Document: 506 U.S. 546 113 S.Ct. 941 122 L.Ed.2d 330 UNITED STATES, Petitionerv.William F. HILL et ux. No. 91-1421. Argued Nov. 2, 1992. Decided Jan. 25, 1993. Syllabus * Under § 57(a)(8) of the Internal Revenue Code 1954, 26 U.S.C. (1976 ed.), "the excess deduction for depletion . over adjusted basis of" "property (as defined in [§] 1614)" is an "ite[m] tax preference" on which a taxpayer must pay "minimum tax" year question. See 56(a). In computing minimum taxes due their interests oil and gas deposits years 1981 1982, respondents Hill calculated allowances according to "percentage depletion" method, included interests' bases unrecovered costs certain depreciable tangible items used drilling development (machinery, tools, pipes, etc.), as identified 1.612-4(c)(1) applicable Treasury Department regulations. The Commissioner disputed that inclusion, assessed larger based exclusion from mineral bases. Hills paid resulting deficiencies filed refund claim, denied. Claims Court granted summary judgment ensuing suit, Appeals affirmed. Held: term "adjusted basis," 57(a)(8), does not include Treas.Reg. 1.612-4(c)(1). Pp. ____. (a) definitional scheme established by accompanying regulations suggests strongly "property" with concerned excludes just those improvements wish basis. Section 614(a) defines 57(a)(8)'s purposes "each separate interest owned each deposit." Reg. 1.611-1(d)(4) "mineral deposit" "minerals place," while 1.611-1(d)(3) enterprise" deposit or improvements, if any, production gas." (Emphasis added.) Because these regulatory definitions were well-established when Congress passed it reasonable assume relied accepted distinction between them its reference 614. This conclusion confirmed 1.57-1(h)(3)'s incorporation into 1016 Code, ed. Supp. V), provides rules making "[a]djustments basis" determining amount gain loss recognize he sells otherwise disposes property. To follow 1016(a)(2)'s directive subtract his original property "not less than allowable" exhaustion, wear tear, obsolescence, amortization, depletion, determine whether parts item sold are subject different treatments, treat properties under section. Depletion depreciation two major categories treatment, review pertinent regulation provisions reveals boundaries virtually impassable. Thus, depletable associated equipment together, requires seller them. light this rule Hills' failure identify any exception rule, may be inferred deposits. (b) astonishing results reading manner urged Hills, whereby at issue here would shelter, capital they represented, percentage many times themselves. It hard believe enact limit benefit taxpayers could realize "items preference," only define one way create even greater proportional investing items, do so oblique fashion that, far appears, has no precedent federal income history. P. (c) Contrary contention, other foreclose foregoing conclusion. First, 1.612-1(b)(1)'s reference, title, "[s]pecial rul[e]" excluding amounts recoverable through deductions "cost" cannot have been intended indicate such should, general calculation since allow title subsection defeat entire framework basis, 1.612-1(b)(1) was issued long before enacted. Second, run counter 1.612-4(b)(1), specifies intangible adjustments relate. There reason why regulation's deviation principles allocation, be, should force Government, Court, another deviation. 945 F.2d 1529 (CA Fed 1991), reversed. SOUTER, J., delivered opinion unanimous Court. Kent L. Jones, DC, petitioner. Richard B. Robinson, Denver, CO, respondents. Justice SOUTER 1 §§ 56 56, allowable taxpayer's interest. question presented includes We hold cover costs. 2 William Lola E. exploration business, and, returns respective years, deducted $439,884 $371,636 respect interest's question.1 interests, portions originally purchase but forth) exploit Having thus reduced preference $29,812 $26,736 1982. 3 inclusion deposits' bases, exclusion. $30,963 $18,733, then sued United States, petitioner here, favor. 21 Cl.Ct. 713 (1990). Federal Circuit (1991). importance fisc, we certiorari, 503 ----, 112 1758, 118 422 (1992). now reverse. II 4 An producer ordinarily depreciate recover (before disposition) investment land drills wells because process producing taxable out use up land. See, e.g., 1.167(a)-2 (disallowing "land apart physical added it"). Part price fee simple land, however, represents right extract subsurface deposits, (unlike land) "wasting assets," gradually depleted minerals removed. owner wasting assets, basic theory, accordingly allowed "reasonable allowance depletion," 611(a) "to compensate [him] part exhausted production, gone, owner's assets remain unimpaired." Paragon Jewel Coal Co. v. Commissioner, 380 624, 631, 85 1207, 1211, 14 116 (1965). 