Opposition Brief — United States v. Exxon Corp.

No. 96-1127

IN THE

Supreme Court of the United States

OCTOBER TERM, 1996

UNITED STATES OF AMERICA,

Petitioner,

V.

EXXON CORPORATION AND SUBSIDIARIES,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

BRIEF FOR RESPONDENTS IN OPPOSITION

ROBERT L. MOORE, II

Counsel of Record

THOMAS D. JOHNSTON

EMMETT B. LEWIS

ALAN I. HOROWITZ

MILLER & CHEVALIER,

Chartered

Metropolitan Square

655 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 626-5800

WILSON - Epes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTION PRESENTED

Whether Treas. Reg. § 1.613-3(a) should be construed

as directing use of a “representative market or field price”

only when that price is lower than the taxpayer’s actual

sales proceeds for oil or gas sold away from the well,

notwithstanding the regulation’s tnequivocal command

that “the gross income from the property shall be assumed

to be equivalent to the representative market or field price

of the oil or gas before conversion or transportation.”

ii

RULE 29.1 STATEMENT

Exxon Corporation has no parent company. The fol-

lowing affiliates of Exxon Corporation are publicly held.

Compania Minera Disputada de las Condes S.A.

Esso Malaysia Berhad

Esso Societe Anonyme Francaise

General Sekiyu K.K.

Imperial Oil Limited

Les Docks des Petroles d’Ambes

Societe Francaise EXXON CHEMICAL

Tonen Kagushiki Kaisha

sthigieeeng ee

EEE OE ey

ee

TABLE OF CONTENTS

Page

NEE ee a 1

ARGUMENT .................. A AS FS, OEP OOS LE AOD PRE EEC 7

I. THERE IS NO REASON FOR SUPREME

COURT REVIEW OF THE DECISION BE-

A CEE SEE SUS sO a a ee eo ae ee 7

II. THE DECISION OF THE COURT OF AP-

PEALS IS CORRECT ........................... tet. 10

A. The Unmistakable Terms of the Governing

Regulation Direct the Taxpayer to Use a

Representative Market or Field Price to

Compute Depletable Income for Sales Away

From the Vicinity of the Well ..................... 10

B. The Principle of Deference to Administrative

Agencies Lends No Support to the Govern-

ET ce ee Ca 12

C. The Courts Have Consistently Construed the

Regulation as Directing Use of an RMFP

for All Sales Away From the Well, Regard-

less of Actual Sales Proceeds .............0.. 17

D. The Regulation as Written Is Fully Consist-

os wee we oe tk... 19

E. The Regulation as Written Accords With the

Policies of the Depletion Provisions ........... 20

SESE TEESE PERUANO 24

(iii)

iv

TABLE OF AUTHORITIES

CASES Page

Armco, Inc. v. Commissioner, 87 T.C. 865 (1986) .. 13 |

Batterton v. Francis, 432 U.S. 416 (1977) ............... 10

Biddle v. Commissioner, 302 U.S. 573 (1938)........ 13

Bingler v. Johnson, 394 U.S. 741 (1969).................. 12

Bloomington Limestone Corp. v. United States, 445

ik Bh By, fo eo 5 | Peer cone 17

Commissioner v. Portland Cement Co., 450 U.S.

I Se tees ssscctercsiesies Botan weealentanieSilbiiabaaniaatdsis 10

Commissioner v. Schleier, 115 S. Ct. 2159 (1995).. 13

Cottage Savings Ass’n v. Commissioner, 499 U.S.

et. 3} ee ELIS Sah A AO BO CE 13

Davis v. United States, 495 U.S. 472 (1990) ~......... 13, 15

Duignan v. United States, 274 U.S. 195 (1927) ........ 12

Estate of Lang v. Commissioner, 64 T.C. 404

5, |, NR ESE) Ret Rene eert ee ERRORS Ge Can 13

Exxon v. Commissioner, 102 T.C. 721 (1994)........ passim

G.D. Searle & Co. v. Cohn, 455 U.S. 404 (1982) .... 12

Halliburton Co. v. Commissioner, 100 T.C. 216

(1993), aff'd, 25 F.3d 1043 (5th Cir.), cert.

denied, 115 S. Ct. 486 (1994) ................................ 13

Helvering v. New York Trust Co., 292 U.S. 455

hE, SISO aA LEN ART RL LenS Ors ON 13

Helvering v. Wilshire Oil Co., 308 U.S. 90 (1939).. 20

Honeywell v. Commissioner, 87 T.C. 624 (1987) .... 20 ,

Hugoton Prod. Co. v. United States, 315 F.2d 868

CCR. Ch. TOGR) CHOCO FP anc nen seinense ns passim

Hugoton Prod. Co. v. United States, 349 F.2d 418

(Ct. Cl. 1965) (Hugoton ff) ....................... 12, 17, 18, 19

Island Creek Coal Co. v. Commissioner, 30 T.C. 370

fA Ree Raye ome ENGR ER NR Dy RRO IEDR MOOT 20

Louisiana Land & Exploration Co. v. Commis-

piener, TOR TA. TER CGD anki essences 24

Lyng v. Payne, 476 U.S. 926 (1986) ..............000..... 15

Martin v. Occupational Safety & Health Review

Comm'n, 499 U.S. 144 (1991) .......................2..0... 15 j

Niles v. United States, 710 F.2d 1391 (9th Cir. ;

i, RRA Pe RAN NMC OR, SARCOMA) Li AR ULAR RO AMO 14

Northern Ind. Pub. Serv. Co. v. Porter County

Chapter of Izaak Walton League of America,

FG) Ge Tis Re CUED eininiiehecncomins 15

Vv

TABLE OF AUTHORITIES—Continued

Page

Shamrock Oil & Gas Corp. v. Commissioner, 35

T.C. 979 (1961), aff'd, 346 F.2d 377 (5th Cir.),

cert. denied, 382 U.S. 892 (1965) .........0 2

Signal Gasoline Corp. v. United States, 77 F.2d 728

(9th Cir. 1935), cert. denied, 296 U.S. 657

CREED dckiieindithiantab ene 11

Smiley v. Citibank (S.D.), N.A., 116 S. Ct. 1730

CO cine ee ee 14

Somerville v. United States, 13 Cl. Ct. 287 (1987 :.. 14

St. Louis Bank for Cooperatives v. United States,

G24 F.2d 1041 (Ct. Cl. 1960) ............................... 14

Stubbs, Overbeck & Assocs., Inc. v. United States,

466 F280 1148 (0b Cir. 1971} ............................. 13

Tandy v. Commissioner, 92 T.C. 1165 (1989)... 14

Transco Exploration Co. v. Commissioner, 949 F. 2d

See et eee icc ee oe ee 20

Udall v. Tallman, 380 U.S. 1 (1965)... 15

United States v. Cannelton Sewer Pipe Co., 364

8 Se ee Ne mee eh ed 11, 18, 19, 22

United States v. Dakota-Montana Oil Co., 288 U.S.

