Santa Fe Pacific Gold Company and Subsidiaries, By and Through Its Successor in Interest, Newmont USA Limited v. Commissioner , 130 T.C. No. 17 ( 2008 )

130 T.C. No. 17UNITED STATES TAX COURT
SANTA FE PACIFIC GOLD COMPANY AND SUBSIDIARIES, BY AND THROUGH
ITS SUCCESSOR IN INTEREST, NEWMONT USA LIMITED, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22956-06. Filed June 25, 2008.
P used the percentage depletion method to
calculate depletion deductions for its mine, M, which
was placed in service on or before Dec. 31, 1989. P
was subject to the alternative minimum tax but did not
make adjusted current earnings (ACE) adjustments under
sec. 56(g)(4)(C)(i) or (F)(ii), I.R.C, for depletion
for M even though M’s adjusted basis had been fully
depleted for cost depletion purposes. When calculating
the sec. 57(a)(1), I.R.C., preference for M, P included
development costs capitalized under sec. 56(a)(2),
I.R.C., in M’s adjusted basis.
Held: Sec. 56(g)(4)(F)(i), I.R.C., does not
preclude the sec. 56(g)(4)(C)(i), I.R.C., ACE
adjustment from applying to depletion.
Held, further, unamortized sec. 56(a)(2), I.R.C.,
costs are not included in M’s adjusted basis for
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purposes of calculating sec. 56(g)(4)(C)(i), I.R.C.,
ACE adjustments for depletion.
Held, further, because of R’s concession,
unamortized sec. 56(a)(2), I.R.C., costs may be
included in M’s adjusted basis for purposes of
calculating sec. 57(a)(1), I.R.C., preferences for the
years at issue.
Held, further, to the extent that the same amounts
are not also treated as sec. 57(a)(1), I.R.C.,
preferences, P is required to make a sec.
56(g)(4)(C)(i), I.R.C., ACE adjustment for depletion
for M.
David D. Aughtry, Arnold B. Sidman, and William O.
Grimsinger, for petitioner.
Curt M. Rubin and Jennifer S. McGinty, for respondent.
OPINION
GOEKE, Judge: This case is before the Court on the parties’
cross-motions for partial summary judgment. After concessions,1
the primary issue for decision, for purposes of adjusting
petitioner’s alternative minimum taxable income (AMTI) under the
alternative minimum tax (AMT), is whether section 56(g)(4)(C)(i)2
1
Respondent concedes the portions of the adjusted current
earnings (ACE) adjustments set forth in the notice of deficiency
attributable to petitioner’s Twin Creeks Mines made pursuant to
sec. 56(g)(4) in the amounts of $3,659,182, $12,676,115,
$22,655,817, and $6,574,253 for the years ending Dec. 31, 1994,
Dec. 31, 1995, Dec. 31, 1996, and May 5, 1997, respectively.
2
Unless otherwise indicated, all section references are to
(continued...)
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limits the depletion deduction for a mine placed in service on or
before December 31, 1989, specifically petitioner’s Mesquite
Mine, to depletion deductions allowed in computing earnings and
profits, or whether section 56(g)(4)(F) alone governs all
adjusted current earnings (ACE) adjustments relating to depletion
regardless of when the property is placed in service. We must
also decide whether unamortized mine development costs that must
be capitalized and amortized under section 56(a)(2) (unamortized
section 56(a)(2) costs) are included in the adjusted basis of
depletable property, specifically the Mesquite Mine, for purposes
of determining (1) the amount of section 57(a)(1) preferences,
and/or (2) the amount of section 56(g)(4)(C)(i) ACE adjustments
for depletion.
We hold that unamortized section 56(a)(2) costs are not
included in the adjusted basis of depletable property for
purposes of determining the amount of section 56(g)(4)(C)(i) ACE
adjustments for depletion. In addition, because respondent
conceded that unamortized section 56(a)(2) costs may be included
in the adjusted basis of depletable property for purposes of
determining section 57(a)(1) preferences, petitioner is not
liable for any increases in its AMT liability that might
2
(...continued)
the Internal Revenue Code (Code) in effect for the years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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otherwise arise from our holding on this issue. We hold further
that section 56(g)(4)(C)(i) applies to depletion of the Mesquite
Mine to the extent that the amount by which the depletion
deductions attributable to the Mesquite Mine exceeded the mine’s
adjusted basis during the years at issue is not also treated as a
section 57(a)(1) preference.
Background
The record establishes or the parties do not dispute the
following facts.
Petitioner is the successor in interest to the Santa Fe
Pacific Gold Corp. and an alternate agent for the Santa Fe
Pacific Gold Corp. & Subs. Consolidated Group. At the time it
filed its petition, petitioner’s principal place of business was
Denver, Colorado.
Petitioner owned several gold mines during the taxable years
ending December 31, 1994, 1995, and 1996, and May 5, 1997 (the
years at issue), that were placed in service on or before
December 31, 1989. Petitioner’s Mesquite Mine was placed in
service in September 1981, and petitioner’s two Twin Creeks Mines
were placed in service in December 1987 and March 1989.
Petitioner calculated its depletion deductions using the
percentage depletion method under section 613, as opposed to the
cost depletion method under section 612, for regular tax purposes
for all of its mines during the years at issue. Petitioner was
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subject to the AMT during the years at issue, and it included
section 57(a)(1) preferences for depletion when calculating its
AMTI. When calculating its ACE adjustment, petitioner did not
make any adjustments under section 56(g)(4)(C)(i) for mines that
were placed in service on or before December 31, 1989.
Petitioner incurred development costs under section 616(a) for
its mines, which it capitalized and amortized over a 10-year
period as required by section 56(a)(2).
On November 13, 2006, respondent issued a notice of
deficiency to petitioner for the years at issue. Respondent made
the following changes to petitioner’s ACE adjustments for
depletion:3
Year Reported ACE Adjusted ACE
1994 $6,119,535 $12,676,873
1995 18,517,208 42,115,880
1996 3,004,144 44,790,687
1997 2,378,500 13,738,815
Petitioner timely petitioned the Court to review
respondent’s determinations. The parties filed cross-motions for
partial summary judgment on the issue of whether section
56(g)(4)(C)(i) requires ACE adjustments for depletion for mines
placed in service on or before December 31, 1989. Because one of
petitioner’s arguments is that section 57(a)(1) precludes the
3
Respondent also made other adjustments in the notices of
deficiency that the Court will address in a separate opinion.
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application of section 56(g)(4)(C)(i) to depletion, we must also
determine whether sections 57(a)(1) and 56(g)(4)(C)(i) perfectly
overlap when applied to depletion. This in turn depends on
whether unamortized section 56(a)(2) costs are included in the
adjusted basis of depletable property for purposes of determining
section 57(a)(1) preferences and/or section 56(g)(4)(C)(i) ACE
adjustments. Respondent concedes that petitioner correctly
reported the portions of the ACE adjustments attributable to the
Twin Creeks Mines. The Twin Creeks Mines were not subject to the
section 56(g)(4)(C)(i) ACE adjustment because their adjusted
bases were greater than the depletion deductions attributable to
them. See infra pp. 8-9. The parties filed memoranda in support
of their respective motions and in opposition to the opposing
party’s motion, and the Court held a hearing on these issues in
Washington, D.C.
