Commissioner v. Engle
464 U.S. 206 (1984)

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U.S. Supreme Court

Commissioner v. Engle, 464 U.S. 206 (1984)

Commissioner of Internal Revenue v. Engle

No. 82-599

Argued October 11, 1983

Decided January 10, 1984*

464 U.S. 206

Syllabus

In response both to the public outcry concerning the United States' growing dependence on foreign energy and to the alleged excessive profits that major integrated oil companies were earning, the Tax Reduction Act of 1975 repealed, as applied to the major integrated oil companies, the percentage depletion allowance authorized as a deduction from taxable income, but exempted independent producers and royalty owners from the repeal so as to encourage domestic production of oil and gas. The Act added § 613A to the Internal Revenue Code. That section provides that a percentage depletion allowance under § 611 for such independent producers and royalty owners shall be computed in accordance with § 613

"with respect to . . . so much of the taxpayer's average daily production of domestic crude oil as does not exceed the taxpayer's depletable oil quantity"

and "depletable natural gas quantity." During 1975, respondents (husband and wife) in No. 82-599 assigned their oil and gas leases to third parties, while retaining overriding royalties. As partial consideration for these assignments, respondents received $7,600 in advance royalties. This constituted the entire income received from the property in 1975, since there was no oil and gas production that year. On their joint federal income tax return for 1975, respondents claimed a percentage depletion deduction equal to 22% of the advance royalties. The Commissioner of Internal Revenue disallowed the deduction because the advance royalties were not received "with respect to" any "average daily production" of oil or gas. The Tax Court upheld this determination, but the Court of Appeals reversed. In No. 82-774, petitioner joint owners leased their oil and gas interests in 1975 to various lessees. Under the leases, petitioners were to receive both royalties from oil and gas produced and annual cash bonuses even if no oil or gas was produced. In 1976, oil and gas was discovered on the property and was produced in substantial amounts. Petitioners claimed depletion deductions on both the bonuses and the royalties received in that year.

Page 464 U. S. 207

The Commissioner disallowed the deduction on the bonuses, again because they were not received "with respect to" any "average daily production." After paying the resulting deficiencies, petitioners filed a suit for refund in the Court of Claims, which held for the Commissioner.

Held: Section 613A was not intended to deny the allowance for percentage depletion on advance royalty or lease bonus income altogether; rather, §§ 611-613A entitle taxpayers to such an allowance at some time during the productive life of the lease. Pp. 464 U. S. 214-227.

(a) Any reasonable interpretation of § 613A must harmonize with the section's goal of subsidizing the combined efforts of small producers and royalty owners in the exploration and production of the Nation's oil and gas resources. The Commissioner's interpretation -- under which taxpayers would receive percentage depletion on income derived from oil and gas interests only if the payment associated with that income could be attributed directly to specific units of production, and which anomalously suggests that a Congress intent on increasing domestic production by small producers included substantial economic disincentives in the same legislation -- does not comport with this goal. By contrast, allowing percentage depletion on all qualified income makes available the maximum public subsidy that Congress was willing to provide. Pp. 464 U. S. 217-220.

(b) The legislative history of § 613A discloses a clear congressional intent to retain the percentage depletion rules that existed in 1975, and under which taxpayers leasing their interests in mineral deposits were entitled to a percentage depletion on any bonus or advance royalty whether there was production of the underlying mineral or not. Pp. 464 U. S. 220-223.

(c) When § 613A is considered together with related Code sections and in light of the legislative history, it is clear that Congress did not mean to withdraw the percentage depletion on lease bonuses or advance royalty income arising from oil and gas properties. Section 613A clearly provides that income attributable to production over a certain level will not be eligible for percentage depletion, but nothing in the statute bars such a depletion on income received prior to actual production. To the contrary, so long as the income can be attributed to production below the established ceilings, lease bonuses and royalty income come within the four corners of the percentage depletion provisions. Pp. 464 U. S. 223-224.

(d) Since the Commissioner's interpretation is unreasonable, this Court will not defer to it. The Commissioner has not shown any "insurmountable" practical problems that would render his position more tenable. While § 613A's various production requirements and limitations make accurate calculation of percentage depletion allowances difficult

Page 464 U. S. 208

in the absence of production figures, these problems can be resolved in a number of reasonable ways, as, for example, by requiring lessors to defer depletion deductions to years of actual production or to adjust deductions taken with amended returns. The Commissioner cannot resolve the practical problems by eliminating the allowances altogether. Pp. 464 U. S. 224-227.

No. 82-599, 677 F.2d 594, affirmed; No. 82-774, 231 Ct.Cl. 642, 689 F.2d 1017, reversed and remanded.

O'CONNOR, J., delivered the opinion of the Court, in which BURGER, C.J., and POWELL, REHNQUIST, and STEVENS, JJ., joined. BLACKMUN, J., filed a dissenting opinion, in which BRENNAN, WHITE, and MARSHALL, JJ., joined, post, p. 464 U. S. 228.

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