Exxon Corp. v. Comm'r of Internal Revenue

• Decision Date: 06 June 1994
• Docket Number: 18432–90.,Nos. 18618–89,s. 18618–89
• Parties: EXXON CORPORATION and Affiliated Companies, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

102 T.C. 721

102 T.C. No. 33

129 Oil & Gas Rep. 384

EXXON CORPORATION and Affiliated Companies, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 18618–89

18432–90.

United States Tax Court.

June 6, 1994.

Robert L. Moore II, Washington, DC, for petitioners.

Val J. Albright, Stephen C. Coen, and James E. Archie, Dallas, TX, for respondent.

Held: In computing allowance for percentage depletion, it is unreasonable to determine petitioners' 1979 “gross income from the property” for sales of natural gas after it was transported away from the wellhead by the method provided for in the last sentence of sec. 1.613–3(a), Income Tax Regs., the representative market or field prices, where those prices result in a “gross income from the property” that is approximately five times petitioners' actual contract sales revenue in connection with such sales; accordingly, in this case it is reasonable to use a net-back method. Respondent's motion for partial summary judgment will be granted, and petitioners' cross-motion for partial summary judgment will be denied.

WHITAKER, Judge:

This issue is before the Court on the parties' timely motion and cross-motion for partial summary judgment pursuant to Rule 121 ¹. In support of Respondent's Motion for Partial Summary Judgment respondent contends that petitioners are not entitled to a percentage depletion deduction based upon a hypothetical “gross income from the property” that exceeds petitioners' actual gross income from the sales of the gas at issue.² Petitioners in support of Petitioners' Cross–Motion for Partial Summary Judgment contend that, under the literal terms of section 1.613–3(a), Income Tax Regs., they must compute their percentage depletion deduction by using the “representative market or field prices” (RMFP's) of the gas at issue.³

FINDINGS OF FACT

During the taxable year 1979, Exxon Company, U.S.A. (Exxon USA), a division of petitioner Exxon Corporation (Exxon), produced natural gas in Texas, and transported the gas through the Exxon Industrial Gas System (EGSI).⁴ On their return for the taxable year 1979, petitioners claimed a depletion deduction relative to natural gas transported by EGSI. In calculating this percentage depletion, petitioners used a figure for the “gross income from the property”, a percentage of which constitutes the depletion allowance, in the amount of more than $495,000,000. This amount was based upon purportedly appropriate RMFP's for the subject natural gas, after transportation, manufacture, or conversion. Petitioners applied a 22 percent depletion rate to petitioners' “gross income from the property”, for a deduction in the amount of $109,017,036. Because of their fixed price contracts, petitioners' actual 1979 contract sales revenue of gas produced by Exxon USA and transported by EGSI for delivery under fixed contracts to certain industrial customers was considerably less than they could have sold it in the absence of such contracts. That actual revenue was approximately $95,502,000, or about one-fifth of the “gross income from the property” for depletion purposes claimed by petitioners on their 1979 return for this gas. The difference between petitioners' claimed “gross income from the property” for purposes of depletion and petitioners' actual gross receipts from the sales of the natural gas at issue was not included in Exxon's 1979 gross income or taxable income for purposes of section 61 or 63.

Respondent conceded solely for purposes of respondent's motion several facts which involve other issues related to percentage depletion that respondent apparently believes might have required us to deny respondent's motion because of the existence of an issue of material fact. Solely for purposes of respondent's motion,⁵ we find as follows:

(1) Exxon possessed the requisite economic interest in the wells for which percentage depletion is claimed;

(2) the gas at issue was sold under fixed price contracts within the meaning of sections 613A(b)(1)(B) and 613A(b)(3)(A);

(3) the volumes of gas claimed by petitioners to be qualified for percentage depletion are so qualified; (4) petitioners properly computed the royalty exclusion;

(5) the gas at issue was not “sold on the premises but [was] manufactured or converted into a refined product prior to sale, or [was] transported from the premises prior to sale” within the meaning of section 1.613–3(a), Income Tax Regs.;

(6) there are one or more RMFP's for the gas at issue;

(7) the RMFP's determined by petitioners are “market or field prices” as defined by section 1.613–3(a), Income Tax Regs., and are “representative” within the meaning of that regulation for the gas at issue, but for the fact that they exceed the amounts for which the gas was actually sold;

(8) an RMFP may exceed the maximum lawful selling price of the gas, and/or the maximum lawful selling prices for the gas at issue were equal to or exceeded the alleged RMFP's used by petitioners;

(9) cost depletion with respect to the gas at issue does not exceed percentage depletion;

(10) the taxable income limitation provided by section 613(a) does not otherwise limit petitioners' percentage depletion deduction;

(11) the actual sales proceeds for the gas at issue do not require further reduction for any income attributable to post-production activities; and

(12) section 1.613–3(c)(6), Income Tax Regs., does not otherwise limit petitioners' percentage depletion deduction.