Discussion
I. Summary Judgment
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). The Court may grant
summary judgment when there is no genuine issue of any material
fact and a decision may be rendered as a matter of law. Rule
121(b); Sundstrand v. Commissioner, 98 T.C. 518, 520 (1992),
affd. 17 F.3d 965 (7th Cir. 1994). The parties agree that there
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are no questions regarding any material facts related to the
issue before the Court and that the issue is a pure question of
law that should be resolved by summary judgment.
II. Statutory Background
Congress enacted the AMT as a part of the Tax Reform Act of
1986 (TRA), Pub. L. 99-514, 100 Stat. 2085, in order to prevent
taxpayers with substantial economic income from avoiding
significant tax liability by using exclusions, deductions, and
credits. See Snap-Drape, Inc. v Commissioner, 105 T.C. 16, 21
(1995), affd. 98 F.3d 194 (5th Cir. 1996). The AMT equals the
excess of the tentative minimum tax over the regular tax for the
year. Sec. 55(a). For corporations, the tentative minimum tax
is 20 percent of so much of AMTI as exceeds the exemption amount,
reduced by the AMT foreign tax credit for the year. Sec.
55(b)(1)(B). AMTI is the taxable income of the taxpayer for the
year determined with the adjustments provided in sections 56 and
58 and increased by the amount of items of tax preference in
section 57. Sec. 55(b)(2).
Section 56(g)(1) provides that the AMTI of any corporation
for the taxable year shall be increased by 75 percent of the
excess of the corporation’s ACE over the corporation’s
preadjustment AMTI, which is the taxpayer’s AMTI determined
without regard to section 56(g) or the alternative tax net
operating loss deduction.
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A. Section 56(g)(4)(C)(i)
Section 56(g)(4)(C)(i) provides that in determining ACE, no
deduction is allowed for any item that would not be deductible
for any taxable year for purposes of computing earnings and
profits. Section 56(g)(5)(A) provides that the term “earnings
and profits” means earnings and profits computed for purposes of
subchapter C. Section 1.312-6(c)(1), Income Tax Regs., provides:
In computing the earnings and profits for any period
beginning after February 28, 1913, the only depletion
or depreciation deductions to be considered are those
based on (i) cost or other basis, if the depletable or
depreciable asset was acquired subsequent to February
28, 1913 * * *. Thus, discovery or percentage
depletion under all revenue acts for mines and oil and
gas wells is not to be taken into consideration in
computing the earnings and profits of a corporation.
[Emphasis added.]
Sections 611 through 614 govern deductions allowable for
depletion of natural resources. Section 613 allows taxpayers
deductions for depletion that are based on a percentage of gross
income, regardless of the adjusted basis of the property, if the
deductions are larger than they would be under the cost depletion
method. Section 612 governs cost depletion, an alternate method
of calculating depletion deductions using the adjusted basis of
the property provided in section 1011. See also sec. 1.611-
2(b)(2), Income Tax Regs.
When the AMT applies, section 56(g)(4)(C)(i) offsets the
permanent benefit of the percentage depletion method by requiring
an ACE adjustment if a taxpayer’s depletion deduction exceeds the
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adjusted basis of the property. The section 56(g)(4)(C)(i) ACE
adjustment equals the excess, if any, of the taxpayer’s current
depletion deduction for the property for regular tax purposes
over the aggregate of the deductions allowable for the current
year and for future years when calculating earnings and profits.
Section 1.56(g)-1(d)(1), Income Tax Regs., provides:
no deduction is allowed in computing adjusted current
earnings for any items that are not taken into account
in determining earnings and profits for any taxable
year * * *. Thus, to the extent an item is, has been,
or will be deducted for purposes of determining
earnings and profits, it does not increase adjusted
current earnings in the taxable year in which it is
deducted for purposes of determining pre-adjustment
alternative minimum taxable income. * * * [Emphasis
added.]
Because a taxpayer is never allowed depletion deductions in
excess of the adjusted basis of the property under the cost
depletion method, section 56(g)(4)(C)(i) requires an ACE
adjustment of the amount by which the depletion deduction for the
property exceeds the adjusted basis of the property. However, to
the extent that the taxpayer has an adjusted basis in its
property, section 56(g)(4)(C)(i) does not require an ACE
adjustment even if the taxpayer deducts an amount for depletion
that exceeds what it would be allowed under the cost depletion
method because the excess deduction will be allowed as a
deduction under the cost depletion method in a future year.
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B. Section 56(g)(4)(F)(i)
For a taxpayer subject to the AMT owning mines placed in
service after December 31, 1989, section 56(g)(4)(F)(i) offsets
both the temporary and the permanent benefits of the percentage
depletion method:
(F) Depletion.--
(i) In general.--The allowance for depletion with
respect to any property placed in service in a taxable year
beginning after December 31, 1989, shall be cost depletion
under section 611.
This requires an ACE adjustment for the difference between a
taxpayer’s depletion deduction and the amount that would be
allowed if the taxpayer calculated its depletion deduction using
the cost depletion method.
To the extent that both section 56(g)(4)(C)(i) and (F)(i)
would otherwise require ACE adjustments (as would be the case if
a mine was placed in service after December 31, 1989, and its
adjusted basis is less than the depletion deduction), the
taxpayer must make an upward ACE adjustment only under section
56(g)(4)(F)(i). See infra pp. 18-19. When a mine’s adjusted
basis is fully depleted, the ACE adjustments under section
56(g)(4)(C)(i) and (F)(i) will both equal the deduction allowed
under the percentage depletion method. Because the adjustment
under section 56(g)(4)(F)(i) will offset the benefit of deducting
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an amount that would not be deductible for purposes of computing
earnings and profits, section 56(g)(4)(C)(i) does not apply.4
C. Section 57(a)(1)
Section 57(a)(1) is also designed to offset the permanent
benefit of the percentage depletion method. It includes as a tax
preference item that must be added to AMTI under section
55(b)(2)(B):
(1) Depletion.--With respect to each property (as
defined in section 614), the excess of the deduction
for depletion allowable under section 611 for the
taxable year over the adjusted basis of the property at
the end of the taxable year (determined without regard
to the depletion deduction for the taxable year). * * *
Section 614(a) defines “property” as “each separate interest
owned by the taxpayer in each mineral deposit in each separate
tract or parcel of land.”
Section 1.57-1(h)(3), Income Tax Regs., which further
explains section 57(a)(1), provides:
(3) Adjusted basis. For the determination of the
adjusted basis of the property at the end of the
taxable year see section 1016 and the regulations
thereunder.