| NN TERT. ee a: A Ns 21

United States v. Henderson Clay Prods., 342 F.2d

(5th Cir. 1963), cert. denied, 377 U.S. 917

MIDE ondiégs watcsrsissgstindons cen ne ee 18, 19, 22

Weyerhaeuser Co. v. United States, 395 F.2d 1005

Ue Ge Be once ee 12

STATUTES AND REGULATORY MATERIALS

BO ME UE: sinc occndncscccansiabibatsesniulial nasa ecco 1

Re eae en Fo anne SN Sh nant ae 10

| |) See eee ne rie ae: 1,3, 19

ee aN ee 7

RS ee Lene een ee 7

BO tars A ND sin cise aesrcsscecdacnsecccee connec ctec. 8

Treas. Reg. (26 C.F.R.) § 1.613- 3(a) - EP Ree ENTS. passim

Treas. Reg. § 1.613-4(c) (6)... 15

Treas. Reg. § 1.6138-5(a) 0.0.0.0. 3, 23

33 Fed. Reg. 10700 (1968) 20... cee 16

vi

TABLE OF AUTHORITIES—Continued

Page

te De. . th ER. SRR ce 16

Rev. Rul. 90-62, 1990-2 C.B. 168 .................................. passim

Priv. Ltr. Rul. 8611008 (Dec. 3, 1985) ..00000... ee. 16

LEGISLATIVE MATERIALS

Tax Reduction Act of 1975, Pub. L. No. 94-12,

ee , re Ee es 7

Staff of the Joint Committee c on Internal Revenue

Taxation, 69th Cong., Ist Sess., Preliminary Re-

port—Depletion—Oil and Gas Revenue Act of

EGE CORI, FI TI DO ecisncdiscestetiarctornsirehbeceeicereeetintse 23

H.R. Conf. Rep. 94-120, 94th Cong., 1st Sess.

IIE coniichitiasce-ceeplencnisiieedheesuiiccnt telcenani een 7

S. Rep. No. 67-275, 67th Cong., Ist Sess. (1921)... 23

Hearings Before the Joint Committee on Internal

Revenue Taxation, 71st Cong., 3d Sess. (1930).. 21

MISCELLANEOUS

Oil and Gas Forum, 12 N.Y.U. Inst. on Fed. Tax’n

RE CIID cckinneinsreccialeencganuames cece MBean Soe 16

Bs Site Bite PUNE wisiinsinsctiiscensttedchionka camel oase ae 9

IN THE

Hiyirenve Court of the United States

OCTOBER TERM, 1996

No. 96-1127

UNITED STATES OF AMERICA,

Petitioner,

V.

EXXON CORPORATION AND SUBSIDIARIES,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Aspeals

for the Federal Circuit

BRIEF FOR RESPONDENTS IN OPPOSITION

STATEMENT

1. This case is governed by Treas. Reg. (26 C.F.R.)

§ 1.613-3(a), a legislative Treasury regulation that has

remained substantially unchanged since its promulgation

in the 1920s. As applicable to the 1974 taxable year,

section 611 of the Internal Revenue Code (26 U.S.C.)

provides that a taxpayer shall be allowed a “reasonable

allowance for depletion . . .; such reasonable allowance

in all cases to be made under regulations prescribed by

the Secretary or his delegate.” Section 613(a) provides

2

that, for oil and gas properties, that depletion allowance

shall be a specified percentage of the taxpayer’s “gross

income from the property.” That latter term is then de-

fined by Treas. Reg. § 1.613-3(a).’

The regulation establishes two distinct methods for

determining “gross income from the property,” depending

upon whether the oil or gas is sold in the vicinity of the

well. It provides:

In the case of oil and gas wells, “gross income from

the property,” as used in section 613(c)(1), means

the amount for which the taxpayer sells the oil or

gas in the immediate vicinity of the well. Jf the oil

or gas is not sold on the premises but is manufac-

tured or converted into a refined product, or is trans-

ported from the premises prior to sale, the gross in-

come from the property shall be assumed to be

equivalent to the representative market or field

price of the oil or gas before conversion or

transportation. |

Id. (emphasis added). Thus, if the oil or gas is sold at

the well, “gross income from the property” is based on

ihe actual sales price. But, in a case like this one, where

the oil or gas is transported from the premises prior to sale,

the regulation directs that the “representative market or

field price” (RMFP) be used to determine the depletable

“gross income from the property.” The RMFP is un-

related to the producer’s actual sales price, but rather is

a “representative” price derived from market data for

comparable oil or gas sold in the immediate vicinity of

the well. See, e.g., Shamrock Oil & Gas Corp. v. Com-

missioner, 35 T.C. 979, 1038-40 (1961), aff'd, 346 F.2d

1 The meaning of the term “gross income from the property,” in

light of the regulatory definition, is the issue presented in this case.

It is therefore misleading for the government to quote that statu-

tory language when it is referring to something else, such as the

actual proceeds from sales away from the well. See Pet. I, 20.

a Tf

3

377 (Sth Cir.), cert. denied, 382 U.S. 892 (1965). Pet.

App. 4a-6a.*

2. Exxon is a fully integrated producer of natural gas.

Because of the magnitude of its reserves in the Texas

Gulf Coast/East Texas area, Exxon built its own gas

pipeline system. To support the capital investment in its

pipeline, Exxon entered into numerous long-term, fixed-

price contracts for the sale of the gas. Exxon processed

most of its gas production and then transported the residue

gas through its pipeline for sale directly to utilities and

other customers. Pet. App. 2a, 37a-38a, 113a-115a.

For many years, natural gas prices were flat, and

Exxon’s long-term contract prices were favorable. In the

early 1970s, however, gas prices rose sharply, and the

long-term contracts became a millstone around the com-

pany’s neck. The contracts required Exxon to supply

customers with amounts equal to most of its gas produc-

tion in the Texas Gulf Coast/East Texas areas at an

average price of $.23 per thousand cubic feet (Mcf) for

the residue gas (methane), which was well below market.

