Opinion ID: 348408
Heading Depth: 2
Heading Rank: 4

Heading: Extraction and Administrability

Text: 41 A fundamental tenet of our federal income tax system is the principle that before gain or loss is recognized there must be a taxable event. Whether a transfer of appreciated property pursuant to a property settlement agreement, United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962), or the seizure by a foreign power of a corporation's foreign assets, United States v. S.S. White Dental Mfg. Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120 (1927), the common question is whether a taxable event has occurred. Mere fluctuation in value of assets owned by a taxpayer is not sufficient to allow recognition of loss or force recognition of gain. The sale of property, its destruction or its abandonment as worthless constitute evidence of losses or gains which are fixed by identifiable events. United States v. S.S. White Dental Mfg. Co., supra, 274 U.S. at 401, 47 S.Ct. at 600. 42 No deduction is allowed in the former situations in part because there is no sufficiently observable, verifiable indicator that consistently provides sufficient information by which to recognize the value change for tax purposes. A deduction is allowed in the latter situations in part because the specified events provide such information. 43 In the case of the depletion deduction, extraction is precisely the kind of observable change accompanied by sufficient trustworthy information to make tax recognition appropriate. Unlike the case of depreciating an asset according to a fixed schedule, the depletion of a natural resource lends itself to false claims that a requirement of extraction helps prevent. This, then, is the function that Congress may have thought extraction would serve in the administration of the depletion deduction provisions. Given this functional relationship between extraction and the depletion deduction, the assumption apparently shared by Congress, the IRS, and the courts that depletion was designed for the extractive industries makes a good deal of sense. Without the frequent references in the legislative history and current regulations to extraction or severance, the existence of this functional relationship could not justify our holding. Without some functional relationship between extraction and depletion, one might be tempted to dismiss these references to extraction as careless remarks. Given both, however, the picture of the depletion deduction as bound up with extraction emerges with a rational aspect. 44 To be sure, in the case at bar the taxpayer presents us with a jury finding that its peat is subsiding at a determinate rate. But in many similar cases it will be difficult and will entail considerable administrative costs to the government to verify the rate by which an asset in place is being exhausted. Wind and water erosion cause irreplaceable soil losses in various parts of the country. In most cases, this is a consequence of cultivation like the depletion of Duda's peat soil. Moreover, the oxidation of organic matter occurs in all cultivated soils, albeit in different degrees and at different rates of subsidence, just as it occurs in Duda's peat. Finally, we might consider the case of a farmer who claims, justifiably, that if Duda is allowed a deduction for its peat, he ought to be allowed a depletion deduction for the exhaustion of the nutrients in his soil attributable to, say, cotton farming. There seems no reason why nutrients, which largely determine the fertility of a particular parcel of land, should not be considered natural deposits. Once the farmer crosses this threshold it will be an easy matter to show, in principle, that long term cultivation depletes the nutrients despite such short term devices as allowing the land to remain fallow. Although the farmer may purchase fertilizer to replace the nutrients, that is no different in principle from requiring Duda to replace its peat. The farmer may show all this in principle, but as a practical matter the administration of the depletion deduction in these sorts of cases raises whole new sets of difficulties. 11 45 It may be that Congress intends to grant deductions in these cases. If so we must insist that it address itself specifically to the case of a natural asset wasting in place. The Code abounds in specifics and delights in the particular; in light of the significant functional difference between the case of an asset wasting in place and an asset that is depleted by extraction, and in light of the legislative history of § 611 and the pertinent treasury regulations, we decline to extend the general depletion provisions to the particular situation with which Duda confronts us.