Therefore, to the extent that a taxpayer’s depletion
deduction exceeds the adjusted basis of the property determined
under section 1016, the taxpayer has a preference item under
4
Examples 1-4 in the appendix to this Opinion illustrate
the operation of sec. 56(g)(4)(C)(i) and (F)(i) and the views of
the parties and the Court on whether sec. 56(g)(4)(C)(i) applies
to depletion.
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section 57(a)(1) that will be added to its AMTI under section
55(b)(2).
D. Unamortized Section 56(a)(2) Costs
Section 616(a) allows a taxpayer to currently deduct mine
development costs. A taxpayer’s election under section 616(b) to
deduct those costs ratably according to units of ore sold may
defer a portion of the deduction. However, section 291(b)
provides that, for corporations, the amount that would otherwise
be deductible under section 616(a) must be reduced by 30 percent,
but that the amount not allowable as a current deduction may be
amortized and deducted ratably over a 60-month period. As an
alternative, section 59(e) provides that a taxpayer may elect for
regular tax purposes to amortize the expenditures that would
otherwise be allowed as a deduction under section 616(a) over 10
years without regard to section 291.
Section 56(a)(2) provides that if a taxpayer is subject to
the AMT, when calculating AMTI the taxpayer must amortize over 10
years any mine development costs that it would otherwise have
deducted currently under section 616(a), without regard to
section 291. However, if a taxpayer makes an election under
section 59(e), section 56(a)(2) does not apply.
A key issue in this case is whether unamortized section
56(a)(2) costs are included in the adjusted basis of depletable
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property when calculating section 56(g)(4)(C)(i) ACE adjustments
and section 57(a)(1) preferences.
III. The Positions of the Parties
Petitioner argues that section 56(g)(4)(C)(i) does not apply
to depletion because ACE adjustments for depletion may be made
only under section 56(g)(4)(F)(i). Because section
56(g)(4)(F)(i) does not apply to mines placed in service on or
before December 31, 1989, petitioner argues that no ACE
adjustment should be made for depletion for mines placed in
service on or before December 31, 1989. In support of this
argument, petitioner asserts that: (1) Congress created a “grace
period” to protect mines placed in service on or before December
31, 1989, from all ACE adjustments for depletion; (2) the rules
of statutory construction show that section 56(g)(4)(C)(i) does
not apply to depletion; (3) the legislative history of section
56(g)(4) confirms that section 56(g)(4)(C)(i) does not apply to
depletion; (4) the statutory scheme of section 56 makes sense
only if section 56(g)(4)(C)(i) does not apply to depletion; and
(5) applying section 56(g)(4)(C)(i) to depletion would duplicate
the adjustment for tax preferences under sections 55(b)(2) and
57(a)(1).
Respondent argues that on its face section 56(g)(4)(C)(i)
applies to both depletable and other property regardless of when
it is placed in service, while section 56(g)(4)(F)(i) applies
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only to depletable property placed in service after December 31,
1989. While subparagraphs (C)(i) and (F)(i) overlap in some
cases, they are not in conflict or ambiguous. Therefore,
respondent argues that there is no need to resort to rules of
statutory construction or legislative history; but even if we
were to use these tools, they would not alter the plain meaning
of the statute.
Respondent further argues that section 56(g)(4)(C)(i) does
not merely duplicate the adjustment for tax preferences in
sections 55(b)(2) and 57(a)(1) because sections 56(g)(4)(C)(i)
and 57(a)(1) treat unamortized section 56(a)(2) costs
differently.
IV. The “Grace Period” Argument
Petitioner first argues that when Congress enacted the AMT,
it included a grace period that protects mines placed in service
on or before December 31, 1989, from any ACE adjustments
resulting from depletion deductions. Petitioner claims that this
intention is found in section 56(g)(4)(F)(i), quoted above.
Petitioner argues that because the limitation “after December 31,
1989,” also applies to six other specifically identified items in
section 56(g)(4), Congress must have intended for this “grace
period” to be an integral part of the AMT scheme as a whole.
Therefore, petitioner believes that section 56(g)(4)(C)(i) does
not apply to depletable property placed in service on or before
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December 31, 1989, either. Petitioner argues that if we do not
extend the “grace period” to section 56(g)(4)(C)(i), we will
negate the protection for depletable property placed in service
on or before December 31, 1989, that Congress intended when it
limited the application of section 56(g)(4)(F)(i) to property
placed in service after that date.
We agree that by limiting the reach of section
56(g)(4)(F)(i) Congress provided some protection for taxpayers
owning depletable property placed in service on or before
December 31, 1989. Section 613(a) allows a taxpayer to calculate
depletion deductions using the percentage depletion method for
regular tax purposes if that method results in a greater
deduction than a deduction calculated under the cost depletion
method. However, for property placed in service after December
31, 1989, section 56(g)(4)(F)(i) offsets the benefit of the
percentage depletion method when the AMT applies. Unlike section
56(g)(4)(C)(i), section 56(g)(4)(F)(i) requires an ACE adjustment
in any year for which the taxpayer’s percentage depletion
deduction exceeds the depletion deduction calculated under the
cost depletion method, even if the percentage depletion deduction
is less than the adjusted basis of the property. Therefore,
section 56(g)(4)(F)(i) may require an ACE adjustment in
situations where section 56(g)(4)(C)(i) would not apply. Because
the limitation in section 56(g)(4)(F)(i) protects property placed
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in service on or before December 31, 1989, from the ACE
adjustment under section 56(g)(4)(F)(i), taxpayers owning such
property do not need to make ACE adjustments for depletion unless
they have already fully depleted the adjusted basis of the
property.
While section 56(g)(4)(F)(i) allows a taxpayer to enjoy the
temporary benefits of the percentage depletion method if it owns
property placed in service on or before December 31, 1989, we do
not see any indication that Congress intended this protection to
extend to the permanent benefits of the percentage depletion
method once the taxpayer has fully depleted the adjusted basis of
the property. Congress included in section 56(g)(4) both
subparagraph (C)(i) and subparagraph (G), which was redesignated
in 1990 but is materially the same as current subparagraph (F),
in TRA.5 If Congress had wished to limit the application of
5
Tax Reform Act of 1986, Pub. L. 99-514, sec. 701(a), 100
Stat. 2320; Omnibus Budget Reconciliation Act of 1990, Pub. L.
101-508, sec. 11301(b), 104 Stat. 1388-449. The original sec.
56(g)(4)(G) provided:
(G) Depletion.–-The allowances for depletion with
respect to any property placed in service in a taxable
year beginning after 1989, shall be determined under
whichever of the following methods yields deductions
with a smaller present value:
(i) cost depletion determined under section 611,
or
(ii) the method used for book purposes.
