Document: 464 U.S. 206 104 S.Ct. 597 78 L.Ed.2d 420 COMMISSIONER OF INTERNAL REVENUE, Petitionerv.Fred L. ENGLE et ux. Philip D. FARMAR, al., Petitioners v. UNITED STATES. Nos. 82-599, 82-774. Argued Oct. 11, 1983. Decided Jan. 10, 1984. Syllabus In response both to the public outcry concerning United States' growing dependence on foreign energy and alleged excessive profits that major integrated oil companies were earning, Tax Reduction Act of 1975 repealed, as applied companies, percentage depletion allowance authorized a deduction from taxable income, but exempted independent producers royalty owners repeal so encourage domestic production gas. The added § 613A Internal Revenue Code (Code). That section provides under 611 for such shall be computed in accordance with 613 "with respect . much taxpayer's average daily crude does not exceed quantity" "depletable natural gas quantity." During 1975, respondents (husband wife) No. 82-599 assigned their leases third parties, while retaining overriding royalties. As partial consideration these assignments, received $7,600 advance This constituted entire income property since there was no year. On joint federal tax return claimed equal 22% Commissioner (Commissioner) disallowed because royalties to" any "average production" or Court upheld this determination, Appeals reversed. 82-774, petitioner leased interests various lessees. Under petitioners receive produced annual cash bonuses even if produced. 1976, discovered substantial amounts. deductions bonuses, again they production." After paying resulting deficiencies, filed suit refund Claims, which held Commissioner. Held: Section intended deny lease bonus altogether; rather, §§ 611-613A entitled taxpayers an at some time during productive life lease. Pp. 214-227. (a) Any reasonable interpretation must harmonize section's goal subsidizing combined efforts small exploration Nation's resources. Commissioner's interpretation—under would derived only payment associated could attributed directly specific units production, anomalously suggests Congress intent increasing by included economic disincentives same legislation—does comport goal. By contrast, allowing all qualified makes available maximum subsidy willing provide. 217-220. (b) legislative history discloses clear congressional retain rules existed leasing mineral deposits whether underlying not. 220-223. (c) When is considered together related sections light history, it did mean withdraw arising properties. clearly attributable over certain level will eligible depletion, nothing statute bars prior actual production. To contrary, long can below established ceilings, come within four corners provisions. 223-224. (d) Since unreasonable, defer it. has shown "insurmountable" practical problems render his position more tenable. While 613A's requirements limitations make accurate allowances difficult absence figures, resolved number ways, as, example, requiring lessors years adjust taken amended returns. cannot resolve eliminating altogether. 224-227. 677 F.2d 594 (7th Cir.1982), affirmed; 231 Ct.Cl. 642, 689 1017 (1982), reversed remanded. Carter G. Phillips, Washington, D.C., C.I.R. Thomas J. Donnelly, Pittsburgh, Pa., Fred Engle, Marvin K. Collie, Houston, Tex., Farmar, al. Justice O'CONNOR delivered opinion Court: 1 These consolidated cases present question (Code), 26 U.S.C. 611-613A, entitle lessees interests. 2 * A. 3 Ever enacting earliest laws, subsidized development our nation's Toward end, allowed holders deposits, including wells, deduct incomes larger two allowances: cost percentage.1 amortize wells total lives.2 statutorily specified "gross income" generated property, irrespective costs incurred.3 Through provisions, permitted recover investments have made generate additional capital further 4 Taxpayers historically preferred percentage, opposed cost, are good benefits significantly greater. Prior well-settled others bonus4 royalty5 received, regarded "payment extracted," Herring Commissioner, 293 322, 324, 55 179, 180, 79 L.Ed. 389 (1934), "return pro tanto [the lessor's] investment anticipation its extraction ." Palmer Bender, 287 551, 559, 53 225, 227, 77 489 (1933). Though had once argued should apply income,6 determined property" accordingly subject depletion. See supra, U.S., 327-328, S.Ct., 181. based not, least short run, substance itself. 