Updating 907 keys

In all cases, the IE should estimate the tax effect of potential changes before expanding the examination time to permit consultation with engineers and economists. FOGEI is determined under the proportionate profits method by allocating total income from the production and sale of the oil or gas product between FOGEI and FORI based on the relative costs of the FOGEI and FORI activities.The International Foreign Tax Credit Technical Advisor and the Petroleum Industry Program (PIP) will gather industry data to advise on reasonable rates of return so as to further conserve examination resources. The proportionate profits method is similar in concept to the proportionate profits method used in Treas. §1.613-4(d)(4) to determine gross income from mining of hard minerals for purposes of determining allowable percentage depletion. These concepts apply as well to the FOGEI determination.ATTACHMENT Attachment 1: Discussion of Classification of Assets as FOGEI or FORI Meaning of Extraction for IRC § 907 and the regulations: A key to interpreting the IRC § 907 regulations is to understand the full meaning of certain terms and phrases: FOGEI. In the case of oil and gas wells, "gross income from the property", as used in IRC § 613(c)(1), means the amount for which the taxpayer sells the oil or gas in the immediate vicinity of the well.

Both of those methods, as well as other methods, are acceptable when applied reasonably and in a manner consistent with the regulations.

For example, when comparable costs of transportation or processing are available, taxpayers and IEs may be able to estimate the value of FOGEI through netback adjustments to the sales price of the oil or gas. FOGEI is determined under the residual (rate of return) method by first calculating FORI and subtracting FORI from the total income from the production and sale of the oil or gas product.

In applying these formulas to determine FOGEI, gross sales would be the sales of the extracted oil or gas product. The term includes incidental impurities from these wells, such as sulphur, nitrogen, or helium.

Classification of Assets as FOGEI and FORI Assets Based on a review of applicable statutes and regulations (see Attachment 1), certain assets used with respect to producing wells and converting raw well effluent into marketable crude oil and natural gas should be classified as FOGEI assets. §1.907(c)-1(b)(2) as: The gross income from extraction is determined by reference to the fair market value of the minerals in the immediate vicinity of the well. The term does not include hydrocarbon minerals derived from shale oil or tar sands. IRC § 613A(e) and the underlying regulations provide the following definitions: Immediate vicinity of the well.

FOGEI is defined in the Code and regulations as taxable income derived from the extraction of minerals from oil or gas wells based on the fair market value (FMV) of the minerals in the immediate vicinity of the well.

The regulations under IRC § 907 do not provide specific methods for determining FMV in the immediate vicinity of the well but provide that all the facts and circumstances that exist in the particular case must be considered.

The basic premise of the statute is to prevent excess foreign tax credits, available because of the very high taxes imposed on FOGEI by producing countries, from offsetting US tax on other foreign source income.

The Code section also limits, in more restricted situations, the creditability of foreign taxes imposed on FORI, which encompasses activities downstream from the well, including transportation of the crude oil and gas from the well to the place of sale and processing of the oil and gas.

BACKGROUND IRC § 907 was enacted in 1975 and final regulations, effective for taxable years beginning after December 31, 1982, were issued in 1991.

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