Brief for the Respondents in Opposition — United States v. Skelly Oil Co.

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SAT, ) )

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2 @PREME COURT. - ra | : .

i "SOHN. DAVIS, CLERK,

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| Supreme Cot of the Huited Bates

Ocrosas TERM, 1968 ~

oe ; & ire of ; _—

UNITED STATES OF AMERICA, -

| | a - Petitioner,

: Vv. ; o : « ’

SKELLY OIL COMPANY.

° e

. a

® ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES coum OF APPEALS FOR THE TENTH CIRCUIT —

ar

A —

BRIEF FOR SKELLY OIL COMPANY

‘IN OPPOSITION. :

Ropert J. Casey,

age enw _ Attorney for Respondent, _

Fes 120 Broadway, .

N ew Work, New York 10005.

Tuomas E. Tyre; Tees

Joun A. Craic, ~ an

Tuomas J. McCoy, Jr., A

Casey, TyrE, Craic &-McCoy,,

120 Broadway,

New York, New York 10005,

. aif Counsel. -

Ba as i NSP AS art Toe aE 5 2 i ng

4

; ; rp

7 INDEX yi

* » oP

: ee ; ‘PAGE ;

. Opinions below ........5: panes ounces eithrseeeer oe

Jurisdiction -:. . Lees Saag h naesee eee 1

Question. presented ar Py “ery e Leda ” eieaue 5, 2 :

“ai aes ies” a

Statutes and regulations involved ......... <waaawn -. 3

-- Statement. Keseenetouss ti veaeat tere oa dens 5

i ~~ 3

Summary of argument ase Seed eccceccesegorens 7

Argument SR pn ee a a NR RE. ore

Conclusion ..... picceteases (ccne VEST wegees cbuge 22

; ane oo Cirations

CasEs: ; “ ae

Amoriows Automobile Ass’h v. United States, 367 oF

»° U.S..687 (1960) . pawaggersccsesessoondeuerger’ oo

Arrowsmith v. Commissioner, 344 U, 8. 6 (1952). , 10

t “a

“ Gill Dolores v. Commissioner, | 41 B.T.A. 686 i

er: as . deuce RP Rte Ai He, samaeminga ere — «19y

“Douglas v. ‘Commissioner, 322 2 US. 1, (noe) . AAg

7 a

~ Gordon, Commissioner v. (United: States Sesniays

Court Nos. 76Q, 781, Oct. 1967 tone, decided

4 Mae ®, ia apa pavaee eves ninaciye alee oe

' 7 PAGE

Casns (Cont'd) : PEE iileae ERY 9 eee” ge ;

: ge ngpron Production Co. v. United States, 349 F. od :

. 418 (Ct. Cls. 1965) We esawTeeeee yee atecawescees 20, 22

Iifeld Co. v. , Heriondes, 292 US. 62 (1984) ....°. . 18

: ‘Egdchentoe +. United States, 276 U.S. 145 (1928) 9,10 =

EK ramer, Walter E. v. Commissioner, 27 B.T.A.

1043 (1933). ..... OP eet Oe ee re eget a

Lewis, United States v., 340 U.S. 590 (1951) a. ae

Lewyt Corp. %. Commissioner, 349 U. S..237 (iss) il

‘Mickigon Wisconsin Pipeline Ok: v. Corporation

Commission of Oklahoma, 355 U.S. 425 (1958) . <7 2

| : National Life é Accident Ins. Co. v. United States, frie

é 7 244.F. Supp. 135 (M.D. Tenn. 1965)' aff’d on ;

other issues, 385 F.2d 832 (C.A. 6th, 1967) .... 10 -

North American Oil Consolidated v. Burnet, 286 |

© UB, 41 (1982). . fee eeeeeeeeeeteeeeereee. 8,13

| O’Meara v. Commissioner, 8. C. 622 (1948) ease 21,22

' Permian Basin Area Rate Cases, Nos. 90, et al.

Mes. 5 October Term, 1967, decided May 1, 1968 .....:. 20

Perry v. United States, 160 F. - Supp. 270 (Ct.

CIs. 1958) 2s. ees ceewreseeteeeeeees ate o+ 0B, 15,22 °”

ees es .

"Salinas Corp. AP. v. United States, 381 F.2d 399

(Ct. Cls, 1967) ........ Oe a re ..18, 15, 16,22 |

Tellier, Commissioner v, 383 U.S. 687 (1966) rope tae

Waggoner v. Commissioner, 47 B.T.A. 699: (1942) 19

7 Welch v. ew: 290 U.S. 111 (1933) eer

ii

| a ea oon PAGE

Statutes anD Rzcuations:. ri |

Internal Revenue Code of 1954: . ;

Section 111 ....... aMirpeneresscaredesty,~ cae .sa

EE gio so 5 vk dew pekweess ore Te Cy ede

Section 611 ....... (sisecatalustehineeasnvabien 2

Section 613 ..... ie seu Siadieeaks Pe pn ey 3

Section 1341 ae | SR cos eennees “10, 13, 17, 22

Section 1341(a)(4)-...7..... uipea's eues 5, 13, 15, 16, 9 ‘a

Section 1341 (a) (5) pote ov vievsccecccccvces cess Aga

; * 1

Treasury Regulations: ° 4

Section 1. 612-3 (a) (2) . hae oben aah kahinwny bw whet: ae

Section 1.1841-1 eee ecescees hen an capes 4.

: MiscenLaxzous: | |

American Law Institute, Federal Income Tax Stat-

ute, Sections X332, X333, (Feb. 1954 Draft) . 15

Income Tax—Recovered Property Previously De-

ducted Includéd in Gross Income in Year of

Recovery, 66 Michigan Law Review 381 (No. 2, .

<I TD bbe NT tubsk ses nesdecccsoe. a

- New York Times, July 21, “1968 ebeocesegtuses >

Revenue Ruling 60-344, 1960-2 CB 186 RS ere 4, 6. .

Revenue Ruling 1968-78, I.R.B. 1968-7,18 ........ 19

Sen. Report No. 1622, 83d Cong. 2d Sess, ...... 14.

Statement of Ellsworth C. ‘Alvord, Hearings on -

E.R. 7378, Senate Committee on Finance, 77th

Cong. ad Sess. 1784 (1942) PO PPP Py peken 15

2 - district: court are. reported at 255 F. Supp. 228. (R. + "y, :

apene “oo of the Ried Stites

+ Ocroszr Tzem, 1968 A eat '

No. 280 -

- Unrrep States or AMERICA, - .

chld kta ie Petitioner, .