Id. at 2a, 116a. Exxon typically sold at market the “non-

residue” portion of the gas stream (that is, natural gas

liquids processed from the raw gas, such as butane and

propane), and its combined actual sales proceeds from

both portions of the raw gas stream (netted back to ex-

clude transportation and processing costs) was approxi-

mately $.30/Mcf. Id. at 119a.

3. In keeping with its consistent practice in earlier

years, Exxon calculated its percentage depletion deduction

for 1974 in accordance with the dictates of Treas. Reg.

§ 1.613-3(a). Because the gas transported through its

* The depletion allowance is subject to a limitation that it cannot

exceed 50 percent of the “taxable income from the property” (that

is, “gross income from the property” less expenses). 26 U.S.C.

§613(a); 26 C.F.R. § 1.613-5(a). This case concerns only the

starting point of the calculation, the “gross income from the prop-

erty.” The taxable income limitation is not at issue.

4

pipeline was not sold in the “vicinity of the well,” Exxon

based its depletion deduction for that gas on an RMFP—

that is, a weighted average price derived from sales by

all producers—rather than on Exxon’s own sales prices.

As a result of the rapidly rising-market, 1974 marked the

first time that the average wellhead sales price reflected

by the RMFP (estimated at that time as $.36/Mcf and

found after trial to be $.39/Mcf) exceeded the ($.30/

Mcf) price derived from Exxon’s “downsteam” gas sales

away from the well. Pet. App. 3a, 25a.

The Commissioner disallowed $11.1 million of Exxon’s

depletion deduction (increasing its tax liability by $5.3

million), asserting that Exxon was required to use as its

depletable income the $.30/Mcf figure derived from its

actual sales proceeds (netted back to exclude transporta-

tion and processing costs), rather than an RMFP. In so

doing, the Commissioner treated the RMFP provision as

a one-way street that should be used only where it would

reduce the taxpayer’s deduction. The Commissioner on

audit had initially proposed to use the same “net-back”

approach for Exxon’s 1968-73 taxable years as for 1974,

but he changed his mind and concurred with Exxon’s use

of an RMFP for the earlier years when he discovered that

a “net-back” approach would increase Exxon’s deduction

for those years. Pet. App. 8a, 45a.

4. Exxon paid the asserted deficiency and brought this

suit for a refund in the Court of Federal Claims. The

government filed a pretrial motion for judgment on the

pleadings addressed to the issue it now seeks to present

to this Court, arguing that, as a matter of law, a taxpayer

may not base its depletion deduction on an RMFP that

exceeds its own sales proceeds for the gas. The court

denied this motion in an extensive opinion. Pet. App.

33a-84a.

The court found that the text of the governing regula-

tion plainly requires use of an RMFP for gas transported

prior to sale, without regard to whether the RMFP ex-

5

ceeds actual sales proceeds. The court observed that the

regulatory text had remained essentially unchanged for

60 years, despite numerous opportunities to amend it (see

Pet. App. 58a-59a, 66a & n.17), and stated that the

court was not going “to rewrite it.” Jd. at 70a. Looking

at the regulation’s history, the court explained that its

“plain meaning is .. . Supported by its evolution. .. .

There is no persuasive indication that Congress intended

Sales prices of the gas to be determinative or that sales

prices constituted a ceiling above which no deduction

could be allowed.” Id. at 59a-60a. The court also ex-

amined the issue from a policy standpoint and concluded

that “the plain language of the regulation produces a ra-

tional, intended tax rule. . .; [Exxon’s] interpretation of

the regulation, as opposed to the government’s, makes

more sense in the context of depletion deductions.” Jd.

at 61a.

The case then proceeded to trial on the contested fac-

tual issue—the amount of the 1974 RMEFP. The court

ruled for the government after trial. Pet. App. 85a-171a.

In its opinion, the court first reaffirmed its prior rejection

of the government’s position that a taxpayer cannot use

an RMFP that exceeds its own actual sales proceeds. Id.

at 120a-131la. The court criticized the government’s posi-

tion as improperly requiring “the court, in essence, .. .

to read into the regulation a cap on the RMFP or hold

that the regulation as written is invalid whenever an

RMFP exceeds the sales price.” Jd. at 123a.

The court nonetheless ruled for the government on two

other grounds. It held that Exxon had failed to meet its

burden of proof of an RMFP because the wellhead price

data it used to support its proposed RMFP of $.41/Mcf

was overinclusive. Jd. at 135a-167a. It also held that

the RMFP was not “reasonable according to the facts of

this case.” Id. at 167a-170a.

5. The court of appeals reversed. Pet. App. 1a-30a.

The government’s primary argument on appeal was to

6

defend the judgment below on the same theory raised in

the petition but rejected by the trial court—namely, that

a taxpayer can never use an RMFP that exceeds its actual

sales proceeds. The court of appeals, however, “agree[d]

with the Court of Federal Claims that neither prior case

law, nor the language of the statute, nor its legislative

history limits an otherwise valid RMFP to actual gross

income.” Pet. App. 17a.

The court first observed that the governing regulation

had been consistently construed as establishing the general

principle that, for sales away from the well, “the RMFP

approach must be used whenever a representative price

can be established.” Jd. at 8a, citing Hugoton Prod. Co.

v. United States, 315 F.2d 868, 873 (Ct. Cl. 1963)

(Hugoton I). Turning to the statutory and regulatory

language, the court found that “the plain language of the

tax scheme supports Exxon’s contention.” Pet. App. 13a.

The court noted that the text of the regulation contained

no language purporting to limit the RMFP to actual pro-

ceeds, and it described this omission as having “added

importance because it is clear that the Secretary was

aware of the possibility that the field price could exceed

actual revenues.” Jd. In particular, the court observed

that, for hard minerals, the Secretary had created by regu-

lation a rebuttable presumption that such an RMFP in

excess of actual sales proceeds was not “representative,”

but had withdrawn a proposal to apply the same rule to

oil and gas. 7d. at 13a-14a. Finally, the court found that

use of an RMFP for all sales away from the well is con-

sistent with the statutory objective of basing depletion

on the welihead value for the gas, excluding subsequent

changes in that value attributable to downstream events

like processing and transportation. /d. at 14a-17a.

The court of appeals also rejected the grounds relied

upon by the trial court for its judgment. First, the court

ruled that Exxon had carried its burden of proof because

a subset of the wellhead sales data on which it relied was

undeniably sufficient to prove an RMFP. Pet. App. 23a-

7

25a. Second, the court of appeals ruled that a court is

not permitted “to conduct an independent reasonableness

inquiry once an RMFP has been established.” Jd. at 29a.

