Court Opinion

ID: 4484738
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:57.749389+00
Date Added: 2024-06-11T15:03:42.432164
License: Public Domain

Goffe, J., concurring in part and dissenting in part: I concur with the result reached by the majority on the management fee issue. I concur only with the result reached by the majority on the prepaid turnkey drilling contract issue. I concur only with the result reached by the majority in disallowing portions of the prepaid footage and daywork contracts and portions of the prepaid third-party well-servicing contracts. I dissent from the holding of the majority with respect to the Amarex Funds drilling well charges. In order to reach the results upon which I concur with the majority, I would not apply the business purpose test, nor the distortion of income test, and instead of applying the deposit vs. payment test of the prepaid cattlefeed cases, I would ascertain whether "payment” occurred independently of the "deposit” cattlefeed cases. Instead of explaining my disagreements with the majority by issue, it is more meaningful to discuss the concepts applied by the majority which, in my view, are not applicable and the concepts which are applicable but which have been misapplied by the majority. My first point of departure from the majority is its conclusion that the issues should be examined under Rev. Rul. 75-152, 1975-1 C.B. 144, which involves prepaid cattlefeed expense. No reason is given for such a conclusion except that respondent’s argument tracks the three-part test of that ruling. Petitioners, on brief, vehemently disagree with the conclusion that analysis under the cattlefeed ruling is appropriate and, upon careful analysis, I agree with petitioners. Although the grounds for disallowance in the statutory notice of deficiency in this case track the three-part test of Rev. Rul. 75-152, the similarity ends there. Rev. Rul. 75-152 involves only prepaid cattlefeed, a commodity that is consumed in the process of fattening cattle for sale. Prepaid IDC involve the cost of (1) acquiring a capital asset with a useful life extending over a period of more than 1 taxable year, i.e., an oil or gas well, or (2) the subsequent writeoff of a business loss (dry hole). Cattlefeed is an essential ingredient of the business of fattening cattle for sale. The payment of IDC is not relevant to the production of income until the well is completed as a producer or abandoned as a dry hole. We examined the prepaid cattlefeed issue in Van Raden v. Commissioner, 71 T.C. 1083 (1979), affd. 650 F.2d 1046 (9th Cir. 1981), in the manner set forth in Rev. Rul. 75-152, because respondent’s position was consistent with that ruling and the ruling dealt specifically with the issue involved (71 T.C. 1096). Nevertheless, five of the judges of this Court concurred only in the result and pointed out that respondent’s position was nothing more than an attempt to require farmers on the cash method of accounting to inventory cattlefeed. Concurring opinion of Judge Tannenwald, 71 T.C. at 1111. The class of taxpayers involved in Rev. Rul. 75-152 (farmers on the cash method of accounting) is allowed special accounting concessions in the Treasury regulations. Likewise, cash basis taxpayers who pay IDC are accorded a special benefit in the Code and regulations by being given the option to expense IDC. Such concessions are, however, granted to these different classes of taxpayers for totally different reasons. Farmers have enjoyed the historical concession because of the nature of the farming business. Van Raden v. Commissioner, supra at 1106. Taxpayers who pay IDC are given the option to deduct an otherwise capital expenditure because of the great risk involved in exploring for oil and gas. Standard Oil Co. (Ind.) v. Commissioner, 77 T.C. 349, 397 (1981), on appeal (7th Cir., Mar. 1, 1982); Sun Co. v. Commissioner, 677 F.2d 294, 299 (3d Cir. 1982), affg. 74 T.C. 1481, 1510 (1980); Gates Rubber Co. v. Commissioner, 74 T.C. 1456, 1477 (1980), on appeal (10th Cir., May 5, 1981). This distinction between feed costs and capital expenditures is most effectively pointed out in the concurring opinion of Judge Tannenwald in Van Raden v. Commissioner, supra at 1110. In view of the distinctions pointed out above, the issues here should not be examined in the context of Rev. Rul. 75-152. It does not constitute authority. It may well be that the Commissioner would prefer scrutiny under Rev. Rul. 75-152, rather than focus upon the case law and published and private rulings which he has issued on the precise question involved here, because his position in this case is inconsistent with those rulings. Petitioners rightfully rely upon the announced position of the Commissioner reflected in his rulings. A brief description of the history of