5 Even pre-1975 law, however, eventually Lessors receiving without being been required recapture restore previously deducted amounts income. Douglas 322 275, 285, 64 988, 994, 88 1271 (1944). Furthermore, one each dollar always reduce paid lessors. Helvering Twin Bell Oil Syndicate, 312, 174, 383 (1934). Thus, those who large small, single extracted land. 6 1970s, brought about abrupt redirection policy. Escalating prices Arab embargo awakened reliance sources. Some thought reaping public's expense, reinvesting little concomitant subsidies production.7 responded repealing companies. Pub.L. 94-12, 89 Stat. 26, 47-53. At time, new 613A, provided that: 7 "[T]he to— 8 (A) depletable quantity; (B) 9 applicable (determined table contained paragraph (5)) deemed subsection purposes section." 613A(c)(1).8 10 beginning year met terms provision allowance.9 B 11 Engle wife Wyoming Engles $7600 received. view, amendments Code. 12 Court, judge dissenting, determination. 76 T.C. 915 (1981). It agreed tied Engle's receipts production.10 But Seventh Circuit (CA7 1982). found Congress' motivation "small producers"—namely, subsidize equally Id., 600. therefore that, Code's long-standing treatment royalties, interpreted authorize property. 601-602. 13 Also families Farmar A.A. Sugg, 46,515 acres land Irion County, Texas, leases, Farmars Suggs 20% sold value leases. also sum continuing sums through 1979, payable type Claims. 1017, concluded "[t]his statutory language regularly linking indicates us wanted allowable 'with to' from, connected with, year." App. Pet. Cert. p. 8a. attributable, id., 16a. 14 sought writ certiorari adverse decision Circuit, We granted writs we decide effect II 15 provisions Rather, which, title indicates, "Limitation Percentage Depletion Case Gas Wells." 613A. Our sole task case determine Congress, "limitation," 16 starting point, course, authorizes producer owner otherwise disqualified, see 613A(d), compute "the with" 613's concept. 613A(c)(1). stipulates "be quantity Ibid. take different positions what means. 17 contends finally adopts he took half century ago case—namely, year.11 He points 613A(c)(1)' requirement 613A(c)(2) (10)'s repeated references "aggregate production," "production year," calendar From reference points, redefines year.12 year, concludes intend Brief 18-24. 18 taxpayers, suggest intend, change all. contend regardless physical occurred claimed. constitutes limitation amount of, rather than prerequisite to, taxpayer may claim. simply reenacted: prospective extraction. conclude do occurs Respondents pp. 5-9; 7-16. 19 taxpayers' interpretations exhaust possible readings linguistic maze. For read timing, though availability, allowance.13 potentially eventual deferred attributed, allocation method, precede receipt. receipts, capitalized amortized against extraction, rates quantities subsequent years.14 20 Each reconciled "production" "taxable year" completely inadvertent, gives meaning references. duty then "to find most fairly said imbedded statute, sense harmonious scheme general manifested." NLRB Lion Co., 352 282, 297, 330, 338, 331 (1957) (Frankfurter, J., concurring part dissenting part). circumstances enactment particular legislation particularly relevant inquiry, Watt Alaska, 451 259, 266, 101 1673, 1677, 68 80 (1981), now turn. 21 country's earning. production15 improve competitive producers"—the independents owners—vis-a-vis ones.16 goal, put, therefore, 22 If adopted, interested favorable use financing arrangements provide pre-payments spread non-production periods or, importantly, shift risks parties better able bear them.17 naturally begin demanding offset increased expense delayed receipt payments, bunching, risk bearing. Lessees forced pay will, turn, less money purchase extract minerals therefrom. solely reasons, choose forms and, devote fewer dollars reserves. short, enabling legislation. Such effort increase owners. 