The government does not challenge either of these rulings

in its petition.

ARGUMENT

The petition for certiorari advances no credible basis

for further review of this case. The question presented,

involving the depletion allowance for integrated oil and

gas producers that was repealed for years after 1974,

is of no continuing significance apart from the pending

disputes between the government and Exxon. There is

no conflict in the circuits, and, indeed, the decision below

fully accords with prior Court of Claims authority con-

struing the applicable regulation. Moreover, the decision

below is clearly correct because the text of the regulation

cannot possibly support the government’s proffered con-

struction, and there is no historical, policy, or other rea-

son for failing to give effect to the regulation’s plain

terms.

I. THERE IS NO REASON FOR SUPREME COURT

REVIEW OF THE DECISION BELOW

1. The government declares that this case presents a

“recurring” issue because “other taxpayers can be expected

to assert similar claims for inflated depletion deductions.”

Pet. 10-11. There is no basis whatsoever for this declara-

tion of continuing importance. The percentage depletion

allowance for oil and gas wells was repealed, with limited

exceptions, more than 20 years ago. 26 U.S.C. § 613A(a);

Tax Reduction Act of 1975, Pub. L. No. 94-12, § 501,

89 Stat. 47; see generally H.R. Conf. Rep. 94-120, 94th

Cong., Ist Sess. 67-68 (1975). One exception was a

“grandfather clause” permitting a depletion allowance for

gas sold under fixed contracts in effect on February 1,

1975. 26 U.S.C. §613A(b). That grandfather clause,

however, has little or no future Significance since the con-

8

tracts it encompasses surely have expired; thus, the per-

centage depletion allowance is no longer available to

integrated producers.

The government suggests (Pet. 5 n.1) that the issue

presented here is not completely “dead” because of the

exception for small independent producers and royalty

owners. 26 U.S.C. § 613A(c). But even the relatively

small depletion allowances available to such taxpayers do

not implicate the issue in this case because they would

not involve an RMFP, but rather would be calculated

under the first sentence of the regulation using the actual

wellhead sales price. As the government notes (Pet. 6),

a “‘non-integrated’ producer t’pically sells natural gas in

an unprocessed state at the weil-head,” and royalty reve-

nues are treated as wellhead sales because the royalty is

paid for extraction of raw mineral. As a practical matter,

therefore, it is highly unlikely that the issue presented here

will ever arise in the future. The government does not

contend that there are any cases pending with another

taxpayer involving this issue, and we are aware of none.

In short, the question presented in the petition has no

significance whatsoever apart from Exxon’s existing tax

litigation.

2. The government observes that, because of the grand-

father clause, the RMFP issue remains alive for several of

Exxon’s post-1974 tax years, which involve substantial

tax liabilities. Pet. 10. The petition, however, studiously

avoids making the connection necessary to sustain its as-

sertion of “fiscal importance.” Jd. It does not state that

the Federal Circuit’s decision here resolves the issue pre-

sented for other tax years, and, indeed, the government

has taken the opposite position in the lower courts. -In

its February 5, 1997, answer to Exxon’s complaint regard-

ing the 1975 tax year, the government denied the allega-

tion that “Exxon is entitled to percentage depletion .. .

based on the applicable representative market or field

price for the gas [citing the Federal Circuit’s decision

below].” Complaint in No. 96-688T, Court of Federal

9

Claims, 4 8(d) (filed Oct. 30, 1996). Unless the govern-

ment is prepared to acknowledge that this Court’s disposi-

tion would be controlling for other years, its assertion of

“fiscal importance” should be ignored.

In any event, the government can hardly argue that

certiorari is appropriate just to resolve a large monetary

dispute with a single taxpayer, when it takes the opposite

position when the shoe is on the other foot. For example,

when Exxon sought review of a judgment that exceeded

$2 billion, the government remarked dismissively that

“mere monetary size . . . does not entitle [Exxon] to fur-

ther review in the absence of a legal issue of sufficient

general significance.” Brief for the United States in Op-

position at 16 n.14, Exxon Corp. v. United States, 474

U.S. 1105 (1986) (No. 85-429) (emphasis added). That

observation is equally apt when the government is the

petitioner.

3. The government argues that a “conflict” between

the decision below and an interlocutory decision of the

Tax Court “warrants this Court’s review.” Pet. 16. A

conflict between a court of appeals decision and a trial

court decision, however, does not provide a reason for

intervention by this Court. See Sup. Ct. R. 10.1. Indeed,

the conflict may disappear upon appeal of the trial court’s

decision.

Moreover, the asserted conflict does not bear on the

question presented in the petition. Although the Tax

Court did grant summary judgment for the government

in Exxon’s 1979 case, the court did not embrace the

government’s contention here that an RMFP cannot ex-

ceed the actual sales proceeds for the gas. To the con-

trary, as the Court of Federal Claims noted (Pet. App.

130a-131a), the Tax Court specifically stated that “[t]here

may be particular situations in which it is reasonable

based upon the ‘peculiar facts’ to allow the use of the

RMFP even where it exceeds the taxpayer’s actual gross

income.” Exxon v. Commissioner, 102 T.C. 721, 744

n.28 (1994).

10

Rather, the Tax Court ruled for the government be-

cause it found that the RMFP method was “unreason-

able,” as compared to the Commissioner’s proposed “net-

back” method, on the particular facts before it. Jd. at

744 & n.28. The court explained that substituting its view

of reasonableness for the rule established by Treas. Reg.

§ 1.613-3(a) was justified by the language of 26 U.S.C.

§ 611(a), which “provides for a ‘reasonable allowance for

depletion’ under the ‘peculiar conditions in each case.’”

102 T.C. at 744. As the court of appeals held, however,

this assertion of judicial authority is untenable and, in-

deed, contrary to precedent of this Court. See Pet. App.

26a-29a; Commissioner v. Portland Cement Co., 450

U.S. 156, 171 n.20 (1981). The government does not

dispute the Federal Circuit’s holding on this point. Thus,

even the Tax Court has not subscribed to the position the

government advances in its petition, and there is no reason

for this Court to grant certiorari to entertain it.

II. THE DECISION OF THE COURT OF APPEALS IS

CORRECT

A. The Unmistakable Terms of the Governing Regula-

tion Direct the Taxpayer to Use a Representative

Market or Field Price to Compute Depletable In-

come for Sales Away From the Vicinity of the Well

The government does not deny that the outcome of

this case is controlled by Treas. Reg. § 1.613-3(a), which

is 2 “legisiative” regulation, issued pursuant to an express

delegation of Congressional authority in Code section

611, that has “the force and effect of law.” Batterton v.

