corporation.    Moreover, in

Badger Materials, we attributed the merger information contained

in the taxpayer's Federal income tax return to the agent

conducting the income tax audit, not to an agent responsible for

an unrelated audit of a different kind of tax.

      Finally, although neither party addresses this point, we

note that the returns under audit herein for the taxable periods

of 1985 were New Petroleum's Quarterly Federal Excise Tax Returns

(Form 720).   On Form 720, there is a line which states that if

the taxpayer will not be liable for returns in succeeding

quarters, then the word "FINAL" should be entered.    Had New

Petroleum entered the word "FINAL" on the appropriate line, that

might have been sufficient to put respondent on notice of New

Petroleum's merger into Energy.   However, Energy's failure to

introduce into evidence New Petroleum's final 1991 Form 720 leads

us to infer that no such entry appears on the form.    See Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947).

     Thus, based on the record and the facts discussed herein, we

hold that Energy is equitably estopped to deny that the

limitations period for the taxable periods of 1985 was extended

properly under section 6501(c)(4).8

8
     Even if we were to find that the error in the extension was
the result of mutual mistake, rather than any deliberate
deception on petitioner's part, the Court has the power to reform
                                                   (continued...)
                               - 25 -

Issue 2.    Independent Producer Issue9

     Background

     Pursuant to the 1982 reorganization, Old Petroleum

contributed all of the assets of its hydrocarbons division to

Products, including all of the stock of Texgas.     In exchange, Old

Petroleum received the stock of Products, which it then

distributed to Holdings, the parent company of Products and Old

Petroleum.    Thereafter, Products owned 100 percent of the stock

of Texgas, a retailer of propane,10 and Old Petroleum no longer

owned stock in Products or Texgas.      In the December 31, 1984,

reorganization, Old Petroleum transferred all of its domestic oil

and gas properties to New Petroleum, which was also a subsidiary

of Holdings.    Petroleum, Products, and Texgas were related

persons within the meaning of section 613A(d)(3).

     Petroleum was in the oil and gas exploration and production

business.    Products was in the business of processing and

marketing oil and natural gas and their derivatives, including

propane, for Petroleum as well as for unrelated oil and gas

producers.




8
 (...continued)
the written instrument to conform to the agreement and intent of
the parties. See Woods v. Commissioner, 92 T.C. 776, 789 (1989).
9
     When references in this opinion apply to both Old Petroleum
and New Petroleum, the term "Petroleum" is used.
10
     Propane is a product derived from natural gas under sec.
1.613A-7(r)(3), Income Tax Regs. Accordingly, references herein
to natural gas include propane.
                              - 26 -

     Effective December 31, 1982, Old Petroleum and Products

entered into a service agreement under which Products agreed, for

a cash fee, to act as an agent for Petroleum to process and sell

its propane to unrelated third parties.    As Petroleum's agent,

Products handled Petroleum's marketing, distribution, storage,

sales, and collection efforts.   Pursuant to the service

agreement, Petroleum retained title to its propane until Products

sold the propane on Petroleum's behalf to unrelated third

parties.   Neither Products nor Texgas was a buyer or seller under

Petroleum's sales contracts with unrelated third parties.

     Petroleum produced natural gas from individual wells, which

went to 10 different processing plants.    From 3 of the 10

processing plants, Petroleum moved its propane by pipeline to a

storage terminal at Mont Belvieu, Texas.    By exchange agreements,

Petroleum exchanged the volumes of propane at the 7 other plants

for a like volume of propane held by Products.    Petroleum's use

of the exchange agreements as a substitute for physical

transportation was both economically efficient and a common

practice in the oil and gas industry.   Moreover, the propane

owned by Petroleum and Products satisfied strict industry

standards so that the propane volumes could be easily commingled

and exchanged.

     As Products sold Petroleum's propane, the accounting group

recorded those sales as Petroleum's sales in accordance with

Petroleum's accounting practices, which were customary in the oil

and gas business and were consistently applied.    Petroleum's
                                    - 27 -

general ledger showed the sale of Petroleum's propane inventory

by Petroleum, with Products as agent, to unrelated third parties

in bulk sales.     Petroleum's handling of its propane inventory was

consistent with industry practice.