23 Ironically, defends crisis 1975. Reply 6. argues strong incentives produce immediately No disputes premise. Requiring indeed optimize early suggested production; eliminated Eliminating deductions, deferring them, thereby shrink Smaller subsidies, reduced smaller absolute initial premise—that production—is C 24 reasonableness measured process enacted. introduced, neither bill, H.R. 2166, 94th Cong., 1st Sess. (1975), nor accompanying Ways Means Committee report, H.Rep. 19, wells. introduced debate House floor. 121 Cong.Rec. 4651-4652 (1975). floor amendment contain exemptions ultimately enacted exemption when 2166 reached Senate added. 7813 slight alteration Conference Committee, Floor. 25 either Senate's Committee's suggested. conferees maintain allowance, entirety, whose yearly quantities.18 explained Report, proposed legislation: ". retains percent extent 2,000 barrels day, 12,000,000 cubic feet. Where allocated between types 27 28 conference substitute follows providing gas." H.Conf.Rep. 120, Sess., 67-68 U.S.Code Cong. & Admin.News, 54, 132-133 (emphasis added). 29 exempting repeal, expressed existed. Again, harmony interpretation. 30 attempts support previous Congress. 17488, 93d 2d (1974), exempt repeal. report 17488 emphasized "a lessor lands lump installments thus exemptions." H.R.Rep. 1502, 46 (1974). " '[t]he idea special entities, expressly involving very air unlikely known several, many, members 613A,' almost certainly reduction bill." (quoting 70a). 31 reported out another lieu 17488. bill retained differed many other respects. itself,19 reflected Moreover, Senate, House, 2166,20 dismiss reconstruction mere wishful thinking. "air" evidence definition aloft it.21 D 32 noted true setting complex revenue acts, however precise language, ascertained apart sections, mind isolated integral part." Morgan's Inc., 121, 126, 60, 62, 232 Commissioner's, taxpayers', commentators' viewed terms, becomes mean, suggests, 33 concerned shrinking levels assisting compete ones. payments haste, surprisingly defined class levels. agree can, ceilings established, Lease extracted, 613(a) computation for, III 34 Unable persuasive text, purpose, reminds "choice among courts," National Muffler Dealers Ass'n, Inc. States, 440 472, 488, 99 1304, 1312, 59 519 (1979), choice, "implement mandate manner," upheld. States Correll, 299, 307, 445, 450, 537 (1967). "But principle [only sets] framework judicial analysis; displace [Commissioner's interpretation] unreasonable," Cartwright, 411 546, 550, 93 1713, 1716, 36 528 (1973) (similarly refusing unreasonable Commissioner). 35 Holders consistently past 50 years. 489. long-run view relation allow occurs. 1271. usually presume "Congress aware [our long-standing] adopt[s] re-enacts [the] [explicit] Lorillard Pons, 434 575, 581, 98 866, 870, 40 (1978); Albemarle Paper Co. Moody, 422 405, 414 n. 8, 95 2362, 2370 n.8, 45 280 Had meant eliminate believe addressed decisions contrary explicitly. Mastro Plastics Corp. NLRB, 350 270, 289, 349, 361, 100 309 (1956). short-run odds scheme. modified plainly explore develop deposits. 217-218. Yet discourage using 218-220. Not continue require allowed, deplete. Rev.Rul. 81-266, 1981-2 Cum.Bull. 139 contemplates take. 611(b)(1), 613(a). skews industry's means exploration, unreasonably denies industry contemplated receive.22 "unrealistic deference. 1716. 37 Finally, persuaded doubt calculation figures. 30a. returns later years.23 broad authority prescribe "needful regulations" enforcement 7805(a), up him method best implements mandate. 306-307, 449-450. What do—because "unreasonable" purpose—is might "simpler administer," 9, ignoring views enactment, purpose articulated. IV 38 this, where effective expeditious nation tax's laws issue, important decide. concern include questions that. North American Consul. Burnet, 286 417, 52 613, 1197 (1932). Nor appropriate period used issue significant one, none raised review. Cf. CFR 1.461-1 (assets having useful beyond close necessarily deductible expenditure made). holds 39 Accordingly, never contested deduction, judgment affirmed.24 Claims 82-744 denying reversed, remanded proceedings conformity opinion. ordered. 41 BLACKMUN, whom BRENNAN, WHITE, MARSHALL join, dissenting. 