Herbel v. Commissioner

DUHÉ, Circuit Judge:

Taxpayers appeal the Tax Court’s decision that payments received in settlement of a “take or pay” contract dispute are not “production payments” under 26 U.S.C. § 636(a). We affirm.

I

In February 1988, the Webbs and the Her-béis (collectively,“Appellants”) formed Malibu Petroleum, Inc. to explore for and produce oil and natural gas. The Webbs owned 90% and the Herbels owned 10%. Appellants chose to treat Malibu as an “S” corporation for federal tax purposes. 1 Shortly after incorporation, Malibu acquired an inter est in gas welis covered by a take-or-pay contract 2 with…