In respondent's determination of “gross income from the property”, respondent used a type of net-back methodology, whereby the actual revenues received by petitioners for the gas after transportation were reduced by royalties in connection with the wells at issue, which resulted in a complete disallowance. ⁶ Petitioners ask us to hold that Exxon must use the applicable RMFP's as the figure for “gross income from the property” for purposes of percentage depletion where the gas is transported away from the well. Respondent asks the Court to hold that petitioners' “gross income from the property” for purposes of percentage depletion cannot exceed the actual gross income from the sale of the gas minus the royalty exclusion required by section 613(a); thus respondent effectively contends that under these circumstances respondent may employ a net-back methodology to determine “gross income from the property”.

OPINION

Rule 121(b) provides that this Court may grant a summary adjudication in favor of the moving party where it has been shown that “there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law.” Respondent has conceded, solely for purposes of respondent's motion, the propriety of petitioners' depletion deduction other than with respect to the legal issue at hand. We have held that it is appropriate to do so. E.g., Jacklin v. Commissioner, 79 T.C. 340, 345 (1982). While there are several factual disputes concerning other aspects of petitioners' depletion deduction, the parties appear to agree that there is no issue as to any material fact with respect to the specific legal question before us. Consequently, it is ripe for summary judgment. 6 Moore, Moore's Federal Practice, par. 56.13, at 56–177 (2d ed. 1993).

Section 611 allows a “reasonable allowance for depletion” in the case of, inter alia, oil and gas wells, “according to the peculiar conditions in each case”. Section 613(a) provides for a percentage depletion deduction based upon a percentage of a taxpayer's “gross income from the property”. ⁷ While the statute is silent as to the definition of “gross income from the property” as it relates to the issue before us, respondent's regulations provide that it means

the amount for which the taxpayer sells the oil or gas in the immediate vicinity of the well. If the oil or gas is not sold on the premises but is manufactured or converted into a refined product prior to sale, or is transported from the premises prior to sale, the gross income from the property shall be assumed to be equivalent to the representative market or field price of the oil or gas before conversion or transportation. [Sec. 1.613–3(a), Income Tax Regs.]

Petitioners assert that, under the literal terms of this regulation, where, as here, the gas was transported from the premises prior to sale, respondent may not use a net-back methodology to determine gross income from the property, but must apply the literal language of section 1.613–3(a), Income Tax Regs., and use the RMFP's, the result of which is considerably higher than the amount actually received by petitioners after the gas was transported away from the well. The parties have not cited, and the Court has not found, any published opinion of this Court directly involving this issue.⁸

Petitioners contend that we must follow the literal language of the regulation at issue and require use of the RMFP's without further analysis. Petitioners essentially rely upon the so-called “ordinary meaning” or “plain meaning” rule, whereby courts have held that, in the exercise of judicial restraint, the plain words of a regulation should be followed where those words are clear and unambiguous, without resort to legislative intent or legislative history. Petitioners refer to this Court's holding that, “When the authority to prescribe legislative regulations exists, this Court is not inclined to interfere if the regulations as written support the taxpayer's position.” Walt Disney, Inc. v. Commissioner, 97 T.C. 221, 228 (1991), revd. on other grounds 4 F.3d 735 (9th Cir.1993); see also Transco Exploration Co. v. Commissioner, 95 T.C. 373, 383–384 (1990), affd. 949 F.2d 837 (5th Cir.1992); Woods Investment Co. v. Commissioner, 85 T.C. 274, 281–282 (1985). Respondent cites the plain meaning of the words “gross income” in section 613(a) to assert that the correct interpretation of the regulation at issue is that “gross income from the property” can never exceed “gross income”. Respondent contends...