# Brief for the Respondents in Opposition — United States v. Skelly Oil Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0084%3A03 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for the Respondents in Opposition - **Published:** January 1, 1969 - **Citation:** 394 U.S. 678 ## Text tf SAT, ) ) i. ; £1LED 2 @PREME COURT. - ra | : . i "SOHN. DAVIS, CLERK, mmm | 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 ......... 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 ° \ 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 ™ Ped . 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0084%3A03. Public record. Not legal advice.