5 degree, practice theory drifted apart. require calculate whichever methods produces current year. 1.611-1(a)(1); see also 613(a) ed.) ("In case shall section 611 computed without [concerning depletion]"). first "cost remains firmly moored rationale articulated Jewel. estimates number units deposit, deducts appropriate portion deposit's unit extracted sold. 1.611-2; 1.612-1. When sum prior equals cost plus additions,2 "[n]o further allowed." 1.611-2(b)(2). second ties. generously allows extracting deduct specified gross income, exceeded deposit. 613 V); 1.613-1. For issue, produced method. 6 depletion's gleam dimmed tax.3 "tax "[w]ith [interest deposit],4 [mineral interest] end (determined regard year)." turn, extra 15% enumerated tax-preference 57(a) exceeds specific permitted 56. dollar-for-dollar every outlay can interest, like list eligible outlays possible. 7 dispute about costs, Regulations implementing 263(c) 612 Code. grants option against "intangible costs." distinguishing costs" "capital items," parties refer "tangible costs": 8 "The apply expenditures acquires considered having salvage value. Examples actual materials structures constructed property, pipe, casing, tubing, tanks, engines, boilers, machines, etc. These returnable depreciation." 1.612-4(c)(1).5 9 these, extent already recovered depreciation, add calculating tax. III 10 enter race handicap. As noted, n. 4, supra, 614, speaks terms ed). A 1.611-1(d)(4), neighboring term, enterprise," mining (emphasis added). time 25 Fed.Reg. 11796 (1960); Pub.L. 91-172 301, 83 Stat. 580, 582, think contained Thus property's 11 They assert, (and dispute) occurs operative provision regulations, concerns allocation enterprise On argue limited function "assist[ing] identifying operating acquired unit." Brief Respondents 18, 21. Consistently view, note, directs us "see thereunder [f]or determination property." 1.57-1(h)(3). computation argue, independent definition regulations; thus, implications term's extend case. 12 agree proper place look concerning adjustment basis; conclude wholly predicated on, rather of, understanding distinct "improvements" within meaning 611. 13 together type 1001(a) rule: determined subtracting "amount realized." 1011(a) "basis 1012 [or Code] ), provided 1016." basis." taxpayers, acknowledging centrality 1016, seize last phrase addressing section: 15 properly expenditure item, chargeable account, including betterments made 1.1016-2(a). 16 ordinary meanings "betterments," say, all valuable additions more mere repairs; incurred increase value specifically referred "improvements," 1.611-5; therefore, 1016. 17 chosen passage, carry weight ask bear. purpose "including property" 1.1016-2(a) provide guidance particular cases whether, accounting purposes, expense existing "property," treated own. Rather, ensure coordination 263, "improvements betterments" (which probably read unit) borrowed. 263(a)(1) currently "paid new buildings permanent estate."6 V). said "[t]he 263 reflect principle income. serves prevent utilizing attributable, later asset becomes producing." Idaho Power Co., 418 1, 16, 94 2757, 2766, 41 535 (1974). ensures fulfillment 263's implicit promise: If deemed "improvement betterment" will able later, either form recovery upon sale realized.7 18 deciphering answered, relying embodied 1016's directives. our most important mandate found 1016(a)(2), exchanged [for depletion] subtitle laws." words, ever took selling, must, reduce least amount.8 19 directive, who bought apartment building sits single how much went each, (if produce income) exchange subtracted taken not; there subtraction land's 1.167(a)-5 (requiring apportionment "a combination nondepreciable lump sum, example, land"). 20 Although some flexibility treatment,9 almost completely dealing falling categories, cannot, matter, choose category other; not, decide Nor "improvement" pleases: say roof, adding (or assets), whereas grading site, Rev.Rul. 74-265, 1974-1 Cum.Bull. (distinguishing land). treatment. half-century ago, "[t]h[e] runs [Internal Code]." Choate 324 3, 65 469, 470, 89 L.Ed. 653 (1945). Code's "does natural resources 611." 