The Effects of the 1969 Tax Reform Act on Petroleum Property Values
Authors: Dutton Granville 
Published: December 2007

The 1969 Tax "Reform" Act has seriously crippled the capability of the U.S. oil industry to meet the challenge of providing the tremendous energy needs of the 70's. If this challenge is not met, it will have been caused in great part by those in the Federal government, Congress, and the news media who have so successfully maligned the U. S. petroleum industry.

Introduction
The 27 1/2 percent depletion rate had been in effect 44 years before its reduction to 22 percent by the Tax "Reform" Act of 1969. Mineral production payments had been treated as economic interests in property since the courts established this principle in a landmark decision' rendered in 1940. During the years in which this treatment was allowed, a considerable number of regulations were adopted governing the application of these laws to petroleum transactions. These tax provisions significantly affected the value of petroleum properties and were naturally incorporated in the standard methods of evaluating them.
As of Sept. 1, 1970, the new regulations, applicable to the revised statutory sections dealing with percentage depletion, carved-out and retained production percentage depletion, carved-out and retained production payments and the minimum tax, had not been issued. payments and the minimum tax, had not been issued. Although such regulations when issued could alter the impact of the new tax laws, I shall discuss the apparent effects of the statutory revisions upon the evaluation of petroleum properties.
Percentage Depletion Percentage Depletion Depletion as applied to oil and gas reserves is the act or process of reducing the quantity of the exhaustible reserves of hydrocarbons. Since such depletion constitutes the using up of the capital represented by such reserves, the value of the reserves depleted by production is not income and therefore should not production is not income and therefore should not be subject to an income tax. The problem is how to value the produced reserves properly so as to permit a reasonable deduction from production revenues for this depletion of capital.
The familiar history of the 27 1/2 percent rate of depletion allowance is that it was a frank compromise between the 25 percent and the 30 percent rates proposed by the two houses of the U. S. Congress. Less proposed by the two houses of the U. S. Congress. Less familiar is the fact that the establishment of this rate did away with a complex, cumbersome and litigious method of attempting to place a "windfall" value on hydrocarbon discoveries.

Statutory Provisions
The 1969 Act, which applies to all taxable years beginning after Oct. 9, 1969, made no significant changes in the language of the percentage depletion provisions of the income tax laws; the changes were provisions of the income tax laws; the changes were in the amounts allowed in lieu of cost depletion. In addition to the reduction from 27 1/2 to 22 percent in depletion allowance on production of oil and gas wells, there was a reduction from 23 to 22 percent on sulfur, uranium and many other U. S. minerals. Oil shale, gold, silver, copper and iron mined in the U. S. remain at 15 percent, but the depletion rate was reduced to 14 percent on foreign production of these items. Also reduced from 15 to 14 percent were bentonite, certain other clays, rock asphalt and metal mines.
JPT
P. 1475