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section 56(g)(4)(C)(i) to property placed in service after
December 31, 1989, it could have included a limitation similar to
the one found in section 56(g)(4)(F)(i). In the absence of clear
evidence that Congress intended to protect depletable property
placed in service on or before December 31, 1989, from all ACE
adjustments related to depletion, we will not restrict the
application of section 56(g)(4)(C)(i) to property placed in
service after December 31, 1989.
V. Statutory Construction
Petitioner also argues that the rules of statutory
construction show that section 56(g)(4)(C)(i) does not apply to
depletion. Petitioner supports its argument with three theories,
which we address in turn.
A. No Provision Should Be Superfluous
First, petitioner argues that courts must attempt to
interpret statutory provisions so as not to render any other
provisions in the same enactment superfluous. See Freytag v.
Commissioner, 501 U.S. 868, 877 (1991). Petitioner argues that
applying section 56(g)(4)(C)(i) to depletion renders the
limitation of section 56(g)(4)(F)(i) to mines placed in service
after December 31, 1989, superfluous.
As discussed above, subparagraphs (C)(i) and (F)(i) do serve
different functions. While applying section 56(g)(4)(C)(i) to
depletion renders the protection in section 56(g)(4)(F)(i)
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superfluous for the owner of property that has fully depleted the
adjusted basis of the property for cost depletion purposes, the
limitation on the application of section 56(g)(4)(F)(i) is of
significant benefit for taxpayers with property placed in service
on or before December 31, 1989, that have not fully depleted the
property’s adjusted basis. Petitioner enjoyed this benefit with
respect to its Twin Creeks Mines. See supra note 1. Therefore,
applying section 56(g)(4)(C)(i) to depletable property placed in
service on or before December 31, 1989, does not render the
limitation in section 56(g)(4)(F)(i) superfluous.
B. The Particular Is Not Included in the General
Petitioner next argues that section 56(g)(4)(C)(i) does not
apply to depletion because it is a general provision that
includes what is already included in a more particular provision,
section 56(g)(4)(F)(i). In United States v. Chase, 135 U.S. 255,
260 (1890), the Supreme Court stated:
where there is, in the same statute, a particular
enactment, and also a general one, which, in its most
comprehensive sense, would include what is embraced in
the former, the particular enactment must be operative,
and the general enactment must be taken to affect only
such cases within its general language as are not
within the provisions of the particular enactment. * * *
While respondent agrees with this theory, he disagrees that
it applies in this case. Section 56(g)(4)(F)(i) is the
“particular enactment” that deals specifically with depletion,
but it applies only to property placed in service after December
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31, 1989. In the case of a taxpayer with property placed in
service after December 31, 1989, whose depletion deduction
exceeds the adjusted basis of the property for cost depletion
purposes, petitioner is correct that subparagraphs (C)(i) and
(F)(i) would both require the taxpayer to make the same ACE
adjustment to the extent that the depletion deduction exceeds the
adjusted basis of the property. Respondent concedes that in such
situations only the particular provision, section 56(g)(4)(F)(i),
applies. However, section 56(g)(4)(F)(i) does not apply to
property placed in service on or before December 31, 1989.
Therefore, only the general provision, section 56(g)(4)(C)(i),
applies to such property, and there is no overlap between the
particular and the general. Because the Mesquite Mine was placed
in service on or before December 31, 1989, it is subject only to
the adjustment in section 56(g)(4)(C)(i).
C. Ambiguities Must Be Resolved Against the Drafter
Petitioner next argues that ambiguous statutes must be
resolved against the drafter, in this case the Government.
However, this canon of statutory construction applies only where
statutes are ambiguous. Chickasaw Nation v. United States, 208
F.3d 871, 880 (10th Cir. 2000), affd. 534 U.S. 84 (2001); see
also White v. United States, 305 U.S. 281, 292 (1938). As
discussed above, section 56(g)(4)(C)(i) applies to all property
regardless of when it was placed in service, and it offsets the
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permanent benefit of the percentage depletion method and other
deductions that are not allowed when calculating earnings and
profits. Section 56(g)(4)(F)(i) applies only to depletable
property that is placed in service after December 31, 1989, and
it offsets the temporary and permanent benefits of the percentage
depletion method. We decline to read ambiguity into a statute
that has only one meaning on its face.
VI. Legislative History
Petitioner also argues that the legislative history of
section 56(g)(4) clarifies any remaining ambiguities and confirms
that section 56(g)(4)(C)(i) does not apply to depletion.
Generally, the Court looks to legislative history only if the
statute is unclear. Blum v. Stenson, 465 U.S. 886, 896 (1984);
Woodral v. Commissioner, 112 T.C. 19, 22 (1999). However, we do
not find section 56(g)(4) unclear.
Furthermore, the legislative history of section 56(g)(4)
does not alter our understanding of the statute. The House
conference report for TRA explains that some adjustments will be
made to ACE according to how those items are treated when
calculating earnings and profits, and then goes on to say:
“Additionally, adjusted current earnings requires different
treatment of certain specifically listed items.” H. Conf. Rept.
99-841 (Vol. II), at II-275 (1986), 1986-3 C.B. (Vol. 4), 1, 275.
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We agree that depletion is specifically listed in section
56(g)(4)(F)(i) and is therefore entitled to “different
treatment”. However, it does not necessarily follow that the
general provisions in section 56(g)(4)(C)(i) do not apply to
depletable property that is outside the scope of section
56(g)(4)(F)(i).
VII. The Statutory Scheme of Section 56
Petitioner next argues that applying section 56(g)(4)(C)(i)
to depletion conflicts with the statutory scheme of section 56
because it: (1) Requires section 56(g)(4)(C)(i) to be read in
isolation; (2) conflicts with the regulations; (3) is
inconsistent with section 56(g)(4)(F)(i); and (4) is inconsistent
with respondent’s ACE worksheets.
Petitioner argues that respondent’s position, that section
56(g)(4)(C)(i) applies to depletion, is plausible only if section
56(g)(4)(C)(i) is read in isolation; and if we are to read
individual paragraphs in isolation, then section 56(g)(5)(B)
eliminates all section 56(g)(4) adjustments.
We agree that phrases must be construed in the light of the
overall purpose and structure of the whole statutory scheme.
Dole v. United Steelworkers of Am., 494 U.S. 26, 35 (1990);
Woodral v. Commissioner, supra at 22. However, we disagree that
respondent’s position is plausible only if section 56(g)(4)(C)(i)
is read in isolation. Read by itself, section 56(g)(4)(C)(i)
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applies to all property regardless of when it is placed in
service and offsets the permanent benefit of the percentage
depletion method and other deductions that are not allowed in any
year when computing earnings and profits. Read in the context of
section 56 as a whole, it applies only to depletion if a taxpayer
owns depletable property with an adjusted basis smaller than the
amount of the taxpayer’s depletion deduction and the property is
not subject to section 56(g)(4)(F)(i); i.e., was placed in
service on or before December 31, 1989. While section
56(g)(4)(F)(i) may limit its application, section 56(g)(4)(C)(i)
does not conflict with the rest of section 56 unless we adopt
petitioner’s position that section 56(g)(4)(F)(i) is the only
section that governs ACE adjustments for depletion. We decline
to create a conflict where there is none on the face of the
statute.