Ve : ' 7 .

Sxetty Om Yours.

: ' ° —

eas : ‘

‘ON PETITION FOR A WRIT OF CERTIORARI TO-THE UNITED —

STATES COURT OF APPEALS FOR THE TENTH CJROUIT

Ll

Vv

‘BRIEF | F FOR ‘SKELLY OIL ,_ COMPANY

IN OPPOSITION Z,

Opinions Below Rae Bs

The findings of fact, conclusions and decision’ of the

The initial opinion and opinion after rehearing of the

of appeals are’ reported in 392 F. 46 128. iu33"h \

.

—EE

e en -

Jurisdiction

pes The initial judgincnt of the ‘court of: saneaia was en-_

tered on April 20, 1967. The petition of the United States ~~

for a rehearing was granted on June 27, 1967 and reargu-

ment was held. on July 13, 1967, ‘The judgment upon re-.- .

hearing was entered on April 3, 1968. (Pet. App. E, pp. © ~=—

24-25) On July 2, 1968 the time for filing a petition for -

1“R” references are to the printed record in the Court of Appeals. :

.

.

~ duced and sold the mineral during the years 1952 through ©

1957, and the sale price thereof entered into the computa- —

reas ee oe

a writ.of certiorari was extended to oe including ily ~*:

1968... The. jurisdiction of this Court i is invoked under 98° :

U. S.C. 1S5A(1).. :

}

wd

a | -. “Se

are } : : €

3 ° Gea Presented:

_Where respondent, a’ producer of natural gas, pro-

tion of its depletion allowance, -and in 1958, pursuant. to

a lawsuit, it was required to repay a.portion of said sales

price, goes Section 1341(a)(4)_of the Internal Revenue _.

Code of 1954 require that its otherwise allowable ordinary ~ -

and necessary husiness expense deduction be adjusted so |

as to reflect the previously allowed depletion’ allowance?

The Court vs after exhaustive consideration, held that

.it does not. es ms. °

4

—

} San Statute and Regulation iniciesh )

Tptegnal Revénue Code of 1954:

we

SEc. 611. ALLOWANCE OF Depuction FOR Dessaven.

(a) General Rule—In the Case of mines, dil and gas

‘ie. “other natural deposits, and timber, there shall .

be allowed as a-deduction in computing taxable income

reasonable allowance for depletion and for deprecia-

tion of” mnproreentn, according to the peculiar condi-.

tions in each‘case; such reasonable allowance in all

_-eases to be made under regulations prescribed by the

Secretary or his detegate.\ For purposes of this part,

the term ‘‘mines’’ includes feposits of waste or residue,

the extraction of ores or mi erals from which is treated

as mining under section 613(c). In any case in which

- it is ascertained as a result of\operations or of develop-

5s as

po

,

- 3 |

&

,

#

: ment work that the recoverable units are greater orless. __

than the prior estimate thereof, then such prior esti-

*; Mate (but not the basis for depletion) shall be revised

‘andthe allowance under this: section for subsequent. |

= taxable years shall be based on such revised estimate.

(26 U.S.C. 611.) ;

Sec.613. Percentage DEPLETION.

7 * a

-\

(a) General Rule.—In the case of the mines, wells,

_ ,and other natural deposits listed in subsection (b), the .

allowance for depletion under section 611 shall be the

pertentage, specified in subsection (b), of -the gross

‘income from the property excluding from such gross

income an amount equal to any rents of royalties paid.

or. incurred by the taxpayer-in respect of the property.

Such allowance shall not exceed: 50 percent of the tax-

payer’s taxable income from the property (computed

. without —— depletion). In no case shall the

allowance for depletion under’ section 611 be less than

it would be if compuied. without. reference to this

‘section...

ee roy

_(b) Percentage Depletion Rates—The mines, wells,

and other natural. deposits, and the percentages, -re-

ferred to in subsection (a) are as follows:

- (1) 27% percent—oil and gas wells. |

7s. * « ;

(26 U.S.C.613.) | er

Sec. 1341. Computation pr Tax Waere Taxpayer Re-

stores SusstanTiaL Amount Hetp Unper Cuam or Ricxr.

v

(a) General Rule—If— _ :

(1) an item was included in gross income for .

a prior taxable year (or years) because. it appeared

_ “that the taxpayer had an unrestricted right to such :

.- item; ~ ~*~

(2) a. Sadustion i is Pe veeren for the iniestie year .

because it was-establishéd after the close of such

prior taxable year (on years) that the taxpayer did

- not have an unrestricted right to such item or to a

| portion of. qpich item; and —

| (3) the amount of such deduction exceeds $3,000

- then ‘the tax impo8ed by this chapter for the inxable .

oer: shall be the lesser of the following: * -: _

* (4): the tax for the taxable _ —" with |. 7

such. deduction ; ; Or 3 . tw |

(5) an amount equal to—

(A) the tax for the taxable year ce”

without such deduction, minus

“(B) the decrease in tax idador this chapter (or:

’ the corresponding provisions of prior revenue

laws) for the prior taxable year (or years) which

? would result solely from the exclusion of such item

“(or portion thereof) from gross income for such

K | prior taxable year (or years).

Nee

_* e - * / ‘

: Praiiee Rejuisttone on Income Tax (1954 Code) : ~ By]

§ 1.1341-1. Restoration of amounts received or ac-

~. erued under claim of right—(a) In general—(1)- If,

during the taxable year, the taxpayer is entitled under

other provisions of chapter 1 of the Internal’Revenue . |

Code of 1954 to a deduction of more than $3,000 be- . f

cause of the restoration to another of an item which ~

was included in the taxpayer’s gross income for a prior.

| ble year (or years) under a claim of right; ‘the tax |

~ + imposed by chapter 1 of the Internal Revenue Codavof

' 1954 for the taxable year shall-‘be the tax provide eee

in ee (b) of this section. — , \

3

(b) Determination of tax. (1) Under the circum-

stances described in‘paragraph (a) of this section, the.

tax imposed by chapter 1 of the Internal Revenue Code -

of 1954 for the taxable year shall be the lesser of —

as (i) The tax for the taxable year computed under

"section 1341(a)(4), that. is, with the deduction taken

into account, or

- (ii) The tax for the taxable year computed under

‘section 1341(a)(5), that is,-without taking such deduc-

tion into account, minus the decrease in tax * * * for

the prior taxable year (or syears) which would result

solely from the exclusion from gross income of all or |

4, .that portion of the income included under a claim of ©

right to which the deduction is attributable. * * *

* * * ;

: @

Or

(26 CFR. 1.13411.)

