“Darling, It’s Better, Down Where It’s Wetter, Take It From Me”
Judge Morrison is belting out the Alan Menken and Howard Ashman 1989 Academy Award winner, as he drowns the IRS in CGG Americas, Inc, 147 T. C. 2, filed 7/21/16.
CGG is a submarine seismic reflector. Here’s how the parties stipulated it works.
“Boats would tow submerged arrays of pneumatic chambers that had been pressurized with compressed air. At regular intervals, the chambers were triggered to produce pulses of sound energy. The sound waves generated by this process traveled through the solids, liquids, and gases that made up the geological formations in the substructure of the ocean floor, were reflected back to the water surface, and were captured by groups of special microphones (called hydrophones) that converted the captured sound energy into electrical impulses.
“The data initially generated by the surveys was raw acoustic data. CGGA processed (and reprocessed) the raw acoustic data to create usable information such as visual representations (including maps) of geological formations in the earth’s subsurface.” 147 T. C. 2, at pp. 4-5.
What effects this has on Sebastian the Crab and his aquatic fellows I cannot tell. As this is a nonpolitical blog, I will refrain from comments on climate change, ocean acidification, marine life and similar matters; my views are available elsewhere.
By way of disclosure, I am a charter member of the Cousteau Society.
Howbeit, as the info that CGG thus obtained was flogged to would-be lessors, lessees, drillers and purchasers of pieces of the continental shelf in the Gulf of Mexico to hunt for petroleum, did CGG get the Section 167(h)(1) quick-kick 24-month write-off of their considerable costs in so doing?
That provision accords quick-kick to expenses for geological and geophysical exploration with a view to extracting oil, and CGG is clearly in that hunt.
But CGG owns nothing, leases nothing, and drills for nothing. And their data was useful for nothing other than finding oil. Their customers weren’t doing their own versions of the work CGG was doing.
So IRS says they have to capitalize their expenses.
No, says Judge Morrison. In all the cases and Rev. Rul.s IRS cites, nowhere does it say that geological and geophysical exploration expenses can only be deductible if incurred by the drillbabies.
IRS says the statute is unambiguous, so legislative intent not needed. Judge Morrison sends that argument out to sea. But after exhaustively (and exhaustingly) traversing decades of bills that went nowhere, with tons of testimony before Congress thrown in, here’s where Judge Morrison surfaces.
“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.” 147 T.C. 2, at p. 40.
Ultimately, nowhere has Congress stated unequivocally that only drillbabies get the quick-kick.
IRS has a last-gasp argument that the exploration is carried out by the drillbabies and not CGG. But the CGG info is essential; if CGG didn’t do it, the drillbabies would have to. You can’t spend money drilling at random and hope to hit oil. Clark Gable and Spencer Tracy are dead, and “Boom Town” was so 1940. And forget Jett Rink (if you can; the GMOD never can).
The IRS is sunk.