Furthermore, contrary to petitioner’s argument, section
56(g)(5)(B) does not eliminate all section 56(g)(4) adjustments.
Section 56(g)(5)(B) provides:
(5) Other definitions.–-For purposes of paragraph (4)--
* * * * * * *
(B) Treatment of alternative minimum taxable
income.–-The treatment of any item for purposes of
computing alternative minimum taxable income shall be
determined without regard to this subsection.
- 23 -
While we agree that section 56(g)(5)(B) cannot be read in
isolation without causing some confusion, it is clear from the
statute as a whole that paragraph (5)(B) simply means that items
used in making ACE adjustments should not be included in
preadjustment AMTI as well. Otherwise, ACE would always equal
preadjustment AMTI, and section 56(g)(1) would be meaningless.
Petitioner also argues that the structure of the regulations
indicates that depletion is treated separately from other
adjustments that are based on earnings and profits. Section
1.56(g)-1(d)(3), Income Tax Regs., contains a partial list of
items not deductible in computing earnings and profits that does
not mention depletion, and section 1.56(g)-1(j), Income Tax
Regs., separately addresses depletion. Petitioner argues that
this means that depletion is never subject to the general
earnings and profits rule. However, the list in section 1.56(g)-
1(d)(3), Income Tax Regs., is clearly a “partial list”. Section
1.56(g)-1(d)(3), Income Tax Regs., provides:
Items described in paragraph (d)(1) of this section
[referring to items not deductible in computing
earnings and profits] are not taken into account in
computing earnings and profits (and thus are not
deductible in computing adjusted current earnings) even
if they are not identified in this paragraph (d)(3).
* * *
Therefore, it does not prove that there cannot be an ACE
adjustment related to depletion under the general earnings and
profits rule, particularly because the regulations under section
- 24 -
312 specifically include deductions under the percentage
depletion method as an item that is not allowable as a deduction
when calculating earnings and profits. Sec. 1.312-6(c)(1),
Income Tax Regs. Furthermore, the specific regulation that
governs depletion, section 1.56(g)-1(j), Income Tax Regs.,
applies only to property placed in service after December 31,
1989.
While noting that implications drawn from subsequent
legislation provide a hazardous basis for divining the intent of
an earlier Congress, petitioner next argues that the
parenthetical in section 56(g)(4)(F)(ii), which was added in 1992
by the Energy Policy Act of 1992, Pub. L. 102-486, sec.
1915(a)(2), 106 Stat. 3022, confirms that section 56(g)(4)(C)(i)
does not apply to depletion. Section 56(g)(4)(F)(ii) provides:
(ii) Exception for independent oil and gas
producers and royalty owners.--In the case of any
taxable year beginning after December 31, 1992, clause
(i) (and subparagraph (C)(i)) shall not apply to any
deduction for depletion computed in accordance with
section 613A(c). [Emphasis added.]
Petitioner argues that the use of the parenthetical “(and
subparagraph (C)(i))” indicates that the information inside the
parentheses is redundant. Therefore, the fact that Congress
chose to state in parentheses that section 56(g)(4)(C)(i) does
not apply to independent oil and gas producers means that section
56(g)(4)(C)(i) would not have applied to those taxpayers in any
event because section 56(g)(4)(C)(i) does not apply to depletion.
- 25 -
Respondent, by contrast, argues that if Congress had believed
that the clause regarding section 56(g)(4)(C)(i) was redundant,
it would not have included the clause.
Respondent’s argument is more persuasive. It is a cardinal
rule of statutory construction to give effect to every clause in
a statute if possible, and this does not change simply because
the clause is in parentheses. Market Co. v. Hoffman, 101 U.S.
112, 115-116 (1879). While it is inappropriate to give a
parenthetical such weight that it contradicts the plain meaning
of the rest of the statute, see, e.g., Chickasaw Nation v. United
States, 534 U.S. at 89, respondent’s argument is consistent with
our interpretation of section 56(g)(4)(C)(i). Therefore, given
the limited utility of using the views of a subsequent Congress
to make inferences as to the intent of an earlier Congress, we
will not interpret section 56(g)(4)(F)(ii) as meaning that
section 56(g)(4)(C)(i) does not apply to depletion.
Petitioner also argues that the Commissioner’s corporate AMT
instructions for the last 20 years confirm that section
56(g)(4)(C)(i) does not apply to depletion. Petitioner points
out that the Commissioner’s “Adjusted Current Earnings Worksheet”
does not list depletion among the ACE adjustments for items not
deductible from earnings and profits.
Even if we were to find the Commissioner’s worksheets to be
misleading, these informal publications are not law. Zimmerman
- 26 -
v. Commissioner, 71 T.C. 367, 371 (1978), affd. without published
opinion 614 F.2d 1294 (2d Cir. 1979); Green v. Commissioner, 59
T.C. 456, 458 (1972). However, we do not find the worksheets to
be misleading because they have a place for “Other items” and
point to the partial list in section 1.56(g)-1(d)(3), Income Tax
Regs., indicating that the worksheets are not comprehensive.
In addition, the Commissioner published a technical advice
memorandum in 1999 addressing another taxpayer’s argument similar
to petitioner’s current argument that section 56(g)(4)(C)(i) does
not apply to depletion for property placed in service on or
before December 31, 1989. Tech. Adv. Mem. 199910045 (Mar. 12,
1999). The taxpayer’s arguments were rejected for the same
reasons respondent gives in this case. Id. Therefore,
petitioner’s argument that respondent is now changing his
position after 20 years is without merit.
VIII. Development Costs
Petitioner’s final argument is that if section
56(g)(4)(C)(i) applies to depletion, then section 57(a)(1) is
superfluous or at least duplicative. Both section 56(g)(4)(C)(i)
ACE adjustments and section 57(a)(1) preferences appear to
require adjustments for the same amount: the excess of the
depletion deduction allowed under the percentage depletion method
over the adjusted basis of the property.
- 27 -
Respondent concedes that there may be some overlap between
the two sections and agrees with petitioner that under section
1.56(g)-1(a)(6)(ii), Income Tax Regs., the amount of the ACE
adjustment is reduced by the amount taken into account under
section 57(a)(1) to prevent duplication. However, respondent
argues that sections 56(g)(4)(C)(i) and 57(a)(1) do not perfectly
overlap. Respondent concedes that unamortized section 56(a)(2)
costs are added to the adjusted basis of property when
calculating section 57(a)(1) preferences but argues that they are
not added to the adjusted basis of property when calculating
section 56(g)(4)(C)(i) ACE adjustments. Therefore, the section
57(a)(1) preference will generally be less than the excess of the
depletion deduction over the property’s adjusted basis as
calculated for purposes of section 56(g)(4)(C)(i), and the ACE
adjustment will be the difference between this excess and the
amount of the section 57(a)(1) preference.