     As agent for Petroleum, Products collected from third party

purchasers payments due to Petroleum, and it was responsible for

pursuing any unpaid propane bills.           If, however, a bill remained

unpaid, it was Petroleum, not Products, that had to bear the

loss. For the taxable years in issue, Petroleum, Products, and

Texgas had the following volumes and values of propane

production:

Parties               Propane Sales             Propane Sales
1983                 Volume (gallons)              Value
 Old Petroleum          8,521,279                $3,918,477
 Products             290,982,398               142,699,588
 Texgas               152,234,737               131,469,955


1984
                                                 1
 Old Petroleum          5,349,081                 $2,307,907
 Products             351,855,506               161,166,870
 Texgas               159,090,931               136,352,438

1985
 New Petroleum          7,930,188                $2,994,311
 Products             289,494,801               116,275,633
 Texgas               151,400,579               124,263,589
1
    Petitioners concede that due to an accounting error, the $2,307,907
amount shown as Old Petroleum's propane sales for 1984, although reflected in
Petroleum's books, does not include gross receipts received by Old Petroleum
from its sales of 818,708 gallons of propane in December 1984. The highest
price per gallon of propane during 1984 was approximately 58 cents. Thus, Old
Petroleum's gross receipts from its December 1984 propane sales would have
been no more that approximately $475,000, resulting in annual gross receipts
of no more than $2,782,907 for that year.

     For 1983, 1984, and 1985, respectively, Products sold

155,614,505, 156,887,148, and 155,225,544 gallons of propane to

Texgas.   Given that Products was able to obtain all the propane
                                - 28 -

it needed from sources other than Petroleum, Petroleum's

production was not necessary for Products to meet its supply

obligations to Texgas.

     Discussion

     Respondent determined for the taxable years in issue that

pursuant to section 613A(d)(2)(A)11 and section 1.613A-7(r)(2),

11
     Section 613A provides, in pertinent part, as follows:

     SEC. 613A(d)(2). Retailers Excluded.--Subsection (c) shall
     not apply in the case of any taxpayer who directly, or
     through a related person, sells oil or natural gas
     (excluding bulk sales of such items to commercial or
     industrial users), or any product derived from oil or
     natural gas (excluding bulk sales of aviation fuels to the
     Department of Defense)--


          (A) through any retail outlet operated by the taxpayer
          or a related person, or

          (B) to any person--

                       (i) obligated under an
                  agreement or contract with the
                  taxpayer or a related person to use
                  a trademark, trade name, or service
                  mark or name owned by such taxpayer
                  or related persons, in marketing or
                               distributing oil or
                  natural gas or any product derived
                  from oil or natural gas, or

                       (ii) given authority, pursuant to an
                  agreement or contract with the taxpayer
                  or a related person to occupy any
                  retail outlet owned, leased, or in any way
                  controlled by the taxpayer or a related
                  person.


     Notwithstanding the preceding sentence this paragraph shall
     not apply in any case where the combined gross receipts from
     the sale of such oil, natural gas, or any product derived
                                                   (continued...)
                                 - 29 -

Income Tax Regs.12, Petroleum was not an independent producer,

because it sold propane through Texgas, a related retailer.

Petitioners assert that Petroleum qualifies as an independent

producer because it sold its propane in bulk to unrelated third

parties and in no year did its own sales exceed $5 million.

        Respondent's argument is premised on the presumption that

the 1982 reorganization was a "scheme" developed by Petroleum's

tax department to allow Petroleum to qualify as an independent

producer for the taxable years in issue.     To foster the illusion

that Petroleum's propane was being sold to unrelated third

parties, respondent argues, Old Petroleum entered into the

service agreement and exchange agreements with Products to

disguise the fact that Petroleum was selling propane through

Texgas.     Thus, respondent contends that Products did not act as

Petroleum's agent, but that it acquired (took title to)

Petroleum's propane and subsequently sold the propane to Texgas.



11
     (...continued)
         therefrom, for the taxable year of all retail outlets taken
         into account for purposes of this paragraph do not exceed
         $5,000,000. * * *
12
   Sec. 1.613A-7(r)(2), Income Tax Regs., provides in pertinent
part:

        (2) * * * A taxpayer shall be deemed to be selling oil or
        natural gas (or a derivative product) through a retail
        outlet operated by a related person in any case in which a
        related person who operates a retail outlet acquires for
        resale oil or natural gas (or a derivative product) which
        the taxpayer produced or caused to be made available for
        acquisition by the related person pursuant to an arrangement
        whereby some or all of the taxpayer's production is
        marketed. * * * [Emphasis added.]
                              - 30 -

Accordingly, respondent argues that Petroleum is denied

independent producer status, because pursuant to section

613A(d)(2)(A) and section 1.613A-7(r)(2), Income Tax Regs.,

Petroleum is deemed to be selling its propane through a retail

outlet (Texgas) operated by a related person (Products).