Statement

_ The material facts may be summarized as follows: .

Respondent, Skelly Oil Company, produces and sells.

_ natural gas in Oklahoma and was so engaged in 1952 when

the Oklahoma Corporation Commission established a mini- -

mim price for sales of natural gas at the wellhead. (R. 21)

‘This order raised the price of the gas respondent was sell-

"ing under pfe-existing contracts with’ Cities Service Com-

‘. pany and Dorchester Corporation. (RB. 22) The minimum

' price order was ruled-invalid in Michigan Wisconsin Pipe-

line Co. v. Corporation Commission of -Oklahoma, 355 U.S.

425 (1958), and was subsequently vacated. (R. 22)

. . ds computing its depletie» allowance for each of the

years 1952 through 1957, Six had included in its ‘‘gross

income’’ and in its ‘‘gross 1ucome from the property’’ the ;

amounts charged under the invalidated minimum price -

order. (R. 23-25) _ Se BEF neha Pie ite

- In 1958; Cities Service Company sued Skelly for

$777,858.25, representing alleged ,overcharges for natural

Q

Penner

‘gas purchased by it from Skelly between August 1, 1952 and

December 22, 1957. (R. 22). Also in 1958, Dorchester Cor-

-. poration, which sold gas to Northern Natural Gas Pipeline

Company of America for Skelly’s account, was required,

due to the invalidation, to repay Natural Gas Pipeline Com- _

pany: for alleged overcharges and it sought reimbursement’

from Skelly. (RR. 24) .t

- Jn October arid November, 1958, Skelly, paid $5,536.54

‘to Dorchester Corporation and settled the lawsuit brought

by Cities Service Company by paying Cities - $500,000.

(R. 22; 24) On its Federal tax return for 1958 Skelly took

a business expense deduction for the $505,536.54 which it

had paid to Dorchester and Cities Service. (R: 25) |

- Upon audit of Skelly’s Federal tax return for 1958 the

Internal Revenue Service reduced Skelly’s otherwise allow-_

- able depletion. allowance on ifs mineral production for 1958

by $139,022.55, representing 271% percent of the $505,536.54

deducted on the return. Skelly paid the resulting assess-

ment and filed a claim and later a suit for refund. (R. 25)

The only issue presented to the trial Court was whether,

in computing Skelly’s liability for Federal income tax for ©

the taxable year ending Decem er 31, 1958 under’ the pro-*.

visions of Section 1341(a) (4) of the 1954 Internal Revenue

Code, it was proper to reduce its otherwise allowable per-

centage depletion for the taxable _year by $139,022.55 Tep-

; —resenting 27% ] percent of $505, 536.54, the puréhase price

received by it from the sale of natural gas during prior

taxable years, which purchase price had been included by

it in gross income for such prior taxable years under a -

' - claim of right without restriction as to use, and which it

was required to restore to the payors thereof during the

taxable year ending December 31, 1958; or, in the alter-

native, whether Skelly was required to redue) its otherwise

allowable’ deduction under Section 1341(a)(4) of $505,-

536.54 by 2714 percent, or $139,022.55, to reflect percentage

depletion. previously claimed and altowed thereon in its

: Federal income tax returns for the years in which such |

~ amount was taken ‘into gross income under a claim of ‘ight

_ reversed ‘holding that no legal authority supported the

. decision. (Pet. App. A, pp. 1-10) After granting a rehear-

. Ing, the Court of Appeals reiterated its prior decision with:

one judge dissenting. (Pet. App. D, pp. 13-23)

- sideration, correctly held that under all judicial authority

. except for one obscure pre-1954 case, and under the clear

litigation even though said litigation involved amounts re-

8 depletion allowance was afforded by law.

economic transactions are involved,

7

‘

without restriction as to use. (R. 12, 20)

The Trial Court held that Skelly was entitled to a deduc-

tion in 1958 of only $366,513.99 on account. of the $505,536.54

payment (R. 29), but the Court of Appeals unanimously .

Summary of Argument an

The issue in this case is a very narrow one, dependent )

in its scope upon the peculiar circumstances of a particular

taxpayer. : oe | :

_ The Court below, after careful consideration and recon-

mandate of Section 1341 of the Internal Revenue Code of -

1954 and the intention of Congress in enacting the section, .

respondent, Skelly Oil Company, was ertitled to take a

deductionin 1958 for. amounts paid;out in settlement of .

ceived in prior years from the sal

e of minerals upon ‘which

No double deduction is involved because two separate

Under the annual accounting concept a “‘transactional’?

approach to the question is forbidden. ow

In any event, the issue is of little importance to the

administration of the revenue laws because its impact de-

pends upon the effect of the.entiré Section 1341 on an indi-¥.

vidual taxpayer, and the Government itself in similar cir-

cumstances has refused to apply the ‘‘tax equalization”’ rule

it here asks this Court to create. .

Respondent contends that the uniformity and symmetry

of the Internal Revenue Code should not be destroyed be-

cause one, taxpayer: received a benefit therefrom. -

i

‘\\

. g ° \

< Argument

. The decision of the Court hhow t is Lacie a sup-

ported by all principles of tax accounting and by all

_ legal authority. 6 S..

. The most fundamental concept of taxation, and the es- |

. sence of our system of taxation, is that income’ and deduc-

. tions mist be determined on an annual basis. , The doc-

trine was established by this Court in Burnet v. Sanford &

“Brooks Co., 282 U.S. 359 (1931), and further elaborated

| -upon and strengthened in North American Ol Consolidated ©

v. Burnet, 286 U.S. 418 (1932), United States v. Lewis,

. 340-8. 590 (1951), and Healy v..Commissioner, 345 US.

- 278 (1953). Most recently, this concept was flatly reaffirmed

in Commissioner v. Gordon, — U.S. — (United States

-Supreme Court, Nos. 760; 781, Oct. 1967 Term, décided

May 20, 1968), when this Court stated at page 12:

‘* Absent other specific directions from Congress,

code provisions must- be interpreted so as to con-

form to the basic. premise of annual tax. accounting. :

.. It would be wholly inconsistent with this premise to.

hold that the essential character of a transaction,

and its tax impact, should remain not only undeter-—

minable but unfixed for an indefinite. and unlimited

- period i in the future, awaiting events that- might or

might not happen.” =~ !