the case law and the Commissioner’s position on prepaid IDC is in order. The scenario commenced when the Commissioner issued Rev. Rul. 170, 1953-2 C.B. 141, in which he held that a cash basis taxpayer could deduct IDC, which he had paid, only in the taxable year in which the drilling and development services were rendered to him. That ruling was requested in connection with the tax liabilities of Edwin W. Pauley and Barbara Jean Pauley, who later filed refund suits in the District Court. The court held in favor of the taxpayers, contrary to Rev. Rul. 170. Pauley v. United States, an unreported case (S.D. Cal. 1963, 111 AFTR 2d 955, 63-1 USTC par. 9280). Edwin Pauley paid the IDC to Pike Drilling Co., prior to which time Pike had no business dealings with Pauley. Pike wanted some assurance that Pauley would pay for drilling the well. Pike generally needed cash for conducting its drilling operations. As a result of negotiations, Pauley agreed to pay Pike $95,000 on December 31, 1947, when the drilling contract was executed. The well was not "spudded in” until January 13,1948. The court held that the work performed by Pike was not personal services and that the payment of $95,000 was deductible in 1947. The majority in the instant case, at page 36 of its opinion, characterizes the holding in Pauley to be based upon "the finding that impelling business necessity motivated the prepaid IDC.” I can find nothing in the opinion in Pauley upon which to base such a conclusion. If an "impelling business necessity” were present, it was not the business necessity of Pauley, who prepaid the IDC but, instead, that of Pike, who wanted to be sure that Pauley would pay at all. Subsequent to the Pauley decision, the Commissioner issued Rev. Rul. 71-252,1971-1 C.B. 146, in which he followed Pauley and expressly revoked Rev. Rul. 170. In Rev. Rul. 71-252, the Commissioner recited a set of facts similar to those in Pauley and pointed out that as a bona fide transaction, the taxpayer was obligated to pay the IDC at the times specified in the drilling contract. The Commissioner held that the deduction for prepaid IDC was allowable. There was no mention of distortion of income. On December 27,1979, the Commissioner issued Letter Ruling 8012060 in which he held that if the IDC were prepaid pursuant to a binding contract, they would be deductible in the year of payment by a cash basis taxpayer regardless of whether the driller performed any work under the turnkey drilling contract in the year of prepayment. No mention was made of the distortion of income test. As late as March 31, 1982, the Commissioner issued Letter Ruling 8226135 to an accrual basis taxpayer, under facts whereby the prepayment was made to assure the drilling contractor adequate funds. That ruling held the prepaid IDC to be deductible in the year of payment, without mention of the distortion of income test. In Rev. Rul. 80-71,1980-1 C.B. 106, the Commissioner ruled that certain prepayments of IDC were not allowable. The payments were not required under the contracts. The Commissioner examined the question under the provisions of sections 461 and 446(b) and concluded that if the taxpayer were permitted to deduct the prepaid IDC, it would result in a material distortion of income. In that ruling, the Commissioner distinguished Pauley and Rev. Rui. 71-252 on the grounds that the prepayment was occasioned by the driller’s concern over Pauley’s willingness and ability to pay at a later date. The ruling recognizes that IDC are admittedly capital in nature, but the ruling does not say whether the taxpayer can elect to deduct the IDC in the taxable year in which drilling services are performed or whether such IDC must be capitalized. The most recent decision on the subject is Dillingham v. Commissioner, an unreported case (W.D. Okla. 1981, 48 AFTR 2d 81-5815, 81-2 USTC par. 9601). The court found that the prepayment of IDC was required for a legitimate business purpose, and the transaction was not a sham merely to permit the taxpayer to control the timing of the deduction. The court concluded that the taxpayers were entitled to rely upon Rev. Rui. 71-252, supra, and Pauley v. United States, supra, and the IDC prepayments were deductible in the year paid by taxpayers on the cash or accrual method of accounting. Admittedly, rulings are not binding upon the Commissioner. In section 601.201(a)(5) of the Statement of Procedural Rules, however, the Commissioner describes a revenue ruling as the official interpretation by the Internal Revenue Service, published for the information and guidance of taxpayers and Internal Revenue Service officials. A revenue ruling is simply the contention of one of the parties to the litigation. Estate of Lang v. Commissioner, 64 T.C. 404 (1975), affd. in part and revd. in part 613 