     We disagree.   A taxpayer is generally free to structure its

business transactions as it pleases, though motivated by tax

reduction considerations, provided the transaction is imbued with

a sufficient business purpose.     Gregory v. Helvering, 293 U.S.

465 (1935); Casebeer v. Commissioner, 909 F.2d 1360 (9th Cir.

1990), affg. in part, revg. in part and remanding T.C. Memo.

1987-628; Rice's Toyota World, Inc. v. Commissioner, 81 T.C. 184,

196 (1983), affd. on this issue, revd. in part      752 F.2d 89 (4th

Cir. 1985).   On brief respondent seems to be arguing that

Petroleum devised the 1982 reorganization to obtain tax benefits

associated with independent producer status.    Respondent,

however, does not argue that the reorganization was devoid of

economic substance, nor does respondent challenge the validity of

Petroleum's corporate structure.    Rather, respondent asks us to

disregard the provision of the service agreement which

establishes that Petroleum was to retain title to its propane

until Products sold the propane on Petroleum's behalf to

unrelated third parties.   We decline to do so.13



13
       Respondent does not dispute that Petroleum qualifies as an
independent producer if the terms of the service agreement are
respected. See Rev. Rul. 92-72, 1992-2 C.B. 118.
                              - 31 -

     On the basis of the entire record, we are convinced tt not

merely in form, but in substance, Products acted as an agent for

Petroleum and pursuant to the service agreement did not purchase

any of the propane that it marketed for Petroleum.   We note that

Petroleum's production was not necessary for Products to meet its

supply obligations to Texgas because Products was able to obtain

all the propane it needed from sources other than Petroleum.

Furthermore, it was Petroleum, not Products, that bore the risk

of loss if any propane bills remained unpaid.   Thus, as discussed

supra, we find as a fact that Petroleum, under the service

agreement, retained title to its propane until Products sold the

propane on Petroleum's behalf.   Accordingly, we hold that

Products did not acquire Petroleum's propane for resale to

Texgas, and that Petroleum, pursuant to section 613A(d)(2)(A) and

section 1.613A-7(r)(2), Income Tax Regs., is not deemed to be

selling its propane through Texgas, a retail outlet operated by

Products, a related person.   Therefore, Petroleum qualifies as an

independent producer for the taxable years in issue.

Issue 3.   Recomputation of Petroleum's WPT NIL Computations

     Background

     On its original Federal income tax returns for each of the

taxable years in issue, Petroleum claimed percentage depletion as

an independent producer.   With certain statutory modifications,

Petroleum's original percentage depletion NIL calculations

paralleled its original WPT NIL calculations.   When calculating
                              - 32 -

its original percentage depletion NIL, Petroleum generally

included the same amounts as overhead (indirect expenses) and

followed the same apportionment procedures as were included and

followed in its original WPT NIL computations.

     In the petitions filed in these cases, petitioners asserted

for the first time that they should be permitted to modify their

allocation process for computing the WPT NIL.14    During May and

September of 1995, petitioners provided respondent with a revised

apportionment formula for computing the WPT NIL.    To the amounts

that were included in overhead in their original computations,

petitioners contend that they should be permitted to include as

additional overhead six new categories of indirect costs, which

petitioners claim are attributable to the mining process.    In

their revised computations, petitioners also changed their method

for allocating overhead among producing properties and between

gas and oil on a single property from actual revenue to

production, using a conversion ratio derived from relative market

prices of gas and oil.

     Discussion

     Respondent determined the following deficiencies in WPT for

the taxable periods of 1983, 1984, and 1985, respectively:




14
     Respondent did not raise this issue in the notices of
deficiency.
                               - 33 -

$3,471,045, $3,060,042, and $2,109,854.15     On August 22, 1994,

each petitioner timely filed a petition with this Court

contesting the entire amount of the deficiencies asserted. In

addition thereto, petitioners claimed overpayments of WPT of

$6,107,901, $5,969,611, and $7,931,434 for the taxable periods of

1983, 1984, and 1985, respectively, resulting from a

recomputation of their WPT NIL calculations.       At trial and on

brief, respondent contends that Petroleum's WPT NIL

recomputations are not in accord with section 1.613-5(a), Income

Tax Regs., because they impermissibly deviated from the

percentage depletion calculations claimed on Petroleum's original

returns.16   Accordingly, respondent argues that petitioners

15
     The deficiencies as determined by respondent are in windfall
profit taxes for the taxable periods in issue and in the amounts
set forth below:

