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21 Tex. L. Rev. 410 (1942-1943)
Federal Income Tax--Percentage Depletion of Oil and Gas Wells

handle is hein.journals/tlr21 and id is 433 raw text is: COMMENTS FEDERAL INCOME TAx-PERCENTAGE DEPLETION OF OIL AND GAS WELLS The necessity for additional revenue for the prosecution of the war has brought up again the controversial topic of whether or not oil producers ought to be allowed a percentage of income as a deduction for depletion in determining their income tax liability. While the clause of the Act dealing with this matter was re-enacted unchanged in the 1942 Act,' the opposition to it is continually growing so that it probably will be modified when the tax bill comes up again in 1943. Much of the difficulty concerning the subject of depletion arises because of the misunderstanding on the part of the general public as to the nature of the term. I. Depletion Defined Depletion, as used in accounting and tax terminology, is applied to wasting assets such as the products of mines, wells, and timber tracts. Just as in a manufacturing concern the cost of the raw material be- comes a part of the cost of the finished product, so in a copper mine the cost of the ore is a part of the cost of the finished metal, or in the case of an oil well, the cost of the oil in place is a part of the cost of the refined petroleum. For example: A purchases an oil wel2 for $100,000, the estimated yield of oil being 100,000 barrels. The well is an asset worth $100,000, and each barrel that is taken from the ground and delivered to the refinery depletes the oil.in place 1/100,000th of the original quantity. The book value thereof must be reduced by 1/100,000th of its original cost by an entry charging Depletion Expense $1 and crediting the same amount to a contra- valuation account called Reserve for Depletion of Oil Property. Thus, when there is no more oil in place, presumably 100,000 barrels have been withdrawn, and the original asset value will have been completely eliminated by a corresponding valuation reserve of $100,000. The foregoing discussion describes the cost, or unit, depletion principle.3 'Revenue Act of 1942, H. R. 7378; for debates in the Senate see 88 Cong. Rec., (Oct. 1942) at 8280-89. 2As here used, the term well means the value of the hidden mineral which is tapped by drilling; it excludes the derrick, pipe, rigging, etc., which are classified as depreciable property. aSee U.S. Treas. Reg. 103, Sec. 19, 23(m)-2(1939); 1 Prentice-Hall 1942 Fed. Tax Serv. 4J14, 462.

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