Petitioner argues that if section 56(g)(4)(C)(i) applies to
depletion, sections 56(g)(4)(C)(i) and 57(a)(1) perfectly overlap
because unamortized section 56(a)(2) costs are included in the
adjusted basis of depletable property for purposes of calculating
both section 57(a)(1) preferences and section 56(g)(4)(C)(i) ACE
adjustments.6
6
Example 5 in the appendix to this Opinion illustrates the
operation of secs. 56(a)(2), 57(a)(1), and 56(g)(4)(C)(i), and
(continued...)
- 28 -
To decide this issue, we must consider whether sections
56(g)(4)(C)(i) and 57(a)(1) share the same definitions of
“property” and “adjusted basis”. Our analysis shows that they do
and that section 56(a)(2) costs should not be included in the
adjusted basis of property for purposes of calculating the
adjustments under either section 56(g)(4)(C)(i) or 57(a)(1).
However, because respondent conceded in this case that section
56(a)(2) costs may be included in the adjusted basis of property
for purposes of calculating the section 57(a)(1) preference, we
will allow petitioner to include section 56(a)(2) costs in the
adjusted basis of the Mesquite Mine for the years at issue.
A. Section 56(g)(4)(C)(i)
The ACE adjustment in section 56(g)(4)(C)(i) is the excess
of the amount of the depletion deduction allowable under the
percentage depletion method over the adjusted basis of the
property. See secs. 1.312-6(c)(1), 1.611-2(b)(2), Income Tax
Regs.
Section 614(a) provides the definition of “property” for
purposes of determining depletion deductions:
SEC. 614 (a). General Rule.--For the purpose of
computing the depletion allowance in the case of mines,
wells, and other natural deposits, the term “property”
means each separate interest owned by the taxpayer in
6
(...continued)
the positions of the parties and the Court.
- 29 -
each mineral deposit in each separate tract or parcel
of land. [Emphasis added.]
Section 1.611-1(d), Income Tax Regs., further explains the
difference between “property” and the entire “mineral
enterprise”:
(1) “Property” means--(i) in the case of
minerals, each separate economic interest owned in each
mineral deposit in each separate tract or parcel of
land or an aggregation or combination of such mineral
interests permitted under section 614(b), (c), (d), or
(e); * * *
* * * * * * *
(3) “Mineral enterprise” is 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 of the land as is necessary for purposes of
mineral extraction. The value of the mineral
enterprise is the combined value of its component parts.
(4) “Mineral deposit” refers to minerals in
place. When a mineral enterprise is acquired as a
unit, the cost of any interest in the mineral deposit
or deposits is that proportion of the total cost of the
mineral enterprise which the value of the interest in
the deposit or deposits bears to the value of the
entire enterprise at the time of its acquisition.
(5) “Minerals” includes ores of the metals, coal, oil,
gas, and all other natural metallic and nonmetallic
deposits, except minerals derived from sea water, the air,
or from similar inexhaustible sources. It includes but is
not limited to all of the minerals and other natural
deposits subject to depletion based upon a percentage of
gross income from the property under section 613 and the
regulations thereunder.
[Emphasis added.]
These definitions make it clear that for purposes of determining
depletion deductions, “property” includes only the actual
- 30 -
minerals, not improvements or the surface land that are part of
the entire “mineral enterprise”. While the definition of
“minerals” is not limited to property eligible for the depletion
deduction under section 613 but also includes oil and gas, it is
limited to natural deposits that are exhaustible; i.e., subject
to depletion. Sec. 1.611-1(d)(5), Income Tax Regs. Therefore,
“property” for purposes of determining the allowable deduction
for cost depletion purposes does not include unamortized section
56(a)(2) costs because those are not costs paid for exhaustible
minerals.
Neither the Code nor the regulations specifically state
whether unamortized section 56(a)(2) costs are included in the
adjusted basis used for cost depletion purposes. However,
consistent with the definition of “property”, the definition of
“adjusted basis” for cost depletion purposes does not include
unamortized section 56(a)(2) costs. Under section 612 the
adjusted basis for purposes of determining depletion deductions
is the adjusted basis provided in section 1011. Section 1.612-1,
Income Tax Regs., provides:
(b) Special rules. (1) The basis for cost
depletion of mineral or timber property does not
include:
(i) Amounts recoverable through depreciation
deductions, through deferred expenses, and through
deductions other than depletion, * * *
- 31 -
Because unamortized section 56(a)(2) costs are not recovered
through depletion deductions but are amortized under section
56(a)(2), they are not part of the adjusted basis for cost
depletion purposes.
This is consistent with the treatment of development costs
that are deferred under section 616(b) (section 616(b) costs) or
disallowed and amortized under section 291(b) (section 291(b)
costs). Like section 56(a)(2) costs, section 616(b) costs and
section 291(b) costs are associated with depletable property but
are deducted or amortized separately from the depletion
deductions. Under section 616(c), section 616(b) costs are
included in the adjusted basis of the mine under section
1016(a)(9) for most purposes but are disregarded for purposes of
computing depletion deductions under section 611. Similarly,
under section 291(b)(5) the portion of the adjusted basis of
property attributable to section 291(b) costs is not taken into
account for purposes of determining depletion deductions under
section 611.
Petitioner argues that unamortized section 56(a)(2) costs
should be included in the adjusted basis of depletable property
for purposes of both sections 57(a)(1) and 56(g)(4)(C)(i) because
section 56(a)(7)7 specifically provides that unamortized section
7
Sec. 56(a)(7) was redesignated sec. 56(a)(6) in 1997.
Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 403(a), 111
(continued...)
- 32 -
56(a)(2) costs are included in the adjusted basis of the
property. As in effect for the years at issue, section 56(a)(7)
provides:
(7) Adjusted basis.--The adjusted basis of any property
to which paragraph (1) or (5) applies (or with respect to
which there are any expenditures to which paragraph (2) or
subsection (b)(2) applies) shall be determined on the basis
of the treatment prescribed in paragraph (1), (2), or (5),
or subsection (b)(2), whichever applies. [Emphasis added.]
Because section 56(a)(2) provides that the section 56(a)(2) costs
shall be capitalized and amortized ratably over a 10-year period,
petitioner argues that section 56(a)(7) requires section 56(a)(2)
costs to be included in the adjusted basis of depletable property
for all AMT purposes.
Section 56(a)(7) does provide that development costs should
be included in the basis of the property to which section
56(a)(2) applies. However, development costs are incurred to
improve the entire mineral enterprise, not to acquire the actual
minerals in place. See sec. 616(a). Therefore, unamortized
section 56(a)(2) costs are added to the adjusted basis of the
mineral enterprise, but they are excluded from the adjusted basis
of the mineral deposits for the purpose of determining depletion
deductions. See sec. 1.611-1(d)(3) through (5), Income Tax Regs.