The annual accounting, approach was established in

Burnet v. Sanford & Brooks, Co., supra, because of its ease

‘of. application and its ‘production of revenue at regular

_ intervals.. In doing so the Court specifically rejected the _

- . **transactional’’? approach er method which would post-

pone the assessment of the tax, until the transaction giving

- rise.to income or deduction is finally concluded, to the end

_ Of a lifetime or for some other indefinite period.: _—_

* In North American Oil Consolidated v. Burnet, supra,

it was established that if a taxpayer receives income under

hy its a

*

claim of right he must report it as income even though it

subsequently develops that its equivalent must be résfored.

United States v. Lewis, supra, established that in such. ..

_ circumstances, the taxpayer, if he was entitled to any de-

duction, was limited to a deduction of the amount restored

only in the year of restoration. H ealy v. Commissioner,

supra, made it clear that the deduction must be the amount

restored and is not to be limited fo the tax paid when the

restored item was originally received. It was recognized.

that the application of the rule could result in either a

benefit or a burden to the taxpayer’or-to the Government.

Petitioner concedes this annual accounting principle

(Pet., pp. 7, 8), states it, and then proceeds to ignore it. The.

Court below recognized that the application of the annual

-?

accounting rule benefited this particular taxpayer, but held

that such benefit is consistent with the scheme of our taxa- ~

_ tion system.’ The petitioner would have this Court abort

_ these long-established principles and grant relief in this

case despite the law. This should not be done. .

No ‘‘loss’’ predicated upon a single transaction is in-

volved in this case. The gas was‘ produced and sold over

a five-year period. Such a ‘‘transactional’’ contention was

rejected completely in ‘Burnet—v. Sanford ¢ Brooks Co.,

supra. Respondent here was sued for over $700,000 and

' settled the litigation by paying, $505,536. ° This payment is:

deductible under Sectioh 162 of the Code as an ordinary and .

‘necessary business expense of the year 1958 and not asa.

loss. Kornhauser v.*United States, 276 U.S. 145 (1928); .

Welch v. Helvering, 290 U.S. 111 (1933) ; Commissioner v.

- Téllter, 383 U.S. 687 (1966). No provision of the Revenue ' ;

Code or judicial or regulatory: authority requires or permits

the tracing of the amounts paid out in. 1958 back to the

years 1952 through 1957 so as to eliminate from the de-’

ductible amount the depletion allowance. legally permitted

' when: equivalent amounts were received from the produc-

tion and sale of gas. er ts) :

The case of Arrowsmith v. Commissioner, 344 US. 6°

(1952), is not. to the contrary. ‘That case stands for the

. duction. The fact is that in-Arrowsmith there could have

been no deduetion at all under thge Code nnless it -was a’

capital loss deduction. In -the instant case the amounts |

‘paid clearly qualified as ordinary and necessary expense

= | ee ihe

ite i

¢

| skopositioa! that the nature of a sitoniiel deduction, i. fe; -

‘

whether it is a capital or ordinary, or even allowable at

all, may ‘be determined by reference to the facts giving rise

to the repayment, but it does not permit. the facts of the:

original receipt to be reevaluated and the tax consequences

_ thereof to be redetermined. National Life & Accident Ins.

Co. 'v. United States, 244 F. ‘Supp. 135, 1839 (M.D: Ténn. -

1965), aff’d on other issues, 385 F.2d 832 (C.A. 6th 1967).

Arrowsmith had nothing to do with the amount of the de-

deductions and have only an incidental relation to the de-

pletion allowance in prior years. ‘Kornhauser v. United

. States, supra. Petitioner has in fact stipulated, and does

_not now dispute that the amount is otherwise deductible

unless limited by Section 13841. ©-°. »

- The repayment in this case was because of money

: steitediiy received but the prior depletion allowance was

not involved in. the litigation. | Respondent was not sued

because it took a depletion allowance to which it was not

entitled. It was sued for. damages on account of over-

charges resulting from the minimum price statutes. But .

respondent produced and sold the gas in 1952 through

' 1957 and was entitled to the depletion allowance. The re-

payment arose out-of the lawsuit for overcharging and

was not based upon an allegation of lack bd title -to the

_ ° mineral.

There is no provision of tax law that requires that all

_ deductions for, business expenses paid out of the proceeds

from the production and sale of minerals, upon which a.

depletion allowance was once secured, must be ‘reduced by

the amount of depletion previously allowed.’ That, how-

ever, is the basic thrust of petitioner’s contentions. The

characterization of the deduction as a ‘‘loss deduction,”’’

“in an-attempt to avoid the impact of the annual accounting

7

-~———,—»

, Tules, and thus subliminally superimpose on -the issue the

- long discredited transactional approach, does not strengthen *

petitioner’s cause. Weer ca Oe ee

The fact is that respondent produced and sold the

mineral, and was entitled to the depletion allowance under

the law. In a later year it paid ‘back some of the money

- it had charged for the mineral but the entire series of trans-

actions. occurring between “1952 and 1958 cannot now be.

reconstituted as if they never happened. The law specifi-

cally prohibits such procedure... ¥ Bi

The analogy of a dividend transaction between domestic

corporations is-not in point for the simple reason ‘that,

upon repayment, the receiving corporation would not be.

entitled to any deduction at all, as the repayment would -

not be a deductible expense ‘but a: contribution to capital.

See Walter E. Kramer v. Commissioner, 27 B.T.A. 1043,

1048 (1933). a ae aoe?

What petitioner proposes is the engrafting of a new

rule of law onto the Internal Revenue Code so as to enable

it to prevail in this case only. It is contending thatthe -

otherwise allowable deduction of $505,656, which the. re-

spondent without question paid out, must somehow be ad-

_ Justed so as to equalize the tax for one year (1958) with

_. the tax paid in 1952 through 1957 on amounts which totaled

$505,656. This is impossible unless Section 1341(a) (4) of

the Code somehow created a new definition of the current

year’s deduction, which it did not. _ Compare Sections

1341(a)(4) and 1341(a) (5). Presumably ‘petitioner pro-

- poses to do this solely’in this case because it is satisfied

that the adjustment proposed would, in fact, equalize the

tax. But that would not necessarily be the case for other

taxpayers. Should the entire Symmetry and scheme of

the Code be upset in order to deal with oné taxpayer?

This ‘Court said ‘‘no” in Lewyt Corporation v. Commis-

. stoner, 349 U.S. 237, 240 (1955), with the following: lan-

guage: : 7 po

§

ar)

12 .

’ 5

“But the rule thaf ed equitable nee |

tions do not control the measure of deductions or!

