Administration Tackles Royalty Issues
here is a basic rule of thumb taught to law T school graduates studying for the tax section of the bar exam: "The government always wins."
It sometimes seems that the same rule of thumb would apply equally well in predicting the outcome of royalty disputes with the federal Minerals Management Service (MMS). The second-largest revenue collector in the federal government after the Internal Revenue Service, MMS has been highly successhi in applying the "gross proceeds" provisions contained in most federal oil, gas, and coal leases to increase the government's revenues from production on federal lands and on the outer continental shelf.
One noteworthy exception was the loss that MMS sustained in the courts in 1988, when it argued that it was entitled to its pro rata share of all proceeds received under take-or-pay contracts, regardless of whether those payments were derived from production. In Diamond Shamrock Exploration Co. v. Hodef, 853 F.2d 1159853 F.2d (5th Cir. 1988), the court held that the applicable statutes and regulations permitted MMS to collect royalties only on the value of production actuaUy saved, removed, or sold from the leased area. The court reasoned that the take-orpay payments are Mary Anne Sullivan is a partner not payments for the in the Washington, DC, law firm purchase of gas; they of Hogan 8 Hartson. She gratefullyacknowledges the research are payments for the assistance of Amy Allen in the failure to purchase preparation of this article. Allen gas, and thus do not is a student at the Duke Univer-reflect the value of siry School of Law and a sumthe gas. Therefore, mer associate with Hogan & Hartson. Copyright 8 1993 by Executive Enterprises
M a y Anne Sullivan
the court concluded that royalties could be assessed only on gas as it was sold and that take-or-pay payments are not royalty-bearing unless make-up gas is taken at some later point in the contract period.