Article by Walter D. Schwidetzky
The pool of capital doctrine is the tax law's nonstatutory tribute to the oil and gas industry. It provides that when services or property are contributed toward the acquisition, development, and exploration of oil and gas, and an ‘economic interest’ is received in exchange, no taxable event takes place. The doctrine creates an exception to the general rule of the tax code, which would normally require the recognition of income.
The pool of capital doctrine had its start in the early days of oil and gas development. In recent years, it has been the subject of often-spirited discussion. Its attackers have opposed its application to the area of services, preferring to employ the general rule of recognition as codified in section 83. Defenders of the doctrine have resisted these revisionist efforts. In one case, an annoyed federal circuit court of appeals taxed a particularly ardent (and well-respected) defender with appellate costs after ruling against him. Revenue Ruling 83-46 brought this conflict between the principles of section 83 and the pool of capital doctrine into full focus. In this ruling, the Internal Revenue Service (Service) applied section 83 to certain cases previously believed to be within the pool of capital doctrine. This Revenue Ruling coupled will a preexisting antagonism in some circles toward the doctrine has cast some doubt on the doctrine's validity.
This Article will discuss the origins, development, and validity of the pool of capital doctrine. Particular attention will be paid to the issue of whether the doctrine should be applied to the contribution of services. Thereafter, a revision of the pool of capital doctrine will be proposed. The proposal will take into account the relevant arguments of the contending parties. This proposal will admittedly reduce the pool of capital doctrine's all-encompassing nature, but will also provide a more systematic approach to the issues involved.
About the Author
Walter D. Schwidetzky. Professor, University of Baltimore School of Law, B.A. 1974; J.D. 1978; M.B.A. 1978; L.L.M. (taxation) 1984, University of Denver.
Citation
61 Tul. L. Rev. 519 (1987)