Court Opinion

ID: 9482142
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:41:41.892896+00
Date Added: 2024-06-11T17:48:47.688798
License: Public Domain

NIES, Chief Judge,
dissenting.
Congress has imposed a minimum tax on “items of tax preference” to insure that taxpayers with substantial economic income could not avoid significant tax liability by using exclusions, deductions, and credits. In general, for taxable years 1981 and 1982, the years at issue here, a minimum tax of 15 percent rate was imposed on a portion of the taxpayers’ “items of tax preference.” See 26 U.S.C. § 56(a) (1982).*
The particular “item of tax preference” at issue here concerns a deduction for depletion of a mineral deposit allowable under section 611. Under section 57(a)(8) of the Code, the portion of a depletion deduction that constitutes an “item of tax preference” is the excess of such deduction over the “adjusted basis of the property.” The amount of depletion allowed for taxpayers’ oil and gas deposits for taxable years 1981 and 1982 under section 611 is $439,884 and $371,636, respectively. The point of dis*1539agreement is over whether those amounts should be reduced by the unrecovered depreciated costs of certain machinery, pipes and equipment as a part of the “adjusted basis of the property.” The amount of the depletion deduction subject to the alternative minimum tax as a tax preference item is then reduced to $233,339 and $240,420 in 1981 and 1982, respectively.
Cost is the starting point for determining the “basis” of property. See 26 U.S.C. § 1012. Section 1016 then sets out what adjustments can be made to the cost and provides that “[pjroper adjustment in respect of the property shall in all cases be made — (1) for expenditures * * * properly chargeable to capital account.” I disagree with the majority that this provision permits the costs of machinery and the like to be added as an “adjustment” to the “basis” of a mineral deposit so as to reduce the amount of a tax preference item for minimum tax purposes. The reason for my conclusion is the reference in section 57(a)(8) to section 614 for the definition of “property.” Section 614(a) states that “the term property means each separate interest owned by the taxpayer in each mineral deposit_” (Emphasis added.) Giving that definition to the term “property” where it appears in sections 57(a)(8) and 1016 means one must determine the adjusted basis of the mineral deposit.
A mineral deposit has a special meaning. As explained in the regulations, a mineral deposit may be part of a mineral enterprise. A mineral enterprise is defined in section 1.611-l(d)(3) as “the mineral deposit or deposits and improvements, if any, used in mining or in the production of oil and gas and only so much of the surface land as is necessary for purposes of mineral extraction.” The distinction between a mineral deposit and a mineral enterprise must be made because only the mineral deposit itself is subject to a depletion allowance under section 611. In order to obtain that tax benefit, the taxpayer must maintain a separate capital account for the mineral deposit. See Treas.Keg. § 1.611— 2(b)(1) (1982). The capital account of the mineral deposit on which depletion is calculated includes the cost of the deposit itself and certain exploration costs and other specific adjustments. It does not include the cost of improvements used in production, such as machinery and pipes. The latter are adjustments only to the enterprise. There is no disagreement here over what items enter into calculation of the basis of the property for purposes of the depletion allowance. However, when it comes to determining how much of the basis of the property has not been depleted, the majority allows an additional item to be added. Costs which are part of the capital account of the enterprise, per the majority, may be transferred over to the mineral deposit so as to reduce the minimum tax.
I see no reason, in logic or in the statute and regulations, why costs of capital improvements, which have nothing to do with the calculation of depletion under section 611 of the Code, should be added to the adjusted basis of the oil and gas deposits for purposes of reducing the alternative minimum tax. I agree with the government’s analysis that inasmuch as only the deposits themselves are the “property” de-pletable under section 611, it is solely the adjusted basis of that “property” which must be deducted from the depletion allowance to arrive at the excess of depletion subject to the minimum tax. Section 57(a)(8) clearly envisions application of the same rules for tax preference purposes and calculation of tax preference items based on the same “property” for which the depletion deduction was calculated in the first place. The Claims Court found it conceivable that Congress could have decided that it would decrease the amount of the tax preference item by the amount of unrecov-ered depreciable property costs so as to encourage investments and improvements to oil and gas deposits by having the minimum tax not apply to the extent the taxpayers’ costs for tangible improvements to the well have not yet been recovered. The trial judge concluded the statutory provisions result in that policy choice. I disagree. It appears to me that a straight forward as well as logical reading of the statute indicates its rejection.

 All references are to the Internal Revenue Code, codified at Title 26 of the United States Code, applicable during 1981 and 1982, the tax years in issue.