Francis, 432 U.S. 416, 426 n.9 (1977); see also Hugoton

I, 315 F.2d at 871 & n.14. The government, however,

does not even attempt to advance an interpretation of the

text that could support the result it seeks. That is because

the text is unequivocal, and its meaning is unmistakable.®

3 The government does contend that the Tax Court found the

regulation to be ambiguous. Pet. 14. But the Tax Court’s state-

ments in this regard were half-hearted at best, and that court

a

11

The regulation describes two methods for computing

the “gross income from the property,” a calculation de-

signed to estimate the value of the mineral as it comes

out of the ground. See Pet. App. 5la-57a; 69a-70a;

United States v. Cannelton Sewer Pipe Co., 364 U.S. 76,

81 (1960); Signal Gasoline Corp. v. United States, 77

F.2d 728, 730 (9th Cir. 1935), cert. denied, 296 U.S.

657 (1936). For sales in the vicinity of the well, the

actual sales price is a direct measure of wellhead value,

and the first sentence of the regulation therefore specifies

that depletion should be based upon the “amount for

which the taxpayer sells the oil or gas.” For sales away

from the vicinity of the well, however, the actual sales

price is not a direct measure of wellhead value because

the price is affected by events that may occur “down-

stream”—such as processing, transportation, and market-

ing. The second sentence of the regulation specifies that,

for such sales, depletion should also be based on a direct

measure of wellhead value—the “representative market

or field price,” which is a weighted average of the prices

received industry-wide from wellhead sales of comparable

gas in the market area.

The Court of Federal Claims correctly observed that

the government’s position asks the courts not to interpret

the regulation, but to “rewrite it” (Pet. App. 70a) to say

something entirely different—namely, that for sales away

from the well, “gross income from the property” means

the lesser of the RMFP or a net-back from the taxpayer’s

actual sales proceeds. The government’s position “contra-

dicts” the regulation as written because the Secretary “has

chosen to embody in [the regulation] only one concept—

never suggested any way to read the regulation to support the

government’s position. The Tax Court’s ruling ultimately rested

not on any finding of ambiguity, but on the mistaken views that

“there has been considerable erosion of the rule foreclosing inquiry

of legislative purpose even in the context of ‘clear’ language” (id.

at 728) and that its own notion of reasonableness could override

the regulatory definition (id. at 744).

12

‘representative market or field price.” Hugoton Prod.

Co. v. United States, 349 F.2d 418, 427 (Ct. Cl. 1965)

(Hugoton Il). Even if there were some merit to the

government’s contention (Pet. 18-21) that the regulation

as written is “at odds with” (Pet. 19) the policies of the

depletion allowance (and we vigorously disagree (see

pages 20-24, infra) ), “it is the province of Congress and

the Commissioner, not the courts, to make the appropriate

adjustments.” Bingler v. Johnson, 394 U.S. 741, 751

(1969). The legislative regulation is “as binding on the

Government as it is upon the taxpayer” (Weyerhaeuser

Co. v. United States, 395 F.2d 1005, 1008 (Ct. Cl.

1968) ), and it unequivocally requires use of the RMFP

for all sales away from the well.

,

B. The Principle of Deference to Administrative Agen-

cies Lends No Support to the Government’s Position

1. The government argues that there is no need to

engage in the tedious task of reading the regulatory text

because the courts must defer to Rev. Rul. 90-62, 1990-2

C.B. 158, an IRS revenue ruling that was issued in the

midst of this litigation. Pet. 14, 16-18. This astounding

contention is entirely without merit. Indeed, the notion

that this ruling controls the outcome here is so far-fetched

that the government mentioned the ruling in the court of

appeals only in passing and did not have the temerity to

argue that it was entitled to any deference or was other-

wise relevant to the decision. See Gov't C.A. Br. 32.

That candid assessment by government appellate counsel

of the ruling’s insignificance, not judicial error, is the

explanation for the Federal Circuit’s “failing to defer” to

Rev. Rul. 90-62 or “even [to] ‘acknowledge [its] exist-

ence” (Pet. 16) in the court’s comprehensive opinion.*

4In accordance with its longstanding rule against entertaining

arguments not presented to the court of appeals, this Court should

not even consider the government’s administrative deference argu-

ment. See, e.g., G.D. Searle & Co. v. Cohn, 455 U.S. 404, 412 n.7

(1982); Duignan v. United States, 274 U.S. 195, 200 (1927).

13

This Court has repeatedly noted that revenue rulings

“do not have the force and effect of regulations.” Com-

missioner v. Schleier, 115 S. Ct. 2159, 2167 n.8 (1995):

Davis v. United States, 495 U.S. 472, 484 (1990): see

also Biddle v. Commissioner, 302 U.S. 573, 582 (1938):

Helvering v. New York Trust Co., 292 U.S. 455, 468

(1934). Rather, revenue rulings have been described as

merely “stat[ing] the institutional litigating position of

the Internal Revenue Service.” Armco, Inc. v. Commis-

sioner, 87 T.C. 865, 868 (1986): see also Stubbs, Over-

beck & Assocs., Inc. v. United States, 445 F.2d 1142.

1146-47 (Sth Cir. 1971); Halliburton Co. v. Commis-

sioner, 100 T.C. 216, 232 (1993), aff'd, 25 F.3d 1043

(Sth Cir.), cert. denied, 115 S. Ct. 486 (1994): Estate

of Lang v. Commissioner, 64 T.C. 404, 406-07 (1975).

Even the Tax Court’s decision for the government in

Exxon’s 1979 tax year placed no reliance on Rev. Rul.

90-62, stating that “a revenue ruling is only a statement

of [the Commissioner’s] position and is entitled to no

precedential weight.” 102 T.C. at 726 n.8. If the courts

had to defer to such pronouncements, particularly when

addressed to specific litigation, it would mean the end of

a taxpayer’s right to litigate tax controversies because

the IRS could always prevail by setting forth its litigating

position in a pending case in a revenue ruling instead of

in a brief.

