# Opposition Brief — United States v. Exxon Corp.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1997
- **Citation:** 520 U.S. 1119

## Text

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_0108%3A3. Public record. Not legal advice.