7
(...continued)
Stat. 844.
- 33 -
On the basis of the foregoing discussion, we conclude that
unamortized section 56(a)(2) costs are not included in the
adjusted basis of property for purposes of calculating ACE
adjustments under section 56(g)(4)(C)(i) for depletion.
B. Section 57(a)(1)
Section 57(a)(1) includes as a tax preference item:
(1) Depletion.--With respect to each property (as
defined in section 614), the excess of the deduction
for depletion allowable under section 611 for the
taxable year over the adjusted basis of the property at
the end of the taxable year (determined without regard
to the depletion deduction for the taxable year). * * *
[Emphasis added.]
Section 614(a) defines “property” as “each separate interest
owned by the taxpayer in each mineral deposit in each separate
tract or parcel of land.” (Emphasis added.) This is the
definition of “property” that is used for purposes of cost
depletion, which does not include unamortized section 56(a)(2)
costs. Therefore, unamortized section 56(a)(2) costs are not
part of the property used in determining the amount of the
section 57(a)(1) preference. However, both petitioner and
respondent take the position that, notwithstanding the narrow
definition of “property” in section 614(a), unamortized section
56(a)(2) costs are included in the definition of “adjusted basis”
for purposes of section 57(a)(1).
The regulations under section 57(a)(1) reference section
1016 for determination of the adjusted basis. Sec. 1.57-1(h)(3),
- 34 -
Income Tax Regs. Section 1016(a)(9) requires adjustments to
basis for deferred section 616(b) costs, and section 1016(a)(20)
requires adjustments to basis for unamortized development costs
deferred under section 59(e). While section 1016 does not
specifically refer to unamortized section 56(a)(2) costs, it does
require adjustments for items properly chargeable to capital
account and for depletion. Sec. 1016(a)(1) and (2).
The Commissioner has historically argued that deferred
section 616 development costs are part of the adjusted basis used
in calculating the section 57(a)(1) preference on the basis of
the reference to section 1016 in section 1.57-1(h)(3), Income Tax
Regs., and the references to deferred section 616 development
costs in section 1016(a)(9) and (20). See Tech. Adv. Mem. 83-14-
011 (Dec. 22, 1982); Tech. Adv. Mem. 97-47-002 (Nov. 21, 1997);
Field Serv. Adv. Mem. 200021006 (May 25, 2000); cf. Field Serv.
Adv. Mem. 0614 (June 30, 1993). While the pattern in section
1016 is to adjust basis for deferred section 616 development
costs, respondent’s argument ignores the fact that the definition
of “property” in section 614(a), which is the definition of
property used by section 57(a)(1), does not include the entire
mineral enterprise but includes only minerals in place.
Therefore, section 1016 may require unamortized section 56(a)(2)
costs to be added to the basis of the mineral enterprise, but it
- 35 -
is only the adjusted basis of the minerals in place that is used
to calculate the section 57(a)(1) preference.
While not directly on point, the Supreme Court’s reasoning
in United States v. Hill, 506 U.S. 546 (1993), persuades us that
unamortized section 56(a)(2) costs are not included in the
adjusted basis of depletable property for purposes of calculating
section 57(a)(1) preferences. The issue in Hill was whether
unrecovered costs of depreciable tangible items used to exploit
the taxpayers’ mines (unrecovered depreciation costs) should be
added to the adjusted basis for purposes of section 57(a)(8),
which was redesignated section 57(a)(1) in 1986 by TRA sec.
701(a), 100 Stat. 2320. Id. at 548. The Supreme Court reasoned
that because taxpayers do not deduct unrecovered depreciation
costs through depletion but instead deduct them through
depreciation, the unrecovered depreciation costs are separate
assets from the mineral deposits. Id. at 558-559. This is
similar to the way that land is treated as a separate asset from
a building that sits on it for purposes of calculating
depreciation, but the land and the building have a combined
adjusted basis for purposes of determining gain or loss when they
are sold together. Id. The Supreme Court relied on the
definitions of “property”, “mineral deposit”, “minerals in
place”, and “mineral enterprise” found in section 614(a) and
section 1.611-1(d), Income Tax Regs., to decide that the term
- 36 -
“property” used in section 57(a)(8) includes only minerals in
place and excludes improvements. Id. at 553-560. While noting
the taxpayers’ argument that section 1016 governs adjustments to
basis, the Supreme Court concluded that “the computation of
adjusted basis under § 1016 is wholly predicated on, rather than
independent of, an understanding of ‘mineral deposit’ as distinct
from ‘improvements’ within the meaning of the regulations under §
611.” Id. at 554.
The Supreme Court declined to extend its reasoning to costs
deferred under section 616, particularly section 616(b) costs,
because section 616(c) sets up a different system for section
616(b) costs. Id. at 564 n.12. However, the Supreme Court’s
findings, that (1) the term “property” as used in section 614(a)
includes only minerals in place and (2) the definition of
“property” is critical to defining the adjusted basis of the
property, apply in the case before us. Id. at 553-554. Because
unamortized section 56(a)(2) costs are not directly incurred to
acquire minerals in place, they are not included in the
definition of depletable property in section 614(a). Under the
reasoning in Hill, this means that they cannot be included in the
adjusted basis of depletable property for purposes of calculating
section 57(a)(1) preferences.
This interpretation is also supported by the legislative
history of the revisions to the AMT in 1986. The House
- 37 -
conference report states: “The excess over the adjusted basis of
the depletable property is a preference.” H. Conf. Rept. 99-841
(Vol. II), supra at II-268, 1986-3 C.B. (Vol. 4) at 268 (emphasis
added). Because unamortized section 56(a)(2) costs are not
depletable but are amortized over a 10-year period, this
statement indicates that they should not be added to the adjusted
basis of the property for purposes of section 57(a)(1).
Petitioner again argues that section 56(a)(7) defines
“adjusted basis” for all AMT purposes and that that section
provides that unamortized section 56(a)(2) costs are included in
the basis of property. However, section 1.57-1(h)(3), Income Tax
Regs., references section 1016, not section 56(a)(7), for the
definition of “adjusted basis” for purposes of calculating
section 57(a)(1) preferences. In any event, our analysis shows
that the property referred to in section 56(a)(7) is the mineral
enterprise, and only the adjusted basis of the mineral deposit is
relevant for determining section 57(a)(1) preferences.
Our analysis is inconsistent with the Commissioner’s
historical and current position that unamortized section 56(a)(2)
costs may be included in the adjusted basis of depletable
property for purposes of calculating section 57(a)(1)
preferences. However, because respondent has conceded this issue
as it relates to the Mesquite Mine, the parties should
nevertheless apply respondent’s concession in the Rule 155
- 38 -
computation that the parties agree will be necessary after the
remaining issue has been resolved.