42 Court's today troubling perhaps ended how arrived there. principles traditionally governed approach field administrative prevail 'unreasonable inconsistent statutes.' Bingler Johnson, 394 741, 749-750, 1439, 1444-1445, 695 (1969), quoting South Texas Lumber 333 496, 501, 695, 698, 92 831 (1948); accord, Thor Power Tool 439 522, 533, 773, 781, 58 785 (1979); Fulman 528, 841, 845, (1978). professes adhere rule today, ante, 224-225, review reasoning chosen honor breach. Because I regard consistent controlling policies 1954 Code, surely respects rival advanced dissent. 43 concedes interpreting disallow compatible statute. Ante, 215- 217. am sanguine easily accommodate 613A(c) requires calculated turn "Taxable 7701(23) fiscal "upon basis subtitle A." claims produced, asks given 7701(23), hence occurred. event, fit closely textual grounds. 44 produces itself characterizes 613A(c). couched output, before possibly establish ex ante feet represents. problem exacerbated fact vary depending fuel nature process, factors often begins. 613A(c)(4) (6). A academic literature, 216-217 13, appears convinced overcome "by allocation" timing theory, own problems. particular, unclear 613A(d)(1), limited 65 overall rise recognized years.1 assertion caused retention "in ways," 226-227, stands normal rationale deference head. One reason court, assess consequences ambiguities ways minimize difficulties. Rather give due expertise first instance construing embraced complications recognizes left bring order confusion created. Ockham's razor nowhere evidence. justify rejection administrable interpretation, relies Contrary enacted," 220, interpret bonuses. product Houses abolish With minor exceptions here, accomplish result. 4651-4652, 4657-4658 full after Finance version lacked Senator Hollings Senators five-year producers. 7238-7239. producers, initially approved Bentsen indefinitely 3,000 18,000,000 7304-7305. thereafter effectively amendment's figures two-thirds lowering 7807-7808, 7813. cut back still surviving (from 1,000 barrels) percent). 94-120, 47 Given abolished curtailed perpetuation underwent restrictions became silence record continued availability hardly compelling preserve status quo incidental respect. Report's statement (which legislation," 221) "retains day 67 (1975) 132 However, pointed word "retains" casts whatsoever applicability precondition allowance. 594, 600 (1982). Similarly, Report states "follows depletion," 68, 133 added); altogether leave untouched. say, does, entirety" satisfied newly 613A(c), 221, say preserved unchanged affected changes truism scope changes. easy conclusion explicitly progeny alter prevailing rules, ----, overlooks haste acted2 dismantles structure rested. 48 poverty source rest analysis characterization Reasoning principally national shortages, assumes fundamental "increase owners." 219.3 because, preserves results variations surveys. reasons desire preproduction forgo desirable production-linked payments. case, according demand compensate them attractive risk-shifting features alternative schemes, leaving funds rate invested capital. sum, maximize producers; so, concludes, incorrect. 49 respect, ignores purports construe. pre-existing levels; create merely old one. More intact deliberately scaled back. 1980 thereafter. 613A(c)(3)(B). output fell barrel limit substantially curtailed, 1984 beyond—a reduction. 613A(c)(5). 613A(d)(1).4 denied transferees "proven" transferred December 31, 1974. 613A(c)(9); 67-68. whole, actually reduces them. remarkable result, hard-bargained compromise conferees, stable outright. See, e.g., 8918 (remarks Rep. Ullman). ill accords pristine carefully calibrated attempt disallowing limits owners, hard incorrect face achieves result.5 indictment depends single-minded exist. 51 accept [of laws] courts." Assn., (1979). 224. compatability views, lies behind restricts well conceded graft Herring's onto provision, impossible square principle.6 concerns me discrete sign willingness vested responsibility administer ambiguous scheme, fidelity integrity courts entertain settled (1973), "this business administering Nation." reading conception policy into bears designed ends, intruded responsibilities area disregarded own. Originally, 172-173 (1913). 