1.167(a)-2. Accordingly, itself carefully appends, timber, qualification "and peculiar conditions case."10 ed.); 1.611-5(a). implement distinction, 611, mentioned above, separately improvements." 1.611-1(d)(3). defining "[w]hen unit, proportion total bears acquisition." 1.611-1(d)(4); 1.611-2(g)(2)(vii) statement attached return showing "[a]n among surface production"). designed isolate depletion. 22 generally treating "more land," tools sale, 167 required him keep deductions. Since, point out, incorporates infer IV 23 Our astonishing, circuitously achieved urge. challenge "[i]n event credited account reserve account." recorded accounts. regulation, shelter result, itself. $21,000 straight-line $1000, $20,000 year,11 $19,000 year, years. At 20th fully depreciated, value, continued own it. $210,000, cost, tax; beginning 21st $1000 per remained hands. rate 15%, benefit, investment, $31,500 alone, additional item. know, history V 24 contend yet discussed 612, which, adjective, independently reinforce conclusion: timber include: "(i) Amounts deductions, deferred expenses, 27 "(ii) residual operations." 1.612-1(b)(1). 28 This, course, exactly reached after detour applies terms, depletion; 1.612-1(b) "Special rules." Therefore, "general rule" "[a]mounts deductions," excluded "special rule." But argument proves too much. stuck logic, claim operations" absurdity try to, support. answer arguable suggestion pitted wins, infelicity. 29 infelicity understandable here. unconnected concept annual measured relation nor cumulative concepts meet provisions, 57(a)(8). Since enacted, 11801 91-172, applied After inserted where expect it: That 1.57-1(h)(3), unfortunately contains correlative 612. 30 specifying ed., V) expenses chooses instead capitalize sort bins. Costs "represented pre-existing relate, initial entry account. 1.612-4(b)(2). represented 1.612-4(b)(1); 1.612-4(d) fails elect correctly, "he elected property"). latter altogether option. fail logic argument. allowing deviates another. explained fact deviation.12 31 Reversed. syllabus constitutes prepared Reporter Decisions convenience reader. States Detroit Lumber 200 321, 337, 282, 287, 50 499. All references related during issue. cited codified 1982 editions Regulations. course enacting 1986, redesignated 57(a)(1) 1986. Tax Reform Act 99-514, 701(a) 701(f)(1), 100 2333, 2343. October 1992, enacted Energy Policy 102-486, 106 2776. 1915(a) amends December 31, 613A(c) taxation alternative infra. Allowable property," clearing ground, draining, road making, surveying, geological work, grading, drilling, shooting, cleaning wells, opts deducting expenses. 1.612-4(b)(1). discussion infra, Equity Fiscal Responsibility 97-248, 201, 96 411, repealed noncorporate 201(c)(1), 201(e)(1). same time, preference, "alternative income." 201(a). While simply normal provision, 55 (1982 recalculation set rules. imposed graduated income"; both liability liability. income," relevant subsequent supra. 614)." "[f]or mines, deposits," tract parcel land." (The remainder 614 detailed may, sometimes combine "property".) 1.614-1(a) makes Revenue] Code." "labor, fuel, repairs, hauling, supplies, etc., connection operation facilities 1.612-4(c)(2). "charged off expense." Ibid. longest lineages 1864 "no buildings, betterments, estate." 117 1864, 282. wording 1894, 553, 2(B) 1913, 38 167. adopted 1918. 215(b) 1918, 40 1069. language apparently originated passage House Committee Report 1924, discussing progenitor H.R.Rep. 179, 68th Cong., 1st Sess., (1924) ("Under charges, sale"). forerunner Treas.Regs. 65, Art. 581 (1924). tracing word text might hope insight Two circumstances dash hope. betterments," unrelated thereunder. payments "serv[e] enhance what essentially asset." Lincoln Sav. & Loan Assn., 403 345, 354, 91 1893, 1899, 519 (1971). So payment "creating" "enhancing" exists, need Here, precisely phrased erroneously case, actually deducted, resulted "(by allowed) reduction [his] taxes." 1016(a)(2)(B) 1016(a)(2)(A). furnace installed; also, circumstances, "composite" combines furnace. 1.167(a)-7 (describing "group," "classified," "composite," component accounts property). 7, supra carries 263(a). offset year." Assuming placed service year's depreciation. service. cite Service Technical Advice Memorandum 8314011 (Dec. 22, 1982), holds unamortized 616 acknowledge, memoranda "may precedent." 6110(j)(3) sets system treatment entirely here; particular, 616(c) mandates 616(b) "shall mine

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