Whatever deference might be appropriate for a long-

Standing revenue ruling issued in the normal course, the

law is clear that no deference is owed to Rev. Rul. 90-62

because it concededly was issued in response to this litiga-

tion. See Pet. 18 n.3. Although the government has never

before presented this Court with such an extreme invoca-

tion of administrative deference principles (see Cottage

Savings Ass'n v. Commissioner, 499 U.S. 554, 563 n.7

(1991)), the lower courts have “routinely looked upon

such bootstrapping revenue rulings with disfavor,” view-

ing them as no more than “thinly veiled attempt[s] to

influence” the pending litigation. Tandy v. Commissioner,

14

92 T.C. 1165, 1170 (1989) (citing Fribourg Navigation

Co. v. Commissioner, 383 U.S. 272, 279 (1966)). The

courts refuse to “allow the IRS to take advantage of a

self-serving ruling” in this manner. Niles v. United States,

710 F.2d 1391, 1393 n.3 (9th Cir. 1983). See also

Somerville v. United States, 13 Cl. Ct. 287, 290 (1987)

(“Revenue rulings issued under such circumstances are

of no weight since the government cannot be allowed to

bootstrap its own positions”); St. Louis Bank for Co-

operatives v. United States, 624 F.2d 1041, 1051 (Ct.

Cl. 1980).

The government invokes Smiley v. Citibank (S.D.),

N.A., 116 S. Ct. 1730 (1996), as authority that defer-

ence is owed even to such a “bootstrapping” revenue rul-

ing (Pet. 18 n.3), but that case says nothing of the kind.

To the contrary, Smiley reiterates the settled rule that the

courts owe no deference “to agency litigating positions

that are wholly unsupported by regulations, rulings, or

administrative practice.” /d. at 1733. This Court em-

phasized the very distinction between agency litigating

positions and duly promulgated regulations that the gov-

ernment seeks to obscure. It ruled that deference was

appropriate in Smiley because “we have before us here a

full-dress regulation, issued by the Comptroller himself

and adopted pursuant to the notice-and-comment proce-

dures of the Administrative Procedure Act.” Jd. In this

case, however, the government relies upon what is nothing

more than a publication of the IRS’s litigating position in

a pending case, unsupported by any evidence of adminis-

trative practice and issued without notice and comment.

No deference is owed to such a. pronouncement.

Moreover, the ruling invoked here lacks the basic hall-

marks of reliability that are necessary for deference even

to a duly promulgated regulation. Deference is owed to

agency interpretations only “so long as the interpretation

‘sensibly conforms to the purpose and wording of the

regulations.’ Martin v. Occupational Safety & Health

15

Review Comm'n, 499 U.S. 144, 151 (1991), quoting

Northern Ind. Pub. Serv. Co, v. Porter County Chapter

of Izaak Walton League of America, Inc., 423 U.S. 12,

15 (1975). As noted above, the “interpretation” set forth

in Rev. Rul. 90-62 cannot possibly be harmonized with

the language of the regulation, and, indeed, the ruling

does not discuss the text of the regulation at all.

In addition, the cases relied upon by the government

generally call for deference when the agency interpretation

is “contemporaneous” or supported by a “long history.”

Lyng v. Payne, 476 U.S. 926, 939 (1986); Udall v.

Tallman, 380 U.S. 1, 17-18 (1965); see also Davis vy.

United States, 495 U.S. at 484 (“contemporaneous” and

“long use”). The regulation at issue here was issued in

substantially its current form in 1929 (Pet. App. 93a),

and the ruling for which the government seeks deference

was issued in 1990, which is hardly a model of contem-

poraneity. The petition tries to cure this defect by assert-

ing without support that the regulation “conforms to the

lengthy and consistent administrative practice under this

regulation.” Pet. 14. In fact, however, the one-sided- rule

embodied in Rev. Rul. 90-62 does not conform to prior

practice, but rather departs from what the regulatory

history shows was the commonly held understanding of

the regulation.

2. In 1968, the Secretary addressed the proper use of

an RMFP and amended the hard minerals depletion regu-

lation to create a rebuttable presumption that “a price is

not a representative market or field price” if the price

plus nonmining costs “regularly exceeds the taxpayer’s

actual sales price of his product.” Treas. Reg. § 1.613-

4(c)(6). That presumption is rebutted if the taxpayer

shows “that the loss on nonmining operations is directly

attributable to unusual, peculiar, and nonrecurring factors

rather than to the use of a market or field price which is

not representative.” Jd. Significantly, the Secretary for-

mally proposed extending the new, more restrictive, hard

16

minerals rule to cover oil and gas depletion at the same

time, but that proposal ultimately was withdrawn, leav-

ing in place the current unqualified language requiring

use of an RMFP for all sales away from the well. See

36 Fed. Reg. 19256 (1971); 33 Fed. Reg. 10700 (1968).

The Secretary’s consideration and rejection of this pro-

posed change is simply incompatible with the proposition

that the regulation never allowed use of an RMFP in

excess of actual sales proceeds. See Pet. App. 13a, 58a-

60a.°

Indeed, the government’s position here goes even fur-

ther than the constraint on use of an RMFP that was

added only for hard minerals in 1968. The government

now would absolutely prohibit use of an RMFP in excess

of sales proceeds for oil and gas depletion, whereas the

presumption against such an RMFP in the hard minerals

5 Other evidence confirms that the regulation was not understood

to bar such an RMFP. At a forum held in 1954, Delbert_Williams,

then-Chief of the IRS’s Natural Resources Section, was asked

whether the taxpayer should use an RMFP where, “because of

adverse market or other conditions,” the price received for sales

away from the well was “less than the field price.” Mr. Williams

replied that it was appropriate in such a situation to use the higher

RMFP:

The Regulations appear to be very clear on that point. Section

39.23(m) of Regulations 118 [now Treas. Reg. § 1.613-3(a) |,

provides that in the case of any oil or gas not sold on the

property but transported therefrom, manufactured or con-

verted into refined product prior to sale, the gross income

from such oil for depletion purposes is the representative mar-

ket or field price before such transportation or conversion.

Oil and Gas Forum, 12 N.Y.U. Inst. on Fed. Tax’n 438, 444-45

(1954). Although this statement by ‘a senior IRS official concerning

his area of expertise was not binding on the agency, it certainly

belies the government’s assertion that there existed a consistent

administrative practice that would have prohibited use of an

RMFP in the circumstances described. See also Priv. Ltr. Rul.

8611008 (Dec. 3, 1985) (construing Treas. Reg. § 1.613-3(a) to

require taxpayer to use RMFP that exceeds sales proceeds in

determining windfall profit tax removal price).

17

regulation is rebuttable. Ironically, if the Secretary had

added the iatter constraint to the oil and gas regulation,

that would not have changed the outcome of this case.