IX. Conclusion
On the basis of our analysis, unamortized section 56(a)(2)
costs are not included in the adjusted basis of depletable
property when calculating the amount of section 56(g)(4)(C)(i)
ACE adjustments or section 57(a)(1) preferences. However,
because respondent conceded that unamortized section 56(a)(2)
costs may be included in the adjusted basis of the Mesquite Mine
for purposes of calculating section 57(a)(1) preferences,
petitioner may include such costs. Therefore, petitioner is not
required to make adjustments to its calculation of section
57(a)(1) preferences for the Mesquite Mine for the years at issue
and should compute its AMT consistent with our holding that
section 56(g)(4)(C)(i) applies to depletion to the extent that
amounts treated as section 56(g)(4)(C)(i) ACE adjustments are not
also treated as section 57(a)(1) preferences.
To reflect the foregoing,
An appropriate order will
be issued.
- 39 -
APPENDIX
Example 1: The Operation of Section 56(g)(4)(C)(i) and (F)(i)
Taxpayer owns a mine that was placed in service after
December 31, 1989. The mine has an adjusted basis of $100. The
deduction allowed under the percentage depletion method is $25,
and the deduction allowed under the cost depletion method is $20.
Taxpayer did not incur any development costs under section 616(a)
that it is required to capitalize and amortize under section
56(a)(2). In order to demonstrate the difference between section
56(g)(4)(C)(i) and (F)(i), in Examples 1-4 we assume that section
57(a)(1) does not apply.
Under section 56(g)(4)(F)(i), Taxpayer must make an ACE
adjustment of $5, which is the difference between the deduction
allowed under the percentage depletion method ($25) and the
deduction allowed under the cost depletion method ($20).
Taxpayer does not make an ACE adjustment under section
56(g)(4)(C)(i) because Taxpayer’s deduction for depletion ($25)
is less than the mine’s adjusted basis ($100), so it does not
exceed the amount allowable as a deduction in any tax year.
Taxpayer will eventually be allowed to deduct $25 under the cost
depletion method.
Example 2:
Same as Example 1, except that Taxpayer’s mine was placed in
service on or before December 31, 1989.
Taxpayer is not required to make any ACE adjustments for
depletion. Section 56(g)(4)(F)(i) does not apply to property
placed in service on or before December 31, 1989, and as
discussed in Example 1, Taxpayer is not required to make an
adjustment under section 56(g)(4)(C)(i).
Example 3:
Same as Example 1, except that Taxpayer’s mine has an
adjusted basis of zero. Therefore, no deduction is allowed under
the cost depletion method.
Taxpayer must make an ACE adjustment under section
56(g)(4)(F)(i) of $25, which is the difference between the
deduction allowed under the percentage depletion method ($25) and
the deduction allowed under the cost depletion method (zero).
Taxpayer is not required to make an ACE adjustment under
section 56(g)(4)(C)(i). Because Taxpayer is required to take
into account the excess of the deduction allowed under the
percentage depletion method over the amount allowed in any year
($25) in calculating its ACE, Taxpayer is no longer claiming a
- 40 -
deduction for an item that would not be deductible for purposes
of computing earnings and profits.
Example 4:
Same as Example 3, except that Taxpayer’s mine was placed in
service on or before December 31, 1989.
Taxpayer is not required to make an ACE adjustment under
section 56(g)(4)(F)(i) because that section does not apply to
property placed in service on or before December 31, 1989.
Petitioner argues that section 56(g)(4)(C)(i) does not
require Taxpayer to make an ACE adjustment for depletion because
only section 56(g)(4)(F)(i) applies to depletion.
Respondent argues that Taxpayer is required to make an
adjustment under section 56(g)(4)(C)(i) of $25, which is the
difference between the deduction taken under the percentage
depletion method ($25) and the amount that would be allowable in
any year under the cost depletion method (zero). Because
Taxpayer did not make an ACE adjustment for this amount under
section 56(g)(4)(F)(i), nothing prevents section 56(g)(4)(C)(i)
from applying.
We agree with respondent that section 56(g)(4)(F)(i) does
not prevent section 56(g)(4)(C)(i) from applying to depletion.
However, as discussed in the Opinion, the $25 difference
between the amount allowable under the percentage depletion
method and the adjusted basis of the mine will be taken into
account under section 57(a)(1). Therefore, section
56(g)(4)(C)(i) will be preempted by section 57(a)(1) just as it
was preempted by section 56(g)(4)(C)(i) in Example 3.
Example 5: The Treatment of Section 56(a)(2) Costs Under
Sections 57(a)(1) and 56(g)(4)(C)(i)
Taxpayer owns property that was placed in service on or
before December 31, 1989. The property has an adjusted basis for
cost depletion purposes(cost basis) of zero, excluding
unamortized section 56(a)(2) costs. Taxpayer has unamortized
section 56(a)(2) costs of $20. Taxpayer is allowed a deduction
of $25 under the percentage depletion method.
Respondent and petitioner both argue that Taxpayer’s section
57(a)(1) preference equals $5:
$25 (depletion deduction)
- 0 (cost basis)
- 20 (unamortized section 56(a)(2) costs)
5 (section 57(a)(1) preference)
- 41 -
Respondent argues that Taxpayer’s section 56(g)(4)(C)(i) ACE
adjustment equals $20:
$25 (depletion deduction)
- 0 (cost basis)
- 5 (amount taken into account under section 57(a)(1))
20 (section 56(g)(4)(C)(i) ACE adjustment)
Respondent argues that the unamortized section 56(a)(2) costs are
not included in basis for purposes of section 56(g)(4)(C)(i).
Petitioner argues that Taxpayer’s section 56(g)(4)(C)(i) ACE
adjustment, if it applies to depletion, would equal zero because
unamortized section 56(a)(2) costs are taken into account:
$25 (depletion deduction)
- 0 (cost basis)
- 20 (unamortized section 56(a)(2) costs)
- 5 (amount taken into account under section 57(a)(1))
0 (section 56(g)(4)(C)(i) ACE adjustment)
Under the Court’s analysis, Taxpayer’s section 57(a)(1)
preference should equal $25 because unamortized section 56(a)(2)
costs are not taken into account in either calculation:
$25 (depletion deduction)
- 0 (cost basis)
25 (section 57(a)(1) preference)
Therefore, Taxpayer’s section 56(g)(4)(C)(i) ACE adjustment
would equal zero:
$25 (depletion deduction)
- 0 (cost basis)
- 25 (amount taken into account under section 57(a)(1))
0 (section 56(g)(4)(C)(i) ACE adjustment)
However, because respondent conceded that petitioner may
include section 56(a)(2) costs in the Mesquite Mine’s adjusted
basis for purposes of determining the section 57(a)(1)
preferences attributable to that mine, in their Rule 155
computations the parties should follow respondent’s position (the
section 57(a)(1) preference would be $5 and the section
56(g)(4)(C)(i) ACE adjustment would be $20 in this example).