. tax benefits cuts béth ways. It is applicable to the

- . Government as to the taxpayer. Congress may “

strict or lavish in its allowance of deductions

tax benefits. The formula it writes may be arbitrary

and harsh in its applications. But where the benefit

roe 7 the: rt ay is fairly within the statu-

the cdnstruction sought is in

a Ba with the the statute as an organic whole, the

- benefits: will. not. be withheld from the ‘taxpayer

though they represent an unexpected Tr cipcecir

me (Emphasis sate

The ad hoc creation of an inverse tax benelit;| or ‘‘tax

equalization,’’ rule would not sustain petitioner’s conten-

tion, primarily- because no tax benefit is involved. Com-

pare Section ‘111, Internal Revenue Code of 1954. Re-

. spondent paid out money, it did not recover it. Its mineral

' was not restored, it is gone forever. If, as ‘contended, the -

previously allowed depletion allowance were restored to

“income in 1958 (thus creating income where none exists)

would a depletion allowance be allowed on: that created

income? “It would have to be ‘‘gross income from the

property”? for depletion purposes or else there would be

no reason for the ‘‘gredit to income.’’ By the same token,

if an operating loss was experienced. ‘in the prior years,

would petitioner be | so apt to apply the rule it proposes ©

in this case?

Petitioner would ave this Court create a new rule of

'. law with widespread, ramifications just to penalize one

taxpayer—a rule that would be engrafted upon, or replace, ©

‘the tax benefit rule, and which would require taa equaliza-

tion dependent upon the long term economic result of a

transaction or group of‘transactions. To do so this Court

would have te add a new section to the Revenue Code

‘foundation of taxing system. See, e.g., American Auto-

and nto of long line of legal .precedents that are the

mobile Assn. mted States, 367: U.S. 687 (1960).

ses

«

‘|

/

13°

4

It is highly improbabl | that the eescabadil: would, | in .

the’ long run, benefit from the eréation of a new tax equali-

zation rule because it would most likely bé applicable only

‘to respondent’ s situation and only for this particular

year. Other,taxpayers who restored income received undeti

claim of. right might have paid no tax in the years of receipt, | Nie,

despite the allowance for depletion, orthe depletion allow- . -

ance may have had little/ economic benefit to them depend-.

ing upon the area rate,*the ‘field: price of the mineral and/or

their costs of production.’ What adjustment would then

be: made to ‘‘equalize the tax?’ ;

‘ Petitioner’s strenuous effort in A. P. Sullivan diaie: Vv:

‘United States, 381 F.2d 399 (Ct. Cls. 1967), to persuade the

Court of Claims to overrule, a ‘‘tax eqyalization’’ doctrine

enunciated in-Perry v. United States, 160 F. Supp, 270.

(Ct. Cls. 1958), vitjates the — of its pe to this

Court in the bsenss case.

« 2. The purpose and intent of Sectlinis 1341(a) (4) of the ;

' Revenue Code supports the decision of the Court below.

The Court below did not*inferpret Section 1341(a) (4) _

as proyiding.a ‘loophole’ ’of any kind. - It applied it as it

is written.and as it was intended to be applied by Congress.

Further, it was never contended, and . the Court below

did not hold, that . this Section created a. new deduction,

By the same token, it does not operate to limit a taxpayer ie.

.. recovery to a tax no greater than the tax originally paid

with respect to the restored claim of right item.

Prior to the enactment of Section 1341 as part of the

1954 Code, a taxpayer who had previously included an

item in gross income under the ¢laim of right principle of

North American Oil Consolidated v. Burnet, supra, was

required to take a deduction for the repayment of: that

. item in the year of such repayment. United States v. Lewis,

_ supra, specifically held that in the claim. of right situation

_ a taxpayer should deduct the amount which he was required

m4

take a déduction

_ pute his tax for the year of receipt’ by cluding the receipt, _

are —— |

MS ae | / ;

to restore in the year of repayment and in no other year.

claim of right cifcumstances of taxpayer must etther (1)

Congress, in. ium Section 1341, provided that under

or the year of repayment,;or_(2) recom-

whichever produces the greater benefit. No option is in-

volved! The section is andatory,/ The clear truth is that

‘Congress sought to and did remove the burdeff’ on the tax-

_ payer resulting from the application of United States v.

Lewis, supra, while preserving to taxpayers the benefits

. which were recognized as possible under that decision.

Contrary to the assertions in the petition, it was not

- the intent of Congress to overrule completgly the rule oi

lay, enunciated in Lewis and Healy. The Committee~Re-

ports clearly explain that thé purpose of Section 1341 was

to ameliorate one of the aspects.of those cases and leave -

the others:as provided by existing law. And prior ‘law. ;

‘did not deny the deduction allowed in the instant case—it

required it. Senate Report No. 1622, 83d 1 Cong. 2 2d ne .

pp. ‘118, #1, ‘specifically points #3 that:

“Under present_law- 2a taxpayer is obliged to.

repay amounts which he had received in a prior year

and included ‘in income because it appeared that he

_ had an unrestricted right so such amounts, he may .

__ take a deduction in the year of restitution.. In many

instances of this nature, the déduction allowable in

later years ‘does not compensate the taxpayer ade-

quately for the tax paid in the earlier 7.

- * *.. . :

' “Tf the taxpayer included : an- item i: in gross income

in one taxable year, and in a. subsequent taxable:

year lie becomes entitled to a deduction because the

_. item or a portion thereof is no longér subject to his

: unrestricted ‘use, and. the amount of the deduction

~ is in excess-of $3,000, the tax for the subsequent year

.. is reduced -by either the tax attributable to the .de-

-~ “Anétion or the decrease.in the tax for the nrior year

attributable to the removal of the item, whichever is

greater.. Under the rule of the Lewis case (340 U. S.

_

&

|

%

eas

590 (1951)), the taxpayer is entitled to a deduction |

only in the year of repayment.’” (Emphasis sup- ~

Unier the rule espoused by petitioner there would be no

alternatives. The tax effect of repayment wouldélways be -

‘commensurate with the prior tax paid. Thus, Section

'1341(a)(4) would be vitiated. = :

_ The adjustment-of-taz-for-the-year-of-repaymen meth-:

od, which the petitioner sought to sustain in the Court

- Below, has been rejected by Congress many times. [Sze,

* Statement of Ellsworth C. Alvord, Hearings on H.R. 7378

Before the Senate @émmittee on Finance, 77: Cong. 2nd

‘Sess. 1784 (1942) ; American Law Institute, Federal Income

“Tax Statute, Sections X332, X333 (Feb. 1954 draft).] |

“Moreover, while seeking such judicial amendtnent to the

Revenue Code in this case, ‘the petitioner was: simultane-

ously urging the Court of, Claims to apply the very prin-~

ciple of the instant case where. that application redounded *

to its benefit, even though such result overruled a long-

standing precedent. See and compare, A.‘P. Sullivan Corp.