The RMFP found by the court below is demonstrably a

“representative” price because the disparity between that

price and Exxon’s actual sales proceeds was caused by

the combination of a rising market and unfavorable long-

term contracts. Thus, Exxon would have rebutted the

presumption and been permitted to use its RMFP. See

Bloomington Limestone Corp. v. United States, 445 F.2d

1105, 1109 (7th Cir. 1971) (downstream losses “caused

by depressed market conditions” rebutted the presumption

that proposed RMFP was not representative). In sum,

there is no support whatsoever for the government’s asser-

tion that its litigating position in this case conforms to

“a lengthy and consistent administrative practice.”

C. The Courts Have Consistently Construed the Regu-

lation as Directing Use of an RMFP for Ail Sales

Away From the Well, Regardless of Actual Sales

Proceeds

The Court of Claims had several occasions to consider

the meaning of Treas. Reg. § 1.613-3(a). In Hugoton I,

the court rejected the government’s attempt to use the

taxpayer’s own sales data to calculate percentage deple-

tion for sales away from the well, holding that “if there

is [an RMFP], it must govern.” 315 F.2d at 871. The

court specifically criticized the government’s resistance

there to using an RMFP where it might benefit a tax-

payer, noting that the Commissioner “has chosen the

market comparison method, and he has defended its

application when productive of larger revenues.” J/d. at

873. In Hugoton II, one of the litigants attacked the

validity of the RMFP methodology by raising a hypothe-

tical in which, as here, the RMFP exceeded the actual

sales proceeds and therefore depletion would be based

on “gross income from the property” that “would exceed

[the taxpayer’s] actual gross income.” 349 F.2d at 424.

18

The court, however, was untroubled by this result, em-

phasizing that, for sales away from the well, a producer's

actual income “is immaterial to the ultimate resolution

of the case,” and the RMFP is “conclusive [of] the value

of [the taxpayer's] gas at the wellhead.” /d. at 425, 426.

Citing this Court’s decision in United States v. Cannelton

Sewer Pipe Co., the court declared without qualification

that, for sales away from the well, the “depletion allow-

ance is intended to be based on the constructive income

from a raw product .. . not on the value of the finished

article.” Jd. at 425.

In United States v. Henderson Clay Prods., 324 F.2d

7 (Sth Cir. 1963), cert. denied, 377 U.S. 917 (1964), a

case involving a hard mineral, the taxpayer claimed an

RMFP that exceeded its gross income from the finished

product. The court was skeptical of this contention as

a factual matter and ultimately rejected ¢ on the ground

that the claimed RMFP was not “representative” of the

price for which the taxpayer could have sold the raw

mineral. See generally Pet. App. 8a-10a. Significantly,

however, the court in that case did not endorse the legal

position the government takes here that an RMFP could

not exceed actual sales proceeds if the price in fact was

representative. To the contrary, the court remarked that

it must be “irrelevant whether, in a particular case,”

use of an RMFP “will give a higher base or a lower

base than the gross income from the finished product will

vield.” 324 F.2d at 12.

In short, long before this case arose, the courts repeat-

edly indicated their understanding that Treas. Reg.

§ 1.613-3(a) means what it says and requires an RMFP

for all sales away from the well, regardless of actual sales

proceeds. Moreover, the Court of Claims specifically

invited the Commissioner to “amend the applicable Regu-

lation” if he was troubled by the operation of the RMFP

mechanism. Hugoton II, 349 F.2d at 430. The Com-

missioner accepted that invitation in the hard minerals

19

area, where it is generally harder to determine an RMFP

than for oil and gas. See Henderson, 324 F.2d at 15;

pages 15-16, supra. He declined the invitation, however,

with respect to oil and gas depletion, and it is not the

province of the courts “to legislate in his place” and

create a limitation on the use of an RMFP that cannot

be found in the regulation. Hugoton II, 349 F.2d at 430.

D. The Regulation as Written Is Fully Consistent With

the Statute

The government argues that its position, as reflected

in Rev. Rul. 90-62, should be accepted because it “con-

forms the text of the regulation with the text cf the

Statute.” Pet. 14. See also Pet. 21-22. The government

reasons that the meaning of the term “gross income from

the property” in the depletion provisions must be “con-

sistent with [the] ordinary meaning” of “gross income”

in secuun 61(a) of the Code, which refers to a taxpayer’s

actual income. Pet. 21. This simplistic view of “gross

income from the property,” however, is obviously unten-

able. The government’s own reading of the regulation

contemplates that gas sold away from the well normally

will be depleted on the basis of an RMFP, not actual

proceeds from sales away from the well. Indeed, that

is the essence of this Court’s decision in Cannelton: “Con-

gress intended to grant miners « depletion allowance

based on the constructive income from the raw mineral

product.” 364 U.S. at 86 (emphasis added). Thus, the

government’s argument contradicts one of the funda-

mental features of the longstanding depletion framework.

The lower courts have expressly rejected the notion

that the term “gross income from the property” in section

613(a) should be construed by reference to section 61,

instead of being regarded as a term defined by regulation.

“(T]he only definition of gross income or means of calcu-

lating gross income that exists with respect to oil and

gas properties is found in the regulations under § 613(a),”

20

and that definition “does not attempt to measure actual

income.” Transco Exploration Co. v. Commissioner, 949

F.2d 837, 839, 841 (Sth Cir. 1992). Net income for

depletion purposes “is a term to be construed in the light

of the regulations and the statute” while “net income for

the general purposes of the Code . . . is subject to a much

broader interpretation.” /Jsland Creek Coal Co. v. Com-

missioner, 30 T.C. 370, 385 (1958). See also Helvering

v. Wilshire Oil Co., 308 U.S. 90, 102 (1939).

The three cases cited by the government (Pet. 21) are

not to the contrary. Each of these cases involved royalty

Owners or mineral sold at the well and therefore were

governed by the first sentence of the regulation, which

defines “gross income from the property” in that situation

in terms of actual sales proceeds. In calculating deple-

tion using the “ordinary meaning” (Pet. 21) of “gross

income,” the courts were simply applying the text of the

regulation, and the cases cast no aspersions on similarly

applying the text of the second sentence of the regula-

tion for gas-sold away from the well.

E. The Regulation as Written Accords With the Polli-

cies of the Depletion Provisions

Finally, the government contends that the decision

below does not conform with the “object of the depletion

provisions of the Code.” Pet. 18. Even if there were

some merit to this contention, it would not give the

courts a license to amend a legislative Treasury regula-

tion. See, e.g., Transco Exploration Co. v. Commissioner,

949 F.2d at 841 (court has no authority “to amend the

regulations judicially to avoid” a particular result); Honey-

well v. Commissioner, 87 T.C. 624, 635 (1987). In

fact, however, the contention is insubstantial because the

regulation as written is fully consistent with the policies

of the depletion provisions.