F.2d 770 (9th Cir. 1980). The majority, in the instant case, merely assumes that the tests in the cattlefeed ruling (Rev. Rui. 75-152) apply. There is no authority to apply such tests except those announced by the Commissioner in his rulings. I conclude that there are some basic flaws in such an analysis. The first and third tests, i.e., business purpose and distortion of income, are intertwined. Although the statutory notice of deficiency in this case is not a model of clarity, it disallows the deduction for prepaid IDC as a distortion of income. "Distortion of income” is generally accepted to mean that the Commissioner has determined that the taxpayer’s method of accounting does not clearly reflect income; therefore, the Commissioner, in his discretion, has altered that method to more clearly reflect income under section 446(b). In Van Raden v. Commissioner, 71 T.C. 1083 (1979), affd. 650 F.2d 1046 (9th Cir. 1981), we held that the presence of a substantial business purpose satisfied the distortion of income test. It is important to reiterate here the logic of this relationship from pages 1105 and 1106 of that opinion (71 T.C.): Accounting methods and the nature of the business are inextricable. "A method of accounting which reflects the consistent application of generally accepted accounting principles in a particular trade or business in accordance with accepted conditions or practices in that trade or business will ordinarily be regarded as clearly reflecting income, provided all items of gross income and expense are treated consistently from year to year.” Sec. 1.446-l(a)(2), Income Tax Regs. (Emphasis added.) Examples of accounting methods which are dictated by the particular trade or business include those where the production, purchase, or sale of merchandise is an income-producing factor, sec. 1.446 — l(a)(4)(i), Income Tax Regs.; a taxpayer whose sole source of income is wages need not keep formal books in order to have an accounting method, sec. 1.446 — 1(b)(2), Income Tax Regs.; crop method of accounting for farmers, sec. 1.446 — l(c)(l)(iii), Income Tax Regs.; if the taxpayer is engaged in more than one trade or business, a different method of accounting may be used for each trade or business if it clearly reflects income, sec. 1.446-l(d)(l), Income Tax Regs.; income from long-term contracts may be included under either the percentage of completion method or the completed contract method, sec. 1.451-3(a), Income Tax Regs.; dealers in personal property who regularly sell on the installment plan may report on the installment method of accounting, sec. 1.453-l(a), Income Tax Regs. Because the method of accounting and the nature of the trade or business are so interdependent, we conclude that the distortion of income must not be examined in a vacuum but in light of the business practice or business activities which give rise to the transaction which the Commissioner has determined must be accorded a different accounting treatment. For example, material distortions of income may occur if the sales force of a business is more successful in December than in January, yet such a distortion would not require adjustment to clearly reflect income because the distortion resulted from the business activity itself. Should the result be different if the taxpayer purchases a year’s supply of its primary cost item at its lowest cost consistently from year to year? We do not think so. In short, a substantial legitimate business purpose satisfies the distortion of income test. We recognized this implicitly in Sandor v. Commissioner, supra. See Stokes v. Commissioner, 22 T.C. 415 (1954); Maple Leaf Farms, Inc. v. Commissioner, 64 T.C. 438 (1975); Hi-Plains Enterprises, Inc. v. Commissioner, 60 T.C. 158 (1973), affd. 496 F.2d 520 (10th Cir. 1974). The majority, at pages 25-26 of its opinion, implies that petitioners concede that the business purpose test should be applied. That is not petitioners’ position. They contend that they are entitled to deduct prepaid IDC under the rationale of Pauley v. United States, supra. As an alternative, they argue that a substantial business purpose existed for prepayment of IDC. I disagree with the majority that section 446(b) applies to IDC. Under section 446(a), taxable income is computed under the method of accounting employed by the taxpayer in maintaining his books. Section 446(b) permits the Secretary to prescribe another method if, in the Secretary’s opinion, the taxpayer’s method does not clearly reflect income. In my view, this authority to change the method of accounting from that utilized by the taxpayer does not extend to the deduction for intangible drilling and development costs (IDC) which the taxpayer may elect to deduct under section 263(c). Expenditures for IDC are admittedly capital in nature. They