_v. United States, supra, overruling Perry v. United States,

‘supra. Pointing out that the taxing statttes must be liter-

ally applied as enacted, and without reference to equitable

considerations, the Government pérsuaded the Court of

Claims to overrzile its previous decision, héwever inequi-_

table the result to the taxpayer. In* doing so petitioner

based its argument on the very principles of law rekied

upon by the Court below in the tnstant’ case. ‘ |

+

. “ue

If pétitioner’s ‘‘tax equalization’”’ theory had any

foundation in law there was no need for Congress ‘to enact |

Section 134%. Thus the petition for certiorari asks this

Court fo ‘uvalidate Section. 1341 of the Intefnal Revenue

‘Code of 1954, or at the very least, subsection 1341(a) (4)

thereof.. , -

e —

* The. contention that the Court below “eonfused” the

~ terms ‘‘‘item’’ and ‘‘deduction’”? by regarding them as”

_ having the same meaning: is a pseudo-intellectual exercise |

ee

16 <p ae

without foundstion in fact. tt did not do so. The Court

below concerned itself with whether the deduction referred

_ to'in Section 1341(a)(4) must be limited by the tax paid

in prior years, and concluded that under all legal authority.

and legislative history it was not, and was never intended

to be so limited. As a matter of law, Section 1841(a) (5),

_which petitioner would have the Court substitute for Sec- -

tion 1341(a) (4), requires only that the ‘‘item’’ referred to

. be previously included in ‘‘gross income.’’ But the full

amount of the proceeds: from the sale of gas were reported

/ *. “in ‘*gross‘income’’ by respondent! The depletion allowance

has no relation to ‘‘gross income’”’ but rather to ‘‘gross in-

come from the property’’—terms of &rt in the field of taxa-

tion which are not synonymous. See Revenue Ruling 60-344,

_ 1960-2 CB 186. The Treasury Department often applies

_ the. distinction to maximize the collection of revenue.

The truth is that Congress has devised an orderly, uni-~

form method for dealing with questiops such as are involved

in the instant case. Petitioner has no compunctions about

strictly applying the letter of the law to taxpayers when

_ the result.is to its benefit. See A. P. Sullivan Corp. v.

= United .States, supra;_ see. also, Income Tax-Recovered.

Property Previously Deducted Included in Gross Income .

in Year of Recovery, 66 Michigan Law Review 381 (No. 2,

December 1967), especially footnotes 19, 24, 25. may

But ‘‘(t)he basic principle cannot be changed simply*

’--beeause it is of advantage to a taxpayer or to the Govern-

ment in a particular case that a different rule be followed.”’ -

Healy v. Commissioner, supra, at pages 284-285.

Under the statutory scheme of the Revenue Code there

are at least eleven situations in which the application of

_ Section 1341(a)(4). will result in a\ benefit to taxpayers.

‘Petitioner has not challenged these

. instant case which involves the depletion allowance, even

though such benefits have been appa’ ent for.many years.

‘There are probably as many situations where the results

are detrimental to taxpayers. It is submitted, ‘however,?

<A ata ee oman. clin teh

.

17

: wen oe

-that the law must be evenly applied and the entire statu- ~

tory scheme and all case law cannot be abrogated in order —

to penalize one taxpayer. See discussion of administrative

importance and fipeness for review, infra, pages 19-22.

It must .also be remembered that the recipients of the

amounts-paid by respondent must include the-total amount _

paid in their gross income. Any reshuffling of the statu- ©

tory scheme may thus involve not only Section 1341 but

other sections.of the Code as well. Such overall reforma- ~

tion, even if desirable, is the task of Congress, not of the

Courts. : : - " +e

Actually, the scope of the decision below is very limited.

The decision is not one of broad application or uniform

impact; whether it benefits or burdens:a taxpayer depends

“upon the specific circumstances in each case. See discus-

sion, infra, at pages 19-22. For example, if a loss had .

been.incurréd by respondent in the year of receipt despite

the depletion allowance, resulting in no tax benefit, would

the petitioner advance this ‘‘tax equalization’”’ theory? If —

-.the properties which produced the mineral had been aban-

- doned in the interim, could the ‘‘transactional’’ argument

still be made? It is submitted that the narrow issue raised

by the Government in this case is not ripe for review by

this Court. Too many questions have -been left unan-

swered. ° poe Sana : |

The Treasury Department is currently studying pro-

posed tax legislation which may well make the issue in this -

case moot. See New York Times, July 21, 1968, pages 1,

24. Respondent submits that the broad overall tax reform

_ urged upon the Court by this petition for certiorari should -

Best be left to Congress. ae

>

3. No double deduction is involved in this, case.

‘The assertion of “‘double deduction”? in the petition for

certiorari’ is specious at best and untrue at worst. No

“double deduction’’ is involved. The fact is that respond-

ent sold gas in the years 1952 through 1957. It was en-

18

titled tothe depletion allowance under the law because it

produced ‘and sold the mineral. Its mineral deposit was, in

fact, depleted—no question with regard to that is involved ~

in the case. In a later year, 1958, pursuant to litigation,

respondent was required to pay $505,536 to the purchaser's ~

of its gas upon the settlement of a suit for $700,000. The

deduction of the amount paid out no more constitutes a

double deduction for depletion than “does the deduction of

_ wage and salary expense, or any other expense of doing

- business where the money used to pay such expenses was

originally derived from mineral production on which deple-

- tion was allowable under the law.

Depletion is allowed because of the production of the

~ mineral -which is a wasting asset and as long as the mineral °

. is produced and sold the deduction is permitted under the

law as a restoration of capital. Not’all mineral producers

are entitled to the same rate and even in the same industry

the allowable amount varies widely depending upon net

income from the property limitations, overliead expense,

extraction and: processing costs,.and sales price of the

mineral. Even aside from consideration of the annual

accounting requirement there is a wide gulf between the

depletion allowance and an ‘ordinary business expense. .