Taxable Period Ended                     Amount
Mar. 31, 1983                           $898,508
June 30, 1983                            882,297
Sept. 30, 1983                           865,264
Dec. 31, 1983                            824,976
Mar. 31, 1984                            874,332
June 30, 1984                            594,829
Sept. 30, 1984                           649,637
Dec. 31, 1984                            941,244
Mar. 31, 1985                            554,711
June 30, 1985                            516,123
Sept. 30, 1985                           535,574
Dec. 31, 1985                            503,446

     Total                          8,640,941
16
     Respondent further argued that petitioners' new WPT NIL
calculations should be rejected, because they are not defensible
under cost accounting principles. We find it unnecessary to
                                                   (continued...)
                                - 34 -

should be proscribed from modifying the overhead allocation

process used in their original WPT NIL calculations and instead

be required to retain the method originally employed, which

parallels their percentage depletion calculations and which was

accepted by respondent during the examination process. Cf. sec.

1.613-4(d)(2), Income Tax Regs. (generally, if a taxpayer has

consistently employed a reasonable method of determining the

costs of the various phases of the mining and nonmining process,

such method shall not be disturbed).

     In response to phased decontrol of crude oil prices

announced by President Carter in April 1979, and increased

worldwide crude oil prices, Congress determined that the

additional revenues of "windfall" that U.S. oil producers would

thereby receive were an appropriate object of taxation.    H. Rept.

96-304 at 7 (1979), 1980-3 C.B. 81, 91; S. Rept. 96-394 at 6

(1979), 1980-3 C.B. 131, 142.    Consequently, Congress enacted the

Crude Oil Windfall Profit Tax Act of 1980 (Windfall Profit Tax

Act), Pub. L. 96-223, 94 Stat. 229, which from March 1, 1980,

until its repeal effective August 23, 1988, imposed an excise on

the "windfall profit" from certain crude oil produced in the


16
 (...continued)
address this issue given that we hold, based on respondent's
threshold argument, that petitioners cannot compute the NIL using
one allocation method for percentage depletion purposes, which
has the effect of increasing their deduction, and a different
method for WPT purposes, which has the effect of reducing their
WPT.
                              - 35 -

United States.   See sec. 4986(a).   Under the Windfall Profit Tax

Act, the applicable tax rate is applied to the windfall profit

per barrel.   The windfall profit per barrel is generally

calculated under section 4988(a) by subtracting the applicable

adjusted base price of each crude barrel of oil, and a severance

tax adjustment, from the removal price.   After this calculation

has been performed, section 4988(b)(1) limits the taxable

windfall profit on any barrel of crude oil to not more than 90

percent of the net income attributable to that barrel of oil.

     Pursuant to section 4988(b)(2), the NIL attributable to a

barrel of oil for WPT purposes is generally calculated by

determining "taxable income from the property" from which a

barrel is produced for the taxable year, divided by the number of

barrels of taxable crude oil from such property taken into

account for such taxable year.   In computing the "taxable income

from the property", a taxpayer deducts both direct and indirect

(overhead) expenditures related to that property.

     The term "taxable income from the property" generally has

the same meaning that it has for purposes of the NIL on the

deduction for percentage depletion under section 613(a).17    As

17
     Sec. 4988(b) provides, in pertinent part, as follows:

     SEC. 4988(b)(3). Taxable income from the property.--For
     purposes of this subsection--

          (A) In general.--Except as otherwise provided in this
     paragraph, the taxable income from the property shall be
                                                   (continued...)
                                 - 36 -

such, Congress specifically provided the starting point whereby

taxable income from the property must be determined under section

613(a), and, by doing so, Congress adopted the focus on income

and expenses of individual properties historically applied under

section 613.