are listed in subsection (c) of section 263 which is entitled "Capital Expenditures.” They are likewise described in section 1.263, Income Tax Regs., as being capital expenditures. Standard Oil Co. (Ind.) v. Commissioner, 68 T.C. 325, 346 (1977); Gates Rubber Co. v. Commissioner, 74 T.C. 1456, 1474 (1980), on appeal (10th Cir., May 5, 1981); Sun Co. v. Commissioner, 677 F.2d 296, 297 (3d Cir. 1982), affg. 74 T.C. 1481, 1507 (1981). In F.H.E. Oil Co. v. Commissioner, 149 F.2d 238 (5th Cir. 1945), the Circuit Court of Appeals held that IDC were capital in nature. That holding gave rise to H.R. Con. Res. 50, 79th Cong., 1st Sess., 59 Stat. 844 (1945), which recognized and approved Treasury regulations granting the option to deduct IDC. Standard Oil Co. (Ind.) v. Commissioner, 68 T.C. at 347. Section 263(c), by its own terms, codifies House Concurrent Resolution 50 and directs the Secretary to prescribe regulations permitting the current deduction of IDC which correspond to regulations which previously granted the option. An analogy can be drawn between IDC and research and experimental expenditures. Section 263(a)(1)(B) explicitly recognizes that research and experimental expenditures are capital in nature, but provides that section 263 shall not apply to such expenditures which are deductible under section 174. In his recent treatise, Federal Taxation of Income, Estates and Gifts (1981), Professor Bittker describes the cases which construe the power of the Commissioner to change the taxpayer’s method of accounting under section 446(b). At vol. 4, pages 105-118 (par. 105.1.6) of his treatise, Professor Bittker makes the following observation: These judicial testimonials to the broad powers of the IRS must be qualified in one fundamental respect: An accounting method that is explicitly authorized or prescribed by Congress cannot be rejected even if the IRS, on sober evaluation of its impact, concludes that it does not clearly reflect income. The preemptive character of such statutory provisions as IRC [sec.] 174, permitting taxpayers to deduct research and experimental expenditures even if income would be more clearly reflected by capitalizing these outlays and depreciating them over their useful lives, is obvious. [Fn. refs, omitted.] I agree with Professor Bittker as to section 174 (expenditures for research and experimentation) and conclude that such reasoning likewise applies to IDC deductible under section 263(c) and the regulations. Section 263(c), like section 174, preempts section 446(b) and precludes the Commissioner from changing the timing of IDC as deductions. The only way that the accounting treatment for IDC can clearly reflect income is to treat such capital items in the traditional manner, i.e., capitalize them and permit their amortization over the estimated useful life of the asset (the oil or gas well). This treatment is, however, contrary to section 263(c) which permits the taxpayer to deduct the entire capital cost as a current deduction. Admittedly, exercise of the option to deduct IDC results in a distortion of income, but that distortion has been authorized by Congress in section 263(c). The majority describes IDC as "product” costs on page 41 of its opinion. As explained above, IDC have consistently been held to be capital expenditures. The product costs vs. periodic costs distinction which is found in the prepaid cattlefeed cases has no application here. I have been unable to find any authority whereby the Commissioner was sustained for changing the date for beginning the amortization of a capital asset to more clearly reflect income. Such authority obviously does not exist because the capital expenditure is made at a point in time which business judgment demands, not some artificial future date. The holding of the majority also contravenes clear congressional intent encouraging the exploration for oil and gas. We pointed out the direct relationship between the option to expense IDC and risk in Standard Oil Co. (Ind.) v. Commissioner, 77 T.C. 349, 397 (1981), with the following: Courts have long recognized that the allowability of the deduction of IDC goes hand-in-hand with the taking of risks: "The argumentative justification for liberality in taxation of oil and gas is that such liberality encourages and emboldens the fiscally timid to exploit the hidden resource. It rewards the risk-taker. * * * [United States v. Cocke, 399 F.2d 433, 452 (5th Cir. 1968).] "The regulations do not comtemplate that investors * * * [can be] allowed a deduction for intangible drilling costs without assuming the risk of the unknown result of the drilling. * * * [Haass v. Commissioner, 55 T.C. 43, 50 (1970).] "Thus it is clear that risk and IDC are inextricably related. [Standard Oil Co. (Indiana) v. Commissioner, 68 T.C. at 350.] "The