_ The case of lifeld Co. v. Hernandez, 292-U. S. 62 (1934),

is not pertinent. There the Court refused to allow the tax-

payer to deduct the same economic loss twice, because to do

so would constitute the allowance of a double deduction,

but the situation there is far removed from that of the in-

’ stant'case. There the taxpayer experienced only one loss

and sought to deduct it twice. Here the‘taxpayer produced

- and sold the mineral and was legally and validly entitled to *

the depletion allowances in the years of sale. because its

mineral was depleted. In a later year it was required-to _

_ pay $505,536 to the purchasers and it was legally and

validly entitled to deduct the amount paid as a business

expense. It thus suffered two losses. Its ‘mineral was fore-

. ever depleted and its $505,536 was paid out.

peseinitininliaben snd

sai i ment AD nner esi AD HA. nani dhe ih uh anita d ety eAla sang hime nile we

Owen Vee ee ee ee arene

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PRR oa

19

There is no provision of tax-law that requires that the

depletion allowance be continually adjusted retroactively

depending. upon subsequent events, as petitioner would have

this Court believe. - :

3 -_—

-4. The case of Dauglas v. Commissioner does not support

‘the.propositiorf for which it is cited in the petition.

In Douglas v. Commissioner, 322 US. 275 (1944), this

Court held valid a Treasury Regulation which required that

_ depletion allowéd on advance royalties, received before ac- ~~"

‘tual production, must be restored if the mineral lease was

_ later cancelled and no production of mineral ever took place.

Petitioner failed to mention, however, that that Regulation.

provided, and current Regulations still provide, that the de-

pletion must be restored only if the lease expires, termi--

nates or is abandoned before any production is attained.

If any mineral is produced, however, no matter how much,

no restoration of depletion is required. See, Treasury

Regulations Secs. 1.612-3(a) (2), 1.612-3(b)(2); Dolores.

7 Crabb v. Commissioner, 41 B.T.A. 686 (1940) ; Waggoner

v. Commissioner, 47 B.T.A. 699. (1942), acquiescence 1945

CB 7; Revenue Ruling 1968-78, I-R.B. 1968-7, 18. In the -

instant case there was no failure of production and the

‘leases did not expire or terminate and were not aban-

doned. The mineral which gave rise to the depletion al-—

lowance was produced and sold and Respondent has con- |

tinued to produce minerals from all of the properties —

involved. . Respondent did not recover the mineral sold |

in ‘prior, years or any rights thereto.” It is gone forever.

The Douglas rule thus holds that if production is never |

obtained and, therefore, no depletion of the mineral occurs,

the depletion: allowance previously deducted must be taken

into income. But. if some production is obtained no zes-

toration is required because the original amount received

constitutes the sales price of, and hence the gross income

. from, the production of the mineral. This is the only work-

able rule. ‘Otherwise'a hypothetical value, for depletion ,

20

purposes, ‘not based 1 upon n ‘gross income from the prop-

erty’? would have to be established for all minerals by the

Treasury Department in each producing area throughout

the world. This would be wo Cireotty — to the mavenne

Code.

5. This case ot no: ‘administrative importance and is not

ripe fot revi by this Court.

Petitioner’s allegations that large einenate of revenue

will be jeopardized as a result of this decision and the deci-

sions in the natural gas rate cases under the jurisdiction

-of the Federal Power Commission, is without foundation.

In the first place, the Federal Power Commission has :

~ jurisdiction over sellers and transporters of gas as well as

producers, and customer refunds may have little or no tax —

effect when and if some amount thereof filters back to pro-

ducers—the only party entitled to a depletion allowance.

Even in that event, whether or not a given producer would

be affected by the application of the petitioner’s new ‘‘tax

- equalization’’ theory, would depend upon its peculiar cir- .

cumstances, such as overhead expense, cost of production,

- ‘profit or loss, ete., in ‘both the year of production and. the

year of, repayment. See and compare Sections 1341(a) (4)

and Section 1341(a)(5) of the Internal Revenue Code of

1954; see ning Production Co. v. United States, 349

F.2d 418 (Ct. Cl. 1965). In fact, if the petitioner’s theory

- were correct then the tax adjustment called for-here would

require that, after the Revenue Service made its adjust-

ment, the Federal Power Commission would have to re-

_ open the rate cases to adjust the rates which are formulated

by reference to the economics of the industry and which

includes depletion but not the tax effect thereof.

It should be noted that in the Permian Basin Area Rate

Cases, Nos. 90, et al., Oct. 1967 Term, decided May 1, 1968,

this Court pointed out (p. 71, footnote 115) that in ‘deter-

mining the average rate for basin producers an allowance

sos Sonesta pani abonnieren core ae tel thes .

at

for income taxes was not included, the Federal Power Com-

mission noting that the producers will incur no Federal in-

come tax liability at any return up to 15 percent. (The

Commission determined a rate of 12 percent.) The effect

of the ‘‘tax equalization?’ adjustment proposed by peti-

tioner would necessitate reconsideration in rate cases of

the very subject matter that the Federal Power Commis-

sion refused to consider because of its difficulty and vary-

ing impact upon individual producers. .

; In fact, the Internal Revenue Service itself has been

reluctant to.attempt the adjustment proposed by petitioner.

(See Technical Advice Memorandum From’ Natural Re-

sources Division to District Director, St. Louis, Mo. . Ap- .

pendix A, pp. 1a-3a.). Acceptance of the petitioner’s argu-

ment would not result,in certainty but could only result in _—

uncertainty in the application of the revenue laws. That

is why the Court of Appeals rejected the petitioner’s con-

tentions.

The Court below did not hold that a producer who makes

a refund is entitled to deductions of $1.275 for every dollar

refunded. It merely held that the tax effect of business

transactions cannot be held open indefinitely so as to: de--

termine their long-range economic results and that an other-

wise allowable current year business expense cannot be ©

_ made to depend on the original source of the funds used to .

pay it.

Respondent does not quarrel with the proposition that

the deduction referred to in Section 1341(a) (4) must be

defined by other Code provisions and the long series of

precedents supporting that definition. It merely reiterates

that no'Code provision or judicial precedent permits what —

petitioner proposes to do. The only case which even gives

a scintilla of support to petitioner’s contention, O’Meara

+ v. Commissioner, 8 T.C. 634 (1948), is inconsistent on its

face, was not reviewed by an appellate court, and the issue

-involved, being one of several, was obviously not clearly ,

22

presented to the Tax Court. There, too, the real issue was

whether the taxpayer was entitled to.any deduction at all.

No ordinary and necessary business expense was involved.

Without the transactional approach no deduction would

have been permitted. In any event, the theory applied

there is precisely the theory applied in Perry v. United

States, supra, which the Court of Claims, in A. P. Sullivan

Corp. v. United States, supra, lately held, at petitioner’ ~

urging, was erroneously decided. .