1918, calculate discovery 1067-1068 (1919). proved administer, favor (1926). detailed study Baker, Nature Depletable Income, Tax.L.Rev. 267 (1952). 612. generally multiplying numeral interest ratio estimated recoverable 1.611-2(a) (1983). 613. gross excluding rents incurred (computed depletion)." lessee execution landowner. Bonus figured per acre basis." H. Williams C. Meyers, Manual Terms An pre-payment landowner's share kind value, free expenses 656-657. pertinent 1926 wells," 16, situations technically exist contended precedes future practically assured, obtained, G.C.M., XII-1 (1933), revoked G.C.M. 14448, XIV-1 (1935). 7239-7244 (statement Sen. Hollings); 7244-7248 Ribicoff); 7267 Cranston); Landis, Impact Income Energy Crisis: Don't Mix, Calif.L.Rev. 1040, 1042-1048 (1976). aggregate divided days 613A(c)(2)(A). paragraphs designated gradually decreasing calculating allowances. 613A(c)(3), (5). separate like Glass 949 embodied regulations. Fed.Reg. 24279 seq. (1977). Interestingly enough, literally circumstances. Although interprets Fed.Reg., 24287 (proposed 1.613A-7(f)(1)), permit situation reversed—when 24281 1.613A-3(a)(4)(7)). Jones, Analysis CA-7 Decision Allowing Absent Abstraction, 57 Taxation 230, 233 (1982); Bravenec, Significance Gas, Q. 193, 211-214 (1975); Note, Bonuses Advance Royalties: Reviewed, Baylor L.Rev. 97, 120-121 supra. debates replete shortage. 4606 Rhodes) ("I think recall here shortage petroleum"); 7807 Curtis) ("Our objective oil"); ibid. Bartlett) people body done next sources country ."); 8128 Dole) ("The vitally maintaining high production."); 8944 Pickle) ("In crisis, need—desperately—is production."). Members repeatedly aimed 4610 Cotter) ("[I]t serve notice subservient demands 8879 Long) ("Although 85 ineligible [percentage] depletion."). refundable Shamrock 979, 1057 (1961). averse lessors, likely prefer uncertain sums, streams, materialize returned. 4641 de la Garza) ("We hurting people" owners). Conversely, condition Williams, Law 666, 793-795 properties, predictably nonrefundable exchange arrangements. pooling fashion, lessees, insurers insureds, resources Arrow, Essays Theory Risk Bearing 134-143 (1971). Bentsen, 7277 stated "as Hearings Before Subcomm. Comm. Finance, 7777 Dole 2000-barrel figure "identif[ied] importance producers." 8128. believed "exemption [would] remain giving greatly need vast bulk drilling programs." Representatives, Chairman Wilbur Mills, served Committee. 95th Legislative Record Means, 359 (1979) (listing committee membership). grew members, chaired Representative Al Ullman, members. 360. Committees intent, characterize committee. 2000 15% day. deliberations sessions culminated legislation, position. 30-32. best: Post-enactment interpretive material "hazardous inferring enactment." Consumer Product Safety Comm'n GTE Sylvania, 447 102, 118, 2051, 2061, 766 (1980); Southeastern Community College Davis, 442 397, 411, 2361, 2370, 60 980 computing codified 611(b), equitably apportioned lessee. implemented 611(b) capitalize well. 1.1613-2(c)(5) indication benefit L.Rev., 120-121. Taxation, 122. currently 22, express precluded raising proceeding. dissent (favorable taxpayers) Judge Fay "if years, secs. 613A(d)(1) nonsensical." 915, 945, minimum, seem multiplied carryforward ceiling carried forward relatively portion principal counteract effects then-current recession. perceived immediate stimulus, proceeded unusual speed. proceedings, devoted severely limited. Laws 1061, 126 supports Representatives spoke 217-218, 15. exception Rhodes, legislators opponents considering. 7813, 8133, 8878-8879 (votes Bartlett Curtis); 8124 Bartlett). (noting expressing "we going wrong way" depletion). Pickle, comment quotes, full: "I disappointed [by 613A]. country. way get offer drilling. worked reverse." Presumably [§ 613A's] articulated." 227. noted, contains "shall treated following ceiling. mitigates obviously discard ground incentive interpretations. 215, 12. "bonus exhaustion" rule, exclude 613(a), justified hands lessor. 225-226. correctness affect

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