taking of risks has always been inextricably related to the availability of the IDC option. [Gates Rubber Co. v. Commissioner, 74 T.C. at 1477; Sun Co. v. Commissioner, 74 T.C. at 1510.]” The Court of Appeals in Sun Co. v. Commissioner, 677 F.d 294 (3d Cir. 1982), agrees with our conclusion. In 1977, the tax-preference provisions were modified to reduce the IDC subject to such treatment to the excess over the net income from oil and gas. The following discussion accompanied the Senate floor amendment which modified the law: In the period 1969 through 1973, independent producers in the United States drilled 9 out of 10 exploratory — wildcat—wells, found 54 percent of the oil and gas discovered, and accounted for 75 percent of the "significant” petroleum discoveries as defined by the American Association of Petroleum Geologists. Drilling is an extremely high risk business. Only one exploratory well in nine produces anything. Eight out of nine exploratory wells are dry holes. In addition, at least 20 percent of developmental wells are dry holes. Due to the extreme risk, private foundations are not allowed under Federal law to invest in oil and gas activities. In addition, trust funds of widows or orphans cannot be invested in drilling, again because of the extreme risk of these investments. In order to prevent increasing dependence on overseas oil, our tax laws must not discourage risk taking in the oil and gas business. The 15-percent penalty tax on intangible drilling costs discourages active wildcatting which is so important to our energy needs. [123 Cong. Rec. S6701-6702 (daily ed. Apr. 28,1977).] The purpose of Congress — to encourage risk-taking by permitting the immediate deduction of IDC — is thwarted by the holding of the majority. The majority postpones the deduction to some unspecified date when services are performed or the well is completed. At the present time, the average time of completion of an oil or gas well is 15 months. It is not uncommon for completion to require 18 months and deeper wells require up to 3 to 4 years to complete. The postponement of the deduction to the risk-taker who pays IDC in cash makes the investment in such a highly speculative venture even less attractive and will have the effect of "drying up” the very venture capital which Congress has sought to encourage by enactment of section 263(c). It is fundamental that the IDC provisions are to be construed liberally. Exxon Corp. v. United States, 212 Ct. Cl. 258, 547 F.2d 548, 555 (1976); Standard Oil Co. (Ind.) v. Commissioner, 68 T.C. at 345; Gates Rubber Co. v. Commissioner, supra at 1475; Sun Co. v. Commissioner, supra at 1508. The courts should not be niggardly in their approach to the IDC regulations, as the IDC option is viewed by Congress as an incentive to oil and gas prospecting and exploration, a continuing objective of national importance. Exxon Corp. v. United States, 212 Ct. Cl. at 269-271, 547 F.2d at 555; Standard Oil Co. (Ind.) v. Commissioner, 77 T.C. 349, 387 (1981). The majority adopts just such an approach by requiring postponement of the deduction until the drilling services are performed or until the well is completed, rather than permitting a full deduction when the IDC are paid. The operator incurs the risk when he pays the IDC, not when some services are performed. The risk is undertaken when the money is paid. It is then that the payment has been made for the acquisition of the capital asset, i.e., the oil or gas well. This is the payment which Congress sought to encourage. If I were to concede that section 446(b) applied to IDC, which I do not, I would hold that the Commissioner has abused his discretion in applying section 446(b), and I conclude that the majority has misapplied the distortion of income test in this case. The majority never really explains how the income of the partnership is distorted by allowing the prepaid IDC as deductions when paid by a taxpayer on the cash method of accounting. It is difficult to understand why the Commissioner continues to issue rulings in which he allows taxpayers to deduct IDC without mention of distortion of income while, at the same time, he asks this Court to delve into the murky distortion of income test. The majority reaches different results as to the different kinds of contracts which give rise to IDC. As to the footage and daywork contracts and the well-servicing contracts, the majority holds that the amounts deducted were deposits and that petitioners failed to prove a business purpose. The majority, however, allows a portion thereof for wells spudded in 1973 because the funds were beyond the control of the partnership and there was no material distortion of income. The majority finds no distortion in prepayment of the IDC on turnkey contracts. The majority disallows all of