Further, in the interim after 0’M eara Congress enacted’

Section 1341 of the Code and in doing so made the clear.

distinction between a recomputation of prior year’s taxes

- and the current year’s deduction taken respondent, . '

Skelly Oil Company, in: the instant case. Application of

the. alleged O’Meara’rule, as defined by petitioner, would’ -

-nullify that distinction.

'"- The-'‘ paucity of litigation’’ on the subject i is clearly not

- because all taxpayers acceded to petitioner’s contention.

More likely it is either because the Revenue Service has

never before pressed such a theory (see Appendix A, pp.

1-3) or the theory is just ‘not applicable to all’ taxpayers

because of the necessity “Of — “individual facts

and gircumstances in order to apply it. - -

- Because of the many legal and factual problems that

must still be analyzed: and determined before any validity

can be ascribed to petitioner’s novel theory of ‘‘tax equaliza-

tion””’. (see, e e.g., Hugoton Production Co. v. United States,

supra) it is submitted that this issue is not ripe for review

~~. by this Court and no purpose would be served by further

* “review of this case, |

Ne ee eT

23

| Conclusion coe

The petition for a writ of certiorari should be-denied. 7

ied oat Respectfully submitted,

| ' Rosert J. Casey,

‘ | 120 Broadway,

i : ; New York, Ne ew York 10005.

Of Counsel: .

Tuomas E. Tyre,

Joun A. Craia, © ae |

Tuomas J. McCoy, Jz., oe /

Casey, Tznz, Craic & McCoy, |

.. 120 Broadway, . '- fe

“ New ‘York, New York 10008.

n

oe

la

_ Appendix A

. Jan 12, 1968

District Director :

St. Louis District Office , / *. |

Chief, Engineeri g and Valuation Branch aa

> National Office T: -E:N 2 Pn ° ,

[Taxyayer ‘name and address omitted). 4

AU:F 227 ¢ “eco .

s ; 3 :

Years: 1959, 1962-1965 .

"This is’in ‘reply to a memorandum dated November 9,°

1967, requesting technical advice as to the proper Federal

- income tax treatment of refunds on the sale of natural gas- <°».

ordered by the Federal Power Commission (F.P.C.) and the ;

' allocation th f to canes, overhead and other

yelated chayges.

The pertinent facts as ptesented i in your memorandum, a:

'” memorandum to Mr. Richard Moore, Technical Coordinator,

St. Louis, dated November 6, 1967, and a letter from the’

“ taxpayer dated November 3, 1967, are understood to be’ as

follows:

[Taxpayer’s name and address omitted.]

(Taxpayer}. is principally engaged in the production;

long distante transmission and ‘sale of natural gas.- Such .

gas is transported largely. in interstate commerce, and is

‘sold along its routé to some 100 local natural gas’ distribu-

tion companies for the purpose of resale, and also to various | 4g

industries for their own use. _[Taxpayer’s] natural gas -*.

transmission system ‘consists of four_parallel lines and

extends a distance of approximately 1,200 miles in and from.

the Hugoton Embayment in the states of Texas, Oklahoma, ‘te

and "Kansas, through the states of..Missouri, Illinois, In-_

diana, and Ohio, into the state of Michigan. [Taxpayer] ©

: produces. approximately 15 to 20 per cent of the naturale,”

gas. , transported and sold through its system.

1

~

Y

"Waaie the Natural Gas Act, (15. U.S.C: 717 et 6a):

on

the F.P. O. has regulatory jurisdiction over [taxpayer] as

an interstate natural gas ‘pipeline company. In ‘general, -

the F.P.C: regulates the prices [taxpayer] can‘ pay for

purchased gas and the prices at which it.can sell gas to

customers for resale. The major part of [ta¥payer’s]

a. are to customers for resale and are snbject*to F.P.C.

regulatory jurisdiction. The- FP 2. aiso promulgates ac-

counting ‘rules, performs compliance audits, and ‘generally.

oversees the accounting | and reporting practices of -

natural gas companies under its jurisdiction. |

Of the gas that [taxpayer] produces, the portion that as |

-sold at.the wellhead does not go into the. [taxpayer] system

and is not the subject of ‘this technical, advice request. The

remaining portion of the gas that [taxpayer] produces is

not sold onthe lease but enters the [taxpayer] transmission

pipeline system, along with purehased gas, and is trans-

ported to the various markets.. This latter described gas |

is the subjeet of this technical advice.

. The taxpayer’s depletion - computation. « on this latter

gas-was based on some unstated figure which, upon audit,

was ‘‘adjusted by the Internal. Revenue ‘Servios to reflect

‘depletion upon the royalty price used by [taxpaye!) in

fea making paynient to its royalty owners.’’ See November 6,

1967 letter referred to above.

_It is understood that the F.P.C.. in ordering the re-. |

funds, did: not allocate the amount. to be refunded to tlie

cost of produced gas, or to transportation. costs, or to

; overhead costs, ete.

_ The questions on which you have ony technical

advice may be stated as follows :

1. ‘Under the facts in n thia case the refunds as

. ordered by the F.P.C. are not broken down into any

parts, ie., no portion ‘of the sales price is allocated

; to the eoat of produced gas, transportation cei

3a

overhead costs, etc. :Should these total sums ré-

funded be allocated to any of the above mentioned

=e items??? . . eS

| 2. “If the value of any of the above refunds

- should ultimetely be allecated to gas. sales, at the.

‘ wellhead, should this amouht be reduced by the de-

pletion previously taken?’’. [Emphasis in ofiginal

5 | StS ork ene :

: Based upon: the ‘foregoing, the price of the gas at the

wellhead for depletion purposes, was. determined by. the

District Director, without regard to any sale at the wellhead

(which was absent in this case) or without regard to any

sale at the end of the transmission: line. Furthermore, the

refund directed to be made by [taxpayer], because of over-

charges to its customers, was determined. without regard ~

to any wellhead price of the gas. Therefore, no portion \.

‘of the sales price refund should be allocated to the cost

of produting gas, pie scape sap eae! ey grainy costs, ete.

In as much as it has been determine that, under the .

facts of this case, that no portion of the gas sales refund

should be allocated as set out above, the total of such

_ refund should not be reduced by depletion previously taken.

_ However, in those instances wherein refunds are allocated :

to gas sales at the wellhead, then the amount of refund must «

be reduced, by the depletion previously taken. [Emphasis

- supplied by Respondent. ] | i le