        Taxable income from the property, pursuant to section 1.613-

5(a), Income Tax Regs., is defined as "gross income from the

property" (as defined in section 613(c) and sections 1.613-3 and

1.613-4, Income Tax Regs.) less:

        all allowable deductions (excluding any deduction for
        depletion) which are attributable to mining processes,
        including mining transportation, with respect to which
        depletion is claimed. These deductible items include
        operating expenses, certain selling expenses,
        administrative and financial overhead, depreciation,
        taxes deductible under section 162 or 164, losses
        sustained, intangible drilling and development * * *
        expenditures, etc. * * * Expenditures which may be
        attributable both to the mineral property upon which
        depletion is claimed and to other activities shall be
        properly apportioned to the mineral property and to
        such other activities. Furthermore, where a taxpayer
        has more than one mineral property, deductions which
        are not directly attributable to a specific mineral
        property shall be properly apportioned among the
        several properties. * * *


Accordingly, section 1.613-5(a), Income Tax Regs., controls the

computation of the NIL for both percentage depletion and WPT

purposes.




17
     (...continued)
         determined under section 613(a). [Emphasis added.]
                                  - 37 -

       Petitioners, in reliance on Shell Oil Co. v. Commissioner,

89 T.C. 371 (1987), supplemented by 90 T.C. 747 (1988), revd. in

part and remanded in part 952 F.2d 885 (5th Cir. 1992), argue

that they are entitled to claim the benefit of changes in law,

new facts, or any other item that might affect the taxpayer's

liability.    See secs. 6511, 6512(b); see also Stone v. White, 301

U.S. 532, 534-535 (1937); Bull v. United States, 295 U.S. 247,

260-262 (1935).       Petitioners assert that this is precisely what

they did here, i.e., that after reviewing their records in

preparation for these cases, petitioners claimed in their

petitions the benefit of changes in law as set forth in Shell

Oil.    Petitioners further assert that contrary to respondent's

contention, it is not necessary that they show authority

permitting their percentage depletion apportionment method to be

radically different from their WPT apportionment method.

       We disagree.    Given that petitioners claimed the benefits of

percentage depletion and are subject to the WPT, they are faced

with the dilemma of explaining what authority permits them to

compute an NIL for percentage depletion purposes and an NIL for

WPT purposes, both of which are calculated under section 1.613-

5(a), Income Tax Regs., in a way that achieves radically

different results.

       Section 4988(b)(3)(A) expressly states that "the taxable

income from the property shall be determined under section

613(a)." (Emphasis added.)      Thus, when Congress enacted the WPT,
                              - 38 -

it grafted the WPT NIL onto the existing body of percentage

depletion law by incorporating section 613(a) into section

4988(b)(3)(A).   A plain reading of section 4988(b)(3)(A) requires

petitioners to compute the NIL for WPT purposes in the same

manner as they computed the NIL under section 613 for percentage

depletion purposes.   See Chevron U.S.A. Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984) (the court must give

effect to the unambiguously expressed intent of Congress).    It is

unreasonable to believe Congress intended to allow taxpayers to

compute their NIL differently for percentage depletion purposes

and WPT purposes, where Congress explicitly incorporated by

reference, the section 613 NIL calculation into section 4988.    If

taxpayers were able to utilize petitioners' approach they could

manipulate their allocation methods under sections 613 and 4988,

thereby allowing taxpayers to increase their percentage depletion

deductions by excluding certain items of overhead from the

allocation process, and decrease their WPT by including the same

items of overhead in the allocation process.   Cf. Portland Golf

Club v. Commissioner, 497 U.S. 154, 166-170 (1990)(taxpayer was

required to use same method of allocating fixed expenses, in

determining whether nonmember sales activity was undertaken with

intent to earn profit, that it did in calculating its actual loss

from those sales).

     Finally, we note that petitioners' reliance on Shell Oil Co.

v. Commissioner, supra, is misplaced, because in that case the
                                - 39 -

Court of Appeals for the Fifth Circuit was not faced with the

issue herein of whether a taxpayer must figure the NIL

consistently under sections 613 and 4988.    Rather, the issues in

Shell Oil Co. v. Commissioner, supra, concerned the attribution

and allocation of expenses for the calculation of the taxable

income from the taxpayer's oil and gas properties under section

1.613-5(a), Income Tax Regs., for purposes of the WPT NIL.    As

discussed supra note 16, in the instant cases we never reach the

issue of whether petitioners' allocation method is defensible

under cost accounting principles, because we find based on

respondent's threshold argument that petitioners are bound by

their original computations.

     Thus, based on the record and the facts discussed herein, we

hold that petitioners are not entitled to recompute Petroleum's

WPT NIL computations for the taxable periods of 1983, 1984, and

1985, where the recomputations do not follow the percentage

depletion calculations claimed on their original Federal income

tax returns.

     To reflect the foregoing,



                                 Decisions will be entered

                               under Rule 155.