the IDC paid for Amarex drilling well charges because income is materially distorted. In his concurring opinion in Van Raden v. Commissioner, 71 T.C. 1083 (1979), affd. 650 F.2d 1046 (9th Cir. 1981), Judge Tannenwald suggests that the historical concession granted to farmers to choose between a cash expenditures and an inventory method of accounting satisfies the clear reflection of income requirement of section 446(b). In Frysinger v. Commissioner, 645 F.2d 523 (5th Cir. 1981), affg. T.C. Memo. 1980-89, the Court of Appeals approved and applied our opinion in Van Raden v. Commissioner, supra, and also drew the distinction which I have attempted to articulate here (p. 528): Rather we hold that where the taxpayer is a farmer covered by the special provisions allowing farmers to take current deductions for feed expenses, where the prepayment is for a business purpose and not merely tax avoidance, and where it is in line with normal business practice and not unreasonable, the Commissioner cannot use his discretionary authority to vitiate the benefits granted the taxpayer by his own regulations merely because the taxpayer’s method may otherwise result in a distortion of income. The Court will not approve the Commissioner’s method of accounting unless it clearly reflects income. Reynolds Cattle Co. v. Commissioner, 31 B.T.A. 206 (1934). In changing the method of accounting of the taxpayer, the Commissioner is given much discretion. But he may not capriciously or arbitrarily sacrifice the facts of the case to theory or fiction. Robert Hyams Coal Co. v. United States, 26 F.2d 805 (E.D. La. 1928). See Bay State Gas Co. v. Commissioner, 75 T.C. 410, 413 (1980); Magnon v. Commissioner, 73 T.C. 980, 1004 (1980); and Garth v. Commissioner, 56 T.C. 610 (1971), where we stated at page 618: It is well settled that the Commissioner has broad powers in determining whether the accounting method used by a taxpayer does clearly reflect income, Commissioner v. Hansen, 360 U.S. 446, 447; but this is not to say that the Commissioner has authority to force a taxpayer to change from a method of accounting which does "clearly reflect income” to a method which in the Commissioner’s opinion more clearly reflects income. It is not the province of the Court to weigh and determine the relative merits of systems of accounting. Brown v. Helvering, 291 U.S. 193 (1935).5  In my view, the quotation from Garth v. Commissioner, supra, is applicable here. The majority has utterly failed to show how the Commissioner’s accounting method which the majority adopts with respect to some of the IDC more clearly reflects income than the accounting method employed by the partnership, i.e., deduct when paid (taxpayer on cash method of accounting). The majority seems to hold that IDC are deductible by a taxpayer on the cash method of accounting as the services in drilling the well are performed. This holding is contrary to Pauley v. United States, an unreported case (S.D. Cal. 1963, 11 AFTR 2d 955, 63-1 USTC par. 9280), wherein the Court held that IDC were not paid for personal services. As we pointed out above, the nature of the oil business is such that only the completion of the well as either a producer or its abandonment as a dry hole is of significance. On page 43 of its opinion, the majority advances the following new and novel principle about clearly reflecting the income of a taxpayer who utilizes the cash method of accounting: "A cash basis taxpayer’s income is clearly reflected if he deducts as an expense in the same year as he pays for and receives his bargained for benefits because the transaction is closed at that point.” This new principle will affect a host of deductions traditionally allowed to a taxpayer on the cash method when he makes the payment. For example, if a taxpayer on the cash method paid a lawyer a retainer fee to represent him, he would be required to pro rate that fee over the period that the lawyer performed the services. In any event, that principle is contrary to Pauley v. United States, supra, in which it was held that drilling the well was not the rendition of personal services. Even the Commissioner follows Pauley in all of his published and private rulings. The Commissioner has not asked us to hold that IDC are payments for services. As explained above, IDC are capital expenditures. The majority points out on page 44 of its opinion that the drillers took the prepayments of IDC into income from time to time as actually earned. This is immaterial. How could the accounting treatment by the recipients of the IDC be binding on petitioners? Moreover, it is not pointed out, nor does the record disclose, whether the drillers were on the cash or accrual method of accounting. On pages 44-45 of its opinion, the majority points out that it was necessary to prepay