1. The government states that the RMFP provision

“serves two related functions.” Pet. 12. The first assert-

Me ete eens -

21

edly is to “ensure[] that a taxpayer may not include in its

depletable income any value that was added to the oil

or gas after extraction by processing, conversion or trans-

portation.” Jd. (emphasis added). This function could

more properly be stated in a neutral fashion—to ensure

that depletable income reflects the value of the gas in

its raw state at the well, unaffected by downstream en-

hancements or decrements. Certainly the cited reference

does not suggest that the RMFP rule should not be applied

neutrally; it states without qualification that “the field

price of the oil or gas at the well indicates the income

from the property.” Hearings Before the Joint C ommittee

on Internal Revenue Taxation, 71st Cong., 3d Sess. 104,

111 (1930) (testimony of B.H. Bartholow).

Nor does the government give any logical reason why

the RMFP rule should not be applied neutrally. Use

of a “constructive income” figure for sales away from the

well implements the broad purpose of the percentage

depletion provisions—to provide a simplified method of

giving the producer a return of capital based on the value

of the mineral upon extraction. See Pet. App. 17a; 53a-

54a; United States vy. Dakota-Montana Oil Co., 288 U.S.

459, 466-67 (1933): Hugoton I, 315 F.2d at 869. The

government does not explain why this purpose is under-

mined by evenhanded application of the RMFP rule.

That approach makes the producer base its depletion on

the wellhead value; as the court of appeals noted, it does

not allow the producer to include value added by process-

ing and transportation. Pet. App. 16a. Conversely, the

government’s proposed one-sided rule would undermine

the goal of percentage depletion because in some cases it

would deny producers an allowance based on the full

wellhead value.

The second policy identified by the government is “to

ensure that integrated producers are not treated better

than nonintegrated producers.” Pet. 12. Again, this is

22

a one-sided statement of a neutral policy. The depletion

provisions seek to place the integrated producers on a

par with non-integrated producers, treating the integrated

producers “as if the operator were selling the mineral

mined to himself for fabrication.” Cannelton, 364 U.S. at

89. The RMFP mechanism achieves that goal because

the RMFP represents the weighted average wellhead price,

thus making the integrated producer base its depletion on

the same wellhead price received by the “average” non-

integrated producer. See Pet. App. 17a n.8; Hugoton I,

315 F.2d at 876. The parity policy is not advanced by pre-

venting taxpayers from using the RMFP when it exceeds

actual sales proceeds. That rule would force the inte-

grated producer to base its depletable income on an

amount lower than that used by the average non-integrated

producer, which would “give a preference to the non-

integrated miner . . . and [would] reintroduce, in reverse,

the tax discrimination between integrated and non-

integrated miners against which the whole tenor of the

Cannelton opinion is directed.” United States v. Hender-

son Clay Prods., 324 F.2d at 12.

The government takes a skewed and myopic view in

arguing that the decision below conflicts with this parity

policy. The government finds a “competitive advantage”

for integrated producers because they can base their

depletion on an amount that exceeds their actual sales

proceeds, whereas non-integrated producers must look to

their actual revenues. Pet. 20-21. But it is equally true

that integrated producers sometimes must base their deple-

tion on an amount that is /ower than their actual sales

proceeds, whereas non-integrated producers are never

forced to do so. That is the fundamental structure of

the regulation—non-integrated producers use actual in-

come for their wellhead sales and integrated producers

use constructive income for their sales away from the

well. When that structure is applied evenhandedly, as the

court of appeals foun ap eropriate, there is parity on

reereerereeerecerare tearm eines

23

average between integrated producers and non-integrated

producers. When the structure becomes a one-way street,

as the government proposes, integrated producers are

treated less favorably, on average, than non-integrated

producers.

2. The government also asserts that “the depletion

provisions seek . . . to preclude a taxpayer from using

the depletion deduction to offset profits from a separate

line of business.” Pet. 18. Strictly speaking, this policy

goal is not implicated here because its source is the legis-

lative history of the “taxable income limitation,” which is

not at issue in this case. See Pet. App. 90a; S. Rep. No.

275, 67th Cong., Ist Sess. 15 (1921); note 2, supra.

In any event, this policy concern, like depletion gener-

ally, is not concerned with downstream events. In full

accord with the Congressional sources of the policy goal

asserted in the petition, “constructive income” at the

well has always been the point of reference in computing

the taxable income limitation for sales away from the

well. See, e.g., Staff of the Joint Committee on Internal

Revenue Taxation, Vol. I, Pt. 2, 69th Cong., Ist Sess.,

Preliminary Report—Depletion—Oil and Gas Revenue

Act of 1926, at 13 (Comm. Print 1927) (“Depletion Re-

port’). Thus, the computation occurs at the wellhead

without any reference to events that occur downstream,

such as gains or losses suffered by an integrated pro-

ducer in marketing its product away from the well. “Tax-

able income from the property” is simply “gross income

from the property as defined in . . . § 1.613-3” minus the

expenses of extraction. Treas. Reg. § 1.613-5(a). Indeed,

the pertinent legislative history flatly declares that the

“net-back” approach the government seeks to use here is

impermissible: for sales away from the well, “the gross

receipts from a refined and transported product cannot be

24

used in determining the income.” Depletion Report, at 13

(emphasis added).°

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

ROBERT L. MOORE, IT

Counsel of Record

THOMAS D. JOHNSTON

EMMETT B. LEWIS

ALAN I. HOROWITZ

MILLER & CHEVALIER,

Chartered

Metropolitan Square

655 Fifteenth Street, N.W.

Washington, D.C. 20005

FEBRUARY 1997 (202) 626-5800

6 The government plucks some numbers from the record on sum-

mary judgment in Exxon’s 1979 Tax Court case that supposedly

“illustrat[e}” how the decision below contravenes this policy. Pet.

19-20. This illustration ignores the fact that the policy underlying

the taxable income limitation is focused on production income at

the well, not downstream events, and therefore actual sales pro-

ceeds are irrelevant. In any case, the numbers do not even support

the government’s erroneous characterization of the policy. The

government’s illustration includes income only from gas sales, but

it is well settled that the taxable income limitation takes into

account income from all minerals produced on the property.

Louisiana Land & Exploration Co. v. Commissioner, 102 T.C. 21,

57 (1994). When the oil income from the property is included, the

gross income from the property will greatly exceed the claimed

depletion allowance.