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High Court to Review Energy Investment Tax Breaks With AM-Scotus Rdp

April 27, 1992

WASHINGTON (AP) _ With at least $1 billion a year in tax revenues at stake, the Supreme Court agreed Monday to decide what tax breaks are available to oil and gas exploration investors.

The justices, granting a Bush administration appeal, said they review the tax-deduction calculations approved by lower courts.

Under federal tax law, an owner of oil and gas deposits is entitled to deduct both a reasonable allowance to cover depletion of the mineral deposit and depreciation of ″improvements″ such as machinery, pipes and other equipment.

The allowance for depreciation of improvements is based on a taxpayer’s costs of acquiring the improvements. Once a taxpayer has fully recovered those costs through annual depreciation allowances, no more deductions are allowed.

But the depletion allowance in the federal tax code works differently. It is based on a taxpayer’s production revenues. The depletion allowance may be claimed so long as revenues are received, even after the costs of acquiring and developing the mineral deposit have been fully recovered.

That can result in an unusual advantage for mineral deposit owners. To offset that, Congress devised a minimum tax on ″tax preference″ income. Since 1969, taxpayers who claim a deduction for mineral depletions have that sheltered money subjected to a minimum tax.

At issue in this high-stakes dispute is how that minimum tax is calculated.

The Internal Revenue Service used one calculation when deciding that William and Lola Hill, oil and gas investors from Killbuck, Ohio, owed over $49,000 in back taxes for 1981 and 1982.

The U.S. Claims Court and the U.S. Court of Appeals for the Federal Circuit ruled that the IRS used the wrong calculation.

In the appeal acted on today, government lawyers told the justices those rulings, if not overturned, would carry ″dramatic consequences.″

″The Internal Revenue Service advises that, for the period from 1985 to 1989 alone, more than $5 billion of revenue from the minimum tax on tax preference income is affected,″ the government appeal said.

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