the Amarex Funds drilling well charges in 1973 to permit the investors to deduct the cost of their investment. This Court has never before held that the distortion of income test would be applied at the partner level. Instead, we have consistently held that such test would be applied at the partnership level, beginning with Resnik v. Commissioner, 66 T.C. 74, 80 (1976), affd. per curiam 555 F.2d 634 (7th Cir. 1977), and continuing with, e.g., Van Raden v. Commissioner, 71 T.C. 1083, 1103 (1979), affd. 650 F.2d 1046 (9th Cir. 1981); Davis v. Commissioner, 74 T.C. 881, 906 (1980), on appeal (6th Cir., Feb. 17, 1981); Stradlings Building Materials, Inc. v. Commissioner, 76 T.C. 84, 86 (1981); Brannen v. Commissioner, 78 T.C. 471, 504-505 (1982).1  On pages 27-28 of its opinion, the majority holds that there is nothing in the regulations which deals with the timing of the election to expense IDC. I disagree. Section 1.612-4(d), Income Tax Regs., provides: Manner of making election. The option granted in paragraph (a) of this section to charge intangible drilling and development costs to expense may be exercised by claiming intangible drilling and development costs as a deduction on the taxpayer’s return for the first taxable year in which the taxpayer pays or incurs such costs; no formal statement is necessary. If the taxpayer fails to deduct such costs as expenses in such return, he shall be deemed to have elected to recover such costs through depletion to the extent that they are not represented by physical property, and through depreciation to the extent that they are represented by physical property. Section 1.612-4(e), Income Tax Regs., provides in part as follows: "Any taxpayer * * * must exercise the option granted in paragraph (a) of this section in the return for the first taxable year in which the taxpayer pays or incurs such expenditures.” In my view, the regulations approve the deduction of IDC when paid. As explained above, the regulations have been approved by Congress. At the very least, if the taxpayer did not deduct them in the year paid he would, under the regulations quoted above, be deemed to have waived his election to deduct them and would be required to recover IDC through depletion and depreciation, contrary to the intent of Congress and section 263(c). The majority applies the ''deposit” theory to IDC which, heretofore, has been applied only to prepaid cattlefeed cases. In Owens v. Commissioner, 64 T.C. 1, 17 (1975), we observed as follows: Moreover, in approaching our decision, we assume, for the purposes of this case, that the "tax treatment of advance payments for livestock feed” is a sui generis proposition to which principles governing other types of advance payment do not apply. See Mann v. Commissioner, 483 F.2d at 676. In so doing, we do not imply that such principles might not be applied in other cases involving livestock feed. The United States Court of Appeals for the Eighth Circuit, to which an appeal in the instant case would lie, made the following observation as to prepaid expenses in Mann v. Commissioner, 483 F.2d 673, 676 (8th Cir. 1973): There is clearly no common thread or governing principle which rationalizes and renders predictable the results concerning deductibility of advance payments in general. However, special theories and practices have developed which govern the tax treatment of advance payments for livestock feed. Instead of delving into the morass of the case law covering the "deposit” theory in which we have not been very successful on appeal, it would be preferable to decide such a question on the basis of whether or not the taxpayers had "paid” the IDC, which was the test recently applied to IDC in Burns v. Commissioner, 78 T.C. 185 (1982). The majority holds that there was no business purpose for the prepayment of IDC pursuant to footage and daywork contracts. This is inconsistent with the holding of the Commissioner in Letter Ruling 8012060 dated December 27, 1979, wherein he allowed a deduction for the amount of a reasonable estimate of the IDC that will ultimately become due upon completion of the well. As the foregoing demonstrates, I would analyze the issues of this case in an entirely different manner than does the majority. The application of my analysis to the facts involved would yield the following results: allowance of none of the management fees; allowance of all of the prepaid IDC pursuant to the turnkey and the Amarex Funds drilling well charges; and allowance of portions of the prepaid IDC pursuant to the footage and daywork contracts and third-party well-servicing contracts. Dawson, Wiles, and Kórner, JJ, agree with this concurring and dissenting opinion.   See Koebig & Koebig, Inc. v. Commissioner, T.C. Memo. 1964-32.   Cheroff v. Commissioner, T.C. Memo. 1980-125.