High court limits tax deduction for depletion

Journal Article · Mon Mar 01 04:00:00 EST 1993 · Public Utilities Fortnightly; (United States)

OSTI ID:6499263

Burkhart, L A

The US Supreme Court has curbed the depletion allowance tax break available to investors in resources such as natural gas, oil, and coal. In Hill v. US the high court reversed a federal court, a victory to the federal government through increased tax revenues, but a loss - estimated at more than $1 billion a year - to energy companies and investors who tap such resources. The case began when William and Lola Hill determined the adjusted basis of their oil and natural gas deposits for alternative minimum tax purposes and included not only the unrecovered portions of the amounts they paid originally to purchase their interest but the unrecovered costs of depreciable tangible items used to exploit the deposits as well. In effect, the Hills were arguing that the producer should be allowed to write off the value of both the mineral rights and the equipment used to exploit a field before the minimum tax applies. The Commissioner of the Internal Revenue Service disputed including the tangible costs, and assessed a larger minimum tax. The Hills paid the tax then filed for a refund, which the Commissioner denied. A Claims Court sided with the Hills, a decision which the Court of Appeals for the Federal Circuit affirmed. Justice David Souter, writing for a unanimous Supreme Court in the January 25 decision, disagreed with the lower courts, and said the proper method for calculating the alternative minimum tax on the preference associated with depletion did not include adjusting that preference to reflect the cost of drilling tools, machinery, and other equipment. He noted the Tax Code allows for depreciation of the drilling equipment. Calling the boundary between depletion and depreciation virtually impassable, Justice Souter said that by allowing the Hills to shelter the tangible items over the tax years owned, the astonishing results would be a percentage depletion many times that of the costs themselves.

• OSTI ID: 6499263
• Journal Information: Public Utilities Fortnightly; (United States), Journal Name: Public Utilities Fortnightly; (United States) Vol. 131:5; ISSN PUFNAV; ISSN 0033-3808
• Country of Publication: United States
• Language: English

Related Subjects

01 COAL, LIGNITE, AND PEAT
017000 -- Coal
Lignite
& Peat-- Legislation & Regulations
02 PETROLEUM
021000 -- Petroleum-- Legislation & Regulations
03 NATURAL GAS
031000 -- Natural Gas-- Legislation & Regulations
29 ENERGY PLANNING, POLICY, AND ECONOMY
294000* -- Energy Planning & Policy-- Fossil Fuels
CARBONACEOUS MATERIALS
COAL
DEPRECIATION
DRILLING EQUIPMENT
ENERGY SOURCES
EQUIPMENT
FLUIDS
FOSSIL FUELS
FUEL GAS
FUELS
GAS FUELS
GASES
GEOLOGIC DEPOSITS
LAWS
MACHINERY
MATERIALS
MINERAL RESOURCES
MINERAL RIGHTS
NATURAL GAS
NATURAL GAS DEPOSITS
PETROLEUM
RESOURCES
TAX LAWS
US DEPLETION ALLOWANCES